-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ISmgU313gnTibEYEAK4mUeDjacZueLPM7aWa9CbKY82K1JYfw4J9H6LyRQld3Y0X cEiYXXYF3xbyGbyOBa0juA== 0001010410-01-000012.txt : 20010402 0001010410-01-000012.hdr.sgml : 20010402 ACCESSION NUMBER: 0001010410-01-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED BANCSHARES INC /PA CENTRAL INDEX KEY: 0000944792 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232802415 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25976 FILM NUMBER: 1587601 BUSINESS ADDRESS: STREET 1: 300 NORTH THIRD ST CITY: PHILADELPHIA STATE: PA ZIP: 19106 BUSINESS PHONE: 2158292265 MAIL ADDRESS: STREET 1: 2300 PACKARD BLDG STREET 2: 111 S 15TH ST CITY: PHILADELPHIA STATE: PA ZIP: 19102 10-K 1 0001.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. ------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 UNITED BANCSHARES, INC. -------------------------- (Exact name of registrant as specified in its charter) 0-25976 (Registrant's file number) PENNSYLVANIA 23-2802415 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 NORTH THIRD STREET, PHILADELPHIA, PA 19106 ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (732) 863-9000 Securities registered pursuant to Section 12(g)f of the Act: NONE Securities registered pursuant to Section 12(g)f of the Act: Common Stock, $.01 par value ----------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) FORM 10-K Index PART I Item No. Page - -------- ---- 1. Business...................................................... 3 2. Properties.................................................... 11 3. Legal Proceedings............................................. 13 4. Submission of Matters to a Vote of Security Holders........... 14 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................... 14 6. Selected Financial Data....................................... 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 17 8. Financial Statements and Supplementary Data................... 30 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 30 PART III 10. Directors and Executive Officers of Registrant................ 30 11. Executive Compensation........................................ 32 12. Security Ownership of Certain Beneficial Owners and Management 34 13. Certain Relationships and Related Transactions................ 35 PART IV 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 36 UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 28, 2001. 2 United Bancshares, Inc. (sometimes herein also referred to as the "Company" or "UBS") has two classes of capital stock authorized - 2,000,000 shares of $.01 par value Common Stock and Series Preferred Stock (Series A Preferred Stock). The Board of Directors designated a subclass of the common stock, designated Class B Common Stock, by filing of Articles of Amendment to its Articles of Incorporation on September 30, 1998. This Class of stock has all of the rights and privileges of Common Stock with the exception of voting rights. Of the 2,000,000 shares of Common Stock authorized, 250,000 have been designated Class B Common Stock. There is no market for the Common Stock. None of the shares of the Registrant's stock was sold within 60 days of the filing of this Form 10-K. As of March 28, 2001 the aggregate number of the shares of the Registrant's Common Stock outstanding was 1,099,421 (including 191,667 Class B Non voting). The Board of Directors of United Bancshares, Inc. designated one series of the Series Preferred Stock (the "Series A Preferred Stock"), 500,000 authorized of which 143,150 shares were outstanding as of March 28, 2001. The Exhibit index is on page 36. There are 61 pages in the Form 10-K. PART I SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENT Certain of the matters discuss in this document and the documents incorporated by reference herein, including matters discuss under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" may constitute forward looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended and may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of United Bancshares, Inc (the "UBS") to be materially different from future results, performance or achievements expressed or implied by such forward looking statements. The words "expect," "anticipate," "intended," "plan," "believe," "seek," "estimate," and similar expressions are intended to identify such forward-looking statements. The UBS's actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation: (a) the effects of future economic conditions on the UBS and its customers; (b) governmental monetary and fiscal policies, as well as legislation and regulatory changes; ( c ) the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral and securities, as well as interest-rate risks; (d) the effects of competition from other commercial banks, thrifts, mortgage companies, consumer finance companies, credit unions securities brokerage firms, insurance company's, money-market and mutual funds and other financial institutions operating in the UBS's trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally together with such competitors offering banking products and services by mail, telephone, computer and the Internet; and (e) the failure of assumptions underlying the establishment of reserves for loan losses and estimates in the value of collateral, and various financial assets and liabilities and technological changes being more difficult or expensive than anticipated. All written or oral forward-looking statements attribute to US are expressly qualified in their entirety by use the foregoing cautionary statements. ITEM 1 -- BUSINESS United Bancshares, Inc. United Bancshares, Inc. ("Registrant" or "UBS") is a holding company for United Bank of Philadelphia (the "Bank"). UBS was incorporated under the laws of the Commonwealth of Pennsylvania on April 8, 1993. The Registrant became the Bank Holding Company of the Bank, pursuant to the Bank Holding Company Act of 1956, as amended, on October 14, 1994. The Bank commenced operations on March 23, 1992. UBS provides banking services through the Bank. The principal executive offices of UBS and the Bank are located at 300 North Third Street, Philadelphia, Pennsylvania 19106. The Registrant's telephone number is (215) 351-4600. 3 As of March 28, 2001, UBS and the Bank had a total of 70 employees. United Bank of Philadelphia The Bank, an African-American controlled, state-chartered member bank of the Federal Reserve System is regulated by both the Federal Reserve Board and the Commonwealth of Pennsylvania Department of Banking (the "Department"). The deposits held by the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank conducts all its banking activities through its five offices located as follows: (i) Market Street Branch 714 Market Street, Philadelphia, Pennsylvania; (ii) Center City Branch Two Penn Center, Philadelphia, Pennsylvania; (iii) West Philadelphia Branch 37th and Lancaster Avenue, Philadelphia, Pennsylvania, (iv) Mount Airy Branch 1620 Wadsworth Avenue, Philadelphia, Pennsylvania; and (v) Progress Plaza Branch 1015 North Broad Street, Philadelphia, Pennsylvania. Through these locations, the Bank offers a broad range of commercial and consumer banking services. At December 31, 2000, the Bank had total deposits aggregating approximately $83.2 million and had total net loans outstanding of approximately $44.7 million. Although the Bank's primary service area for Community Reinvestment Act purposes is Philadelphia County, it also services, generally, the Delaware Valley, which consists of portions of Montgomery, Bucks, Chester, and Delaware Counties in Pennsylvania; New Castle County in Delaware; and Camden, Burlington, and Gloucester Counties in New Jersey. The city of Philadelphia is comprised of 353 census tracts and, based on 1990 census data, 204 or 58% of these are designated as low to moderate-income tracts while 105 or 30% are characterized both as low to moderate-income and minority tracts. The Bank's primary service area consists of a population of 1,577,815, which includes a minority population of 752,309. The Bank engages in the commercial banking business, serving the banking needs of its customers with a particular focus on, and sensitivity to, groups that have been traditionally under-served, including Blacks, Hispanics and women. The Bank offers a wide range of deposit products, including checking accounts, interest-bearing NOW accounts, money market accounts, certificates of deposit, savings accounts and Individual Retirement Accounts. The focus of the Bank's lending activities is on the origination of commercial, consumer and residential loans. A broad range of credit products are offered to the businesses and consumers in the Bank's service area, including commercial loans, mortgage loans, student loans, home improvement loans, auto loans, personal loans, and home equity loans. At March 28, 2001, the Bank's maximum legal lending limit was approximately $1.1 million per borrower. However, the Bank's internal Loan Policy limits the Bank's lending to $500,000 per borrower in order to diversify the loan portfolio. The Bank has established relationships with correspondent banks to participate in loans that exceed the Bank's internal policies or legal lending limits. The Board of Directors of the Bank maintains the ability to waive its internal lending limit upon consideration of a loan. The Board of Directors has exercised this power with respect to loans and participations on a number of occasions. The Bank also offers commercial and retail products. In the area of commercial loans, the Bank has flexibility to develop loan arrangements targeted at a customer's objectives. Typically, these loans are term loans or revolving credit arrangements with interest rate, collateral and repayments terms, varying based upon the type of credit, and various factors used to evaluate risk. The Bank participates in the government-sponsored Small Business Administration ("SBA") lending program and when the Bank deems it appropriate, obtains SBA guarantees for up to 90% of the loan amount. This guaranty is intended to reduce the Bank's exposure to loss in its commercial loan portfolio. Commercial loans are typically made of the basis of cash flow to support repayment with secondary reliance placed on the underlying collateral. The Bank's consumer loan program includes installment loans for home improvement and the purchase of consumer goods and automobiles, student loans, home equity and VISA secured and unsecured revolving lines of credit, and checking overdraft protection. The Bank also offers residential mortgage loans to its customers. In addition, the Bank offers safe deposit boxes, travelers' checks, money orders, direct deposit of payroll and Social Security checks, wire transfers and access to regional and national automated teller networks as well as international and trust services through correspondent institutions. 4 Competition There is substantial competition among financial institutions in the Bank's service area. The Bank competes with local, regional and national commercial banks, as well as savings banks and savings and loan associations. Many of these banks and financial institutions have an amount of capital that allows them to do more advertising and promotion and to provide a greater range of services to customers. To date, the Bank has attracted, and believes it will continue to attract its customers from the deposit base of such existing banks and financial institutions largely due to the Bank's mission to service groups of people who have traditionally been un-served and by its devotion to personalized customer service. The Bank's strategy has been, and will continue to be, to emphasize personalized services with special sensitivity to the needs of Blacks, Hispanics and women and to offer competitive rates to borrowers and depositors. In order to compete, the Bank relies upon personal contacts by the officers, directors and employees of the Bank to establish and maintain relationships with Bank customers. The Bank focuses its efforts on the needs of individuals and small and medium-sized businesses. In the event there are customers whose loan demands exceed the Bank's lending limit, the Bank will seek to arrange for such loans on a participation basis with other financial institutions and intermediaries. The Bank will also assist those customers requiring other services not offered by the Bank to obtain such services from its correspondent banks. Registrant believes that a portion of the Bank's customer base is derived from customers who were dissatisfied with the level of service provided at larger financial institutions. While some of such customers have followed officers of those institutions who were hired by the Bank, others were attracted to the Bank by calling programs of its officers and referrals from other customers. The Bank has sought, in the past, and intends to continue in the future, to hire customer contact officers who have good relationships with desirable customers. These personal relationships, provision of a high level of customer services, and referrals from satisfied customers, form the basis of the Bank's competitive approach, as opposed to advertising, rate competition or the development of proprietary banking products, services or programs. In the past, the principal competition for deposits and loans have been other depository institutions. However, now the Bank also competes with other financial intermediaries such as brokerage houses offering investment vehicles to the general public. Other entities, both public and private, seeking to raise capital through the issuance and sale of debt or equity securities are also competitors with banks and savings and loan associations in the acquisition of deposits. Supervision and Regulation The Holding Company, UBS, as a Pennsylvania business corporation, is subject to the jurisdiction of the Securities and Exchange Commission (the "SEC") and of state securities commissions for matters relating to the offering and sale of its securities. Accordingly, if UBS wishes to issue additional shares of its Common Stock, in order, for example, to raise capital or to grant stock options, UBS will have to comply with the registration requirements of the Securities Act of 1933 as amended and the applicable states securities laws, or find an applicable exemption from registration. UBS is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and to supervision by the Federal Reserve Board. The BHC Act requires UBS to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than 5% of the voting shares of any corporation, including another bank. In addition, the BHC Act prohibits UBS from acquiring more than 5% of the voting shares of, or interest in, or all or substantially all of the assets of, any bank located outside Pennsylvania, unless such an acquisition is specifically authorized bylaws of the state in which such bank is located. A bank holding company also is prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any such company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the Federal Reserve Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. 5 As a bank holding company, UBS is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may also make examinations of the holding company and any or all of subsidiaries. Further, under Section 106 of the 1970 amendments to the BHC Act and the Federal Reserve Board's regulation, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit or provision of credit of any property or services. The so called "anti-tying" provisions state generally that a bank may not extend credit, lease, sell property or furnish any service to a customer on the condition that the customer obtain additional credit or service from the bank, its bank holding company or any other subsidiary of its bank holding company, or on the condition that the customer not obtain other credit or services from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act and by state banking laws on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company and on taking of such stock or securities as collateral for loans to any borrower. Under Pennsylvania law, UBS is permitted to control an unlimited number of banks. However, UBS would be required under the BHC Act to obtain the prior approval of the Federal Reserve Board before acquiring all or substantially all of the assets of any bank, or acquiring ownership or control of any voting shares of any other than the Bank, if, after such acquisition, would control more than 5% of the voting shares of such bank. The Bank. The deposits of United Bank of Philadelphia are insured by the FDIC. The Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and by the FDIC. In addition, the Bank is subject to a variety of local, state and federal laws that affect its operation. Under the Pennsylvania Banking Code of 1965, as amended, the ("Code"), the Registrant has been permitted to control an unlimited number of banks. However, the Registrant would be required under the BHC Act to obtain the prior approval of the Federal Reserve Board before it could acquire all or substantially all of the assets of any bank, or acquiring ownership or control of any voting shares of any bank other than the Bank, if, after such acquisition, the registrant would own or control more than 5 percent of the voting shares of such bank. The BHC Act has been amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 which authorizes bank holding companies, subject to certain limitations and restrictions, to acquire banks located in any state. In 1995, the Code was amended to harmonize Pennsylvania law with the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable Pennsylvania institutions to participate fully in interstate banking and to remove obstacles to the choice by banks from other states engaged in interstate banking to select Pennsylvania as a head office location. Some of the more salient features of the amendment are described below. A bank holding company located in Pennsylvania, another state, the District of Columbia or a territory or possession of the United States may control one or more banks, bank and trust companies, national banks, interstate banks and, with the prior written approval of the Pennsylvania Department of Banking, may acquire control of a bank and trust company or a national bank located in Pennsylvania. A Pennsylvania-chartered institution may maintain branches in any other state, the District of Columbia, or a territory or possession of the United States upon the written approval of the Pennsylvania Department of Banking. Finally, a banking institution existing under the laws of another jurisdiction may establish a branch in Pennsylvania if the laws of the jurisdiction in which it is located permit a Pennsylvania-chartered institution or a national bank located in Pennsylvania to establish and maintain a branch in such jurisdiction on substantially the same terms and conditions. 6 In 1995, the Pennsylvania General Assembly enacted the Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act which, among other things, provides protection to lenders from environmental liability and remediation costs under the environmental laws for releases and contamination caused by others. A lender who engages in activities involved in the routine practices of commercial lending, including, but not limited to, the providing of financial services, holding of security interests, workout practices, foreclosure or the recovery of funds from the sale of property shall not be liable under the environmental acts or common law equivalents to the Pennsylvania Department of Environmental resources or to any other person by virtue of the fact that the lender engages in such commercial lending practices. A lender, however, will be liable if it, its employees or agents, directly cause an immediate release or directly exacerbate a release of regulated substances on or from the property, or knowingly and willfully compelled the borrower to commit an action which caused such release or violation of an environmental act. The Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act, however, does not limit federal liability which still exists under certain circumstances. A subsidiary bank of a holding company is subject to certain restrictions imposed by the Federal Reserve Act, as amended, on any extensions of credit to the bank holding company or its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on taking such stock or securities as collateral for loans. The Federal Reserve Act, as amended, and Federal Reserve Board regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person who becomes a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship. Federal law also prohibits the acquisition of control of a bank holding company without prior notice to certain federal bank regulators. Control is defined for this purpose as the power, directly or indirectly, to direct the management or policies of the bank or bank holding company or to vote 25% or more of any class of voting securities of the bank holding company. From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Bank. It cannot be predicted whether any such legislation will be adopted or how such legislation would affect the business of the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank's business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. Because the Bank is a member bank of the Federal Reserve System, the Federal Reserve Board possesses the power to prohibit institutions regulated by it (such as the Bank) from engaging in any activity that would be an unsafe and unsound banking practice or in violation of applicable law. Moreover, the Federal Reserve Board is: (i) empowered to issue cease-and-desist or civil money penalty orders against the Bank or its executive officers, directors and/or principal shareholders based on violations of law or unsafe and unsound banking practices; (ii) authorized to remove executive officers who have participated in such violations or unsound practices; (iii) may restrict lending by the Bank to its executive officers, directors, principal shareholders or related interests thereof; (iv)may restrict management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area. Additionally, the Bank Control Act provides that no person may acquire control of the Bank unless the Federal Reserve Board has been given 60-days prior written notice and within that time has not disapproved the acquisition or extended the period for disapproval. 7 In April 1995, regulators revised the Community Reinvestment Act ("CRA") with an emphasis on performance over process and documentation. Under the revised rules, the five-point rating scale is still utilized by examiners to assign a numerical score for a bank's performance in each of three areas: lending, service and investment. Under the CRA, the FDIC is required to: (i) assess the records of all financial institutions regulated by it to determine if these institutions are meeting the credit needs of the community (including low-and moderate-income neighborhoods) which they serve, and (ii) take this record into account in its evaluation of any application made by any such institutions for, among other things, approval of a branch or other deposit facility, office relocation, a merger or an acquisition of bank shares. The CRA also requires the federal banking agencies to make public disclosures of their evaluation of each bank's record of meeting the credit needs of its entire community, including low and moderate income neighborhoods. This evaluation will include a descriptive rate ("outstanding," "satisfactory," "needs to improve" or "substantial noncompliance") and a statement describing the basis for the rating. After its most recent examination of the Bank under CRA, the FDIC gave the Bank a CRA rating of "Outstanding". Under the Bank Secrecy Act ("BSA"), banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions in any one day of which the Bank is aware that exceed $10,000 in the aggregate or other lesser amounts. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 The Bank believes that further merger activity within Pennsylvania is likely to occur in the future, resulting in increased concentration levels in banking markets within Pennsylvania and other significant changes in the competitive environment. The Riegle-Neal allows adequately capitalized and managed bank holding companies to acquire banks in any state starting one year after enactment (September 29, 1995). Another provision of the Riegle-Neal Act allows interstate merger transactions beginning June 1, 1997. States are permitted, however, to pass legislation providing for either earlier approval of mergers with out-of-state banks, or "opting-out" of interstate mergers entirely. Through interstate merger transactions, banks will be able to acquire branches of out-of-state banks by converting their offices into branches of the resulting bank. The Riegle-Neal Act provides that it will be the exclusive means for bank holding companies to obtain interstate branches. Under the Riegle-Neal Act, banks may establish and operate a "de novo branch" in any State that "opts-in" to de novo branching. Foreign banks are allowed to operate branches, either de novo or by merger. These branches can operate to the same extent that the establishment and operation of such branches would be permitted if the foreign bank were a national bank or state bank. All these changes are expected to intensify competition in local, regional and national banking markets. The Pennsylvania Banking Code has been amended to enable Pennsylvania institutions to participate fully in interstate banking (see discussion above). Federal Deposit Insurance Corporation Act of 1991 GENERAL. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDIC Improvement Act") includes several provisions that have a direct impact on the Bank. The most significant of these provisions are discussed below. In order to minimize losses to the deposit insurance funds, the FDIC Improvement Act establishes a format to monitor FDIC-insured institutions and to enable prompt corrective action by the appropriate federal supervisory agency if an institution begins to experience any difficulty. The FDIC Improvement Act establishes five "capital" categories. They are: (1) well capitalized, (2) adequately capitalized, (3)undercapitalized, (4) significantly undercapitalized, and (5) critically undercapitalized. The overall goal of these new capital measures is to impose more scrutiny and operational restrictions on banks as they descend the capital categories from well capitalized to critically undercapitalized. Under Current regulations, a "well-capitalized" institution would be one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio, a 5% Tier 1 Leverage Ratio, and is not subject to any written order or final directive by its regulatory agency to meet and maintain a specific capital level. 8 An "adequately capitalized" institution would be one that meets the required minimum capital levels, but does not meet the definition of a "well-capitalized" institution. The existing capital rules generally require banks to maintain a Tier 1 Leverage Ratio of at least 4% and an 8% total risk-based capital ratio. Since the risk-based capital requirement to be in the form of Tier 1 capital, this also will mean that a bank would need to maintain at least 4% Tier 1 risk-based capital ratio. An institution must meet each of the required minimum capital levels in order to be deemed "adequately capitalized." The most recent notification dated January 13,2001, from the Federal Reserve authorities categorized the Bank as "adequately capitalized" under the regulatory framework for prompt and corrective action. An "undercapitalized" institution is one that fails to meet one or more of the required minimum capital levels for an "adequately capitalized" institution. Under the FDIC Improvement Act, an "undercapitalized" institution must file a capital restoration plan and is automatically subject to restrictions on dividends, management fees and asset growth. In addition, the institution is prohibited from making acquisitions, opening new branches or engaging in new lines of business without the prior approval of its primary federal regulator. A number of other restrictions may be imposed. A "critically undercapitalized" institution is one that has a tangible equity (Tier 1 capital) ratio of 2% or less. In addition to the same restrictions and prohibitions that apply to "undercapitalized" and "significantly undercapitalized" institutions, any institution that becomes "critically undercapitalized" is prohibited from taking the following actions without the prior written approval of its primary federal supervisory agency: engaging in any material transactions other than in the usual course of business; extending credit for highly leveraged transactions; amending its charter or bylaws; making any material changes in accounting methods; engaging in certain transactions with affiliates; paying excessive compensation or bonuses; and paying interest on liabilities exceeding the prevailing rates in the institution's market area. In addition, a "critically undercapitalized" institution is prohibited from paying interest or principal on its subordinated debt and is subject to being placed in conservatorship or receivership if its tangible equity capital level is not increased within certain mandated time frames. Management cannot anticipate what changes Congress may enact, or, if enacted, their impact on UBS's financial position and reported results of operation. Financial Services Act of 1999 On March 11, 2000 the Financial Services Act of 1999 (the "FSA"),sometimes referred to as the Gramm-Leach-Bliley Act, became effective. The FSA repeals provisions of the Glass-Steagall Act, which had prohibited commercial banks and securities firms from affiliating with each other and engaging in each other's businesses. Thus, many of the barriers prohibiting affiliations between commercial banks and securities firms have been eliminated. The FSA amends the Act to allow new "financial holding companies" ("FHC") to offer banking, insurance, securities and other financial products to consumers. Specifically, the FSA amends Section 4 of the Act in order to provide for a framework for the engagement in new financial activities. Bank holding companies may elect to become a financial holding company if all its subsidiary depository institutions are well capitalized and well managed. If these requirements are met, a bank holding company may file a certification to that effect with the Federal Reserve Board and declare that it elects to become a FHC. After the certification and declaration is filed, the FHC may engage either de novo or through an acquisition in any activity that has been determined by the Federal Reserve Board to be financial in nature or incidental to such financial activity. Bank holding companies may engage in financial activities without prior notice to the Federal Reserve Board if those activities qualify under the new list in Section 4(k) of the Act. However, notice must be given to the Federal Reserve Board within 30 days after a FHC has commenced one or more of the financial activities. 9 Under the FSA, a bank subject to various requirements is permitted to engage through "financial subsidiaries" in certain financial activities permissible for affiliates of FHCs. However, to be able to engage in such activities the bank must continue to be well capitalized and well managed and receive at least a "satisfactory" rating in its most recent Community Reinvestment Act examination. UBS cannot be certain of the effect of the foregoing recently enacted legislation on its business, although there is likely to be consolidation among financial services institutions and increased competition for UBS. Privacy of Consumer Financial Information The FSA also a contains a provision designed to protect the privacy of each consumer's financial information in a financial institution. Pursuant to the requirements of the FSA, the financial institution regulators (the "regulators") have effective November 13, 2000, promulgated final regulations (the "regulations") intended to better protect the privacy of a consumer's financial information maintained in financial institutions. Compliance with the regulations are optional until July 1 2001. The regulations are designed to prevent financial institutions, such as the Bank, from disclosing a consumer's nonpublic personal information to third parties that are not affiliated with the financial institution. However, financial institutions can share a customer's personal information or information about business with their affiliated companies. The regulations also provide that financial institutions can disclose nonpublic personal information to nonaffiliated third parties for marketing purposes but the financial institution must provide a description of its privacy policies to the consumers and give the consumers an opportunity to opt-out of such disclosure and, thus, prevent disclosure by the financial institution of the consumer's nonpublic personal information to nonaffiliated third parties. The regulations, among other things, provide guidance concerning what are "nonpublic personal information", "consumers", and "customers", as well as about the required timing for notices to customers and the means by which customers can exercise their right to opt-out of disclosure of their personal information. These privacy regulations will affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. Although it is not possible at this time to assess the impact of the privacy regulations on financial institutions or the Bank, the Bank does not believe the privacy regulations will have a material adverse impact on its operations in the near term. Nevertheless, the implementation of the privacy regulations have and will continue to require significant effort by the staff for the Bank and UBS. Consumer Protection Rules - Sale of Insurance Products In addition, as mandated by Section 305 of the FSA, the regulators have published consumer protection rules (the "Rules") which apply to the retail sales practices, solicitation, advertising or offers of insurance products, including annuities, by depository institutions such as Bank and their subsidiaries. The Rules are proposed to be effective on April 1, 2001. In very brief summary the Rules provide, that before the sale of insurance or annuity products can be completed, disclosures must be made that state that such insurance products, are not deposits or other obligation of or guaranteed by the FDIC or any other agency of the United States, the Bank or its affiliates. In the case of an insurance product, including an annuity, that involves an investment risk, that there is an investment risk involved with the product, including a possible loss of value. The Rules also provide that the Bank may not condition an extension of credit on the consumer's purchase of an insurance product or annuity from Bank or its affiliates or on the consumer's agreement not obtain or a prohibition on the consumer obtaining an insurance product or annuity from an unaffiliated entity. 10 The Rules also requires formal acknowledgment from the consumer that such disclosures have been received. In addition, to the extent practical, the Bank must keep insurance and annuity sales activities physically separate from the areas where retail sales are routinely accepted from the general public. The Bank currently does not market insurance product. The Rules will significantly affect the manner in which the Bank would market insurance products, if the Bank does so in the future. Governmental Policies and Future Legislation As the enactment of the FSA confirms, from time to time, various proposals are made in the United States Congress as well as Pennsylvania legislature and by various bank regulatory authorities which would alter the powers of, and place restrictions on, different types of bank organizations. Among current proposals which could be significance to UBS or the Bank are the continued liberalization of the restrictions on the acquisition of out-of-state banks by bank holding companies, the expansion of the powers of banks and thrift institutions, the liberalization of the restrictions upon the activities in which bank holding companies may engage, the imposition of limitations on interest rates and service charges, certain consumer legislation and the requirement to provide certain basic banking services. It is impossible to predict whether any of the proposals will be adopted and the impact, if any, of such adoption on the business of UBS or the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States, UBS's business is particularly susceptible to being affected by federal and state legislation and regulations that may increase the costs of doing business. Regulatory Actions. In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written Agreement with its primary regulators with regard to, among other things, achievement of agreed-upon capital levels, implementation of a viable earnings/strategic plan, adequate funding of the allowance for loan losses, the completion of a management review and succession plan, and improvement in internal controls. See, Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Beginning in 1996, the Bank has operated under a Supervisory Letter from its primary regulator. The Supervisory Letter prevents the Bank and the Company from declaring or paying dividends without the prior written approval of its regulators and prohibits the Bank and Company from issuing long-term debt. ITEM 2 -- PROPERTIES Corporate Headquarters In August 1999, the Bank moved its corporate headquarters from the branch facility at 714 Market Street to 300 North Third Street, Philadelphia, Pennsylvania. In October 2000, the Bank purchased this building from a former officer in conjunction with the settlement of a legal matter for approximately $1.4 million. Before its purchase, the Bank leased this building from this officer under a 10-year non-cancelable capital lease. The facility consists of 25,000 square feet including executive offices, operations, finance, human resource, security and loss prevention functions. The Bank sublets approximately 1400 square feet to Tucci & Tannenbaum, P.C. Market Street Branch The Bank's Market Street Branch is located on the first floor of a multi-tenant retail and commercial office building at 714 Market Street, Philadelphia, Pennsylvania. The Bank occupies approximately 5,700 square feet of space pursuant to a lease that expires on February 28, 2002. The lease has renewal options for two five-year periods and is subject to escalation clauses. The first floor contains a banking lobby, the vault and customer service area. The aggregate monthly rent for this location is $9,069. 11 Mt. Airy Branch The Bank operates a branch at 1620 Wadsworth Avenue, in the Mt. Airy section of Philadelphia. This facility, comprising a retail banking lobby, teller area, offices, vault and storage space is currently leased at a monthly rental of $3,375. Center City Branch The Bank operates a branch location at Two Penn Center, 15th Street and JFK Boulevard, Philadelphia, Pennsylvania. The Bank leases approximately 4,769 square feet at its Two Penn Center location. The space includes lobby, teller area, customer service area, primary lending area and administrative offices, as well as a vault. The aggregate monthly rent for this location is $13,115. Frankford Branch In 1995, the Bank purchased a branch facility at 4806 Frankford Avenue. In September 2000, the Bank closed this facility. It is expected to be sold in during 2001. West Girard Branch The Bank leases a facility located at 2836 West Girard Avenue. The branch operations of this facility were discontinued in September 2000. An ATM machine will remain operational at this facility until the April 30, 2001 lease expiration. The aggregate monthly rental for the facility is $1,375. West Philadelphia Branch On July 22, 1996, the Bank acquired a branch location at 3750 Lancaster Avenue from PNC Bank. The facility is comprised of approximately 3,000 square feet. The main floor houses teller and customer service areas, a drive-up teller facility and automated teller machine. The basement provides storage for the facility. The aggregate monthly rental is approximately $2,625 exclusive of taxes, insurance, utilities and janitorial service. University City Branch The Bank leased a branch facility located at 40th and Chestnut Streets, in the University City Section of West Philadelphia from First Union National Bank ("First Union"). This facility was acquired from First Union in September, 1999. In September 2000, the branch operations of this facility were consolidated with the Bank's West Philadelphia branch office. In October 2000, the Bank exercised its option to purchase this facility from First Union and immediately sold it for a gain of approximately $329,000. Progress Plaza Branch The Bank leases a branch facility located at 1015 North Broad Street, Philadelphia, Pennsylvania. The facility comprises a teller and customer service area, lobby and vault. The aggregate monthly rental for this facility is $3,656 per month. 12 ITEM 3 -- LEGAL PROCEEDINGS Monument Financial v. United Bank of Philadelphia A writ of summons was issued at the request of Monument Financial Group, Inc. and Ronald Hatfield, respectively, an United Bank of Philadelphia (the "Bank") account holder and its principal (collectively the "Plaintiffs") to commence an action against the Bank in the Court of Common Pleas, Philadelphia County on June 28,1999. The suit involves the processing of account transactions in alleged non-compliance with the deposit contract. This conduct by the Bank allegedly resulted in a loss to the Plaintiffs in an undetermined amount. The Plaintiffs filed a complaint on July 28, 1999. This action was voluntarily dismissed by the Plaintiffs on the February 4, 2000. William Jairett et al v. First Montauk Securities Corp., et al A complaint was filed in the United States District Court for the Eastern District of Pennsylvania by William Jairett and others against Ronald Hatfield and certain related parties (collectively the " Hatfield Defendants"), the Monument Financial Group, Inc ("Monument Financial") as well as United Bank of Philadelphia (the "Bank"). In summary the alleged claims against the Bank are that the Bank failed to properly disbursed funds from the Monument Financial deposit account maintained with the Bank, because the Bank disbursed funds, in noncompliance with the deposit contract due to the failure to require the necessary signatures needed to authorize disbursements and withdrawals from the account. The Court has recently granted, in part, a motion to further amend an amended answer and cross claim by the Hatfield Defendants and Monument Financial to include claims of fraud and misrepresentation and conspiracy against the Bank and other defendants but has denied a motion for leave to amend to include a cross claim for tortuous interference against the Bank and others. The Bank believes that certain insurance coverage is available to it to provide partial protection against any loss by the Bank due to these claims and to defray part of the legal fees for defense against the claims and the Bank is in the process of determining the complete extent of its insurance coverage. The Bank intends to vigorously defend the claims which have been made against it. An action, similar to the federal court action, has been filed against the Bank and the others defendants in the Common Pleas Court of Philadelphia making allegations similar to those in the Jairett litigation. That action was filed to toll the statute of limitations in the event the federal litigation was dismissed. At this time the parties are not actively pursuing the Common Pleas Court litigation. Chappell v. United Bank of Philadelphia On May 26, 2000, upon receipt of independent consultant reports confirming certain conduct engaged in by Emma C. Chappell, United Bancshares' former Chairman, President, and CEO of the United Bancshares and the Bank, Emma C. Chappell's employment was terminated. On June 29, 2000, Emma C. Chappell filed a demand for arbitration seeking certain contractual payments. In July 2000, United Bancshares responded to the demand for arbitration and separately commenced a lawsuit in the United States District Court for the Eastern District of Pennsylvania seeking damages arising from transactions and occurrences relating to Emma C. Chappell's April 1999 acquisition of the office building rented by United Bancshares. The parties (ECC Properties/Emma C. Chappell and United Bancshares) reached a settlement on October 16, 2000 through which United Bancshares obtained title to the office building and several adjacent properties for $1.34 million, stopped paying rent to its former Chairman and the parties released each other from all other claims or disputes. In addition, this settlement included Emma Chappell's resignation from United Bancshares'/United Bank of Philadelphia Board of Directors. 13 Rococo LLC v. United Bank of Philadelphia On May 15, 2000, Rococo LLC, the contractor of W. T. Development Company, the Bank's borrower, filed a complaint in the Court of Common Pleas of Delaware County. The complaint seeks damages from the W. T. Development Company and Bonsall Village, Inc. partnership developers of the residential construction project known as Bonsall Village, for alleged nonpayment of construction invoices and also seeks damages from the Bank of $34,474 alleging that the Bank acted in concert with W. T. Development Company with respect to nonpayment of certain of those invoices. The Bank has responded to an amended complaint and the Bank believes that it has substantial defenses and will vigorously contest the claims in the complaint. While discovery has not begun, based on the preliminary information which has been gathered, the Bank believes that the claims against it are not well founded. In March of 2001, W. T. Development Company and Bonsall Village, Inc., the Bank's codefendants in the litigation, filed a petition to obtain leave of court to file a crossclaim against the Bank seeking damages against he Bank for its alleged failure to honor its commitment to finance the phased construction of the Bonsall Village project, as a result of which W. T. Development Company and Bonsall Village, Inc. allegedly were unable to fulfill their obligations to the plaintiff, Rococo L.L.C. If the Bank is found liable on such crossclaim the codefendants will seek to hold the Bank liable for any damages due the plaintiff, Rococo, L.L.C., from the codefendants. The Bank believes that it has substantial defenses against such crossclaim and will vigorously contest those claims. NO OTHER MATERIAL CLAIMS HAVE BEEN INSTITUTED OR THREATENED BY OR AGAINST REGISTRANT OR ITS AFFILIATES OTHER THAN IN THE ORDINARY COURSE OF BUSINESS. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matters were submitted to a vote of Registrant's security holders since the Registrant's last periodic filing. 1. On October 27, 2000 the Annual Meeting of shareholders of UBS was held. At the Annual Meeting Mr. L. Armstead Edwards, Ms. Marionette Y. Frazier, and Ernest L. Wright were elected directors, with the voting for those directors, as follows: L. Armstead Edwards For 48.19% Against 0% Abstain 2.83% 401,630 0 23,550 Marionette Y. Frazier For 48.18% Against 0% Abstain 2.84% 401,506 0 23,675 Ernest L. Wright For 48.05% Against 0% Abstain 2.96% 400,506 0 24,675 Refer to page 30 for a list of individuals who continued in office as directors of UBS. 2. The UBS shareholders ratified the Board of Directors selection of Grant Thornton, LLP as UBS's independent auditors for the year 1999, with the voting for such ratification, as follows: For 50.24% Against .13% Abstain .65% 418,699 1,072 5,410 3. The UBS shareholders ratified the amendment of UBS's Articles of Incorporation to expand the authorized shares of Class B Common Stock by 500,000 shares, with the voting for such ratification, as follows: For 47.70% Against 2.37% Abstain .94% 397,531 19,790 7,860 PART II ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock As of March 28, 2001 there were 3,170 shareholders of record of UBS's Common Stock. The Common Stock is not traded on any national exchange or otherwise traded in any recognizable market. Prior to December 31, 1993, the Bank conducted a limited offering (the "Offering") pursuant to a registration exemption provided in Section 3(a)(2) of the Securities Exchange Act of 1933 (the "Act"). The price-per-share during the Offering was $12.00. Prior to the Offering, the Bank conducted an initial offering of the Common Stock (the "Initial Offering") at $10.00 per share pursuant to the same registration exemption. 14 Beginning April 24, 1995, Registrant commenced a private offering solely to existing stockholders of 250,000 shares of its common stock and 750,000 warrants to purchase a share of the common stock. 18,465 shares and 55,395 warrants have been sold pursuant to this offering. Each unit, consisting of one share of common stock and three warrants to purchase one share of common stock in each of three subsequent years (total 3 shares), were issued at $12.00 per unit. The warrant exercise price was $8.00 per share for the 1996 Warrant, was $9.00 per share for the 1997 Warrant, and was $10.00 per share for the 1998 Warrant. The units were offered pursuant to an exemption from registration contained in section 4(2) and 3(a)(5) of the Act. No underwriters were used and no commissions were paid as a result of this offering. The offering closed on December 31, 1995. In December 1995, the Registrant sold 41,666 shares of Registrant's common stock in an offering exempt from registration pursuant to section 4(2) of the Act at a purchase price of $12.00 per share. This sale was accomplished pursuant to a commitment to purchase these securities issued in December 1994. Beginning May 10, 1996, Registrant commenced a private offering solely to existing stockholders of 250,000 shares of its common stock. 6,934 shares were sold pursuant to this offering. The stock was offered pursuant to an exemption from registration contained in 4(2) and 3(a)(5) of the Act. During 1996, the Registrant received, $55,536 and issued 6,942 shares as a result of warrant exercises by shareholders to purchase common stock at a price of $8.00 per share. Beginning May 19, 1997, Registrant commenced an offering solely to existing stockholders of 250,000 shares of its common stock, initially on a pro-rata basis. 3,550 shares were sold pursuant to this offering. The stock was offered pursuant to an exemption contained in 4(2) and 3(a)(5) of the Act. During 1997, the Registrant received $34,710 and issued 3,856 shares as a result of exercise of the 1997 warrants at $9.00 per share. During 1998, Registrant received $14,922 as a result of the exercise of the 1998 Warrants at $10.00 per share and sold 6,492 shares of common stock as a result to its offering solely to stockholders of record. This offering was exempt pursuant to an exemption from registration contained in sections 4(2) and 3(a)(5) of the Act. As of March 31, 1999, there were no warrants outstanding to purchase common stock of the Bank. In June 2000 and December 2000, respectively, the Bank received $411,809 and $436,212 and issued 34,317 and 36,351 shares, respectively, as a result of the purchase of common stock by members of the Bank's board of directors in a limited offering at a price of $12.00 per share. Class B Common Stock On September 30, 1998, the Registrant filed Articles of Amendment to its Articles of Incorporation with the Secretary of State of the Commonwealth of Pennsylvania. The filing amended the Articles of Incorporation of the Registrant to designate a sub-class of its Common Stock as Class B Common Stock. Pursuant to the terms of the amendment, holders of the Class B Common Stock have all rights of Common Stockholders, with the exception of voting rights. Effective October 9, 1998, the Registrant sold 83,333 shares of its Class B Common Stock to First Union Corporation ("First Union") for a purchase price of $12 per share. The sale was exempt from registration requirements pursuant to section 4(2) of the Act. Effective February 8, 1999, the Registrant sold 83,333 shares of its Class B Common Stock to First Union for a purchase price of $12 per share. The sale was exempt from registration requirements pursuant to section 4(2) of the Act. Effective September 23, 1999, Registrant sold 25, 000 shares of its Class B Common Stock to First Union Corporation at a purchase price of $12 per share. The sale was exempt from registration pursuant to section 4(2) of the Act. Effective December, 1999, the Registrant sold 5,000 shares of its Class B Common Stock to an individual for a purchase price of $12 per share. The sale was exempt from registration pursuant to section 4(2) of the Act. Series A Preferred Stock Registrant has engaged in the sale of Series A Preferred Stock which has the characteristics identified in the UBS Articles of Incorporation incorporated by reference as an Exhibit hereto pursuant to an exemption from registration contained in Section 4(2) of the Securities Act. 15 Dividends Registrant has not, during the three most recent fiscal periods declared or paid any cash or stock dividends. The Pennsylvania Banking Code of 1965, as amended, provides that cash dividends may be declared and paid only from accumulated net earnings and that, prior to the declaration of any dividend, if the surplus of a bank is less than the amount of its capital, the bank shall, until surplus is equal to such amount, transfer to surplus an amount which is at least ten percent of the net earnings of the bank for the period since the end of the last fiscal year or any shorter period since the declaration of a dividend. If the surplus of a bank is less than 50% of the amount of its capital, no dividend may be declared or paid by the Bank without the prior approval of the Pennsylvania Department of Banking. Under the Federal Reserve Act, if a bank has sustained losses equal to or exceeding its undivided profits then on hand, no dividend shall be paid, and no dividends can ever be paid in an amount greater than such bank's net profits less losses and bad debts. Cash dividends must be approved by the Board if the total of all cash dividends declared by a bank in any calendar year, including the proposed cash dividend, exceeds the total of the Bank's net profits for that year plus its retained net profits from the preceding two years less any required transfers to surplus or to a fund for the retirement of preferred stock. Under the Federal Reserve Act, the Board has the power to prohibit the payment of cash dividends by a bank if it determines that such a payment would be an unsafe or unsound banking practice. As a result of this regulation, the Bank, and therefore the Registrant, whose only source of income is dividends from the Bank, will be unable to pay any dividends while an accumulated deficit exists. The Registrant does not anticipate that dividends will be paid for the foreseeable future. The Federal Deposit Insurance Act generally prohibits all payments of dividends by a bank which is in default of any assessment to the FDIC. In April 1993, the shareholders of United Bank of Philadelphia (the Bank) voted in favor of the formation of a bank holding company, United Bancshares, Inc. (the Company). Accordingly, in October 1994 the Company became a bank holding company in conjunction with the issuance of its common shares in exchange for the common shares of the Bank. The financial statements are prepared on a consolidated basis to include the accounts of the Company and the Bank. The purpose of this discussion is to focus on information about the Bank's financial condition and results of operations which is not otherwise apparent from the consolidated financial statements included in this annual report. This discussion and analysis should be read in conjunction with the financial statements presented elsewhere in this report. ITEM 6. -- SELECTED FINANCIAL DATA Selected Financial Data
Year ended December 31, ----------------------------------------------------------------------- (Dollars in thousands, except per share data) 2000 1999 1998 1997 1996 - --------------------------------------------- ---- ---- ---- ---- ---- Net interest income ............... $ 5,415 $ 5,264 $ 5,241 $ 4,744 $ 4,259 Provision for loan losses ......... 565 1,007 351 97 85 Noninterest income ................ 3,197 2,226 1,816 1,517 1,118 Noninterest expense ............... 8,801 7,714 6,696 5,983 6,123 Net income (loss) ................. (755) (1,230) 10 181 (832) Net income (loss) per share - basic (0.72) (1.24) 0.01 0.22 (1.03) Balance sheet totals: Total assets ................... $ 93,533 $ 137,249 $121,983 $108,914 $ 96,769 Net loans ...................... 44,743 59,444 57,271 73,694 69,097 Investment securities .......... 35,014 51,433 43,196 18,253 14,460 Deposits ....................... 83,238 124,766 109,063 99,427 88,761 Shareholders' equity ........... 9,350 9,027 8,904 7,059 6,759 Ratios: Equity to assets ............. 7.74% 8.07% 6.40% 6.61% 7.45% Return on assets ............. (0.63)% (1.03)% 0.01% 0.18% (0.89)% Return on equity ............. (8.08)% (12.71)% 0.14% 2.69% (12.02)%
16 ITEM 7. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Summary The Company recorded a net loss of approximately $755,000 for 2000 ($0.72 per share) compared to a net loss of approximately $1,230,000 ($1.24 per share) for 1999 and net income of approximately $10,000 ($0.01 per share) in 1998. During 2000, the Bank's financial results were favorably impacted by a lower level of loan loss provisions compared to 1999 as well as the implementation of many expense control measures. A more detailed explanation for each component of earnings is included in the sections below. During 2000, management implemented an asset reduction/capital improvement plan that resulted in a $41.5 million decline in the Bank's deposit levels. The Bank now faces the challenge of re-building the level of earning assets to generate core profitability while maintaining adequate capital levels and meeting the Bank's mission of serving the un-served communities in the Philadelphia region. The allowance for loan losses as a percentage of total loans decreased from 2.57% in 1999 to 1.24% in 2000. This decrease is attributable to aggressive charge-offs of problem loans during 2000. The Bank had made significant provisions for many of these loans in prior years. Table 1--Average Balances, Rates, and Interest Income and Expense Summary
DECEMBER 31, ----------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------ --------------------------- -------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------------------------------ --------------------------- -------------------------- (Dollars in thousands) Assets: Interest-earning assets: Loans .............................. $ 55,262 $4,655 8.42% $ 68,526 $5,589 8.16% $ 71,338 $6,270 8.79% Investment securities held-to-maturity ............... 28,659 1,875 6.54 21,692 1,226 5.65 11,436 746 6.52 Investment securities available-for-sale ............. 18,044 1,284 7.12 9,275 612 6.60 8,392 557 6.64 Federal funds sold ................. 5,518 339 6.15 13,753 681 4.95 12,959 688 5.31 -------- ------- -------- ------ -------- ------ Total interest-earning assets . 107,483 8,153 7.59 113,246 8,108 7.16 104,125 8,261 7.93 Noninterest-earning assets: Cash and due from banks ............ 5,339 2,835 4,646 Premises and equipment, net ........ 3,671 1,880 1,760 Other assets ....................... 4,494 3,366 3,576 Less allowance for loan losses ..... (562) (1,567) (565) -------- -------- -------- Total ......................... $120,425 $119,760 $113,542 ======== ======== ======== Liabilities and shareholders' equity: Interest-bearing liabilities: Demand deposits ................... $ 19,851 602 3.03% $ 19,892 569 2.86% $ 22,622 620 2.74% Savings deposits .................. 30,776 497 1.61 26,744 440 1.65 23,283 428 1.84 Time deposits ..................... 28,531 1,387 4.86 35,020 1,695 4.84 37,365 1,899 5.08 Other borrowed funds .............. 1,925 252 13.09 1,246 140 11.24 1,521 73 4.85 -------- ------- -------- ------ -------- ------ Total interest- bearing liabilities ...... 81,083 2,738 3.38 82,902 2,844 3.43 84,791 3,020 3.56 Noninterest-bearing liabilities: Demand deposits ................... 27,567 24,019 19,740 Other ............................. 3,233 3,177 1,747 Shareholders' equity ............... 8,542 9,662 7,264 -------- -------- -------- Total ........................ $120,425 $119,760 $113,542 ======== ======== ======== Net interest earnings .............. $5,415 $5,264 $5,241 Net yield on interest-earning assets 5.04% 4.65% 5.03%
For purposes of computing the average balance, loans are not reduced for nonperforming loans. 17 Net Interest Income Net interest income is an effective measure of how well management has balanced the Bank's interest rate-sensitive assets and liabilities. Net interest income, the difference between (a) interest and fees on interest-earning assets and (b) interest paid on interest-bearing liabilities, is a significant component of the Bank's earnings. Changes in net interest income result primarily from increases or decreases in the average balances of interest-earning assets, the availability of particular sources of funds and changes in prevailing interest rates. Net interest income for 2000 totaled $5.4 million, an increase of $151,000 or 2.86%, compared to 1999. Net interest income in 1999 totaled $5.3 million, an increase of $23,000, or 0.45%, compared to 1998. Table 2--Rate-Volume Analysis of Changes in Net Interest Income
2000 COMPARED TO 1999 1999 COMPARED TO 1998 ------------------------------------- ------------------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ------------------------------------- ------------------------------------- VOLUME RATE NET VOLUME RATE NET ------------------------------------- ------------------------------------- (Dollars in thousands) Interest earned on: Loans .................................. $(673) $(261) $(934) $(245) $(436) $(681) Investment securities held-to-maturity . 646 3 649 569 (89) 480 Investment securities available-for-sale 605 67 672 37 18 55 Federal funds sold ..................... (450) 108 (342) 26 (33) (7) ----- ----- ----- ----- ----- ----- Total interest-earning assets ......... 128 (83) 45 387 (540) (153) ----- ----- ----- ----- ----- ----- Interest paid on: Demand deposits ........................ (33) 66 33 (67) 16 (51) Savings deposits ...................... 109 (52) 57 58 (46) 12 Time deposits .......................... (226) (82) (308) (120) (84) (204) Other borrowed funds ................... 68 44 112 56 11 67 ----- ----- ----- ----- ----- ----- Total interest-bearing liabilities .... (82) (24) (106) (73) (103) (176) ----- ----- ----- ----- ----- ----- Net interest income ................... $ 210 $ (59) $ 151 $ 460 $(437) $ 23 ===== ===== ===== ===== ===== =====
Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances due to the interest sensitivity of consolidated assets and liabilities. In 2000, there was an increase in net interest income of $210,000 due to changes in volume but a decrease of $59,000 due to changes in rate. In 1999, there was an increase in net interest income of $460,000 due to changes in volume but a decrease of $437,000 due to changes in rate. Average earning assets decreased from $113.2 million in 1999 to $107.5 million in 2000 and increased from $104.1 million in 1998 to $113.2 million in 1999. The 1999 growth in earning assets was primarily attributed to the acquisition of $31.5 million in deposits from First Union Corporation in September 1999. The acquired deposits primarily consisted of core noninterest checking deposits and savings deposits. However, to meet capital requirements mandated in its Written Agreement with regulators (Refer to Regulatory Matters below) the Bank implemented an asset reduction/capital improvement plan in 2000 that included the reduction of non-First Union acquired deposits. Beginning in June 2000, the Bank sold higher yielding certificates of deposit to other financial institutions, encouraged some large deposit accountholders to remove deposits, and consolidated three branches in its branch network. The net interest margin of the Bank was 5.04% in 2000, 4.65% in 1999 and 5.03% in 1998. While the prime rate increased 75 basis points during 2000, the Bank did not experience a similar increase in yield on its loan portfolio. This is because much of the Bank's loan portfolio is fixed rate in nature and not related to prime. In addition, during 2000, the average outstanding loan balance declined from $68.5 million to $55.3 million. This decline was related to significant paydowns/payoffs in the purchased automobile loan portfolio of the Bank. Proceeds from these paydowns were used to fund the Bank's asset reduction plan. 18 During 2000, the average federal funds yield was 6.15% compared to 4.95% in 1999 and 5.31% in 1998. During 2000, the average investment in federal funds decreased by $8.2 million. Consistent with its asset reduction/capital improvement plan, the Bank reduced the level of deposits in its "sweep" checking account product which represent high balance short-term deposits. These deposits were typically invested in Federal Funds Sold. The yield on the investment portfolio increased 82 basis points to 6.76% in 2000 compared to 5.94% in 1999 and 6.57% in 1998. In September 1999 when the Bank acquired $31.5 million in deposits from First Union, funds were placed in investment securities to achieve a minimum yield of 7%, thereby, increasing the average yield on the portfolio. The cost of interest-bearing liabilities declined to 3.38% in 2000 compared to 3.43% in 1999 and 3.56% in 1998. Consistent with market conditions, during the last quarter of 1999 and the first quarter of 2000, the Bank reduced the rates it pays on many of its interest-bearing products by as much as 25 basis points. In addition, in June 2000, the Bank sold higher yielding certificates of deposit to other financial institutions which resulted in a reduction in the cost of funds. Provision for Loan Losses The provision is based on management's estimate of the amount needed to maintain an adequate allowance for loan losses. This estimate is based on the review of the loan portfolio, the level of net credit losses, past loan loss experience, the general economic outlook and other factors management feels are appropriate. The provision and allowance for loan losses charged against earnings in 2000 was $565,000 compared to $1,007,003 in 1999 and $350,500 in 1998. Significant provisions were made for the year ended December 31, 1999 for one community development loan and other loan policy changes which required increased provisions. The community development loan was charged-off by June 30, 2000 with the exception of approximately $114,000 related to off-balance sheet risk associated with an outstanding letter of credit. This amount remains fully reserved. In addition, in September 2000, the Bank made provisions for and charged-off loans totaling $498,000. Approximately $267,000 of these loans were guaranteed by the SBA. The Bank continues to work with the Small Business Administration (SBA) to collect on the guarantees associated with these loans. Management believes the level of the allowance for loan losses is adequate as of December 31, 2000. Noninterest Income Noninterest income increased $712,000 in 2000 compared to 1999 and increased $410,000 in 1999 compared to 1998. The amount of the Bank's noninterest income generally reflects the volume of the transactional and other accounts handled by the Bank and includes such fees and charges as low balance account charges, overdrafts, account analysis, and other customer service fees. Customer service fees increased $587,000 in 2000 compared to 1999. This increase was primarily due to growth in fees on deposits because of an increase in minimum balance requirements and other deposit-related fee increases that went into effect on April 15, 2000. In addition, there is a higher level of demand deposit accounts in 2000. A higher level of demand deposit accounts result in more overdraft fees, activity service charges and low balance fees. The Bank also increased its ATM surcharge fees for non-customers from $1.50 to $1.75 in June 2000. To achieve capital ratios as set forth in its Written Agreement with regulatory agencies (Refer to Regulatory Matters below), in June 2000 the Bank sold approximately $6.6 million in certificates of deposit to other financial institutions to reduce its asset size. These transactions resulted in a gain of $253,000. During 2000, the Bank sold approximately $20 million of its investment portfolio to fund the reduction in asset size. The Bank recorded a loss of $200,000 on these sales. In October 2000, the Bank sold one of the branch facilities it acquired from First Union in 1999 for a gain of approximately $329,000. 19 Noninterest Expense Noninterest expense increased $1.1 million, or 14.1%, in 2000 to $8.8 million compared to $7.7 million in 1999 and $6.7 million in 1998. Salaries and benefits increased $113,000, or 3.8%, in 2000 compared to an increase of $407,000, or 15.9%, in 1999. This increase is primarily attributable to raises and additional employees related to the acquisition of deposits/branches from First Union in September 1999. However, in May 2000, the Bank began strategic reductions in staff and job consolidations to reduce the level of personnel expense. The closure/consolidation of three branches in September 2000 resulted in further reductions in this expense during the quarter ended December 31, 2000. Occupancy and equipment expense increased approximately $380,000, or 26.95%, during 2000 compared to an increase of $162,000 or 12.7%, during 1999. The increase during 2000 was primarily attributable to a lease the Bank entered into in July 1999 to house its corporate headquarters including its executive offices and other non-branch operating departments. The Bank leased 25,000 square feet at an average cost of $14.14 per foot until September 2000. In accordance with Financial Accounting Standards Board Statement No. 13, this lease was accounted for as a capital lease in the amount of $1,483,000 as the present value of future minimum lease payments exceeds 90% of the fair market value of the building. In October 2000, the Bank purchased this facility for approximately $1.4 million. This transaction is expected to save the Bank $1.6 million over the remaining 9-year term of the lease it had in place and removes the capital lease obligation. In addition, in conjunction with its acquisition of deposits from First Union, the Bank assumed the leases of four branches, two of which were in close proximity to its existing branches. Due to more favorable characteristics of these branches (i.e. visibility, drive-through, ATM's, etc.), the Bank relocated its branch operations to the acquired facilities. These facilities have higher rental rates. The Bank consolidated two of the acquired branches with its existing branch network and closed its Frankford branch in September 2000. In October 2000, the Bank sold one of the acquired facilities located in West Philadelphia for a gain of approximately $329,000. The Bank's Frankford and West Girard branches have been listed with realtors and are expected to be sold during 2001. Data processing expenses are a result of the management decision of the Bank to outsource a majority of its data processing operations to third party processors. Such expenses are reflective of the high level of accounts being serviced for which the Bank is charged a per account charge by processors. In addition, the Bank uses outside loan servicing companies to service its mortgage, credit card, installment and student loan portfolios. Data processing expenses increased by $108,000, or 12.6%, during 2000 compared to an decrease of $5,000, or 0.6%, in 1999. This increase is primarily attributable to the First Union acquisition related growth in average deposit levels for which the Bank pays outside services to process transactions and provide statement rendering. The Bank continues to study methods by which it may reduce its data processing costs, including but not limited to a consolidation of servicers, in-house processing versus outsourcing, and the renegotiation of existing contracts with servicers. Marketing and public relations expense decreased by $146,000, or 47.9%, in 2000 compared to an increase of $83,000, or 37.5%, in 1999. In June 2000, management implemented an earnings enhancement plan that included a reduction in all nonessential expenses including marketing. As the Bank was in an asset reduction mode, there were no new business initiatives that required marketing. Professional services increased $150,000 or 38.2%, in 2000. This increase was primarily related to fees the Bank paid to attorneys to handle loan related legal matters as well as to negotiate the elements of its Written Agreement with Federal Regulators in February 2000 Office operations and supplies expense increased by $62,000, or 8.7%, in 2000. This increase was primarily a result of the acquisition of branches from First Union in 1999 and the relocation of the corporate headquarters. However, in September 2000, the Bank closed/consolidated branches which resulted in reductions in branch operating costs (i.e. security guards, supplies, etc.) during the quarter ending December 31, 2000. 20 Federal deposit insurance premiums were $169,000 in 2000 compared to $105,000 in 1999 and $82,000 in 1998. FDIC insurance premiums are applied to all financial institutions based on a risk based premium assessment system. Under this system, bank strength is based on three factors: 1) asset quality, 2) capital strength, and 3) management. Premium assessments are then assigned based on the institution's overall rating, with the stronger institutions paying lower rates. The Bank's assessment was based on 1.96 basis points for BIF (Bank Insurance Fund) assessable deposits and SAIF (Savings Insurance Fund) assessable deposits. The increase during 2000, is a result of the perceived risk associated with the Bank's weakening financial condition and declining capital base. All other expenses are reflective of the general cost to do business and compete in the current regulatory environment and maintenance of adequate insurance coverage. FINANCIAL CONDITION Sources and Uses of Funds The Bank's financial condition can be evaluated in terms of trends in its sources and uses of funds. The comparison of average balances in Table 3 indicates how the Bank has managed these elements. Average funding uses decreased approximately $5.8 million, or 5.09%, in 2000 compared to $9.1 million, or 8.76%, in 1999. Table 3--Sources and Use of Funds Trends
2000 1999 1998 --------------------------------- ---------------------------------- ------- INCREASE INCREASE AVERAGE (DECREASE) AVERAGE (DECREASE) AVERAGE BALANCE AMOUNT PERCENT BALANCE AMOUNT PERCENT BALANCE ------- ------ ------- ------- ------ ------- ------- (Dollars in thousands) Funding uses: Loans ................ $ 55,262 $(13,264) (19.36)% $ 68,526 $(2,812) (3.94)% $ 71,338 Investment securities Held-to-maturity .... 28,659 6,967 32.12 21,692 10,256 89.68 11,436 Available-for-sale .. 18,044 8,769 94.54 9,275 883 10.52 8,392 Federal funds sold .. 5,518 (8,235) (59.88) 13,753 794 6.13 12,959 -------- -------- -------- ------- -------- Total uses ........ $107,483 $ (5,763) $113,246 $ 9,121 $104,125 ======== ======== ======== ======= ======== Funding sources: Demand deposits: Noninterest-bearing . $ 27,567 $ 3,548 14.77% $ 24,019 $ 4,279 21.68% $ 19,740 Interest-bearing .... 19,851 (41) (0.21) 19,892 (2,730) (12.07) 22,622 Savings deposits ..... 30,776 4,032 15.08 26,744 3,461 14.86 23,283 Time deposits ........ 28,531 (6,489) (18.53) 35,020 (2,345) (6.28) 37,365 Other borrowed funds . 1,925 679 54.49 1,246 (275) (18.08) 1,521 -------- -------- -------- ------- -------- Total sources ..... $108,650 $ 1,729 $106,921 $ 2,390 $104,531 ======== ======== ======== ======= ========
*Includes held-to-maturity and available-for-sale securities Investment Securities and Other Short-Term Investments The Bank's investment portfolio is classified as either held-to-maturity or available-for-sale. Investments classified as held-to-maturity are carried at amortized cost and are those securities the Bank has both the intent and ability to hold to maturity. Investments classified as available-for-sale are those investments the Bank intends to hold for an indefinite amount of time, but not necessarily to maturity, and are carried at fair value, with the unrealized holding gains and losses reported as a component of shareholders' equity on the balance sheet. 21 Average investment securities and federal funds sold, in the aggregate, increased by $7.5 million, or 16.8%, in 2000 compared to an increase of $11.9 million, or 36.4%, in 1999. The increase in the average balances during 2000 is a result of the acquisition of deposits from First Union in September 1999. These deposits were acquired without corresponding loans and funds were therefore placed in U.S. Government Agency and mortgage-backed securities to maximize the yield. In addition, the Bank invested the funds from paydowns/payoffs in the loan portfolios in similar securities. However, to fund its asset reduction/capital improvement plan, the Bank sold investment securities totaling approximately $20 million during the latter half of 2000. The Bank's investment portfolio primarily consists of mortgage-backed pass-through agency securities, U.S. Treasury securities, and other government-sponsored agency securities. The Bank does not invest in high-risk securities or complex structured notes. As reflected in Table 4, the assumed average maturity of the investment portfolio was 4.4 years at year-end 2000. Approximately 39.3% of the portfolio consists of mortgage-backed pass-through securities that have longer-term contractual maturities but are sometimes paid off/down before maturity or have repricing characteristics that occur before final maturity. The Bank has attempted to minimize the repayment risk (risk of very fast or very slow repayment) associated with these types of securities by investing primarily in a number of seasoned mortgage pools for which there is a repayment history. This history better enables the Bank to project the repayment speeds of these pools. In addition, the Bank has minimized the interest rate risk associated with these mortgage-backed securities by investing in a variety of pools, many of which have variable rates with indices that track closely with the current interest rate environment. In a declining rate environment, the duration of the investment portfolio is significantly shortened because of the high level of callable government agency securities - approximately 60.7% at December 31, 2000. These higher yielding securities are likely to be called as rates trend downward. The result is additional liquidity and a reduction in yield on the portfolio. The Bank is taking steps to combat the impact of the high level of optionality in the portfolio by identifying replacement loans or securities that are fixed rate or perform well when "shock" tested in a declining rate environments. Table 4--Analysis of Investment Securities
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS TEN YEARS ------------------ ------------------ ----------------- ---------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL ------ ----- ------ ----- ------ ----- ------ ----- ----- (Dollars in thousands) Other government securities $ -- --% $ 12,427 6.26% $ 8,336 6.96% $ -- -- $ 20,763 Mutual funds 100 6.40 -- -- -- -- -- -- 100 Other investments -- -- -- 406 6.00 -- -- 406 Mortgage-backed securities -- -- -- -- -- -- -- 13,745 ------- -------- ------- ------ -------- Total securities $ 100 $ 12,427 $ 8,742 $ -- $ 35,014 ======= ======== ======= ====== ======== Average maturity 4.4 years
The above table sets forth the maturities of investment securities at December 31, 2000 and the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security). Loans Average loans decreased approximately $13.3 million, or 19.4%, in 2000 compared to a decrease of $2.8 million, or 3.94%, in 1999. Although the Bank purchased a $22 million portfolio of seasoned automobile loans from NationsBank in February 1999, close to 80% of this portfolio had paid down by year-end of 2000. Paydowns in this portfolio are averaging $500,000 per month. In June 2000, the Bank sold approximately $2.1 million in student loans as part of its ongoing strategy to originate and sell these loans to generate gains and minimize its data processing costs. The Bank's mortgage loan portfolio continues to decline because of payoffs/paydowns for which there were no new originations to replace. Further, in September 2000, the Bank charged-off commercial and consumer loans totaling $498,000. Collection of these loans will be pursued through alternative means. These charge-offs were in-line with the Bank's strategy to clear its loan portfolio of any loans for which payment is unlikely. 22 Over-riding all of these factors is that during 2000 the Bank was in an asset reduction/capital improvement mode and a re-organization was underway. As a result, new business was not actively sought. Management believes it is now positioned to expand its business development efforts in the Philadelphia region and has developed strategic plans to incorporate these initiatives. Table 5--Loans Outstanding, Net of Unearned Income
DECEMBER 31, -------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollars in thousands) Commercial and industrial...... $11,429 $13,664 $13,643 $12,095 $10,107 Commercial real estate ........ 652 1,288 1,518 1,515 649 Residential mortgages ......... 22,316 26,237 31,365 35,962 36,622 Consumer loans ................ 10,908 19,822 11,424 22,611 17,340 Loans held-for-sale ........... -- -- -- 1,979 4,906 ------- ------- ------- ------- ------- Total loans ................ $45,305 $61,011 $57,950 $74,162 $69,624 ======= ======= ======= ======= =======
Table 6--Loan Maturities and Interest Sensitivity
WITHIN AFTER ONE BUT AFTER ONE YEAR WITHIN FIVE YEARS TEN YEARS TOTAL -------- ----------------- --------- ----- (Dollars in thousands) Commercial and industrial .............. $ 4,407 $ 4,030 $ 2,992 $11,429 Commercial real estate ................. 114 -- 538 652 Residential mortgages .................. -- -- 22,316 22,316 Consumer loans ......................... 821 7,299 2,788 10,908 ------- ------- ------- ------- Total loans ........................ 5,342 11,329 28,634 45,305 Loans maturing after one year with: Fixed interest rates ................ $34,892 Variable interest rates ............. 10,414
Nonperforming Loans Table 7 reflects the Bank's nonperforming loans for the last five years. The Bank generally determines a loan to be "nonperforming" when interest or principal is past due 90 days or more. If it otherwise appears doubtful that the loan will be repaid, management may consider the loan to be nonperforming before the lapse of 90 days. The Bank's policy is to charge off unsecured loans after 90 days past due. Interest on nonperforming loans ceases to accrue except for loans that are well collateralized and in the process of collection. When a loan is placed on nonaccrual, previously accrued and unpaid interest is generally reversed out of income unless adequate collateral from which to collect the principal of, and interest on, the loan appears to be available. Table 7--Nonperforming Loans
(Dollars in thousands) 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Nonaccrual loans ........................ $453 $2,027 $1,720 $1,179 $800 Interest income included in net income for the year ......................... 20 67 37 14 6 Interest income that would have been recorded under original terms ........ 28 113 189 112 45 Loans past due 90 days and still accruing 34 53 125 306 408
There is no known information about possible credit problems other than those classified as nonaccrual that causes management to be uncertain as to the ability of any borrower to comply with present loan terms. 23 The Bank grants commercial, residential, and consumer loans to customers primarily located in Philadelphia County, Pennsylvania and surrounding counties in the Delaware Valley. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. At December 31, 2000, approximately 38% of the commercial loan portfolio of the Bank was concentrated in loans made to religious organizations. From inception, the Bank has received support in the form of investments and deposits and has developed strong relationships with the Philadelphia region's religious community. Loans made to these organizations were primarily for expansion and repair of church facilities. At December 31, 2000, none of these loans were nonperforming. During 2000, nonaccrual loans decreased to $453,000, down from $2 million at December 31, 1999. This decrease is primarily attributable to the charge-off of one community development construction loan that accounted for approximately $600,000 of the total nonaccrual loans in 1999. In addition, during 2000, the Bank cleared its portfolio by aggressively charging-off other loans for which collectibility was uncertain. At December 31, 2000, approximately $94,000 of the total nonaccrual loans was residential mortgages. The underlying real estate collateral associated with these loans minimizes the risk of loss. Allowance for Loan Losses The allowance for loan losses reflects management's continuing evaluation of the loan portfolio, assessment of economic conditions, the diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount and quality of nonperforming loans. Table 8 presents the allocation of loan losses by major category for the past five years. The specific allocations in any particular category may prove to be excessive or inadequate and consequently may be reallocated in the future to reflect then current conditions. Table 8--Allocation of Allowance for Loan Losses
2000 1999 1998 1997 ------------------------ ---------------------- ----------------------- ---------------------- PERCENT PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS OF LOANS IN EACH IN EACH IN EACH IN EACH CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS ------ ----------- ------ ----------- ------ ----------- ------ ----------- (Dollars in thousands) Commercial and industrial $383 25.23% $ 263 22.40% $272 23.55% $144 16.31% Commercial real estate .. 11 1.44 877 2.11 132 2.62 13 2.04 Residential mortgages ... 102 24.08 144 43.00 55 59.12 180 48.49 Consumer loans .......... 66 49.26 283 32.49 188 19.71 97 33.16 Unallocated ............. -- -- -- -- 32 -- 34 -- ---- ------ ------ ------ ---- ------ ---- ------ $562 100.00% $1,567 100.00% $679 100.00% $468 100.00% ==== ====== ====== ====== ==== ====== ==== ======
Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of the examination. 24 Table 9--Analysis of Allowance for Loan Losses
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollars in thousands) Balance at January 1 $1,567 $ 679 $ 468 $ 528 $ 476 ------ ------- ------- ------- ------- Charge-offs: Commercial and industrial (321) (25) -- (66) (17) Commercial real estate (803) -- -- -- -- Residential mortgages (47) -- (9) -- Consumer loans (597) (315) (180) (160) (25) ------ ------- ------- ------- ------- (1,721) (387) (180) (235) (42) ------ ------- ------- ------- ------- Recoveries - consumer loans 151 268 41 78 9 ------ ------- ------- ------- ------- Net charge-offs (1,570) (119) (139) (157) (33) Provisions charged to operations 565 1,007 350 97 85 ------ ------- ------- ------- ------- Balance at December 31 $ 562 $ 1,567 $ 679 $ 468 $ 528 ====== ======= ======= ======= ======= Ratio of net charge-offs to average loans outstanding 2.84% 0.17% 0.19% 0.23% 0.05%
The amount charged to operations and the related balance in the allowance for loan losses are based upon the periodic evaluations of the loan portfolio by management. These evaluations consider several factors, including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience, and management's estimate of future potential losses. During 2000, the Bank charged-off approximately $1.6 million of its classified loans. Approximately $600,000 of the total charge-offs related to one community development loan that had been fully reserved at December 31, 1999. In addition, the Bank charged-off loans totaling $498,000 of which approximately $267,000 of these loans were guaranteed by the Small Business Administration (SBA). The Bank will perform post charge-off collections to maximize its recovery on all charged-off loans. Workout attorneys have been engaged to aggressively pursue collections of these loans. Deposits Average deposits grew approximately $1.05 million, or 1.0%, in 2000 compared to growth of $2.7 million, or 2.6%, in 1999. The increase is primarily related to the acquisition of $31.5 million in deposits from First Union Corporation in September 1999. These deposits included primarily core deposits consisting of checking and savings accounts. However, to meet capital requirements mandated in its Written Agreement with regulators (Refer to Regulatory Matters below) the Bank implemented an asset reduction/capital improvement plan in 2000 that included the reduction of non-First Union acquired deposits. Beginning in June 2000, the Bank sold higher yielding certificates of deposit to other financial institutions and encouraged some large deposit accountholders to remove deposits to fund its asset reduction plan. In addition, the Bank's September 2000 branch consolidation resulted in some deposit attrition. Table 10--Average Deposits by Class and Rate
2000 1999 1998 ---------------------- ---------------------- -------------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE ------ ---- ------ ---- ------ ---- (Dollars in thousands) Noninterest-bearing demand deposits $27,567 --% $24,019 --% $19,740 --% Interest-bearing demand deposits 19,851 3.03 19,892 2.86 22,622 2.74 Savings deposits 30,776 1.61 26,744 1.65 23,283 1.84 Time deposits 28,531 4.86 35,020 4.84 37,365 5.08
25 Other Borrowed Funds The average balance for other borrowed funds increased $679,000, or 54.5%, in 2000 compared to a decrease of $275,000, or 18.08%, in 1999. This increase was a result of the need to borrow funds either by utilizing a fully secured Federal Funds line of credit with a correspondent bank or using a Master Repurchase Agreement with another financial institution. These borrowings were necessary to temporarily fund the Bank's asset reduction/capital improvement plan until other assets were sold. This increase was offset by the reversal of the $1.5 million capital lease obligation related to the Bank's purchase of a previously leased building for its corporate offices. Generally, the level of other borrowed funds is dependent on many items such as loan growth, deposit growth, customer collateral/security requirements and interest rates paid for these funds. Liquidity and Interest Rate Sensitivity Management The primary functions of asset/liability management are to assure adequate liquidity and maintain appropriate balance between interest-sensitive earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and enhance consistent growth of net interest income through periods of changing interest rates. The Bank is required to maintain minimum levels of liquid assets as defined by Federal Reserve Board (FRB) regulations. This requirement is evaluated in relation to the composition and stability of deposits; the degree and trend of reliance on short-term, volatile sources of funds, including any undue reliance on particular segments of the money market or brokered deposits; any difficulty in obtaining funds; and the liquidity provided by securities and other assets. In addition, consideration is given to the nature, volume and anticipated use of commitments; the adequacy of liquidity and funding policies and practices, including the provision for alternate sources of funds; and the nature and trend of off-balance-sheet activities. As of December 31, 2000, management believes the Bank's liquidity is satisfactory and in compliance with FRB regulations The Bank's principal sources of asset liquidity include investment securities consisting primarily of U.S. Government and agency issues, particularly those of shorter maturities, and mortgage-backed securities with monthly repayments of principal and interest. There are no securities maturing in one year or less. However, other types of assets such as federal funds sold, as well as maturing loans, are sources of liquidity. Approximately $5.3 million in loans are scheduled to mature within one year. The Bank's overall liquidity has been enhanced by a significant level of core deposits which management has determined are less sensitive to interest rate movements. The Bank has avoided reliance on large-denomination time deposits as well as brokered deposits. Table 11 provides a breakdown of the maturity of time deposits of $100,000 or more. Table 11--Maturity of Time Deposits of $100,000 or More (Dollars in thousands) 3 months or less ............... $6,212 Over 3 through 6 months ........ 1,356 Over 6 months through 1 year.... 1,255 Over 1 through five years ...... 240 Over five years ................ -- ------ Total .......................... $9,063 ====== 26 Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans that are tied to prime or other short-term indices differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits are much more interest-sensitive than passbook savings accounts. The shorter-term interest rate sensitivities are key to measuring the interest sensitivity gap or excess interest-earning assets over interest-bearing liabilities. Management of interest sensitivity involves matching repricing dates of interest-earning assets with interest-bearing liabilities in a manner designed to optimize net interest income within the limits imposed by regulatory authorities, liquidity determinations and capital considerations. Table 12 sets forth the earliest repricing distribution of the Bank's interest-earning assets and interest-bearing liabilities at December 31, 2000, the Bank's interest rate sensitivity gap ratio (i.e., excess of interest rate-sensitive assets over interest rate-sensitive liabilities, divided by total assets) and the Bank's cumulative interest rate sensitivity gap ratio. For purposes of the table, except for savings deposits, an asset or liability is considered rate-sensitive within a specified period when it matures or could be repriced within such period in accordance with its contractual terms. At December 31, 2000, a slight liability sensitive position is maintained on a cumulative basis through one year of 0.68%. This level is within the Bank's policy guidelines of +/-15% on a cumulative one-year basis. The current gap position is relatively evenly matched as a result of the number of loans either repricing or maturing in 12 months closely matching certificate of deposit maturities. Interest rate risk is minimized by the Bank's high level of core deposits that have been placed in longer repricing intervals. Generally, because of the Bank's negative gap position in shorter time frames, the Bank can anticipate that decreases in market rates will have a positive impact on the net interest income, while increases will have the opposite effect. For purposes of the gap analysis, such deposits (savings, MMA, NOW) which do not have definitive maturity dates and do not readily react to changes in interest rates have been placed in longer repricing intervals versus immediate repricing time frames, making the analysis more reflective of the Bank's historical experience. Table 12--Interest Sensitivity Analysis
INTEREST RATE SENSITIVITY GAPS AS OF DECEMBER 31, 2000 --------------------------------------------------------------------------------------- OVER OVER 1 YEAR OVER 3 MONTHS 3 THROUGH THROUGH 3 THROUGH OVER FIVE OR LESS 12 MONTHS 3 YEARS 5 YEARS YEARS CUMULATIVE ------- ------ ------- ------- ----- ---------- (Dollars in thousands) Interest-sensitive assets: Interest-bearing deposits with banks ...... $ 245 $ -- $ -- $ -- $ -- $ 245 Investment securities ..................... 6,751 1,206 6,332 7,243 13,482 35,014 Federal funds sold ........................ 720 -- -- -- -- 720 Loans .................................... 9,949 7,409 8,655 3,839 14,891 44,743 -------- -------- -------- -------- -------- -------- Total interest-sensitive assets .... 17,665 8,615 14,987 11,082 28,373 $ 80,722 -------- -------- -------- -------- -------- ======== Cumulative totals .................. 17,665 26,280 41,267 52,349 80,722 -------- -------- -------- -------- -------- Interest-sensitive liabilities: Interest checking accounts ................ 4,783 -- 11,160 -- -- $ 15,943 Savings accounts .......................... 2,536 -- 22,820 -- -- 25,356 Certificates less than $100,000 ........... 4,276 6,412 1,235 567 -- 12,490 Certificates of $100,000 or more .......... 6,212 2,611 240 -- -- 9,063 Other borrowed funds ...................... -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- Total interest-sensitive liabilities $ 17,807 $ 9,023 $ 35,455 $ 567 $ -- $ 62,852 ======== ======== ======== ======== ======== ======== Cumulative totals .................. $ 17,807 $ 26,830 $ 62,285 $ 62,852 $ 62,852 ======== ======== ======== ======== ======== Interest sensitivity gap ................... $ (142) $ (408) $(20,468) $ 10,515 $ 28,373 ======== ======== ======== ======== ======== Cumulative gap ............................. (142) (550) (21,018) (10,503) 17,870 Cumulative gap/total earning assets ........ (0.18)% (0.68)% (26.04)% (13.01)% 22.14% Interest-sensitive assets to interest-sensitive liabilities ........... 99.20% 95.48% 42.27% 1,954.50% -- %
Core deposits such as checking and savings deposits have been placed in repricing intervals based on historical trends and management's estimates. 27 While using the interest sensitivity gap analysis is a useful management tool as it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest rate changes that are characteristic of various interest rate-sensitive assets and liabilities. Consequently, even though the Bank currently has a positive gap position because of unequal sensitivity of these assets and liabilities, management believes this position will not materially impact earnings in a changing rate environment. For example, changes in the prime rate on variable commercial loans may not result in an equal change in the rate of money market deposits or short-term certificates of deposit. A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the net income of the Bank. The calculated estimates of net income or "earnings" at risk at December 31, 2000 are as follows: Net interest Percent of Changes in rate income change --------------- ------ ------ (Dollars in thousands) +200 basis points $ 4,302 (1.40)% +100 basis points 4,563 (3.00) Flat rate 4,713 -- -100 basis points 4,648 (3.20) -200 basis points 4,574 (8.70) 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, 2000 are as follows: Percent of Changes in rate Net equity change --------------- ---------- ------ (Dollars in thousands) +200 basis points $ 10,566 (14.40)% +100 basis points 11,742 (4.90) Flat rate 12,349 -- -100 basis points 12,638 2.30 -200 basis points 12,559 1.70 The assumptions used in evaluating the vulnerability of the Company'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 Company's assets and liabilities, as well as the estimated effect of changes in interest rates on the earnings and equity, could vary substantially if different assumptions are used or actual experience differs from the assumptions on which the calculations were based. The Bank's Board of Directors and management consider all of the relevant factors and conditions in the asset/liability planning process. Interest rate exposure is not significant and is within the policy limits of the Bank at December 31, 2000. However, if significant interest rate risk arises, the Board of Directors and management may take, but are not limited to, one or all of the following steps to reposition the balance sheet as appropriate: 1. Limit jumbo certificates of deposit and movement into money market deposit accounts and short-term certificates of deposit through pricing and other marketing strategies. 2. Purchase quality loan participations with appropriate interest rate/gap match for the Bank's balance sheet. 3. Restructure the Bank's investment portfolio. 28 The Board of Directors has determined that active supervision of the interest rate spread between yield on earning assets and cost of funds will decrease the Bank's vulnerability to interest rate cycles. Capital Resources Total shareholders' equity increased $322,000 in 2000 compared to an increase of approximately $123,000 in 1999. The increase in 2000 is a result of the proceeds from the issuance of common stock of $848,000 in a limited offering to the Company's Board of Directors, offset by the net loss of $755,000 which resulted in an increase in the accumulated deficit. The FRB standards for measuring capital adequacy for U.S. Banking organizations require that banks maintain capital based on "risk-adjusted" assets so that categories of assets with potentially higher risk will require more capital backing than assets with lower risk. In addition, banks are required to maintain capital to support, on a risk-adjusted basis, certain off-balance-sheet activities such as loan commitments. The FRB standards classify capital into two tiers, referred to as Tier I and Tier II. Tier I consists of common shareholders' equity, noncumulative and cumulative perpetual preferred stock, and minority interests less goodwill and/or intangible assets). Tier II capital consists of allowance for loan losses, hybrid capital instruments, term subordinated debt, and intermediate-term preferred stock. Banks are required to meet a minimum ratio of 8% of qualifying capital to risk-adjusted total assets with at least 4% Tier I capital and a Tier I leverage ratio of at least 6%. Capital that qualifies as Tier II capital is limited to 100% of Tier I capital. As indicated in Table 13, the Company's risk-based capital ratios are above the minimum requirements. Management continues the objective of raising additional capital by offering additional stock (preferred and common) for sale in a private offering as well as increasing the rate of internal capital growth as a means of maintaining the required capital ratios. However, the Bank's growth, continued losses and the additional provisions to the allowance for loans losses may have an adverse effect on its capital ratios. The Company and the Bank do not anticipate paying dividends in the near future. Table 13--Capital Ratios (Dollars in thousands) 2000 1999 1998 ---- ---- ---- Total Capital .................. $ 9,317 $ 9,223 $ 8,823 Less: Intangible Assets ........... (2,298) (2,429) -- -------- -------- -------- Tier I capital ................. 7,019 6,794 8,823 Tier II capital ................ 537 770 679 -------- -------- -------- Total qualifying capital ....... $ 7,556 $ 7,564 $ 9,502 ======== ======== ======== Risk-adjusted total assets (including off-balance-sheet exposures) .................. $ 42,949 $ 60,795 $ 54,373 ======== ======== ======== Tier I risk-based capital ratio 16.34% 11.18% 16.23% Total (Tier I and II) risk-based capital ratio ................ 17.59% 12.44% 17.48% Tier I leverage ratio .......... 7.39% 5.08% 7.67% Regulatory Matters In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written Agreement (Agreement) with its primary regulators with regard to, among other things, achievement of agreed-upon capital levels, implementation of a viable earnings/strategic plan, adequate funding of the allowance for loan losses, the completion of a management review and succession plan, and improvement in internal controls. The Agreement requires the Bank to increase its capital ratio to 6.5% by June 30, 2000 and to 7% at all times thereafter. As of December 31, 2000, the Bank had met the required ratios by implementing strategies that included: increasing profitability, consolidating branches, and soliciting new and additional sources of capital. Management continues to address all matters outlined in the Agreement. Its most recent notification from its regulators dated January 13, 2001, indicates that it is "partially" in compliance with the Agreement's terms and conditions. Failure to comply could result in additional regulatory supervision and/or actions. 29 Recent Accounting Pronouncements In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued, in June 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and in June, 2000, by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS No. 133). SFAS No. 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS No. 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized assets or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized as hedge accounting. SFAS No. 133 is required for all fiscal quarters or fiscal years beginning after June 15, 2000. On April 1, 2000, the Company adopted SFAS No. 133. Concurrent with the adoption, the Company reclassified approximately $6.1 million of investment securities from held-to-maturity to available-for-sale. Subsequent to the reclassification, the Company transferred approximately $9.5 million of investment securities from available-for-sale to trading. In June 2000, the Company recorded a loss on the sale of these securities of $127,000. The Company does not have any derivative instruments at December 31, 2000. Based upon the Company not using derivatives at the current time, management does not anticipate the adoption of SFAS No. 133 will have any continuing impact on earnings or the financial position of the Company. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Consolidated Financial Statements attached hereto as Exhibits. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Directors of the Registrant and Bank ------------------------------------
PRINCIPAL OCCUPATION AND YEAR FIRST TERM NAME AGE OTHER DIRECTORSHIPS BECAME DIRECTOR WILL EXPIRE - ---- --- ------------------- --------------- ----------- James F. Bodine 79 Retired as Managing Partne 1993 2002 Urban Affairs Partnership Philadelphia, Pennsylvania S. Amos Brackeen 82 Founder and Pastor, 1993 2003 Philippian Baptist Church of Philadelphia, Pennsylvania Kemel G. Dawkins 77 President, Kemrodco 1993 2001 Development and Construction Company, Inc., President, Kem-Her Construction Company Inc. Philadelphia, Pennsylvania
30
PRINCIPAL OCCUPATION AND YEAR FIRST TERM NAME AGE OTHER DIRECTORSHIPS BECAME DIRECTOR WILL EXPIRE - ---- --- ------------------- --------------- ----------- L. Armstead Edwards 58 Treasurer, 1993 2004 United Bancshares, Inc. Owner and President, P.A.Z., Inc. Philadelphia, Pennsylvania Marionette Y. Frazier 56 Partner, 1996 2004 John Frazier, Inc. Philadelphia, Pennsylvania William C. Green 76 Co-founder, Ivy Leaf 1993 2002 Middle School Philadelphia, Pennsylvania Angela M. Huggins 61 President and CEO 1993 2001 RMS Technologies Inc. Foundation William B. Moore 58 Secretary, 1993 2003 United Bancshares, Inc. Pastor, Tenth Memorial Baptist Church Philadelphia, Pennsylvania Evelyn F. Smalls 55 President and CEO of Registrant 2000 2002 and United Bank of Philadelphia Ernest L. Wright 72 Founder, President and 1993 2004 CEO of Ernest L. Wright Construction Company Philadelphia, Pennsylvania
(b) Executive Officers of Registrant and Bank ----------------------------------------- Name Age Office - ---- --- ------ Evelyn F. Smalls 55 President and Chief Executive Officer Brenda M. Hudson-Nelson 39 Senior Vice President/Chief Financial Officer James F. Bodine 79 Co-Chairman, Board of Directors L. Armstead Edwards 58 Co-Chairman, Board of Directors William B. Moore 58 Secretary Marionette Y. Frazier 56 Assistant Secretary Angela M. Huggins 61 Treasurer
31 (c) Family Relationships. -------------------- There are no family relationships between any director, executive officer or person nominated or chosen by the Bank to become a director or executive officer. (d) Other ----- There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the past five years. ITEM 11 -- EXECUTIVE COMPENSATION COMPENSATION TABLE
NAME OF INDIVIDUAL OR NUMBER CAPACITIES IN IN GROUP WHICH SERVED - -------- ------------ 2000 SALARY 2000 BONUS 2000 OPTIONS SERP ----------- ---------- ------------ ---- Evelyn F. Smalls President $118,921 $ -- $ -- $ -- Chief Executive Officer Brenda M. Hudson-Nelson Senior Vice President $ 96,445 $ -- $ -- $ -- Chief Financial Officer
In June 2000, the Bank entered two-year employment agreements with its chief executive officer and its chief financial officer covering such items as salaries, bonuses and benefits. The agreements expire in 2002 and provide for guaranteed minimum annual compensation of $141,000 and $101,000, respectively, over the term of the contracts. The Bank made no stock-based compensation awards to any employee during 2000. Report of Compensation Committee on the Named Executive Officers' Annual Compensation ------------------------------------------------------ The Executive Committee of the Bank's Board of Directors acts as the Bank's Board of Directors Compensation Committee (the "Bank Compensation Committee") which is composed entirely of independent outside directors. The Bank Compensation Committee is responsible for setting and administering the Bank's compensation policies, including those which govern salary and the bonus program applicable to the Bank's named executive officers Ms. Smalls and Ms. Hudson-Nelson (hereinafter some times referred to as "Named Executive Officers"). COMPENSATION COMMITTEE REPORT Executive Compensation Policy Principles The Bank's Compensation policy is also designed to (i) retain and attract qualified key executives essential to the long-term success of the Bank and UBS; (ii) reward such executives for consistent successful management of the Bank and enhancement of shareholder value; and (iii) create a performance-oriented environment that rewards performance not only with respect to the Bank's goals but also the Bank's performance in relation to comparable industry performance levels. The Bank's Compensation Committee annually considers the Bank's economic performance in terms of its asset diversification and quality, expense levels, net income, capital accumulation and retention, return on equity and other relevant criteria used in the financial services industry and seeks to relate those considerations to the Bank's performance and each executive's performance of her/his duties. The Bank's executive compensation program, established by the Bank Compensation Committee, is based on the belief that each executive officer's compensation should bear a relationship to the business success of the Bank and thus UBS, the value of the UBS's stock and any significant accomplishments by the executive officer. 32 Elements of Executive Compensation Program The Bank's total compensation program for its executive officers currently consists of base salary, a fringe benefit package, and an opportunity, depending on the Bank's annual earnings and other economic criteria, to obtain a cash bonus and options to purchase UBS stock at the market price or a premium above the market price determined by the Compensation Committee when such options are awarded. Salary Compensation and Fringe Benefits The salary compensation is competitive in the light of the Bank's past performance and present position in relationship to the other similar size banks in the Delaware Valley and is combined with a fringe benefit package available to the executive officers and other employees designed to retain and attract experienced banking personnel. Each officer's salary is reviewed annually based on that person's level of management responsibility at the Bank and performance of duties. No Bonus Awards The Bank's officers, including the Named Executive Officers, have an opportunity to be awarded a cash bonus based in large measure on the economic performance of the Bank on an annual basis and each individual officer's accomplishment of her/his designated responsibilities and goals. No bonuses were paid to the Named Executive Officers, because of the Bank's negative earnings performance in the year 2000 and the reduction which occurred in the Bank's capital. Nevertheless, the Bank Compensation Committee particularly noted that the Named Executive Officers were only recently named to their positions and have made great strides to implementing compliance with the terms of the Written Agreement with the Bank's regulators and guiding the Bank to a return to profitable operations. Executive Compensation Decisions for 2000 The Bank Compensation Committee evaluated the Bank's business performance for the year 2000 and determined, based on such performance and the criteria outlined above, determined that salary increases provide in the employment agreements of the named executive officers were merited. Based on the Bank's 2000 business performance, the Compensation Committee determined that neither bonuses nor stock options should be granted to the Named Executive Officers or other key officers at this time. Factors and Criteria on which President's Compensation Was Based in 2000 The Bank Compensation Committee meets annually, without President Smalls being present, to evaluate her business performance and review her compensation package. The Bank Compensation Committee reports on that evaluation to the independent directors of the Board. Ms. Smalls is eligible to participate in all executive compensation programs available to all other executives. As indicated in the foregoing discussion concerning the principles upon which the Bank's compensation policy is based, the Bank's economic performance and the performance by Ms. Smalls of her duties as President are the essential elements upon which the 2000 compensation was based. Also considered by the Bank Compensation Committee was significant change in the Bank's management and the progress that the Bank has made in recent months to develop fundamental profitable operations. In establishing Ms. Smalls' 2000 annual compensation, the primary economic performance criteria which the Bank Compensation Committee considered were the Bank's annual earnings, and the adequacy of the Bank's regulatory capital ratios. The Committee also considered that the Bank reduced its problem loans and nonperforming assets and successfully managed its overhead expense and staff. 33 In accordance with the criteria described above, the Bank Compensation Committee determined that, based on the Bank's earnings performance and its other accomplishments in 2000, Ms. Smalls earned the salary specified in her employment agreement. The Compensation Committee The Bank's Compensation Committees is composed of the following members: James F. Bodine, L. Armstead Edwards, William B. Moore, Marionette Y. Frazier, and Angela M. Huggins who endorse this report. Respectfully submitted: James F. Bodine, Co-chairman L. Armstead Edwards, Co-chairman Directors of the Bank are compensated for each meeting attended in the amount of three hundred dollars fifty ($350) per Board meeting attended and one hundred fifty dollars ($150) for each committee meeting attended. Directors who are also salaried officers of the Bank receive no remuneration for their services as Directors. During the year ended December 31, 2000, the Bank paid Directors' fees to its "non-interested" Directors totaling $47,250. UBS has paid no director fees since its inception. One hundred thousand shares of the Bank's Common Stock are subject to a Long Term Incentive Compensation Plan (the "Plan") under which options to purchase the Bank's Common Stock may be granted to key employees of a price not less than the fair market value thereof at the date of the grant ("Options"), and Common Stock may be awarded as Restricted Stock, subject for a period of time to substantial risk of forfeiture and restrictions on disposition as determined by the Compensation Committee as of the date of the grant ("Restricted Stock"). Pursuant to the Plan, options are granted in tandem with Stock Appreciation Rights ("SARs") allowing the holder of an Option to surrender the Option and receive an amount equal to the appreciation in market value of a fixed number of shares of Common Stock from the date of the grant of the Option. SARs may be payable in Common Stock or cash or a combination of both. The Plan also allows the Compensation Committee to grant Performance Shares, which are contingent rights to receive, when certain performance criteria have been attained, amounts of Common Stock and cash determined by the Compensation Committee for such an award. Such rights are subject to forfeiture or reduction if performance goals specified are not met during the performance period. No such options, restricted stock or SARs were granted for 2000 performance. No deferred compensation, incentive compensation or any further compensation pursuant to any plan has been paid by the Bank, or will be paid by the Bank based on services rendered to the Bank to the date of this filing. At its annual meeting held May 6, 1994, the shareholders of the Registrant approved the establishment of an Employee Stock Ownership Plan ("ESOP"). The ESOP has not been formally activated by the Registrant. No purchases have been made pursuant to the ESOP. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SHAREHOLDERS OWNING IN EXCESS OF FIVE PERCENT OF REGISTRANT'S COMMON STOCK PERCENTAGE OF NAME AND ADDRESSES AMOUNT AND NATURE OF OUTSTANDING OF SHAREHOLDERS BENEFICIAL OWNERSHIP COMMON STOCK OWNED - ------------------ ---------------------- ------------------- First Union Corporation 241,666 21.98% (50,000 or 4.54% Broad and Chestnut Streets are voting shares) Philadelphia, Pennsylvania 19101 Philadelphia Municipal 71,667 6.52% Retirement System 2000 Two Penn Center Philadelphia, Pennsylvania 19102 34 DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK AND UBS SHARES OF REGISTRANT'S COMMON STOCK AMOUNT PERCENTAGE OF NAME BENEFICIALLY OWNED OUTSTANDING SHARES - ---- ------------------ ------------------ James F. Bodine 44,333 4.030% S. Amos Brackeen 5,000 0.450 Kemel G. Dawkins 20,150 1.830 L. Armstead Edwards 12,917 1.170 Marionette Y. Frazier 14,500 1.320 William C. Green (2) 18,583 1.690 Angela M. Huggins 8,368 0.760 William B. Moore 1,417 0.130 Evelyn F. Smalls (1) 50 0.005 Ernest L. Wright 7,084 0.640 ------- ------ TOTAL 132,402 12.040% ======= ====== Each of these officers and directors are officers and directors of the Registrant. (1) The President and Chief Executive Officer, currently Evelyn F. Smalls, also acts as Trustee of a voting trust agreement pursuant to which Fahnstock, Inc deposited 5,209 shares of Common Stock of UBS with United Bank of Philadelphia, as Trustee, to be voted by the current president and chief executive officer pursuant to the terms of the Voting Trust. The term of the Voting Trust is ten years. The President and Chief Executive Officer, currently Evelyn Smalls, acts as Trustee of a voting trust agreement pursuant to which NationsBank Corporation deposited 33,500 shares of Common Stock of UBS with United Bank of Philadelphia as Trustee, to be voted by the current President and Chief Executive Officer pursuant to the terms of the Voting Trust. The term of the Voting Trust is ten years. (2) Owned jointly with Liller B. Green, his wife. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Some of the directors and executive officer of the Bank and the Companies with which they are associated were customers of and had banking transactions with the Bank in the ordinary course of its business during the year 2000. All loans and commitments to lend were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. In the opinion of Bank management, the loan commitments did not involve more than normal risk of collectively or present other unfavorable features. 35 PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements: December 31, 2000 and 1999 Report of Independent Certified Public Accountants, March 21, 2001 Consolidated Balance Sheets at December 31, 2000 and 1999. Consolidated Statements of Operations for the three years ended December 31, 2000. Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2000. Consolidated Statements of Cash Flows for the three years ended December 31, 2000. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto. 3. The following exhibits are filed herewith or incorporated by reference as a part of this Annual Report. 3(i) Articles of Incorporation (Incorporated by reference to Registrant's 1997 Form 10-K). 3(ii) Bylaws (Incorporated by reference to Registrant's 1997 Form 10-K). 9.l Voting Trust Agreement with NationsBank (Incorporated by reference to Registrant's 1997 Form 10-K). 9.2 Voting Trust Agreement with Fahnstock (Incorporated by reference to Registrant's 1997 Form 10-K). 10(a) Lease Agreements between the Bank and various landlords. (Incorporated by reference to Registrant's 1999 Form 10-K). 10(b) Employment contract between the Bank and Evelyn F. Smalls 10(c) Employment contract between the Bank and Brenda M. Hudson-Nelson 11. Statement of Computation of Earnings Per Share. Included at Item 8 hereof. 12. Statement of Computation of Ratios. Included at Item 8 hereof. (b) No reports on Form 8-K have been filed during the last quarter covered by this report. (c) Not applicable. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized UNITED BANCSHARES, INC. DATE /s/ Evelyn F. Smalls March 28, 2001 - ---------------------------------------------------- ----------------- Evelyn F. Smalls, President & CEO, Director /s/ Brenda M. Hudson-Nelson March 28, 2001 - ---------------------------------------------------- ----------------- Brenda M. Hudson-Nelson, SVP, CFO /s/ James F. Bodine March 28, 2001 - ---------------------------------------------------- ----------------- James F. Bodine, Director /s/ S. Amos Brackeen March 28, 2001 - ---------------------------------------------------- ----------------- S. Amos Brackeen, Director /s/ Kemel G. Dawkins March 28, 2001 - ---------------------------------------------------- ----------------- Kemel G. Dawkins, Director /s/ L. Armstead Edwards March 28, 2001 - ---------------------------------------------------- ----------------- L. Armstead Edwards, Director /s/ Marionette Y. Frazier March 28, 2001 - ---------------------------------------------------- ----------------- Marionette Y. Frazier, Assistant Secretary, Director /s/ William C. Green March 28, 2001 - ---------------------------------------------------- ----------------- William C. Green, Director /s/ Angela M. Huggins March 28, 2001 - ---------------------------------------------------- ----------------- Angela M. Huggins, Treasurer, Director /s/ William B. Moore March 28, 2001 - ---------------------------------------------------- ----------------- William B. Moore, Secretary, Director /s/ Ernest L. Wright March 28, 2001 - ---------------------------------------------------- ----------------- Ernest L. Wright, Director 37 Shareholders and Board of Directors United Bancshares, Inc. and Subsidiary We have audited the accompanying consolidated balance sheets of United Bancshares, Inc. and Subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in note 15 to the financial statements, the Bank entered into a written agreement with the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking dated February 23, 2000. Management's plans in regard to this matter are described in note 15. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Bancshares, Inc. and Subsidiary as of December 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Philadelphia, Pennsylvania March 21, 2001 38 United Bancshares, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS December 31, ---------------------------------- Assets 2000 1999 - ------ ---- ---- Cash and due from banks ........................................................ $ 5,328,384 $ 9,396,669 Interest-bearing deposits with banks ........................................... 245,496 365,547 Federal funds sold ............................................................. 720,000 7,158,000 ------------- ------------- Cash and cash equivalents ............................................ 6,293,880 16,920,216 Investment securities: Available-for-sale, at market value ........................................ 11,426,544 19,129,535 Held-to-maturity, at amortized cost (market value of $23,555,339 and $31,470,822 in 2000 and 1999, respectively) ......................... 23,587,092 32,303,774 Loans, net of unearned discount of $176,915 and $225,302 in 2000 and 1999, respectively ..................................................... 45,305,468 61,010,995 Less allowance for loan losses ................................................. (562,174) (1,566,642) ------------- ------------- Net loans ............................................................ 44,743,294 59,444,353 Bank premises and equipment, net ............................................... 3,457,518 3,825,321 Accrued interest receivable .................................................... 1,158,485 1,221,679 Foreclosed real estate ......................................................... 50,000 397,641 Intangible assets .............................................................. 2,297,674 2,428,524 Prepaid expenses and other assets .............................................. 518,721 1,578,036 ------------- ------------- Total assets ......................................................... $ 93,533,208 $ 137,249,079 ============= ============= Liabilities and Shareholders' Equity Liabilities: Demand deposits, noninterest-bearing ....................................... $ 20,386,652 $ 26,206,218 Demand deposits, interest-bearing .......................................... 15,942,933 29,119,779 Savings deposits ........................................................... 25,355,811 33,342,400 Time deposits, under $100,000 .............................................. 12,489,281 23,464,035 Time deposits, $100,000 and over ........................................... 9,063,433 12,633,964 ------------- ------------- 83,238,110 124,766,396 Obligations under capital leases ........................................... -- 1,444,607 Accrued interest payable ................................................... 230,357 600,546 Accrued expenses and other liabilities ..................................... 715,232 1,410,215 ------------- ------------- Total liabilities .................................................... 84,183,699 128,221,764 ------------- ------------- Shareholders' equity: Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000 shares authorized; 143,150 issued and outstanding in 2000 and 1999 ........................................................ 1,432 1,432 Common stock, $0.01 par value; 2,000,000 shares authorized; 1,099,421 and 1,028,753 issued and outstanding in 2000 and 1999, respectively ...................................................... 10,994 10,288 Additional paid-in-capital ................................................. 14,717,484 13,870,169 Accumulated deficit ........................................................ (5,413,111) (4,658,391) Accumulated other comprehensive income (loss) .............................. 32,710 (196,183) ------------- ------------- Total shareholders' equity ........................................... 9,349,509 9,027,315 ------------- ------------- $ 93,533,208 $ 137,249,079 ============= =============
The accompanying notes are an integral part of these statements. 39 United Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, ------------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Interest income: Interest and fees on loans................................... $ 4,655,329 $ 5,589,589 $ 6,270,323 Interest on investment securities............................ 3,150,160 1,812,983 1,275,542 Interest on federal funds sold............................... 339,348 680,715 688,285 Interest on time deposits with other banks................... 8,469 24,834 26,329 ----------- ----------- ----------- Total interest income.................................. 8,153,306 8,108,121 8,260,479 ----------- ----------- ----------- Interest expense: Interest on time deposits.................................... 1,387,091 1,695,078 1,898,967 Interest on demand deposits.................................. 602,194 568,903 619,921 Interest on savings deposits................................. 496,764 440,002 427,682 Interest on borrowed funds................................... 252,515 140,075 73,265 ----------- ----------- ----------- Total interest expense................................. 2,738,564 2,844,058 3,019,835 ----------- ----------- ----------- Net interest income.................................... 5,414,742 5,264,063 5,240,644 Provision for loan losses........................................ 565,000 1,007,003 350,500 ----------- ----------- ----------- Net interest income after provision for loan losses.... 4,849,742 4,257,060 4,890,144 ----------- ----------- ----------- Noninterest income: Gain on sale of loans........................................ 18,931 43,856 201,664 Customer service fees........................................ 2,617,845 2,031,245 1,457,508 Gain (loss) on sale of investments........................... (200,070) -- 1,201 Gain on sale of fixed assets................................. 329,237 -- -- Other income................................................. 430,991 151,303 155,663 ----------- ----------- ----------- Total noninterest income............................... 3,196,934 2,226,404 1,816,036 ---------- ---------- ---------- Noninterest expense: Salaries, wages and employee benefits........................ 3,075,523 2,962,500 2,555,774 Occupancy and equipment...................................... 1,790,356 1,437,775 1,275,902 Office operations and supplies............................... 777,112 715,207 525,771 Marketing and public relations............................... 158,698 304,537 221,348 Professional services........................................ 544,083 393,607 232,793 Data processing.............................................. 971,503 863,208 868,665 Deposit insurance assessments................................ 169,102 104,991 82,389 Other operating.............................................. 1,315,019 931,861 933,605 ----------- ----------- ----------- Total noninterest expense.............................. 8,801,396 7,713,686 6,696,247 ----------- ----------- ----------- Net income (loss)...................................... $ (754,720) $(1,230,222) $ 9,933 =========== =========== =========== Net income (loss) per common share--basic and diluted............. $ (0.72) $ (1.24) $ 0.01 =========== =========== =========== Weighted average number of common shares......................... 1,049,166 995,699 845,902 =========== =========== ===========
The accompanying notes are an integral part of these statements. 40 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) Years ended December 31, 2000, 1999 and 1998
SERIES A ACCUMULATED TOTAL PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER SHARE- --------------- ------------ PAID-IN ACCUMULATED COMPREHENSIVE HOLDERS' COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) EQUITY INCOME (LOSS) ------ ------ ------ ------ ------- ------- ------------- ------ ------------- Balance at January 1, 1998 ........... 93,150 $ 932 823,695 $ 8,236 $10,425,626 $(3,438,102) $ 62,163 $ 7,058,855 Proceeds from issuance of preferred stock ....... 39,849 398 -- -- 796,582 -- -- 796,980 Proceeds from issuance of common stock .......... -- -- 89,795 898 1,064,025 -- -- 1,064,923 Unrealized losses on investment securities . -- -- -- -- -- -- (26,375) (26,375) $ (26,375) Net income ............... -- -- -- -- -- 9,933 -- 9,933 9,933 ------- ------ --------- ------- ----------- ----------- --------- ----------- ----------- Balance at December 31, 1998..........132,999 1,330 913,490 9,134 12,286,233 (3,428,169) 35,788 8,904,316 $ (16,442) ============ Proceeds from issuance of preferred stock ....... 10,151 102 202,918 203,020 Proceeds from issuance of common stock .......... 115,263 1,154 1,381,018 1,382,172 Unrealized losses on investment securities . -- -- -- -- -- (231,971) $ (231,971) Net loss ................. -- -- -- -- -- (1,230,222) -- (1,230,222) (1,230,222) ------- ------ --------- ------- ----------- ----------- --------- ----------- ----------- Balance at December 31, 1999..........143,150 1,432 1,028,753 10,288 13,870,169 (4,658,391) (196,183) 9,027,315 $(1,462,193) =========== Proceeds from issuance of common stock .......... -- -- 70,668 706 847,315 -- -- 848,021 Unrealized gains on investment securities . -- -- -- -- -- -- 228,893 228,893 $ 228,893 Net loss ................. -- -- -- -- -- (754,720) -- (754,720) (754,720) ------- ------ --------- ------- ----------- ----------- --------- ----------- ----------- Balance at December 31, 2000..........143,150 $1,432 1,099,421 $10,994 $14,717,484 $(5,413,111) $ 32,710 $ 9,349,509 $ (525,827) ======= ====== ========= ======= =========== =========== ========= =========== ===========
The accompanying notes are an integral part of these statements. 41 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, -------------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) ............................................ $ (754,720) $ (1,230,222) $ 9,933 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for loan losses ................................. 565,000 1,007,003 350,500 Gain on sale of loans ..................................... (18,931) (43,856) (201,664) Gain on sale of fixed assets .............................. (329,237) -- -- Loss on sale of investment securities ..................... 200,070 -- (1,201) Depreciation and amortization ............................. 959,158 677,452 584,744 (Increase) decrease in accrued interest receivable and other assets ........................................... 1,470,150 410,561 (1,345,070) (Decrease) increase in accrued interest payable and other liabilities ...................................... (1,065,172) (435,256) 1,402,385 ------------ ------------ ------------ Net cash provided by operating activities .............. 1,026,318 385,682 799,627 ------------ ------------ ------------ Cash flows from investing activities: Purchase of available-for-sale investments ................... (1,737,678) (14,688,776) (11,708,818) Purchase of held-to-maturity investments ..................... (2,636,746) (48,678,917) (33,748,996) Proceeds from maturity and principal reductions of available-for-sale investments ............................ 951,885 3,377,145 11,058,766 Proceeds from maturity and principal reductions of held-to-maturity investments .............................. 982,708 51,501,203 9,429,511 Proceeds from sale of investments available-for-sale ........ 18,888,327 -- -- Net proceeds from branch acquisitions ........................ -- 27,694,690 -- Proceeds from sale of student loans .......................... 2,574,775 2,975,360 12,846,705 Proceeds from sale of deposits to other financial institutions (6,544,666) -- -- Net decrease (increase) in loans ............................. 11,580,215 15,870,049 8,276,373 Purchase of automobile loans ................................. -- (21,982,333) (4,848,864) Purchase of premises and equipment ........................... (1,566,672) (1,429,324) (203,413) ------------ ------------ ------------ Net cash (used in) provided by investing activities .... 22,492,148 14,639,097 (8,898,736) ------------ ------------ ------------ Cash flows from financing activities: Net increase (decrease) in deposits .......................... (34,983,620) (14,463,843) 9,636,339 Repayments on long-term debt ................................. (9,203) (11,191) (32,497) Reverse repurchase agreement ................................. -- (1,557,755) 216,702 Net proceeds from issuance of common stock ................... 848,021 1,382,172 1,064,923 Net proceeds from issuance of preferred stock ................ -- 203,020 796,980 ------------ ------------ ------------ Net cash provided by (used in) financing activities .... (34,144,802) (14,447,597) 11,682,447 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ... (10,626,336) 577,182 3,583,338 Cash and cash equivalents at beginning of year ................... 16,920,216 16,343,034 12,759,696 ------------ ------------ ------------ Cash and cash equivalents at end of year ......................... $ 6,293,880 $ 16,920,216 $ 16,343,034 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for interest ....................... $ 3,108,753 $ 2,780,355 $ 2,960,086 ============ ============ ============
The accompanying notes are an integral part of these statements. 42 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2000, 1999, and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of United Bancshares, Inc. (the Company) and its wholly owned subsidiary, United Bank of Philadelphia (the Bank). All significant intercompany transactions and balances have been eliminated. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold on an overnight basis. Securities Held-to-Maturity Bonds, notes, and debentures for which the Bank has both the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Securities Available-for-Sale Available-for-sale securities consist of bonds, notes and debentures, and certain equity securities for which the Bank does not have positive intent to hold to maturity. These securities are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried as a separate component of shareholders' equity net of related income tax effects. Gains and losses on the sale of available-for-sale securities are determined by the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Loans The Bank has both the positive intent and ability to hold its loans to maturity. These loans are stated at the amount of unpaid principal, reduced by net unearned discount and an allowance for loan losses. Interest income on loans is recognized as earned based on contractual interest rates applied to daily principal amounts outstanding and accretion of discount. It is the Bank's policy to discontinue the accrual of interest income when a default of principal or interest exists for a period of 90 days except when, in management's judgment, the collection of principal and interest is reasonably anticipated or adequate collateral exists. Interest received on nonaccrual loans is either applied against principal or reported as interest income according to management's judgment as to collectibility of principal. When interest accruals are discontinued, interest credited to income is reversed and the loan is classified as nonperforming. (Continued) 43 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Unearned discount is amortized over the weighted average maturity of the mortgage loan portfolio. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield. The Bank is amortizing these amounts over the contractual life of the loan. Loans Held-for-Sale Loans held-for-sale are carried at the aggregate of lower of cost or market value. For purchased loans, the discount remaining after the loan loss allocation is being amortized over the remaining life of the purchased loans using the interest method. Allowance for Loan Losses The Bank adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan Income Recognition and Disclosures." Under SFAS No. 114, the allowance for loan losses related to "impaired loans" is based on the discounted cash flows using the impaired loans' initial effective interest rate as the discount rate, or the fair value of the collateral for collateral-dependent loans. A loan is impaired when it meets the criteria to be placed on nonaccrual status. Loans which are evaluated for impairment pursuant to SFAS No. 114 are assessed on a loan-by-loan basis and include only commercial nonaccrual loans. Large groups of smaller, homogeneous loans, such as credit cards, student loans, residential mortgages, and other student loans, are evaluated collectively for impairment. The allowance for loan losses is maintained at a level considered adequate to provide for potential losses in the loan portfolio. The allowance is increased by provisions charged to operating expenses and reduced by charge-offs net of recoveries. Management's determination of the adequacy of the allowance is based on continuous credit reviews of the loan portfolio, consideration of the current economic conditions, review of specific problem loans, and other relevant factors. This evaluation is subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. However, actual losses on specific loans, which are encompassed in the analysis, may vary from estimated losses. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed over the shorter of the related lease term or the useful life of the assets. (Continued) 44 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Income Taxes The liability method is used in accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income (Loss) Per Share The Company follows the provisions of SFAS No. 128, which eliminates primary and fully diluted earnings per share (EPS) and requires presentation of basic and diluted EPS in conjunction with the disclosure of the methodology used in computing such EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Off-Balance-Sheet Financial Instruments In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Financial Instruments The following methods and assumptions were used by the Bank in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. (Continued) 45 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June, 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and in June, 2000, by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS No. 133). SFAS No. 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS No. 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized assets or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized as hedge accounting are recognized in current year earnings. SFAS No. 133 is required for all fiscal quarters or fiscal years beginning after June 15, 2000. On April 1, 2000, the Company adopted SFAS No. 133. Concurrent with the adoption, the Company reclassified approximately $6.1 million of investment securities from held-to-maturity to available-for-sale. Subsequent to the reclassification, the Company transferred approximately $9.5 million of investment securities from available-for-sale to trading. In June 2000, the Company recorded a loss on the sale of these securities of $127,000. Statement of Financial Accounting Standards No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments," (SFAS No. 119) requires disclosures about financial instruments, which are defined as futures, forwards, swap and option contracts and other financial instruments with similar characteristics. On-balance sheet receivables and payables are excluded from this definition. The Company did not hold any derivative financial instruments as defined by SFAS No. 119 at December 31, 2000 or 1999. Loans held-for-sale: Fair values are estimated using quoted rates based upon secondary market sources for similar loans. Loans: The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated prepayments and amortizations. Prepayments and discount rates were based on current marketplace estimates and pricing. Residential mortgage loans were discounted at the current effective yield, including fees, of conventional loans, adjusted for their maturities with a spread to the Treasury yield curve. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are equal to the amounts payable on demand at the reporting date (e.g., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate the fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation. The Treasury Yield Curve was utilized for discounting cash flows as it approximates the average marketplace certificate of deposit rates across the relevant maturity spectrum. Commitments to extend credit: The carrying amounts for commitments to extend credit approximate fair value as such commitments are not substantially different from the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparts. (Continued) 46 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Foreclosed Real Estate Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less the cost to sell. Revenue and expenses from operations and changes in valuation allowance are charged to operations. The historical average holding period for such properties is 24 months. Management's Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Segments SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The statement also requires that public enterprises report a measure of segment profit or loss, certain specific revenue and expense items and segment assets. It also requires that information be reported about revenues derived from the enterprises' products or services, or about the countries in which the enterprises earn revenues and hold assets, and about major customers, regardless of whether that information is used in making operating decisions. The Company has one reportable segment, "Community Banking." All of the Company's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the other. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit. Reclassifications Certain reclassifications have been made to the prior years financial statements to conform to the 2000 presentation. (Continued) 47 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Organizational Costs On January 1, 1999, the Bank adopted the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-5, "Reporting on Costs of Start-Up Activities" which requires that costs of start-up activities, as defined, including organizational costs, be expensed as incurred. The adoption of SOP 98-5 had no material impact on the Bank's financial statements. Comprehensive Income On January 1, 1998, the Bank adopted SFAS No. 130, which establishes new standards for reporting comprehensive income which includes net income as well as certain other items which result in a change to equity during the period. These financial statements have been reclassified to reflect the provisions of SFAS No. 130. The income tax effects allocated to comprehensive income (loss) is as follows: DECEMBER 31, 2000 -------------------------------------- NET OF BEFORE TAX TAX TAX AMOUNT EXPENSE AMOUNT ------ ------- ------ Unrealized gains on securities Unrealized holding gains arising during period $543,166 $180,826 $362,340 Less reclassification adjustment for losses realized in net income (200,070) (66,623) (133,447) -------- -------- -------- Other comprehensive loss, net $343,096 $114,203 $228,893 ======== ======== ======== DECEMBER 31, 1999 -------------------------------------- NET OF BEFORE TAX TAX TAX AMOUNT BENEFIT AMOUNT ------ ------- ------ Unrealized losses on securities Unrealized holding losses arising during period $(348,498) $(116,527) $(231,971) Less reclassification adjustment for losses realized in net income -- -- -- --------- --------- --------- Other comprehensive loss, net $(348,498) $(116,527) $(231,971) ========= ========= ========= 48 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued DECEMBER 31, 1998 -------------------------------------- NET OF BEFORE TAX TAX TAX AMOUNT BENEFIT AMOUNT ------ ------- ------ Unrealized losses on securities Unrealized holding losses arising during period $(39,462) $(12,282) $(27,180) Less reclassification adjustment for gains realized in net income 1,201 396 805 -------- -------- -------- Other comprehensive loss, net $(38,261) $(11,886) $(26,375) ======== ======== ======== 2. CASH AND DUE FROM BANK BALANCES The Bank maintains various deposit accounts with other banks to meet normal funds transaction requirements and to compensate other banks for certain correspondent services. The withdrawal or usage restrictions of these balances did not have a significant impact on the operations of the Bank as of December 31, 2000. 3. INVESTMENTS The amortized cost, gross unrealized holding gains and losses, and estimated market value of the available-for-sale and held-to-maturity investment securities by major security type at December 31, 2000 and 1999 are as follows:
2000 --------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- Available-for-sale: Other Government securities $ 5,475,732 $26,629 $ -- $ 5,502,361 Mortgage-backed securities 5,395,957 22,192 -- 5,418,149 ----------- ------- -------- ----------- Total debt securities ..... 10,871,689 48,821 -- 10,920,510 Investments in mutual funds 100,084 -- -- 100,084 Other investments ......... 405,950 -- -- 405,950 ----------- ------- -------- ----------- $11,377,723 $48,821 $ -- $11,426,544 =========== ======= ======== =========== Held-to-maturity: Other Government securities $15,260,048 $ -- $(20,454) $15,239,594 Mortgage-backed securities 8,327,044 -- (11,299) 8,315,745 ----------- ------- -------- ----------- $23,587,092 $ -- $(31,753) $23,555,339 =========== ======= ======== ===========
(Continued) 49 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 3. INVESTMENTS - Continued
1999 -------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- Available-for-sale: Other Government securities $ 11,255,096 $ -- $ (207,335) $ 11,047,761 Mortgage-backed securities 7,668,672 -- (86,940) 7,581,732 ------------ ------------ ------------ ------------ Total debt securities 18,923,768 -- (294,275) 18,629,493 Investments in mutual funds 94,092 -- -- 94,092 Other investments 405,950 -- -- 405,950 ------------ ------------ ------------ ------------ $ 19,423,810 $ -- $ (294,275) $ 19,129,535 ============ ============ ============ ============ 1999 -------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- Held-to-maturity: Other Government securities $ 17,556,702 $ -- $ (506,631) $ 17,050,071 Mortgage-backed securities 14,747,072 -- (326,321) 14,420,751 ------------ ------------ ------------ ------------ $ 32,303,774 $ -- $ (832,952) $ 31,470,822 ============ ============ ============ ============
Maturities of investment securities classified as available-for-sale and held-to-maturity at December 31, 2000 were as follows. Expected maturities may differ from contractual maturities. Amortized Market cost value ---- ----- Available-for-sale: Due after one month through three years ... $ 1,999,625 $ 1,990,375 Due after three year through five years ... 1,000,000 997,623 Due after five years through fifteen years 2,476,107 2,514,363 Mortgage-backed securities ................ 5,395,957 5,418,149 ----------- ----------- Total debt securities ..................... 10,871,689 10,920,510 Investments in mutual funds ............... 100,084 100,084 Other investments ......................... 405,950 405,950 ----------- ----------- $11,377,723 $11,426,544 =========== =========== (Continued) 50 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 3. INVESTMENTS - Continued Amortized Market cost value ---- ----- Held-to-maturity: Due in one month through three years ...... $ 3,750,000 $ 3,733,380 Due after three years through five years .. 5,677,543 5,644,223 Due after five years through fifteen years 5,832,505 5,861,991 Mortgage-backed securities ................ 8,327,044 8,315,745 ----------- ----------- $23,587,092 $23,555,339 =========== =========== The Bank recorded a loss of $200,070 on the sale of investments during the year ended December 31, 2000. There were no investments sold during 1999. The Bank recorded a gain on the sale of investments during 1998 of $1,201. As of December 31, 2000 and 1999, investment securities with a book value of $12,930,953 and $9,964,172, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. 4. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of the net loans is as follows: Assets 2000 1999 ------ ---- ---- Commercial and industrial .......... $11,429,356 $13,664,212 Commercial real estate ............. 651,969 1,288,232 Residential mortgages .............. 22,316,280 26,236,947 Consumer loans ..................... 10,907,863 19,821,604 ----------- ----------- Total loans ...................... 45,305,468 61,010,995 Less allowance for loan losses ...... (562,174) (1,566,642) ----------- ----------- Net loans......................... $44,743,294 $59,444,353 =========== =========== As of December 31, 2000 and 1999, the Bank had loans to certain officers and directors and their affiliated interests in aggregate dollar amounts of approximately $1,463,900 and $1,442,600, respectively. During 2000 and 1999, new loans to such related parties amounted to $86,800 and $429,000 and repayments amounted to $65,500 and $126,700, respectively. Such transactions are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for other nonrelated party transactions. Nonaccrual loans totaled approximately $453,000 and $2,027,000 as of December 31, 2000 and 1999, respectively. At December 31, 2000 and 1999, unamortized deferred fees and costs totaled $111,413 and $151,645, respectively. (Continued) 51 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 4. LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued Loans having a carrying value of $50,000 and $406,400 were transferred to foreclosed real estate in 2000 and 1999, respectively. Changes in the allowance for possible loan losses are as follows: 2000 1999 1998 ---- ---- ---- Balance, beginning of year $ 1,566,642 $ 679,557 $ 468,806 Provision ................ 565,000 1,007,003 350,500 Charge-offs .............. (1,720,755) (387,480) (180,727) Recoveries ............... 151,287 267,562 40,978 ----------- ----------- ----------- Balance, end of year ..... $ 562,174 $ 1,566,642 $ 679,557 =========== =========== =========== At December 31, 2000, there were no loans considered to be impaired under SFAS No. 114. At December 31, 1999, the recorded investment in loans that were on a nonaccrual basis and were considered to be impaired under SFAS No. 114 was $844,300, respectively. At December 31, 1999, the related allowance for loan losses was $674,100, respectively. The average recorded investment in impaired loans during the year ended December 31, 1999 was approximately $844,300. For the years ended December 31, 1999 and 1998, the Bank recognized interest income on those impaired loans of $9,100 and $36,800, respectively. The Bank grants commercial, residential, and consumer loans to customers primarily located in Philadelphia County, Pennsylvania and surrounding counties in the Delaware Valley. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. During 2000, approximately 38% of the Bank's commercial loan portfolio was concentrated in loans made to religious organizations. 5. BANK PREMISES AND EQUIPMENT The major classes of bank premises and equipment and the total accumulated depreciation are as follows:
Estimated useful life 2000 1999 ------------- ---- ---- Buildings and leasehold improvements 10-15 years $ 3,506,388 $ 3,654,194 Furniture and equipment........... 3- 7 years 3,100,810 2,710,371 ----------- ----------- 6,607,198 6,364,565 Less accumulated depreciation..... (3,149,680) (2,539,244) ----------- ---------- $ 3,457,518 $ 3,825,321 =========== ===========
(Continued) 52 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 5. BANK PREMISES AND EQUIPMENT - Continued In October 2000, the Bank purchased the building that houses its corporate headquarters from a former officer in conjunction with the settlement of a legal matter for approximately $1.4 million. Before its purchase, the Bank leased this building from this officer under a non-cancelable capital lease. At December 31, 1999, this lease was accounted for as a capital lease in the amount of $1,483,000 with accumulated depreciation of $74,150. The Bank leases other facilities and other equipment under non-cancelable operating lease agreements. The amount of expense for operating leases for the years ended December 31, 2000, 1999 and 1998 was $511,836, $367,554 and $323,330. Future minimum lease payments under operating leases are as follows: Operating Year ending December 31, leases ------------------------ ------ 2001.................................................... $ 352,300 2002.................................................... 263,400 2003.................................................... 229,600 2004.................................................... 49,100 2005.................................................... 36,000 Thereafter.............................................. 21,000 ----------- Total minimum lease payments............................ $ 951,400 =========== 6. DEPOSITS At December 31, 2000, the scheduled maturities of time deposits (certificates of deposit) are as follows (dollars in thousands): 2001..................................................... $ 19,551 2002..................................................... 841 2003..................................................... 634 2004..................................................... 233 2005..................................................... 218 Thereafter............................................... 76 ---------- $ 21,553 ========== 53 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 7. BORROWINGS Reverse Repurchase Agreements The Bank enters into sales of securities under agreements to repurchase identical securities or reverse repurchase agreements. The amounts advanced to the Bank under these agreements represent short-term loans and would be reflected as a payable in the balance sheet. The securities underlying the agreements are book-entry securities maintained at the Federal Reserve Bank of Philadelphia. The average balance of reverse repurchase agreements entered into during 2000 was $777,000 and the maximum amount outstanding at any month-end during 2000 was $2.96 million. As of December 31, 2000, the Bank had no reverse repurchase agreements outstanding. Credit Lines As of December 31, 2000, the Bank has outstanding two borrowing arrangements with financial institutions, collateralized by investment securities. One arrangement is a fully secured Federal Funds line of credit with a correspondent bank totaling $2 million, the second is a Master Repurchase Agreement with another financial institution. Borrowings under these agreements have interest rates that fluctuate based on market conditions. As of December 31, 2000, the Bank had no borrowings outstanding. 8. CAPITAL STOCK OFFERINGS In June 2000 and December 2000, respectively, the Bank received $411,809 and $436,212 and issued 34,317 and 36,351 shares, respectively, as a result of the purchase of common stock by members of the Bank's board of directors in a limited offering at a price of $12.00 per share. On September 30, 1998, the Company designated a subclass of its Common Stock as Class B. Pursuant to the terms of the amendment, holders of the Class B Common Stock have rights of Common Stockholders, with the exception of voting rights. On October 9, 1998, the Company sold 83,333 shares of Class B Common Stock to one shareholder for a purchase price of $12 per share. On February 9, 1999 and September 24, 1999, the Bank sold 83,333 and 25,000 shares of Class B Stock, respectively, to the same shareholder at $12 per share. During 1998, the Bank received $64,922 and issued 6,492 shares as a result of warrants exercised by shareholders to purchase common stock at a price of $10.00 per share. As of December 31, 1998, no warrants remained outstanding. In July 1998, the Company began a limited offering of its Series A Preferred Stock (noncumulative, 6%, $.01 par value) to Fannie Mae Corporation. The nonvoting preferred stock was offered at a price of $20 per share, in an amount for which the aggregate purchase price does not exceed the lesser of (1) 9.99% of the total equity of the Company or (2) $880,000. During 1998, the Company received $796,980 and issued 39,849 shares of preferred stock from this offering. During 1999, the Company received $203,020 from Fannie Mae and issued 10,151 shares of preferred stock from this offering. Upon the declaration of a common dividend, each of the Series A preferred shares will be accorded a non-cumulative dividend preference equal to 6% of the purchase price of the stock per annum prior to the payment of any dividend on account of any other class or series of the Company. No dividends have been declared or paid. 54 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 9. INCOME TAXES The Bank accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." At December 31, 2000, the Bank has net operating loss carryforwards of approximately $4,300,000 for income tax purposes that begin to expire in 2008 through 2020. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. For financial reporting purposes, a valuation allowance of $1,643,919 and $1,499,042 as of December 31, 2000 and 1999, respectively, has been recognized to offset the deferred tax assets related to the cumulative temporary differences and the tax loss carryforwards. Significant components of the Bank's deferred tax assets are as follows:
2000 1999 ---- ---- Deferred tax assets: Provision for loan losses $ 91,668 $ 467,180 Unrealized (gains) losses on investment securities (11,121) 98,092 Depreciation 147,588 29,390 Net operating loss carryforwards 1,465,342 880,707 Other (49,558) 23,673 Valuation allowance for deferred tax assets (1,643,919) (1,499,042) ----------- ----------- Net deferred tax assets $ -- $ -- =========== ===========
2000 1999 1998 ---- ---- ---- Effective rate reconciliation: Tax at statutory rate $(256,073) $(418,275) $ 3,377 Nondeductible expenses 4,903 33,742 17,634 Increase in valuation allowance 155,997 379,094 -- Other 95,173 6,055 -- (Utilization of) increase in net operating loss -- (616) (21,011) --------- --------- --------- Total tax expense $ -- $ -- $ -- ========= ========= ========= 10. FINANCIAL INSTRUMENT COMMITMENTS The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit, which are conditional commitments issued by the Bank to guarantee the performance of an obligation of a customer to a third party. Both arrangements have credit risk essentially the same as that involved in extending loans and are subject to the Bank's normal credit policies. Collateral may be obtained based on management's assessment of the customer. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments is represented by the contractual amount of those instruments. (Continued) 55 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 10. FINANCIAL INSTRUMENT COMMITMENTS - Continued Summaries of the Bank's financial instrument commitments are as follows: 2000 1999 ---- ---- Commitments to extend credit............. $ 5,570,835 $ 6,140,622 Outstanding letters of credit............ 139,000 259,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and unused credit card lines. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. 11. FAIR VALUES OF FINANCIAL INSTRUMENTS Fair value information about financial instruments is required to be disclosed, whether or not recognized in the balance sheet, where it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flows or other valuation techniques. Those techniques are significantly affected by assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank.
2000 1999 --------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- (Dollars in thousands) Assets: Cash and cash equivalents ... $ 6,294 $ 6,294 $16,920 $16,920 Investment securities ....... 35,014 34,982 51,433 50,600 Loans, net of allowance for loan losses ............... 44,743 44,600 59,444 58,209 Liabilities: Demand deposits ............. 36,330 36,330 55,326 55,326 Savings deposits ............ 25,356 25,356 33,342 33,342 Time deposits ............... 21,553 21,538 36,098 36,198 Off Balance Sheet: Commitments to extend credit 5,571 5,571 6,141 6,141 Outstanding letters of credit 139 139 259 259
56 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 12. EMPLOYEE COMPENSATION In June 2000, the Bank entered into two-year employment agreements with its chief executive officer and its chief financial officer covering such items a salaries, bonuses and benefits. The agreements expire in 2002 and provide for guaranteed minimum annual compensation over the term of the contracts. The Company made no stock-based compensation awards to any employee during 2000, 1999 and 1998. In accordance with the contractual terms with its former chief executive officer, the Bank granted the option to acquire up to 4% of the Bank's stock as of December 31, 1993 at $8.54 per share, which was the book value at the date of grant. The Company adopted a Stock Option Plan in 1998. Under this Plan, options to acquire shares of common stock were granted to the former chief executive officer. The Stock Option Plan provides for the granting of options at the fair market value of the Company's common stock at the time the options are granted. Each option granted under the stock Option Plan may be exercised within a period of ten years from the date of grant. However, no option may be exercised within one year from the date of grant. In 1998, options to purchase 29,694 shares of the Company's common stock at a price of $8.54 per share were awarded, to the former chief executive officer. Had compensation cost for the Plan been determined based on the fair value of the options at the grant date consistent with the method required by SFAS No. 123, "Accounting for Stock-based Compensation," the Company's net loss and loss per share would have been reduced to the pro forma amounts indicated below: Year ended December 31, ----------------------- 2000 1999 ---- ---- (In thousands) Net loss As reported ................. $ (755) $ (1,230) Pro forma ................... $ (755) $ (1,230) Basic and Diluted loss per share As reported ................. $ (0.72) $ (1.24) Pro forma ................... $ (0.72) $ (1.24) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998: no dividends declared; expected volatility of 20%; a risk-free interest rate of 4.7%, and expected life of 10 years. 13. CORE DEPOSIT INTANGIBLES On September 24, 1999, the Bank acquired four branches from First Union Corporation with deposits totaling $31.5 million. The Bank paid a deposit premium of 7%, or $2,186,500, and incurred approximately $351,650 in consulting and other costs directly related to these branch acquisitions. Subsequent to the acquisition, the Bank transferred back to First Union one significant deposit relationship totaling $940,000 and received a $66,000 refund of deposit premium. The premium and branch acquisition costs are being amortized over 14 years. Amortization totaled $176,818 and $43,626 for the year ended December 31, 2000 and 1999, respectively. 57 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 14. CONSOLIDATED FINANCIAL INFORMATION--PARENT COMPANY ONLY Condensed Balance Sheets DECEMBER 31, ----------------------- 2000 1999 ---- ---- (Dollars in thousands) Assets: Due from banks (subsidiary) ............. $ 289 $ 289 Investment in United Bank of Philadelphia 9,061 8,738 -------- -------- Total assets ............................ $ 9,350 $ 9,027 ======== ======== Shareholders' equity: Series A preferred stock .................. $ 1 $ 1 Common Stock .............................. 11 10 Additional paid-in capital ................ 14,718 13,870 Accumulated deficit ....................... (5,413) (4,658) Net unrealized holding gains (losses) on securities available-for-sale ...... 33 (196) -------- -------- Total shareholders' equity .............. $ 9,350 $ 9,027 ======== ======== Condensed Statements of Operations YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ---- ---- ---- (Dollars in thousands) Equity in net income (loss) of subsidiary $ (755) $(1,230) $ 10 ------- ------- ------- Net income (loss) $ (755) $(1,230) $ 10 ======= ======= ======= Condensed Statements of Cash Flows
YEAR ENDED DECEMBER 31, ------------------------------------ 2000 1999 1998 ---- ---- ---- (Dollars in thousands) Cash flows from operating activities: Net income (loss) $ (755) $(1,230) $ 10 Equity in net (income) loss of subsidiary 755 1,230 (10) ------- ------- ------- Net cash provided by operating activities -- -- -- ------- ------- ------- Cash flows from investing activities: Investment in subsidiary (847) (1,561) (1,783) ------- ------- ------- Net cash used in investing activities (847) (1,561) (1,783) ------- ------- ------- Cash flows from financing activities: Issuance of preferred stock -- 203 797 Issuance of common stock 847 1,382 1,065 ------- ------- ------- Net cash provided by financing activities 847 1,585 1,862 ------- ------- ------- Net increase in cash and cash equivalents -- 24 79 Cash and cash equivalents at beginning of year 289 265 186 ------- ------- ------- Cash and cash equivalents at end of year $ 289 $ 289 $ 265 ======= ======= =======
58 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 15. REGULATORY MATTERS The Bank engages in the commercial banking business, with a particular focus on serving Blacks, Hispanics and women, and is subject to substantial competition from financial institutions in the Bank's service area. As a bank holding company and a banking subsidiary, the Company and the Bank, respectively, are subject to regulation by the Federal Reserve Board and the Pennsylvania Department of Banking and are required to maintain capital requirements established by those regulators. Prompt corrective actions may be taken by those regulators against banks that do not meet minimum capital requirements. Prompt corrective actions range from restriction or prohibition of certain activities to the appointment of a receiver or conservator of an institution's net assets. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices, the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total Tier I capital (as defined in the regulations) for capital adequacy purposes to risk-weighted assets (as defined). Management believes, as of December 31, 2000, that the Bank meets the capital adequacy requirements to which it is subject. In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written Agreement (Agreement) with its primary regulators with regard to, among other things, achievement of agreed-upon capital levels, implementation of a viable earnings/strategic plan, adequate funding of the allowance for loan losses, the completion of a management review and succession plan, and improvement in internal controls. The current Agreement requires the Bank to increase its capital ratio to 6.5% by June 30, 2000 and to 7% at all times thereafter. As of December 31, 2000, the Bank had met the required ratios by implementing strategies that included: increasing profitability, consolidating branches, and soliciting new and additional sources of capital. Management continues to address all matters outlined in the Agreement. Its most recent notification from its regulators dated January 13, 2001, indicates that it is "partially" in compliance with the Agreement's terms and conditions. Failure to comply could result in additional regulatory supervision and/or actions. Beginning in 1996, the Bank has operated under a Supervisory Letter from its primary regulator. The Supervisory Letter prevents the Bank and the Company from declaring or paying dividends without the prior written approval of its regulators and prohibits the Bank and Company from issuing long-term debt. The most recent notification dated January 13, 2001, from the Federal Reserve Bank categorized the Bank as "adequately capitalized" under the regulatory framework for prompt and corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. The Bank's growth, continued losses and the additional provisions to the allowance for loans losses may have an adverse effect on its capital ratios. (Continued) 59 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 15. REGULATORY MATTERS - Continued The Bank's actual capital amounts and ratios are as follows: (IN THOUSANDS)
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------- ----------------------------------- --------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- AS OF DECEMBER 31, 2000: TOTAL CAPITAL TO RISK- WEIGHTED ASSETS: CONSOLIDATED $ 7,556 17.59% $ 3,459 equal or greater than 8.00% N/A N/A BANK 7,267 16.92 3,436 equal or greater than 8.00 4,295 equal or greater than 10.00% TIER I CAPITAL TO RISK- WEIGHTED ASSETS: CONSOLIDATED 7,019 16.34 1,730 equal or greater than 4.00 N/A N/A BANK 6,730 15.67 1,718 equal or greater than 4.00 2,577 equal or greater than 6.00% TIER I CAPITAL TO AVERAGE ASSETS: CONSOLIDATED 7,019 7.39 3,812 equal or greater than 4.00 N/A N/A BANK 6,730 7.08 3,800 equal or greater than 4.00 4,750 equal or greater than 5.00%
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------- ----------------------------------- --------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- AS OF DECEMBER 31, 1999: TOTAL CAPITAL TO RISK- WEIGHTED ASSETS: COMPANY (CONSOLIDATED) $ 7,564 12.44% $ 4,864 equal or greater than 8.00% N/A N/A BANK 7,275 12.07 4,822 equal or greater than 8.00 6,027 equal or greater than 10.00% TIER I CAPITAL TO RISK- WEIGHTED ASSETS: COMPANY (CONSOLIDATED) 6,794 11.18 2,431 equal or greater than 4.00 N/A N/A BANK 6,505 10.80 2,409 equal or greater than 4.00 3,614 equal or greater than 6.00% TIER I CAPITAL TO AVERAGE ASSETS: COMPANY (CONSOLIDATED) 6,794 5.08 5,350 equal or greater than 4.00 N/A N/A BANK 6,505 4.87 5,343 equal or greater than 4.00 6,679 equal or greater than 5.00%
60 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Years ended December 31, 2000, 1999, and 1998 16. COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, 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. 17. EARNINGS PER SHARE COMPUTATION In accordance with SFAS No. 128, income (loss) per share is calculated as follows: YEAR ENDED DECEMBER 31, 2000 ---------------------------------------- LOSS SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ NET LOSS $ (754,720) =========== BASIC LOSS PER SHARE LOSS AVAILABLE TO STOCKHOLDERS $ (754,720) 1,049,166 $(0.72) =========== ========= ====== YEAR ENDED DECEMBER 31, 1999 ---------------------------------------- LOSS SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ NET LOSS $(1,230,222) =========== BASIC EPS LOSS AVAILABLE TO STOCKHOLDERS $(1,230,222) 995,699 $(1.24) =========== ======== ====== YEAR ENDED DECEMBER 31, 1998 ---------------------------------------- LOSS SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ NET INCOME $ 9,933 ======= BASIC EPS INCOME AVAILABLE TO STOCKHOLDERS $ 9,933 845,902 $0.01 ======= ======= ===== 61 EX-10.1 2 0002.txt 10(B) EMPLOYMENT CONTRACT (EVELYN F. SMALLS) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT made as of this day of June, 2000 between United Bank of Philadelphia, a bank organized and incorporated under the laws of the Commonwealth of Pennsylvania, with offices at 300 North Third Street, Philadelphia, Pennsylvania 19106 (the "Bank") and Evelyn Smalls (the "Employee"). WITNESSETH: WHEREAS, the Bank is a Pennsylvania bank, incorporated on September 17, 1990 as a Pennsylvania-chartered commercial bank; and WHEREAS, the Bank would like to employ the Employee as President of the Bank; and WHEREAS, the parties desire to provide for such employment of the Employee in accordance with the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 1 of 8 1. Duties and Term. a. The Bank hereby employs the Employee to serve in the capacity of President of the Bank and, in such capacity, to be responsible for the day-to-day operations and overall management of the Bank, promote the Bank in the minority community and with the public in general and such additional activities as will promote the profitability and growth of the Bank or as shall be assigned by the Board of Directors. The Employee will perform such other duties of a managerial or executive nature consistent with her title as are from time to time determined by the Board. The Employee agrees to be so employed by Bank and shall devote her best efforts and all of her business time to the performance of her duties hereunder. b. The term of the Employee's employment hereunder shall commence upon the date of the execution of this Agreement and shall continue until the second anniversary of this date (the "Original Term"); provided, however, that employment may be terminated earlier in the event that: (i) any governmental or other approvals necessary for the Employee to fill this role cannot be obtained or (ii) the Bank terminates the Employee pursuant to Paragraph 4 of this Agreement. c. This Agreement shall be subject to renewal upon agreement of the parties at any time during the Original Term (any period of employment after the Original Term shall be referred to as a "Renewal Term." EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 2 of 8 2. Compensation. a. Salary. During the first year of the Original Term, the Bank shall pay the Employee an annual salary of $135,000 payable in equal bi-weekly installments or as the parties otherwise agree. Thereafter the Employee's annual salary shall be such as is mutually determined by the Employee and the Board of Directors of the Bank, but in no event shall be less than the Employee's salary during the previous year of the Original Term. The Employee's annual salary during any Renewal Term shall be the subject of mutual agreement between the Employee and the Bank but shall not be less than the Employee's salary during the previous year of the Employment Term. b. Additional Compensation. The Employee shall have the opportunity to receive an annual cash bonus (the "Annual Bonus"), which shall be divided into two tiers: the initial cash bonus (the "Initial Cash Bonus"), equal up to 12% of the Employee's Base Salary, and the additional cash bonus (the "Additional Cash Bonus"), which shall be equal to 12% of the Employee's Base Salary. Both the Initial Cash Bonus and the Additional Cash Bonus shall be based upon separate financial performance targets for each fiscal year, or, in the case of the 2000 fiscal year, the last six months of operation (the "Performance Targets"). The Performance Targets shall be determined as follows: EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 3 of 8 (i) The target financial performance on which the Employee's Initial Cash Bonus will be based (the "Initial Cash Bonus Target") shall be equal to the annual EBITDA target for the Bank for that fiscal year as set forth in the Bank's budget. However, for the 2000 fiscal year, the Initial Cash Bonus Target shall be break-even for the last six months of the fiscal year. (ii) The target financial performance on which the Employee's Additional Cash Bonus will be based (the "Additional Cash Bonus Target") shall be equal to the sum of (x) the Initial Cash Bonus Target and (y) the product of the Initial Cash Bonus Target multiplied by 8 percent. However, the Additional Cash Bonus Target for 2000 shall be the target EBITDA of the Bank as set forth in the Bank's budget. c. Fringe benefits. During the Employment Term, the Bank, at its expense, shall provide to the Employee health, disability, life and other insurance benefits. During the Employment Term, the Employee shall be entitled to receive benefits under employee benefit, retirement, pension profit-sharing, deferred compensation, long-term incentive, stock option, restricted stock, phantom stock or other similar plans that may be established at the sole discretion of the Board of Directors of the Bank. EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 4 of 8 d. Insurance. The Employee shall be a beneficiary of the Bank's group health and disability insurance. During the period of employment, the Bank, at its sole expense, will provide the Employee with term life insurance coverage in the amount of two times the salary identified in Section 2(a) hereof. The policy shall be owned by the Employee who shall have all incidents of ownership of the policy, including, without limitation, the right to name the beneficiary thereof. e. Vacation. During each calendar year during the Employment Term, the Employee shall be entitled to take four weeks vacation at such times as the Employee and the Bank mutually agree. Such agreement shall not be unreasonably with-held. Employees vacation shall vest according to vesting schedule contained in the Bank's Employee manual. f. Reimbursement of Expenses. The Employee shall be reimbursed for all items of travel, entertainment and other expense reasonably incurred by her on behalf of the Bank upon presentation to the Bank of vouchers representing such items of expense. Such expenses shall include the cost of leasing an automobile for the Employee and the cost of insurance on such automobile up to a maximum amount of $500 per month. g. Entire Compensation. The compensation provided for herein, and any additional compensation made available to the Employee in the discretion of the Board of Directors of the Bank, is in full payment of the services to be rendered by the Employee to the Bank. 3. Death or Total Disability of the Employee. ------------------------------------------ i. Death. In the event of the death of the Employee during the Employment Term, this Agreement shall terminate effective as of the date of the Employee's death, and the Bank shall not have any further obligations or liability hereunder, except as set forth in Section 5 hereof. b. Total Disability. In the event of the Total Disability, as that term is defined in this Section 3(b), of the Employee for a period of 90 consecutive days during the Employment Term, the Bank shall have the right to terminate the Employee's employment hereunder after such 90 consecutive days of Total Disability by giving the Employee 30 days' written notice thereof and, upon expiration of such 30-day period, this Agreement shall terminate and the Bank shall not have any further obligations or liability hereunder, except as set forth in Section 5 hereof. The Term "Total Disability", as used in this Section 3(b), shall mean a mental, emotional or physical injury, illness or incapacity which, in the reasonable opinion of the Bank, renders the Employee unable to perform the principal duties, functions and responsibilities required of him hereunder. 4. Discharge for Cause. The Bank may immediately discharge the Employee and terminate her employment hereunder for the following reasons: (i) habitual intoxication; (ii) drug addiction; (iii) conviction of a felony during the Employment Term; (iv) adjudication as an incompetent or (v) the Employee's willful breach or habitual neglect of her duties or obligations as set forth herein. Upon receipt of such notice by the Employee, in the case of clauses (i), (ii), (iii), and (iv) and in the case of clause (v) upon the expiration of a 30-day cure period, this Agreement shall terminate and the Bank shall not have any further obligations or liability hereunder, other than as set forth in Section 5 hereof. 5. Obligations of the Bank Upon Termination. Upon Termination of this Agreement, the Bank shall not have any further obligations or liability hereunder, other than reimbursement of expenses pursuant to Section 2(d) hereof, except to pay to the Employee the unpaid portion, if any, of the Employee's salary accrued for the period up to the date of termination and payable to the Employee pursuant to Section 2(a) hereof. 6. Amendments. Any amendment to this Agreement shall be made only by written agreement signed by the parties hereto. 7. Construction. This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. 8. Assignment. The rights and obligations of the Bank under this Agreement may not be assigned by the Bank without the prior written consent of the Employee. 9. Notices. All notices, consents and other communications to be given hereunder shall be in writing and shall be delivered personally or sent by certified mail, return receipt requested, postage prepaid, and addressed to the parties at their respective addresses set forth in the first paragraph of this Agreement. Any party may from time to time change its address for purposes of notices to that party by notice specifying a new address, but no change shall be deemed to have been given until it is actually received by the party to whom the notice is being given. IN WITNESS WHEREOF, this Agreement has been executed by the Bank and by the Employee as of the day and year first above written. UNITED BANK OF PHILADELPHIA BY: -------------------------- Co-Chairman of the Board ------------------------- Evelyn Smalls EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 5 of 8 EX-10.2 3 0003.txt 10(C) EMPLOYMENT CONTRACT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT made as of this day of June, 2000 between United Bank of Philadelphia, a bank organized and incorporated under the laws of the Commonwealth of Pennsylvania, with offices at 300 North Third Street, Philadelphia, Pennsylvania 19106 (the "Bank") and Brenda Hudson-Nelson (the "Employee"). WITNESSETH: WHEREAS, the Bank is a Pennsylvania bank, incorporated on September 17, 1990 as a Pennsylvania-chartered commercial bank; and WHEREAS, the Bank would like to employ the Employee as Senior Vice President and Chief Financial Officer of the Bank; and WHEREAS, the parties desire to provide for such employment of the Employee in accordance with the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 1 of 8 1. Duties and Term. a. The Bank hereby employs the Employee to serve in the capacity of Senior Vice President and Chief Financial Officer of the Bank and, in such capacity, to be responsible for the financial and operational matters of the Bank as are consistent with her title. Employee will be responsible for conducting such additional activities as will promote the profitability and growth of the Bank or as shall be assigned by the President of the Board of Directors. The Employee agrees to be so employed by Bank and shall devote her best efforts and all of her business time to the performance of her duties hereunder. b. The term of the Employee's employment hereunder shall commence upon the date of the execution of this Agreement and shall continue until the second anniversary of this date (the "Original Term"); provided, however, that employment may be terminated earlier in the event that: (i) any governmental or other approvals necessary for the Employee to fill this role cannot be obtained or (ii) the Bank terminates the Employee pursuant to Paragraph 4 of this Agreement. c. This Agreement shall be subject to renewal upon agreement of the parties at any time during the Original Term (any period of employment after the Original Term shall be referred to as a "Renewal Term." EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 2 of 8 2. Compensation. a. Salary. During the first year of the Original Term, the Bank shall pay the Employee an annual salary of $100,000 payable in equal bi-weekly installments or as the parties otherwise agree. Thereafter the Employee's annual salary shall be such as is mutually determined by the Employee and the Board of Directors of the Bank, but in no event shall be less than the Employee's salary during the previous year of the Original Term. The Employee's annual salary during any Renewal Term shall be the subject of mutual agreement between the Employee and the Bank but shall not be less than the Employee's salary during the previous year of the Employment Term. b. Additional Compensation. The Employee shall have the opportunity to receive an annual cash bonus (the "Annual Bonus"), which shall be divided into two tiers: the initial cash bonus (the "Initial Cash Bonus"), equal up to 12% of the Employee's Base Salary, and the additional cash bonus (the "Additional Cash Bonus"), which shall be equal to 12% of the Employee's Base Salary. Both the Initial Cash Bonus and the Additional Cash Bonus shall be based upon separate financial performance targets for each fiscal year, or, in the case of the 2000 fiscal year, the last six months of operation (the "Performance Targets"). The Performance Targets shall be determined as follows: EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 3 of 8 (i) The target financial performance on which the Employee's Initial Cash Bonus will be based (the "Initial Cash Bonus Target") shall be equal to the annual EBITDA target for the Bank for that fiscal year as set forth in the Bank's budget. However, for the 2000 fiscal year, the Initial Cash Bonus Target shall be break-even for the last six months of the fiscal year. (ii) The target financial performance on which the Employee's Additional Cash Bonus will be based (the "Additional Cash Bonus Target") shall be equal to the sum of (x) the Initial Cash Bonus Target and (y) the product of the Initial Cash Bonus Target multiplied by 8 percent. However, the Additional Cash Bonus Target for 2000 shall be the target EBITDA of the Bank as set forth in the Bank's budget. c. Fringe benefits. During the Employment Term, the Bank, at its expense, shall provide to the Employee health, disability, life and other insurance benefits. During the Employment Term, the Employee shall be entitled to receive benefits under employee benefit, retirement, pension profit-sharing, deferred compensation, long-term incentive, stock option, restricted stock, phantom stock or other similar plans that may be established at the sole discretion of the Board of Directors of the Bank. EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 4 of 8 d. Insurance. The Employee shall be a beneficiary of the Bank's group health and disability insurance. During the period of employment, the Bank, at its sole expense, will provide the Employee with term life insurance coverage in the amount of two times the salary identified in Section 2(a) hereof. The policy shall be owned by the Employee who shall have all incidents of ownership of the policy, including, without limitation, the right to name the beneficiary thereof. e. Vacation. During each calendar year during the Employment Term, the Employee shall be entitled to take four weeks vacation at such times as the Employee and the Bank mutually agree. Such agreement shall not be unreasonably with-held. Employees vacation shall vest according to vesting schedule contained in the Bank's Employee manual. f. Reimbursement of Expenses. The Employee shall be reimbursed for all items of travel, entertainment and other expense reasonably incurred by her on behalf of the Bank upon presentation to the Bank of vouchers representing such items of expense. Such expenses shall include the cost of leasing an automobile for the Employee and the cost of insurance on such automobile up to a maximum amount of $500 per month. g. Entire Compensation. The compensation provided for herein, and any additional compensation made available to the Employee in the discretion of the Board of Directors of the Bank, is in full payment of the services to be rendered by the Employee to the Bank. 3. Death or Total Disability of the Employee. ------------------------------------------ a. Death. In the event of the death of the Employee during the Employment Term, this Agreement shall terminate effective as of the date of the Employee's death, and the Bank shall not have any further obligations or liability hereunder, except as set forth in Section 5 hereof. b. Total Disability. In the event of the Total Disability, as that term is defined in this Section 3(b), of the Employee for a period of 90 consecutive days during the Employment Term, the Bank shall have the right to terminate the Employee's employment hereunder after such 90 consecutive days of Total Disability by giving the Employee 30 days' written notice thereof and, upon expiration of such 30-day period, this Agreement shall terminate and the Bank shall not have any further obligations or liability hereunder, except as set forth in Section 5 hereof. The Term "Total Disability", as used in this Section 3(b), shall mean a mental, emotional or physical injury, illness or incapacity which, in the reasonable opinion of the Bank, renders the Employee unable to perform the principal duties, functions and responsibilities required of him hereunder. 4. Discharge for Cause. The Bank may immediately discharge the Employee and terminate her employment hereunder for the following reasons: (i) habitual intoxication; (ii) drug addiction; (iii) conviction of a felony during the Employment Term; (iv) adjudication as an incompetent or (v) the Employee's willful breach or habitual neglect of her duties or obligations as set forth herein. Upon receipt of such notice by the Employee, in the case of clauses (i), (ii), (iii), and (iv) and in the case of clause (v) upon the expiration of a 30-day cure period, this Agreement shall terminate and the Bank shall not have any further obligations or liability hereunder, other than as set forth in Section 5 hereof. 5. Obligations of the Bank Upon Termination. Upon Termination of this Agreement, the Bank shall not have any further obligations or liability hereunder, other than reimbursement of expenses pursuant to Section 2(d) hereof, except to pay to the Employee the unpaid portion, if any, of the Employee's salary accrued for the period up to the date of termination and payable to the Employee pursuant to Section 2(a) hereof. 6. Amendments. Any amendment to this Agreement shall be made only by written agreement signed by the parties hereto. 7. Construction. This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. 8. Assignment. The rights and obligations of the Bank under this Agreement may not be assigned by the Bank without the prior written consent of the Employee. 9. Notices. All notices, consents and other communications to be given hereunder shall be in writing and shall be delivered personally or sent by certified mail, return receipt requested, postage prepaid, and addressed to the parties at their respective addresses set forth in the first paragraph of this Agreement. Any party may from time to time change its address for purposes of notices to that party by notice specifying a new address, but no change shall be deemed to have been given until it is actually received by the party to whom the notice is being given. IN WITNESS WHEREOF, this Agreement has been executed by the Bank and by the Employee as of the day and year first above written. UNITED BANK OF PHILADELPHIA BY: ---------------------------- Co-Chairman of the Board ---------------------------- Brenda Hudson-Nelson EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 5 of 8 -----END PRIVACY-ENHANCED MESSAGE-----