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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
UNITED BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
0-25976
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(Registrants' file number)
Pennsylvania 23-2802415
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 North Third Street, Philadelphia, Pennsylvania 19106
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 351-4600
Securities registered pursuant to Section 12(b)f of the Act: NONE
Securities registered pursuant to Section 12(g)f of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes ___ No [ X ]
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United Bancshares, Inc. (sometimes herein also referred to as the "Company"
or "UBS") has two classes of capital stock authorized - 2,000,000 shares of $.01
par value Common Stock and Series Preferred Stock (Series A Preferred Stock).
The Board of Directors designated a subclass of the common stock, designated
Class B Common Stock, by filing of Articles of Amendment to its Articles of
Incorporation on September 30, 1998. This Class of stock has all of the rights
and privileges of Common Stock with the exception of voting rights. Of the
2,000,000 shares of Common Stock authorized, 250,000 have been designated Class
B Common Stock. There is no market for the Common Stock. None of the shares of
the Registrant's stock was sold within 60 days of the filing of this Form 10-K.
As of March 17, 2003 the aggregate number of the shares of the Registrant's
Common Stock outstanding was 1,102,088 (including 191,667 Class B non voting).
The Board of Directors of United Bancshares, Inc. designated one series of
the Series Preferred Stock (the "Series A Preferred Stock"), 500,000 authorized
of which 143,150 shares were outstanding as of March 18, 2002.
There are 210 pages in the Form 10-K.
FORM 10-K
United Bancshares, Inc.
Index
Item No. Page
PART I
1. Business............................................................ 3
2. Properties..........................................................10
3. Legal Proceedings...................................................11
4. Submission of Matters to a Vote of Security Holders.................11
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................................12
6. Selected Financial Data.............................................13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................13
7A. Quantitative and Qualitative Disclosures about Market Risk..........28
8. Financial Statements and Supplementary Data.........................28
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................28
PART III
10. Directors and Executive Officers of Registrant......................29
11. Executive Compensation..............................................30
12. Security Ownership of Certain Beneficial Owners and Management......32
13. Certain Relationships and Related Transactions......................33
14. Controls and Procedures.............................................33
PART IV
15. Exhibits, Financial Statements Schedules and Reports on Form 8-K....34
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 17, 2003.
2
PART I
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENT
Certain of the matters discussed in this document and the documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" may constitute forward looking statements for the purposes of the
Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as
amended, and may involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of
United Bancshares, Inc ("UBS") to be materially different from future results,
performance or achievements expressed or implied by such forward looking
statements. The words "expect," "anticipate," "intended," "plan," "believe,"
"seek," "estimate," and similar expressions are intended to identify such
forward-looking statements. UBS' actual results may differ materially from the
results anticipated by the forward-looking statements due to a variety of
factors, including without limitation: (a) the effects of future economic
conditions on UBS and its customers including economic factors which affect
consumer confidence in the securities markets, wealth creation, investment and
consumer saving patterns; (b) UBS interest rate risk exposure and credit risk;
(c) changes in the securities markets with respect to the market values of
financial assets and the stability of particular securities markets; (d)
governmental monetary and fiscal policies, as well as legislation and regulatory
changes; (e) changes in interest rates on the level and composition of deposits,
loan demand, and the values of loan collateral and securities, as well as
interest-rate risks; (f) changes in accounting requirements or interpretations;
(g) the effects of competition from other commercial banks, thrifts, mortgage
companies, consumer finance companies, credit unions securities brokerage firms,
insurance company's, money-market and mutual funds and other financial
institutions operating in the UBS' trade market area and elsewhere including
institutions operating locally, regionally, nationally and internationally,
together with such competitors offering banking products and services by mail,
telephone, computer and the internet; (h) any extraordinary events (such as the
September 11, 2001 events and the U.S. Government's response to those events or
the U.S. Government becoming involved in a conflict in a foreign country; (i)
the failure of assumptions underlying the establishment of reserves for loan
losses and estimates in the value of collateral, and various financial assets
and liabilities and technological changes being more difficult or expensive than
anticipated; (j) UBS' success in generating new business in its existing
markets, as well as its success in identifying and penetrating targeted markets
and generating a profit in those markets in a reasonable time; (k) UBS' timely
development of competitive new products and services in a changing environment
and the acceptance of such products and services by customers; and (l) UBS'
success in managing the risks involved in the foregoing.
All written or oral forward-looking statements attributed to UBS are
expressly qualified in their entirety by use of the foregoing cautionary
statements. All forward-looking statements included in this Report are based
upon information presently available, and UBS assumes no obligation to update
any forward-looking statement.
ITEM 1 -- BUSINESS
United Bancshares, Inc.
United Bancshares, Inc. ("Registrant" or "UBS") is a holding company for
United Bank of Philadelphia (the "Bank"). UBS was incorporated under the laws of
the Commonwealth of Pennsylvania on April 8, 1993. The Registrant became the
Bank Holding Company of the Bank, pursuant to the Bank Holding Company Act of
1956, as amended, on October 14, 1994.
The Bank commenced operations on March 23, 1992. UBS provides banking
services through the Bank. The principal executive offices of UBS and the Bank
are located at 300 North Third Street, Philadelphia, Pennsylvania 19106. The
Registrant's telephone number is (215) 351-4600.
As of March 17, 2003, UBS and the Bank had a total of 51 employees.
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United Bank of Philadelphia
The Bank, an African-American controlled, state-chartered member bank of
the Federal Reserve System is regulated by both the Federal Reserve Board and
the Commonwealth of Pennsylvania Department of Banking (the "Department"). The
deposits held by the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC").
The Bank conducts all its banking activities through its four offices
located as follows: (i) Center City Branch Two Penn Center, Philadelphia,
Pennsylvania; (ii) West Philadelphia Branch 37th and Lancaster Avenue,
Philadelphia, Pennsylvania, (iii) Mount Airy Branch 1620 Wadsworth Avenue,
Philadelphia, Pennsylvania; and (iv) Progress Plaza Branch 1015 North Broad
Street, Philadelphia, Pennsylvania. In January 2002, the Bank closed and
consolidated its 714 Market Street Branch with its branch located at Two Penn
Center to create operating efficiencies. Through its locations, the Bank offers
a broad range of commercial and consumer banking services. At December 31, 2002,
the Bank had total deposits aggregating approximately $76.9 million and had
total net loans outstanding of approximately $43.5 million. Although the Bank's
primary service area for Community Reinvestment Act purposes is Philadelphia
County, it also services, generally, the Delaware Valley, which consists of
portions of Montgomery, Bucks, Chester, and Delaware Counties in Pennsylvania;
New Castle County in Delaware; and Camden, Burlington, and Gloucester Counties
in New Jersey.
The city of Philadelphia is comprised of 353 census tracts and, based on
1990 census data, 204 or 58% of these are designated as low to moderate-income
tracts while 105 or 30% are characterized both as low to moderate-income and
minority tracts. The Bank's primary service area consists of a population of
1,577,815, which includes a minority population of 752,309.
The Bank engages in the commercial banking business, serving the banking
needs of its customers with a particular focus on, and sensitivity to, groups
that have been traditionally under-served, including Blacks, Hispanics and
women. The Bank offers a wide range of deposit products, including checking
accounts, interest-bearing NOW accounts, money market accounts, certificates of
deposit, savings accounts and Individual Retirement Accounts.
The focus of the Bank's lending activities is on the origination of
commercial, consumer and residential loans. A broad range of credit products is
offered to the businesses and consumers in the Bank's service area, including
commercial loans, mortgage loans, student loans, home improvement loans, auto
loans, personal loans, and home equity loans. At March 17, 2003, the Bank's
maximum legal lending limit was approximately $1,007,000 per borrower. However,
the Bank's internal Loan Policy limits the Bank's lending to $500,000 per
borrower in order to diversify the loan portfolio. The Board of Directors of the
Bank maintains the ability to waive its internal lending limit upon
consideration of a loan. The Board of Directors has exercised this power with
respect to loans and participations on a number of occasions.
The Bank also offers commercial and retail products. In the area of
commercial loans, the Bank has flexibility to develop loan arrangements targeted
at a customer's objectives. Typically, these loans are term loans or revolving
credit arrangements with interest rate, collateral and repayments terms, varying
based upon the type of credit, and various factors used to evaluate risk. The
Bank participates in the government-sponsored Small Business Administration
("SBA") lending program and when the Bank deems it appropriate, obtains SBA
guarantees for up to 90% of the loan amount. This guaranty is intended to reduce
the Bank's exposure to loss in its commercial loan portfolio. Commercial loans
are typically made on the basis of cash flow to support repayment with secondary
reliance placed on the underlying collateral.
The Bank's consumer loan program includes installment loans for home
improvement and the purchase of consumer goods and automobiles, student loans,
home equity and VISA secured and unsecured revolving lines of credit, and
checking overdraft protection. The Bank also offers residential mortgage loans
to its customers. Other services the Bank offers include safe deposit boxes,
travelers' checks, money orders, direct deposit of payroll and Social Security
checks, wire transfers and access to regional and national automated teller
networks as well as international and trust services through correspondent
institutions.
4
Competition
There is substantial competition among financial institutions in the Bank's
service area. The Bank competes with local, regional and national commercial
banks, as well as savings banks and savings and loan associations. Many of these
banks and financial institutions have an amount of capital that allows them to
do more advertising and promotion and to provide a greater range of services to
customers. To date, the Bank has attracted, and believes it will continue to
attract its customers from the deposit base of such existing banks and financial
institutions largely due to the Bank's mission to service groups of people who
have traditionally been un-served and by its devotion to personalized customer
service. The Bank's strategy has been, and will continue to be, to emphasize
personalized services with special sensitivity to the needs of Blacks, Hispanics
and women and to offer competitive rates to borrowers and depositors.
In order to compete, the Bank relies upon personal contacts by the
officers, directors and employees of the Bank to establish and maintain
relationships with Bank customers. The Bank focuses its efforts on the needs of
individuals and small and medium-sized businesses. In the event there are
customers whose loan demands exceed the Bank's lending limit, the Bank will seek
to arrange for such loans on a participation basis with other financial
institutions and intermediaries. The Bank will also assist those customers
requiring other services not offered by the Bank to obtain such services from
its correspondent banks.
Registrant believes that a portion of the Bank's customer base is derived
from customers who were dissatisfied with the level of service provided at
larger financial institutions. While some of such customers have followed
officers of those institutions who were hired by the Bank, others were attracted
to the Bank by calling programs of its officers and referrals from other
customers. The Bank has sought, in the past, and intends to continue in the
future, to hire customer contact officers who have good relationships with
desirable customers. These personal relationships, provision of a high level of
customer services, and referrals from satisfied customers, form the basis of the
Bank's competitive approach, as opposed to advertising, rate competition or the
development of proprietary banking products, services or programs.
In the past, the principal competition for deposits and loans have been
other depository institutions. However, now the Bank also competes with other
financial intermediaries such as brokerage houses offering investment vehicles
to the general public. Other entities, both public and private, seeking to raise
capital through the issuance and sale of debt or equity securities are also
competitors with banks and savings and loan associations in the acquisition of
deposits.
United Wealth Management Services ("UWMS"), a division of the Bank, was
introduced in September 2002, to provide a full array of non-deposit products
including investments, insurance and brokerage services through the Bank's
branch network. The Bank's partner in this venture is UVEST Investment Services.
UVEST is a registered broker/dealer that has been offering a wide range of
investment products and services since 1982. The Bank intends to use UWMS as a
vehicle to introduce and market all of its products and services including loans
and deposits.
Supervision and Regulation
Regulation of United Bancshares, Inc.
UBS, as a Pennsylvania business corporation, is subject to the jurisdiction
of the Securities and Exchange Commission (the "SEC") and certain state
securities commissions concerning matters relating to the offering and sale of
its securities. Accordingly, if UBS wishes to issue additional shares of its
Common Stock, for example, to raise capital or to grant stock options, UBS must
comply with the registration requirements of the Securities Act of 1933, as
amended, and any applicable states securities laws, or find an applicable
exemptions from registration.
The Bank Holding Company Act
UBS, as a bank holding company, is subject to the Bank Holding Company Act
of 1956, as amended (the "BHC Act"), and supervision by the Federal Reserve
Board. The BCH Act limits the business of bank holding companies to banking,
managing or controlling banks, performing certain servicing activities for
subsidiaries and engaging in such other activities as the Federal Reserve Board
may determine to be closely related to banking.
5
UBS is subject to the supervision of and inspection by the Federal Reserve Board
and required to file with the Board an annual report and such additional
information as the Board may require pursuant to the BHC Act and its
implementing regulations.
A bank holding company is prohibited from engaging in or acquiring direct
or indirect control of more than 5% of the voting shares of any company engaged
in non-banking activities, unless the Federal Reserve Board, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks, as to be a proper incident thereto. In making
this determination, the Board considers whether the performance of these
activities by a bank holding company would offer benefits to the public that
outweigh possible adverse effects.
The BHC Act requires UBS to secure the prior approval of the Federal
Reserve Board before it owns or controls, directly or indirectly, more than 5%
of the voting shares of any corporation, including another bank. In addition,
the BHC Act prohibits UBS from acquiring more than 5% of the voting shares of,
or an interest in, or all or substantially all of the assets of, any bank
located outside Pennsylvania, unless such an acquisition is specifically
authorized by the laws of the state in which such bank is located.
Subject to compliance with Pennsylvania law, and, as noted above,
compliance with the BHC Act UBS is permitted to control a number of banks.
However, UBS is required under the BHC Act to obtain the prior approval of the
Federal Reserve Board before acquiring all or substantially all of the assets of
any bank, or acquiring ownership or control of any voting shares of any other
bank if, after such acquisition, UBS would control more than 5% of the voting
shares of such bank.
The BHC Act and the Federal Reserve Board's regulations prohibit a bank
holding company and its subsidiaries from engaging in certain tying arrangements
in connection with any extension of credit or services. The "anti-tying"
provisions prohibit a bank from extending credit, leasing, selling property or
furnishing any service to a customer on the condition that the customer obtain
additional credit or service from the bank, its bank holding company or any
other subsidiary of its bank holding company, or on the condition that the
customer not obtain other credit or services from a competitor of the bank, its
bank holding company or any subsidiary of its bank holding company.
The Bank, as a subsidiary of UBS, is subject to certain restrictions
imposed by the Federal Reserve Act, as amended, on any extensions of credit to
UBS or its subsidiaries, on investments in the stock or other securities UBS or
its subsidiaries, and on taking such stock or securities as collateral for
loans.
The Federal Reserve Act and Federal Reserve Board regulations also place
certain limitations and reporting requirements on extensions of credit by a bank
to principal shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition, that Act and
those regulations may affect the terms upon which any person who becomes a
principal shareholder of a holding company may obtain credit from banks with
which the subsidiary bank maintains a correspondent relationship.
Federal law also prohibits the acquisition of control by UBS of a bank
holding company, without prior notice to certain federal bank regulators.
Control is defined for this purpose as the power, directly or indirectly, to
direct the management or policies of the bank or bank holding company or to vote
25% or more of any class of voting securities of the bank holding company.
The Financial Services Act
The Financial Services Act (the "FSA Act"), sometimes referred to as the
Gramm-Leach-Bliley Act, repealed the provisions of the Glass-Steagall Act, which
prohibited commercial banks and securities firms from affiliating with each
other and engaging in each other's businesses. Thus, many of the barriers
prohibiting affiliations between commercial banks and securities firms have been
eliminated.
The FSA Act authorizes the establishment of "financial holding companies"
("FHC") to engagement in new financial activities offering and banking,
insurance, securities and other financial products to consumers. Bank holding
companies may elect to become a FHC, if all of its subsidiary depository
institutions are well capitalized and well managed. See Regulatory Action below.
If those requirements are met, a bank holding company may file a certification
6
to that effect with the Federal Reserve Board and declare that it elects to
become a FHC. After the certification and declaration are filed, the FHC may
engage either de novo or through an acquisition in any activity that has been
determined by the Federal Reserve Board to be financial in nature or incidental
to such financial activity.
Under the FSA Act the Bank, subject to various requirements, is permitted
to engage through "financial subsidiaries" in certain financial activities
permissible for affiliates of an FHC. However, to be able to engage in such
activities the Bank must be well capitalized and well managed and receive at
least a "satisfactory" rating in its most recent Community Reinvestment Act (the
"CRA Act") examination. See the Community Reinvestment Act below.
UBS cannot be certain of the future effect of the legislation and
regulations, described above, on its business, although there may be
consolidation among financial service institutions and increased competition for
UBS as well as an increase in the expense of regulatory compliance.
Regulation of the Bank
The Bank is subject to supervision, regulation and examination by the
Pennsylvania Department of Banking and the Federal Reserve Board because the
Bank is a member bank of the Federal Reserve System. The FDIC insures the Bank's
deposits and thus the Bank is subject to certain FDIC regulations. In addition,
the Bank is subject to a variety of local, state and federal laws that affect
its operation. Below are summarized those laws and regulations which a have
material impact on the operations and expenses of the Bank and thus UBS.
Branch Banking
The Pennsylvania Banking Code of 1965, as amended, the ("Banking Code"),
has been amended to harmonize Pennsylvania law with federal law to enable
Pennsylvania banking institutions, such as the Bank, to participate fully in
interstate banking and to remove obstacles to out of state banks engaging in
banking in Pennsylvania.
Federal Reserve Membership Regulations
Since the Bank is a member bank of the Federal Reserve System, the Federal
Reserve Board possesses the power to prohibit institutions regulated by it, such
as the Bank, from engaging in any activity that would be an unsafe and unsound
banking practice or violate the law. Moreover, the Board has: (i) empowered the
FDIC to issue cease-and-desist or civil money penalty orders against the Bank or
its executive officers, directors and/or principal shareholders based on
violations of law or unsafe and unsound banking practices; (ii) authorized the
FDIC to remove executive officers who have participated in such violations or
unsound practices; (iii) restricted lending by the Bank to its executive
officers, directors, principal shareholders or related interests thereof; (iv)
restricted management personnel of the Bank from serving as directors or in
other management positions with certain depository institutions whose assets
exceed a specified amount or which have an office within a specified geographic
area. Additionally, the Bank Control Act provides that no person may acquire
control of the Bank unless the Federal Reserve Board has been given 60-days
prior written notice and within that time has not disapproved of the acquisition
or extended the period for disapproval.
The Federal Deposit Insurance Corporation Act
The Federal Deposit Insurance Corporation Act (the "FDIC Act") includes
several provisions that have a direct material impact on the Bank. The most
significant of these provisions are discussed below.
To minimize losses to the deposit insurance funds, the FDIC Act has
established a format to monitor FDIC-insured institutions and to enable prompt
corrective action to be taken by the appropriate federal supervisory agency if
an institution begins to experience difficulty. The FDIC Act establishes five
"capital" categories. They are: (1) well capitalized, (2) adequately
capitalized, (3) undercapitalized, (4) significantly undercapitalized, and (5)
critically undercapitalized. The overall goal of these new capital measures is
to impose more scrutiny and operational restrictions on banks as they descend
the capital categories from well capitalized to critically undercapitalized.
Under current regulations, a "well-capitalized" institution would be one
that has at least a 10% total risk-based capital ratio, a 6% Tier I risk-based
capital ratio, a 5% Tier I leverage ratio, and is not subject to any written
order or final directive by its regulatory agency to meet and maintain a
specific capital level.
7
An "adequately capitalized" institution would be one that meets the
required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules generally require
banks to maintain a Tier I Leverage Ratio of at least 4% and an 8% total
risk-based capital ratio. Since the risk-based capital requirement to be in the
form of Tier I capital, this also will mean that a bank would need to maintain
at least 4% Tier I risk-based capital ratio. An institution must meet each of
the required minimum capital levels in order to be deemed "adequately
capitalized." The most recent notification dated February 26, 2003, from the
Federal Reserve authorities categorized the Bank as "adequately capitalized"
under the regulatory framework for prompt and corrective action. See Regulatory
Action below.
An "undercapitalized" institution is one that fails to meet one or more of
the required minimum capital levels for an "adequately capitalized" institution.
Under the FDIC Act, an "undercapitalized" institution must file a capital
restoration plan and is automatically subject to restrictions on dividends,
management fees and asset growth. In addition, the institution is prohibited
from making acquisitions, opening new branches or engaging in new lines of
business without the prior approval of its primary federal regulator. A number
of other restrictions may be imposed.
The Community Reinvestment Act
The Bank is required, by the CRA Act and the implementing regulations, to:
(i) meet the credit needs of the community, including the low and
moderate-income neighborhoods, which it serves. The Bank's CRA Act record is
taken into account by the regulatory authorities in their evaluation of any
application made by the Bank for, among other things, approval of a branch or
other deposit facility, branch office relocation, a merger or an acquisition.
The CRA Act also requires the federal banking agencies to make public disclosure
of their evaluation of a bank's record of meeting the credit needs of its entire
community, including low and moderate-income neighborhoods. After its most
recent CRA Act examination the Bank was given an "outstanding" CRA Act rating."
The Bank Secrecy Act
Under the Bank Secrecy Act ("BSA"), the Bank and other financial
institutions are required to report to the Internal Revenue Service currency
transactions, of more than $10,000 or multiple transactions of which the Bank
has knowledge exceed $10,000 in the aggregate. Civil and criminal penalties are
provided under the BSA for failure to file a required report, for failure to
supply information required by the BSA or for filing a false or fraudulent
report.
Privacy of Consumer Financial Information
The FSA Act also contains provisions designed to protect the privacy of
each consumer's financial information held in a financial institution. The
regulations (the "Regulations") issued pursuant to the FSA Act are designed to
prevent financial institutions, such as the Bank, from disclosing a consumer's
nonpublic personal information to third parties. However, financial institutions
can share a consumer customer's personal information or information about
business with affiliated companies.
The FSA Act Regulations permit financial institutions to disclose nonpublic
personal information to nonaffiliated third parties for marketing purposes but
financial institutions must provide a description of their privacy policies to
the consumers and give consumers an opportunity to opt-out of such disclosure
and prevent disclosure by the financial institution of the consumer's nonpublic
personal information to nonaffiliated third parties. These privacy Regulations
will affect how consumer information is transmitted through diversified
financial companies and conveyed to outside vendors.
Consumer Protection Rules - Sale of Insurance Products
In addition, as mandated by FSA Act, the bank regulators have published
consumer protection rules (the "Rules") which apply to the retail sales
practices, solicitation, advertising or offers of insurance products, including
annuities, by depository institutions such as the Bank.
8
The Rules provide that before the sale of insurance or annuity products can
be completed, disclosures must be made that such insurance products are not
deposits or other obligations of or guaranteed by the FDIC or any other agency
of the United States, the Bank or any affiliate and that insurance products,
including an annuities, may involve an investment risk, including a possible
loss of value.
The Rules also provide that the Bank may not condition an extension of
credit on the consumer's purchase of an insurance product or annuity from the
Bank or any affiliate or on the consumer's agreement not obtain or prohibit the
consumer from obtaining an insurance product or annuity from an unaffiliated
entity.
Finally the Rules also require formal acknowledgment by the consumer that
such disclosures have been received. In addition, to the extent practical, the
Bank must keep insurance and annuity sales activities physically separate from
the areas where retail sales are routinely accepted from the general public. The
Bank currently does not market insurance products.
New Legislation and Regulations
The Patriot Act of 2001
The Patriot Act of 2001 which was enacted in the wake of the September 11,
2001 attacks, include provisions designed to combat international money
laundering and advance the U.S. government's war against terrorism. The Patriot
Act, and the regulations, which implement it, contains many obligations, which
must be satisfied by financial institutions, including the Bank, which involve
additional expenses for the Bank.
The Sarbanes-Oxley Act of 2002
On July 30, 2002 the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act")
became law. The stated goals of the Sarbanes-Oxley Act are to increase corporate
responsibility, provide enhanced penalties for accounting and auditing
improprieties by publicly traded companies and protect investors by improving
the accuracy and reliability of corporate disclosures made pursuant to the
securities law. The changes required by Sarbanes-Oxley Act and its implementing
regulations are intended to allow shareholders to monitor the performance of
companies and their directors more easily and effectively.
The Sarbanes-Oxley Act generally applies to all domestic companies, such as
UBS, that file periodic reports with the SEC under the Securities Exchange Act
of 1934, as amended. The Sarbanes-Oxley Act includes very significant disclosure
requirements and new corporate governance rules, requires the SEC, the
securities exchanges and the NASDAQ stock market to adapt extensive additional
disclosures, corporate governance provisions and other related rules, as well as
mandating that studies of certain significant issues be made by the SEC and the
US Comptroller General. Given the extensive number of Sarbanes-Oxley Act rules
and regulations to be finalized and implemented, the final scope and impact of
its requirements on UBS and the financial services industry have yet to be
determined.
The Sarbanes-Oxley Act addresses, among other matters, directors' audit
committees; certification of financial statements by the chief executive officer
and chief financial officer; forfeiture of bonuses and profits made by directors
and senior officers in the twelve month period covered by restated financial
statements; a prohibition on insider trading during pension blackout periods;
disclosure of off-balance sheet transactions; a prohibition by companies, other
than federally insured financial institutions, on personal loans to their
directors and officers; expedited filing of reports concerning stock
transactions by directors and executive officers; formation of a public
accounting oversight board; auditor independence; and increased criminal
penalties for violation of certain the securities laws.
To implement the requirements of Sarbanes-Oxley Act and regulations, UBS'
management has instituted a series of actions to strengthen and improve UBS',
corporate governance practices. Included in those actions was the development of
a system designed to evaluate and monitor the continued effectiveness of the
design and operation of UBS' internal controls and procedures for financial
reporting.
9
These series of actions by UBS' management improves UBS' and the Bank's
Audit Committees and Risk Management Committees of the Boards, and UBS' and
Bank's structures and processes which are intended to provide tools to
strengthen internal controls, communications and disclosure of necessary
information to those who must know and use it. UBS' system of internal controls
and procedures, which are in place, are designed to capture information from all
segments of its business. At UBS and the Bank, each key material element of
their operation is subject to oversight to help insure proper internal controls
and procedures, administration, risk management and delivery of critical
information disclosures to appropriate audit and financial officers, executive
management, Board committees and the Boards of directors. UBS' management
believes that the addition of these new controls and processes has brought with
it a broader and more in depth analysis to UBS' systems of controls and
procedures and corporate governance.
The rules and regulations, discussed above, which implement the
Sarbanes-Oxley Act could have a significant economic impact on the compliance
cost of the UBS and all publicly held companies.
Future Legislation and Governmental Policies
From time to time various Federal and state legislation have been proposed
that could result in additional regulation of, and restrictions on, the business
of the Bank. As the enactment of the FSA Act and the Sarbanes-Oxley Act confirm,
from time to time, various proposals are enacted in the United States Congress
as well as Pennsylvania legislature and issued by various bank regulatory
authorities which alter the powers of, and place restrictions on, different
types of bank organizations.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is particularly susceptible
to being affected by federal and state legislation and regulations that may
increase the costs of doing business. Bank management cannot anticipate the
changes in laws and regulations and their impact on the Bank's business,
financial position and reported results of operation.
Regulatory Action
In February 2000, as a result of a regulatory examination completed in
December 1999, the Bank entered into a Written Agreement with its primary
regulators with regard to, among other things, achievement of agreed-upon
capital levels, implementation of a viable earnings/strategic plan, adequate
funding of the allowance for loan losses, the completion of a management review
and succession plan, and improvement in internal controls. See, ITEM 7,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
ITEM 2 -- PROPERTIES
Corporate Headquarters
In August 1999, the Bank moved its corporate headquarters from the branch
facility at 714 Market Street to the building at 300 North Third Street,
Philadelphia, Pennsylvania. In October 2000, the Bank purchased the building
from a former officer in conjunction with the settlement of a legal matter for
approximately $1.4 million. Before its purchase, the Bank leased the building
from this officer under a 10-year non-cancelable capital lease. The facility
consists of 25,000 square feet including executive offices, operations, finance,
human resource, security and loss prevention functions. The Bank sublets
approximately 2,500 square feet to the African American Interdenominational
Ministries.
Market Street Branch (closed)
The Bank's Market Street Branch was located on the first floor of a
multi-tenant retail and commercial office building at 714 Market Street,
Philadelphia, Pennsylvania. The Bank occupied approximately 5,700 square feet of
space pursuant to a lease that expired on February 28, 2002. In conjunction with
the expiration of the lease, the branch operations of this facility were
consolidated with the branch located at Two Penn Center in January 2002. The
aggregate monthly rent for this location was $14,023.
10
Mt. Airy Branch
The Bank operates a branch at 1620 Wadsworth Avenue, in the Mt. Airy
section of Philadelphia. This facility, comprising a retail banking lobby,
teller area, offices, vault and storage space is currently leased at a monthly
rental of $3,517.
Center City Branch
The Bank operates a branch location at Two Penn Center, 15th Street and JFK
Boulevard, Philadelphia, Pennsylvania. The Bank leases approximately 4,769
square feet at its Two Penn Center location. The space includes lobby, teller
area, customer service area, primary lending area and administrative offices, as
well as a vault. The aggregate monthly rent for this location is $13,115.
Frankford Branch and ATM Machine
In 1995, the Bank purchased a branch facility at 4806 Frankford Avenue. In
September 2000, the Bank closed this facility. In June 2002, the Bank sold this
facility. An ATM machine remains operational at this facility. The aggregate
monthly rental for the ATM Machine is $500.
West Girard Branch and ATM Machine
The Bank leased a facility located at 2820 West Girard Avenue. The branch
operations of this facility were discontinued in September 2000. An ATM machine
remained operational at this facility until February 2002 when it was relocated
to 2820 West Girard. The aggregate monthly rental for the ATM Machine at the new
location is $500.
West Philadelphia Branch
On July 22, 1996, the Bank acquired a branch location at 3750 Lancaster
Avenue from PNC Bank. The facility is comprised of approximately 3,000 square
feet. The main floor houses teller and customer service areas, a drive-up teller
facility and automated teller machine. The basement provides storage for the
facility. The aggregate monthly rental is $2,875 exclusive of taxes, insurance,
utilities and janitorial service.
Progress Plaza Branch
The Bank leases a branch facility located at 1015 North Broad Street,
Philadelphia, Pennsylvania. The facility comprises a teller and customer service
area, lobby and vault. The aggregate monthly rental for this facility is $3,875
per month. The Bank has been notified by the landlord that extensive
improvements to the shopping plaza in which this branch is located is planned
for early 2004. This will result in the temporary relocation of this facility to
a yet undetermined nearby location at the beginning of 2004.
ITEM 3 -- LEGAL PROCEEDINGS
No material claims have been instituted or threatened by or against
Registrant or its affiliates other than in the ordinary course of business.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable. No matters were submitted to a vote of Registrant's
security holders since the Registrant's last periodic filing.
11
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Common Stock
As of March 17, 2003 there were 3,168 shareholders of record of UBS's
Common Stock.
The Common Stock is not traded on any national exchange or otherwise traded
in any recognizable market. Prior to December 31, 1993, the Bank conducted a
limited offering (the "Offering") pursuant to a registration exemption provided
in Section 3(a)(2) of the Securities Exchange Act of 1933 (the "Act"). The
price-per-share during the Offering was $12.00. Prior to the Offering, the Bank
conducted an initial offering of the Common Stock (the "Initial Offering") at
$10.00 per share pursuant to the same registration exemption.
In June 2000 and December 2000, respectively, the Bank received $411,809
and $436,212 and issued 34,317 and 36,351 shares, respectively, as a result of
the purchase of UBS common stock by members of the Bank's board of directors in
a limited offering at a price of $12.00 per share. This offering was exempt from
registration under the Act pursuant to the exemption in section 4(2) of the Act.
In May 2001 and December 2001, respectively, the Bank received $2,000 and
$9,596 and issued 167 and 800 shares, respectively, as a result of the purchase
of UBS common stock by two individuals in a limited offering at a price of
$12.00 per share. This offering was exempt from registration under the Act
pursuant to the exemption in section 4(2) of the Act.
In June 2002, the Bank received $20,400 and issued 1,700 shares as a result
of the purchase of UBS common stock by new members of the Bank's board of
directors in a limited offering at a price of $12.00 per share. This offering
was exempt from registration under the Act pursuant to the exemption in section
4(2) of the Act.
Dividends
UBS has not, during the three most recent fiscal periods declared or paid
any cash or stock dividends. The Pennsylvania Banking Code of 1965, as amended,
provides that cash dividends may be declared and paid only from accumulated net
earnings and that, prior to the declaration of any dividend, if the surplus of a
bank is less than the amount of its capital, the bank shall, until surplus is
equal to such amount, transfer to surplus an amount which is at least ten
percent of the net earnings of the bank for the period since the end of the last
fiscal year or any shorter period since the declaration of a dividend. If the
surplus of a bank is less than 50% of the amount of its capital, no dividend may
be declared or paid by the Bank without the prior approval of the Pennsylvania
Department of Banking.
Under the Federal Reserve Act, if a bank has sustained losses equal to or
exceeding its undivided profits then on hand, no dividend shall be paid, and no
dividends can ever be paid in an amount greater than such bank's net profits
less losses and bad debts. Cash dividends must be approved by the Board if the
total of all cash dividends declared by a bank in any calendar year, including
the proposed cash dividend, exceeds the total of the Bank's net profits for that
year plus its retained net profits from the preceding two years less any
required transfers to surplus or to a fund for the retirement of preferred
stock. Under the Federal Reserve Act, the Federal Reserve Board has the power to
prohibit the payment of cash dividends by a bank if it determines that such a
payment would be an unsafe or unsound banking practice. As a result of these
laws and regulations, the Bank, and therefore the Registrant, whose only source
of income is dividends from the Bank, will be unable to pay any dividends while
an accumulated deficit exists. The Registrant does not anticipate that dividends
will be paid for the foreseeable future.
The Federal Deposit Insurance Act generally prohibits all payments of
dividends by a bank, which is in default of any assessment to the FDIC.
12
The information below has been derived from UBS' consolidated financial
statements.
ITEM 6 -- SELECTED FINANCIAL DATA
Selected Financial Data
Year ended December 31,
------------------------------------------------------------
(Dollars in thousands, except per share data) 2002 2001 2000 1999 1998
------------------------------------------------------------
Net interest income.............................. $ 3,726 $ 4,060 $ 5,415 $ 5,264 $ 5,241
Provision for loan losses........................ 175 335 565 1,007 351
Noninterest income............................... 2,327 2,443 3,197 2,226 1,816
Noninterest expense.............................. 6,095 7,038 8,801 7,714 6,696
Net income (loss)................................ (217) (870) (755) (1,230) 10
Net income (loss) per share - basic (0.20) (0.79) (0.72) (1.24) 0.01
Balance sheet totals:
Total assets................................. $86,044 $ 88,668 $93,533 $137,249 $121,983
Net loans.................................... 43,459 42,292 44,743 59,444 57,271
Investment securities........................ 21,518 25,806 35,014 51,433 43,196
Deposits..................................... 76,929 79,423 83,238 124,766 109,063
Shareholders' equity......................... 8,500 8,558 9,350 9,027 8,904
Ratios:
Equity to assets.......................... 7.45% 7.67% 7.74% 8.07% 6.40%
Return on assets.......................... (0.25)% (0.95)% (0.63)% (1.03)% 0.01%
Return on equity.......................... (2.55)% (9.31)% (8.08)% (12.71)% 0.14%
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Because UBS is a bank holding company for the Bank, the financial
statements in this report are prepared on a consolidated basis to include the
accounts of the Company and the Bank. The purpose of this discussion is to focus
on information about the Bank's financial condition and results of operations,
which is not otherwise apparent from the consolidated financial statements
included in this annual report. This discussion and analysis should be read in
conjunction with the financial statements presented elsewhere in this report.
Results of Operations
Summary
The Company recorded a net loss of approximately $217,000 thousand for 2002
($0.20 per share) compared to a net loss of approximately $870,000 ($0.79 per
share) for 2001 and net loss of approximately $755,000 ($0.72 per share) in
2000. In 2002, the Bank was awarded a $198,000 grant from the U.S. Treasury
Department's Bank Enterprise Award (BEA) Fund which is included in other income
on the consolidated statement of operations. These funds are awarded to
financial institutions that demonstrate community development through loan and
deposit activity. The financial results for 2002 were also positively impacted
by the continued implementation of the Bank's profit restoration plan that
resulted in reductions in noninterest expenses of $943,000 compared to 2001.
Components of the plan included among other things staff
reductions/consolidations, salary reductions, reduction in branch operating
hours, elimination of director fees, and the reduction of other operating
expenses.
In addition, revenue enhancement strategies were employed to generate
expanded opportunities for fee income through the implementation of new products
and services including the debit card and wealth management services. The
marketing of consumer loan products including home equity, automobile, student,
and credit card loans, and; the installation of additional high volume automated
teller machines are also expected to contribute to increased revenues.
During 2002, while expense reductions were achieved, a greater impact is
expected to be realized with increased loan originations that build the Bank's
loan-to-deposit ratio. Increased loan volume will result in a higher net
interest margin and therefore increased revenues. Thus, while continuing to
control expenses, management will place more focus on the implementation of
business development strategies to increase the level of loans outstanding to
achieve profitability.
13
During 2003, to build momentum around business development and to generate
interest and enthusiasm in the marketplace, management will embark on a
re-branding campaign for the Bank. The campaign will focus on a re-introduction
of the Bank and emphasize its commitment to the community. This campaign will
include among other things, in-branch marketing of the Bank's products and
services, direct mail advertising/solicitation, and the use of newspaper and
television media . A major focus will be placed on the Bank's new division,
United Wealth Management Services, as a lead-in to cross-sell the Bank's other
products and services.
A more detailed explanation for each component of earnings is included in
the sections below.
Table 1--Average Balances, Rates, and Interest Income and Expense Summary
December 31,
2002 2001 2000
----------------------- ----------------------- ------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) balance Interest rate balance Interest rate balance Interest rate
----------------------- ----------------------- ------------------------
Assets:
Interest-earning assets:
Loans........................... $ 42,839 $3,006 7.02% $ 45,828 $3,595 7.85% $ 55,262 $4,655 8.42%
Investment securities
held-to-maturity 10,155 626 6.16 14,669 987 6.73 28,659 1,875 6.54
Investment securities
available-for-sale 13,783 831 6.03 11,758 772 6.57 18,044 1,284 7.12
Federal funds sold.............. 10,406 169 1.62 7,726 282 3.65 5,518 339 6.15
------- ------ ------- ------ ------- ------
Total interest-earning assets 77,183 4,632 6.00 79,981 5,636 7.05 107,483 8,153 7.59
Noninterest-earning assets:
Cash and due from banks......... 4,542 4,801 5,339
Premises and equipment, net..... 2,613 3,214 3,671
Other assets.................... 2,926 4,028 4,494
Less allowance for loan losses.. (674) (576) (562)
-------- -------- --------
Total........................ $ 86,590 $ 91,448 $120,425
======== ======== ========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Demand deposits................. $ 12,882 114 0.89% $ 13,802 178 1.29% $ 19,851 602 3.03%
Savings deposits................ 21,931 129 0.59 24,480 317 1.29 30,776 497 1.61
Time deposits................... 23,712 662 2.79 24,089 1,081 4.49 28,531 1,387 4.86
Other borrowed funds............ - - - 1 - - 1,925 252 13.09
-------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities 58,525 906 1.55 62,372 1,576 2.53 81,083 2,738 3.38
Noninterest-bearing liabilities:
Demand deposits................. 19,565 19,612 27,567
Other........................... - 431 3,233
Shareholders' equity................ 8,500 9,033 8,542
-------- ------ -------- ------ -------- ------
Total........................ $ 86,590 $ 91,448 $120,425
======== ======== ========
Net interest earnings............... $3,726 $4,060 $5,415
Net yield on interest-earning assets 4.83% 5.08% 5.04%
For purposes of computing the average balance, loans are not reduced for
nonperforming loans.
Net Interest Income
Net interest income is an effective measure of how well management has
balanced the Bank's interest rate-sensitive assets and liabilities. Net interest
income, the difference between (a) interest and fees on interest-earning assets
and (b) interest paid on interest-bearing liabilities, is a significant
component of the Bank's earnings. Changes in net interest income result
primarily from increases or decreases in the average balances of
interest-earning assets, the availability of particular sources of funds and
changes in prevailing interest rates.
14
Net interest income in 2002 totaled $3.7 million, a decrease of $334,000,
or 8.22%, compared to 2001. Net interest income for 2001 totaled $4.1 million, a
decrease of $1.3 million or 25%, compared to 2000.
Table 2--Rate-Volume Analysis of Changes in Net Interest Income
2002 compared to 2001 2001 compared to 2000
----------------------------- -----------------------------
Increase (decrease) due to Increase (decrease) due to
----------------------------- -----------------------------
(Dollars in thousands) Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
Interest earned on:
Loans............................................... $ (209) $ (380) $(589) $ (742) $(317) $(1,059)
Investment securities held-to-maturity.............. (277) (84) (361) (942) 55 (887)
Investment securities available-for-sale............ 122 (63) 59 (412) (100) (512)
Federal funds sold.................................. 44 (157) (113) 81 (138) (57)
----- ----- ----- ------- ----- -------
Total interest-earning assets.................... (320) (684) (1004) (2,015) (500) (2,515)
----- ----- ----- ------- ----- -------
Interest paid on:
Demand deposits..................................... (8) (55) (63) (78) (345) (423)
Savings deposits................................... (16) (172) (188) (83) (96) (179)
Time deposits....................................... (9) (410) (419) (200) (107) (307)
Other borrowed funds................................ - - - (252) - (252)
----- ----- ----- ------- ----- -------
Total interest-bearing liabilities............... (33) (637) (670) (613) (548) (1,161)
----- ----- ----- ------- ----- -------
Net interest income.............................. $ (287) $ (47) $(334) $(1,402) $ 48 $(1,354)
====== ====== ===== ======= ===== =======
Changes in interest income or expense not arising solely as a result of volume
or rate variances are allocated to rate variances due to the interest
sensitivity of consolidated assets and liabilities.
In 2002, there was a decrease in net interest income of $334,000 due to
changes in volume but a decrease of $47,000 due to changes in rate. In 2001,
there was a decrease in net interest income of $1.4 million due to changes in
volume but an increase of $48,000 due to changes in rate.
Average earning assets decreased from $80 million in 2001 to $77 million in
2002 and decreased from $107.5 million in 2000 to $80 million in 2001. To meet
capital requirements mandated in its Written Agreement with regulators (Refer to
Regulatory Matters below) the Bank implemented an asset reduction/capital
improvement plan in 2000 that included the reduction of deposits. Beginning in
June 2000, the Bank sold higher yielding certificates of deposit to other
financial institutions, encouraged some large deposit account holders to remove
deposits, and consolidated three branches in its branch network. The Bank's core
deposit base was stable during 2002 and represented 84% of total deposits. Until
additional capital is raised, the Bank will not seek to significantly increase
its level of deposits.
The net interest margin of the Bank was 4.83% in 2002, 5.08% in 2001, 5.04%
in 2000. Management actively manages its exposure to interest rate changes.
While the prime rate decreased 400 basis points during 2001 and another 150
basis points in 2002, the Bank did not experience a similar decline in yield on
its earning assets. This is because much of the Bank's loan portfolio is fixed
rate in nature and not related to prime. In addition, 65% of the Bank's
investment portfolio is fixed rate. These characteristics of the Bank's earning
assets coupled with the Bank's significant level of core deposits resulted in
minimal impact to the Bank's net interest margin during the declining rate
environment.
During 2002, the average federal funds yield was 1.62% compared to 3.65% in
2001 and 6.15% in 2000. During 2002, the average investment in federal funds
increased by $2.7 million. Because of the declining rate environment, the Bank
experienced a high level of payoffs/paydowns in its loan portfolio as well as a
significant level of calls of its higher yielding government agency securities.
Alternate investment strategies were developed and continue to be implemented to
place liquid funds into longer-term securities including mortgage-backed (MBS)
and other agency securities to decrease the level of investment in low yielding
Federal Funds Sold.
15
The yield on the investment portfolio decreased 57 basis points to 6.09% in
2001 compared to 6.66% in 2002 compared to 6.76% in 2000. As indicated above,
the Bank experienced a significant level of called agency securities that were
re-invested in a lower interest rate environment--thereby, reducing the yield on
the portfolio.
The cost of interest-bearing liabilities declined to 1.55% in 2002 compared
to 2.53% in 2001. Consistent with market conditions during 2002, the Bank
reduced the rates it pays on many of its interest-bearing products. Because most
of the Bank's deposits are considered core, they were not sensitive to declining
rates.
Provision for Loan Losses
The provision is based on management's estimate of the amount needed to
maintain an adequate allowance for loan losses. This estimate is based on the
review of the loan portfolio, the level of net credit losses, past loan loss
experience, the general economic outlook and other factors management feels are
appropriate.
The provision for loan losses charged against earnings in 2002 was $175,000
compared to $335,000 in 2001 and $565,000 in 2000. Significant provisions were
made for the year ended December 31, 2001 for one commercial borrower that the
Bank added to its classified loans and provided a specific reserve of $357,000.
This borrower is in the telecommunications industry with loans totaling
approximately $1.3 million and is experiencing severe financial difficulty.
Guarantees from the Small Business Administration (SBA) reduce the Bank's
exposure to approximately $714 thousand. Management continues to work closely
with this borrower to develop a workout plan to minimize the risk of loss. These
loans have been modified to provide for a moratorium on principal payments until
January 2004. The borrower is in compliance with the modified terms.
During the current unstable economic environment, the Bank monitors its
credit quality very closely by working with borrowers in an effort to identify
and control credit risk. Systematic provisions are made to the allowance to
cover potential losses related to the Bank's classified loans. Management
believes the level of the allowance for loan losses is adequate as of December
31, 2002.
Noninterest Income
Noninterest income decreased $116,000 in 2002 compared to 2001 and
decreased $754,000 in 2001 compared to 2000.
The amount of the Bank's noninterest income generally reflects the volume
of the transactional and other accounts handled by the Bank and includes such
fees and charges as low balance account charges, overdrafts, account analysis,
and other customer service fees. Customer service fees decreased $275,000 in
2002 compared to 2001 primarily because of a reduction in activity fees on
deposits and lower surcharge income on the Bank's ATM network. The Bank's lower
deposit levels in 2002 compared to 2001 result in less overdraft fees, activity
service charges and low balance fees.
Surcharges from the Bank's ATM network declined because of the 714 Market
Street branch closure in January 2002 and another ATM location lease expiration.
In addition, the Bank had two high-volume ATMs out of service for lengthy
periods during the year due to an accident and a relocation. Management
continues the process of identifying other potentially high volume locations.
The decline in customer service fees was partially offset by a $198,000
grant the Bank received from the U.S. Treasury Department's Bank Enterprise
Award (BEA) Fund. The Bank received this grant as a result of certificates of
deposit it placed with other Community Development Financial Institutions (CDFI)
throughout the country. (Note: United Bank of Philadelphia also has a CDFI
designation and periodically receives such deposits to support its community
development mission.)
Also, in 2002, the Bank syndicated a $60 million back-up line of credit
with other minority banks throughout the country for a major corporation for
which it received an agent fee. This fee will be received annually for the
administration of this line of credit.
During 2002, the Bank sold its former Frankford branch facility for a gain
of $48,000. In addition, the Bank sold approximately $1.1 million of its
available-for-sale portfolio for a gain of approximately $26,000.
16
During 2001, the Bank sold its former West Girard branch facility for a
gain of $78,000. In addition, the Bank sold approximately $3.5 million of its
available-for-sale portfolio for a gain of approximately $78,000.
Noninterest Expense
Noninterest expense decreased $943,000, or 13.4% in 2002 compared to a
decrease of $1.8 million, or 20% in 2001 compared to 2000.
Salaries and benefits decreased $320,000, or 12.01% in 2002 compared to a
decrease of $411,000, or 13.4%, in 2001. In April 2002, as part of its Profit
Restoration Plan, the Bank made strategic reductions in staff, job
consolidations, and reduced salaries for certain employees to lower the level of
personnel expense. Management continues its review to ensure the Bank is
operating with the most efficient organizational structure.
Occupancy and equipment expense decreased approximately $316,000, or
19.62%, during 2002 compared to a decrease of approximately $181,000, or 10.1%,
during 2001. The decrease is primarily attributable to the closure/consolidation
of the Bank's 714 Market Street branch in January 2002. In addition, the Bank's
former West Girard branch was sold in June 2001 and the Bank's former Frankford
branch office was sold on June 8, 2002. The sale of these branches results in
occupancy expense savings. In addition, many of the fixed assets initially
acquired in 1992 when the Bank opened for business are now fully depreciated (10
year life). This results in a reduction in monthly depreciation expense.
Data processing expenses are a result of the management decision of the
Bank to outsource a majority of its data processing operations to third party
processors. Such expenses are reflective of the high level of accounts being
serviced for which the Bank is charged a per account charge by processors. In
addition, the Bank uses outside loan servicing companies to service its
mortgage, credit card, installment and student loan portfolios. Data processing
expenses decreased by $168,000, or 20.81%, during 2002 compared to a decrease of
$163,000 or 16.8%, during 2001. The decrease is primarily attributable to a
reduction in deposit levels for which the Bank pays an outside servicer to
process transactions and provide statement rendering. In addition, during 2002,
the Bank received a $75,000 credit from its core service provider to cover
projected cost savings that were lost due to delays in conversion of its core
processing system.
In November 2002, the Bank converted its core data processing to a new
vendor, FISERV. This conversion will reduce monthly data processing expense by
at least $7,500 and result in other efficiencies that may allow further
reductions in personnel expense. The Bank continues to study methods by which it
may reduce its data processing costs, including but not limited to a
consolidation of servicers, in-house loan servicing options and the
re-negotiation of existing contracts with servicers.
Marketing and public relations expense decreased by $27,000, or 24.39% in
2002 compared to a decrease of $49,000, or 31.1% in 2001. The Bank does not use
a significant amount of traditional marketing and advertising. Management seeks
to use innovative methods to market the Bank's products and services through its
corporate alliances and strong ties to the religious community to enhance its
visibility and expand channels of distribution for its products and services for
minimal cost.
Professional services increased by $51,000, or 21.92% in 2002. During 2002,
the Bank worked with outside attorneys to settle two outstanding legal matters.
In addition, the legal review and implementation of the Sarbanes-Oxley Act that
was enacted in 2002, resulted in increased legal fees.
Office operations and supplies expense decreased by $21,000, or 4.54%, in
2002. Savings were realized as a result of the closure/consolidation of the
Bank's 714 Market Street branch due to reductions in branch operating cost (i.e.
security guards, supplies, etc.). In addition, in conjunction with the Bank's
earnings enhancement / profit restoration plan, all other operating expenses are
tightly controlled.
Federal deposit insurance premiums were $36,000 in 2002 compared to
$150,000 in 2001 and $169,000 in 2000. FDIC insurance premiums are applied to
all financial institutions based on a risk based premium assessment system.
17
Under this system, bank strength is based on three factors: 1) asset
quality, 2) capital strength, and 3) management. Premium assessments are then
assigned based on the institution's overall rating, with the stronger
institutions paying lower rates. The Bank's assessment was based on 15 basis
points for BIF (Bank Insurance Fund) assessable deposits and SAIF (Savings
Insurance Fund) assessable deposits. The decrease during 2002 is a result of a
reduction in the Bank's level of deposits as well as improvement in the Bank's
risk rating.
All other expenses are reflective of the general cost to do business and
compete in the current regulatory environment and maintenance of adequate
insurance coverage.
FINANCIAL CONDITION
Sources and Uses of Funds
The Bank's financial condition can be evaluated in terms of trends in its
sources and uses of funds. The comparison of average balances in Table 3 below
indicates how the Bank has managed these elements. Average funding uses
decreased approximately $2.8 million, or 3.50% in 2002 compared to approximately
$27.5 million, or 25.6%, in 2001.
Table 3--Sources and Use of Funds Trends
2002 2001 2000
------------------------------- ------------------------------- ---------
Increase Increase
Average (decrease) Average (decrease) Average
(Dollars in thousands) balance amount Percent balance amount Percent balance
--------- -------- ------- --------- -------- ------- ---------
Funding uses:
Loans ............................. $42,839 $(2,989) (6.52)% $45,828 $ (9,434) (17.07)% $ 55,262
Investment securities
Held-to-maturity................. 10,155 (4,514) (30.77) 14,669 (13,990) (48.82) 28,659
Available-for-sale............... 13,783 2,025 17.22 11,758 (6,286) (34.84) 18,044
Federal funds sold............... 10,406 2,680 34.69 7,726 2,208 40.01 5,518
------- ------- ------- -------- --------
Total uses................... $77,183 $(2,798) $79,981 $(27,502) $107,483
======= ======= ======= ======== ========
Funding sources:
Demand deposits:
Noninterest-bearing.............. $19,565 $ (47) (0.09)% $19,612 $ (7,955) (28.86)% $ 27,567
Interest-bearing................. 12,882 (920) (6.67) 13,802 (6,049) (30.47) 19,851
Savings deposits................... 21,931 (2,549) (10.41) 24,480 (6,296) (20.46) 30,776
Time deposits...................... 23,712 (377) (1.57) 24,089 (4,442) (15.57) 28,531
Other borrowed funds............... - (1) (100.00) 1 (1,924) (99.95) 1,925
------- ------- ------- -------- --------
Total sources................ $78,090 $(3,894) $81,984 $(26,666) $108,650
======= ======= ======= ======== ========
*Includes held-to-maturity and available-for-sale securities
Investment Securities and Other Short-Term Investments
The Bank's investment portfolio is classified as either held-to-maturity or
available-for-sale. Investments classified as held-to-maturity are carried at
amortized cost and are those securities the Bank has both the intent and ability
to hold to maturity. Investments classified as available-for-sale are those
investments the Bank intends to hold for an indefinite amount of time, but not
necessarily to maturity, and are carried at fair value, with the unrealized
holding gains and losses reported as a component of shareholders' equity on the
balance sheet.
Average investment securities and federal funds sold, in the aggregate,
increased by $191,000, or .56%, in 2002 compared to a decrease of $18 million,
or 34.6%, in 2001. The bulk of the increase was in the category of Federal Funds
Sold that increased on average by $2.7 million. During 2002, because of the
declining rate environment, the Bank experienced a high level of
payoffs/paydowns in its loan portfolio as well as a significant level of calls
of its higher yielding government agency securities. These funds are temporarily
held in Federal Funds Sold until loans and/or investments can be originated or
purchased.
18
The Bank's current investment portfolio primarily consists of
mortgage-backed pass-through agency securities and other government-sponsored
agency securities. The Bank does not invest in high-risk securities or complex
structured notes As reflected in Table 4 below, the average duration of the
portfolio is 2.62 years. In the current low interest rate environment, the
duration of the investment portfolio is significantly shortened because of the
of callable government agency securities.- approximately 21.4%. Approximately
$10.8 million in securities were called during the year. The average yield of
called securities was 6.00%. Calls will likely continue as the rate environment
remains at historically low levels. The result is additional liquidity and a
reduction in yield on the portfolio.
Approximately 78.6% of the portfolio consist of mortgage-backed
pass-through securities that have longer-term contractual maturities but are
sometimes paid off/down before maturity or have repricing characteristics that
occur before final maturity. The Bank has attempted to minimize the repayment
risk (risk of very fast or very slow repayment) associated with these types of
securities by investing primarily in a number of seasoned mortgage pools for
which there is a repayment history. This history better enables the Bank to
project the repayment speeds of these pools. In addition, the Bank has minimized
the interest rate risk associated with these mortgage-backed securities by
investing in a variety of pools, many of which have variable rates with indices
that track closely with the current interest rate environment.
The Bank will continue to take steps to combat the impact of the high level
of optionality in the portfolio by identifying replacement loans or securities
that diversify risk and provide some level of monthly cashflow to be reinvested
in the future rising rate environments. In 2002, a strategy to invest $4 million
in variable rate mortgage-backed securities was implemented. These securities
have average current yields of approximately 4.00% and estimated durations of 4
years with monthly cashflow. These securities will adjust at various intervals
ranging from one to seven years.
Table 4--Analysis of Investment Securities
After one but After five but
Within one year within five years within ten years After ten years
--------------- ----------------- ---------------- ---------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Total
------ ----- ------ ----- ------ ----- ------ ----- ------
Other government securities...... $ % $1,000 4.66% $3,862 5.90% $ % $ 4,862
Mutual funds..................... 106 1.35 106
Other investments................ 288 6.00 288
Mortgage-backed securities....... 16,262
----- ------ ------ ------ -------
Total securities................. $ 106 $1,000 $4,150 $21,518
Average maturity................. 2.62 years
The above table sets forth the maturities of investment securities at December
31, 2002 and the weighted average yields of such securities (calculated on the
basis of the cost and effective yields weighted for the scheduled maturity of
each security).
Loans
Average loans decreased approximately $3 million, or 6.52%, in 2002
compared to a decrease of $9.4 million, or 17.07%, in 2001. The Bank has
developed relationships with other financial institutions in the region with
which it participates in loans as a strategy to stabilize and grow its
commercial loan portfolio. This strategy continues to be utilized while the Bank
enhances it own business development capacity. Approximately $10 million in
commercial loan participations were booked during 2002. Most of these
participations were secured by commercial real estate.
Increases in the commercial loan portfolio were offset by significant
levels of repayments in the Bank's residential mortgage loan portfolio as
consumers refinance existing loans or sell existing homes to purchase new homes
to take advantage of the current low interest rate environment. Because the Bank
is not a competitive player in the mortgage loan origination market, it does not
generate sufficient mortgage loan volume to cover these payoffs.
The Bank's loan-to-deposit ratio at December 31, 2002 was 56.5% up from
53.2% at December 31, 2001. The target loan-to-deposit ratio is 75%. This level
would allow the Bank to optimize interest income on earning assets while
maintaining adequate liquidity. Management will continue to implement loan
growth strategies including the purchase of additional commercial loan
participations and the origination of small business loans and consumer loans
including home equity, automobile, student and credit card loans.
19
As reflected in Table 5 below, during 2002, because of the purchase of loan
participations, commercial real estate loans increased by $6.4 million to 27% of
total loans. Conversely, the rapid repayments in the mortgage loan portfolio
resulted in a reduction of $4.6 million, or 25.3%--thereby creating a
significant shift in the composition of the overall loan portfolio.
As reflected in Table 6 below, approximately 55% of the Bank's loan
portfolio have scheduled maturities of five years or more. This position is
largely a result of the Bank's relatively high level of residential mortgage
loans. While scheduled maturities exceed five years, due to the high level of
refinancing in this portfolio, the actual duration of the portfolio may be much
shorter.
Table 5--Loans Outstanding, Net of Unearned Income
December 31,
------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Commercial and industrial................... $10,855 $11,054 $11,429 $13,664 $13,643
Commercial real estate...................... 11,898 5,504 652 1,288 1,518
Residential mortgages....................... 13,560 18,148 22,316 26,237 31,365
Consumer loans.............................. 7,820 8,294 10,908 19,822 11,424
------- ------- ------- ------- -------
Total loans............................. $44,133 $43,000 $45,305 $61,011 $57,950
======= ======= ======= ======= =======
Table 6--Loan Maturities and Interest Sensitivity
Within After one but After
(Dollars in thousands) one year within five years five years Total
------------ ----------------- ---------- -------
Commercial and industrial................... $ 7,622 $ 1,908 $ 1,325 $10,855
Commercial real estate...................... 1,520 2,028 8,350 11,898
Residential mortgages....................... 13,560 13,560
Consumer loans.............................. 522 5,027 2,271 7,820
------- ------- ------- -------
Total loans........................... 9,664 8,963 25,506 44,133
Loans maturing after one year with:
Fixed interest rates.................... $32,787
Variable interest rates................. 1,682
Nonperforming Loans
Table 7 reflects the Bank's nonperforming and restructured loans for the
last five years. The Bank generally determines a loan to be "nonperforming" when
interest or principal is past due 90 days or more. If it otherwise appears
doubtful that the loan will be repaid, management may consider the loan to be
nonperforming before the lapse of 90 days. The Bank's policy is to charge off
unsecured loans after 90 days past due. Interest on nonperforming loans ceases
to accrue except for loans that are well collateralized and in the process of
collection. When a loan is placed on nonaccrual, previously accrued and unpaid
interest is reversed out of income unless adequate collateral from which to
collect the principal of, and interest on, the loan appears to be available.
Table 7--Nonperforming Loans
(Dollars in thousands) 2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Nonaccrual loans............................ $ 651 $ 412 $ 453 $2,027 $1,720
Interest income included in net income
for the year............................ 25 25 20 67 37
Interest income that would have been
recorded under original terms........... 49 29 28 113 189
Loans past due 90 days and still accruing... 797 526 34 53 125
Restructured loans.......................... 1,286 182 632 580 -
20
The balance of impaired loans was $ 1,951,000 and $412,000 as of December
31, 2002 and 2001, respectively. The Bank identifies a loan as impaired when it
is probable that interest and principal will not be collected according to the
contractual terms of the loan agreement. The impaired loan balance included
$651,000 and $412,000 of non-accrual loans at December 31, 2002 and 2001,
respectively. The allowance for loan loss associated with the $1,951,000 of
impaired loans was $402,000 at December 31, 2002. Interest income recognized on
impaired loans during 2002 and 2001 was $104,000 and $25,000, respectively. The
Bank recognizes income on impaired loans under the cash basis when the loans are
both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Bank. If these factors do not exist, the Bank will
not recognize income on such loans.
From time to time, management will modify or restructure the terms of
certain loans to provide relief to borrowers. Restructured loans are those loans
whose terms have been modified because of deterioration in the financial
condition of a borrower to provide for a reduction of either interest or
principal, regardless of whether such loans are secured or unsecured and
regardless of whether such credits are guaranteed by the government or by
others. As of December 31, 2002, the Bank had approximately $1.3 million in
restructured loans consisting primarily of three loans to one borrower in the
technology industry.
There is no known information about possible credit problems other than
those classified as nonaccrual or impaired that causes management to be
uncertain as to the ability of any borrower to comply with present loan terms.
The Bank grants commercial, residential, and consumer loans to customers
primarily located in Philadelphia County, Pennsylvania and surrounding counties
in the Delaware Valley. Although the Bank has a diversified loan portfolio, its
debtors' ability to honor their contracts is influenced by the region's economy.
At December 31, 2002, approximately 18.71% of the commercial loan portfolio
of the Bank was concentrated in loans made to religious organizations. From
inception, the Bank has received support in the form of investments and deposits
and has developed strong relationships with the Philadelphia region's religious
community. Loans made to these organizations were primarily for expansion and
repair of church facilities. At December 31, 2002, none of these loans were
nonperforming.
During 2002, nonaccrual loans totaled $651,000, compared to $412,000 at
December 31, 2001. At December 31, 2002, approximately $66,000 of the total
nonaccrual loans was residential mortgages and $342,000 carried some level of
guarantee from the Small Business Administration. The underlying real estate
collateral and credit enhancement provided by the SBA minimizes the risk of
loss.
Allowance for Loan Losses
The allowance for loan losses reflects management's continuing evaluation
of the loan portfolio, assessment of economic conditions, the diversification
and size of the portfolio, adequacy of collateral, past and anticipated loss
experience, and the amount and quality of nonperforming loans. Table 8 below
presents the allocation of loan losses by major category for the past five
years. The specific allocations in any particular category may prove to be
excessive or inadequate and consequently may be reallocated in the future to
reflect then current conditions.
The allowance for loan losses as a percentage of total loans was 1.53% at
December 31, 2002 compared with 1.65% at December 31, 2001. During the past two
years, there has been an economic downturn and economic uncertainty continues.
Because the impact on the borrowers may lag the current economic conditions, the
Bank proactively monitors its credit quality while working with borrowers in an
effort to identify and control credit risk.
At December 31, 2002, the Bank's classified loans totaled $2.7 million , or
6.1%, of total loans. Specific reserves of $608,000 have been allocated to these
loans. Approximately $357 thousand was allocated to one loan for which full
collectibility is uncertain. (Refer to Provision for Loan Losses above for
further discussion on this loan.)
21
Table 8--Allocation of Allowance for Loan Losses
2002 2001 2000 1999 1998
------------------- ------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Commercial and
industrial.......... $ 565 24.60% $ 576 37.30% $ 383 25.23% $ 263 22.40% $ 272 23.55%
Commercial real
estate.............. 37 26.96 29 1.21 11 1.44 877 2.11 132 2.62
Residential mortgages. 45 17.72 30 19.29 102 24.08 144 43.00 55 54.12
Consumer loans........ 28 30.72 73 42.20 66 49.25 283 32.49 188 19.71
Unallocated........... - - - - - - - - 32 -
----- ------- ----- ------- ----- ------- ------ ------- ----- -------
$ 675 100.00% $ 708 100.00% $ 562 100.00% $1,567 100.00% $ 679 100.00%
===== ======= ===== ======= ===== ======= ====== ======= ===== =======
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of the examination.
Table 9--Analysis of Allowance for Loan Losses
Year ended December 31,
------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Balance at January 1....................... $ 708 $ 562 $ 1,567 $ 679 $ 468
Charge-offs:
Commercial and industrial.............. (61) (321) (25) -
Commercial real estate................. (100) (803) - -
Residential mortgages.................. - (47) -
Consumer loans......................... (261) (261) (597) (315) (180)
------ ------ ------- ------- ------
(361) (322) (1,721) (387) (180)
------ ------ ------- ------- ------
Recoveries--commercial loans................ 27 - - - -
Recoveries--consumer loans.................. 126 133 151 268 41
------ ------ ------- ------- ------
153 133 151 268 41
Net charge-offs............................ (208) (189) (1,570) (119) (139)
Provisions charged to operations........... 175 335 565 1,007 350
------ ------ ------- ------- ------
Balance at December 31..................... $ 675 $ 708 $ 562 $ 1,567 $ 679
====== ====== ======= ======= ======
Ratio of net charge-offs to average loans
outstanding............................. 0.49% 0.41% 2.84% 0.17% 0.19%
The amount charged to operations and the related balance in the allowance
for loan losses are based upon the periodic evaluations of the loan portfolio by
management. These evaluations consider several factors, including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience, and management's estimate of future potential losses.
22
Deposits
Average deposits declined approximately $3.9 million, or 4.71%, in 2002
compared to a decline of $24.7 million, or 23.2%, in 2001. The decline is
primarily attributable to the maturity of certificates of deposits the Bank held
on deposit from a special deposit program of the Commonwealth of Pennsylvania.
This program was eliminated in 2002. Because of mandatory capital requirements
outlined in the Bank's Written Agreement with its regulators (See Regulatory
Matters below), aggressive deposit retention or new business development
strategies have not been implemented.
Table 10--Average Deposits by Class and Rate
2002 2001 2000
------------------ ------------------ ------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
------------------ ------------------ ------------------
Noninterest-bearing demand deposits $19,565 - % $19,612 - % $27,567 - %
Interest-bearing demand deposits 12,882 0.89 13,802 1.29 19,851 3.03
Savings deposits 21,931 0.59 24,480 1.30 30,776 1.61
Time deposits 23,712 2.79 24,089 4.49 28,531 4.86
Other Borrowed Funds
The Bank did not borrow funds during 2002. Generally, the level of other
borrowed funds is dependent on many items such as loan growth, deposit growth,
customer collateral/security requirements and interest rates paid for these
funds. The Bank's liquidity has been enhanced by loan paydowns/payoffs and
called investment securities--thereby, reducing the need to borrow.
Liquidity and Interest Rate Sensitivity Management
The primary functions of asset/liability management are to assure adequate
liquidity and maintain appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and enhance
consistent growth of net interest income through periods of changing interest
rates.
The Bank is required to maintain minimum levels of liquid assets as defined
by Federal Reserve Board ("FRB") regulations. This requirement is evaluated in
relation to the composition and stability of deposits; the degree and trend of
reliance on short-term, volatile sources of funds, including any undue reliance
on particular segments of the money market or brokered deposits; any difficulty
in obtaining funds; and the liquidity provided by securities and other assets.
In addition, consideration is given to the nature, volume and anticipated use of
commitments; the adequacy of liquidity and funding policies and practices,
including the provision for alternate sources of funds; and the nature and trend
of off-balance-sheet activities. As of December 31, 2002, management believes
the Bank's liquidity is satisfactory and in compliance with FRB regulations.
The Bank's principal sources of asset liquidity include investment
securities consisting primarily of U.S. Government and agency issues,
particularly those of shorter maturities, and mortgage-backed securities with
monthly repayments of principal and interest. There are no securities maturing
in one year or less. However, other types of assets such as federal funds sold,
as well as maturing loans, are sources of liquidity. Approximately $9.2 million
in loans are scheduled to mature within one year.
23
The Bank's overall liquidity has been enhanced by a significant level of
core deposits which management has determined are less sensitive to interest
rate movements. The Bank has avoided reliance on large-denomination time
deposits as well as brokered deposits. Table 11 provides a breakdown of the
maturity of time deposits of $100,000 or more.
Table 11--Maturity of Time Deposits of $100,000 or More
(Dollars in thousands)
3 months or less.......................... $ 7,754
Over 3 through 6 months................... 769
Over 6 months through 1 year.............. 1,114
Over 1 through five years................. 1,246
Over five years........................... -
-------
Total................................ $10,883
=======
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Overnight federal funds on which rates
change daily and loans that are tied to prime or other short-term indices differ
considerably from long-term investment securities and fixed-rate loans.
Similarly, time deposits are much more interest-sensitive than passbook savings
accounts. The shorter-term interest rate sensitivities are key to measuring the
interest sensitivity gap or excess interest-earning assets over interest-bearing
liabilities. Management of interest sensitivity involves matching repricing
dates of interest-earning assets with interest-bearing liabilities in a manner
designed to optimize net interest income within the limits imposed by regulatory
authorities, liquidity determinations and capital considerations. Table 12 sets
forth the earliest repricing distribution of the Bank's interest-earning assets
and interest-bearing liabilities at December 31, 2002, the Bank's interest rate
sensitivity gap ratio (i.e., excess of interest rate-sensitive assets over
interest rate-sensitive liabilities, divided by total assets) and the Bank's
cumulative interest rate sensitivity gap ratio. For purposes of the table,
except for savings deposits, an asset or liability is considered rate-sensitive
within a specified period when it matures or could be repriced within such
period in accordance with its contractual terms. At December 31, 2002, a slight
asset sensitive position is maintained on a cumulative basis through one year of
5.26%. This level is within the Bank's policy guidelines of +/-15% on a
cumulative one-year basis. The current gap position is relatively evenly matched
as a result of the number of loans either repricing or maturing in 12 months
closely matching certificate of deposit maturities. Interest rate risk is
minimized by the Bank's high level of core deposits that have been placed in
longer repricing intervals. Generally, because of the Bank's positive gap
position in shorter time frames, the Bank can anticipate that increases in
market rates will have a positive impact on the net interest income, while
increases will have the opposite effect.
For purposes of the gap analysis, such deposits (savings, MMA, NOW) which
do not have definitive maturity dates and do not readily react to changes in
interest rates have been placed in longer repricing intervals versus immediate
repricing time frames, making the analysis more reflective of the Bank's
historical experience.
24
Table 12--Interest Sensitivity Analysis
Interest rate sensitivity gaps as of December 31, 2002
--------------------------------------------------------------------------
Over
Over 1 year Over
3 months 3 through through 3 through Over
(Dollars in thousands) or less 12 months 3 years 5 years 5 years Cumulative
-------- --------- --------- --------- --------- ----------
Interest-sensitive assets:
Interest-bearing deposits with banks. $ $ 865 $ $ $ $ 865
Investment securities................ 9,410 830 438 1,026 9,419 21,123
Federal funds sold................... 10,122 10,122
Loans................................ 14,630 4,939 5,764 4,046 14,754 44,133
------ ------ ----- ----- ------ ------
Total interest-sensitive assets.... 34,162 6,634 6,202 5,072 24,173 $76,243
------ ------ ----- ------ ------ =======
Cumulative totals.................. 34,162 40,796 46,998 52,070 76,243
------ ------ ------ ------ ------
Interest rate sensitivity gaps as of December 31, 2002
--------------------------------------------------------------------------
Over
Over 1 year Over
3 months 3 through through 3 through Over
(Dollars in thousands) or less 12 months 3 years 5 years 5 years Cumulative
-------- --------- --------- --------- --------- ----------
Interest-sensitive liabilities:
Interest checking accounts........... 2,927 2,927 5,854
Savings accounts..................... 13,739 13,739 27,478
Certificates less than $100,000...... 4,117 6,362 1,167 615 12,261
Certificates of $100,000 or more..... 6,332 3,306 1,245 10,883
Other borrowed funds................. - - - - -
------- ------- -------- ------- ------- -------
Total interest-sensitive liabilities $27,115 $ 9,668 $ 19,078 $ 615 $ - $56,476
======= ======= ======== ======= ======= =======
Cumulative totals.................. $27,115 $36,783 $ 55,861 $56,476 $56,476
======= ======= ======== ======= =======
Interest sensitivity gap................. $ 7,046 $(3,034) $(12,876) $ 4,457 $24,173
======= ======= ======== ======= =======
Cumulative gap........................... 7,046 4,012 (8,863) (4,406) 19,767
Cumulative gap/total earning assets...... 9.24% 5.26% 11.63% 5.78% 25.93%
Interest-sensitive assets to interest-sensitive
liabilities.......................... 1.26 1.11 0.84 0.92 1.35
Core deposits such as checking and savings deposits have been placed in
repricing intervals based on historical trends and management's estimates.
While using the interest sensitivity gap analysis is a useful management
tool as it considers the quantity of assets and liabilities subject to repricing
in a given time period, it does not consider the relative sensitivity to market
interest rate changes that are characteristic of various interest rate-sensitive
assets and liabilities. Consequently, even though the Bank currently has a
positive gap position because of unequal sensitivity of these assets and
liabilities, management believes this position will not materially impact
earnings in a changing rate environment. For example, changes in the prime rate
on variable commercial loans may not result in an equal change in the rate of
money market deposits or short-term certificates of deposit. A simulation model
is therefore used to estimate the impact of various changes, both upward and
downward, in market interest rates and volumes of assets and liabilities on the
net income of the Bank. The calculated estimates of net income or "earnings" at
risk at December 31, 2002 are as follows:
25
Net interest Percent of
Changes in rate income change
--------------- ----------- ----------
(Dollars in thousands)
+200 basis points $ 3,835 2.43%
+100 basis points 3,790 1.23
Flat rate 3,744 -
-100 basis points 3,696 (1.28)
-200 basis points 3,638 (2.83)
A simulation model is also used to estimate the impact of various changes,
both upward and downward, in market interest rates and volumes of assets and
liabilities on the economic value of the Bank. This model produces an interest
rate exposure report that measures the long-term rate risks in the balance sheet
by valuing the Bank's assets and liabilities at market. It simulates what amount
would be left over if the Bank liquidated its assets and liabilities. This is
otherwise known as "economic value" of the capital of the Bank. The calculated
estimates of economic value at risk at December 31, 2002 are as follows:
Percent of
Changes in rate MV equity change
--------------- ----------- ----------
(Dollars in thousands)
+200 basis points $ 3,335 52.03%
+100 basis points 5,136 26.13
Flat rate 6,953 -
-100 basis points 8,836 27.08
-200 basis points 10,571 52.03
The assumptions used in evaluating the vulnerability of the Bank's earnings
and equity to changes in interest rates are based on management's consideration
of past experience, current position and anticipated future economic conditions.
The interest sensitivity of the Bank's assets and liabilities, as well as the
estimated effect of changes in interest rates on the earnings and equity, could
vary substantially if different assumptions are used or actual experience
differs from the assumptions on which the calculations were based.
The Bank's Board of Directors and management consider all of the relevant
factors and conditions in the asset/liability planning process. Interest rate
exposure is not significant and is within the policy limits of the Bank at
December 31, 2002. However, if significant interest rate risk arises, the Board
of Directors and management may take, but are not limited to, one or all of the
following steps to reposition the balance sheet as appropriate:
1. Limit jumbo certificates of deposit and movement into money market
deposit accounts and short-term certificates of deposit through
pricing and other marketing strategies.
2. Purchase quality loan participations with appropriate interest
rate/gap match for the Bank's balance sheet.
3. Restructure the Bank's investment portfolio.
The Board of Directors has determined that active supervision of the
interest rate spread between yield on earning assets and cost of funds will
decrease the Bank's vulnerability to interest rate cycles.
Capital Resources
Total shareholders' equity declined $58,000 in 2002 compared to 2001. The
decrease in 2002 is a result of the net loss of $217,000 which resulted in an
increase in the accumulated deficit offset by an increase in other comprehensive
income for the fair market value of available for sale investment securities,
net of taxes.
26
The FRB standards for measuring capital adequacy for U.S. Banking
organizations require that banks maintain capital based on "risk-adjusted"
assets so that categories of assets with potentially higher risk will require
more capital backing than assets with lower risk. In addition, banks are
required to maintain capital to support, on a risk-adjusted basis, certain
off-balance-sheet activities such as loan commitments. The FRB standards
classify capital into two tiers, referred to as Tier I and Tier II. Tier I
consists of common shareholders' equity (excluding net unrealized holding gains
on available for sale securities), noncumulative and cumulative perpetual
preferred stock, and minority interests less goodwill and/or intangible assets).
Tier II capital consists of allowance for loan losses, hybrid capital
instruments, term subordinated debt, and intermediate-term preferred stock.
Banks are required to meet a minimum ratio of 8% of qualifying capital to
risk-adjusted total assets with at least 4% Tier I capital and a Tier I leverage
ratio of at least 6%. Capital that qualifies as Tier II capital is limited to
100% of Tier I capital.
As indicated in Table 13, the Company's risk-based capital ratios are above
the minimum requirements. Management continues the objective of raising
additional capital by offering additional stock (preferred and common) for sale
in a private offering as well as increasing the rate of internal capital growth
as a means of maintaining the required capital ratios. However, the Bank's
growth, continued losses and the additional provisions to the allowance for loan
losses may have an adverse effect on its capital ratios. The Company and the
Bank do not anticipate paying dividends in the near future.
Table 13--Capital Ratios
(Dollars in thousands) 2002 2001 2000
------- ------- -------
Total Capital................................. $ 8,263 $ 8,459 $ 9,317
Less:
Intangible Assets......................... (1,937) (2,119) (2,298)
------- ------- -------
Tier I capital................................ 6,326 6,340 7,019
Tier II capital............................... 528 510 537
------- ------- -------
Total qualifying capital...................... $ 6,854 $ 6,850 $ 7,556
======= ======= =======
Risk-adjusted total assets
(including off-balance-sheet exposures)..... $42,104 $41,624 $42,949
======= ======= =======
Tier I risk-based capital ratio................ 15.02% 15.23% 16.34%
Total (Tier I and II) risk-based capital ratio. 16.28% 16.46% 17.59%
Tier I leverage ratio.......................... 7.46% 7.12% 7.39%
Regulatory Matters
In February 2000, as a result of a regulatory examination completed in
December 1999, the Bank entered into a Written Agreement (herein sometimes
referred to as the Agreement) with its primary regulators with regard to, among
other things, achievement of agreed-upon capital levels, implementation of a
viable earnings/strategic plan, adequate funding of the allowance for loan
losses, the completion of a management review and succession plan, and
improvement in internal controls. The Agreement requires the Bank to increase
its capital ratio to 6.5% by June 30, 2000 and to 7% at all times thereafter. As
of December 31, 2000, the Bank had met the required ratios by implementing
strategies that included: reducing expenses, consolidating branches, and
soliciting new and additional sources of capital. Management continues to
address all matters outlined in the Agreement. Management believes that the Bank
is "substantially" in compliance with the Agreement's terms and conditions.
Failure to comply could result in additional regulatory supervision and/or
actions.
As of December 31, 2001, the Bank's tier one leverage capital ratio fell to
6.80% , below the 7% minimum capital ratio required by the Agreement. However,
at December 31, 2002, the tier one leverage ratio had improved to 7.12% as a
result of the smaller average asset size of the Bank. Management continues to
review and revise its capital plan to address the development of new equity. In
addition, a profit restoration plan was developed and implemented during 2002 to
include numerous expense reduction and profit enhancement strategies.
27
Recent Accounting Pronouncements
On January 1, 2002 the Bank adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived assets to be
held and used or to be disposed of by sale. However, SFAS No. 144 makes changes
to the scope and certain measurement requirements of existing accounting
guidance. SFAS No. 144 also changes the requirements relating to reporting the
effects of a disposal or discontinuation of a segment of a business. The
adoption of this statement did not have an impact on the financial condition or
results of operations of the Bank.
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure," amends the disclosure and certain transition provisions of SFAS No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. For entities that use the intrinsic value
method under Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, to account for employee stock compensation for any
period presented, their accounting policies note should include certain
disclosures. The expanded annual disclosure requirements and the transition
provisions are effective for fiscal years ending after December 15, 2002. The
new interim period disclosures are required in financial statements for interim
periods beginning after December 15, 2002. The expanded annual disclosures are
provided in the 2002 financial statements.
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns, or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate, but it which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to existing entities in the first fiscal year
or interim period beginning after June 15, 2003. The Company is in the process
of determing what impact, if any, the adoption of the provisions of FIN 46 will
have upon its financial condition or results of operations.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The financial information required by this Item 7A is incorporated by
reference to page 25 of this Report, the Liquidity and Interest Rate Sensitivity
Management provisions and pages 23 to 26 of this Report including Table --12 the
Interest Sensitivity Analysis Table of this Report.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements on pages 39 to 63 hereof.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
28
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant and Bank
------------------------------------
Principal occupation and Year first Term
Name Age other directorships became director will expire
- ---- --- --------------------------- --------------- -----------
James F. Bodine 81 Co-Chairman, 1993 2003
United Bancshares, Inc.
Retired as Managing Partner,
Urban Affairs Partnership
Philadelphia, Pennsylvania
Bernard E. Anderson 65 Professor of Management/Economist 2002 2006
At the Wharton School,
Philadelphia, PA
David R. Bright 63 Retired, Executive Vice President
Meridian Bancorp 2002 2006
Philadelphia, PA
Luis A. Cortes, Jr. 45 President,
Nueva Esperanza 2002 2006
Philadelphia, PA
L. Armstead Edwards 61 Co-Chairman, 1993 2004
United Bancshares, Inc.
Owner and President,
P.A.Z., Inc.
Philadelphia, Pennsylvania
Marionette Y. Wilson(Frazier) 58 Retired as Partner, 1996 2004
John Frazier, Inc.
Philadelphia, Pennsylvania
Angela M. Huggins 61 Treasurer, 1993 2005
United Bancshares, Inc.
Retired as Vice President
Real Estate Affairs
RMS Technologies, Inc.
William B. Moore 60 Secretary,
United Bancshares, Inc.
Pastor, Tenth Memorial 1993 2003
Baptist Church
Philadelphia, Pennsylvania
Wanda M. Richards 37 Senior Counsel, FCCS 2001 2005
Steven L. Sanders 42 President and Co-CEO,
MDL Capital 2002 2006
29
Principal occupation and Year first Term
Name Age other directorships became director will expire
- ---- --- ------------------- --------------- -----------
Evelyn F. Smalls 57 President and CEO of Registrant 2000 2003
and United Bank of Philadelphia
Ernest L. Wright 74 Founder, President and 1993 2004
CEO of Ernest L. Wright
Construction Company
Philadelphia, Pennsylvania
(b) Executive Officers of Registrant and Bank
Name Age Office
- ---- --- ------
Evelyn F. Smalls 57 President and Chief Executive Officer
Brenda M. Hudson-Nelson 41 Executive Vice President/Chief Financial Officer
James F. Bodine 81 Co-Chairman, Board of Directors
L. Armstead Edwards 61 Co-Chairman, Board of Directors
William B. Moore 60 Secretary
Marionette Y. Frazier 58 Assistant Secretary
Angela M. Huggins 62 Treasurer
(c) Family Relationships.
--------------------
There are no family relationships between any director, executive officer
or person nominated or chosen by the UBS or the Bank to become a director or
executive officer.
(d) Other
There have been no events under any bankruptcy act, no criminal proceedings
and no judgments or injunctions material to the evaluation of the ability and
integrity of any director or executive officer during the past five years.
ITEM 11 -- EXECUTIVE COMPENSATION
The following information relates to all plan and non-plan compensation
awarded to, earned by, or paid to (i) Evelyn F. Smalls, the President and Chief
Executive Officer of the Bank , and (ii) Brenda M. Hudson-Nelson, Executive Vice
President and Chief Financial Officer of the Bank, the only persons who were
serving as executive officers of the Bank at December 31, 2002 (Ms. Smalls and
Ms. Hudson-Nelson are hereinafter sometimes collectively referred to as the
"Named Executive Officers").
(1) UBS' executives are not compensated for their services to UBS rather,
because the Bank is the principal subsidiary of UBS, they are compensated as
officers of the Bank.
30
Summary Compensation Table
The disclosure regarding the compensation of the Bank's executives includes
the following table that sets forth the compensation paid to the Named Executive
Officers during the last three fiscal years.
Annual Compensation(1)
----------------------
Stock All Other
Name and Principal Position During 2002 Year Salary Bonus Options Compensation(2)
- --------------------------------------- ---- ------ ------- ------- ---------------
($) (#) ($)
Evelyn F. Smalls 2002 $148,009 -- -- --
President and Chief Executive Officer 2001 $141,000 -- -- --
of UBS and the Bank 2000 $118,921 -- -- --
-- -- --
Brenda M. Hudson-Nelson 2002 $102,112 -- -- --
Executive Vice President and Chief Financial 2001 $100,900 -- -- --
Officer of UBS and the Bank 2000 $ 96,445 -- -- --
- ------------------
(1) Amounts are not included in the Bonus, Stock Option and All Other
Compensation columns of the table because no compensation of this nature
was paid by UBS or the Bank and the restricted stock awards and long term
incentive payouts columns are not included in the Compensation Table since
these benefits are not made available by UBS or the Bank.
(2) The Commission's compensation disclosure rules require the use, where
applicable, of a series of tables to describe various types of compensation
paid to the specified executive officers. The use of a specific table or
column in a table is not required by the Commission's rules if no
compensation was paid or awarded to the named executives. Only the tables
or columns required to be used by the Commission's rules, because of the
compensation paid to the specified executive officers, have been used in
this Proxy Statement
Executive Employment Agreements
The Bank entered into an Employment Agreement with Evelyn F. Smalls dated
June 12, 2000 to serve as the Bank's President and Chief Executive Officer. The
initial term of the Employment Agreement is two (2) years, unless extended or
terminated. In June 2002, the Employment Agreement was extended for two (2)
years. The Employment Agreement provides for an annual base salary of $135,000
which may be increased, but not decreased. Under her Employment Agreement, Ms.
Smalls has an opportunity to receive an annual initial cash bonus (the "Initial
Cash Bonus") of 12% of her annual base salary and an annual additional cash
bonus (the "Additional Cash Bonus") of 12% of her annual base salary in calendar
years 2002 and 2003, based on performance targets specified in the Employment
Agreement which are based on the annual earnings of the Bank.
The Bank entered into an Employment Agreement with Brenda M. Hudson-Nelson
dated June 12, 2000 to serve as the Bank's Senior Vice President and Chief
Financial Officer. The initial term of the Employment Agreement is two (2)
years, unless extended or terminated. In June 2002, the Employment Agreement was
extended for two (2) years. The Employment Agreement provides for an annual base
salary of $95,000 which may be increased, but not decreased. Under her
Employment Agreement, Ms. Hudson-Nelson has an opportunity to receive an annual
initial cash bonus (the "Initial Cash Bonus") of 12% of her annual base salary
and an annual additional cash bonus (the "Additional Cash Bonus") of 12% of her
annual base salary in calendar years 2000 and 2001, based on performance targets
specified in the Employment Agreement which are based on the annual earnings of
the Bank.
Equity Compensation Plan Information
The Company adopted a Stock Option Plan in 1998. Under this Plan, options
to acquire shares of common stock were granted to the former chief executive
officer. The Stock Option Plan provides for the granting of options at the fair
market value of the Company's common stock at the time the options are granted.
Each option granted under the Stock Option Plan may be exercised within a period
of ten years from the date of grant. However, no option may be exercised within
one year from the date of grant. In 1998, options to purchase 29,694 shares of
the Company's common stock at a price of $8.54 per share were awarded to the
former chief executive officer.
31
Equity Compensation Plan Table
- --------------------------------------------------------------------------------------------------
(a) (b) (c)
- --------------------------------------------------------------------------------------------------
Plan Category Number of Securities Weighted average Number of securities
to be issued upon exercise price remaining available for
exercise of of outstanding future issuance under equity
outstanding options, options, warrants, compensation plans
warrants and rights and rights (excluding securities
reflected in column (a))
- --------------------------------------------------------------------------------------------------
Equity compensation
plans approved by 29,694 $8.54 70,306
security holders
- --------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by - - -
security holders
- --------------------------------------------------------------------------------------------------
Total 29,694 $8.54 70,306
==================================================================================================
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to UBS, as of
March 17, 2003 (1), with respect to the only persons to UBS' knowledge, who may
be beneficial owners of more than 5% of UBS' Common Stock.
Percentage of
Amount and Nature of Outstanding
Beneficial Ownership Corporation
Name and Address of Corporation Common Stock
of Beneficial Owner Common Stock Owned
- --------------------------------------------------------------------------------
Philadelphia Municipal 71,667 7.87%
Retirement System
2000 Two Penn Center
Philadelphia, Pennsylvania 19102
First Union Corporation(2) 50,000 5.49%
1 First Union Center
Charlotte, NC 28288
- ------------------
(1) As of March 17, 2003, there were 907,542 shares of UBS' voting Common Stock
outstanding.
(2) First Union Corporation owns 241,666 shares of UBS Common Stock of which
50,000 are voting shares.
The following table sets forth certain information with respect to the
current executive officers of UBS and Bank as of March 17, 2003:
Name, Principal Occupation UBS Stock
and Business Experience Office with the UBS Beneficially
For Past 5 Years and/or Bank Owned
- --------------------------------------------------------------------------------
Evelyn F. Smalls President and
Chief Executive Officer and 350
Director of UBS and Bank
Brenda M. Hudson-Nelson Executive Vice President and 50
Chief Financial Officer
of UBS and Bank
32
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and executive officers of the UBS and Bank and the
entities with which they are associated were customers of and had banking
transactions with the Bank in the ordinary course of its business during the
year 2002. All loans and commitments to lend were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons. In the opinion of Bank
management, the transactions and loan commitments did not involve more than
normal risk of collectively or present other unfavorable features.
ITEM 14--CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer, Evelyn F. Smalls,
and Chief Financial Officer, Brenda Hudson-Nelson, of the effectiveness of the
design and operation of the UBS' and the Bank's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the UBS' and
the Bank's disclosure controls and procedures are effective in timely alerting
them to material information relating to the UBS (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
As of the date of this report, there have not been any significant changes in
the UBS' and the Bank's internal controls or in any other factors that could
significantly affect those controls subsequent to the date of the evaluation.
33
PART IV
ITEM 15 -- EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report of United
Bancshares, Inc.:
(a) 1. Financial Reports of United Bancshares, Inc. Page
-------------------------------------------- ----
Report of Independent Certified Public Accountants, March 12, 2003.. 39
Consolidated Balance Sheets at December 31, 2002 and 2001........... 40
Consolidated Statements of Operations for the three years ended
December 31, 2002............................................... 41
Consolidated Statements of Changes in Shareholders' Equity for the
three years ended December 31, 2002............................. 42
Consolidated Statements of Cash Flows for the three years ended
December 31, 2002............................................... 43
Notes to Consolidated Financial Statements.......................... 44
2. Financial Statement Schedules
Financial Statement Schedules are omitted because the required
information is either not applicable, not required or is shown in
the respective financial statements or in the notes thereto.
4. The following Exhibits are filed herewith or incorporated by reference
as a part of this Annual Report:
Exhibit Number Item
-------------- ----
(3(i)) Articles of Incorporation
(Incorporated by reference to Registrant's 1998 Form 10-K).
(3(ii)) Bylaws
(Incorporated by reference to Registrant's 1997 Form 10-K).
(9.1) Voting Trust Agreement with NationsBank
(Incorporated by reference to Registrant's 1997 Form 10-K).
(9.2) Voting Trust Agreement with Fahnstock
(Incorporated by reference to Registrant's 1997 Form 10-K).
(10) Material Contracts
a) Lease for branch office located at Two Penn Center
b) Lease for branch office located at 1620 Wadsworth Avenue
c) Lease for branch office located at 3750 Lancaster Avenue
d) Lease for branch office located at 1015 North Broad Street
e) Evelyn F. Smalls' Employment Agreement
f) Brenda Hudson-Nelson's Employment Agreement
g) Brokerage Services Agreement (Dual Employee Program) by and
between UVEST Financial Services Group, Inc. and the
United Bank of Philadelphia, dated July 17, 2002
h) Long Term Incentive Compensation Plan (incorporated by
reference to Registrant's 1992 Form 10)
(11) Statement of Computation of Earnings Per Share.
Included at Item 8 hereof.
(12) Statement of Computation of Ratios.
Included at Item 8 hereof.
34
c) Not applicable.
(13) Annual Report to Security Holders
(21) Subsidiaries of Registrant
Name State of Incorporation
---- ----------------------
United Bank of Philadelphia Pennsylvania
(99) Additional Exhibits
(A) Exhibit 99
Registrants Proxy Statement for its Annual Shareholders Meeting
held on July 26, 2002 is attached hereto as Exhibit 99(A).
(B) Exhibit 99.1
Certification Pursuant to 18U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
the Chief Executive Officer attached hereto as Exhibit 99.1.
(C) Exhibit 99.2
Certification Pursuant to 18U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
the Chief Financial Officer attached hereto as Exhibit 99.2.
b) No reports on Form 8-K have been filed during the last quarter covered by
this report.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized
UNITED BANCSHARES, INC. DATE
/s/ Evelyn F. Smalls March 31, 2003
- -------------------------------------------
Evelyn F. Smalls, President & CEO, Director
/s/ Brenda M. Hudson-Nelson March 31, 2003
- -----------------------------------------
Brenda M. Hudson-Nelson, EVP, CFO
/s/ James F. Bodine March 31, 2003
- -----------------------------------------
James F. Bodine, Co-Chairman, Director
/s/ L. Armstead Edwards March 31, 2003
- ------------------------------------------
L. Armstead Edwards, Co-Chairman, Director
/s/ Marionette Y. Wilson(Frazier) March 31, 2003
- -----------------------------------------
Marionette Y. Wilson(Frazier), Assistant Secretary, Director
/s/ Angela M. Huggins March 31, 2003
- -----------------------------------------
Angela M. Huggins, Treasurer, Director
/s/ William B. Moore March 31, 2003
- -----------------------------------------
William B. Moore, Secretary, Director
/s/ Bernard E. Anderson March 31, 2003
- -----------------------------------------
Bernard E. Anderson, Director
/s/ David R. Bright March 31, 2003
- -----------------------------------------
David R. Bright, Director
/s/ Luis A. Cortes March 31, 2003
- -----------------------------------------
Luis A. Cortes, Director
/s/ Wanda M. Richards March 31, 2003
- -----------------------------------------
Wanda M. Richards, Director
/s/ Steven L. Sanders March 31, 2003
- -----------------------------------------
Steven L. Sanders, Director
/s/ Ernest L. Wright March 31, 2003
- -----------------------------------------
Ernest L. Wright, Director
36
CERTIFICATIONS
I, Evelyn F. Smalls, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of United Bancshares,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Evelyn F. Smalls
-----------------------------------------
Evelyn F. Smalls, Chief Executive Officer
37
CERTIFICATIONS
I, Brenda Hudson-Nelson, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of United Bancshares,
Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Brenda Hudson-Nelson
-----------------------------------------
Brenda Hudson-Nelson, Chief Financial Officer
38
Report of Independent Certified Public Accountants
Shareholders and Board of Directors
United Bancshares, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of United
Bancshares, Inc. and Subsidiary as of December 31, 2002 and 2001, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of United
Bancshares, Inc. and Subsidiary as of December 31, 2002 and 2001, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in note 14 to the financial statements, the Bank entered into
a written agreement with the Federal Reserve Bank of Philadelphia and the
Pennsylvania Department of Banking dated February 23, 2000.
/s/ Grant Thornton LLP
- --------------------------
Philadelphia, Pennsylvania
March 12, 2003
39
United Bancshares, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
Assets 2002 2001
------------ ------------
Cash and due from banks...................................................... $ 4,541,667 $ 5,747,131
Interest-bearing deposits with banks......................................... 865,421 256,847
Federal funds sold........................................................... 10,122,000 7,778,000
------------ ------------
Cash and cash equivalents.......................................... 15,529,088 13,781,978
Investment securities:
Available-for-sale, at fair market value................................. 14,334,360 14,339,643
Held-to-maturity, at amortized cost (fair market value of $7,442,870
and $11,735,146 in 2002 and 2001, respectively)....................... 7,183,403 11,466,372
Loans, net of unearned discount of $87,124 and $141,267 in 2002
and 2001, respectively................................................... 44,133,190 42,999,877
Less allowance for loan losses............................................... (674,550) (708,156)
------------ ------------
Net loans.......................................................... 43,458,640 42,291,721
Bank premises and equipment, net............................................. 2,612,608 2,978,265
Accrued interest receivable.................................................. 555,006 911,470
Foreclosed real estate....................................................... - 45,000
Intangible assets............................................................ 1,937,221 2,118,868
Prepaid expenses and other assets............................................ 433,793 734,741
------------ ------------
Total assets....................................................... $ 86,044,119 $ 88,668,058
============ ============
Liabilities and Shareholders' Equity
Liabilities:
Demand deposits, noninterest-bearing..................................... $ 20,453,455 $ 19,471,758
Demand deposits, interest-bearing........................................ 12,837,464 12,613,507
Savings deposits......................................................... 20,494,208 23,227,604
Time deposits, under $100,000............................................ 10,882,722 10,313,657
Time deposits, $100,000 and over......................................... 12,261,455 13,795,997
------------ ------------
76,929,304 79,422,523
Accrued interest payable................................................. 156,219 263,550
Accrued expenses and other liabilities................................... 458,455 424,274
------------ ------------
Total liabilities.................................................. 77,543,978 80,110,347
------------ ------------
Shareholders' equity:
Series A preferred stock, noncumulative, 6%, $0.01 par value,
500,000 shares authorized; 143,150 issued and outstanding
in 2002 and 2001...................................................... 1,432 1,432
Common stock, $0.01 par value; 2,000,000 shares authorized;
1,102,088 and 1,100,388 issued and outstanding in 2002 and
2001, respectively.................................................... 11,021 11,004
Additional paid-in-capital............................................... 14,749,453 14,729,070
Accumulated deficit...................................................... (6,499,197) (6,282,614)
Accumulated other comprehensive income .................................. 237,432 98,819
------------ ------------
Total shareholders' equity......................................... 8,500,141 8,557,711
------------ ------------
Total liabilities and shareholders' equity......................... $ 86,044,119 $ 88,668,058
============ ============
The accompanying notes are an integral part of these statements.
40
United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2002 2001 2000
------------ ------------ ------------
Interest income:
Interest and fees on loans................................. $3,006,367 $3,595,477 $4,655,329
Interest on investment securities.......................... 1,446,072 1,750,549 3,150,160
Interest on federal funds sold............................. 169,071 281,540 339,348
Interest on time deposits with other banks................. 10,921 8,701 8,469
---------- ---------- ----------
Total interest income................................ 4,632,431 5,636,267 8,153,306
---------- ---------- ----------
Interest expense:
Interest on time deposits.................................. 662,493 1,080,533 1,387,091
Interest on demand deposits................................ 114,399 178,059 602,194
Interest on savings deposits............................... 129,227 317,489 496,764
Interest on borrowed funds................................. - 75 252,515
---------- ---------- ----------
Total interest expense............................... 906,119 1,576,156 2,738,564
---------- ---------- ----------
Net interest income.................................. 3,726,312 4,060,111 5,414,742
Provision for loan losses...................................... 175,000 335,000 565,000
---------- ---------- ----------
Net interest income after provision for loan losses.. 3,551,312 3,725,111 4,849,742
---------- ---------- ----------
Noninterest income:
Gain on sale of loans...................................... - - 18,931
Customer service fees...................................... 1,927,838 2,202,489 2,617,845
Gain (loss) on sale of investments......................... 25,789 78,456 (200,070)
Gain on sale of deposits................................... - - 253,527
Gain on sale of fixed assets............................... 48,054 84,090 329,237
Other income............................................... 325,337 77,998 177,464
---------- ---------- ----------
Total noninterest income............................. 2,327,018 2,443,033 3,196,934
---------- ---------- ----------
Noninterest expense:
Salaries, wages and employee benefits...................... 2,344,746 2,664,660 3,075,523
Occupancy and equipment.................................... 1,293,803 1,609,539 1,790,356
Office operations and supplies............................. 433,557 454,200 777,112
Marketing and public relations............................. 82,692 109,367 158,698
Professional services...................................... 283,671 232,662 544,083
Data processing............................................ 639,854 808,012 971,503
Deposit insurance assessments.............................. 36,258 150,042 169,102
Other operating............................................ 980,332 1,009,165 1,315,019
---------- ---------- ----------
Total noninterest expense............................ 6,094,913 7,037,647 8,801,396
---------- ---------- ----------
Net loss............................................. $ (216,583) $ (869,503) $ (754,720)
========== ========== ==========
Net loss per common share--basic and diluted.................... $ (0.20) $ (0.79) $ (0.72)
========== ========== ==========
Weighted average number of common shares....................... 1,101,247 1,099,520 1,049,166
========== ========== ==========
The accompanying notes are an integral part of these statements.
41
United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
Series A Accumulated Total Compre-
preferred stock Common stock Additional other share- hensive
---------------- ------------------ paid-in Accumulated comprehensive holders' income
Shares Amount Shares Amount capital deficit income (loss) equity (loss)
-------- ------ -------- -------- ----------- ------------ ------------ --------- ------
Balance at
December 31, 1999........ 143,150 $1,432 1,028,753 $10,288 $13,870,169 $(4,658,391) $(196,183) $9,027,315
Proceeds from issuance
of common stock....... - - 70,668 706 847,315 - - 848,021
Unrealized gains on
investment securities - - - - - - 228,893 228,893 228,893
Net loss................ - - - - - (754,720) - (754,720) (754,720)
------- ------ --------- ------- ----------- ----------- ---------- ---------- ---------
Total comprehensive
income (loss)........... $(525,827)
=========
Balance at
December 31, 2000........ 143,150 $1,432 1,099,421 $10,994 $14,717,484 $(5,413,111) $ 32,710 $9,349,509
Proceeds from issuance
of common stock...... 967 10 11,586 11,596
Unrealized gains on
investment securities 66,109 66,109 $ 66,109
Net loss................ (869,503) (869,503) (869,503)
------- ------ --------- ------- ----------- ----------- ---------- ---------- ---------
Total comprehensive
income (loss)........... $(803,394)
=========
Balance at
December 31, 2001........ 143,150 1,432 1,100,388 11,004 14,729,070 (6,282,614) 98,819 8,557,711
Proceeds from issuance
of common stock....... 1,700 17 20,383 20,400
Unrealized gains on
investment securities. 138,613 138,613 138,613
Net loss................ (216,583) (216,583) (216,583)
------- ------ --------- ------- ----------- ----------- ---------- ---------- ---------
Total comprehensive
income (loss)........... $ (77,970)
=========
Balance at
December 31, 2002....... 143,150 $1,432 1,102,088 $11,021 $14,749,453 $(6,499,197) $ 237,432 $8,500,141
======= ====== ========= ======= =========== =========== ========== ==========
The accompanying notes are an integral part of this statement.
42
United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net loss................................................... $ (216,583) $ (869,503) $ (754,720)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for loan losses............................... 175,000 335,000 565,000
Gain on sale of loans................................... - (18,931)
Gain on sale of fixed assets............................ (48,054) (84,090) (329,237)
(Gain)loss on sale of investment securities............. (25,789) (78,456) 200,070
Depreciation and amortization........................... 673,361 772,742 959,158
(Increase) decrease in accrued interest receivable and
other assets.......................................... 702,412 (35,995) 1,470,150
Decrease in accrued interest payable and
other liabilities..................................... (73,151) (257,763) (1,065,172)
---------- ---------- ----------
Net cash provided by (used in) operating activities.. 1,187,196 (218,065) 1,026,318
---------- ---------- ----------
Cash flows from investing activities:
Purchase of available-for-sale investments................. (10,792,294) (14,859,870) (1,737,678)
Purchase of held-to-maturity investments................... (2,247,096) (3,145,558) (2,636,746)
Proceeds from maturity and principal reductions of
available-for-sale investments.......................... 9,936,685 8,674,401 951,885
Proceeds from maturity and principal reductions of
held-to-maturity investments............................ 6,568,297 15,315,665 982,708
Proceeds from sale of investments available-for-sale....... 1,091,063 3,487,208 18,888,327
Proceeds from sale of student loans........................ - 2,574,775
Proceeds from sale of deposits to other financial
institutions - (6,544,666)
Net (increase)decrease in loans............................ (1,341,919) 2,116,573 11,580,215
Purchase of premises and equipment......................... (182,004) (78,265) (1,566,672)
----------- ----------- -----------
Net cash used in investing activities................ 3,032,732 11,510,154 22,492,148
----------- ----------- -----------
Cash flows from financing activities:
Net decrease in deposits................................... (2,493,218) (3,815,587) (34,983,620)
Repayments on long-term debt............................... - (9,203)
Net proceeds from issuance of common stock................. 20,400 11,596 848,021
----------- ----------- -----------
Net cash used in financing activities................ (2,472,818) (3,803,991) (33,144,802)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents. 1,747,110 7,488,098 (10,626,336)
----------- ----------- -----------
Cash and cash equivalents at beginning of year................. 13,781,978 6,293,880 16,920,216
----------- ----------- -----------
Cash and cash equivalents at end of year....................... $15,529,088 $13,781,978 $ 6,293,880
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest..................... $ 1,013,450 $ 1,542,963 $ 3,108,753
=========== =========== ===========
The accompanying notes are an integral part of these statements.
43
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of United
Bancshares, Inc. (the Company) and its wholly owned subsidiary, United Bank
of Philadelphia (the Bank). All significant intercompany transactions and
balances have been eliminated.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and federal funds sold on an
overnight basis.
Securities Held-to-Maturity
Bonds, notes, and debentures for which the Bank has both the positive
intent and ability to hold to maturity are classified as held-to-maturity
and carried at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity.
Securities Available-for-Sale
Available-for-sale securities consist of bonds, notes and debentures, and
certain equity securities for which the Bank does not have positive intent
to hold to maturity. These securities are carried at fair value.
Unrealized holding gains and losses on securities classified as
available-for-sale are carried as a separate component of shareholders'
equity net of related income tax effects.
Gains and losses on the sale of available-for-sale securities are
determined by the specific identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
Loans
The Bank has both the positive intent and ability to hold its loans to
maturity. These loans are stated at the amount of unpaid principal, reduced
by net unearned discount and an allowance for loan losses. Interest income
on loans is recognized as earned based on contractual interest rates
applied to daily principal amounts outstanding and accretion of discount.
It is the Bank's policy to discontinue the accrual of interest income when
a default of principal or interest exists for a period of 90 days except
when, in management's judgment, the collection of principal and interest is
reasonably anticipated or adequate collateral exists. Interest received on
nonaccrual loans is either applied against principal or reported as
interest income according to management's judgment as to collectibility of
principal. When interest accruals are discontinued, interest credited to
income is reversed and the loan is classified as nonperforming.
Unearned discount is amortized over the weighted average maturity of the
mortgage loan portfolio.
(Continued)
44
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Loan origination and commitment fees and certain direct loan origination
costs are deferred, and the net amount is amortized as an adjustment of the
related loan's yield. The Bank is amortizing these amounts over the
contractual life of the loan.
Loans Held-for-Sale
Loans held-for-sale are carried at the aggregate of lower of cost or market
value. The Bank had no loans held for sale as of December 31, 2002.
For purchased loans, the discount remaining after the loan loss allocation
is being amortized over the remaining life of the purchased loans using the
interest method.
Allowance for Loan Losses
The Bank adopted Statement of Financial Accounting Standards (SFAS) No.
114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan Income Recognition and
Disclosures." Under SFAS No. 114, the allowance for loan losses related to
"impaired loans" is based on the discounted cash flows using the impaired
loans' initial effective interest rate as the discount rate, or the fair
value of the collateral for collateral-dependent loans. A loan is impaired
when it meets the criteria to be placed on nonaccrual status. Loans that
are evaluated for impairment pursuant to SFAS No. 114 are assessed on a
loan-by-loan basis and include only commercial nonaccrual loans. Large
groups of smaller, homogeneous loans, such as credit cards, student loans,
residential mortgages, and other student loans, are evaluated collectively
for impairment.
The allowance for loan losses is maintained at a level considered adequate
to provide for potential losses in the loan portfolio. The allowance is
increased by provisions charged to operating expenses and reduced by
charge-offs net of recoveries. Management's determination of the adequacy
of the allowance is based on continuous credit reviews of the loan
portfolio, consideration of the current economic conditions, review of
specific problem loans, and other relevant factors. This evaluation is
subjective as it requires material estimates, including the amounts and
timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change. However, actual losses on
specific loans, which are encompassed in the analysis, may vary from
estimated losses.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets. Amortization of leasehold
improvements is computed over the shorter of the related lease term or the
useful life of the assets.
On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 retains the
existing requirements to recognize and measure the impairment of long-lived
assets to be held and used or to be disposed of by sale. However, SFAS No.
144 makes changes to the scope and certain measurement requirements of
existing accounting guidance. SFAS No. 144 also changes the requirements
relating to reporting the effects of a disposal or discontinuation of a
segment of a business. The adoption of this statement did not have an
impact on the financial condition or results of operations of the Company.
45
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes
The liability method is used in accounting for income taxes. Deferred tax
assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
Earnings (Loss) Per Share
The Company follows the provisions of SFAS No. 128, which eliminates
primary and fully diluted earnings per share (EPS) and requires
presentation of basic and diluted EPS in conjunction with the disclosure of
the methodology used in computing such EPS. Basic EPS excludes dilution and
is computed by dividing income available to common shareholders by the
weighted average common shares outstanding during the period. Diluted EPS
takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into
common stock.
Stock-based Compensation
The Bank accounts for stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, which contains a fair
value-based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123
permits entities to continue accounting for employee stock options and
similar equity instruments under Accounting Principles Board (APB) Opinion
25, Accounting for Stock Issued to Employees. Entities that continue to
account for stock options using APB Opinion 25 are required to make pro
forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
At December 31, 2002, the Company had one stock-based employee compensation
plan, which is more fully described in note 12. The Bank account for this
plan under the recognition and measurement principles of APB No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Stock-based employee compensation costs are not reflected in net income, as
all options granted under the plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
(Continued)
46
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001, and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The following table illustrates the effect on net income and earnings
(loss) per share if the Bank had applied the fair value recognition
provisions of SFAS No. 123, to stock-based employee compensation (in
thousands, except per share amounts).
Year ended December 31,
(In thousands) 2002 2001
-------- --------
Net loss
As reported.................................. $ (217) $ (870)
Less: Stock-based compensation costs
determined under fair value-based
Method for all awards ................. - -
Pro forma.................................... $ (217) $ (870)
Basic and Diluted loss per share
As reported.................................. $ (0.20) $ (0.79)
Pro forma.................................... $ (0.20) $ (0.79)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998: no dividends declared; expected
volatility of 20%; a risk-free interest rate of 4.7%, and expected life of
10 years.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and letters of credit. Such financial instruments are recorded in
the financial statements when they become payable.
Financial Instruments
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued in June, 1999 by SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," and in June, 2000, by SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," (collectively SFAS No. 133). SFAS No. 133 requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair
value.
(Continued)
47
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001, and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Under SFAS No. 133, an entity may designate a derivative as a hedge of
exposure to either changes in: (a) fair value of a recognized assets or
liability or firm commitment, (b) cash flows of a recognized or forecasted
transaction, or (c) foreign currencies of a net investment in foreign
operations, firm commitments, available-for-sale securities or a forecasted
transaction. Depending upon the effectiveness of the hedge and/or the
transaction being hedged, any changes in the fair value of the derivative
instrument is either recognized in earnings in the current year, deferred
to future periods, or recognized as hedge accounting are recognized in
current year earnings. SFAS No. 133 is required for all fiscal quarters or
fiscal years beginning after June 15, 2000. On April 1, 2000, the Company
adopted SFAS No. 133. Concurrent with the adoption, the Company
reclassified approximately $6.1 million of investment securities from
held-to-maturity to available-for-sale. Subsequent to the reclassification,
the Company transferred approximately $9.5 million of investment securities
from available-for-sale to trading. In June 2000, the Company recorded a
loss on the sale of these securities of $127,000.
Statement of Financial Accounting Standards No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments,"
(SFAS No. 119) requires disclosures about financial instruments, which are
defined as futures, forwards, swap and option contracts and other financial
instruments with similar characteristics. On-balance sheet receivables and
payables are excluded from this definition. The Company did not hold any
derivative financial instruments as defined by SFAS No. 119 at December 31,
2002 or 2001.
Loans held-for-sale: Fair values are estimated using quoted rates based
upon secondary market sources for similar loans.
Loans: The fair value of loans was estimated using a discounted cash flow
analysis, which considered estimated prepayments and amortizations.
Prepayments and discount rates were based on current marketplace estimates
and pricing. Residential mortgage loans were discounted at the current
effective yield, including fees, of conventional loans, adjusted for their
maturities with a spread to the Treasury yield curve.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings, and certain types of
money market accounts) are equal to the amounts payable on demand at the
reporting date (e.g., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate the fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation. The Treasury Yield Curve was utilized for discounting
cash flows as it approximates the average marketplace certificate of
deposit rates across the relevant maturity spectrum.
Commitments to extend credit: The carrying amounts for commitments to
extend credit approximate fair value as such commitments are not
substantially different from the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparts.
(Continued)
48
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001, and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Intangible Assets
On September 24, 1999, the Bank acquired four branches from First Union
Corporation with deposits totaling $31.5 million. As a result of the
acquisition, the Bank recorded a core deposit intangible of 2,449,488. The
core deposit intangible is being amortized over 14 years. Amortization
totaled $178,078, $178,078 and $176,818 for the year ended December 31,
2002, 2001 and 2000, respectively. The Bank tested the core deposit
intangible for impairment. No impairment has been recognized
On October 1, 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 147, "Acquisitions of Certain Financial Institutions." SFAS No.
147 removes acquisitions of financial institutions from the scope of SFAS
72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions," and requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations and SFAS No. 142,
"Goodwill and Intangible Assets." SFAS No. 147 also requires that the
acquisition of a less-than-whole financial institution, such as a branch,
be accounted for as a business combination if the transferred assets and
activities constitute a business. In addition, SFAS No. 147 amends SFAS
144, "Accounting for the Impairment of Disposal of Long-Lived Assets," to
include within its scope long-term customer relationship intangible assets
of financial institutions such as depositor-relationship intangible assets.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations
are periodically performed by management, and the real estate is carried at
the lower of carrying amount or fair value less the cost to sell. Revenue
and expenses from operations and changes in valuation allowance are charged
to operations. The historical average holding period for such properties is
24 months.
Management's Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
(Continued)
49
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001, and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Segments
SFAS No. 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in subsequent interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker
in deciding how to allocate resources and assess performance. The statement
also requires that public enterprises report a measure of segment profit or
loss, certain specific revenue and expense items and segment assets. It
also requires that information be reported about revenues derived from the
enterprises' products or services, or about the countries in which the
enterprises earn revenues and hold assets, and about major customers,
regardless of whether that information is used in making operating
decisions.
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the
other. For example, commercial lending is dependent upon the ability of the
Bank to fund itself with retail deposits and other borrowings and to manage
interest rate and credit risk. This situation is also similar for consumer
and residential mortgage lending. Accordingly, all significant operating
decisions are based upon analysis of the Company as one operating segment
or unit.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the 2002 presentation.
Comprehensive Income
The Bank follows SFAS No. 130, which establishes new standards for
reporting comprehensive income that includes net income as well as certain
other items that result in a change to equity during the period. These
financial statements have been reclassified to reflect the provisions of
SFAS No. 130. The income tax effects allocated to comprehensive income
(loss) are as follows:
(Continued)
50
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001, and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 2002
--------------------------------------------
Before tax Tax Net of tax
amount benefit(expense) amount
---------- --------------- ----------
Unrealized gains on securities
Unrealized holding losses arising during period $ 232,674 $ (76,782) $ 155,892
Less: reclassification adjustment for gains
realized in net income 25,789 (8,510) 17,279
--------- --------- ---------
Other comprehensive income, net $ 206,885 $ (68,272) $ 138,613
========= ========= =========
December 31, 2001
--------------------------------------------
Before tax Tax Net of tax
amount benefit(expense) amount
---------- --------------- ----------
Unrealized gains on securities
Unrealized holding gains arising during period $ 177,126 $ (58,451) $ 118,675
Less: reclassification adjustment for gains
realized in net income 78,456 (25,890) 52,566
--------- --------- ---------
Other comprehensive income, net $ 98,670 $ (32,561) $ 66,109
========= ========= =========
December 31, 2000
--------------------------------------------
Before tax Tax Net of tax
amount benefit(expense) amount
---------- --------------- ----------
Unrealized gains on securities
Unrealized holding gains arising during period $ 543,166 $(180,826) $ 362,340
Less reclassification adjustment for losses
realized in net income (200,070) 66,623 (133,447)
--------- --------- ---------
Other comprehensive income, net $ 343,096 $(114,203) $ 228,893
========= ========= =========
New Accounting Pronouncements
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns, or both. FIN 46 also requires disclosures about
variable interest entities that a company is not required to consolidate,
but it which it has a significant variable interest. The consolidation
requirements of FIN 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning
after June 15, 2003. The Company is in the process of determing what
impact, if any, the adoption of the provisions of FIN 46 will have upon its
financial condition or results of operations.
51
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001 and 2000
2. CASH AND DUE FROM BANK BALANCES
The Bank maintains various deposit accounts with other banks to meet normal
fund transaction requirements and to compensate other banks for certain
correspondent services. The withdrawal or usage restrictions of these
balances did not have a significant impact on the operations of the Bank as
of December 31, 2002.
3. INVESTMENTS
The amortized cost, gross unrealized holding gains and losses, and
estimated market value of the available-for-sale and held-to-maturity
investment securities by major security type at December 31, 2002 and 2001
are as follows:
2002
-------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
----------- ---------- ---------- -----------
Available-for-sale:
Other Government securities............ $ 4,299,596 $ 62,189 $ $ 4,361,785
Mortgage-backed securities............. 9,286,548 292,187 9,578,735
----------- ---------- ---------- -----------
Total debt securities.................. 13,586,144 354,376 13,940,520
Investments in mutual funds............ 106,490 106,490
Other investments...................... 287,350 287,350
----------- ---------- ---------- -----------
$13,979,984 $ 354,376 $ - $14,334,360
=========== ========== ========== ===========
Held-to-maturity:
Other Government securities............ $ 500,000 $ 8,985 $ $ 508,985
Mortgage-backed securities............. 6,683,403 250,482 6,933,885
----------- ---------- ---------- -----------
$ 7,183,403 $ 259,467 $ - $ 7,442,870
=========== ========== ========== ===========
2001
-------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
----------- ---------- ---------- -----------
Available-for-sale:
Other Government securities............ $ 5,048,639 $ 49,241 $ $ 5,097,880
Mortgage-backed securities............. 8,751,555 98,250 8,849,805
----------- ---------- ---------- -----------
Total debt securities.................. 13,800,194 147,491 13,947,685
Investments in mutual funds............ 104,608 104,608
Other investments...................... 287,350 287,350
----------- ---------- ---------- -----------
$14,192,152 $ 147,491 $ - $14,339,643
=========== ========== ========== ===========
Held-to-maturity:
Other Government securities............ $ 3,735,435 $ 117,612 $ $ 3,853,047
Mortgage-backed securities............. 7,730,937 151,162 7,882,099
----------- ---------- ---------- -----------
$11,466,372 $ 268,774 $ - $11,735,146
=========== ========== ========== ===========
(Continued)
52
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001 and 2000
3. INVESTMENTS - Continued
Maturities of investment securities classified as available-for-sale and
held-to-maturity at December 31, 2002 were as follows. Expected maturities
may differ from contractual maturities.
Amortized Market
cost value
------------- -----------
Available-for-sale:
Due after one month through three years....... $ - $ -
Due after three year through five years....... 750,000 750,000
Due after five years through fifteen years.... 3,549,596 3,611,785
Mortgage-backed securities.................... 9,286,548 9,578,735
----------- -----------
Total debt securities......................... 13,586,144 13,940,520
Investments in mutual funds................... 106,490 106,490
Other investments............................. 287,350 287,350
----------- -----------
$13,979,984 $14,334,360
=========== ===========
Held-to-maturity:
Due in one month through three years.......... $ - $ -
Due after three years through five years...... 250,000 255,625
Due after five years through fifteen years.... 250,000 253,360
Mortgage-backed securities.................... 6,683,403 6,933,885
----------- -----------
$ 7,183,403 $ 7,442,870
=========== ===========
The Bank recorded a gain of $25,789 on the sale of investments during the
year ended December 31, 2002. The Bank recorded a gain of $78,456 on the
sale of investments during the year ended December 31, 2001. The Bank
recorded a loss of $200,070 on the sale of investments during the year
ended December 31, 2000.
As of December 31, 2002 and 2001, investment securities with a book value
of $7,250,989 and $12,839,925, respectively, were pledged as collateral to
secure public deposits and for other purposes required or permitted by law.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the net loans is as follows:
Assets 2002 2001
----------- -----------
Commercial and industrial............... $10,854,697 $11,053,584
Commercial real estate.................. 11,897,622 5,504,474
Residential mortgages................... 13,560,602 18,147,893
Consumer loans.......................... 7,820,269 8,293,926
----------- -----------
Total loans.......................... 44,133,190 42,999,877
Less allowance for loan losses.......... (674,550) (708,156)
----------- -----------
Net loans............................ $43,458,640 $42,291,721
=========== ===========
(Continued)
53
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001 and 2000
4. LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued
As of December 31, 2002 and 2001, the Bank had loans to certain officers
and directors and their affiliated interests in aggregate dollar amounts of
$839,000 and $1,088,000, respectively. During 2002 and 2001, there were no
new loans to related parties and repayments amounted to $249,000 and
$375,900, respectively.
The balance of impaired loans was $ 1,951,000 and $412,000 as of December
31, 2002 and 2001, respectively. The Bank identifies a loan as impaired
when it is probable that interest and principal will not be collected
according to the contractual terms of the loan agreement. The impaired loan
balance included $651,000 and $412,000 of non-accrual loans at December 31,
2002 and 2001, respectively . The allowance for loan loss associated with
the $1,951,000 of impaired loans was $402,000 at December 31, 2002.
Interest income recognized on impaired loans during 2002 and 2001 was
$104,000 and $25,000, respectively. The Bank recognizes income on impaired
loans under the cash basis when the loans are both current and the
collateral on the loan is sufficient to cover the outstanding obligation to
the Bank. If these factors do not exist, the Bank will not recognize income
on such loans.
At December 31, 2002 and 2001, unamortized deferred fees and costs totaled
$108,670 and $93,853, respectively.
Changes in the allowance for possible loan losses are as follows:
2002 2001 2000
--------- --------- -----------
Balance, beginning of year..... $ 708,156 $ 562,174 $ 1,566,642
Provision...................... 175,000 335,000 565,000
Charge-offs.................... (361,656) (321,681) (1,720,755)
Recoveries..................... 153,050 132,663 151,287
--------- --------- -----------
Balance, end of year........... $ 674,550 $ 708,156 $ 562,174
========= ========= ===========
The Bank grants commercial, residential, and consumer loans to customers
primarily located in Philadelphia County, Pennsylvania and surrounding
counties in the Delaware Valley. Although the Bank has a diversified loan
portfolio, its debtors' ability to honor their contracts is influenced by
the region's economy. At December 31, 2002, approximately 18.71% of the
Bank's commercial loan portfolio was concentrated in loans made to
religious organizations.
5. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows:
Estimated
useful life 2002 2001
------------ ----------- ------------
Buildings and leasehold improvements.... 10-15 years $ 2,870,558 $ 3,617,403
Furniture and equipment................. 3- 7 years 1,411,250 3,140,428
----------- -----------
4,281,808 6,757,831
Less accumulated depreciation........... (1,669,200) (3,779,566)
----------- -----------
$ 2,612,608 $ 2,978,265
=========== ===========
(Continued)
54
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001 and 2000
5. BANK PREMISES AND EQUIPMENT - Continued
The Bank leases other facilities and other equipment under non-cancelable
operating lease agreements. The amount of expense for operating leases for
the years ended December 31, 2002, 2001 and 2000 was $364,469, $465,825 and
$511,836.
Future minimum lease payments under operating leases are as follows:
Operating
Year ending December 31, leases
------------------------ ------------
2003...................................... $ 277,278
2004...................................... 240,163
2005...................................... 84,090
2006...................................... 70,433
2007...................................... 47,504
Thereafter................................ 48,929
----------
Total minimum lease payments.............. $ 768,397
==========
6. DEPOSITS
At December 31, 2002, the scheduled maturities of time deposits
(certificates of deposit) are as follows (dollars in thousands):
2003...................................... $ 20,678
2004...................................... 1,308
2005...................................... 971
2006...................................... 182
2007...................................... -
Thereafter................................ 5
----------
$ 23,144
==========
7. BORROWINGS
As of December 31, 2002, the Bank has outstanding two borrowing
arrangements with financial institutions, collateralized by investment
securities. One arrangement is a fully secured Federal Funds line of credit
with a correspondent bank totaling $2 million, the second is a Master
Repurchase Agreement with another financial institution. Borrowings under
these agreements have interest rates that fluctuate based on market
conditions. As of December 31, 2002, the Bank had no borrowings
outstanding.
55
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001 and 2000
8. CAPITAL STOCK OFFERINGS
In June 2002, the Bank received $20,400 and issued 1,700 shares as a result
of the purchase of common stock by members of the Bank's board of directors
in a limited offering at a price of $12.00 per share.
In May 2001 and December 2001, respectively, the Bank received $2,000 and
$9,596 and issued 167 and 800 shares, respectively, as a result of the
purchase of common stock by two individuals in a limited offering at a
price of $12.00 per share.
In June 2000 and December 2000, respectively, the Bank received $411,809
and $436,212 and issued 34,317 and 36,351 shares, respectively, as a result
of the purchase of common stock by members of the Bank's board of directors
in a limited offering at a price of $12.00 per share.
9. INCOME TAXES
At December 31, 2002, the Bank has net operating loss carryforwards of
approximately $4,680,000 for income tax purposes that begin to expire in
2008 through 2020.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. For
financial reporting purposes, a valuation allowance of $1,783,520 and
$1,781,306 as of December 31, 2002 and 2001, respectively, has been
recognized to offset the deferred tax assets related to the cumulative
temporary differences and the tax loss carryforwards. Significant
components of the Bank's deferred tax assets are as follows:
2002 2001
----------- -----------
Deferred tax assets:
Provision for loan losses................................ $ 105,778 $ 139,875
Unrealized (gains) losses on investment securities....... (116,944) (48,672)
Depreciation............................................. 308,844 189,844
Net operating loss carryforwards......................... 1,592,020 1,597,884
Other.................................................... (106,178) (97,625)
Valuation allowance for deferred tax assets.............. (1,783,520) (1,781,306)
----------- -----------
Net deferred tax assets.............................. $ - $ -
=========== ===========
2002 2001 2000
--------- ----------- -----------
Effective rate reconciliation:
Tax at statutory rate................ $ (73,638) $ (295,631) $ (256,073)
Nondeductible expenses............... 3,152 2,416 4,903
Increase in valuation allowance...... 70,486 174,938 155,997
Other................................ - 118,277 95,173
--------- ----------- -----------
Total tax expense................ $ - $ - $ -
========= =========== ===========
56
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001 and 2000
10. FINANCIAL INSTRUMENT COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and
letters of credit, which are conditional commitments issued by the Bank to
guarantee the performance of an obligation of a customer to a third party.
Both arrangements have credit risk essentially the same as that involved in
extending loans and are subject to the Bank's normal credit policies.
Collateral may be obtained based on management's assessment of the
customer. The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instruments is represented by the
contractual amount of those instruments.
Summaries of the Bank's financial instrument commitments are as follows:
2002 2001
----------- -----------
Commitments to extend credit............ $ 7,939,136 $ 5,325,662
Outstanding letters of credit........... 57,155 64,625
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract and
unused credit card lines. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Commitments generally have
fixed expiration dates or other termination clauses and may require payment
of a fee.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value information about financial instruments is required to be
disclosed, whether or not recognized in the balance sheet, where it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using discounted cash
flows or other valuation techniques. Those techniques are significantly
affected by assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. Certain
financial instruments and all nonfinancial instruments are exempt from
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
(Continued)
57
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001 and 2000
11. FAIR VALUES OF FINANCIAL INSTRUMENTS-Continued
2002 2001
----------------------- ----------------------
Carrying Fair Carrying Fair
(Dollars in thousands) amount value amount value
-------- -------- -------- --------
Assets:
Cash and cash equivalents..................... $ 15,529 $ 15,529 $ 13,781 $ 13,781
Investment securities......................... 21,518 21,777 25,806 26,075
Loans, net of allowance for loan losses....... 43,459 41,942 42,291 41,866
Liabilities:
Demand deposits............................... 33,291 33,291 32,085 32,085
Savings deposits.............................. 20,494 20,494 23,228 23,228
Time deposits................................. 23,144 23,144 24,110 25,127
Off-balance-sheet:
Commitments to extend credit.................. 7,939 7,939 5,326 5,326
Outstanding letters of credit................. 57 57 65 65
12. EMPLOYEE COMPENSATION
In June 2000, the Bank entered into two-year employment agreements with its
chief executive officer and its chief financial officer covering such items
as salaries, bonuses and benefits. The agreements expired in 2002 and were
renewed for two more years. These agreements provide for guaranteed minimum
annual compensation over the term of the contracts. The Company made no
stock-based compensation awards to any employee during 2002, 2001 and 2000.
In 1998, the Company adopted a Stock Option Plan with the approval of its
shareholders. In accordance with the contractual terms with its former
chief executive officer, the Bank granted the right to acquire up to 4% of
the Bank's stock as of December 31, 1993 at $8.54 per share, which was the
book value at the date of grant. Under this Plan, options to acquire shares
of common stock were granted to the former chief executive officer. The
Stock Option Plan provides for the granting of options at the fair market
value of the Company's common stock at the time the options are granted.
Each option granted under the Stock Option Plan may be exercised within a
period of ten years from the date of grant. However, no option may be
exercised within one year from the date of grant. In 1998, options to
purchase 29,694 shares of the Company's common stock at a price of $8.54
per share were awarded, to the former chief executive officer.
58
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001 and 2000
13. CONSOLIDATED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Condensed Balance Sheets
December 31,
-----------------------
(Dollars in thousands) 2002 2001
-------- --------
Assets:
Due from banks (subsidiary)........................... $ 289 $ 289
Investment in United Bank of Philadelphia............. 8,211 8,278
-------- --------
Total assets...................................... $ 8,500 $ 8,567
======== ========
Shareholders' equity:
Series A preferred stock.............................. $ 1 $ 1
Common stock.......................................... 11 11
Additional paid-in capital............................ 14,750 14,729
Accumulated deficit................................... (6,499) (6,283)
Net unrealized holding gains (losses)
on securities available-for-sale.................... 237 99
-------- --------
Total shareholders' equity........................ $ 8,500 $ 8,557
======== ========
Condensed Statements of Operations
Year ended December 31,
------------------------------
(Dollars in thousands) 2002 2001 2000
------- ------- ------
Equity in net loss of subsidiary................... $ (217) $ (870) $ (755)
------- ------- -------
Net loss........................................... $ (217) $ (870) $ 755)
======= ======= =======
Condensed Statements of Cash Flows
Year ended December 31,
------------------------------
(Dollars in thousands) 2002 2001 2000
------- ------- ------
Cash flows from operating activities:
Net loss........................................ $ (217) $ (870) $ (755)
Equity in net loss of subsidiary................ 217 870 755
------ ------ ------
Net cash provided by operating activities... - - -
------ ------ ------
Cash flows from investing activities:
Investment in subsidiary........................... (20) (12) (847)
------ ------ ------
Net cash used in investing activities.............. (20) (12) (847)
------ ------ ------
Cash flows from financing activities:
Issuance of preferred stock..................... - - -
Issuance of common stock........................ 20 12 847
------ ------ ------
Net cash provided by financing activities... 20 12 847
------ ------ ------
Net increase in cash and cash equivalents... - - -
Cash and cash equivalents at beginning of year..... 289 289 289
------ ------ ------
Cash and cash equivalents at end of year........... $ 289 $ 289 $ 289
====== ====== ======
59
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001, and 2000
14. REGULATORY MATTERS
The Bank engages in the commercial banking business, with a particular
focus on serving Blacks, Hispanics and women, and is subject to substantial
competition from financial institutions in the Bank's service area. As a
bank holding company and a banking subsidiary, the Company and the Bank,
respectively, are subject to regulation by the Federal Reserve Board and
the Pennsylvania Department of Banking and are required to maintain capital
requirements established by those regulators. Prompt corrective actions may
be taken by those regulators against banks that do not meet minimum capital
requirements. Prompt corrective actions range from restriction or
prohibition of certain activities to the appointment of a receiver or
conservator of an institution's net assets. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices, the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total Tier I capital (as defined in the regulations) for
capital adequacy purposes to risk-weighted assets (as defined).
In February 2000, as a result of a regulatory examination completed in
December 1999, the Bank entered into a Written Agreement (Agreement) with
its primary regulators with regard to, among other things, achievement of
agreed-upon capital levels, implementation of a viable earnings/strategic
plan, adequate funding of the allowance for loan losses, the completion of
a management review and succession plan, and improvement in internal
controls. The current Agreement requires the Bank to increase its capital
ratio to 6.5% by June 30, 2000 and to 7% at all times thereafter. As of
December 31, 2000, the Bank had met the required ratios by implementing
strategies that included: increasing profitability, consolidating branches,
and soliciting new and additional sources of capital. Management continues
to address all matters outlined in the Agreement. Management believes that
the Bank is "substantially" in compliance with the Agreement's terms and
conditions. Failure to comply could result in additional regulatory
supervision and/or actions.
As of December 31, 2001, the Bank's tier one leverage capital ratio fell to
6.80% , below the 7% minimum capital ratio required by the Agreement.
However, at December 31, 2002, the tier one leverage ratio had improved to
7.12% as a result of the smaller average asset size of the Bank. Management
continues to review and revise its capital plan to address the development
of new equity. In addition, a profit restoration plan was developed and
implemented during 2002 to include numerous expense reduction and profit
enhancement strategies.
(Continued)
60
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001, and 2000
14. REGULATORY MATTERS - Continued
The most recent notification dated February 26, 2003, from the Federal
Reserve Bank categorized the Bank as "adequately capitalized" under the
regulatory framework for prompt and corrective action. To be categorized as
"well capitalized," the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below. The
Bank's growth, continued losses and the additional provisions to the
allowance for loans losses may have an adverse effect on its capital ratios.
The Bank's actual capital amounts and ratios are as follows:
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- --------- --------- --------- ---------
As of December 31, 2002:
Total capital to risk-weighted assets:
Consolidated........................ $ 6,854 16.28% $ 3,391 => 8.00% N/A N/A
Bank................................ 6,565 15.59 3,368 8.00 $ 4,210 10.00%
Tier I capital to risk-weighted assets:
Consolidated........................ 6,326 15.02 1,696 4.00 N/A N/A
Bank................................ 6,037 14.34 1,684 4.00 $ 2,526 >6.00%
Tier I capital to average assets:
Consolidated........................ 6,326 7.46 3,402 4.00 N/A N/A
Bank................................ 6,037 7.12 3,390 4.00 $ 4,238 >5.00%
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- --------- --------- --------- ---------
As of December 31, 2001:
Total capital to risk-weighted assets:
Consolidated........................ $ 6,850 16.46% $ 3,353 => 8.00% N/A N/A
Bank................................ 6,561 15.76 3,330 8.00 $ 4,162 10.00%
Tier I capital to risk-weighted assets:
Consolidated........................ 6,340 15.23 1,665 4.00 N/A N/A
Bank................................ 6,051 14.90 1,625 4.00 $ 2,497 >6.00%
Tier I capital to average assets:
Consolidated........................ 6,340 7.12 3,573 4.00 N/A N/A
Bank................................ 6,051 6.80 3,562 4.00 $ 4,452 >5.00%
61
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001, and 2000
15. COMMITMENTS AND CONTINGENCIES
The Bank is a defendant in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters
is not expected to have a material adverse effect on the consolidated
financial condition of the Company.
The Bank had a One Million Dollar ($1,000,000) unsecured loan participation
in a $40.4 million ($40,400,000) line of credit to KMART Corporation. The
Bank was repaid the One Million Dollar ($1,000,000) loan participation in
full on January 8, 2002. KMART Corporation filed for protection under
Chapter 11 of the federal bankruptcy laws on January 22, 2002. The
bankruptcy filing by KMART Corporation could expose the Bank to a future
claim that the repayment to the Bank of its loan participation was a
preference payment. If the preference claim is made and is successful, the
Bank may be required to return the One Million Dollar ($1,000,000) loan
repayment and incur a loss in that amount to the extent that the Bank can
not obtain repayment of the loan participation from KMART Corporation or as
an unsecured creditor in the bankruptcy proceeding. As of March 12, 2003,
the Bank has not received any notification in regard to this matter.
Management does not believe it is probable that the Bank will have to repay
the $1,000,000 loan repayment to the bankruptcy court.
16. EARNINGS PER SHARE COMPUTATION
In accordance with SFAS No. 128, income (loss) per share is calculated as
follows:
Year ended December 31, 2002
---------------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Net loss.................................. $ (216,583)
==========
Basic EPS
Income available to stockholders... $ (216,583) 1,101,247 $ (0.20)
========== ========== ========
Year ended December 31, 2001
--------------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Net loss.................................. $ (869,503)
==========
Basic loss per share
Loss available to stockholders..... $ (869,503) 1,099,520 $ (0.79)
========== ========= ========
Year ended December 31, 2000
--------------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
----------- ------------- ----------
Net loss.................................. $ (754,720)
==========
Basic loss per share
Loss available to stockholders..... $ (754,720) 1,049,166 $ (0.72)
========== ========= ========
Options to purchase 29,694 shares of common stock were not included in the
computation of diluted EPS for the years ended December 31, 2002, 2001 and
2000 because the Company is in a loss position.
62
United Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002, 2001, and 2000
17. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the consolidated results of operations during 2002
and 2001, on a quarterly basis, for United Bancshares, Inc. and Subsidiary:
2002
(Dollars in thousands) ------------------------------------------------
Fourth Third Second First
quarter quarter quarter quarter
--------- -------- -------- --------
Interest income $ 1,131 $ 1,157 $ 1,169 $ 1,175
Interest expense 201 208 232 265
-------- -------- -------- --------
Net interest income 930 949 937 910
Provisions for loan losses 63 37 38 37
--------- -------- -------- --------
Net interest after provisions
for loan losses 867 912 899 873
Non-interest income 492 760 544 531
Non-interest expense 1,482 1,487 1,508 1,618
-------- -------- -------- --------
Net (loss) income $ (123) $ 185 $ (65) $ (214)
======== ======== ======== ========
2001
------------------------------------------------
Fourth Third Second First
quarter quarter quarter quarter
--------- -------- -------- --------
Interest income $ 1,247 $ 1,351 $ 1,514 $ 1,524
Interest expense 317 402 412 445
-------- -------- -------- --------
Net income 930 949 1,102 1,079
Provisions for loan losses 275 30 20 10
-------- -------- -------- --------
Net interest after provisions
for loan losses 655 919 1,082 1,069
Non-interest income 630 576 652 585
Non-interest expense 1,769 1,768 1,779 1,722
-------- -------- -------- --------
Net loss $ (484) $ (273) $ (45) $ (68)
======== ======== ======== ========
63