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13. Regulatory Matters

12 Months Ended

Dec. 31, 2017

13. REGULATORY MATTERS

The Bank engages in the commercial banking business, with a particular focus on serving African Americans, 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 FDIC and the Pennsylvania Department of Banking (“PADOB”) and are required to maintain capital requirements established by those regulators. Effective January 1, 2010, the FDIC became the Bank’s primary regulator after it voluntarily surrendered its Federal Reserve Membership.

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).

The most recent notification as of December 31, 2017, from the FDIC and PADOB categorized the Bank as “well capitalized” under the regulatory framework for prompt and corrective action due to the Consent Orders described below. The Bank’s growth and other operating factors such as the need for additional provisions to the allowance for loans losses may have an adverse effect on its capital ratios.

The Company and the Bank’s actual capital amounts and ratios are as follow as of December 31, 2017:

(In 000’s)	Actual		Minimum to be Well Capitalized		Minimum to be Adequately Capitalized
	Amount	Ratio	Amount	Ratio	Amount	Ratio
Total (Tier II) capital to risk weighted assets:
Company	$3,338	10.22%	N/A
Bank	3,300	10.11	3,265	10.0%	$2,612	8.00%
Tier I capital to risk weighted assets
Company	3,158	9.67	N/A
Bank	3,120	9.56	2,612	8.00%	1,959	6.00%
Common equity Tier I capital to risk weighted assets
Company	3,158	9.67	N/A
Bank	3,120	9.56	2,122	6.50%	1,469	4.50%
Tier I Leverage ratio (Tier I capital to total quarterly average assets)
Company	3,158	5.58	N/A
Bank	3,120	5.51	2,829	5.00%	2,263	4.00%
Tangible common equity to tangible assets
Company	3,158	5.58	N/A	N/A	N/A	N/A
Bank	3,120	5.51	N/A	N/A	N/A	N/A

The Company and the Bank’s actual capital amounts and ratios are as follow as of December 31, 2016:

(In 000’s)	Actual		Minimum to be Well Capitalized		Minimum to be Adequately Capitalized
	Amount	Ratio	Amount	Ratio	Amount	Ratio
Total (Tier II) capital to risk weighted assets:
Company	$2,897	9.08%	N/A
Bank	2,897	9.08	3,190	10.00%	$2,552	8.00%
Tier I capital to risk weighted assets
Company	2,597	8.14	N/A
Bank	2,597	8.14	2,074	8.00%	$1,914	6.00%
Common equity Tier I capital to risk weighted assets
Company	2,597	8.14	N/A
Bank	2,597	8.14	2,074	6.50%	$1,436	4.50%
Tier I Leverage ratio (Tier I capital to total quarterly average assets)
Company	2,597	4.82	N/A
Bank	2,597	4.82	2,692	5.00%	$2,154	4.00%
Tangible common equity to tangible assets
Company	2,597	4.82	N/A	N/A	N/A	N/A
Bank	2,597	4.82	N/A	N/A	N/A	N/A

On April 25, 2018, the Bank entered into stipulations consenting to the issuance of amended and restated Consent Orders with the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking (“Department”) which serve as a prescriptive Restoration Plan providing benchmarks for capital, earnings and asset quality. The material terms of the Consent Orders are identical. The requirements and status of items included in the Orders are as follows:

The Orders will remain in effect until modified or terminated by the FDIC and the Department and do not restrict the Bank from transacting its normal banking business. The Bank will continue to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Customer deposits remain fully insured to the highest limits set by the FDIC. The FDIC and the Department did not impose or recommend any monetary penalties in connection with the Consent Orders. The Board of Directors is optimistic about the Bank’s ability to achieve the requirements as stated. These Orders represent a more tailored approach by regulators to strengthen and preserve minority-owned financial institutions like United Bank of Philadelphia. The priority for the Board of

Directors and management is to comply with the Order promptly. The requirements of the Orders are as follows:

Increase participation of the Bank’s board of directors in the Bank’s affairs by having the board assume full responsibility for approving the Bank’s policies and objectives and for supervising the Bank’s management;

Have and retain qualified management, and notify the FDIC and the Department of any changes in the Bank’s board of directors or senior executive officers. Add two additional board members with banking experience.

Complete audited financial statements for 2016, 2017, and 2018.

Formulate and implement a Restoration/Strategic Plan to increase profitability reduce expenses and improve operating performance and related ratios.

Develop and implement a Strategic Plan for each year during which the orders are in effect, to be revised Develop a written capital plan detailing the manner in which the Bank will meet and maintain a ratio of Tier 1 capital to total assets (“leverage ratio”) of at least 8.5% and a ratio of qualifying total capital to risk-weighted assets (total risk-based capital ratio) of at least 12.5%, by September 2019;

Formulate a written plan to improve asset quality and reduce the Bank’s risk positions in assets classified as “Doubtful” or “Substandard” at its regulatory examination;

Eliminate all assets classified as “Loss” at its current regulatory examination;

Refrain from accepting any brokered deposits; Prepare and submit quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the Orders.

Refrain from paying cash dividends without prior approval of the FDIC and the Department;

As of December 31, 2017 and December 31, 2016, the Bank’s tier one leverage capital ratio was 5.51% and 4.82%, respectively, and its total risk based capital ratio was 10.11% and 9.08%, respectively. These ratios are below the levels required by the Consent Orders. Management is in the process of addressing all matters outlined in the Consent Orders. The net loss during the quarter resulted in a decrease in the capital ratios. Management has developed and submitted a Capital Plan that focuses on the following:

Core Profitability from Bank operations—Core profitability is essential to stop the erosion of capital.

External equity investments—During 2017, the Company received external investments of $925,000 and from other financial institutions. External capital investments will continue to be sought.

Performance grants---Management has developed a performance grant strategy to attract funding based on economic impact and job creation/retention. The goal is to obtain grant funding from local entities that are seeking a “return on impact”. In April 2019, the Bank received a $2.5 million economic stimulus grant from the City of Philadelphia.

Also, in September 2020, the Bank received a grant totaling $3.4 million from the Pennsylvania CDFI Network to provide financial assistance related to potential losses related to the COVID-19 pandemic. Approximately $2.8 million of this grant was recorded as contributed capital and $617,000 was recorded as deferred revenue. The deferred revenue portion of the grant was allocated to be used to make principal and interest payments for up to six months for struggling small businesses in the Bank’s loan portfolio.

As a result of the above actions, management believes that the Bank has and will be able to comply with the terms and conditions of the Orders.