Regulatory

9 Months Ended

Sep. 30, 2019

Regulatory

Regulatory

11. Regulatory

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 September 30, 2019 and December 31, 2018, the Bank’s tier one leverage capital ratio was 5.37% and 3.00%, respectively, and its total risk-based capital ratio was 11.96%and 6.34%, 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. In May 2021, the Company received a $600,000 capital investment from another financial institution.

· 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.

· Other grants---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 grant revenue 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.

· Further, in August 2021, the Bank was awarded a grant totaling $1,286,000 from the US Treasury’s CDFI Rapid Response Program that was geared to strengthen the Bank as the economy recovers from the effects of the COVID-19 pandemic. This grant resulted in further improvement in the Bank’s capital ratios.

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.  At June 30, 2022, the Bank’s Tier 1 leverage ratio was 9.50% and its total risk-based capital ratio was 21.92% which is considered “well capitalized” under the regulatory framework for prompt and corrective action.