Attached files
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| EX-32.2 - EXHIBIT 32.2 - UNITED BANCSHARES INC /PA | ex322.htm |
| EX-31.1 - EXHIBIT 31.1 - UNITED BANCSHARES INC /PA | ex311.htm |
| EX-32.1 - EXHIBIT 32.1 - UNITED BANCSHARES INC /PA | ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - UNITED BANCSHARES INC /PA | ex312.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission file number: 0-25976
UNITED BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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Pennsylvania
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23-2802415
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(State of other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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The Graham Building, 30 South 15th Street, Suite 1200, Philadelphia, Pennsylvania
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19102
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(Address of principal executive offices)
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(Zip Code)
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(215) 351-4600
[Registrant’s telephone number, including area code]
Name and fiscal year not changed, but former address was 300 North 3rd Street Philadelphia, PA 19106
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on
which registered
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NONE
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NONE
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Securities registered pursuant to Section 12(g) of the Act:
1
Common Stock, $ .01 Par Value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes o No x
Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes o No x
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated filer o Accelerated filer o Non-accelerated filer o Smaller Reporting Company x
Indicate by checkmark whether the Registrant is a shell company (as defined by Rule 126-2 of the Exchange Act):
Yes o No x
The aggregate market value of shares of common stock held by non-affiliates of Registrant (including fiduciary accounts administered by affiliates) was [_not applicable ] on June 30, 2011. Not applicable, the Registrant shares are not publicly traded.
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 500,000 shares of $.01 par value Series Preferred Stock (Series A Preferred Stock).
The Board of Directors designated a subclass of the common stock, Class B Common Stock, by filing of Articles of Amendment to its Articles of Incorporation on September 30, 1998. This Class B Common Stock has all of the rights and privileges of Common Stock with the exception of voting rights. Of the 2,000,000 shares of authorized Common Stock, 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 February 24, 2014 the aggregate number of the shares of the Registrant’s Common Stock outstanding was 1,068,588 (including 191,667 Class B non-voting).
DOCUMENTS INCORPORATED BY REFERENCE:
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Document
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Parts Into Which Incorporated
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None
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The exhibit index is on pages 56 through 58. There are 108 pages in this report.
2
United Bancshares, Inc.
Index
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Item No.
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Page
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PART I
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PART II
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PART III
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PART IV
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| UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF FEBRUARY 24, 2014. | ||
PART I
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENT
Certain of the matters discussed in this document and the documents incorporated by reference herein, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may constitute forward looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, and may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of United Bancshares, Inc (“UBS”) to be materially different from future results, performance or achievements expressed or implied by such forward looking statements. The words “expect,” “anticipate,” “intended,” “plan,” “believe,” “seek,” “estimate,” “will” and similar expressions are intended to identify such forward-looking statements. These forward looking statements include: (a) statements of goals, intentions and expectations; (b) statements regarding business prospects, asset quality, credit risk, reserve adequacy and liquidity. UBS’ actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation: (a) the effects of future economic conditions on UBS and its customers, including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and consumer saving patterns; (b) UBS interest rate risk exposure and credit risk; (c) changes in the securities markets with respect to the fair market values of financial assets and the stability of particular securities markets; (d) governmental monetary and fiscal policies, as well as legislation and regulatory changes; (e) changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral and securities, as well as interest-rate risks; (f) changes in accounting requirements or interpretations; (g) the effects of competition from other commercial banks, thrifts, mortgage companies, consumer finance companies, credit unions securities brokerage firms, insurance company’s, money-market and mutual funds and other financial institutions operating in the UBS’ trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet; (h) any extraordinary events (such as the September 11, 2001 events), the war on terrorism and the U.S. Government’s response to those events or the U.S. Government becoming involved in a conflict in a foreign country including the war in Iraq; (i) UBS’ need for capital; (j) 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; (k) UBS’ success in generating new business in its existing markets, as well as its success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time; (l) UBS’ timely development of competitive new products and services in a changing environment and the acceptance of such products and services by its customers; (m) the ability of key third party providers to perform their obligations to UBS and; (n) UBS’ success in managing the risks involved in the foregoing; and, (o) failure to comply with the consent orders with the FDIC and Pennsylvania Department of Banking.
All written or oral forward-looking statements attributed to UBS are expressly qualified in their entirety by use of the foregoing cautionary statements. All forward-looking statements included in this Report are based upon information presently available, and UBS assumes no obligation to update any forward-looking statement.
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 The Graham Building, 30 S 15th Street, Suite 1200, Philadelphia, Pennsylvania 19102. The Registrant’s telephone number is (215) 351-4600.
As of February 24, 2014, UBS and the Bank had a total of 26 employees.
United Bank of Philadelphia
United Bancshares, Inc. is an African American controlled and managed bank holding company for United Bank of Philadelphia (the “Bank”), a commercial bank chartered in 1992 by the Commonwealth of Pennsylvania, Department of Banking. The deposits held by the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank provides full service community banking in Philadelphia neighborhoods that are rich in diversity providing a market opportunity that includes men, women, families, small business owners, skilled laborers, professionals and many more who need banking services to help make their dreams come true.
The Bank conducts all its banking activities through its three offices located as follows: (i)Center City 30S 15th Street, Philadelphia, Pennsylvania, (ii) Mount Airy Branch 1620 Wadsworth Avenue, Philadelphia, Pennsylvania; and (iii) Progress Plaza Branch 1015 North Broad Street, Philadelphia, Pennsylvania. Through its locations, the Bank offers a broad range of commercial and consumer banking services. At December 31, 2013, the Bank had total deposits aggregating approximately $57.1 million and had total net loans outstanding of approximately $41.2 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 385 census tracts and, based census data, 250 or 65% of these are designated as low to moderate-income tracts while 105 or 27.3% are characterized both as low to moderate-income and minority tracts. The Bank’s primary service area consists of a population of 1,526,006, which includes a minority population of 752,309.
United Bank of Philadelphia, while state chartered as a commercial bank, is uniquely structured to provide retail services to its urban communities, while maintaining and establishing a solid portfolio of commercial relationships that include small businesses, churches and corporations. The Bank has leveraged its CDFI (community development financial institution) designation as established by the United States Department of Treasury to attract deposits from universities and corporations in the region seeking Community Reinvestment Act (the “CRA Act”) credit. The Bank may also be eligible to receive grants from the U.S. Treasury CDFI Bank Enterprise Award Fund for its qualified small business lending activity. Management may pursue CDFI funding in the future for which the Bank is eligible.
The Bank seeks to strengthen communities in the Philadelphia region with innovative products and services including remote deposit capture and other electronic banking services. The Bank primarily engages in commercial banking business 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 (both retail and commercial), including checking accounts, interest-bearing NOW accounts, money market accounts, certificates of deposit, savings accounts and Individual Retirement Accounts.
A broad range of credit products is offered to the businesses in the Bank’s service area, including commercial and industrial and commercial real estate loans. At February 24, 2014, the Bank’s maximum legal lending limit was approximately $655,000 per borrower; however, the Bank’s internal Loan Policy limits the Bank’s lending to $500,000 per borrower in order to diversify the credit risk in the loan portfolio. The Board of Directors of the Bank maintains the ability to waive its internal lending limit upon consideration of a loan. The Board of Directors has exercised this power with respect to loans and participations on a number of occasions.
United Bank of Philadelphia has the 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 and other local agency credit enhancement programs including the Small Business Administration (“SBA”) and Philadelphia Industrial Development Corporation (“PIDC”) when deemed appropriate. These programs offer guarantees of up to 90% of the loan amount. These guarantees are intended to reduce the Bank’s exposure to loss in its commercial loan portfolio. Commercial loans are typically made on the basis of cash flow to support repayment with secondary reliance placed on the underlying collateral.
Other services the Bank offers include safe deposit boxes, travelers’ checks, money orders, direct deposit of payroll and Social Security checks, wire transfers, access to automated teller networks and remote deposit capture.
Segments
The Company has one reportable segment, “Community Banking.” All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the other. For example, commercial lending is dependent upon the ability of the Bank to fund it with retail deposits and other borrowings and to manage interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit.
Access to the Bank’s Website and the United States Securities and Exchange Commission Website
Reports filed electronically by United Bancshares, Inc.’s with the Securities and Exchange Commission including proxy statements, reports on Form 10-K, reports on Form 10-Q, and current event reports on Form 8–K, as well as any amendment of those reports, and other information about UBS and the Bank are accessible at no cost on the Bank’s website at www.ubphila.com under the “investor information” section. These files are also accessible on the Commission’s website at www.sec.gov .
Competition
There is significant competition among financial institutions in the Bank’s service area. Money center banks have positioned new branches in once abandoned neighborhoods seeking to grow market share in minority communities. The Bank competes with local, regional and national commercial banks, as well as savings banks, credit unions 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 including cash management, investment and trust services. 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 “uniqueness” in the marketplace and its mission to service groups of people who have traditionally been under served and by its devotion to personalized customer service. The Bank’s branding message, “So Much More Than Banking” highlights the Bank’s community development focus.
The Bank focuses its efforts on the needs of individuals and small and medium-sized businesses. In the event that 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. In addition, major corporations with operations in the Philadelphia region will continue to be targeted for business including deposits and other banking services.
Supervision and Regulation
UBS, as a Pennsylvania business corporation, is subject to the jurisdiction of the Securities and Exchange Commission (the “SEC”) and certain state securities commissions concerning matters relating to the offering and sale of its securities. Accordingly, if UBS wishes to issue additional shares of its Common Stock, for example, to raise capital or to grant stock options, UBS must comply with the registration requirements of the Securities Act of 1933, as amended, and any applicable states securities laws, or use an applicable exemption from such registration, if available.
Capital Adequacy
Federal and state banking laws impose on financial institutions such as UBS and the Bank certain minimum requirements for capital adequacies. The Company and the Bank are each generally required to maintain a minimum ratio of total capital to risk rated assets of 8%. At least half of the total capital must be composed of “Tier I Capital” which is defined as common equity, retained earnings and qualified perpetual preferred stock, less certain intangibles. The remainder may consist of “Tier II Capital” which is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of loan loss allowance. Also, federal banking regulatory agencies have established minimum leverage capital requirements for banking organizations. Under these requirements, banking organizations must maintain a minimum of Tier I Capital to adjusted average quarterly assets equal to 3% to 5%, subject to bank regulatory evaluation of an organization’s overall safety and soundness. Under the federal banking regulations, a financial institution would be deemed to “adequately capitalized” or better if it exceeds the minimum federal regulatory capital requirements. A financial institution would be deemed “undercapitalized” if it fails to meet the minimum capital requirements and significantly undercapitalized if it has a total risk based capital ratio that is less than 6%, Tier I risk based capital ratio is less than 3%, or a leverage ratio that is less than 3% and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to less than 2%. UBS and the Bank are “adequately” for regulatory capital purposes based upon the most recent notification under regulatory framework for prompt corrective action.
On January 31, 2012, the Bank entered into a Consent Order with its primary regulators that requires the development of a written capital plan (“Capital Plan”) that details the manner in which the Bank will meet and maintain a Leverage Ratio of at least 8.50% and a Total Risk-Based Capital Ratio of at least 12.50%. At a minimum, the Capital Plan must include specific benchmark Leverage Ratios and Total Risk-Based Capital Ratios to be met at each calendar quarter-end, until the required capital levels are achieved.
Basel III
On June 7, 2012, the Federal Reserve approved proposed rules that would substantially amend the regulatory risk-based capital rules applicable to UBS and the Bank. The FDIC and the OCC subsequently approved these proposed rules on June 12, 2012. The proposed rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
In July 2013, the Federal Reserve, the OCC and the FDIC approved the final Basel III risk-based capital rule. This rule aims to improve the quality and quantity of capital for all banking organizations. The agencies, in response to comments on their June 2012 proposed capital rule, sought to minimize the potential burden on community organizations where consistent with applicable law and the establishment of a robust and comprehensive capital framework. Community banking organizations first become subject to the final Basel III rule on January 1, 2015. Thereafter begins a phase-in period through January 1, 2019.
For community banking organizations like UBS and the Bank, the rule in final form provides some relief from the initial proposal in three important areas:
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Banks under $15 billion in assets can continue to count trust-preferred securities—known as TRuPS—as Tier 1 capital.
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Banks can continue to risk-weight residential mortgages as they had under the original Basel I regime. The final rule abandons a proposal to institute a complicated formula of risk weights for residential mortgages.
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All but the largest banks (above $250 billion in assets) can keep available-for-sale securities on the balance sheet without having to adjust regulatory capital levels based on the current market value of those securities. Banks have a one-time opportunity to opt-out on their first regulatory call report after Jan. 1, 2015 from what’s called the accumulated other comprehensive income (AOCI) filter. If they miss doing so, they can’t opt-out later.
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The final rule includes new risk-based capital and leverage ratios and refines the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to UBS and the Bank under the final rule would be:
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a new common equity Tier 1 capital ratio of 4.5%;
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(ii)
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a Tier 1 capital ratio of 6% (increased from 4%);
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(iii)
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a total capital ratio of 8% (unchanged from current rules); and
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(iv)
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a Tier 1 leverage ratio of 4% for all institutions.
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The rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios:
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(i)
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a common equity Tier 1 capital ratio of 7.0%;
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(ii)
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a Tier 1 capital ratio of 8.5%; and
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(iii)
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a total capital ratio of 10.5%.
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The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.
Basel III provides discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the proposed rules permit the countercyclical buffer to be applied only to “advanced approach banks” ( i.e. banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes UBS and the Bank.
The federal bank regulatory agencies also approved revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions would be required to meet the following increased capital level requirements in order to qualify as “well capitalized:”
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a new common equity Tier 1 capital ratio of 6.5%;
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(ii)
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a Tier 1 capital ratio of 8% (increased from 6%);
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(iii)
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a total capital ratio of 10% (unchanged from current rules); and
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(iv)
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a Tier 1 leverage ratio of 5% (increased from 4%).
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UBS and the Bank are currently below the requirements of the new rule but will seek to strengthen its capital ratios in 2014 with new external capital as well as retained earnings.
The Bank Holding Company Act
UBS, as a bank holding company, is subject to the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and supervision by the Federal Reserve Board. The BCH Act limits the business of bank holding companies to banking, managing or controlling banks, performing certain servicing activities for subsidiaries and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking. UBS is subject to the supervision of and inspection by the Federal Reserve Board and is required to file with the Board an annual report and such additional information as the Board may require pursuant to the BHC Act and its implementing regulations. The Federal Reserve Board also conducts inspections of UBS.
A bank holding company is prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities, unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks, as to be a proper incident thereto. In making this determination, the Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects.
The BHC Act requires UBS to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than 5% of the voting shares of any corporation, including another holding company or bank.
The BHC Act and the Federal Reserve Board’s regulations prohibit a bank holding company and its subsidiaries from engaging in certain tying arrangements in connection with any extension of credit or services. The “anti-tying” provisions prohibit a bank from extending credit, leasing, selling property or furnishing any service to a customer on the condition that the customer obtain additional credit or service from the bank, its bank holding company or any other subsidiary of its bank holding company, or on the condition that the customer not obtain other credit or services from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company.
The Bank, as a subsidiary of UBS, is subject to certain restrictions imposed by the Federal Reserve Act, as amended, on any extensions of credit to UBS or its subsidiaries, on investments in the stock or other securities UBS or its subsidiaries, and on taking such stock or securities as collateral for loans.
The Federal Reserve Act and Federal Reserve Board regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, that Act and those regulations may affect the terms upon which any person who becomes a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship.
Under Federal Reserve Board Policy, UBS is expected to serve as a source of financial strength to the Bank and to commit resources to support the Bank. Consistent with its “source of strength” policy, the Federal Reserve Board has stated that as a matter of prudent banking, the bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the perspective rate of earnings retention appears to be consistent with UBS’s capital needs, asset quality and overall financial condition.
Federal Law also grants to the federal banking agencies the power to issue cease and desist orders when a bank or bank holding company, or an officer or director thereof, is engaged in or is about to engage in unsafe and unsound practices.
Regulatory Restrictions on Dividends
The Consent Orders with the FDIC and the Pennsylvania Department of Banking prohibit the payment of dividends without the approval of both regulatory agencies.
Dividend payments by the Bank to UBS are subject to the Pennsylvania Banking Code and the FDIC Act. Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally undivided profits). Under the FDIC, an insured bank may not pay dividends if the bank is in arrears and the payment of any insurance assessment due to the FDIC. See dividend restrictions under Item 5 below.
The Financial Services Act
The Financial Services Act (the “FSA”), sometimes referred to as the Gramm-Leach-Bliley Act, repealed the provisions of the Glass-Steagall Act, which prohibited commercial banks and securities firms from affiliating with each other and engaging in each other’s businesses. Thus, many of the barriers prohibiting affiliations between commercial banks and securities firms have been eliminated.
The FSA authorizes the establishment of “financial holding companies” (“FHC”) to engage in new financial activities offering and banking, insurance, securities and other financial products to consumers. Bank holding companies may elect to become a FHC, if all of its subsidiary depository institutions are well capitalized and well managed. If those 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 are filed, the FHC may engage either de novo or through an acquisition in any activity that has been determined by the Federal Reserve Board to be financial in nature or incidental to such financial activity.
Under the FSA, the Bank, subject to various requirements, is permitted to engage through “financial subsidiaries” in certain financial activities permissible for affiliates of an FHC. However, to be able to engage in such activities the Bank must be well capitalized and well managed and receive at least a “satisfactory” rating in its most recent CRA examination. See “The Community Reinvestment Act” below.
Dodd Frank Act
On July 21, 2010, the Dodd Frank Act was signed into law. The Dodd Frank Act will likely result in dramatic changes across the financial regulatory system, some of which became effective immediately and some of which will not become effective until various future dates. Implementation of the Dodd Frank Act will require many new rules to be issued by various federal regulatory agencies over the next several years. There will be a significant amount of uncertainty regarding the overall impact of this new law on the financial services industry until final rulemaking is complete. The ultimate impact of this law could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, and financial condition. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate. The Dodd Frank Act also includes provisions that, among other things, either have been adopted or will be adopted:
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Centralize responsibility for consumer financial protection by creating a new agency, the Bureau of Consumer Financial Protection, responsible for implementing, examining, and enforcing compliance with federal consumer financial laws, but depository institutions such as the bank with less than $10 billion in assets will continue to be examined and supervised by its current regulators.
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Create the Financial Stability Oversight Council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management, and other requirements as companies grow in size and complexity.
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Provide mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans and new disclosures. In addition, certain compensation for mortgage brokers based on certain loan terms will be restricted.
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Require financial institutions to make a reasonable and good faith determination that borrowers have the ability to repay loans for which they apply. If a financial institution fails to make such a determination, a borrower can assert this failure as a defense to foreclosure.
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Require financial institutions to retain a specified percentage (5% or more) of certain non-traditional mortgage loans and other assets in the event that they seek to securitize such assets.
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Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increase the floor on the size of the DIF, which generally will result in a decrease in the level of assessments for institutions with assets less than $10 billion.
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Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance for noninterest-bearing demand transaction accounts at all insured depository institutions.
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Implement corporate governance revisions, including with regard to executive compensation, say on pay votes, proxy access by shareholders, and clawback policies which apply to all public companies, not just financial institutions.
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Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactions and other accounts.
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Amend the Electronic Funds Transfer Act (EFTA) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.
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Apply the same leverage and risk based capital requirements that apply to insured depository institutions and holding companies.
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As noted above, the Dodd Frank Act requires that the federal regulatory agencies draft many new regulations which will implement the foregoing provisions as well as other provisions contained in the Dodd Frank Act, the ultimate impact of which will not be known for some time.
The Sarbanes-Oxley Act of 2002 (The” SOX Act”)
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In accordance with the requirements of Section 404(a) of the Sarbanes-Oxley Act, management’s report on internal controls is included herein at Part 9. The Dodd-Frank Act permanently exempts non-accelerated filers from the auditor attestation requirement of the Act.
UBS, in compliance with the Sarbanes-Oxley Act of 2002, has made the determination that the Audit Committee of UBS has a “financial expert” on the committee. This “financial expert” is Joseph Drennan, an independent director of the Bank, who is not associated with the daily management of UBS. Mr. Drennan is a former bank executive and currently serves as Chief Financial Officer for a venture capital firm. He has an understanding of financial statements and generally accepted accounting principles.
The Bank has a Code of Ethics for the Chief Executive Officer and Chief Financial Officer of the Bank in compliance with the Sarbanes-Oxley Act.
The Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and the FDIC. In addition, the Bank is subject to a variety of local, state and federal laws that affect its operation. Those laws and regulations which have material impact on the operations and expenses of the Bank and thus UBS are summarized below.
Branch Banking
The Pennsylvania Banking Code of 1965, the (“Banking Code”), has been amended to harmonize Pennsylvania law with federal law to enable Pennsylvania banking institutions, such as the Bank, to participate fully in interstate banking and to remove obstacles to out of state banks engaging in banking in Pennsylvania.
FDIC Membership Regulations
The FDIC (i) is empowered to issue consent 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) is authorized to remove executive officers who have participated in such violations or unsound practices; (iii) has restricted lending by the Bank to its executive officers, directors, principal shareholders or related interests thereof; (iv) has restricted management personnel of the Bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area. Additionally, the Bank Control Act provides that no person may acquire control of the Bank unless the FDIC has been given 60-days prior written notice and within that time has not disapproved of the acquisition or extended the period for disapproval.
Federal Law also grants to the federal banking agencies the power to issue consent orders when a bank or bank holding company, or an officer or director thereof, is engaged in or is about to engage in unsafe and unsound practices.
Regulatory Order
On January 31, 2012, the Bank entered into stipulations consenting to the issuance of Consent Orders with the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking (“Department”). The material terms of the Consent Orders are identical. The requirements and status of items included in the Consent Orders are as follows:
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Requirement
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Increase participation of the Bank’s board of directors in the Bank’s affairs by having the board assume full responsibility for approving the Bank’s policies and objectives and for supervising the Bank’s management;
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Board participation has been improved with attendance at board and committee meetings.
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Have and retain qualified management, and notify the FDIC and the Department of any changes in the Bank’s board of directors or senior executive officers;
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A management assessment was completed in June 2012 in conjunction with the required management review and written management plan with benchmarks for recommended enhancements.
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Retain a bank consultant acceptable to the FDIC and the Department to develop a written analysis and assessment of the Bank’s management needs and thereafter formulate a written management plan;
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An engagement letter from a qualified consultant was received and approved by the Bank’s regulators. Upon acceptance, the review commenced in May 2012 and was completed in June 2012. A written management plan was submitted based on the results of the review.
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Formulate and implement written profit and budget plans for each year during which the orders are in effect;
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A three year profit and budget plan was prepared and submitted to regulators as required.
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Develop and implement a strategic plan for each year during which the orders are in effect, to be revised annually;
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A comprehensive strategic plan was prepared and submitted to regulators as required.
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Develop a written capital plan detailing the manner in which the Bank will meet and maintain a ratio of Tier 1 capital to total assets (“leverage ratio”) of at least 8.5% and a ratio of qualifying total capital to risk-weighted assets (total risk-based capital ratio) of at least 12.5%, within a reasonable but unspecified time period;
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A capital plan with quarterly benchmarks was prepared and submitted to regulators as required.
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Formulate a written plan to reduce the Bank’s risk positions in each asset or loan in excess of $100,000 classified as “Doubtful” or “Substandard” at its regulatory examination;
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A classified asset reduction plan with quarterly benchmarks measured against capital was prepared and submitted as required.
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Eliminate all assets classified as “Loss” at its current regulatory examination;
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All assets classified as “Loss” have been eliminated.
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Revise the Bank’s loan policy to establish and monitor procedures for adherence to the loan policy and to eliminate credit administration and underwriting deficiencies identified at its current regulatory examination;
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The Bank’s loan policy has been revised to include enhanced monitoring procedures and submitted to regulators as required.
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Develop a comprehensive policy and methodology for determining the allowance for loan and lease losses;
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The ALLL policy and methodology for determining the allowance for loan losses were submitted to regulators as required.
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Develop an interest rate risk policy and procedures to identify, measure, monitor and control the nature and amount of interest rate risk the Bank takes;
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The Bank’s interest rate risk policy and procedures were submitted to regulators as required.
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Requirement
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Status
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Refrain from accepting any brokered deposits;
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The Bank did not accept brokered deposits.
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Refrain from paying cash dividends without prior approval of the FDIC and the Department;
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The Bank did not pay cash dividends.
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Establish an oversight committee of the board of directors of the Bank with the responsibility to ensure the Bank’s compliance with the orders, and
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An oversight committee consisting of three outside directors and one inside director was established and meets periodically to ensure compliance with the orders.
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Prepare and submit quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the orders.
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Quarterly reports have been prepared and submitted as required.
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The Orders will remain in effect until modified or terminated by the FDIC and the Department and do not restrict the Bank from transacting its normal banking business. The Bank will continue to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Customer deposits remain fully insured to the highest limits set by the FDIC. The FDIC and the Department did not impose or recommend any monetary penalties in connection with the Consent Orders.
At December 31, 2013 and 2012, the Bank’s tier one leverage capital ratio was 5.67% and 6.00%, respectively, and its total risk based capital ratio was 9.48% and 11.16%, respectively. The tier one leverage ratio declined as a result of the Bank’s net loss. The risk based capital ratio declined as a result of losses as well as a shift in the composition of the Bank’s balance sheet to include a higher level of loans. Management developed a Capital Plan that focuses on curtailing losses to stop the erosion of capital and increasing capital from potential external equity investments.
Management believes that the Bank has and will continue to endeavor to comply with the terms and conditions of the Orders and will continue to operate as a going concern and an independent financial institution for the foreseeable future.
Federal Deposit Insurance Assessments
The Federal Deposit Insurance Corporation Act (the “FDIC Act”) includes several provisions that have a direct material impact on the Bank. The most significant of these provisions are discussed below.
The Bank is insured by the FDIC, which insures the Bank’s deposits up to applicable limits per insured depositor. For this protection, each insured bank pays a quarterly statutory insurance assessment and is subject to certain rules and regulations of the FDIC. The amount of FDIC assessments paid by individual insured depository institutions, such as the Bank, is based on their relative risk as measured by regulatory capital ratios and certain other factors. Under this system, in establishing the insurance premium assessment for each bank, the FDIC will take into consideration the probability that the deposit insurance fund will incur a loss with respect to an institution, and will charge an institution with perceived higher inherent risks a higher insurance premium. The FDIC will also consider the different categories and concentrations of assets and liabilities of the institution, the revenue needs of the deposit insurance fund, and any other factors the FDIC deems relevant. Increases in the assessment rate and additional special assessments with respect to insured deposits could have an adverse impact on the results of operations and capital levels of the Bank and/or UBS.
In accordance with the Economic Stabilization Act, the deposit insurance per account owner was increased from $100,000 to $250,000 through December 31, 2013. The newly enacted Dodd Frank Act made this change in deposit insurance permanent and, as a result, each account owner’s deposits will be insured up to $250,000 by the FDIC. In addition, the Dodd Frank Act provided for unlimited deposit insurance coverage on non-interest bearing transaction accounts, including Interest on Lawyer Trust Accounts but excluding interest-bearing NOW accounts, without an additional fee at insured institutions through December 31, 2012. The expiration of this expanded coverage did not have any significant impact on the Bank’s liquidity.
Under the FDIC’s risk-based assessment system, insured institutions are required to pay deposit insurance premiums based on the risk that each institution poses. An institution’s risk is measured by its regulatory capital levels, supervisory evaluations, and certain other factors. An institution’s assessment rate depends upon the risk category to which it is assigned. Pursuant to the Dodd Frank Act, the FDIC will calculate an institution’s assessment level based on its total average consolidated assets during the assessment period less average tangible equity (i.e. Tier 1 capital) as opposed to an institution’s deposit level which was the previous basis for calculating insurance assessments. Pursuant to the Dodd Frank Act, institutions will be placed into one of four risk categories for purposes of determining the institution’s actual assessment rate. The FDIC will determine the risk category based on the institution’s capital position (well capitalized, adequately capitalized, or undercapitalized) and supervisory condition (based on exam reports and related information provided by the institution’s primary federal regulator).
In 2009, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for FDIC deposit insurance. Collection of the prepayment amount does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments or receive a rebate of prepaid amounts not fully utilized after the collection of assessments due in June 2013. The amount of the Bank’s prepayment was $502,011. The Bank amortized and expensed $32,923 for the quarter ending December 31, 2009, and $135,784, $162,588, $109,086, and $61,630, for the years ending December 31, 2010, 2011, 2012, and 2013, respectively. There was no prepaid assessment remaining at December 31, 2013.
In connection with the Dodd Frank Act’s requirement that insurance assessments be based on assets, the FDIC issued the final rule that provides that assessments be based on an institution’s average consolidated assets (less average tangible equity) as opposed to its deposit level. The new assessment schedule, effective as of April 1, 2011, results in the collection of assessment revenue that is approximately revenue neutral compared to the prior method of calculating assessments. Pursuant to this new rule, the assessment base is larger than the prior assessment base, but the new rates are lower than prior rates, ranging from approximately 2.5 basis points to 45 basis points (depending on applicable adjustments for unsecured debt and brokered deposits) until such time as the FDIC’s reserve ratio equals 1.15%. Once the FDIC’s reserve ratio equals or exceeds 1.15%, the applicable assessment rates may range from 1.5 basis points to 40 basis points. There was no significant impact on the Company’s assessment as a result of this change in assessment base.
The FDIC insurance premiums are “risk based.” Accordingly, higher premiums would be charged to banks that have lower capital ratios or higher risk profiles. As a result, a decrease in the bank’s capital ratios, or a negative evaluation by the FDIC, the Bank’s primary federal banking regulator, may increase the Bank’s net funding cost and reduce its net income.
The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, rule, regulation, order, or condition imposed by the FDIC. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, will continue to be insured for a period of six months to two years, as determined by the FDIC. There are no pending proceedings to terminate the FDIC deposit insurance of the Bank, and the management of the Bank does not know of any practice, condition, or violation that might lead to termination of deposit insurance.
The Community Reinvestment Act
The Bank is required, by the Community Reinvestment Act (“CRA”) and its implementing regulations, to meet the credit needs of the community, including the low and moderate-income neighborhoods, which it serves. The Bank’s CRA record is taken into account by the regulatory authorities in their evaluation of any application made by the Bank for, among other things, approval of a branch or other deposit facility, branch office relocation, a merger or an acquisition. The CRA also requires the federal banking agencies to make public disclosure of their evaluation of a bank’s record of meeting the credit needs of its entire community, including low and moderate-income neighborhoods. After its most recent CRA examination the Bank was given an “outstanding” CRA rating.
The Bank Secrecy Act
Under the Bank Secrecy Act (“BSA”), the Bank and other financial institutions are required to report to the Internal Revenue Service currency transactions, of more than $10,000 or multiple transactions of which the Bank has knowledge exceed $10,000 in the aggregate. The BSA also requires the Bank to file suspicious activity reports for transactions that involve more than $5,000 and which the Bank knows, suspects or has reason to suspect, involves illegal fund is designed to evade the requirements of the BSA or has no lawful purpose.
Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report.
Privacy of Consumer Financial Information
The FSA also contains provisions designed to protect the privacy of each consumer’s financial information held in a financial institution. The regulations (the “Regulations”) issued pursuant to the FSA are designed to prevent financial institutions, such as the Bank, from disclosing a consumer’s nonpublic personal information to third parties. However, financial institutions can share a consumer customer’s personal information or information about business with affiliated companies.
The FSA Regulations permit financial institutions to disclose nonpublic personal information to nonaffiliated third parties for marketing purposes but financial institutions must provide a description of their privacy policies to the consumers and give consumers an opportunity to opt-out of such disclosure and prevent disclosure by the financial institution of the consumer’s nonpublic personal information to nonaffiliated third parties. These privacy Regulations will affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
The Patriot Act
The Patriot Act of 2001 which was enacted in the wake of the September 11, 2001 attacks, include provisions designed to combat international money laundering and advance the U.S. government’s war against terrorism. The Patriot Act, and the regulations, which implement it, contains many obligations, which must be satisfied by financial institutions, such as the Bank, which include appropriate policies and procedures and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their customers all of which involve additional expenses for the Bank. Failure to comply with the Patriot Act could have serious legal and reputational consequences for a financial institution.
Below is a list of the significant risks that concern UBS, the Bank and the banking industry. The list should not be considered an all inclusive list and has not been prepared in any certain order.
Failure to Comply with the FDIC and Pennsylvania Department of Banking Consent Orders
The Bank has entered into Consent Orders with the FDIC and the Department which, among other provisions, require the Bank to increase its tier one leverage capital ratio to 8.5% and its total risk based capital ratio to 12.5%. As of December 31, 2013, the Bank’s tier one leverage capital ratio was 5.67% and its total risk based capital ratio was 9.48%. See the Regulatory Orders section. The Bank’s failure to comply with the terms of the Consent Orders could result in additional regulatory supervision and/or actions. The ability of the Bank to continue as a going concern is dependent on many factors, including achieving required capital levels, earnings and fully complying with the Consent Orders. The Consent Orders raise substantial doubt about the Bank’s ability to continue as a going concern.
Changes in the economy, especially in the Philadelphia region, could have an adverse affect on the Company
The economic turmoil has led to elevated levels of commercial and consumer loan delinquencies. The business and earnings of the Bank and UBS are directly affected by general conditions in the U.S. and in particular, economic conditions in the Philadelphia region. These conditions include legislative and regulatory changes, inflation, and changes in government and monetary and fiscal policies, increases in unemployment rates, and declines in real estate values, all of which are beyond the Bank’s control. Continued weakness in the economy could result in a decrease in products and service demand, decrease in deposits and deterioration of customer credit quality, an increase in loan delinquencies, non-accrual loans and increases in problem assets. Real estate pledged as collateral for loans made by the Bank may decline in value, reducing the value of assets and collateral associated with the Bank’s existing loans. Because of the Bank’s concentration in the Philadelphia region, it is less able to respond or diversify credit risk among multiple markets. These factors could result in an increase in the provision for loan losses, thus reducing net income.
Future loan losses may exceed the Bank’s allowance for loan losses
The Bank and UBS are subject to credit risk, which is the risk of losing principal or interest due to borrowers’ failure to repay loans in accordance with their terms. The downturn in the economy and the real estate market in the Bank’s market area could have a negative effect on collateral values and borrowers’ ability to repay. This downturn in economic conditions could result in losses to UBS in excess of loan loss allowances. To the extent loans are not paid timely by borrowers, the loans are placed on non-accrual status, thereby reducing interest income. To the extent loan charge-offs exceed the Bank’s projections, increased amounts allocated to the provision for loan losses would reduce income.
Exposure to Credit Risk on Commercial Lending can Adversely Affect Earnings and Financial Condition
The Bank’s loan portfolio contains a significant number of commercial real estate and commercial and industrial loans. These loans may be viewed as having a higher credit risk than residential real estate or consumer loans because they usually involve larger loan balances to a single borrower and are more susceptible to a risk of a default during an economic down turn. A deterioration of these loans may cause a significant increase in non-performing loans. An increase in non-performing loans could cause an increase in loan charge offs and a corresponding increase in the provision for loan losses which could adversely impact the Bank’s earning and financial condition.
Our operations are subject to interest rate risk and variations in interest rates may negatively affect financial performance
In addition to other factors, our earnings and cash flows are dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and investment securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Changes in the general level of interest rates may have an adverse effect on our business, financial condition, and results of operations. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, influence the amount of interest income that we receive on loans and investment securities and the amount of interest that we pay on deposits and borrowed funds. Changes in monetary policy and interest rates also can adversely affect:
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our ability to originate loans and obtain deposits;
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the fair value of our financial assets and liabilities; and
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the average duration of our investment securities portfolio.
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If the interest rates paid on deposits and other borrowed funds increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowed funds.
The Dodd-Frank Wall Street Reform and Consumer Protection Act may adversely impact our business
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which provides for a broad range of financial reform and will result in a number of new regulations which could significantly impact regulatory compliance costs and the operations of community banks and bank holding companies. The Dodd-Frank Act, among other things, broadens the base for FDIC insurance assessments which may increase our FDIC insurance premiums; repeals the prohibition on a bank’s payment of interest on demand deposit accounts of commercial clients beginning one year after the date of enactment; and contains provisions affecting corporate governance and executive compensation for publicly traded companies. The Dodd-Frank Act also creates a new Bureau of Consumer Financial Protection with broad authority to develop and implement rules regarding most consumer financial products. Although many of the details of the Dodd-Frank Act and the full impact it will have on our business will not be known for many months or years in part because many of the provisions require the adoption of implementing rules and regulations, we expect compliance with the new law and its rules and regulations to result in additional costs, including increased compliance costs. These changes may also require us to invest significant management attention and resources to make any necessary changes to our operations in order to comply. These changes may adversely affect our business, financial condition and results of operations.
Government regulation can result in limitations on operations
The Bank operates in a highly regulated environment and is subject to supervision and regulation by a number of governmental regulatory agencies. Regulations adopted by these agencies are generally intended to provide protection for depositors and customers rather than for the benefit of the shareholders. These regulations establish permissible activities for the Bank to engage in, require maintenance of adequate capital levels, and regulate other aspects of operations. The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effect of these changes on the Bank’s business and profitability. The current economic crisis creates the potential for increased regulation, new federal or state laws and regulations regarding lending and funding practices and liquidity standards that could negatively impact the Bank’s operations by restricting the Bank’s business operations, increase the cost of compliance and adversely affect profitability. Losses from operations may result in deterioration of the Bank’s capital levels below required levels and could result in severe regulatory action.
The financial services industry is very competitive
The Bank faces competition in attracting and retaining deposits, making loans, and providing other financial services throughout the Bank’s market area. The Bank’s competitors include other community banks, larger banking institutions, trust companies and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies and other non-bank businesses. Many of these competitors have substantially greater resources, including access to capital markets, than the Bank and are able to expend greater funds for advertising and marketing. If the Bank is unable to compete effectively, the Bank will lose market share and income from deposits, loans, and other products may be reduced.
Higher FDIC assessments could negatively impact profitability
The FDIC insurance premiums are “risk based.” Accordingly, higher premiums would be charged to banks that have lower capital ratios or higher risk profiles. As a result, a decrease in the Bank’s capital ratios, or a negative evaluation by the FDIC, the Bank’s primary federal banking regulator, may increase the Bank’s net funding cost and reduce its earnings.
Inadequate liquidity
The Bank may not be able to meet the cash flow requirements of its 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. While the Bank actively manages its liquidity position and is required to maintain minimum levels of liquid assets, rapid loan growth or unexpected deposit attrition may negatively impact the Bank’s ability to meet its liquidity requirements. The inability to increase deposits to fund asset growth represents a potential liquidity risk. The Bank may need to reduce earning asset growth through the reduction of current production, sale of assets and/or the participating out of future and current loans. This might reduce future earnings of the Bank.
Lack of Deposit Growth Could Increase the Bank’s Cost of Funds
A decline in the aggregate balance of deposits or the failure of deposits to grow at a rate comparable to loan growth could require the Bank to obtain other sources of loan funds at higher costs, thus reducing the Bank’s net interest income.
Ability to attract and retain management and key personnel may affect future growth and earnings
The success of UBS and the Bank will be influenced by its ability to attract and retain management experienced in banking and financial services and familiar with the communities in the Bank’s market areas. The Bank’s ability to retain executive officers, management team, and support staff is important to the successful implementation of the Bank’s strategic plan. It is critical, as the Bank grows, to be able to attract and retain qualified staff with the appropriate level of experience and knowledge in community banking. The unexpected loss of services of key personnel, or the inability to recruit and retain qualified personnel in the future could have an adverse effect on the Bank’s business, financial condition, and results of operations.
The ability to maintain adequate levels of capital to meet regulatory minimums and support growth
The Bank and UBS may not be able to maintain the requisite minimum regulatory capital levels to support asset growth. While management may seek additional capital through available government programs, unforeseen economic events may negatively impact the Bank’s and UBS’ profitability and result in erosion of capital. This might restrict growth and reduce future earnings of the Company.
The soundness of other financial services institutions may adversely affect UBS and the Bank.
Routine funding transactions may be adversely affected by the actions and soundness of other financial institutions. Financial service institutions are interrelated as a result of trading, clearing, lending, borrowing or other relationships. As a result, a rumor, default or failures within the financial services industry could lead to market wide liquidity problems which, in turn, could materially impact the financial condition of UBS and the Bank.
Our information systems may experience an interruption or breach in security that could impact our operational capabilities.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in our client relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrences of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of client business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
Additional risk factors also include the following all of which may reduce revenues and/or increase expenses and/or pull the Bank’s management attention away from core banking operations which may ultimately reduce the Bank’s earnings
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New developments in the banking industry
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Variations in quarterly or annual operating results
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Revision of or the issuance of additional regulatory actions affecting UBS or the Bank
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Litigation involving UBS or the Bank
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Changes in accounting policies or procedures
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Investments in UBS common shares involve risk. There is no trading market for UBS’ common shares.
There were no unresolved staff comments.
All of the Bank’s properties are in good operating condition and are adequate for the Bank’s present needs.
Corporate Headquarters
United Bank of Philadelphia’s corporate office is located in The Graham Building, 30 S. 15th Street, Suite 1200, Center City Philadelphia. In February 2005, the Bank began a 10-year lease for its new Center City headquarters location. The Graham building is located in the heart of the Philadelphia business district, directly across from City Hall. The Bank occupies approximately 10,000 square feet on the 12th Floor that provides adequate and suitable space for executive offices, operations, finance, human resource, and security and loss prevention functions. The average monthly lease rate over the term of the lease is $16,200
In August 2005, the Bank assumed the remaining term from another financial institution of a lease for retail space on the ground level of the Graham Building that expired in 2009. At expiration of the sublease, the Bank amended its corporate office lease to include this retail space for which the term is co-terminous. The Bank’s average aggregate gross monthly rental is $7,500.
In 2013, in conjunction with the sale and closure of its 38th and Lancaster Street branch and the approval to open a retail branch in the Graham building retail space for which the Bank was already obligated, management renegotiated and extended the terms of both leases to 2023. The decision to extend these leases came after a long and extensive evaluation of the cost/benefit of the Bank’s corporate office location in Philadelphia’s central business district close to City government. Management believes that a corporate and retail presence in Center City Philadelphia is consistent with the Bank’s shift in strategic direction to focus on business banking. Execution strategies, including corporate collaborations, will be developed to better capitalize on the small business marketplace.
Mt. Airy Branch
The Bank operates a branch at 1620 Wadsworth Avenue, in the Mt. Airy section of Philadelphia. This facility is located in a densely populated residential neighborhood and in close proximity to small businesses/retail stores. This facility includes a retail banking lobby, teller area, offices, and vault and storage space. In December 2008, the Bank began a new 10-year lease term for which the average monthly rent is $5,285.
Progress Plaza Branch
The Bank leases a branch facility located at 1015 North Broad Street, Philadelphia, Pennsylvania. The Progress Plaza branch is a very active branch with the largest number of customers seeking service on a daily basis. This area of North Philadelphia is an important area for the Bank and its mission. The facility is comprised of teller and customer service areas, lobby and vault. Extensive improvements to the shopping plaza were completed in 2010. In April 2008, the Bank’s branch was relocated within the shopping plaza to a newly constructed space at which time it began a 10-year lease for which the average aggregate gross monthly rent is $5,996.
From time to time, the Bank is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company.
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Not applicable.
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
UBS’ Common Stock is not traded on any national exchange or otherwise traded in any recognizable market. There is no established public trading market for UBS’ common stock. 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 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.
There were no capital stock transactions during 2013 and 2012.
As of February 24, 2014 there were 3,143 shareholders of record of UBS’ voting Common Stock and two shareholders of record of UBS’ Class B Non-voting Common Stock.
Dividend Restrictions
The Consent Orders with the FDIC and the Pennsylvania Department of Banking prohibit the payment of dividends without the approval of both regulatory agencies. UBS has never 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 the 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 Federal Reserve Board if the total of all cash dividends declared by a bank in any calendar year, including the proposed cash dividend, exceeds the total of the Bank’s net profits for that year plus its retained net profits from the preceding two years less any required transfers to surplus or to a fund for the retirement of preferred stock. Under the Federal Reserve Act, the Federal Reserve Board has the power to prohibit the payment of cash dividends by a bank if it determines that such a payment would be an unsafe or unsound banking practice. As a result of these laws and regulations, the Bank, and therefore UBS, whose only source of income is dividends from the Bank, will be unable to pay any dividends while an accumulated deficit exists. UBS does not anticipate that dividends will be paid for the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
There were no equity compensation instruments outstanding at December 31, 2013.
The information below has been derived from UBS’ consolidated financial statements.
Selected Financial Data
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(Dollars in thousands, except per share data)
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2013
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2012
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2011
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2010
|
2009
|
2008
|
|
Net interest income
|
$2,815
|
$2,946
|
$3,068
|
$3,094
|
$3,124
|
$3,291
|
|
Provision for loan losses
|
75
|
453
|
170
|
747
|
235
|
368
|
|
Noninterest income
|
1,407
|
1,525
|
1,071
|
1,465
|
1,313
|
1,209
|
|
Noninterest expense
|
4,816
|
5,034
|
5,000
|
5,040
|
4,747
|
4,785
|
|
Net loss
|
(669)
|
(1,016)
|
(1,031)
|
(1,228)
|
(545)
|
(653)
|
|
Net loss per share – basic
|
(0.63)
|
(0.95)
|
(0.97)
|
(1.15)
|
(0.51)
|
(0.61)
|
|
Net loss income per share – fully diluted
|
(0.63)
|
(0.95)
|
(0.97)
|
(1.15)
|
(0.51)
|
(0.61)
|
|
Balance sheet totals:
|
||||||
|
Total assets
|
$60,751
|
$65,616
|
$77,017
|
$73,966
|
$68,318
|
$69,435
|
|
Net loans
|
41,871
|
40,298
|
40,635
|
44,686
|
46,860
|
48,077
|
|
Investment securities
|
9,580
|
12,922
|
18,490
|
16,477
|
11,834
|
12,562
|
|
Deposits
|
57,110
|
60,977
|
71,300
|
67,211
|
60,307
|
60,904
|
|
Shareholders’ equity
|
3,210
|
4,240
|
5,261
|
6,297
|
7,531
|
8,050
|
|
Ratios:
|
||||||
|
Tier 1 Leverage ratio
|
5.67%
|
6.00%
|
6.29%
|
7.63%
|
10.08%
|
10.41%
|
|
Tangible common equity ratio
|
1.04%
|
2.52%
|
3.48%
|
5.02%
|
7.25%
|
7.87%
|
|
Equity to assets ratio
|
6.50%
|
7.37%
|
8.05%
|
8.51%
|
11.02%
|
11.59%
|
|
Return on assets
|
(1.06)%
|
(1.44)%
|
(1.32)%
|
(1.68)%
|
(0.79)%
|
(0.87)%
|
|
Return on equity
|
(16.26)%
|
(19.53)%
|
(18.92)%
|
(17.49)%
|
(7.66)%
|
(8.21)%
|
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Because UBS is a bank holding company for the Bank, the financial statements in this report are prepared on a consolidated basis to include the accounts of UBS 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.
Critical Accounting Policies
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses. Loans that are determined to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance. When evaluating the adequacy of the allowance, an assessment of the loan portfolio will typically include changes in the composition and volume of the loan portfolio, overall portfolio quality and past loss experience, review of specific problem loans, current economic conditions which may affect borrowers’ ability to repay, and other factors which may warrant current recognition. Such periodic assessments may, in management’s judgment, require the Bank to recognize additions or reductions to the allowance.
Various regulatory agencies periodically review the adequacy of the Bank’s allowance for loan losses as an integral part of their examination process. Such agencies may require the Bank to recognize additions or reductions to the allowance based on their evaluation of information available to them at the time of their examination. It is reasonably possible that the above factors may change significantly and, therefore, affect management’s determination of the allowance for loan losses in the near term.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures. (Refer to Note 1 and Note 4 of the notes to financial statements.)
Executive Brief
United Bank of Philadelphia is the only African American-owned and controlled community development financial institution headquartered in Philadelphia. Management continues to seek to maximize the Bank’s “community bank” competitive advantage by leveraging its strategic partnerships and relationships to increase market penetration and to help ensure that the communities it serves have full access to financial products and services.
The Company reported a net loss of approximately $669,000 ($0.63 per common share) for the year ended December 31, 2013 compared to a net loss of approximately $1,016,000 ($0.95 per common share) for the year ended December 31, 2012. The improvement in operating results is primarily related to lower provisions for loan losses and a reduction in noninterest expenses. Management is committed to further improving the Company’s operating performance by implementing more effective strategies to achieve and sustain profitability, augment capital, and manage loan and other real estate portfolios. The following actions are crucial to enhancing the Company’s future financial performance:
Increase Capital. The critical importance of establishing and maintaining capital levels to support the Bank’s risk profile and growth is understood; however, capital continues to decline as a result of operating losses. A concentrated effort will be made to stabilize and strengthen the Bank’s capital by the following:
|
|
·
|
Core Profitability from Bank operations—Core profitability is essential to stop the erosion of capital. Refer to the Earnings Enhancement discussion below.
|
|
|
·
|
External equity investments—Potential investors will be sought in 2014 to generate a minimum investment of $1 million.
|
The Bank is a CDFI and may have the ability to utilize programs of the U.S. Treasury’s CDFI Fund to supplement capital. The Bank Enterprise Award (BEA) Program and Technical Assistance (TA) Program were created to support FDIC-insured financial institutions, like the Bank, around the country that are dedicated to financing and supporting community and economic development activities. These programs complement the community development activities of insured depository institutions (i.e., banks and thrifts) by providing financial incentives to expand investments in CDFIs and to increase lending, investment, and service activities within economically distressed communities. In 2012, the Bank applied for a BEA grant based on lending activity but did not qualify. An application was not submitted in 2013 because of insufficient qualifying activity. When possible, management will continue to seek funding from available CDFI programs to supplement capital and support technical assistance and growth.
Manage asset quality to minimize credit losses and reduce collection costs. Asset quality trends improved in 2013 with a decrease in the level of delinquencies and classified loans. While some progress has been made in the Bank’s underwriting and customer relationship management practices, additional efforts are necessary to ensure continued improvement in asset quality trends. Proactive monitoring of the loan portfolio is essential to the identification of emerging problem credits. In conjunction with its regulatory orders, management has developed a Classified Asset Reduction Plan that is being utilized to reduce the level of non-performing assets. Forbearance, foreclosure and/or other appropriate collection methods will be used as necessary and may result in increased loan and collection expense.
Earnings enhancement plan. The Bank will seek to increase noninterest income and further reduce noninterest expense to achieve core earnings. A strategy of increased SBA loan origination with sales of the guaranteed portion in the secondary market for a gain will be utilized. There is a growing pipeline of SBA loans that are expected to close during 2014. Although some improvement has been made in 2013 compared to 2012, the Bank’s noninterest expense remains elevated. The sale of a bank-owned branch in December 2012 resulted in reduced occupancy expense; however, unlike other similar-sized community banks, the Bank continues to incur a higher level of professional service fees (audit and legal) because of its SEC filing requirements as a result of having in excess of 1,200 shareholders. Further savings and efficiencies, where possible, including the following:
|
|
1.
|
Review and re-negotiation of significant contracts (i.e. data processing, credit card, EFT services, etc.)-The Bank’s EFT contract expires in August 2014. At expiration, EFT services will be consolidated with the Bank’s core vendor to achieve operational and cost efficiencies.
|
|
|
2.
|
Sale and/or other disposition of other real estate properties to reduce ongoing carrying costs— The Bank has gradually reduced the level of other real estate and related expenses.
|
The amortization of the Bank’s core deposit intangible related to a premium paid for a branch acquisition was completed in October 2013. Going forward, the completion of this amortization reduces the Bank’s amortization expense by more than $100,000 annually.
Another challenge to increased earnings is the reduction in the volume of earning assets following a decline in the level of public funds in 2012 and 2013. Although margins have increased because of growth in loan origination activity, net interest income declined because of the reduction in the volume of earning assets. Management must continue to balance asset growth with capital adequacy requirements.
Results of Operations
In 2013, the Company recorded a net loss of approximately $669,000 ($0.63 per share) compared to a net loss of approximately $1,016,000 ($0.95 per share) in 2012. A detailed explanation for each component of earnings is included in the sections below.
Table 1—Average Balances, Rates, and Interest Income and Expense Summary
|
2013
|
2012
|
2011
|
|||||||
|
Average
|
Yield/
|
Average
|
|
Yield/
|
Average
|
Average
|
Yield/
|
||
|
(Dollars in thousands)
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
balance
|
Balance
|
rate
|
|
Assets:
|
|||||||||
|
Interest-earning assets:
|
|||||||||
|
Loans
|
$42,201
|
$2,610
|
6.18%
|
$41,732
|
$2,628
|
6.30%
|
$42,238
|
$2,666
|
6.31%
|
|
Investment securities
|
10,903
|
274
|
2.51
|
15,464
|
439
|
2.84
|
18,329
|
616
|
3.36
|
|
Interest bearing balances with other banks
|
307
|
1
|
0.33
|
305
|
1
|
0.33
|
305
|
1
|
0.33
|
|
Federal funds sold
|
6,768
|
14
|
0.21
|
8,907
|
17
|
0.19
|
10,958
|
20
|
0.18
|
|
Total interest-earning assets
|
60,179
|
2,899
|
4.82
|
66,408
|
3,085
|
4.65
|
71,830
|
3,303
|
4.60
|
|
Noninterest-earning assets:
|
|||||||||
|
Cash and due from banks
|
1,826
|
1,743
|
1,687
|
||||||
|
Premises and equipment, net
|
621
|
921
|
1,079
|
||||||
|
Other assets
|
1,479
|
2,351
|
3,082
|
||||||
|
Less allowance for loan losses
|
(870)
|
(884)
|
(814)
|
||||||
|
Total
|
$63,235
|
$70,539
|
$76,864
|
||||||
|
Liabilities and shareholders’ equity:
|
|||||||||
|
Interest-bearing liabilities:
|
|||||||||
|
Demand deposits
|
$14,302
|
$ 28
|
0.20%
|
$16,196
|
$ 49
|
0.30%
|
$15,948
|
73
|
0.46%
|
|
Savings deposits
|
13,604
|
7
|
0.05
|
14,397
|
7
|
0.05
|
14,236
|
11
|
0.08
|
|
Time deposits
|
16,078
|
49
|
0.30
|
19,417
|
83
|
0.43
|
26,019
|
151
|
0.58
|
|
Total interest-bearing liabilities
|
43,984
|
84
|
0.19
|
50,010
|
139
|
0.28
|
56,203
|
235
|
0.42
|
|
Noninterest-bearing liabilities:
|
|||||||||
|
Demand deposits
|
15,047
|
15,327
|
14,458
|
||||||
|
Other
|
91
|
-
|
-
|
||||||
|
Shareholders’ equity
|
4,113
|
5,202
|
6,203
|
||||||
|
Total
|
$63,235
|
$70,539
|
$76,864
|
||||||
|
Net interest income
|
$ 2,815
|
$2,946
|
$3,068
|
||||||
|
Spread
|
4.63%
|
4.37%
|
4.18%
|
||||||
|
Net yield on interest-earning assets
|
4.68%
|
4.45%
|
4.27%
|
||||||
For purposes of computing the average balance, loans are not reduced for nonperforming loans. Loan fee income is included in interest income on loans but is not considered material.
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 totaled approximately $2,815,000 in 2013 and approximately $2,946,000 in 2012, a decrease of approximately $131,000, or 4.45%
Table 2—Rate-Volume Analysis of Changes in Net Interest Income
|
2013 compared to 2012
|
2012 compared to 2011
|
|||||
|
Increase (decrease) due to
|
Increase (decrease) due to
|
|||||
|
(Dollars in thousands)
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
|
Interest earned on:
|
||||||
|
Loans
|
$ 29
|
$ (47)
|
$ (18)
|
$(32)
|
$(6)
|
$(38)
|
|
Investment securities
|
(140)
|
(25)
|
(165)
|
(108)
|
(69)
|
(177)
|
|
Interest-bearing deposits with other banks
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Federal funds sold
|
(4)
|
1
|
(3)
|
(4)
|
1
|
(3)
|
|
Total Interest-earning assets
|
(115)
|
(71)
|
(186)
|
(144)
|
(74)
|
(218)
|
|
Interest paid on:
|
||||||
|
Demand deposits
|
(5)
|
(16)
|
(21)
|
1
|
(25)
|
(24)
|
|
Savings deposits
|
-
|
-
|
-
|
-
|
(4)
|
(4)
|
|
Time deposits
|
(16)
|
(18)
|
(34)
|
(43)
|
(25)
|
(68)
|
|
Total interest-bearing liabilities
|
(21)
|
(34)
|
(55)
|
(42)
|
(54)
|
(96)
|
|
Net interest income
|
$ (94)
|
$ (37)
|
$(131)
|
$(102)
|
$(20)
|
$ (122)
|
Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to volume variances due to the interest sensitivity of consolidated assets and liabilities.
In 2013, there was a decrease in net interest income of approximately $94,000 due to changes in volume and a decrease of approximately $37,000 due to changes in rate. In 2012, there was a decrease in net interest income of approximately $102,000 due to changes in volume and a decrease of approximately $20,000 due to changes in rate.
Average earning assets declined to approximately $60.2 million in 2013 from approximately $66.4 million in 2012, but the net interest margin of the Bank increased from 4.45% to 4.68% for the same period. The net interest margin improved as a result of a reduction in the cost of funds generated by rate reductions made on the Bank’s deposit products to follow market conditions. Also, the redemption of approximately $8 million in jumbo certificates of deposit in 2012 served to reduce the Bank’s cost of funds as well as the level of investment in lower yielding Federal Funds Sold; thereby, boosting the net yield on average assets.
The average yield on the investment portfolio declined to 2.51% in 2013 from 2.84% in 2012. The decline in yield was the result of an investment transaction during the quarter ended June 30, 2013 that resulted in the sale of higher yielding bonds to generate gains that were used to augment capital.
The cost of interest-bearing liabilities fell 9 basis points in 2013 compared to 2012 as a result of the continued low interest rate environment. Rate reductions were made on the Bank’s deposit products in 2013 to follow market conditions. In addition, there was a reduction in the level of higher rate certificates of deposit. Deposit rates have relatively “bottomed-out”; therefore, there is little room to make further downward adjustments.
Provision for Loan Losses
The provision for loan losses 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 loan losses, past loan loss experience, the general economic outlook and other factors management feels are appropriate.
The provision for loan losses charged against earnings in 2013 was $75,000 compared to $453,000 in 2012. The Bank’s provision is based on a review and analysis of the loan portfolio, and is therefore subject to fluctuation based on qualitative factors like delinquency trends, charge-offs, economic conditions, concentrations, etc. Management monitors its credit quality closely by working with borrowers in an effort to identify and control credit risk. Systematic provisions are made to the allowance for loan losses to cover probable loan losses in the portfolio. The higher level of provision in 2012 was related to one impaired loan for which a $340,000 specific reserve was required. Based on its analysis, management believes the level of the allowance for loan losses is adequate as of December 31, 2013. Refer to the Allowance for Loan Loss section below for further discussion/analysis of the Bank’s credit quality.
Noninterest Income
Noninterest income decreased approximately $118,000, or 7.72%, compared to 2012. In an effort to boost its capital ratios, the Bank recognized nonrecurring gains on the sales of assets. In 2013, in conjunction with a bond transaction, the Bank sold securities with a book value totaling approximately $7.4 million and recognized a gain of approximately $378,000. In 2012, the Bank realized a gain of approximately $527,000 on the sale of its 38th and Lancaster Avenue branch.
In conjunction with its SBA loan origination strategy, the Bank recognized a net gain of approximately $69,000 on the sale of the guaranteed portion of an SBA loan in 2012 as a result of favorable market conditions for secondary market loan sales. In 2013, the Bank opted to recognize its SBA loans held-for-sale at fair value under ASC 825, Financial Instruments; and therefore recognized a fair value increase of approximately $154,000 related to two SBA loans totaling approximately $1.6 million. In January 2014, the guaranteed portion of these loans was sold and the gain on sale was recognized. Management will seek to continue increase its SBA loan volume and related gains on sales as a means to enhance earnings.
The customer service fee component of noninterest income reflects the volume of 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. During 2013, customer service fees increased approximately $3,000, or 0.80%, compared to 2012 primarily as a result of increased overdraft fees.
During 2013, surcharge income on the Bank’s ATM network declined approximately $59,000, or 18.45%, compared to 2012. The decline is related to the expiration and non-renewal of the Bank’s ATM contract with Rite Aid that resulted in the removal of ATMs from stores in July 2013. The Bank is actively seeking to place machines in other high volume locations. Also, consistent with trends in the industry, ATM usage has declined as consumers continue to move to electronic payment methods utilizing debit and credit cards versus cash. Methods to reduce cost and increase revenues associated with the ATM network continue to be evaluated including consolidation of EFT processing with the Bank’s core data processing provider in 2014 and the implementation of a more cost effective network communication system.
Since 2002, the Bank has served as arranger/agent for loan syndications for several major corporations throughout the country. In this capacity, the Bank arranges back-up lines/letters of credit with other minority banks for which it receives agent/administrative fees. In 2013 and 2012, these fees totaled $153,000 and $145,000, respectively. The Bank serves as agent/arranger for two facilities. Fees on these facilities are received annually for the administration of the credit facilities. The increase in 2013 is a result of incentive compensation for growth in the Comcast facility from $24 million to $32.3 million.
Noninterest Expense
Noninterest expense decreased approximately $218,000, or 4.33%, in 2013 compared to 2012.
Salaries and benefits increased approximately $15,000, or 0.94%, in 2013 compared to 2012. In 2012, the Bank severed unproductive personnel in the lending/credit administration area, including the senior lending officer. A business development officer was hired in January 2013 to support the shift to business banking. In addition, in August 2013, as required by the Consent Orders, a senior lending officer was hired to support the Bank’s business development and credit administration functions. Management will continue to review the organizational structure to maximize efficiencies and increase utilization/productivity.
Occupancy and equipment expense decreased approximately $74,000, or 6.99%, in 2013 compared to 2012. The reduction is a result of the sale of the Bank’s former 38th and Lancaster Avenue branch in December 2012 and lower depreciation expense related to fully depreciated equipment. In April 2013, management renegotiated and extended the lease of the Bank’s corporate office located at the Graham Building and related retail space for the relocation of the former 38th and Lancaster branch. The new lease has a term of 10 years and will result in an annual reduction in lease expense of approximately $11,000.
Marketing and public relations expense increased approximately $29,000, or 39.47%, in 2013 compared to 2012. In 2013, the Company used a public relations/marketing consultant to support the shift in strategy away from consumer banking to business banking.
Professional services expense increased approximately $22,000, or 6.98%, in 2013 compared to 2012. In 2013, the Bank incurred approximately $25,000 in executive search consulting fees in conjunction with the hiring of a senior lending officer in August 2013.
Data processing expenses are a result of management’s decision 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. The Bank experiences a higher level of data processing expenses relative to its peer group because of the nature of its deposit base--low average balance and high transaction volume. In addition, the Bank uses outside loan servicing companies to service its mortgage, credit card, and student loan portfolios. To better serve its customers, the Bank also has an ATM network larger than its peer group for which it pays processing fees.
Data processing expenses decreased approximately $21,000, or 4.42%, in 2013 compared to 2012. In May 2012, management successfully negotiated a reduction in its core processing cost in conjunction with contract renewal/extension. Further reduction will be achieved in the consolidation of the Bank’s EFT vendor with its core processor.
Loan and collection expenses decreased approximately $4,000, or 3.45%, in 2013 compared to 2012. The decrease is directly related to a reduction in the level of foreclosure/collection activity.
Other real estate expense decreased approximately $137,000, or 39.31%, in 2013 compared to 2012. During 2012, a valuation allowance expense of approximately $232,000 was recorded on the Bank’s other real estate portfolio because of market value declines. Approximately $123,000 of the valuation decline related to one property that was sold in December 2012 and the reduction in the net liquidation value of a portfolio of low-income residential real estate properties that had been vacant for more than one year. In 2013, the valuation allowance expense related to other real estate properties declined to approximately $157,000 because of property sales and value stabilization.
Federal deposit insurance premiums increased approximately $22,000, or 19.05%, in 2013 compared to 2012. Assessments are based on many factors including the Bank’s deposit size and composition and its current regulatory ratings. Although deposit levels declined in 2013 compared to 2012, the assessments increased as a result of the Bank’s regulatory evaluation and Consent Orders. Refer to “Federal Deposit Insurance Assessments” above).
All other expenses are reflective of the general cost to do business and compete in the current regulatory environment and maintain adequate insurance coverage.
FINANCIAL CONDITION
Sources and Uses of Funds
The Bank’s financial condition can be evaluated in terms of trends in its sources and uses of funds. The comparison of average balances in Table 3 below indicates how the Bank has managed these elements. Average funding uses decreased approximately $6,229,000, or 9.38%, in 2013 compared to 2012.
Table 3—Sources and Use of Funds Trends
|
2013
|
2012
|
|||||||
|
Increase
|
Increase
|
|||||||
|
Average
|
(decrease)
|
Average
|
(decrease)
|
|||||
|
(Dollars in thousands)
|
Balance
|
amount
|
Percent
|
balance
|
Amount
|
Percent
|
||
|
Funding uses:
|
||||||||
|
Loans
|
$42,201
|
$ 469
|
1.12%
|
$41,732
|
$(506)
|
(1.20)%
|
||
|
Investment securities
|
|
10,903
|
(4,561)
|
(29.49)
|
15,464
|
(2,867)
|
(18.54)
|
|
|
Interest-bearing balances with other banks
|
307
|
2
|
0.66
|
305
|
-
|
-
|
||
|
Federal funds sold
|
6,768
|
(2,139)
|
(24.01)
|
8,907
|
(2,051)
|
(18.72)
|
||
|
Total uses
|
|
$60,179
|
$(6,229)
|
$66,408
|
$(5,422)
|
|||
|
Funding sources:
|
||||||||
|
Demand deposits:
|
||||||||
|
Noninterest-bearing
|
$15,047
|
$ (280)
|
(1.86)%
|
$15,327
|
$ 869
|
6.01%
|
||
|
Interest-bearing
|
14,302
|
(1,894)
|
(11.69)
|
16,196
|
248
|
1.56
|
||
|
Savings deposits
|
13,604
|
(793)
|
(5.51)
|
14,397
|
161
|
1.13
|
||
|
Time deposits
|
16,078
|
(3,339)
|
(17.20)
|
19,417
|
(6,602)
|
(25.37)
|
||
|
Total sources
|
$59,031
|
$(6,306)
|
$65,337
|
$(5,324)
|
||||
Investment Securities and Other Short-Term Investments
The Bank’s investment portfolio is classified as either 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. In 2013, the Bank reclassified its entire held-to-maturity portfolio as available-for-sale as a result of the sale of securities classified as held-to-maturity.
Average investment securities decreased approximately $4,561,000, or 29.49%, in 2013 compared to 2012. The decrease was primarily related to a reduction in investable funds resulting from a decline in deposits and increased loan origination activity.
The yield on the investment portfolio declined to 2.51% for the year ended December 31, 2013 compared to 2.84% for the year ended December 31, 2012 primarily as a result of an investment transaction during the quarter ended June 30, 2013 that resulted in the sale of higher yielding bonds to generate gains that were used to augment capital. As reflected in Table 4 below, the duration of the portfolio has extended to 4.70 years at December 31, 2013 compared to 3.20 years at December 31, 2012 as a result of this transaction that included the purchase of replacement securities of 7-10 year callable agency securities as well as 15 and 20 year government sponsored enterprises (GSE) mortgage-backed pass-through securities.
At December 31, 2013, 41% of the investment portfolio consisted of callable agency securities for which no significant call activity is projected because many of the securities were purchased in the 2013 low interest rate environment which may result in an extended duration. Approximately 59% of the portfolio consists of GSE mortgage-backed pass-through securities. The payments of principal and interest on these pools of GSE loans are guaranteed by these entities that bear the risk of default. The Bank’s risk is prepayment risk when defaults accelerate the repayment activity. These loans have longer-term contractual maturities but are sometimes paid off/down before maturity or have repricing characteristics that occur before final maturity. Management’s goal is to maintain a portfolio with a relatively short duration to allow for adequate cash flow to fund loan origination activity and to manage interest rate risk. The Bank will continue to take steps to control the level of optionality in the portfolio by identifying replacement securities that diversify risk and provide some level of monthly cash flow.
Table 4—Analysis of Investment Securities
|
Within one year
|
After one but
within five years
|
After five but
within ten years
|
After ten years
|
||||||
|
(Dollars in thousands)
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Total
|
|
Other government securities
|
$ -
|
-%
|
$ -
|
-%
|
$3,802
|
2.50%
|
$ -
|
- %
|
$3,802
|
|
Money market funds
|
-
|
-
|
129
|
||||||
|
Mortgage-backed securities
|
-
|
-
|
-
|
-
|
5,649
|
||||
|
Total securities
|
$ -
|
$ -
|
$3,802
|
$ -
|
$9,580
|
||||
|
Average maturity
|
4.7 years
|
||||||||
The above table sets forth the maturities of investment securities at December 31, 2013 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 increased approximately $469,000, or 1.12%, in 2013 compared to 2012. The Bank’s commercial loan pipeline continues to grow as a result of the adoption of a business banking focus, specifically targeting SBA loans. This strategy is designed to generate fee income from sales of the guaranteed portion as well as build loan volume. The Bank funded more than $11.3 million commercial loans in 2013—more than half in the latter part of the year; however, commercial loan payoffs totaled approximately $6.1 million as a result of the conversion of several construction loans to permanent financing as well as increased market competition from money center banks in the region for quality performing loans. Also, the Bank’s consumer and residential mortgage loan portfolios continue to decline as a result of residential mortgages and home equity repayment activity as consumers refinance to take advantage of the continued low interest rate environment. The Bank does not originate residential mortgage loans and made a strategic shift in its lending program in 2012 to phase out consumer lending, including home equity loans and lines of credit.
The Bank’s small business lending activity continues to grow which is consistent with its strategic focus. In 2013, the Bank originated SBA loans totaling approximately $2,000,000. The guaranteed portion of these loans totaling approximately $1.6 million was transferred to loans held for sale at fair value resulting in the recognition of a gain of approximately $154,000 from a fair value adjustment at December 31, 2013. The sale of these loans was completed in January 2014. The pipeline of SBA loans scheduled to close in 2014 is in excess of $4 million and growing. Focused and aggressive business development efforts targeting small businesses are being employed for which credit enhancements through the SBA or other loan guaranty programs may be available to mitigate credit risk.
As reflected in Table 5 below, the Bank’s loan portfolio is concentrated in commercial loans that comprise approximately $37.3 million, or 87%, of total loans at December 31, 2013. Approximately $16.5 million of these loans are secured by owner occupied commercial real estate that may serve to minimize the risk of loss. The Bank continues to have a strong niche in lending to religious organizations, including construction loans, for which total loans at December 31, 2013 were $12.6 million, or 34%, of the commercial portfolio. Management closely monitors this concentration to proactively identify and manage credit risk in light of the somewhat high level of unemployment that may impact the tithes and offerings that provide cash flow for repayment. Further balance in concentrations will be sought through increased small business loan originations.
As reflected in Table 6 below, approximately $10 million, or 23%, of the Bank’s loan portfolio has scheduled maturities or repricing in five years or more. This position is largely a result of the relatively high level of loans in the commercial real estate portfolio that typically have five to seven year balloon structures. While scheduled maturities and repricing exceed five years, the actual duration of the portfolio may be much shorter because of changes in market conditions and refinancing activity.
Table 5—Loans Outstanding, Net of Unearned Income
|
December 31,
|
|||||
|
(Dollars in thousands)
|
2013
|
2012
|
2011
|
2010
|
2009
|
|
Commercial and industrial
|
$4,310
|
$3,734
|
$3,730
|
$5,729
|
$4,353
|
|
Commercial real estate
|
32,962
|
31,381
|
30,197
|
30,738
|
32,294
|
|
Residential mortgage loans
|
2,709
|
3,140
|
3,356
|
4,432
|
5,313
|
|
Consumer loans
|
2,730
|
3,247
|
4,219
|
4,713
|
5,626
|
|
Total loans
|
$42,711
|
$41,502
|
$41,502
|
$45,612
|
$47,587
|
|
Table 6—Loan Maturities and Repricing
|
||||
|
(Dollars in thousands)
|
Within
one year
|
After one but
within five years
|
After
five years
|
Total
|
|
Commercial and industrial
|
$2,292
|
$1,542
|
$ 476
|
$4,310
|
|
Commercial real estate
|
9,723
|
17,109
|
6,130
|
32,962
|
|
Residential mortgage loans
|
1,671
|
72
|
966
|
2,709
|
|
Consumer loans
|
166
|
130
|
2,434
|
2,730
|
|
Total loans
|
$13,852
|
$18,853
|
$10,006
|
$42,711
|
|
Loans maturing after one year with:
|
||||
|
Fixed interest rates
|
$26,552
|
|
||
|
Variable interest rates
|
$2,307
|
|
||
Nonperforming Loans
Table 7 reflects the Bank’s nonperforming and restructured loans for the last five years. The Bank generally determines a loan to be “nonperforming” when interest or principal is past due 90 days or more. The loan is also placed on nonaccrual status at that time. 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.
Table 7—Nonperforming Loans
|
(Dollars in thousands)
|
2013
|
2012
|
2011
|
2010
|
2009
|
|
Nonaccrual loans
|
$2,190
|
$2,584
|
$2,132
|
$2,781
|
$3,783
|
|
Impaired loans
|
1,882
|
2,344
|
1,687
|
2,516
|
3,553
|
|
Interest income on nonaccrual loans included in net income for the year
|
12
|
39
|
144
|
110
|
219
|
|
Interest income that would have been recorded under original terms
|
144
|
169
|
165
|
186
|
195
|
|
Interest income recognized on impaired loans
|
3
|
39
|
5
|
63
|
34
|
|
Loans past due 90 days and still accruing
|
730
|
211
|
471
|
205
|
776
|
|
Troubled Debt Restructured loans
|
-
|
-
|
-
|
-
|
-
|
At December 31, 2013, nonaccrual loans totaled approximately $2,190,000 compared to approximately $2,584,000 at December 31, 2012. The decrease is related to the charge-off of three commercial and industrial loans totaling approximately $524,000 in 2013. A significant portion of the Bank’s nonaccrual loans are commercial loans with real estate collateral that may help to mitigate potential losses. Management continues to actively work with these borrowers to develop suitable repayment plans.
Loans past due 90 days and still accruing were approximately $730,000 and relate primarily to one commercial real estate borrower with credits totaling approximately $442,000 for which the full payment of principal and accrued interest are expected to be made as management has established repayment arrangements with the borrower.
The level of classified loans (including impaired loans) decreased to approximately $3,189,000 at December 31, 2013 from approximately $3,531,000 at December 31, 2012. Again, the decrease is related to the asset based loan charge-off referenced above as well as continued collection activity on classified loans. In general, classified loans possess potential weaknesses/deficiencies deserving management’s closer attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects at some future date. Some of these borrowers may be experiencing adverse operating trends, which potentially could impair debt, services capacity but secondary sources of repayment are accessible and considered adequate to cover the Bank's exposure. Accordingly, a specific reserve has been allocated to cover potential exposure. Management is working proactively with these borrowers to prevent any further deterioration in credit quality.
Impaired loans totaled approximately $1,882,000 at December 31, 2013 compared to $2,344,000 at December 31, 2012. The Bank identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The valuation allowance associated with impaired loans was approximately $378,000 and $843,000, at December 31, 2013 and 2012, respectively. The allowance was determined based on careful review and analysis including collateral liquidation values and/or guarantees and is deemed adequate to cover shortfalls in loan repayment The decline in impaired loans and related specific reserves is related to charge-off of three impaired loans totaling approximately $524,000 in 2013 for which specific reserves were previously allocated. Management is working aggressively to resolve the potential credit risk associated with its impaired loans by detailing specific payment requirements including the sale of underlying collateral or obtaining take-out financing.
The commercial loan portfolio of the Bank has a concentration 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 are primarily for expansion and repair of church facilities. At December 31, 2013 and 2012, loans to religious organizations represented approximately $629,000 and $674,000, respectively, of total impaired loans. Management continues to work closely with its attorneys and the leadership of these organizations in an attempt to develop suitable repayment plans to avoid foreclosure. In general, loans to religious organizations are being monitored closely to proactively identify potential weaknesses in this area of high concentration.
The Bank grants commercial 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.
Interest income recognized on impaired loans during the year ended December 31, 2013 and 2012 was approximately $3,000 and $39,000, respectively. The Bank recognizes income on impaired loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. If these factors do not exist, the Bank will not recognize income on such loans.
The Bank may modify or restructure the terms of certain loans to provide relief to borrowers. Troubled debt restructurings (“TDRs”). TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. The Company made modifications to certain loans in its commercial loan portfolio that included the term out of lines of credit to begin the amortization of principal. The terms of these loans do not include any financial concessions and are consistent with the current market. Management reviews all loan modifications to determine whether the modification qualifies as a troubled debt restructuring (i.e. whether the creditor has been granted a concession or is experiencing financial difficulties). Based on this review and evaluation, none of the loans modified during 2013 and 2012 met the criteria of a troubled debt restructuring. The Company had no loans classified as TDRs troubled debt restructurings at December 31, 2013 and 2012.
Allowance for Loan Losses
The determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance is the accumulation of three components that are calculated based on various independent methodologies that are based on management’s estimates. The three components are as follows:
|
|
·
|
Specific Loan Evaluation Component – Includes the specific evaluation of impaired loans.
|
|
|
·
|
Historical Charge-Off Component – Applies a rolling, eight-quarter historical charge-off rate to all pools of non-classified loans.
|
|
|
·
|
Qualitative Factors Component – The loan portfolio is broken down into multiple homogenous sub classifications, upon which multiple factors (such as delinquency trends, economic conditions, concentrations, growth/volume trends, and management/staff ability) are evaluated, resulting in an allowance amount for each of the sub classifications. The sum of these amounts comprises the Qualitative Factors Component.
|
All of these factors may be susceptible to significant change. Management increased the qualitative factor for its commercial real estate portfolio at December 31, 2013 as the trends in delinquencies increased in this category of loans. There were no other significant changes in other qualitative factors during the year ended December 31, 2013. The average historical loss factor for commercial and industrial loans increased as a result of $524,000 charge-offs during 2013. With the exception of this segment, the average eight rolling quarter net loss factors have declined during the year as a result of a lower level of net charge-offs in 2013. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods. Management believes that the allowance for loan losses is adequate at December 31, 2013. While available information is used 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. (Refer to Note 4 of the financial statements for further details on the allowance for loan losses.)
Table 8 below presents the allocation of loan losses by major category for the past five years. The specific allocations in any particular category may prove to be excessive or inadequate and consequently may be reallocated in the future to reflect then current conditions. The allowance for loan losses as a percentage of total loans was 1.96% at December 31, 2013 and 2.90% at December 31, 2012. The reduction is related to charge-off of three impaired loans totaling approximately $524,000 in 2013 for which specific reserves were previously allocated. In June 2013, the Bank recovered approximately $75,000 related to one previously charged-off commercial real estate loan.
Table 8—Allocation of Allowance for Loan Losses
|
2013
|
2012 | 2011 | 2010 | 2009 | ||||||
|
Percent
of loans
in each
category
to
|
Percent
of loans
in each
category to
|
Percent
of loans
in each
category to
|
Percent
of loans
in each
category
to
|
Percent
of loans
in each
category
to
|
||||||
|
Amount
|
Total loans
|
Amount
|
total loans
|
Amount
|
total loans
|
Amount
|
total loans
|
Amount
|
total loans
|
|
|
(Dollars in thousands)
|
||||||||||
|
Commercial and industrial
|
$483
|
10.09%
|
$835
|
9.00%
|
$387
|
8.99%
|
$301
|
12.56%
|
$324
|
8.54%
|
|
Commercial real estate
|
280
|
77.18
|
364
|
75.62
|
412
|
72.76
|
553
|
67.39
|
298
|
68.47
|
|
Consumer real estate
|
59
|
9.15
|
-
|
11.12
|
40
|
13.46
|
36
|
10.33
|
38
|
11.17
|
|
Consumer and other loans
|
17
|
3.58
|
5
|
4.26
|
28
|
4.79
|
36
|
9.72
|
65
|
11.82
|
|
Unallocated
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2
|
-
|
|
$839
|
100.00%
|
$1,204
|
100.00%
|
$867
|
100.00%
|
$926
|
100.00%
|
$727
|
100.00%
|
|
Table 9—Analysis of Allowance for Loan Losses
|
Year ended December 31,
|
|||||
|
(Dollars in thousands)
|
2013
|
2012
|
2011
|
2010
|
2009
|
|
Balance at January 1
|
$1,204
|
$867
|
$926
|
$727
|
$587
|
|
Charge-offs:
|
|||||
|
Commercial and industrial
|
(524)
|
(56)
|
(65)
|
(189)
|
(22)
|
|
Commercial real estate
|
-
|
-
|
(150)
|
(227)
|
(62)
|
|
Consumer real estate
|
(5)
|
(80)
|
(4)
|
(8)
|
-
|
|
Consumer and other loans
|
(10)
|
(21)
|
(46)
|
(177)
|
(57)
|
|
(539)
|
(157)
|
(265)
|
(601)
|
(141)
|
|
|
Recoveries:
|
|||||
|
Commercial loans
|
3
|
-
|
10
|
7
|
2
|
|
Commercial real estate
|
78
|
8
|
-
|
1
|
-
|
|
Consumer real estate
|
9
|
17
|
6
|
||
|
Consumer and other loans
|
9
|
16
|
21
|
45
|
44
|
|
99
|
41
|
37
|
53
|
46
|
|
|
Net charge-offs
|
(440)
|
(116)
|
(228)
|
(548)
|
(95)
|
|
Provisions charged to operations
|
75
|
453
|
170
|
747
|
235
|
|
Balance at December 31
|
$839
|
$1,204
|
$867
|
$926
|
$727
|
|
Ratio of net charge-offs to average loans outstanding
|
1.04%
|
0.28%
|
0.54%
|
1.17%
|
0.20%
|
|
|
|||||
Deposits
In 2013, average deposits decreased approximately $6,306,000, or 9.65%, concentrated in the category of time deposits. The publication of the Bank’s Consent Orders in 2012 negatively impacted depository relationships with governmental entities resulting in unplanned time deposit redemptions totaling $8 million in 2012. The Bank has approximately $6.0 million governmental or quasi-governmental certificate of deposit relationships remaining. Management proactively communicates with agency officials to avoid further reduction in account balances. Based on these communications, no significant reductions are anticipated. In general, the Bank is not seeking certificates of deposit from its corporate customers as they generally carry a higher cost and are more labor intensive because of rollover negotiations and setup. Money market accounts are preferred because of their core nature as well as their flexibility and lower cost.
There was a decrease in average noninterest bearing demand deposits totaling approximately $280,000, or 1.83%, and a decrease in average interest-bearing demand deposits totaling $1,894,000, or 11.69%, during the year primarily related to several significant depository relationships for which the balances fluctuate in conjunction with construction and/or contract funding received. These deposits fluctuate widely based on required payment activity related to projects completed by these customers. As small business loans are originated, primary operating accounts are required to be maintained at the Bank which will serve to grow core deposits.
In addition, the Bank has experienced attrition in its average savings account balances that declined by approximately $793,000, or 5.51%, in 2013 compared to 2012. The decline is primarily related to several small business customers that have used reserve savings accounts during this period of economic recovery.
Table 10—Average Deposits by Class
|
2013
|
2012
|
2011
|
||||
|
(Dollars in thousands)
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
|
Noninterest-bearing demand deposits
|
$15,047
|
-%
|
$15,327
|
-%
|
$14,458
|
-%
|
|
Interest-bearing demand deposits
|
14,302
|
0.20
|
16,196
|
0.30
|
15,948
|
0.46
|
|
Savings deposits
|
13,604
|
.05
|
14,397
|
0.05
|
14,236
|
0.08
|
|
Time deposits
|
16,078
|
0.30
|
19,417
|
0.43
|
26,019
|
0.58
|
Other Borrowed Funds
The Bank did not borrow funds during 2013. Generally, the level of other borrowed funds is dependent on many items such as loan growth, deposit growth, customer collateral/security requirements and interest rates paid for these funds. The Bank’s liquidity has been enhanced by loan paydowns/payoffs and called investment securities—thereby, reducing the need to borrow. The Bank’s contingent funding source is the Discount Window at the Federal Reserve Bank for which it currently has $750,000 in securities pledged that result in borrowing capacity of approximately $500,000.
Off Balance Sheet Arrangements
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit, which are conditional commitments issued by the Bank to guarantee the performance of an obligation of a customer to a third party. Both arrangements have credit risk essentially the same as that involved in extending loans and are subject to the Bank’s normal credit policies. Collateral may be obtained based on management’s assessment of the customer. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments is represented by the contractual amount of those instruments.
A summary of the Bank’s financial instrument commitments in thousands is as follows:
|
2013
|
2012
|
|||||||
|
Commitments to extend credit
|
$ | 10,279 | $ | 9,484 | ||||
|
Outstanding standby letters of credit
|
1,051 | 1,173 | ||||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and unused credit card lines. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The increase in commitments at December 31, 2013 compared to 2012 is primarily related to an increase in approved but unfunded loans. Management believes the Bank has adequate liquidity to support the funding of unused commitments.
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 must maintain minimum levels of liquid assets. 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, 2013, management believes the Bank’s liquidity is satisfactory.
The Bank's principal sources of asset liquidity include investment securities consisting principally of U.S. Government and agency issues, particularly those of shorter maturities, and mortgage-backed securities with monthly repayments of principal and interest. Other types of assets such as federal funds sold, as well as maturing loans, are also sources of liquidity. Approximately $13.8 million in loans are scheduled to mature within one year.
By policy, the Bank’s minimum level of liquidity is 6.00% of total assets. At December 31, 2013, the Bank had total short-term liquidity, including cash and federal funds sold, of approximately $5.8 million, or 9.53%, compared to $10.2 million, or 15.51%, at December 31, 2012. The decline is primarily a result of increased loan origination activity as well as a reduction in deposits.
In conjunction with the investment transaction executed in 2013, the Bank reclassified its entire securities portfolio to available-for-sale; thereby, increasing sources of liquidity. Approximately 72% of these securities are pledged as collateral for deposits of governmental/quasi-governmental agencies as well as the Discount Window at the Federal Reserve Bank. Therefore, they are restricted from use to fund loans or to meet other liquidity requirements.
To ensure the ongoing adequacy of liquidity, the following strategies will be utilized in order of priority:
|
|
o
|
Seek additional non-public deposits from new and existing private sector customers
|
|
|
o
|
Sell participations of existing commercial credits to other financial institutions
|
While management continues to seek additional non-public core deposits to support ongoing loan demand, liquidity levels have been adequate. As a result, it was not necessary to sell loan participations to other institutions.
The Bank’s contingent funding sources include the Discount Window at the Federal Reserve Bank for which it currently has $750,000 in securities pledged that result in borrowing capacity of approximately $500,000.
The Bank’s overall liquidity has generally been stabilized by a high 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. These deposits include $6 million in deposits of governmental and quasi-governmental organizations that have short-term maturities. Although reduced, liquidity ratios remain above the Bank’s policy minimum of 6%. Management will closely monitor and manage liquidity to minimize risk and ensure that adequate funds are available to meet daily customer requirements and loan demand.
Table 11—Maturity of Time Deposits of $100,000 or More
|
(Dollars in thousands)
|
December 31, 2013 Contractual Terms
|
|||
|
3 months or less
|
$ | 849 | ||
|
Over 3 through 6 months
|
5,602 | |||
|
Over 6 months through 1 year
|
2,074 | |||
|
Over 1 through five years
|
255 | |||
|
Over five years
|
- | |||
|
Total
|
$ | 8,780 | ||
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2013:
Table 12—Contractual Obligations and Other Commitments
|
(Dollars in thousands)
|
Total
|
Less than one year
|
One to three years
|
Four to five years
|
After five years
|
|||||||||||||||
|
Certificates of Deposit
|
$ | 15,463 | $ | 14,383 | $ | 930 | $ | 107 | $ | 43 | ||||||||||
|
Operating Lease Obligations
|
3,794 | 454 | 906 | 803 | 1,631 | |||||||||||||||
|
Total
|
$ | 19,257 | $ | 14,837 | $ | 1,836 | $ | 910 | $ | 1,674 | ||||||||||
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 13 sets forth the earliest repricing distribution of the Bank’s interest-earning assets and interest-bearing liabilities at December 31, 2013, 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, 2013, an asset-sensitive position is maintained on a cumulative basis through one year of 9.58% and represents a decline from the December 31, 2012 positive gap position of 11.62%. This decrease resulted from the reduction in Federal Funds Sold created by a decline in deposit balances. This level is within the Bank’s policy guidelines of +/-15% on a cumulative one-year basis and makes the Bank’s net interest income more favorable in a rising interest rate environment. The most recent economic forecast suggests no further decline in rates but rather increases. Therefore, management does not believe the interest rate risk associated with the Bank’s current position to be significant. Management will continue review and monitor the structure and rates on investment purchases, new loan originations and renewals to manage the interest rate risk profile within acceptable limits.
For purposes of the gap analysis, 50% of 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 13—Interest Sensitivity Analysis
|
Interest rate sensitivity gaps as of December 31, 2013
|
||||||||||||||||||||||||
|
(Dollars in thousands)
|
3 months or less
|
Over 3
Through
12months
|
Over 1 year through
3 years
|
Over 3 through 5 years
|
Over
5 years
|
Cumulative
|
||||||||||||||||||
|
Interest-sensitive assets:
|
||||||||||||||||||||||||
|
Interest-bearing deposits with banks
|
$ | - | $ | 307 | $ | - | $ | - | $ | - | $ | 307 | ||||||||||||
|
Investment securities
|
2,322 | 1,149 | 496 | 402 | 5,082 | 9,451 | ||||||||||||||||||
|
Federal funds sold
|
3,143 | - | - | -- | - | 3,143 | ||||||||||||||||||
|
Loans
|
15,791 | 10,759 | 7,970 | 3,635 | 4,011 | 42,166 | ||||||||||||||||||
|
Total interest-sensitive assets
|
21,256 | 12,215 | 8,466 | 4,037 | 9,093 | 55,067 | ||||||||||||||||||
|
Interest-sensitive liabilities:
|
||||||||||||||||||||||||
|
Interest-bearing checking accounts
|
$ | 1,677 | - | $ | 1,677 | - | - | $ | 3,354 | |||||||||||||||
|
Savings and money market accounts
|
12,134 | - | 12,134 | - | - | 24,258 | ||||||||||||||||||
|
Certificates $100,000 or more
|
1,950 | 6,574 | 256 | - | - | 8,780 | ||||||||||||||||||
|
Certificates of less than $100,000
|
2,264 | 3,595 | 565 | 259 | - | 6,683 | ||||||||||||||||||
|
Total interest-sensitive liabilities
|
18,025 | 10,169 | 14,632 | 259 | -- | 43,085 | ||||||||||||||||||
|
Interest sensitivity gap
|
$ | 3,231 | $ | 2,046 | $ | (6,166 | ) | $ | 3,778 | $ | 9,093 | $ | 11,982 | |||||||||||
|
Cumulative gap
|
$ | 3,231 | $ | 5,277 | ||||||||||||||||||||
|
Cumulative gap/total earning assets
|
5.87 | % | 9.58 | % | ||||||||||||||||||||
|
Cumulative Interest-sensitive assets
to interest-sensitive Liabilities
|
1.17 | 1.19 | ||||||||||||||||||||||
Core deposits such as checking and savings deposits have been placed in repricing intervals based on historical trends and management’s estimates. Nonaccrual loans are not included in the interest-sensitive asset totals.
While using the interest sensitivity gap analysis is a useful management tool as it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest rate changes that are characteristic of various interest rate-sensitive assets and liabilities. Consequently, even though the Bank currently has a positive gap position because of unequal sensitivity of these assets and liabilities, management believes this position will not materially impact earnings in a changing rate environment. For example, changes in the prime rate on variable commercial loans may not result in an equal change in the rate of money market deposits or short-term certificates of deposit.
A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the net income of the Bank over a two year period. The calculated estimates of net interest income or “earnings” at risk at December 31, 2013 are as follows:
| Year 1 | |||
|
Net interest
|
Percent of
|
||
|
Changes in rate
|
Income
|
Risk
|
|
|
(Dollars in thousands)
|
|||
|
+400 basis points
+300 basis points
+200 basis points
|
$3,106
3,053
3,000
|
8.78%
6.91
5.04
|
|
|
+100 basis points
|
2,925
|
2.42
|
|
|
Flat rate
|
2,856
|
-
|
|
|
-100 basis points
|
2,700
|
(5.45)
|
|
|
-200 basis points
-300 basis points
-400 basis points
|
2,492
2,296
2,104
|
(12.72)
(19.58)
(26.32)
|
| Year 2 | |||
|
Net interest
|
Percent of
|
||
|
Changes in rate
|
Income
|
Risk
|
|
|
(Dollars in thousands)
|
|||
|
+400 basis points
+300 basis points
+200 basis points
|
$6,426
6,265
6,104
|
12.70%
9.88
7.07
|
|
|
+100 basis points
|
5,897
|
3.43
|
|
|
Flat rate
|
5,701
|
-
|
|
|
-100 basis points
|
5,303
|
(6.99)
|
|
|
-200 basis points
-300 basis points
-400 basis points
|
4,772
4,276
3,791
|
(16.30)
(25.00)
(33.50)
|
A simulation model is also used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the economic value of the Bank. This model produces an interest rate exposure report that measures the long-term rate risks in the balance sheet by valuing the Bank’s assets and liabilities at market. It simulates what amount would be left over if the Bank liquidated its assets and liabilities. This is otherwise known as “economic value” of the capital of the Bank. The calculated estimates of economic value at risk at December 31, 2013 are as follows:
|
MV of equity
|
|||
|
Changes in rate
|
MV equity
|
Risk change
|
|
|
(Dollars in thousands)
|
|||
|
+400 basis points
+300 basis points
+200 basis points
|
$1,380
1,625
2,127
|
(63.50)%
(57.10)
(43.80)
|
|
|
+100 basis points
|
2,693
|
(28.80)
|
|
|
Flat rate
|
3,783
|
-
|
|
|
-100 basis points
|
4,349
|
14.90
|
|
|
-200 basis points
-300 basis points
-400 basis points
|
4,832
5,410
6,020
|
27.70
43.00
59.10
|
The market value of equity may be impacted by the composition of the Bank’s assets and liabilities. A shift in the level of variable versus fixed rate assets creates swings in the market value of equity. The Bank’s market value of equity declines in a rising rate environment because of the high level of fixed rate loans and investments it has in its portfolio that do not follow market rate changes or re-price immediately. At December 31, 2013, the change in the market value of equity in a +200 basis point interest rate change is -43.80%, in excess of the Bank’s policy limit of 25% and -63.50% in a +400 basis point interest rate change, in excess of the policy limit of 50%. The exception to policy is primarily related to the 2013 bond transaction for which longer term fixed rate bonds and mortgage-backed securities were purchased that decline in value when interest rates rise. The analysis is prepared on a static basis; however, because more than 50% of the portfolio includes amortizing securities, market risk should gradually decline as cashflows are reinvested in the current market. Also, management will continue to mitigate this risk by originating more variable rate loans or structure short maturity balloon mortgages. Although the economic value of equity is in excess of policy, interest-rate exposure is considered reasonable and manageable at December 31, 2013.
The assumptions used in evaluating the vulnerability of the Bank’s earnings and equity to changes in interest rates are based on management’s consideration of past experience, current position and anticipated future economic conditions. The interest sensitivity of the Bank’s assets and liabilities, as well as the estimated effect of changes in interest rates on the earnings and equity, could vary substantially if different assumptions are used or actual experience differs from the assumptions on which the calculations were based. In today’s uncertain economic times, the result of the Bank’s simulation models is even more uncertain.
Capital Resources
Total shareholders’ equity declined approximately $1,030,000, or 24.29%, in 2013 compared to 2012. The decrease is attributable to a net loss of approximately $669,000 and other comprehensive loss related to a decrease in the unrealized gain on the securities classified as available-for-sale totaling approximately $361,000. In 2013, the Bank reclassified its entire securities portfolio to available-for-sale as a result of a securities sale transaction that included bonds previously classified as held-to-maturity; therefore, market fluctuations reflected in other comprehensive income are more significant.
The critical importance of establishing and maintaining capital levels to support the Bank’s risk profile and growth is understood. A concentrated effort will be made to stabilize and strengthen the Bank’s capital through the generation of core profitability from Bank operations and external investment. In 2013, the Bank engaged an investment banker to assist with raising additional capital with a goal of $2 million. Although no equity investments were received in 2013, discussions continue.
Federal and state banking laws impose on financial institutions such as UBS and the Bank certain minimum requirements for capital adequacies. The Company and the Bank are each generally required to maintain a minimum ratio of total capital to risk rated assets of 8%. At least half of the total capital must be composed of “Tier I Capital” which is defined as common equity, retained earnings and qualified perpetual preferred stock, less certain intangibles. The remainder may consist of “Tier II Capital” which is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of loan loss allowance. Also, federal banking regulatory agencies have established minimum leverage capital requirements for banking organizations. Under these requirements, banking organizations must maintain a minimum of Tier I Capital to adjusted average quarterly assets equal to 3% to 5%, subject to bank regulatory evaluation of an organization’s overall safety and soundness. Under the federal banking regulations, a financial institution would be deemed to “adequately capitalized” or better if it exceeds the minimum federal regulatory capital requirements. A financial institution would be deemed “undercapitalized” if it fails to meet the minimum capital requirements and significantly undercapitalized if it has a total risk based capital ratio that is less than 6%, Tier I risk based capital ratio is less than 3%, or a leverage ratio that is less than 3% and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to less than 2%. UBS and the Bank are “well-capitalized” for regulatory capital purposes based upon the most recent notification under regulatory framework for prompt corrective action.
On January 31, 2012, the Bank entered into a Consent Order with its primary regulators that requires the development of a written capital plan ("Capital Plan") that details the manner in which the Bank will meet and maintain a Leverage Ratio of at least 8.50% and a Total Risk-Based Capital Ratio of at least 12.50%. At a minimum, the Capital Plan must include specific benchmark Leverage Ratios and Total Risk-Based Capital Ratios to be met at each calendar quarter-end, until the required capital levels are achieved.
As indicated in Table 14, the Bank’s risk-based capital ratios are above the general minimum requirements but below those required by the Consent Orders. Management has developed a Capital Plan that includes profitability and external investment to improve its capital ratios. UBS and the Bank do not anticipate paying dividends in the near future.
Table 14—Capital Ratios
|
Actual
|
For capital adequacy purposes
|
To be well capitalized under prompt corrective
action provisions
|
|||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||
|
As of December 31, 2013:
|
|||||||
|
Total capital to risk-
|
|||||||
|
weighted assets:
|
|||||||
|
Consolidated
|
$4,067
|
9.48%
|
$3,427
|
8.00%
|
N/A
|
||
|
Bank
|
4,067
|
9.48%
|
3,427
|
8.00%
|
$4,284
|
10.00%
|
|
|
Tier I capital to risk-
|
|||||||
|
weighted assets:
|
|||||||
|
Consolidated
|
3,525
|
8.22%
|
1,713
|
4.00%
|
N/A
|
||
|
Bank
|
3,525
|
8.22%
|
1,713
|
4.00%
|
2,570
|
6.00%
|
|
|
Tier I capital to average assets:
|
|||||||
|
Consolidated
|
3,525
|
5.67%
|
2,485
|
4.00%
|
N/A
|
||
|
Bank
|
3,525
|
5.67%
|
2,485
|
4.00%
|
3,107
|
5.00%
|
|
The quantitative and qualitative disclosures about market risks are included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the following sections: Liquidity and Interest Rate Sensitivity Management, Net Interest Income, Provision for Loan Losses, Allowance for Loan Losses, Liquidity and Interest Rate Sensitivity Management, Non-Interest Income, Non-Interest Expense, Non-Performing Loans, and Off Balance Sheet Arrangements.
See Consolidated Financial Statements on pages 61 to 100 hereof.
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and financial disclosure during the year ended December 31, 2013.
(a) Evaluation of Disclosure Controls and Procedures.
The management of the Company, including the Chief Executive Officer and the Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of the end of the period covered by this Report (the “Evaluation Date”). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective in ensuring that all material information relating to the Company, including our consolidated subsidiary, required to be filed in this Report has been made known to them in a timely manner.
(b) Management’s Report on Internal Control Over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 1992. Based on our evaluation under the framework, management has concluded that our internal control over financial reporting was effective as of December 31, 2013.
(c) Changes in Internal Control Over Financial Reporting.
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the final fiscal quarter of the year to which this Report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
A shareholders’ annual meeting of UBS was held on December 6, 2013. Proxies for the annual meeting were solicited pursuant to Regulation 14A of the Exchange Act and there were no solicitation in opposition to the management’s nominees as listed in the proxy statement and all such nominees were elected.
The matters voted upon at the shareholders’ annual meeting of UBS were the ratification of the appointment of McGladrey LLP as UBS’ independent registered public accounting firm for the year 2013, a non-binding advisory vote on executive officer compensation and a non-binding advisory vote on the frequency of the advisory vote on executive compensation in future years.
The votes cast at the meeting for the election of directors, for, against or withheld, as well as a number of absentee and non-broker votes as to each matter voted upon at the meeting, including a separate tabulation with respect to each nominee for office is as follows:
|
53.29% Shares Voted
|
465,677 of 873,725 Shares
|
|
Question
|
FOR
|
AGAINST
|
WITHHOLD/ABSTAIN
|
|
Ratify McGladrey LLP
|
458,794
|
5,833
|
1,050
|
|
Non-binding advisory vote on
executive compensation
|
410,574
|
6,820
|
48,283
|
|
ONE YEAR
|
TWO YEARS
|
THREE YEARS
|
|
|
Non-binding advisory vote on frequency of advisory vote on executive compensation in future years
|
182,053
|
52,700
|
182,091
|
The following table sets forth certain biographical information. Other than as indicated below, each of the persons named below has been employed in their present principal occupation for the past five years.
(a) Directors of the Registrant and Bank
|
|
Principal occupation and
|
Year first
|
Term
|
|
|
Name
|
Age
|
other directorships
|
became director
|
Will expire
|
|
Bernard E. Anderson
|
76
|
Economist
Whitney M. Young, Jr. Professor Emeritius
Wharton School, University of Pennsylvania
|
2002
|
2014
|
|
Philadelphia, PA
|
||||
|
David R. Bright
|
74
|
Retired, Executive Vice President
|
||
|
Meridian Bancorp
|
2002
|
2014
|
||
|
Philadelphia, PA
|
||||
|
|
||||
|
Joseph T. Drennan
|
69
|
Former Chief Financial Officer
|
2004
|
2014
|
|
Universal Capital Management, Inc.
|
||||
|
Wilmington, DE
|
||||
|
L. Armstead Edwards
|
71
|
Chairman of the Board,
|
1993
|
2016
|
|
United Bancshares, Inc.
|
||||
|
Owner and President,
|
||||
|
Edwards Entertainment., Inc.
|
||||
|
Philadelphia, Pennsylvania
|
||||
|
Marionette Y. Wilson(Frazier)
|
68
|
Retired as co-Founder,
|
1996
|
2016
|
|
John Frazier, Inc.
|
||||
|
Philadelphia, Pennsylvania
|
|
Principal occupation and
|
Year first
|
Term
|
||
|
Name
|
Age
|
other directorships
|
became director
|
Will expire
|
|
William B. Moore
|
71
|
Vice Chairman of the Board,
|
||
|
United Bancshares, Inc.
|
||||
|
Pastor, Tenth Memorial
|
1993
|
2015
|
||
|
Baptist Church
|
||||
|
Philadelphia, Pennsylvania
|
||||
|
Evelyn F. Smalls
|
68
|
President and CEO of Registrant
|
2000
|
2015
|
|
and United Bank of Philadelphia
|
||||
|
Ernest L. Wright
|
85
|
Founder, President and
|
1993
|
2016
|
|
CEO of Ernest L. Wright
|
||||
|
Construction Company
|
||||
|
Philadelphia, Pennsylvania
|
(b) Executive Officers of Registrant and Bank
|
Name
|
Age
|
Office
|
|
Evelyn F. Smalls
|
68
|
President and Chief Executive Officer
|
|
Brenda M. Hudson-Nelson
|
52
|
Executive Vice President/Chief Financial Officer
|
BOARD OF DIRECTORS QUALIFICATIONS
United Bank of Philadelphia has a very engaged and committed Board of Directors. The board takes its governance responsibilities very seriously and challenges management to meet its targeted goals and objectives. Currently, the board has seven (7) outside directors and one (1) insider. This leadership group has diverse experiences in business, banking, and community development that are important to fulfill their oversight responsibilities.
L. Armstead Edwards serves as Chairman and is one of two remaining founding members currently active on the board. Mr. Edwards spent a number of years as an educator and small business owner. He understands the plight of small business owners and combined with his experience in organizational dynamics, he brings a unique perspective to the role. He chairs the Executive Committee and serves on the Asset Liability, Loan and Audit/Compliance Committees. Mr. Edwards has encouraged deliberations to take place at the committee level so the board meeting can focus more on strategic initiatives and engage management on execution and performance measures.
Rev. William B. Moore is a founding member of the board and serves as Vice Chairman and is a member of the Executive and Audit/Compliance Committees. The Chairman and Vice Chairman alternate in leading the board meetings. Rev. Moore has a rich history in the faith community and has been the Senior Pastor of Tenth Memorial Baptist Church for over 30 years. He serves as a strong catalyst in rallying the faith community to support the Bank which is evidenced with the high percentage of loans to churches in the loan portfolio. Rev. Moore also leads an informal Advisory Group of Pastors who offer advice to the Bank’s management regarding the financial needs of the urban community to continue to bridge the economic divide in the region. As a former executive with a quasi-governmental agency, he has a broad based consistency and is very effective in building multi-sector coalitions to ensure economic inclusion.
Joseph T. Drennan, a director since 2004, serves as Treasurer of the Board and is Chairman of the Audit/Compliance Committee and member of the Executive and Asset Liability committees. In addition, he has expertise in generally accepted accounting principles, financial statements, and internal control over financial reporting, as well as an understanding of audit committee functions. Mr. Drennan has over 30 years banking experience as an executive in commercial, consumer and strategic planning. He is the former partner and Chief Financial Officer of Universal Capital Management, Inc. providing equity to start-up and emerging companies.
Marionette Y. Wilson a director since 1993 serves as Secretary of the Board and member of the Executive and Asset Liability Committees. Prior to her retirement, Ms. Wilson was co-founder of a construction management company and her expertise in this area is very helpful as the Bank works to provide financing to emerging contractors in the region. In addition, she is a leader in the faith community and has been instrumental in directing relationships to the Bank.
Evelyn F. Smalls serves as an inside director since 2000 when she was appointed President and Chief Executive Officer of the Bank. She serves on the Executive, Asset Liability and Loan Committees. Ms. Smalls brings versatile skills with over 25 years experience in banking and community and economic development know-how. Her leadership is propelled by her passion to move more inner city communities into the economic mainstream.
David R. Bright a retired Bank President has a rich history in commercial lending and credit administration. Mr. Bright, a director since 2001, serves as Chairman of the Loan Committee and a member of the Executive Committee. In addition, he brought to the Bank a keen knowledge of community reinvestment initiatives that can propel economic inclusion and impact. Mr. Bright’s community interests include his participation on a number of boards including Greater Philadelphia Urban Affairs Coalition, West Oak Lane Charter School, and Allegheny West CDC.
Dr. Bernard E. Anderson a director since 2002 and chairs the Asset Liability Committee. Dr. Anderson as an economist brings a dynamic perspective to the Bank as a retired Whitney E. Young, Jr., Professor of Management, The Wharton School, University of Pennsylvania As an Advisor to the Urban League of Philadelphia as well as the National Urban League, Dr. Anderson firmly believes that economic disparities among minority groups can be remediated through public and private policies aided at expanding economic opportunity for all with the Philadelphia region specifically and across the country in general.
Ernest L. Wright a director since 1992 serves as member of the Loan and Asset Liability Committees. His passion is sales and his expertise is in the construction field. He is the proprietor of Wright Construction Management. Mr. Wright was very helpful when the Bank upgraded its branch facilities by conceptualizing affordable designs and sharing his project management skills. He has been instrumental in referring new clients to the Bank particularly from the faith and small business sectors.
CORPORATE GOVERNANCE
The Bylaws provide that a Board of Directors of not less than five (5) and not more than twenty-five (25) directors shall manage our business. The Board, as provided in the bylaws, is divided into four classes of directors: Class A, Class B, Class C and Class D, with each class being as nearly equal in number as possible. The Board of Directors has fixed the number of directors at nine (9), with three (3) members in Class A, one (1) member in Class B (vacant), three (3) members in Class C, and two (2) members in Class D.
Under UBS’ bylaws, persons elected by the Board of Directors to fill a vacancy on the Board serve as directors for the balance of the term of the director who that person succeeds.
Communicating with the Board of Directors
Shareholders may communicate with any UBS or Bank director or member of a Committee of the Board of Directors of UBS or the Bank by writing to United Bancshares, Inc., Attention: Board of Directors, P.O. Box 54212, Philadelphia, PA 19105. The written communications will be provided to Marionette Y. Wilson, a director and Secretary of the Board of Directors, who will determine the further distribution of the communications which are appropriate based on the nature of the information contained in the communications. For example, communications concerning accounting internal controls and auditing matters will be shared with the Chairman of the Audit/Compliance Committee of UBS’ Board of Directors.
Code of Conduct
UBS and the Bank have adopted a Code of Business Conduct and Ethics ( the “Code”) that applies to all its directors, employees and officers and including its Chief Executive Officer and its Chief Financial Officer. The Code meets the requirement of a code of ethics for UBS’ and the Bank’s principal executive officer and principal financial officer or persons performing similar functions under Item 406 of the SEC’s Regulation S-K. Any amendments to the Code or any waivers of the Code for directors or executive officers will be disclosed promptly on a Form 8-K filed with the SEC or by any other means approved by the SEC. The Code complies with requirements of the Sarbanes – Oxley Act and the listing standards of NASDAQ and UBS provides a copy of the Code to each director, officer and employee.
Under our Code of Ethics, the Board is responsible for resolving any conflict of interest involving the directors, executive officers and senior financial officers. The executive officers are responsible for resolving any conflict of interest involving any other officer or employee.
UBS will provide, without charge, a copy of its Code of Business Conduct and Ethics to any person who requests a copy of the Code. A copy of the Code may be requested by writing to the President of UBS at United Bank of Philadelphia at 30 S. 15th Street, Suite 1200, Philadelphia, PA 19102.
Board Leadership Structure
The positions of the Board Chairman and President and Chief Executive Officer are held by two individuals. The Board believes this structure is appropriate for UBS and the Bank because of the need for the Chairman to have independence in leading the Board of Directors to oversee and direct management and the President and CEO’s direct involvement in leading management of UBS and the Bank.
Directors’ Qualifications
In considering any individual nominated to be a director on UBS’ and the Bank’s Board of Directors’, the Board of Directors considers a variety of factors, including whether the candidate is recommended by the Bank’s executive management and the Board’s Nominating Committee, the individual’s professional or personal qualifications, including business experience, education and community and charitable activities and the individual’s familiarity with the communities in which UBS or the Bank is located or is seeking to locate.
Risk Oversight
The Board of Directors establishes and revises policies to identify and manage various risks inherent in the business of the Company, and both directly and through its committees, periodically receives and reviews reports from management to ensure compliance with and evaluate the effectiveness of risk controls. The President and Chief Executive Officer meets regularly with other senior officers to discuss strategy and risks facing UBS. Senior management attends monthly Board meetings and is available to address any questions or concerns raised by the Board on risk-management-related and any other matters. Each month the Board receives presentations from senior management on strategic matters and discusses significant challenges, risks and opportunities for UBS.
The Board has an active role, as a whole and also at the committee level, in overseeing management of the UBS’ risks. The Audit Committee assists the Board in fulfilling its oversight responsibilities with respect to areas of financial reporting, internal controls and compliance with accounting regulatory requirements. Employees who oversee day-to-day risk management duties, including the Vice President/Chief Risk Officer and Compliance Officer, report their findings to the Audit Committee. The Loan Committee of the Bank assists the Board with fulfilling its oversight responsibilities with respect to management of risks related to the Bank’s loan portfolio and its credit quality. The Asset Liability Management Committee of the Bank assists the Board with fulfilling its oversight responsibilities with respect to management of interest risk and the Bank’s investment portfolio.
Nomination for Directors
Section 3.4 of Article 3 UBS’ Bylaws provides that no shareholder shall be permitted to nominate a candidate for election as a director, unless such shareholder shall provide to the Secretary of UBS information about such candidate as is equivalent to the information concerning candidates nominated by the Board of Directors that was contained in the UBS Proxy Statement for the immediately preceding Annual Meeting of shareholders in connection with election of directors. Such information consists of the name, age, any position or office held with UBS or the Bank, a description of any arrangement between the candidate and any other person(s), naming such persons pursuant to which he or she was nominated as a director, his/her principal occupation for the five (5) years prior to the meeting, the number of shares of UBS stock beneficially owned by the candidate and a description of any material transactions or series of transactions to which UBS or the Bank is a party and in which the candidate or any of his affiliates has a direct or indirect material interest, which description should specify the amount of the transaction and where practicable the amount of the candidates interest in the transaction.
Such information shall be provided in writing not less than one hundred twenty (120) days before the first anniversary preceding the annual meeting of UBS’ shareholders. The Chairman of the Board of Directors is required to determine whether the director nominations have been made in accordance with the provisions of the UBS’ Bylaws, and if any nomination is defective, the nomination and any votes cast for the nominee(s) shall be disregarded.
The Nominating Committee’s process for identifying and evaluating nominees for director, including nominees recommended by security holders and for incumbent directors whose terms of office are set to expire, include review of the directors’ overall service during their terms, including meetings attended, level of participation, quality of performance, and contributions towards advancing UBS’s interests and enhancing shareholder value. With respect to new directors, the procedure includes a review of the candidates’ biographical information and qualifications and a possible check of candidates’ references. All potential candidates are interviewed by all members of the Committee and other members of the board. Using this information, the committee evaluates the nominee and determines whether it should recommend to the board that the board nominate or elect to fill a vacancy with the prospective candidate.
The Committee believes the following qualifications must be met by a nominee: a good character, have a reputation, personally and professionally, consistent with UBS’s image and reputation; be an active or former leaders of organizations; possess knowledge in the field of financial services; have an understanding of the Bank’s marketplace; be independent; be able to represent all of the shareholders; be willing to commit the necessary time to devote to board activities, and be willing to assume fiduciary responsibility.
Policy for Attendance at Annual Meetings
UBS has a policy requiring all of its directors to attend UBS’ annual meeting. At the annual meeting held on December 6, 2013, all of the directors attended the meeting with the exception of Director Anderson.
GENERAL INFORMATION ABOUT UBS’ AND BANK’S BOARDS OF DIRECTORS
Director Independence
The Board of Directors of the Company and the Bank has determined that all of its members are independent and meet the independence requirements of National Association of Securities Dealers (“ NASDAQ”) except Evelyn F. Smalls. Because Ms. Smalls is the President and Chief Executive Officer of the Company and the Bank she is not independent as defined by NASDAQ. In determining the independence of its directors, other than Ms. Smalls, the Board of Directors considered routine banking transactions between the Bank and each of the directors, their family members and businesses with whom they are associated. In each case, the Board of Directors determined that none of the transaction relationships or arrangements impaired the independence of the director.
Meetings and Executive Sessions of Independent Directors
In 2013, the UBS’ and the Bank’s Board of Directors met at least monthly, except in August, and during 2013 held eleven (11) meetings. The independent directors of UBS and the Bank Boards of Directors hold executive sessions on a regular basis, but, in any event, not less than twice a year. During 2013, two (2) executive sessions were held. Each director attended at least 75% of the Board meetings held during 2013 and the committee meetings held by each committee on which the director served except for William B. Moore who attended 64% of board meetings and 50% of Audit/Compliance Committee meetings.
Information About the Committees of the Boards of Directors of the Corporation and the Bank
The Committees of UBS’ Board of Directors are the Executive Committee, Audit/Compliance Committee, and the Nominating Committee. The Corporation and the Bank have the same committees with the same members for each committee, except that the Bank also has an Asset Liability Management Committee and a Loan Committee.
Executive Committee The Executive Committee, comprised of L. Armstead Edwards (Chairman), William B. Moore, Joseph T. Drennan, David R. Bright, Evelyn F. Smalls and Marionette Y. Wilson meets, when necessary, at the call of the Chairman, to exercise the authority and powers of the Board of Directors of the Corporation and the Bank at intervals between meetings of the Board of Directors insofar as may be permitted by law. The Executive Committee also meets to discuss and approve certain human resource matters including compensation, and to ratify and approve certain of the Bank’s loans. The Executive Committee held eleven (11) meetings during 2013.
The Board of Directors does not have a Compensation Committee; the Executive Committee performs that function without Evelyn Smalls who serves as an executive officer of the Bank. The Executive Committee, without Evelyn Smalls, who is not independent, serves as the compensation committee and meets to discuss compensation matters. It annually reviews and approves corporate goals and objectives relevant to CEO compensation, evaluates the CEO’s performance in light of those goals and objectives and determines and approves the compensation and benefits to be paid or provided to Evelyn F. Smalls the President of UBS and Brenda M. Hudson-Nelson Executive Vice President and Chief Financial Officer. The Committee has the responsibility to review and provide recommendations to the full Board regarding compensation and benefit policies, plans and programs. Each member of the Compensation Committee is independent as defined by NASDAQ. During 2013, the Executive Committee held one (1) meeting as the Compensation Committee to discuss the performance and compensation of the executive officers. There is no charter for the Executive Committee acting as a compensation committee.
Audit/Compliance Committee The Audit/Compliance Committee of UBS’ Board of Directors is comprised of Joseph T. Drennan (Chairman), L. Armstead Edwards, Marionette Y. Wilson (Frazier) and William B. Moore, meets when necessary at the call of the Chairman. The Committee meets with the internal auditor to review audit programs and the results of audits of specific areas, as well as other regulatory compliance issues. The Committee selects the independent registered public accounting firm. In addition, the Committee meets with UBS’ independent registered public accounting firm to review the results of the annual audit and other related matters as well as other regulatory compliance issues. Each member of the Committee is “independent” as defined in the applicable listing standards of the NASDAQ. The Committee held four (4) meetings during 2013. The Audit Committee charter will be made available, without charge, upon written request by the shareholders of UBS to the corporate secretary of UBS. A copy of the charter is not available on our website but can be found as Exhibit A to our Proxy Statement filed with the SEC on November 6, 2013.
Each member of the Audit/Compliance Committee is financially literate as defined by NASDAQ. The Boards of Directors of the Company and the Bank have determined that Joseph T. Drennan is the “Financial Expert,” as defined in the Commission’s regulations.
The Compliance Committee was combined with the Audit Committee and is comprised of the same members. On a quarterly basis compliance matters are addressed to include the review of regulatory compliance matters, the Bank’s compliance programs and the CRA Act activities.
Nominating Committee. The Nominating Committee, comprised of L. Armstead Edwards (Chairman), Ernest L. Wright, and Joseph T. Drennan meets at the call of the Chairman. The Committee is responsible for considering and recommending future director nominees to the Board of Directors of UBS and the Bank and the Committee is independent and meets the requirements for independence of NASDAQ. The Nominating Committee does not currently have a formal policy with respect to diversity. However, in considering nominees for director, the Nominating Committee also considers the Board’s desire to be a diverse body with diversity reflecting gender, ethic background and professional experience. The Board and the Nominating Committee believe it is essential that the Board members represent diverse viewpoints. The Nominating Committee charter will be made available, without charge, upon written request by the shareholders of UBS to the corporate secretary of UBS. A copy of the charter is not available on our website but can be found as Exhibit A to our Proxy Statement filed with the SEC on November 6, 2013. The Committee held one (1) meeting during 2013 resulting in the decision not to re-nominate Director Maurice Mitts as director because of scheduling conflicts that did not allow him to attend more than 75% of the Company’s board meetings.
Asset Liability Management Committee. The Asset Liability Management Committee of the Bank, comprised of Bernard E. Anderson (Chairman), L. Armstead Edwards, Joseph T. Drennan, Evelyn F. Smalls and Ernest L. Wright meets, when necessary, at the call of the Chairman, to review and manage the Bank’s exposure to interest rate risk, market risk and liquidity risk. . During 2013, the Asset and Liability Management Committee held four (4) meetings.
Loan Committee. The Loan Committee of the Bank, comprised of David R. Bright (Chairman), L. Armstead Edwards, Evelyn F. Smalls, and Ernest Wright meets when necessary to review and approve loans that are $200,000 and over and to discuss other loan-related matters. During 2013, the Loan Committee held ten (10) meetings.
Board of Directors Compensation
The normal non-officer director fee to be paid by the Bank is Three Hundred Fifty Dollars ($350) for attending each Board meeting and One Hundred Seventy-five Dollars ($175) per quarter for attending the Board of Directors’ Committee meetings. Directors’ fees are not paid to officer directors for attending Bank Board of Directors or Committee meetings. UBS does not pay any fees to any directors for attending UBS’ Board of Directors or Committee meetings. Effective April 1, 2002, the Board of Directors elected to waive all fees for an indefinite period of time. Therefore, no table summarizing the compensation paid to non-employee directors is required for the fiscal year ended December 31, 2013.
Management is responsible for the financial reporting process, including the system of internal controls, and for the preparation of our consolidated financial statements in accordance with generally accepted accounting principles. Our independent registered public accounting firm is responsible for auditing those financial statements. The Audit Committee’s responsibility is to monitor and review these processes, acting in an oversight capacity relying on the information provided to it and on the representations made by management and the independent registered accounting firm.
In connection with the preparation and filing of UBS’ Annual Report on Form 10-K for the year ended December 31, 2012, the Audit Committee (i) reviewed and discussed the consolidated audited financial statements with our management, (ii) discussed with McGladrey LLP, our independent registered public accounting firm, the matters required to be discussed by the standards of the Public Company Accounting Oversight Board (“PCAOB”) (United States), (iii) discussed the independence of McGladrey LLP, and (iv) has received and reviewed the written disclosures and the letter from McGladrey LLP required by PCAOB Rule 3526 “Communication with Audit Committee Concerning Independence” regarding McGladrey LLP’s communications with the Audit Committee concerning independence and has discussed with McGladrey LLP its independence. Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in UBS’ Annual Report on Form 10-K for the year ending December 31, 2013 to be filed with the SEC.
UBS’ Audit Committee is composed of Joseph T. Drennan (Chairman), L. Armstead Edwards, William B. Moore, and Marionette Y. Wilson who each endorsed this report.
|
|
Respectfully submitted:
Joseph T. Drennan (Chairman),
|
|
|
William B. Moore
|
|
|
L. Armstead Edwards,
|
|
|
Marionette Y. Wilson (Frazier)
|
UBS’S AND BANK’S EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the current executive officers of UBS and Bank as of February 24, 2014:
|
Name, Principal Occupation and
Business Experience For Past 5 Years
|
Age as of
February 24, 2014
|
Office with the UBS and/or Bank
|
UBS Stock
Beneficially
Owned
|
|
Evelyn F. Smalls(1)(2)
|
68
|
President and Chief Executive Officer and
Director of UBS and Bank
|
500
|
|
Brenda M. Hudson-Nelson (3)
|
52
|
Executive Vice President and Chief Financial Officer
of UBS and Bank
|
50
|
Footnote Information Concerning Executive Officers
|
|
(1)
|
Ms. Smalls was elected as a director and was appointed as President and Chief Executive Officer in June 2000. Prior to that, Ms. Smalls was Senior Vice President of Human Resources and Compliance from October 1993 to May 2000.
|
|
|
(2)
|
The President and Chief Executive Officer, currently Evelyn F. Smalls, acts as Trustee of certain voting trust agreements (the “Voting Trusts”) pursuant to which Fahnstock, Inc deposited 5,209 shares of Common Stock of UBS.
|
|
|
(3)
|
Ms. Hudson-Nelson was appointed Senior Vice President and Chief Financial Officer in June 2000. Prior to that, Ms. Hudson-Nelson was Vice President and Controller from January 1992 to May 2000. In May 2002, Ms. Hudson-Nelson was promoted to Executive Vice President and Chief Financial Officer.
|
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires that UBS’ directors and executive officers file reports of their holdings of UBS’ Common Stock with the SEC. Based on UBS’ records and other information available to UBS believes that the SEC’s Section 16(a) reporting requirements applicable to UBS’ directors and executive officers were complied with for UBS’ fiscal year ended December 31, 2013.
The Executive Committee, comprised of L. Armstead Edwards (Chairman of the Board), William B. Moore(Vice Chairman of the Board), Marionette Y. Wilson, Joseph T. Drennan, and David R. Bright but without Evelyn Smalls, who is not independent, serves as the compensation committee and meets to discuss compensation matters. It annually reviews and approves corporate goals and objectives relevant to CEO compensation, evaluates the CEO’s performance in light of those goals and objectives and determines and approves the compensation and benefits to be paid or provided to the Evelyn F. Smalls the President of UBS and Brenda M. Hudson-Nelson Executive Vice President and Chief Financial Officer. Each member of the Compensation Committee is independent as defined by NASDAQ. During 2013, the Executive Committee held one (1) meeting as the Compensation Committee.
The Committee’s Process
The Compensation Committee engaged an independent executive compensation consultant, Hay Group, to assist with carrying out certain responsibilities with respect to executive compensation. In that regard, the consultant performed a “benchmarking” study of executive officer compensation comparing each officer’s salary and total compensation with a financial services industry database with similar sized and complexity organizations and positions. The results indicated that the total compensation of the Company’s executive officers was significantly below the average of its peer group.
The goals set forth in the Company’s strategic plan were not met. While the committee remains focused on the achievement of financial and growth goals, it recognizes that the Bank’s financial results were impacted by the weak economic conditions of the last several years; however, the implementation of a sales driven organization is still a work in progress. Given these factors and the continued focus on achieving core profitability, no increases were provided to the executive officers in 2013.
Components of Compensation for 2013
For the fiscal year ended December 31, 2013, the components of executive compensation were:
|
|
•
|
Salary;
|
|
|
•
|
Life Insurance in the amount of two times salary; and
|
|
|
•
|
Automobile Allowance.
|
Salary
Salary provides the compensation base rate and is intended to be internally fair among executive officers at the same level of responsibility.
In setting the salary for the chief executive officer, the committee considers financial results, organizational development, marketing initiatives, board relations, management development, work on representing us to our customers, clients and the public, and results in developing, expanding and integrating our products and services. The committee also takes into account the effects of inflation. The committee exercises discretion in setting the chief executive officer’s salary and may increase or decrease the chief executive officer’s salary based on our financial performance or on non-financial performance factors, if it so decides. However, the employment contract with Ms. Smalls, chief executive officer, sets a minimum salary of $160,000 per year.
The committee receives evaluations of the other executive officer performance from Ms. Smalls and her recommendations for base salaries for the other officer. The recommendations are based on the officer’s level of responsibility and performance of duties. The committee then reviews and modifies, where appropriate, the recommendations and sets the salaries for the other executive officer.
Life Insurance and Auto Allowance
These benefits help to attract and retain qualified personnel within the current financial constraints.
Summary Compensation Table
The table below summarizes the total compensation paid or earned by each of the Named Executive Officers for the years ended December 31, 2013 and 2012.
|
Name and Principal
Position
|
Year
|
Salary ($)
|
Bonus
($)(1)
|
Stock
Awards
($)(1)
|
Option
Awards
($)(1)
|
Non-Equity
Incentive Plan
Compensation(1)
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)(1)
|
All Other
Compensation
($)(2)
|
Total
($)
|
|||||||||||||||||||||||||||
|
Evelyn F. Smalls
Chief Executive Officer
|
2013
2012
|
$
|
168,000
168,000
|
$
|
0
0
|
$
|
0
0
|
$
|
0
0
|
$
|
0
0
|
$
|
0
0
|
$
|
9,209
6,209
|
$
|
177,209
174,209
|
|||||||||||||||||||
|
Brenda Hudson-Nelson,
Chief Financial Officer
|
2013
2012
|
$
|
121,000
121,000
|
$
|
0
0
|
$
|
0
0
|
$
|
0
0
|
$
|
0
0
|
$
|
0
0
|
$
|
6,095
6,095
|
$
|
127,095
127,095
|
|||||||||||||||||||
|
(1)
|
Amounts are not included in the Bonus, Stock Awards, Option Awards, Non-equity Incentive Plan Compensation, Change in Pension and Nonqualified Deferred Compensation Earnings and All Other Compensation columns of the table because no compensation of this nature was paid by UBS or the Bank and the restricted stock awards and long term incentive payouts columns are not included in the Compensation Table since these benefits are not made available by UBS or the Bank.
|
|
(2)
|
The President/Chief Executive Officer receives a $750 per month automobile allowance and the Executive Vice President /Chief Financial Officer receives a $500 per month automobile allowance. UBS’ executives are provided with life insurance policies equivalent to two times their annual salary for which the cost is $209/annually for Evelyn Smalls and $95/annually for Brenda Hudson-Nelson
|
Executive Employment Agreements
The Bank entered into an Employment Agreement with Evelyn F. Smalls in November 2004 to continue to serve as the Bank’s President and Chief Executive Officer. The term of the Employment Agreement was three (3) year. The contract expired in November 2007. Renewal terms are under review by the Compensation Committee. Ms. Smalls is currently working under the provisions of the expired contract which provide for an annual base salary of $160,000 that may be increased, but not decreased as well as life insurance equivalent to two times her base salary, and a $500 per month automobile allowance. In 2013, the Compensation Committee approved an increase in Ms. Smalls’ automobile allowance to $750 per month.
The Bank entered into an Employment Agreement with Brenda M. Hudson-Nelson in November 2004 to continue to serve as the Bank’s Executive Vice President and Chief Financial Officer. The term of the Employment Agreement was three (3) years. Renewal terms are under review by the Compensation Committee. Ms. Hudson-Nelson is currently working under the provisions of the expired contract which provide for an annual base salary of $115,000 that may be increased, but not decreased as well as life insurance equivalent to two times her base salary, and a $500 per month automobile allowance.
Payments Upon Termination
The named executive officers are only entitled to payment of their salary, life insurance, and automobile allowance through the date of termination.
Other Compensation Tables
We have not included a grant of plan-based awards table, an outstanding equity awards table, options exercises and stock vested table, and pension benefits table because those tables are not applicable.
Transactions with Related Parties
Some of our directors, executive officers, and members of their immediate families and the companies with which they are associated were our customers of and had banking transactions with us in the ordinary course of our business during the year 2013. All loans and commitments to lend were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. In our opinion, the transactions and loan commitments did not involve more than normal risk of collectively or present other unfavorable features.
Our written Audit Committee Charter requires our Audit Committee to approve related party transactions. Our written Policy on Related Party Transactions establishes procedures for the Audit Committee’s review and approve of related party transactions other than excepted transactions and preapproved transactions. Transactions available to all employees generally, and transactions involving less than $120,000 when aggregated with all similar transactions in any calendar year, are excepted transactions. The following types of transactions are preapproved transactions:
- Compensation payable to directors or officers if reportable under Item 402 of the Commission’s Regulation S-K;
- Compensation payable to an immediate family member of another director or executive officer, if approved by the Executive Committee acting as the Compensation Committee;
- Transactions with another company (including charitable contributions, grants or endowments to a charitable organization) at which a related person’s only relationship is as an employee (other than executive officer), director or less than 10% owner, if the aggregate amount involved does not exceed $200,000 or 5% of that company’s total revenues; and
- Routine banking relationships that otherwise comply with banking laws and regulations.
The Audit Committee is to apply the following standards when it reviews related party transactions for approval:
- Whether the transaction is on terms no less favorable to the Corporation than terms generally available with an unaffiliated third party under similar circumstances;
- The extent of the related person’s interest in the transaction; and
- Other factors the committee deems appropriate.
For loan transactions, our written Regulation O Policy requires the Executive Committee to review and approve loan transactions with directors, executive officers and their related interests in accordance with the standards established by Federal Reserve Board Regulation O.
The following table sets forth certain information known to UBS, as of February 24, 2014 (1), with respect to the only persons to UBS’ knowledge, who may be beneficial owners of more than 5% of UBS’ Common Stock.
|
Name and Address
of Beneficial Owner
|
Amount and Nature of
Beneficial Ownership
of Corporation
Common Stock
|
Percentage of
Outstanding
Corporation
Common Stock
Owned
|
|
Philadelphia Municipal
|
71,667
|
8.20%
|
|
Retirement System
|
||
|
2000 Two Penn Center
|
||
|
Philadelphia, Pennsylvania 19102
|
||
|
Wells Fargo, (formerly, Wachovia Corporation)2
|
50,000
|
5.72%
|
|
301 S College Street, Floor 27
|
||
|
Charlotte, NC 28288
|
||
|
Greater Philadelphia Urban Affairs Coalition
|
47,500
|
5.44%
|
|
1207 Chestnut Street, Floor 7
|
||
|
Philadelphia, PA 19107
|
||
|
The Estate of James F. Bodine
|
44,583
|
5.10%
|
|
401 Cypress Street
|
||
|
Philadelphia, PA 19106
|
|
(1)
|
As of February 24, 2014, there were 876,921 shares of UBS’ voting Common Stock outstanding.
|
|
(2)
|
Wells Fargo (formerly Wachovia Corporation) owns 241,666 shares of UBS Common Stock of which 50,000 are voting shares.
|
|
(3)
|
UBS does not know of any person having or sharing voting power and/or investment power with respect to more than 5% of the UBS’ Common Stock other than Wachovia Corporation (formerly First Union Corporation), Philadelphia Municipal Retirement System, Greater Philadelphia Urban Affairs Coalition, and the Estate of James F. Bodine.
|
The following table lists the beneficial ownership of shares of the UBS’ Common Stock as of February 24, 2014 for each of the UBS’ directors and executive officers. The table also shows the total number of shares of Common Stock ownership by the directors and executive officers of UBS as a group.
|
Name
|
Common
Stock1,2,3
|
Percent of
Outstanding Stock
|
|
Current Directors
|
|
|
|
L. Armstead Edwards
|
10,833
|
1.24%
|
|
Marionette Y. Wilson (Frazier)
|
17,900
|
2.05%
|
|
Ernest L. Wright
|
7,084
|
*
|
|
Bernard E. Anderson
|
850
|
*
|
|
David R. Bright
|
850
|
*
|
|
Joseph T. Drennan
|
783
|
*
|
|
William B. Moore
|
1,834
|
*
|
|
Evel |