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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
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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, 2000
UNITED BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
0-25976
(Registrant's file number)
PENNSYLVANIA 23-2802415
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 NORTH THIRD STREET, PHILADELPHIA, PA 19106
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 863-9000
Securities registered pursuant to Section 12(g)f of the Act: NONE
Securities registered pursuant to Section 12(g)f of the Act:
Common Stock, $.01 par value
-----------------------------
(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. ( )
FORM 10-K
Index
PART I
Item No. Page
- -------- ----
1. Business...................................................... 3
2. Properties.................................................... 11
3. Legal Proceedings............................................. 13
4. Submission of Matters to a Vote of Security Holders........... 14
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................... 14
6. Selected Financial Data....................................... 16
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 17
8. Financial Statements and Supplementary Data................... 30
9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 30
PART III
10. Directors and Executive Officers of Registrant................ 30
11. Executive Compensation........................................ 32
12. Security Ownership of Certain Beneficial Owners and Management 34
13. Certain Relationships and Related Transactions................ 35
PART IV
14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 36
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 28, 2001.
2
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 28, 2001 the aggregate number of the shares of the
Registrant's Common Stock outstanding was 1,099,421 (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 28, 2001.
The Exhibit index is on page 36. There are 61 pages in the Form 10-K.
PART I
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENT
Certain of the matters discuss in this document and the documents
incorporated by reference herein, including matters discuss under the captions
"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 (the "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. The UBS's 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 the UBS and its customers; (b) governmental monetary and fiscal
policies, as well as legislation and regulatory changes; ( c ) the risks of
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; (d) 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's 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; and (e) 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. All written or oral forward-looking statements attribute to US are
expressly qualified in their entirety by use the foregoing cautionary
statements.
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.
3
As of March 28, 2001, UBS and the Bank had a total of 70 employees.
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 five offices located
as follows: (i) Market Street Branch 714 Market Street, Philadelphia,
Pennsylvania; (ii) Center City Branch Two Penn Center, Philadelphia,
Pennsylvania; (iii) West Philadelphia Branch 37th and Lancaster Avenue,
Philadelphia, Pennsylvania, (iv) Mount Airy Branch 1620 Wadsworth Avenue,
Philadelphia, Pennsylvania; and (v) Progress Plaza Branch 1015 North Broad
Street, Philadelphia, Pennsylvania. Through these locations, the Bank offers a
broad range of commercial and consumer banking services. At December 31, 2000,
the Bank had total deposits aggregating approximately $83.2 million and had
total net loans outstanding of approximately $44.7 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 are
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 28, 2001, the Bank's
maximum legal lending limit was approximately $1.1 million 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 Bank has established
relationships with correspondent banks to participate in loans that exceed the
Bank's internal policies or legal lending limits. 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 of 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. In addition, the Bank offers 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.
Supervision and Regulation
The Holding Company, UBS, as a Pennsylvania business corporation, is subject
to the jurisdiction of the Securities and Exchange Commission (the "SEC") and of
state securities commissions for matters relating to the offering and sale of
its securities. Accordingly, if UBS wishes to issue additional shares of its
Common Stock, in order, for example, to raise capital or to grant stock options,
UBS will have to comply with the registration requirements of the Securities Act
of 1933 as amended and the applicable states securities laws, or find an
applicable exemption from registration.
UBS is subject to the provisions of the Bank Holding Company Act of 1956, as
amended (the "BHC Act"), and to supervision by the Federal Reserve Board. 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 interest
in, or all or substantially all of the assets of, any bank located outside
Pennsylvania, unless such an acquisition is specifically authorized bylaws of
the state in which such bank is located.
A bank holding company also is prohibited from engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any such
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
this determination, the Federal Reserve Board considers whether the performance
of these activities by a bank holding company would offer benefits to the public
that outweigh possible adverse effects.
5
As a bank holding company, UBS is required to file an annual report with the
Federal Reserve Board and any additional information that the Federal Reserve
Board may require pursuant to the BHC Act. The Federal Reserve Board may also
make examinations of the holding company and any or all of subsidiaries.
Further, under Section 106 of the 1970 amendments to the BHC Act and the Federal
Reserve Board's regulation, a bank holding company and its subsidiaries are
prohibited from engaging in certain tying arrangements in connection with any
extension of credit or provision of credit of any property or services. The so
called "anti-tying" provisions state generally that a bank may not extend
credit, lease, sell property or furnish 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.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act and by state banking laws on any
extensions of credit to the bank holding company or any of its subsidiaries, on
investments in the stock or other securities of the bank holding company and on
taking of such stock or securities as collateral for loans to any borrower.
Under Pennsylvania law, UBS is permitted to control an unlimited number of
banks. However, UBS would be 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 than the Bank, if, after such acquisition, would control
more than 5% of the voting shares of such bank.
The Bank. The deposits of United Bank of Philadelphia are insured by the
FDIC. The Bank is subject to supervision, regulation and examination by the
Pennsylvania Department of Banking and by the FDIC. In addition, the Bank is
subject to a variety of local, state and federal laws that affect its operation.
Under the Pennsylvania Banking Code of 1965, as amended, the ("Code"), the
Registrant has been permitted to control an unlimited number of banks. However,
the Registrant would be required under the BHC Act to obtain the prior approval
of the Federal Reserve Board before it could acquire all or substantially all of
the assets of any bank, or acquiring ownership or control of any voting shares
of any bank other than the Bank, if, after such acquisition, the registrant
would own or control more than 5 percent of the voting shares of such bank. The
BHC Act has been amended by the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 which authorizes bank holding companies, subject to
certain limitations and restrictions, to acquire banks located in any state.
In 1995, the Code was amended to harmonize Pennsylvania law with the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable
Pennsylvania institutions to participate fully in interstate banking and to
remove obstacles to the choice by banks from other states engaged in interstate
banking to select Pennsylvania as a head office location. Some of the more
salient features of the amendment are described below.
A bank holding company located in Pennsylvania, another state, the District
of Columbia or a territory or possession of the United States may control one or
more banks, bank and trust companies, national banks, interstate banks and, with
the prior written approval of the Pennsylvania Department of Banking, may
acquire control of a bank and trust company or a national bank located in
Pennsylvania. A Pennsylvania-chartered institution may maintain branches in any
other state, the District of Columbia, or a territory or possession of the
United States upon the written approval of the Pennsylvania Department of
Banking.
Finally, a banking institution existing under the laws of another
jurisdiction may establish a branch in Pennsylvania if the laws of the
jurisdiction in which it is located permit a Pennsylvania-chartered institution
or a national bank located in Pennsylvania to establish and maintain a branch in
such jurisdiction on substantially the same terms and conditions.
6
In 1995, the Pennsylvania General Assembly enacted the Economic Development
Agency, Fiduciary and Lender Environmental Liability Protection Act which, among
other things, provides protection to lenders from environmental liability and
remediation costs under the environmental laws for releases and contamination
caused by others. A lender who engages in activities involved in the routine
practices of commercial lending, including, but not limited to, the providing of
financial services, holding of security interests, workout practices,
foreclosure or the recovery of funds from the sale of property shall not be
liable under the environmental acts or common law equivalents to the
Pennsylvania Department of Environmental resources or to any other person by
virtue of the fact that the lender engages in such commercial lending practices.
A lender, however, will be liable if it, its employees or agents, directly cause
an immediate release or directly exacerbate a release of regulated substances on
or from the property, or knowingly and willfully compelled the borrower to
commit an action which caused such release or violation of an environmental act.
The Economic Development Agency, Fiduciary and Lender Environmental Liability
Protection Act, however, does not limit federal liability which still exists
under certain circumstances.
A subsidiary bank of a holding company is subject to certain restrictions
imposed by the Federal Reserve Act, as amended, on any extensions of credit to
the bank holding company or its subsidiaries, on investments in the stock or
other securities of the bank holding company or its subsidiaries, and on taking
such stock or securities as collateral for loans. The Federal Reserve Act, as
amended, 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, such legislation and
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 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.
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulation of, and restrictions on, the
business of the Bank. It cannot be predicted whether any such legislation will
be adopted or how such legislation would affect the business of the Bank. 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 legislation and regulations that may increase the costs of doing
business.
Because 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 in violation of applicable law. Moreover, the Federal
Reserve Board is: (i) empowered 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 to remove executive officers who
have participated in such violations or unsound practices; (iii) may restrict
lending by the Bank to its executive officers, directors, principal shareholders
or related interests thereof; (iv)may restrict management personnel of a 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 the acquisition or extended the period for disapproval.
7
In April 1995, regulators revised the Community Reinvestment Act ("CRA") with
an emphasis on performance over process and documentation. Under the revised
rules, the five-point rating scale is still utilized by examiners to assign a
numerical score for a bank's performance in each of three areas: lending,
service and investment. Under the CRA, the FDIC is required to: (i) assess the
records of all financial institutions regulated by it to determine if these
institutions are meeting the credit needs of the community (including low-and
moderate-income neighborhoods) which they serve, and (ii) take this record into
account in its evaluation of any application made by any such institutions for,
among other things, approval of a branch or other deposit facility, office
relocation, a merger or an acquisition of bank shares. The CRA also requires the
federal banking agencies to make public disclosures of their evaluation of each
bank's record of meeting the credit needs of its entire community, including low
and moderate income neighborhoods. This evaluation will include a descriptive
rate ("outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance") and a statement describing the basis for the rating. After its
most recent examination of the Bank under CRA, the FDIC gave the Bank a CRA
rating of "Outstanding".
Under the Bank Secrecy Act ("BSA"), banks and other financial institutions
are required to report to the Internal Revenue Service currency transactions of
more than $10,000 or multiple transactions in any one day of which the Bank is
aware that exceed $10,000 in the aggregate or other lesser amounts. 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.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
The Bank believes that further merger activity within Pennsylvania is likely
to occur in the future, resulting in increased concentration levels in banking
markets within Pennsylvania and other significant changes in the competitive
environment. The Riegle-Neal allows adequately capitalized and managed bank
holding companies to acquire banks in any state starting one year after
enactment (September 29, 1995). Another provision of the Riegle-Neal Act allows
interstate merger transactions beginning June 1, 1997. States are permitted,
however, to pass legislation providing for either earlier approval of mergers
with out-of-state banks, or "opting-out" of interstate mergers entirely. Through
interstate merger transactions, banks will be able to acquire branches of
out-of-state banks by converting their offices into branches of the resulting
bank. The Riegle-Neal Act provides that it will be the exclusive means for bank
holding companies to obtain interstate branches. Under the Riegle-Neal Act,
banks may establish and operate a "de novo branch" in any State that "opts-in"
to de novo branching. Foreign banks are allowed to operate branches, either de
novo or by merger. These branches can operate to the same extent that the
establishment and operation of such branches would be permitted if the foreign
bank were a national bank or state bank. All these changes are expected to
intensify competition in local, regional and national banking markets. The
Pennsylvania Banking Code has been amended to enable Pennsylvania institutions
to participate fully in interstate banking (see discussion above).
Federal Deposit Insurance Corporation Act of 1991
GENERAL. The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDIC Improvement Act") includes several provisions that have a direct impact
on the Bank. The most significant of these provisions are discussed below. In
order to minimize losses to the deposit insurance funds, the FDIC Improvement
Act establishes a format to monitor FDIC-insured institutions and to enable
prompt corrective action by the appropriate federal supervisory agency if an
institution begins to experience any difficulty. The FDIC Improvement 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 1 risk-based
capital ratio, a 5% Tier 1 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.
8
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 1 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 1 capital,
this also will mean that a bank would need to maintain at least 4% Tier 1
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 January 13,2001, from the Federal Reserve authorities
categorized the Bank as "adequately capitalized" under the regulatory framework
for prompt and corrective action.
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 Improvement 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.
A "critically undercapitalized" institution is one that has a tangible equity
(Tier 1 capital) ratio of 2% or less. In addition to the same restrictions and
prohibitions that apply to "undercapitalized" and "significantly
undercapitalized" institutions, any institution that becomes "critically
undercapitalized" is prohibited from taking the following actions without the
prior written approval of its primary federal supervisory agency: engaging in
any material transactions other than in the usual course of business; extending
credit for highly leveraged transactions; amending its charter or bylaws; making
any material changes in accounting methods; engaging in certain transactions
with affiliates; paying excessive compensation or bonuses; and paying interest
on liabilities exceeding the prevailing rates in the institution's market area.
In addition, a "critically undercapitalized" institution is prohibited from
paying interest or principal on its subordinated debt and is subject to being
placed in conservatorship or receivership if its tangible equity capital level
is not increased within certain mandated time frames.
Management cannot anticipate what changes Congress may enact, or, if enacted,
their impact on UBS's financial position and reported results of operation.
Financial Services Act of 1999
On March 11, 2000 the Financial Services Act of 1999 (the "FSA"),sometimes
referred to as the Gramm-Leach-Bliley Act, became effective.
The FSA repeals provisions of the Glass-Steagall Act, which had 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 amends the Act to allow new "financial holding companies" ("FHC") to
offer banking, insurance, securities and other financial products to consumers.
Specifically, the FSA amends Section 4 of the Act in order to provide for a
framework for the engagement in new financial activities. Bank holding companies
may elect to become a financial holding company if all its subsidiary depository
institutions are well capitalized and well managed. If these requirements are
met, a bank holding company may file a certification to that effect with the
Federal Reserve Board and declare that it elects to become a FHC. After the
certification and declaration is 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. Bank holding companies may engage in financial activities without
prior notice to the Federal Reserve Board if those activities qualify under the
new list in Section 4(k) of the Act. However, notice must be given to the
Federal Reserve Board within 30 days after a FHC has commenced one or more of
the financial activities.
9
Under the FSA, a bank subject to various requirements is permitted to engage
through "financial subsidiaries" in certain financial activities permissible for
affiliates of FHCs. However, to be able to engage in such activities the bank
must continue to be well capitalized and well managed and receive at least a
"satisfactory" rating in its most recent Community Reinvestment Act examination.
UBS cannot be certain of the effect of the foregoing recently enacted
legislation on its business, although there is likely to be consolidation among
financial services institutions and increased competition for UBS.
Privacy of Consumer Financial Information
The FSA also a contains a provision designed to protect the privacy of each
consumer's financial information in a financial institution. Pursuant to the
requirements of the FSA, the financial institution regulators (the "regulators")
have effective November 13, 2000, promulgated final regulations (the
"regulations") intended to better protect the privacy of a consumer's financial
information maintained in financial institutions. Compliance with the
regulations are optional until July 1 2001.
The regulations are designed to prevent financial institutions, such as the
Bank, from disclosing a consumer's nonpublic personal information to third
parties that are not affiliated with the financial institution.
However, financial institutions can share a customer's personal information
or information about business with their affiliated companies. The regulations
also provide that financial institutions can disclose nonpublic personal
information to nonaffiliated third parties for marketing purposes but the
financial institution must provide a description of its privacy policies to the
consumers and give the consumers an opportunity to opt-out of such disclosure
and, thus, prevent disclosure by the financial institution of the consumer's
nonpublic personal information to nonaffiliated third parties.
The regulations, among other things, provide guidance concerning what are
"nonpublic personal information", "consumers", and "customers", as well as about
the required timing for notices to customers and the means by which customers
can exercise their right to opt-out of disclosure of their personal information.
These privacy regulations will affect how consumer information is transmitted
through diversified financial companies and conveyed to outside vendors.
Although it is not possible at this time to assess the impact of the privacy
regulations on financial institutions or the Bank, the Bank does not believe the
privacy regulations will have a material adverse impact on its operations in the
near term. Nevertheless, the implementation of the privacy regulations have and
will continue to require significant effort by the staff for the Bank and UBS.
Consumer Protection Rules - Sale of Insurance Products
In addition, as mandated by Section 305 of the FSA, the 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 Bank and their
subsidiaries. The Rules are proposed to be effective on April 1, 2001.
In very brief summary the Rules provide, that before the sale of insurance or
annuity products can be completed, disclosures must be made that state that such
insurance products, are not deposits or other obligation of or guaranteed by the
FDIC or any other agency of the United States, the Bank or its affiliates. In
the case of an insurance product, including an annuity, that involves an
investment risk, that there is an investment risk involved with the product,
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 Bank or its
affiliates or on the consumer's agreement not obtain or a prohibition on the
consumer obtaining an insurance product or annuity from an unaffiliated entity.
10
The Rules also requires formal acknowledgment from 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 product. The Rules will
significantly affect the manner in which the Bank would market insurance
products, if the Bank does so in the future.
Governmental Policies and Future Legislation
As the enactment of the FSA confirms, from time to time, various proposals
are made in the United States Congress as well as Pennsylvania legislature and
by various bank regulatory authorities which would alter the powers of, and
place restrictions on, different types of bank organizations. Among current
proposals which could be significance to UBS or the Bank are the continued
liberalization of the restrictions on the acquisition of out-of-state banks by
bank holding companies, the expansion of the powers of banks and thrift
institutions, the liberalization of the restrictions upon the activities in
which bank holding companies may engage, the imposition of limitations on
interest rates and service charges, certain consumer legislation and the
requirement to provide certain basic banking services. It is impossible to
predict whether any of the proposals will be adopted and the impact, if any, of
such adoption on the business of UBS or the Bank. As a consequence of the
extensive regulation of commercial banking activities in the United States,
UBS's business is particularly susceptible to being affected by federal and
state legislation and regulations that may increase the costs of doing business.
Regulatory Actions.
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.
Beginning in 1996, the Bank has operated under a Supervisory Letter from its
primary regulator. The Supervisory Letter prevents the Bank and the Company from
declaring or paying dividends without the prior written approval of its
regulators and prohibits the Bank and Company from issuing long-term debt.
ITEM 2 -- PROPERTIES
Corporate Headquarters
In August 1999, the Bank moved its corporate headquarters from the branch
facility at 714 Market Street to 300 North Third Street, Philadelphia,
Pennsylvania. In October 2000, the Bank purchased this 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 this 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
1400 square feet to Tucci & Tannenbaum, P.C.
Market Street Branch
The Bank's Market Street Branch is located on the first floor of a
multi-tenant retail and commercial office building at 714 Market Street,
Philadelphia, Pennsylvania. The Bank occupies approximately 5,700 square feet of
space pursuant to a lease that expires on February 28, 2002. The lease has
renewal options for two five-year periods and is subject to escalation clauses.
The first floor contains a banking lobby, the vault and customer service area.
The aggregate monthly rent for this location is $9,069.
11
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
$3,375.
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
In 1995, the Bank purchased a branch facility at 4806 Frankford Avenue. In
September 2000, the Bank closed this facility. It is expected to be sold in
during 2001.
West Girard Branch
The Bank leases a facility located at 2836 West Girard Avenue. The branch
operations of this facility were discontinued in September 2000. An ATM machine
will remain operational at this facility until the April 30, 2001 lease
expiration. The aggregate monthly rental for the facility is $1,375.
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 approximately $2,625 exclusive of
taxes, insurance, utilities and janitorial service.
University City Branch
The Bank leased a branch facility located at 40th and Chestnut Streets, in
the University City Section of West Philadelphia from First Union National Bank
("First Union"). This facility was acquired from First Union in September, 1999.
In September 2000, the branch operations of this facility were consolidated with
the Bank's West Philadelphia branch office. In October 2000, the Bank exercised
its option to purchase this facility from First Union and immediately sold it
for a gain of approximately $329,000.
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 $3,656
per month.
12
ITEM 3 -- LEGAL PROCEEDINGS
Monument Financial v. United Bank of Philadelphia
A writ of summons was issued at the request of Monument Financial Group, Inc.
and Ronald Hatfield, respectively, an United Bank of Philadelphia (the "Bank")
account holder and its principal (collectively the "Plaintiffs") to commence an
action against the Bank in the Court of Common Pleas, Philadelphia County on
June 28,1999. The suit involves the processing of account transactions in
alleged non-compliance with the deposit contract. This conduct by the Bank
allegedly resulted in a loss to the Plaintiffs in an undetermined amount. The
Plaintiffs filed a complaint on July 28, 1999. This action was voluntarily
dismissed by the Plaintiffs on the February 4, 2000.
William Jairett et al v. First Montauk Securities Corp., et al
A complaint was filed in the United States District Court for the Eastern
District of Pennsylvania by William Jairett and others against Ronald Hatfield
and certain related parties (collectively the " Hatfield Defendants"), the
Monument Financial Group, Inc ("Monument Financial") as well as United Bank of
Philadelphia (the "Bank"). In summary the alleged claims against the Bank are
that the Bank failed to properly disbursed funds from the Monument Financial
deposit account maintained with the Bank, because the Bank disbursed funds, in
noncompliance with the deposit contract due to the failure to require the
necessary signatures needed to authorize disbursements and withdrawals from the
account. The Court has recently granted, in part, a motion to further amend an
amended answer and cross claim by the Hatfield Defendants and Monument Financial
to include claims of fraud and misrepresentation and conspiracy against the Bank
and other defendants but has denied a motion for leave to amend to include a
cross claim for tortuous interference against the Bank and others.
The Bank believes that certain insurance coverage is available to it to
provide partial protection against any loss by the Bank due to these claims and
to defray part of the legal fees for defense against the claims and the Bank is
in the process of determining the complete extent of its insurance coverage. The
Bank intends to vigorously defend the claims which have been made against it.
An action, similar to the federal court action, has been filed against the
Bank and the others defendants in the Common Pleas Court of Philadelphia making
allegations similar to those in the Jairett litigation. That action was filed to
toll the statute of limitations in the event the federal litigation was
dismissed. At this time the parties are not actively pursuing the Common Pleas
Court litigation.
Chappell v. United Bank of Philadelphia
On May 26, 2000, upon receipt of independent consultant reports confirming
certain conduct engaged in by Emma C. Chappell, United Bancshares' former
Chairman, President, and CEO of the United Bancshares and the Bank, Emma C.
Chappell's employment was terminated. On June 29, 2000, Emma C. Chappell filed a
demand for arbitration seeking certain contractual payments. In July 2000,
United Bancshares responded to the demand for arbitration and separately
commenced a lawsuit in the United States District Court for the Eastern District
of Pennsylvania seeking damages arising from transactions and occurrences
relating to Emma C. Chappell's April 1999 acquisition of the office building
rented by United Bancshares.
The parties (ECC Properties/Emma C. Chappell and United Bancshares) reached a
settlement on October 16, 2000 through which United Bancshares obtained title to
the office building and several adjacent properties for $1.34 million, stopped
paying rent to its former Chairman and the parties released each other from all
other claims or disputes. In addition, this settlement included Emma Chappell's
resignation from United Bancshares'/United Bank of Philadelphia Board of
Directors.
13
Rococo LLC v. United Bank of Philadelphia
On May 15, 2000, Rococo LLC, the contractor of W. T. Development Company,
the Bank's borrower, filed a complaint in the Court of Common Pleas of Delaware
County. The complaint seeks damages from the W. T. Development Company and
Bonsall Village, Inc. partnership developers of the residential construction
project known as Bonsall Village, for alleged nonpayment of construction
invoices and also seeks damages from the Bank of $34,474 alleging that the Bank
acted in concert with W. T. Development Company with respect to nonpayment of
certain of those invoices. The Bank has responded to an amended complaint and
the Bank believes that it has substantial defenses and will vigorously contest
the claims in the complaint. While discovery has not begun, based on the
preliminary information which has been gathered, the Bank believes that the
claims against it are not well founded.
In March of 2001, W. T. Development Company and Bonsall Village, Inc., the
Bank's codefendants in the litigation, filed a petition to obtain leave of court
to file a crossclaim against the Bank seeking damages against he Bank for its
alleged failure to honor its commitment to finance the phased construction of
the Bonsall Village project, as a result of which W. T. Development Company and
Bonsall Village, Inc. allegedly were unable to fulfill their obligations to the
plaintiff, Rococo L.L.C. If the Bank is found liable on such crossclaim the
codefendants will seek to hold the Bank liable for any damages due the
plaintiff, Rococo, L.L.C., from the codefendants. The Bank believes that it has
substantial defenses against such crossclaim and will vigorously contest those
claims.
NO OTHER 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
The following matters were submitted to a vote of Registrant's security holders
since the Registrant's last periodic filing.
1. On October 27, 2000 the Annual Meeting of shareholders of UBS was held.
At the Annual Meeting Mr. L. Armstead Edwards, Ms. Marionette Y. Frazier, and
Ernest L. Wright were elected directors, with the voting for those directors, as
follows:
L. Armstead Edwards For 48.19% Against 0% Abstain 2.83%
401,630 0 23,550
Marionette Y. Frazier For 48.18% Against 0% Abstain 2.84%
401,506 0 23,675
Ernest L. Wright For 48.05% Against 0% Abstain 2.96%
400,506 0 24,675
Refer to page 30 for a list of individuals who continued in office as
directors of UBS.
2. The UBS shareholders ratified the Board of Directors selection of Grant
Thornton, LLP as UBS's independent auditors for the year 1999, with the voting
for such ratification, as follows:
For 50.24% Against .13% Abstain .65%
418,699 1,072 5,410
3. The UBS shareholders ratified the amendment of UBS's Articles of
Incorporation to expand the authorized shares of Class B Common Stock by 500,000
shares, with the voting for such ratification, as follows:
For 47.70% Against 2.37% Abstain .94%
397,531 19,790 7,860
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Common Stock
As of March 28, 2001 there were 3,170 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.
14
Beginning April 24, 1995, Registrant commenced a private offering solely to
existing stockholders of 250,000 shares of its common stock and 750,000 warrants
to purchase a share of the common stock. 18,465 shares and 55,395 warrants have
been sold pursuant to this offering. Each unit, consisting of one share of
common stock and three warrants to purchase one share of common stock in each of
three subsequent years (total 3 shares), were issued at $12.00 per unit. The
warrant exercise price was $8.00 per share for the 1996 Warrant, was $9.00 per
share for the 1997 Warrant, and was $10.00 per share for the 1998 Warrant. The
units were offered pursuant to an exemption from registration contained in
section 4(2) and 3(a)(5) of the Act. No underwriters were used and no
commissions were paid as a result of this offering. The offering closed on
December 31, 1995. In December 1995, the Registrant sold 41,666 shares of
Registrant's common stock in an offering exempt from registration pursuant to
section 4(2) of the Act at a purchase price of $12.00 per share. This sale was
accomplished pursuant to a commitment to purchase these securities issued in
December 1994.
Beginning May 10, 1996, Registrant commenced a private offering solely to
existing stockholders of 250,000 shares of its common stock. 6,934 shares were
sold pursuant to this offering. The stock was offered pursuant to an exemption
from registration contained in 4(2) and 3(a)(5) of the Act. During 1996, the
Registrant received, $55,536 and issued 6,942 shares as a result of warrant
exercises by shareholders to purchase common stock at a price of $8.00 per
share. Beginning May 19, 1997, Registrant commenced an offering solely to
existing stockholders of 250,000 shares of its common stock, initially on a
pro-rata basis. 3,550 shares were sold pursuant to this offering. The stock was
offered pursuant to an exemption contained in 4(2) and 3(a)(5) of the Act.
During 1997, the Registrant received $34,710 and issued 3,856 shares as a result
of exercise of the 1997 warrants at $9.00 per share. During 1998, Registrant
received $14,922 as a result of the exercise of the 1998 Warrants at $10.00 per
share and sold 6,492 shares of common stock as a result to its offering solely
to stockholders of record. This offering was exempt pursuant to an exemption
from registration contained in sections 4(2) and 3(a)(5) of the Act. As of March
31, 1999, there were no warrants outstanding to purchase common stock of the
Bank.
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.
Class B Common Stock
On September 30, 1998, the Registrant filed Articles of Amendment to its
Articles of Incorporation with the Secretary of State of the Commonwealth of
Pennsylvania. The filing amended the Articles of Incorporation of the Registrant
to designate a sub-class of its Common Stock as Class B Common Stock. Pursuant
to the terms of the amendment, holders of the Class B Common Stock have all
rights of Common Stockholders, with the exception of voting rights.
Effective October 9, 1998, the Registrant sold 83,333 shares of its Class B
Common Stock to First Union Corporation ("First Union") for a purchase price of
$12 per share. The sale was exempt from registration requirements pursuant to
section 4(2) of the Act.
Effective February 8, 1999, the Registrant sold 83,333 shares of its Class B
Common Stock to First Union for a purchase price of $12 per share. The sale was
exempt from registration requirements pursuant to section 4(2) of the Act.
Effective September 23, 1999, Registrant sold 25, 000 shares of its Class B
Common Stock to First Union Corporation at a purchase price of $12 per share.
The sale was exempt from registration pursuant to section 4(2) of the Act.
Effective December, 1999, the Registrant sold 5,000 shares of its Class B
Common Stock to an individual for a purchase price of $12 per share. The sale
was exempt from registration pursuant to section 4(2) of the Act.
Series A Preferred Stock
Registrant has engaged in the sale of Series A Preferred Stock which has the
characteristics identified in the UBS Articles of Incorporation incorporated by
reference as an Exhibit hereto pursuant to an exemption from registration
contained in Section 4(2) of the Securities Act.
15
Dividends
Registrant 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 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 this regulation, 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.
In April 1993, the shareholders of United Bank of Philadelphia (the Bank)
voted in favor of the formation of a bank holding company, United Bancshares,
Inc. (the Company). Accordingly, in October 1994 the Company became a bank
holding company in conjunction with the issuance of its common shares in
exchange for the common shares of the Bank. The financial statements 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.
ITEM 6. -- SELECTED FINANCIAL DATA
Selected Financial Data
Year ended December 31,
-----------------------------------------------------------------------
(Dollars in thousands, except per share data) 2000 1999 1998 1997 1996
- --------------------------------------------- ---- ---- ---- ---- ----
Net interest income ............... $ 5,415 $ 5,264 $ 5,241 $ 4,744 $ 4,259
Provision for loan losses ......... 565 1,007 351 97 85
Noninterest income ................ 3,197 2,226 1,816 1,517 1,118
Noninterest expense ............... 8,801 7,714 6,696 5,983 6,123
Net income (loss) ................. (755) (1,230) 10 181 (832)
Net income (loss) per share - basic (0.72) (1.24) 0.01 0.22 (1.03)
Balance sheet totals:
Total assets ................... $ 93,533 $ 137,249 $121,983 $108,914 $ 96,769
Net loans ...................... 44,743 59,444 57,271 73,694 69,097
Investment securities .......... 35,014 51,433 43,196 18,253 14,460
Deposits ....................... 83,238 124,766 109,063 99,427 88,761
Shareholders' equity ........... 9,350 9,027 8,904 7,059 6,759
Ratios:
Equity to assets ............. 7.74% 8.07% 6.40% 6.61% 7.45%
Return on assets ............. (0.63)% (1.03)% 0.01% 0.18% (0.89)%
Return on equity ............. (8.08)% (12.71)% 0.14% 2.69% (12.02)%
16
ITEM 7. -- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Summary
The Company recorded a net loss of approximately $755,000 for 2000 ($0.72 per
share) compared to a net loss of approximately $1,230,000 ($1.24 per share) for
1999 and net income of approximately $10,000 ($0.01 per share) in 1998. During
2000, the Bank's financial results were favorably impacted by a lower level of
loan loss provisions compared to 1999 as well as the implementation of many
expense control measures. A more detailed explanation for each component of
earnings is included in the sections below.
During 2000, management implemented an asset reduction/capital improvement
plan that resulted in a $41.5 million decline in the Bank's deposit levels. The
Bank now faces the challenge of re-building the level of earning assets to
generate core profitability while maintaining adequate capital levels and
meeting the Bank's mission of serving the un-served communities in the
Philadelphia region.
The allowance for loan losses as a percentage of total loans decreased from
2.57% in 1999 to 1.24% in 2000. This decrease is attributable to aggressive
charge-offs of problem loans during 2000. The Bank had made significant
provisions for many of these loans in prior years.
Table 1--Average Balances, Rates, and Interest Income and Expense Summary
DECEMBER 31,
-----------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ --------------------------- --------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------ --------------------------- --------------------------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans .............................. $ 55,262 $4,655 8.42% $ 68,526 $5,589 8.16% $ 71,338 $6,270 8.79%
Investment securities
held-to-maturity ............... 28,659 1,875 6.54 21,692 1,226 5.65 11,436 746 6.52
Investment securities
available-for-sale ............. 18,044 1,284 7.12 9,275 612 6.60 8,392 557 6.64
Federal funds sold ................. 5,518 339 6.15 13,753 681 4.95 12,959 688 5.31
-------- ------- -------- ------ -------- ------
Total interest-earning assets . 107,483 8,153 7.59 113,246 8,108 7.16 104,125 8,261 7.93
Noninterest-earning assets:
Cash and due from banks ............ 5,339 2,835 4,646
Premises and equipment, net ........ 3,671 1,880 1,760
Other assets ....................... 4,494 3,366 3,576
Less allowance for loan losses ..... (562) (1,567) (565)
-------- -------- --------
Total ......................... $120,425 $119,760 $113,542
======== ======== ========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Demand deposits ................... $ 19,851 602 3.03% $ 19,892 569 2.86% $ 22,622 620 2.74%
Savings deposits .................. 30,776 497 1.61 26,744 440 1.65 23,283 428 1.84
Time deposits ..................... 28,531 1,387 4.86 35,020 1,695 4.84 37,365 1,899 5.08
Other borrowed funds .............. 1,925 252 13.09 1,246 140 11.24 1,521 73 4.85
-------- ------- -------- ------ -------- ------
Total interest-
bearing liabilities ...... 81,083 2,738 3.38 82,902 2,844 3.43 84,791 3,020 3.56
Noninterest-bearing liabilities:
Demand deposits ................... 27,567 24,019 19,740
Other ............................. 3,233 3,177 1,747
Shareholders' equity ............... 8,542 9,662 7,264
-------- -------- --------
Total ........................ $120,425 $119,760 $113,542
======== ======== ========
Net interest earnings .............. $5,415 $5,264 $5,241
Net yield on interest-earning assets 5.04% 4.65% 5.03%
For purposes of computing the average balance, loans are not reduced for
nonperforming loans.
17
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.
Net interest income for 2000 totaled $5.4 million, an increase of $151,000
or 2.86%, compared to 1999. Net interest income in 1999 totaled $5.3 million, an
increase of $23,000, or 0.45%, compared to 1998.
Table 2--Rate-Volume Analysis of Changes in Net Interest Income
2000 COMPARED TO 1999 1999 COMPARED TO 1998
------------------------------------- -------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------------- -------------------------------------
VOLUME RATE NET VOLUME RATE NET
------------------------------------- -------------------------------------
(Dollars in thousands)
Interest earned on:
Loans .................................. $(673) $(261) $(934) $(245) $(436) $(681)
Investment securities held-to-maturity . 646 3 649 569 (89) 480
Investment securities available-for-sale 605 67 672 37 18 55
Federal funds sold ..................... (450) 108 (342) 26 (33) (7)
----- ----- ----- ----- ----- -----
Total interest-earning assets ......... 128 (83) 45 387 (540) (153)
----- ----- ----- ----- ----- -----
Interest paid on:
Demand deposits ........................ (33) 66 33 (67) 16 (51)
Savings deposits ...................... 109 (52) 57 58 (46) 12
Time deposits .......................... (226) (82) (308) (120) (84) (204)
Other borrowed funds ................... 68 44 112 56 11 67
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities .... (82) (24) (106) (73) (103) (176)
----- ----- ----- ----- ----- -----
Net interest income ................... $ 210 $ (59) $ 151 $ 460 $(437) $ 23
===== ===== ===== ===== ===== =====
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 2000, there was an increase in net interest income of $210,000 due to
changes in volume but a decrease of $59,000 due to changes in rate. In 1999,
there was an increase in net interest income of $460,000 due to changes in
volume but a decrease of $437,000 due to changes in rate.
Average earning assets decreased from $113.2 million in 1999 to $107.5
million in 2000 and increased from $104.1 million in 1998 to $113.2 million in
1999. The 1999 growth in earning assets was primarily attributed to the
acquisition of $31.5 million in deposits from First Union Corporation in
September 1999. The acquired deposits primarily consisted of core noninterest
checking deposits and savings deposits. However, 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 non-First Union acquired deposits. Beginning in
June 2000, the Bank sold higher yielding certificates of deposit to other
financial institutions, encouraged some large deposit accountholders to remove
deposits, and consolidated three branches in its branch network.
The net interest margin of the Bank was 5.04% in 2000, 4.65% in 1999 and
5.03% in 1998. While the prime rate increased 75 basis points during 2000, the
Bank did not experience a similar increase in yield on its loan portfolio. This
is because much of the Bank's loan portfolio is fixed rate in nature and not
related to prime. In addition, during 2000, the average outstanding loan balance
declined from $68.5 million to $55.3 million. This decline was related to
significant paydowns/payoffs in the purchased automobile loan portfolio of the
Bank. Proceeds from these paydowns were used to fund the Bank's asset reduction
plan.
18
During 2000, the average federal funds yield was 6.15% compared to 4.95% in
1999 and 5.31% in 1998. During 2000, the average investment in federal funds
decreased by $8.2 million. Consistent with its asset reduction/capital
improvement plan, the Bank reduced the level of deposits in its "sweep" checking
account product which represent high balance short-term deposits. These deposits
were typically invested in Federal Funds Sold.
The yield on the investment portfolio increased 82 basis points to 6.76% in
2000 compared to 5.94% in 1999 and 6.57% in 1998. In September 1999 when the
Bank acquired $31.5 million in deposits from First Union, funds were placed in
investment securities to achieve a minimum yield of 7%, thereby, increasing the
average yield on the portfolio.
The cost of interest-bearing liabilities declined to 3.38% in 2000 compared
to 3.43% in 1999 and 3.56% in 1998. Consistent with market conditions, during
the last quarter of 1999 and the first quarter of 2000, the Bank reduced the
rates it pays on many of its interest-bearing products by as much as 25 basis
points. In addition, in June 2000, the Bank sold higher yielding certificates of
deposit to other financial institutions which resulted in a reduction in the
cost of funds.
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 and allowance for loan losses charged against earnings in 2000
was $565,000 compared to $1,007,003 in 1999 and $350,500 in 1998. Significant
provisions were made for the year ended December 31, 1999 for one community
development loan and other loan policy changes which required increased
provisions. The community development loan was charged-off by June 30, 2000 with
the exception of approximately $114,000 related to off-balance sheet risk
associated with an outstanding letter of credit. This amount remains fully
reserved. In addition, in September 2000, the Bank made provisions for and
charged-off loans totaling $498,000. Approximately $267,000 of these loans were
guaranteed by the SBA. The Bank continues to work with the Small Business
Administration (SBA) to collect on the guarantees associated with these loans.
Management believes the level of the allowance for loan losses is adequate as of
December 31, 2000.
Noninterest Income
Noninterest income increased $712,000 in 2000 compared to 1999 and increased
$410,000 in 1999 compared to 1998.
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 increased $587,000 in 2000
compared to 1999. This increase was primarily due to growth in fees on deposits
because of an increase in minimum balance requirements and other deposit-related
fee increases that went into effect on April 15, 2000. In addition, there is a
higher level of demand deposit accounts in 2000. A higher level of demand
deposit accounts result in more overdraft fees, activity service charges and low
balance fees. The Bank also increased its ATM surcharge fees for non-customers
from $1.50 to $1.75 in June 2000.
To achieve capital ratios as set forth in its Written Agreement with
regulatory agencies (Refer to Regulatory Matters below), in June 2000 the Bank
sold approximately $6.6 million in certificates of deposit to other financial
institutions to reduce its asset size. These transactions resulted in a gain of
$253,000. During 2000, the Bank sold approximately $20 million of its investment
portfolio to fund the reduction in asset size. The Bank recorded a loss of
$200,000 on these sales. In October 2000, the Bank sold one of the branch
facilities it acquired from First Union in 1999 for a gain of approximately
$329,000.
19
Noninterest Expense
Noninterest expense increased $1.1 million, or 14.1%, in 2000 to $8.8 million
compared to $7.7 million in 1999 and $6.7 million in 1998.
Salaries and benefits increased $113,000, or 3.8%, in 2000 compared to an
increase of $407,000, or 15.9%, in 1999. This increase is primarily attributable
to raises and additional employees related to the acquisition of
deposits/branches from First Union in September 1999. However, in May 2000, the
Bank began strategic reductions in staff and job consolidations to reduce the
level of personnel expense. The closure/consolidation of three branches in
September 2000 resulted in further reductions in this expense during the quarter
ended December 31, 2000.
Occupancy and equipment expense increased approximately $380,000, or 26.95%,
during 2000 compared to an increase of $162,000 or 12.7%, during 1999. The
increase during 2000 was primarily attributable to a lease the Bank entered into
in July 1999 to house its corporate headquarters including its executive offices
and other non-branch operating departments. The Bank leased 25,000 square feet
at an average cost of $14.14 per foot until September 2000. In accordance with
Financial Accounting Standards Board Statement No. 13, this lease was accounted
for as a capital lease in the amount of $1,483,000 as the present value of
future minimum lease payments exceeds 90% of the fair market value of the
building. In October 2000, the Bank purchased this facility for approximately
$1.4 million. This transaction is expected to save the Bank $1.6 million over
the remaining 9-year term of the lease it had in place and removes the capital
lease obligation.
In addition, in conjunction with its acquisition of deposits from First
Union, the Bank assumed the leases of four branches, two of which were in close
proximity to its existing branches. Due to more favorable characteristics of
these branches (i.e. visibility, drive-through, ATM's, etc.), the Bank relocated
its branch operations to the acquired facilities. These facilities have higher
rental rates. The Bank consolidated two of the acquired branches with its
existing branch network and closed its Frankford branch in September 2000. In
October 2000, the Bank sold one of the acquired facilities located in West
Philadelphia for a gain of approximately $329,000. The Bank's Frankford and West
Girard branches have been listed with realtors and are expected to be sold
during 2001.
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 increased by $108,000, or 12.6%, during 2000 compared to an decrease of
$5,000, or 0.6%, in 1999. This increase is primarily attributable to the First
Union acquisition related growth in average deposit levels for which the Bank
pays outside services to process transactions and provide statement rendering.
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
processing versus outsourcing, and the renegotiation of existing contracts with
servicers.
Marketing and public relations expense decreased by $146,000, or 47.9%, in
2000 compared to an increase of $83,000, or 37.5%, in 1999. In June 2000,
management implemented an earnings enhancement plan that included a reduction in
all nonessential expenses including marketing. As the Bank was in an asset
reduction mode, there were no new business initiatives that required marketing.
Professional services increased $150,000 or 38.2%, in 2000. This increase was
primarily related to fees the Bank paid to attorneys to handle loan related
legal matters as well as to negotiate the elements of its Written Agreement with
Federal Regulators in February 2000
Office operations and supplies expense increased by $62,000, or 8.7%, in
2000. This increase was primarily a result of the acquisition of branches from
First Union in 1999 and the relocation of the corporate headquarters. However,
in September 2000, the Bank closed/consolidated branches which resulted in
reductions in branch operating costs (i.e. security guards, supplies, etc.)
during the quarter ending December 31, 2000.
20
Federal deposit insurance premiums were $169,000 in 2000 compared to $105,000
in 1999 and $82,000 in 1998. FDIC insurance premiums are applied to all
financial institutions based on a risk based premium assessment system. 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 1.96 basis points for BIF (Bank
Insurance Fund) assessable deposits and SAIF (Savings Insurance Fund) assessable
deposits. The increase during 2000, is a result of the perceived risk associated
with the Bank's weakening financial condition and declining capital base.
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
indicates how the Bank has managed these elements. Average funding uses
decreased approximately $5.8 million, or 5.09%, in 2000 compared to $9.1
million, or 8.76%, in 1999.
Table 3--Sources and Use of Funds Trends
2000 1999 1998
--------------------------------- ---------------------------------- -------
INCREASE INCREASE
AVERAGE (DECREASE) AVERAGE (DECREASE) AVERAGE
BALANCE AMOUNT PERCENT BALANCE AMOUNT PERCENT BALANCE
------- ------ ------- ------- ------ ------- -------
(Dollars in thousands)
Funding uses:
Loans ................ $ 55,262 $(13,264) (19.36)% $ 68,526 $(2,812) (3.94)% $ 71,338
Investment securities
Held-to-maturity .... 28,659 6,967 32.12 21,692 10,256 89.68 11,436
Available-for-sale .. 18,044 8,769 94.54 9,275 883 10.52 8,392
Federal funds sold .. 5,518 (8,235) (59.88) 13,753 794 6.13 12,959
-------- -------- -------- ------- --------
Total uses ........ $107,483 $ (5,763) $113,246 $ 9,121 $104,125
======== ======== ======== ======= ========
Funding sources:
Demand deposits:
Noninterest-bearing . $ 27,567 $ 3,548 14.77% $ 24,019 $ 4,279 21.68% $ 19,740
Interest-bearing .... 19,851 (41) (0.21) 19,892 (2,730) (12.07) 22,622
Savings deposits ..... 30,776 4,032 15.08 26,744 3,461 14.86 23,283
Time deposits ........ 28,531 (6,489) (18.53) 35,020 (2,345) (6.28) 37,365
Other borrowed funds . 1,925 679 54.49 1,246 (275) (18.08) 1,521
-------- -------- -------- ------- --------
Total sources ..... $108,650 $ 1,729 $106,921 $ 2,390 $104,531
======== ======== ======== ======= ========
*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.
21
Average investment securities and federal funds sold, in the aggregate,
increased by $7.5 million, or 16.8%, in 2000 compared to an increase of $11.9
million, or 36.4%, in 1999. The increase in the average balances during 2000 is
a result of the acquisition of deposits from First Union in September 1999.
These deposits were acquired without corresponding loans and funds were
therefore placed in U.S. Government Agency and mortgage-backed securities to
maximize the yield. In addition, the Bank invested the funds from
paydowns/payoffs in the loan portfolios in similar securities. However, to fund
its asset reduction/capital improvement plan, the Bank sold investment
securities totaling approximately $20 million during the latter half of 2000.
The Bank's investment portfolio primarily consists of mortgage-backed
pass-through agency securities, U.S. Treasury 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, the assumed average maturity of the investment
portfolio was 4.4 years at year-end 2000. Approximately 39.3% of the portfolio
consists 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.
In a declining rate environment, the duration of the investment portfolio is
significantly shortened because of the high level of callable government agency
securities - approximately 60.7% at December 31, 2000. These higher yielding
securities are likely to be called as rates trend downward. The result is
additional liquidity and a reduction in yield on the portfolio. The Bank is
taking steps to combat the impact of the high level of optionality in the
portfolio by identifying replacement loans or securities that are fixed rate or
perform well when "shock" tested in a declining rate environments.
Table 4--Analysis of Investment Securities
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER
ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS TEN YEARS
------------------ ------------------ ----------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
------ ----- ------ ----- ------ ----- ------ ----- -----
(Dollars in thousands)
Other government securities $ -- --% $ 12,427 6.26% $ 8,336 6.96% $ -- -- $ 20,763
Mutual funds 100 6.40 -- -- -- -- -- -- 100
Other investments -- -- -- 406 6.00 -- -- 406
Mortgage-backed securities -- -- -- -- -- -- -- 13,745
------- -------- ------- ------ --------
Total securities $ 100 $ 12,427 $ 8,742 $ -- $ 35,014
======= ======== ======= ====== ========
Average maturity 4.4 years
The above table sets forth the maturities of investment securities at December
31, 2000 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 $13.3 million, or 19.4%, in 2000
compared to a decrease of $2.8 million, or 3.94%, in 1999. Although the Bank
purchased a $22 million portfolio of seasoned automobile loans from NationsBank
in February 1999, close to 80% of this portfolio had paid down by year-end of
2000. Paydowns in this portfolio are averaging $500,000 per month. In June 2000,
the Bank sold approximately $2.1 million in student loans as part of its ongoing
strategy to originate and sell these loans to generate gains and minimize its
data processing costs. The Bank's mortgage loan portfolio continues to decline
because of payoffs/paydowns for which there were no new originations to replace.
Further, in September 2000, the Bank charged-off commercial and consumer
loans totaling $498,000. Collection of these loans will be pursued through
alternative means. These charge-offs were in-line with the Bank's strategy to
clear its loan portfolio of any loans for which payment is unlikely.
22
Over-riding all of these factors is that during 2000 the Bank was in an asset
reduction/capital improvement mode and a re-organization was underway. As a
result, new business was not actively sought. Management believes it is now
positioned to expand its business development efforts in the Philadelphia region
and has developed strategic plans to incorporate these initiatives.
Table 5--Loans Outstanding, Net of Unearned Income
DECEMBER 31,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Commercial and industrial...... $11,429 $13,664 $13,643 $12,095 $10,107
Commercial real estate ........ 652 1,288 1,518 1,515 649
Residential mortgages ......... 22,316 26,237 31,365 35,962 36,622
Consumer loans ................ 10,908 19,822 11,424 22,611 17,340
Loans held-for-sale ........... -- -- -- 1,979 4,906
------- ------- ------- ------- -------
Total loans ................ $45,305 $61,011 $57,950 $74,162 $69,624
======= ======= ======= ======= =======
Table 6--Loan Maturities and Interest Sensitivity
WITHIN AFTER ONE BUT AFTER
ONE YEAR WITHIN FIVE YEARS TEN YEARS TOTAL
-------- ----------------- --------- -----
(Dollars in thousands)
Commercial and industrial .............. $ 4,407 $ 4,030 $ 2,992 $11,429
Commercial real estate ................. 114 -- 538 652
Residential mortgages .................. -- -- 22,316 22,316
Consumer loans ......................... 821 7,299 2,788 10,908
------- ------- ------- -------
Total loans ........................ 5,342 11,329 28,634 45,305
Loans maturing after one year with:
Fixed interest rates ................ $34,892
Variable interest rates ............. 10,414
Nonperforming Loans
Table 7 reflects the Bank's nonperforming 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 generally
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) 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Nonaccrual loans ........................ $453 $2,027 $1,720 $1,179 $800
Interest income included in net income
for the year ......................... 20 67 37 14 6
Interest income that would have been
recorded under original terms ........ 28 113 189 112 45
Loans past due 90 days and still accruing 34 53 125 306 408
There is no known information about possible credit problems other than those
classified as nonaccrual that causes management to be uncertain as to the
ability of any borrower to comply with present loan terms.
23
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, 2000, approximately 38% 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, 2000, none of these loans were
nonperforming.
During 2000, nonaccrual loans decreased to $453,000, down from $2 million at
December 31, 1999. This decrease is primarily attributable to the charge-off of
one community development construction loan that accounted for approximately
$600,000 of the total nonaccrual loans in 1999. In addition, during 2000, the
Bank cleared its portfolio by aggressively charging-off other loans for which
collectibility was uncertain. At December 31, 2000, approximately $94,000 of the
total nonaccrual loans was residential mortgages. The underlying real estate
collateral associated with these loans 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 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.
Table 8--Allocation of Allowance for Loan Losses
2000 1999 1998 1997
------------------------ ---------------------- ----------------------- ----------------------
PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Commercial and industrial $383 25.23% $ 263 22.40% $272 23.55% $144 16.31%
Commercial real estate .. 11 1.44 877 2.11 132 2.62 13 2.04
Residential mortgages ... 102 24.08 144 43.00 55 59.12 180 48.49
Consumer loans .......... 66 49.26 283 32.49 188 19.71 97 33.16
Unallocated ............. -- -- -- -- 32 -- 34 --
---- ------ ------ ------ ---- ------ ---- ------
$562 100.00% $1,567 100.00% $679 100.00% $468 100.00%
==== ====== ====== ====== ==== ====== ==== ======
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.
24
Table 9--Analysis of Allowance for Loan Losses
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at January 1 $1,567 $ 679 $ 468 $ 528 $ 476
------ ------- ------- ------- -------
Charge-offs:
Commercial and industrial (321) (25) -- (66) (17)
Commercial real estate (803) -- -- -- --
Residential mortgages (47) -- (9) --
Consumer loans (597) (315) (180) (160) (25)
------ ------- ------- ------- -------
(1,721) (387) (180) (235) (42)
------ ------- ------- ------- -------
Recoveries - consumer loans 151 268 41 78 9
------ ------- ------- ------- -------
Net charge-offs (1,570) (119) (139) (157) (33)
Provisions charged to operations 565 1,007 350 97 85
------ ------- ------- ------- -------
Balance at December 31 $ 562 $ 1,567 $ 679 $ 468 $ 528
====== ======= ======= ======= =======
Ratio of net charge-offs to average
loans outstanding 2.84% 0.17% 0.19% 0.23% 0.05%
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.
During 2000, the Bank charged-off approximately $1.6 million of its
classified loans. Approximately $600,000 of the total charge-offs related to one
community development loan that had been fully reserved at December 31, 1999. In
addition, the Bank charged-off loans totaling $498,000 of which approximately
$267,000 of these loans were guaranteed by the Small Business Administration
(SBA). The Bank will perform post charge-off collections to maximize its
recovery on all charged-off loans. Workout attorneys have been engaged to
aggressively pursue collections of these loans.
Deposits
Average deposits grew approximately $1.05 million, or 1.0%, in 2000 compared
to growth of $2.7 million, or 2.6%, in 1999. The increase is primarily related
to the acquisition of $31.5 million in deposits from First Union Corporation in
September 1999. These deposits included primarily core deposits consisting of
checking and savings accounts. However, 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 non-First Union acquired deposits. Beginning in June
2000, the Bank sold higher yielding certificates of deposit to other financial
institutions and encouraged some large deposit accountholders to remove deposits
to fund its asset reduction plan. In addition, the Bank's September 2000 branch
consolidation resulted in some deposit attrition.
Table 10--Average Deposits by Class and Rate
2000 1999 1998
---------------------- ---------------------- --------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(Dollars in thousands)
Noninterest-bearing
demand deposits $27,567 --% $24,019 --% $19,740 --%
Interest-bearing demand
deposits 19,851 3.03 19,892 2.86 22,622 2.74
Savings deposits 30,776 1.61 26,744 1.65 23,283 1.84
Time deposits 28,531 4.86 35,020 4.84 37,365 5.08
25
Other Borrowed Funds
The average balance for other borrowed funds increased $679,000, or 54.5%, in
2000 compared to a decrease of $275,000, or 18.08%, in 1999. This increase was a
result of the need to borrow funds either by utilizing a fully secured Federal
Funds line of credit with a correspondent bank or using a Master Repurchase
Agreement with another financial institution. These borrowings were necessary to
temporarily fund the Bank's asset reduction/capital improvement plan until other
assets were sold. This increase was offset by the reversal of the $1.5 million
capital lease obligation related to the Bank's purchase of a previously leased
building for its corporate offices. 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.
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, 2000, 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 $5.3 million in loans are
scheduled to mature within one year.
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 ............... $6,212
Over 3 through 6 months ........ 1,356
Over 6 months through 1 year.... 1,255
Over 1 through five years ...... 240
Over five years ................ --
------
Total .......................... $9,063
======
26
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, 2000, 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, 2000, a slight
liability sensitive position is maintained on a cumulative basis through one
year of 0.68%. 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 negative gap
position in shorter time frames, the Bank can anticipate that decreases 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.
Table 12--Interest Sensitivity Analysis
INTEREST RATE SENSITIVITY GAPS
AS OF DECEMBER 31, 2000
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OVER
O