-----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, W2EyYRmh4yp9tMirUuWxyr4M1rUjV6upeVRUinkdDvOeZXzmU6R/c1vlpxTV0Kzi ZzzDyrJWm54ozDgi3MD3ig== 0000950159-05-000442.txt : 20050415 0000950159-05-000442.hdr.sgml : 20050415 20050415125628 ACCESSION NUMBER: 0000950159-05-000442 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050415 DATE AS OF CHANGE: 20050415 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: 1934 Act SEC FILE NUMBER: 000-25976 FILM NUMBER: 05752913 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 ub10k_mar05.txt UNITED BANCSHARES, INC. FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- 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, 2004 UNITED BANCSHARES, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) 0-25976 --------------------------- (Registrants' file number) Pennsylvania 23-2802415 -------------------------------- ------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) The Graham Building, 30 South 15th Street, Suite 1200, Philadelphia, Pennsylvania 19102 ------------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 351-4600 Securities registered pursuant to Section 12(b)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. [ ] Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] 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 a Series Preferred Stock (Series A Preferred Stock). The Board of Directors designated a subclass of the common stock, Class B Common Stock, by filing of Articles of Amendment to its Articles of Incorporation on September 30, 1998. This Class B Common Stock has all of the rights and privileges of Common Stock with the exception of voting rights. Of the 2,000,000 shares of authorized Common Stock, 250,000 have been designated Class B Common Stock. There is no market for the Common Stock. None of the shares of the Registrant's stock was sold within 60 days of the filing of this Form 10-K. As of March 17, 2005 the aggregate number of the shares of the Registrant's Common Stock outstanding was 1,068,588 (including 191,667 Class B non-voting). There are 33,500 shares of Common Stock held in treasury stock at March 17, 2005. The Series A Preferred Stock consists of 500,000 authorized shares of stock of which 136,842 shares are outstanding and 6,308 shares are held in treasury stock as of March 17, 2005. There are 78 pages in the Form 10-K. FORM 10-K United Bancshares, Inc. Index Item No. Page -------- ---- PART I 1. Business........................................................... 3 2. Properties......................................................... 13 3. Legal Proceedings.................................................. 14 4. Submission of Matters to a Vote of Security Holders................ 14 PART II 5. Market for Registrant's Common Equity, Related Stockholder Matters. 15 6. Selected Financial Data............................................ 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 16 7A. Quantitative and Qualitative Disclosures about Market Risk......... 37 8. Financial Statements and Supplementary Data........................ 37 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................... 38 9A. Controls and Procedures............................................ 38 9B. Other Information.................................................. 38 PART III 10. Directors and Executive Officers of Registrant..................... 39 11. Executive Compensation............................................. 45 12. Security Ownership of Certain Beneficial Owners and Management..... 47 13. Certain Relationships and Related Transactions..................... 47 14. Principal Accounting Fees and Services............................. 47 PART IV 15. Exhibits and Financial Statements Schedules........................ 48 UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 17, 2005. 2 PART I SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENT Certain of the matters discussed in this document and the documents incorporated by reference herein, including matters discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" may constitute forward looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, and may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of United Bancshares, Inc. ("UBS") to be materially different from future results, performance or achievements expressed or implied by such forward looking statements. The words "expect," "anticipate," "intended," "plan," "believe," "seek," "estimate," and similar expressions are intended to identify such forward-looking statements. UBS' actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation: (a) the effects of future economic conditions on UBS and its customers, including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and consumer saving patterns; (b) UBS interest rate risk exposure and credit risk; (c) changes in the securities markets with respect to the market values of financial assets and the stability of particular securities markets; (d) governmental monetary and fiscal policies, as well as legislation and regulatory changes; (e) changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral and securities, as well as interest-rate risks; (f) changes in accounting requirements or interpretations; (g) the effects of competition from other commercial banks, thrifts, mortgage companies, consumer finance companies, credit unions securities brokerage firms, insurance company's, money-market and mutual funds and other financial institutions operating in the UBS' trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet; (h) any extraordinary events (such as the September 11, 2001 events), the war on terrorism and the U.S. Government's response to those events or the U.S. Government becoming involved in a conflict in a foreign country; (i) 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; (j) UBS' success in generating new business in its existing markets, as well as its success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time; (k) UBS' timely development of competitive new products and services in a changing environment and the acceptance of such products and services by its customers; and (l) UBS' success in managing the risks involved in the foregoing. All written or oral forward-looking statements attributed to UBS are expressly qualified in their entirety by use of the foregoing cautionary statements. All forward-looking statements included in this Report are based upon information presently available, and UBS assumes no obligation to update any forward-looking statement. 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 The Graham Building, 30 S. 15th Street, Suite 1200, Philadelphia, Pennsylvania 19102. The Registrant's telephone number is (215) 351-4600. As of March 17, 2005, UBS and the Bank had a total of 39 employees. 3 United Bank of Philadelphia United Bancshares, Inc. is an African American controlled and managed bank holding company for United Bank of Philadelphia (the "Bank"), a commercial bank chartered in 1992 by the Commonwealth of Pennsylvania, Department of Banking and a member of the Federal Reserve System. The deposits held by the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank provides full service community banking in Philadelphia neighborhoods that are rich in diversity providing a market opportunity that includes men, women, families, small business owners, skilled laborers, professionals and many more who value home ownership and need banking services to help make their dreams come true. The Bank conducts all its banking activities through its three offices located as follows: West Philadelphia Branch 38th and Lancaster Avenue, Philadelphia, Pennsylvania, (iii) Mount Airy Branch 1620 Wadsworth Avenue, Philadelphia, Pennsylvania; and (iv) Progress Plaza Branch 1015 North Broad Street, Philadelphia, Pennsylvania. In July 2004, the Bank closed and consolidated its Two Penn Center (Center City) branch with its Progress Plaza Branch to create operating efficiencies. Through its locations, the Bank offers a broad range of commercial and consumer banking services. At December 31, 2004, the Bank had total deposits aggregating approximately $63.2 million and had total net loans outstanding of approximately $46.5 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 2000 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 1,517,550, which includes a minority population of 752,309. United Bank of Philadelphia, while state chartered as a commercial bank, is uniquely structured to be a player in providing retail services to its urban communities, while maintaining and establishing a solid portfolio of commercial relationships that include small businesses, churches and corporations. The Bank will leverage its CDFI (community development financial institution) designation as established by the United States Department of Treasury to attract deposits from entities seeking Community Reinvestment Act (the "CRA Act") credit as well as grants and/or equity from the US Treasury CDFI Fund and other agencies of the U.S. Government. While the Bank's certification period was scheduled to end in January 2004, a recent review by the CDFI Fund has extended the Bank's certification period to 2006. Among the greatest challenges facing inner city communities is their lack of stability and transience. Outside organizations and institutions that attempt to work within the community get frustrated and can leave at any time because they have no vested stake in the neighborhood. It is very easy for an organization without vested roots in the community to just pick up and leave, thus fostering lack of institutional consistency. The Bank represents consistency to these communities. The Bank takes its commitment to community development quite seriously and recognizes that effective corporate and institutional partnerships must be forged to truly make a difference. Bank management recognizes the potential in these communities and knows that with the right mix of financial services, growth will occur. The Bank will continue to leverage its community "know-how" with the appropriate corporate and institutional partners to help ensure that we create economic profit by making comprehensive products and services are available and accessible through service focused delivery channels. 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. 4 The focus of the Bank's lending activities is on the origination of commercial, consumer and residential loans. A broad range of credit products is 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 17, 2005, the Bank's maximum legal lending limit was approximately $1,132,000 per borrower. However, the Bank's internal Loan Policy limits the Bank's lending to $500,000 per borrower in order to diversify the loan portfolio. The Board of Directors of the Bank maintains the ability to waive its internal lending limit upon consideration of a loan. The Board of Directors has exercised this power with respect to loans and participations on a number of occasions. 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. These guarantees are intended to reduce the Bank's exposure to loss in its commercial loan portfolio. Commercial loans are typically made on the basis of cash flow to support repayment with secondary reliance placed on the underlying collateral. 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 participates in an automobile refinance program that allows customers to reduce high interest rates paid on their automobile loans down to more reasonable market rates. The Bank also offers residential mortgage loans to its customers through its strategic alliance with a Fortune 500 mortgage company. Other services the Bank offers include 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. The Bank will continue to focus on its niche businesses to include the basic deposit and loan business, while developing relationships with several corporate entities that have a commitment to community and economic development in the urban sector. Strategic alliances and partnerships are key to the economic strength of inner city neighborhoods. The Bank will continue to develop these strategic alliances/partnerships to help ensure that the communities we serve have full access to financial products and services. With focused strategies the Bank can realize fee income with a select number of corporations both locally and nationally. By developing the relationships appropriately, a new niche for the Bank can be expanded to add to its core earnings stream. To date, these opportunities have included loan syndications for four (4) major U.S. Corporations for which the Bank receives agent/arranger fees. The Bank will continue to cultivate these and other relationships for additional fee income opportunities. Access to the Bank's Website and the United States Securities and Exchange Commission Website Reports filed electronically by UBS with the Securities and Exchange Commission including proxy statements, reports on Form 10-K, reports on Form 10-Q, and current event reports on Form 8-K, as well as any amendment of those reports, and other information about UBS and the Bank are accessible at no cost on the Bank's web site at www.unitedbankofphiladelphia.com under the "shareholders corner" section. These files are also accessible on the Commission's website at www.sec.gov. 5 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 including trust services and many "free" products and services with bundled account relationships. 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 under 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. UBS 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. Many of the national financial institutions that provide financial services in Philadelphia are no longer headquartered in the region resulting in a loss of connectivity with the community. The Bank plans to further capitalize on this situation by implementing calling programs to offer potential customers a personalized community-based approach to banking. 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. In 2004, the Bank developed a strategic alliance with a group of minority representatives from a Fortune 500 investment firm to provide a full array of non-deposit products including investments, insurance and brokerage services. The Bank intends to use this firm as an extension of its business development staff to introduce and cross-sell all of its products and services including loans and deposits. UBS will continue to be cognizant of the diversity in its market and will continue to develop partnerships to leverage the Bank's capacity in its niche market by skillfully targeting customers and building stakeholder relationships. Supervision and Regulation Regulation of United Bancshares, Inc. UBS, as a Pennsylvania business corporation, is subject to the jurisdiction of the Securities and Exchange Commission (the "SEC") and certain state securities commissions concerning matters relating to the offering and sale of its securities. Accordingly, if UBS wishes to issue additional shares of its Common Stock, for example, to raise capital or to grant stock options, UBS must comply with the registration requirements of the Securities Act of 1933, as amended, and any applicable states securities laws, or find an applicable exemptions from such registration. 6 The Bank Holding Company Act UBS, as a bank holding company, is subject to the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and supervision by the Federal Reserve Board. The BCH Act limits the business of bank holding companies to banking, managing or controlling banks, performing certain servicing activities for subsidiaries and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking. UBS is subject to the supervision of and inspection by the Federal Reserve Board and required to file with the Board an annual report and such additional information as the Board may require pursuant to the BHC Act and its implementing regulations. A bank holding company is prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities, unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks, as to be a proper incident thereto. In making this determination, the Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. The BHC Act requires UBS to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than 5% of the voting shares of any corporation, including another bank. In addition, the BHC Act prohibits UBS from acquiring more than 5% of the voting shares of, or an interest in, or all or substantially all of the assets of, any bank located outside Pennsylvania, unless such an acquisition is specifically authorized by the laws of the state in which such bank is located. Subject to compliance with Pennsylvania law, and, as noted above, compliance with the BHC Act, UBS is permitted to control a number of banks. However, UBS is 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 bank if, after such acquisition, UBS would control more than 5% of the voting shares of such bank. The BHC Act and the Federal Reserve Board's regulations prohibit a bank holding company and its subsidiaries from engaging in certain tying arrangements in connection with any extension of credit or services. The "anti-tying" provisions prohibit a bank from extending credit, leasing, selling property or furnishing any service to a customer on the condition that the customer obtain additional credit or service from the bank, its bank holding company or any other subsidiary of its bank holding company, or on the condition that the customer not obtain other credit or services from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company. The Bank, as a subsidiary of UBS, is subject to certain restrictions imposed by the Federal Reserve Act, as amended, on any extensions of credit to UBS or its subsidiaries, on investments in the stock or other securities UBS or its subsidiaries, and on taking such stock or securities as collateral for loans. The Federal Reserve Act and Federal Reserve Board regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, that Act and those regulations may affect the terms upon which any person who becomes a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship. Federal law also prohibits the acquisition of control by UBS 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. 7 The Financial Services Act The Financial Services Act (the "FSA Act"), sometimes referred to as the Gramm-Leach-Bliley Act, repealed the provisions of the Glass-Steagall Act, which prohibited commercial banks and securities firms from affiliating with each other and engaging in each other's businesses. Thus, many of the barriers prohibiting affiliations between commercial banks and securities firms have been eliminated. The FSA Act authorizes the establishment of "financial holding companies" ("FHC") to engage in new financial activities offering and banking, insurance, securities and other financial products to consumers. Bank holding companies may elect to become a FHC, if all of its subsidiary depository institutions are well capitalized and well managed. See "Regulatory Action" and "Regulatory Matters" below. If those requirements are met, a bank holding company may file a certification to that effect with the Federal Reserve Board and declare that it elects to become a FHC. After the certification and declaration are filed, the FHC may engage either de novo or through an acquisition in any activity that has been determined by the Federal Reserve Board to be financial in nature or incidental to such financial activity. Under the FSA Act the Bank, subject to various requirements, is permitted to engage through "financial subsidiaries" in certain financial activities permissible for affiliates of an FHC. However, to be able to engage in such activities the Bank must be well capitalized and well managed and receive at least a "satisfactory" rating in its most recent CRA Act examination. See "The Community Reinvestment Act" below. UBS cannot be certain of the future effect of the legislation and regulations, described above, on its business, although there may be consolidation among financial service institutions and increased competition for UBS as well as an increase in the expense of regulatory compliance. Regulation of the Bank The Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and the Federal Reserve Board because the Bank is a member bank of the Federal Reserve System. The FDIC insures the Bank's deposits and thus the Bank is subject to certain FDIC regulations. In addition, the Bank is subject to a variety of local, state and federal laws that affect its operation. Below are summarized those laws and regulations which a have material impact on the operations and expenses of the Bank and thus UBS. Branch Banking The Pennsylvania Banking Code of 1965, as amended, the ("Banking Code"), has been amended to harmonize Pennsylvania law with federal law to enable Pennsylvania banking institutions, such as the Bank, to participate fully in interstate banking and to remove obstacles to out of state banks engaging in banking in Pennsylvania. Federal Reserve Membership Regulations Since 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 violate the law. Moreover, the Board has: (i) empowered the Federal Deposit Insurance Corporation (the "FDIC") 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 the FDIC to remove executive officers who have participated in such violations or unsound practices; (iii) restricted lending by the Bank to its executive officers, directors, principal shareholders or related interests thereof; (iv) restricted management personnel of the Bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area. Additionally, the Bank Control Act provides that no person may acquire control of the Bank unless the Federal Reserve Board has been given 60-days prior written notice and within that time has not disapproved of the acquisition or extended the period for disapproval. 8 The Federal Deposit Insurance Corporation Act The Federal Deposit Insurance Corporation Act (the "FDIC Act") includes several provisions that have a direct material impact on the Bank. The most significant of these provisions are discussed below. To minimize losses to the deposit insurance funds, the FDIC Act has established a format to monitor FDIC-insured institutions and to enable prompt corrective action to be taken by the appropriate federal supervisory agency if an institution begins to experience difficulty. The FDIC 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 I risk-based capital ratio, a 5% Tier I 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. 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 I Leverage Ratio of at least 4% and an 8% total risk-based capital ratio. Since the risk-based capital requirement is to be in the form of Tier I capital, this also will mean that a bank would need to maintain at least 4% Tier I 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 March 3, 2005, from the Federal Reserve authorities categorized the Bank as "adequately capitalized" under the regulatory framework for prompt and corrective action. See "Regulatory Action" and "Regulatory Matters" below. 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 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. The Community Reinvestment Act The Bank is required, by the CRA Act and its implementing regulations, to: (i) meet the credit needs of the community, including the low and moderate-income neighborhoods, which it serves. The Bank's CRA Act record is taken into account by the regulatory authorities in their evaluation of any application made by the Bank for, among other things, approval of a branch or other deposit facility, branch office relocation, a merger or an acquisition. The CRA Act also requires the federal banking agencies to make public disclosure of their evaluation of a bank's record of meeting the credit needs of its entire community, including low and moderate-income neighborhoods. After its most recent CRA Act examination the Bank was given an "outstanding" CRA Act rating." The Bank Secrecy Act Under the Bank Secrecy Act ("BSA"), the Bank and other financial institutions are required to report to the Internal Revenue Service currency transactions, of more than $10,000 or multiple transactions of which the Bank has knowledge exceed $10,000 in the aggregate. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report. Privacy of Consumer Financial Information The FSA Act also contains provisions designed to protect the privacy of each consumer's financial information held in a financial institution. The regulations (the "Regulations") issued pursuant to the FSA Act are designed to prevent financial institutions, such as the Bank, from disclosing a consumer's nonpublic personal information to third parties. However, financial institutions can share a consumer customer's personal information or information about business with affiliated companies. 9 The FSA Act Regulations permit financial institutions to disclose nonpublic personal information to nonaffiliated third parties for marketing purposes but financial institutions must provide a description of their privacy policies to the consumers and give consumers an opportunity to opt-out of such disclosure and prevent disclosure by the financial institution of the consumer's nonpublic personal information to nonaffiliated third parties. These privacy Regulations will affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. Consumer Protection Rules - Sale of Insurance Products In addition, as mandated by FSA Act, the bank 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 the Bank. The Rules provide that before the sale of insurance or annuity products can be completed, disclosures must be made that such insurance products are not deposits or other obligations of or guaranteed by the FDIC or any other agency of the United States, the Bank or any affiliate and that insurance products, including an annuities, may involve an investment risk, 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 the Bank or any affiliate or on the consumer's agreement not obtain or prohibit the consumer from obtaining an insurance product or annuity from an unaffiliated entity. Finally the Rules also require formal acknowledgment by 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 products. The Patriot Act The Patriot Act of 2001 which was enacted in the wake of the September 11, 2001 attacks, include provisions designed to combat international money laundering and advance the U.S. government's war against terrorism. The Patriot Act, and the regulations, which implement it, contains many obligations, which must be satisfied by financial institutions, including the Bank, which involve additional expenses for the Bank. The Sarbanes-Oxley Act of 2002 On July 30, 2002 the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") became law. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, provide enhanced penalties for accounting and auditing improprieties by publicly traded companies and protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities law. The changes required by Sarbanes-Oxley Act and its implementing regulations are intended to allow shareholders to monitor the performance of companies and their directors more easily and effectively. The Sarbanes-Oxley Act generally applies to all domestic companies, such as UBS, that file periodic reports with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Sarbanes-Oxley Act includes very significant disclosure requirements and new corporate governance rules, requires the SEC, the securities exchanges and the NASDAQ stock market to adapt extensive additional disclosures, corporate governance provisions and other related rules, as well as mandating that studies of certain significant issues be made by the SEC and the US Comptroller General. Given the extensive number of Sarbanes-Oxley Act rules and regulations to be finalized and implemented, the final scope and impact of its requirements on UBS and the financial services industry have yet to be determined. 10 The SOX Act addresses, among other matters, directors' audit committees; certification of financial statements by the chief executive officer and chief financial officer; forfeiture of bonuses and profits made by directors and senior officers in the twelve (12) month period covered by restated financial statements; a prohibition on insider trading during pension blackout periods; disclosure of off-balance sheet transactions; a prohibition by companies, other than federally insured financial institutions, on personal loans to their directors and officers; expedited filing of reports concerning stock transactions by directors and executive officers; formation of a public accounting oversight board; auditor independence; and increased criminal penalties for violation of certain the securities laws. To implement the requirements of SOX Act and regulations, UBS' management has instituted a series of actions to strengthen and improve UBS', corporate governance practices. Included in those actions was the development of a system designed to evaluate and monitor the continued effectiveness of the design and operation of UBS' internal controls and procedures for financial reporting. These series of actions by UBS' management improves UBS' and the Bank's Audit Committees and Risk Management Committees of the Boards, and UBS' and Bank's structures and processes which are intended to provide tools to strengthen internal controls, communications and disclosure of necessary information to those who must know and use it. UBS' system of internal controls and procedures, which are in place, are designed to capture information from all segments of its business. At UBS and the Bank, each key material element of their operation is subject to oversight to help insure proper internal controls and procedures, administration, risk management and delivery of critical information disclosures to appropriate audit and financial officers, executive management, Board committees and the Boards of directors. UBS' management believes that the addition of these new controls and processes has brought with it a broader and more in depth analysis to UBS' systems of controls and procedures and corporate governance. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 Section 404 ("SOX-404") of the Sarbanes-Oxley Act of 2002 requires that UBS put internal controls for public financial reporting in place to gain assurance that UBS properly presents its financial statements and related footnotes, under generally accepted accounting principles of the United States ("GAAP"). The Commission has recently postponed the effective date of SOX-404 for companies, such as UBS, with less than $75,000,000 in market capitalization, from December 31, 2005 until July 15, 2006. As required by, SOX-404 UBS has undertaken a project to determine (1) what internal controls for public financial reporting are in place and (2) what additional internal controls needed to be implemented in order to gain assurance that UBS properly presents its financial statements and related footnotes, under GAAP. To accomplish this task UBS has devoted such staff to assist for UBS' management in completing the project and thereby enabling the UBS' chief executive officer and chief financial officer to certify, in a timely fashion, whether or not there will be any significant deficiencies or material weaknesses in the internal controls, established to assure that the UBS' financial statements will be prepared under GAAP. Upon completion of management's assessments of the adequacy of its internal controls, its Independent Registered Public Accounting Firm, McGladrey & Pullen, LLP ("McGladrey & Pullen"), will be required to audit management's assessment of internal controls and issue an opinion stating whether (1) management's assessment of the internal controls was fairly stated and (2) whether UBS maintains effective internal control over financial reporting. Based on UBS' management's assessment, the chief executive officer and chief financial officer will then attest whether the UBS' internal control over financial reporting is effective. McGladrey & Pullen will then issue a report stating whether in their opinion management's assessment of the UBS' internal control over financial reporting is fairly stated and that UBS maintains effective internal control over financial reporting as of December 31, 2006. The rules and regulations, discussed above, which implement the Sarbanes-Oxley Act could have a significant economic impact on the compliance cost of the UBS and all publicly held companies. 11 New Legislation and Regulations The Fair and Accurate Credit Reporting Transactions Act The Fair and Accurate Credit Reporting Transactions Act of 2003 (the "Fact Act") became law on December 4, 2003. Among other things, the Fact Act permanently extended the provisions of the Fair Credit Reporting Act (the "FCR Act") that would have expired on January 1, 2004 and had prevented the states from enforcing credit reporting laws that were more restrictive than the FCR Act provisions. Specifically, the Fact Act now permanently prohibits the states from enforcing laws stricter than the Fact Act regulate that regulate: (1) the prescreening of consumer reports, (2) the time within which credit bureaus must respond to consumer disputes, (3) the duties of users of credit bureau information, (4) the information contained in the credit reports, (5) the duties of the information providers, and (6) the exchange of credit information between affiliates. In addition the Fact Act contains provisions concerning (i) how often consumers may obtain free copies of their credit reports, (ii) the disclosure of credit scores used for credit decisions, (iii) a consumers opt-out procedure for exchange of credit information, that would otherwise be treated as a credit report, among affiliates, (iv) the duty of lenders to notify consumers that information contained in their credit reports resulted in their receiving credit on less than the most favorable terms. The Fact Act also contains provisions designed to reduce identity theft and protect the confidentiality of a consumer's private medical information. Future Legislation and Governmental Policies From time to time various Federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Bank. As the enactment of the FSA Act and the Sarbanes-Oxley Act confirm, from time to time, various proposals are enacted in the United States Congress as well as Pennsylvania legislature and issued by various bank regulatory authorities which alter the powers of, and place restrictions on, different types of bank organizations. 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 and state legislation and regulations that may increase the costs of doing business. Bank management cannot anticipate the changes in laws and regulations and their impact on the Bank's business, financial position and reported results of operation. Regulatory Action In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written Agreement ("the 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 required 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: reducing expenses, consolidating branches, and soliciting new and additional sources of capital. Management continues to address all matters outlined in the Agreement. At December 31, 2003, the Bank's Tier 1 leverage ratio had fallen to 6.81%, below the 7.00% minimum required by its Written Agreement with its regulators (See Regulatory Matters below). However, as of December 31, 2004, the Bank's tier one leverage capital ratio had improved to 9.49%. In 2004, Management implemented capital improvement strategies including gains on sales of Bank-owned real estate totaling more than $1.9 million. Management clearly understands that additional capital is essential to achieve the Bank's strategic plan of growth and core profitability. The Board and management continue to aggressively explore strategies for the infusion of new capital into the organization. The most productive way to increase capital is through sustained core earnings. 12 A regulatory examination completed in February 2004 determined that the Bank was not in compliance with certain other elements of the Agreement including the implementation of a viable earnings/strategic plan and the timely charge-off/funding of the allowance for loan losses. Management believes that it has implemented corrective action where necessary including the adoption of an achievable strategic plan. As a result, Management believes that the Bank is "substantially" in compliance with the Agreement's terms and conditions. Failure to comply could result in additional regulatory supervision and/or actions. ITEM 2 -- PROPERTIES Corporate Headquarters United Bank of Philadelphia's corporate offices are located at The Graham Building, 30 S. 15th Street, Suite 1200, Center City Philadelphia. In conjunction with the sale of its corporate headquarters in July 2004, the Bank entered a short-term lease for a portion of the building it previously occupied at 300 North Third Street until January 31, 2005. On February 1, 2005 the Bank began a 10-year lease for its new Center City headquarters location. The Graham building is located in the heart of the Philadelphia business district, directly across from City Hall. The Bank occupies approximately 10,000 square feet on the 12th Floor, including executive offices, operations, finance, human resource, security and loss prevention functions. The average monthly lease rate over the term of the lease is $15,170. Mt. Airy Branch The Bank operates a branch at 1620 Wadsworth Avenue, in the Mt. Airy section of Philadelphia. This facility is located in a densely populated residential neighborhood and in close proximity to small businesses/retail stores. Management believes this branch has not reached its capacity and looks forward to increased opportunities in all aspects of the Bank's niche businesses. This facility, comprising a retail banking lobby, teller area, offices, vault and storage space is currently leased at a monthly rental of $3,730. West Philadelphia Branch In August 2003, the Bank purchased the branch location at 3750 Lancaster Avenue for $287,500. From July 1996 to the time of purchase, this facility had been leased. This branch is located in close proximity to two major universities and hospitals. It 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. Progress Plaza Branch The Bank leases a branch facility located at 1015 North Broad Street, Philadelphia, Pennsylvania. The Progress Plaza branch is a very active branch with the largest number of customers seeking service on a daily basis. This branch became the office of choice after the consolidation of the 28th & West Girard location in 2000 and closure of its 2 Penn Center City location in July 2004. This area of North Philadelphia is an important area for the Bank and its mission. The facility is comprised of a teller and customer service area, lobby and vault. The aggregate monthly rental for this facility is $3,875 per month. This lease expired in October 2003. The Bank had been notified by the landlord that extensive improvements to the shopping plaza in which this branch is located were planned for early 2004 but have since been placed on hold. The Bank is currently leasing this facility on a month-to-month basis until final renovation plans are determined by the landlord. 13 ITEM 3 -- LEGAL PROCEEDINGS No material claims have been instituted or threatened by or against UBS or the Bank other than in the ordinary course of business. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A shareholders annual meeting of UBS was held on November 23, 2004. Proxies for the annual meeting were solicited pursuant to Regulation 14A of the Exchange Act and there were no solicitation in opposition to the management's nominees as listed in the proxy statement and all such nominees were elected. The matter voted upon at shareholders annual meeting of UBS were the reelection of three (3) Class A directors to serve until the expiration of their four (4) year terms and one (1) Class B and one (1) Class C director to serve until the expiration of the balance of the terms of directors that retired in 2003 and the ratification of the appointment of Grant Thornton LLP as UBS' independent certified public accountants for the year 2004. The votes cast at the meeting for the election of directors, for, against or withheld, as well as a number of absentee and non-broker votes as to each matter voted upon at the meeting, including a separate tabulation with respect to each nominee for office is as follows: -------------------------- -------------------------------- 51.879% Shares Voted 452,999.67 of 873,192.32 Shares -------------------------- -------------------------------- 18.502% Accounts Voted 583 of 3,151 Accounts -------------------------- -------------------------------- - ----------------------------------------------------------------------------- Question YES NO WITHHOLD/ABSTAIN - ----------------------------------------------------------------------------- L. Armstead Edwards (CLASS A) 80.813% 0.00% 19.187% 366,082.67 0.00 86,917.00 - ----------------------------------------------------------------------------- Marionette Y. Wilson (CLASS A) 81.144% 0.00% 18.856% 367,582.67 0.00 85,417.00 - ----------------------------------------------------------------------------- Ernest L. Wright 81.089% 0.00% 18.911% (CLASS A) 367,332.67 0.00 85,667.00 - ----------------------------------------------------------------------------- Ahsan M. Nasratullah 96.656% 0.00% 3.344% (CLASS B) 437,849.67 0.00 15,150.00 - ----------------------------------------------------------------------------- Joseph T. Drennan 96.711% 0.00% 3.289% (CLASS C) 438,099.67 0.00 14,900.00 - ----------------------------------------------------------------------------- Ratify Grant Thornton, LLP 96.943% 0.00% 3.002% 439,149.67 0.00 13,600.00 - ----------------------------------------------------------------------------- On December 16, 2004, UBS dismissed Grant Thornton, LLP as its independent registered public accounting firm and retained McGladrey & Pullen, LLP ("McGladrey & Pullen"), Certified Public Accounts, as its new independent registered public accounting firm on December 16, 2004 to audit UBS' financial statements. The decision to change independent accountants was made by the Audit Committee of UBS' Board of Directors, because of the costs savings, which will be realized by appointing McGladrey & Pullen as its independent accountants to audit UBS' financial statements. (Also see ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE). 14 PART II ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS Common Stock The Common Stock is not traded on any national exchange or otherwise traded in any recognizable market. There is no established public trading market for UBS' common stock. Prior to December 31, 1993, the Bank conducted a limited offering (the "Offering") pursuant to a registration exemption provided in Section 3(a)(2) of the Securities Exchange Act of 1933. The price-per-share during the Offering was $12.00. Prior to the Offering, the Bank conducted an initial offering of the Common Stock (the "Initial Offering") at $10.00 per share pursuant to the same registration exemption. 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 UBS' common stock by members of the Bank's board of directors in a limited offering at a price of $12.00 per share. This offering was exempt from registration under the Act pursuant to the exemption in section 4(2) of the Act. In May 2001 and December 2001, respectively, the Bank received $2,000 and $9,596 and issued 167 and 800 shares, respectively, as a result of the purchase of UBS common stock by two individuals in a limited offering at a price of $12.00 per share. This offering was exempt from registration under the Act pursuant to the exemption in section 4(2) of the Act. In June 2002, the Bank received $20,400 and issued 1,700 shares as a result of the purchase of UBS common stock by new members of the Bank's board of directors in a limited offering at a price of $12.00 per share. This offering was exempt from registration under the Act pursuant to the exemption in section 4(2) of the Act. In June 2003, a shareholder of the Bank returned 33,500 shares of common stock and 6,308 shares of preferred Series A stock. These shares were returned for no consideration and were recorded as treasury stock by the Bank. No other transactions with respect to UBS common stock occurred during 2003. There were no capital stock transactions during 2004. As of March 17, 2005 there were 3,149 shareholders of record of UBS' Voting Common Stock and 2 shareholders of record of UBS' Class B Non-voting Common Stock. Dividend Restrictions UBS has never declared or paid any cash or stock dividends. The Pennsylvania Banking Code of 1965, as amended, provides that cash dividends may be declared and paid only from accumulated net earnings and that, prior to the declaration of any dividend, if the surplus of a bank is less than the amount of its capital, the bank shall, until surplus is equal to such amount, transfer to surplus an amount which is at least ten percent of the net earnings of the bank for the period since the end of the last fiscal year or any shorter period since the declaration of a dividend. If the surplus of 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 Federal Reserve Board has the power to prohibit the payment of cash dividends by a bank if it determines that such a payment would be an unsafe or unsound banking practice. As a result of these laws and regulations, the Bank, and therefore UBS, whose only source of income is dividends from the Bank, will be unable to pay any dividends while an accumulated deficit exists. UBS does not anticipate that dividends will be paid for the foreseeable future. The FDIC generally prohibits all payments of dividends by a bank, which is in default of any assessment to the FDIC. (See "Regulatory Action" below) 15 Securities Authorized for Issuance Under Equity Compensation Plans 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. The information below has been derived from UBS' consolidated financial statements. ITEM 6 -- SELECTED FINANCIAL DATA Selected Financial Data
Year ended December 31, ------------------------------------------------------------ (Dollars in thousands, except per share data) 2004 2003 2002 2001 2000 ------------------------------------------------------------ Net interest income.............................. $ 3,280 $ 3,290 $ 3,726 $ 4,060 $ 5,415 Provision for loan losses........................ 45 565 175 335 565 Noninterest income............................... 3,655 1,891 2,327 2,443 3,197 Noninterest expense.............................. 5,243 5,732 6,095 7,038 8,801 Net income (loss)................................ 1,647 (1,115) (217) 870) (755) Net income (loss) per share - basic.............. 1.54 (1.03) (0.20) (0.79) (0.72) Net income per share - fully diluted............. 1.50 - - - - Balance sheet totals: Total assets................................. $ 72,301 $ 74,717 $86,044 $88,668 $93,533 Net loans.................................... 46,490 46,690 43,459 42,292 44,743 Investment securities........................ 13,560 15,637 21,518 25,806 35,014 Deposits..................................... 63,172 67,117 76,929 79,423 83,238 Shareholders' equity......................... 8,811 7,235 8,500 8,558 9,350 Ratios: Tangible Equity to assets................. 9.89% 6.85% 7.45% 7.67% 7.74% Return on assets.......................... 2.38% (1.38)% (0.25)% (0.95)% (0.63)% Return on equity.......................... 26.96% (13.03)% (2.55)% (9.63)% (8.08)%
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Because UBS is a bank holding company for the Bank, the financial statements in this report are prepared on a consolidated basis to include the accounts of 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. Critical Accounting Policies Allowance for Credit Losses The Bank considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The balance in the allowance for loan losses is determined based on management's review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management's assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management's estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods. Income Taxes Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets are subject to management's judgment based upon available evidence that future realization is more likely than not. For financial reporting purposes, a valuation allowance of 100% of the deferred tax asset has been recognized to offset the deferred tax assets related to cumulative temporary differences and tax loss carryforwards. If management determines that the Bank may be able to realize all or part of the deferred tax asset in the future, a credit to income tax expense may be required to increase the recorded value of net deferred tax asset to the expected realizable amount. 16 Background Summary History The Bank entered a Written Agreement ("the Agreement") with the Federal Reserve Bank in 2000 that had many ambitious timelines for the board and management to meet. This Agreement became a motivator for the new management team to dismantle a lack luster business model in order to keep the franchise alive and relevant. This was a model that originally held great promise for it was established to bring the "unbanked" into the mainstream of financial services through affordable pricing and sensitive customer service. The customers came and the numbers grew quickly and the franchise grew through the acquisition of failed savings and loan branches. However, with this growth came increased expenses through the assimilation of acquired branch locations, people, products and the overall conversion expense. The Bank had quickly strayed from its model of building a customer-friendly and affordable franchise into a franchise of transforming several branches of savings and loan customers into the Bank's commercial platform. In 2000, the Bank was still faced with an enormous array of accounts that had not yet been streamlined, thus curtailing the sales capacity of the staff. A major factor that needed to be addressed by the Bank was its capital (tier one leverage ratio). When the Bank entered into the Agreement, the Bank's tier one leverage ratio was slightly under 5%. Aggressive strategies were developed and implemented by moving more expensive deposit relationships (certificates of deposit and IRA's) off the Bank's balance sheet. These deposits were sold for a gain and thus the Bank's total assets were reduced getting the Bank closer to the 7% capital requirement. In 2004, management continued to implement capitalization strategies including the sale of bank-owned real estate for a $1.9 million gain. With this new capital, the Bank's is positioned for growth. A fundamental problem for the Bank's business model was its expense profile. Major cuts were made including consolidating the branch network (from 8 offices to 4). Even with this reduction in branch offices, the Bank still carried more branches than its peer group, which was generally two and no more than three branches. Further reductions were made in 2004 with the closure/consolidation of the Bank's Center City Philadelphia 2 Penn Center office in conjunction with the expiration of a 10-year lease -- bringing the number of full service branches down to three (3). The Bank's reengineering and restructuring has resulted in a more streamlined organization that provided the proper organizational platform to become a more strategy-focused institution. Without compromising the segregation of duties and internal controls, management was able to capitalize on the strengths of its staff by combining functions while pushing for more enhanced leadership throughout the organization which is essential to achieve profitability, the Bank's primary goal. Also, with cross-training, the service model in the branches was adjusted from an average eight(8) employees per branch, down to five(5). Management recognized that before it could introduce new strategies for the Bank's core business, it had to ensure that the organization was running well at every level. By compressing the organization and putting emphasis on process improvements, management eliminated waste, and improved on operational efficiencies, which has been validated through improved audits. To compete in its marketplace, the Bank must have sound business strategies that will yield results. The recent past has enabled management to place more emphasis on strategy, with keen focus on a sound organization. While there was a conscientious effort to dismantle the original business model, management recognized the positive aspects of the model - consistent core (versatile) staffing, low cost of funds, loyal customer base, and strong net interest margins. These strengths can be built upon as a new, productive model formulates and moves into action. As was described earlier, the Bank is now well-capitalized and is much more streamlined. The goal is to develop more earning assets to achieve profitability. In addition, although many changes have been made through consolidations and compressions, management will continue to seek opportunities for the Bank to operate more efficiently and cost-effectively. 17 The Bank's Goals The Bank is a much stronger institution as a result of the aggressive steps taken to decrease expenses, compress the organization, and strengthen internal controls. The ultimate challenge for the institution has been to keep the franchise vibrant while enhancing the business model. Continuing to surround these new strategies and opportunities is a regulatory restraint that is unyielding until the Bank produces a steady stream of earnings. The primary goal during 2004 was to infuse new capital to further stabilize the franchise and position it for growth. Management accomplished this re-capitalization with gains of $1.9 million on sales of bank-owned real estate. This new capital can support the Bank's asset growth to $100 million. The true stability of the Bank will occur with positive growth trends in loans and deposits, month-by-month, quarter-by-quarter, yielding annual sustainable core profits. The Bank will continue to focus on its niche business lines to include the basic deposit and loan business, while developing relationships with several corporate entities that have a commitment to community and economic development in the urban sector. Strategic alliances and partnerships are key to the economic strength of inner city neighborhoods. The Bank has begun to develop these strategic alliances/partnerships to help ensure that the communities it serves have full access to financial products and services. Efforts will continue to attract additional corporate partners to join the Bank's minority credit syndication business line to generate fee income. The Bank focuses on corporations that have a particular interest in impacting urban communities in a sustainable way. United Bank of Philadelphia has been able to leverage its strength in community development in its attainment of such dynamic corporate clients. It has attracted four(4) such clients and has a goal of adding two(2) additional relationships in 2005. While the Bank will continue to provide a full array of commercial products and services, enhanced emphasis will be placed on the production of consumer products through the Bank's financial service centers (branches). Some products will be marketed solely by the Bank while others will be offered through strategic and marketing alliances. Some of the products and services that will be emphasized include the following: o Auto Loans--A relationship with a direct marketing company will continue with mailings taking place at agreed upon times throughout the year. The goal is to attract consumers who may not bank with the Bank through this marketing effort and to cross sell other products including the opening of a deposit account. o Residential Mortgages--Through its marketing alliance with a Fortune 500 mortgage company, the Bank's customers will have access to a full array of affordable mortgage products with special incentives. This marketing alliance will give the Bank name recognition in the mortgage arena thereby setting the stage for the Bank to, in the future, originate mortgages under its own marquee. o Home Equity Loans--This product will receive heightened attention with the co-branded advertising in conjunction with a Fortune 500 mortgage company. All home equity inquiries, as a result of the add campaign, will be referred to the Bank. The Bank will continue to underwrite commercial transactions as well as participate with other banks in the region. The commercial portfolio will be built through traditional loans as outlined: o Working capital lines of credit o Term loans o Demand loans o Commercial real estate (construction and permanent) Church loans and small business loans are deemed the "bread and butter" of loans for the Bank. United Bank of Philadelphia is working in collaborative relationships to enhance volume. Some of these relationships include Small Business Development Centers, religious adjudicators and various local banks. 18 Management's focus will continue to be on relationship banking. The goal is to engage in a more aggressive marketing and advertising campaign to get the Bank back into the marketplace and in the minds of the customers. Full advantage will be taken of the co-branding opportunities with the Bank's strategic alliances to increase the Bank's consumer loan business including brochures, joint seminars, and other business development opportunities. Results of Operations Summary In 2004, the Company recorded net income of approximately $1,647,000 ($1.54 per share) compared to a net loss of approximately $1,115,000 for 2003 ($1.03 per share) and a net loss of $217,000 for 2002 ($0.20 per share). The financial results for the year ended December 31, 2004 included non-recurring income of $1.9 million from the gain on the sale of the Bank's corporate headquarters and an adjacent parking lot. Without this gain, the Bank would have experienced a net loss of approximately $250,000 from its core operations. Revenue enhancement strategies have been employed to expand opportunities for fee income through the expansion of its products and services including corporate loan syndications where the Bank serves in the role of arranger and/or administrative agent. During 2004, the Bank generated fees totaling $178,000 from this line of business compared to $85,000 in 2003 and $25,000 in 2002. Further growth in this new core line of business is projected in 2005. Management continued the implementation of strategies to reduce expenses including the closure/consolidation of its Two Penn Center Center City branch office. The cost of the lease was scheduled to double at expiration. As part of the Bank's profit restoration plan, upon expiration of the lease in July 2004, this branch was closed and consolidated with other branches in the network to further reduce operating costs. While expense reductions continue to be achieved, a greater impact will be realized with deposit growth and increased loan originations that build the Bank's core earnings. Increased deposits will increase the Bank's ability to fund and grow its earning assets while an increased loan-to-deposit ratio will generally result in a higher net interest margin on those assets. Thus, while continuing to control expenses, management will place more focus on the implementation of business development strategies to achieve deposit and loan growth as a means to achieve core profitability. A more detailed explanation for each component of earnings is included in the sections below. 19 Table 1--Average Balances, Rates, and Interest Income and Expense Summary
December 31, 2004 2003 2002 ----------------------- ----------------------- ------------------------ Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) balance Interest rate balance Interest rate balance Interest rate ----------------------- ----------------------- ------------------------ Assets: Interest-earning assets: Loans........................... $46,037 $3,009 6.54% $45,168 $2,913 6.45% $42,839 $3,006 7.02% Investment securities held-to-maturity.............. 7,273 308 4.23 6,479 273 4.21 10,155 626 6.16 Investment securities available-for-sale............ 5,488 252 4.59 9,393 532 5.66 13,783 831 6.03 Interest bearing balances with other banks.............. 880 30 3.41 869 21 2.99 -- -- -- Federal funds sold.............. 6,244 87 1.39 8,498 98 1.15 10,406 169 1.62 ------- ------ ------- ------ ------- ------ Total interest-earning assets 65,922 3,685 5.59 70,407 3,837 5.45 77,183 4,632 6.00 Noninterest-earning assets: Cash and due from banks......... 3,708 4,438 4,542 Premises and equipment, net..... 2,006 2,679 2,613 Other assets.................... 2,726 3,922 2,926 Less allowance for loan losses.. (542) (713) (674) ------- ------- ------- Total........................ $73,820 $80,728 $86,590 ======= ======= ======= Liabilities and shareholders' equity: Interest-bearing liabilities: Demand deposits................. $ 9,315 $ 49 0.53% $11,924 $ 83 0.70% $12,882 114 0.89% Savings deposits................ 18,693 62 0.33 20,241 89 0.44 21,931 129 0.59 Time deposits................... 21,559 295 1.37 21,565 375 1.74 23,712 663 2.79 ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities................. 49,567 406 0.82 53,730 547 1.02 58,525 906 1.55 Noninterest-bearing liabilities: Demand deposits................. 16,306 18,439 19,565 Other........................... 193 -- -- Shareholders' equity................ 7,754 8,559 8,500 ------- ------- ------- Total........................ $73,820 $80,728 $86,590 ======= ======= ======= Net interest earnings............... $3,280 $3,290 $3,726 Net yield on interest-earning assets 4.98% 4.67% 4.83%
For purposes of computing the average balance, loans are not reduced for nonperforming loans. 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 was $3,280,000 in 2004, a decrease of $10,000, or ..31%, compared to 2003. Net interest income totaled $3,290,000 in 2003, a decrease of $436,000, or 11.70%, compared to 2002. 20 Table 2--Rate-Volume Analysis of Changes in Net Interest Income
2004 compared to 2003 2003 compared to 2002 ----------------------------- ----------------------------- Increase (decrease) due to Increase (decrease) due to ----------------------------- ----------------------------- (Dollars in thousands) Volume Rate Net Volume Rate Net ------- ------- ------- ------- ------- ------- Interest earned on: Loans............................................... $ 57 $ 39 $ 96 $ 151 $(244) $ (93) Investment securities held-to-maturity.............. 33 2 35 (167) (186) (353) Investment securities available-for-sale............ (219) (61) (280) (161) (117) (278) Interest-bearing deposits with other banks 5 4 9 Federal funds sold............................... 8 (19) (11) (22) (49) (71) ----- ----- ----- ----- ----- ----- Total interest-earning assets.................... (116) (35) (151) (199) (596) (795) ----- ----- ----- ----- ----- ----- Interest paid on: Demand deposits..................................... (13) (21) (34) (6) (25) (31) Savings deposits................................... ( 5) (22) (27) (7) (33) (40) Time deposits....................................... ( 1) (78) (79) (37) (251) (288) Total interest-bearing liabilities............... (19) (121) (140) (50) (309) (359) ----- ----- ----- ----- ----- ----- Net interest income.............................. $ (97) $ 86 $ (11) $(149) $(287) $(436) ====== ===== ===== ===== ===== =====
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 2004, there was a decrease in net interest income of $97,000 due to changes in volume and an increase of $86,000 due to changes in rate. In 2003, there was a decrease in net interest income of $149,000 due to changes in volume and a decrease of $287,000 due to changes in rate. Average earning assets decreased from $71 million in 2003 to $66 million in 2004 and decreased from $77 million in 2002 to $71 million in 2003. From February 2000 to July 2004, in an effort to manage its capital adequacy, the Bank did not aggressively seek significant deposit growth. In 2004, gains on asset sales were used to re-capitalize the Bank and support growth and profitability strategies. With the increase in the Bank's capital, the Bank is now positioned for deposit growth. Current capital levels allow for approximately $25 million in deposit growth while remaining compliant with mandatory capital requirements outlined in its Written Agreement with its regulators (See Regulatory Matters below). The net interest margin of the Bank was 4.98% in 2004, 4.67% in 2003, and 4.83% in 2002. Management actively manages its exposure to interest rate changes. The Bank's deposit base includes many low cost core checking and savings deposits that are not sensitive to rate changes. Thus, although there were a series of short-term rate increases (in aggregate 125 basis points) by the Federal Reserve in 2004, the Bank's cost of funds did not increase at the same pace while floating rate assets including loans, investments and Federal Funds Sold did increase. During 2004, the average federal funds yield was 1.39% compared to 1.15% in 2003 and 1.62% in 2002. During 2004, the average investment in federal funds decreased by $2.2 million. The reduction was a result of a $3.9 million decline in the Bank's total deposits. In conjunction with its profit restoration plan, the Bank closed its Two Penn Center branch office located in Center City Philadelphia in July 2004. The Bank experienced some attrition primarily related to its savings passbook customers because of the closure of the branch. Because passbook customers must physically enter the branch to complete transactions, electronic banking alternatives including ATMs and e-banking could not be used to help retain the savings account deposits. The yield on the investment portfolio decreased 52 basis points to 4.39% in 2004 compared to 4.81% in 2003 and 6.09% in 2002. The reduction in yield is primarily a result of calls of higher yielding agency securities as well as floating rate mortgage-backed securities that have Treasury and LIBOR indices that repriced in a lower interest rate environment. 21 The cost of interest-bearing liabilities declined to 0.82% in 2004 compared to 1.02% in 2003 and 1.55% in 2002. Consistent with market conditions through mid-year 2004, the Bank reduced the rates it pays on many of its interest-bearing products. Although short-term interest rates subsequently increased in 2004, increases in rates on the Bank's core deposits did not change at the same pace. When setting the pricing for its deposits, the Bank generally uses the median rate paid by its competitors in the region. Because most of the Bank's deposits are considered core, they were not sensitive to rising interest rates and generally lag market changes. Provision for Loan Losses The provision for loan losses is based on management's estimate of the amount needed to maintain an adequate allowance for loan losses. This estimate is based on the review of the loan portfolio, the level of net credit losses, past loan loss experience, the general economic outlook and other factors management feels are appropriate. The net provision for loan losses charged against earnings in 2004 was $45,000 compared to $565,000 in 2003 and $175,000 in 2002. In February 2004, the Bank recovered $265,000 related to one previously charged-off commercial loan. Of this recovery, the Bank credited $165,000 back to operations and retained $100,000 in the allowance for loan losses as required by the reserve analysis performed by management. The Bank made provisions to the allowance totaling $210,000 for the year ended December 31, 2004. In 2003, the Bank made provisions for loan losses totaling $565,000. This level of provision was required because of the charge off of $710,000 that represented the non-Small Business Administration (SBA) guaranteed portion of a loan to one borrower in the telecommunications industry. Severe financial difficulties experienced by the borrower made the full collection of this loan uncertain. Loans to this borrower totaled $1.3 million. The Bank has presented this loan to the SBA for collection of the guaranteed portion of the loans that total $569,000 that represents the Bank's balance on the loan. The SBA documentation review as relates to this loan is currently underway. Although the Bank has charged-off a portion of this loan, management will seek to maximize its recovery through appropriate legal action. The Bank continues to monitor its credit quality very closely by working with borrowers in an effort to identify and control credit risk. Systematic provisions are made to the allowance for loan losses to cover potential losses related to the Bank's classified loans. Management believes the level of the allowance for loan losses is adequate as of December 31, 2004. Noninterest Income Noninterest income increased $1,764,000 in 2004 compared to 2003 and decreased $436,000 in 2003 compared to 2002. In connection with its 2004 re-capitalization plan, the Bank sold bank-owned real estate including a remote bank-owned parking lot and its corporate headquarters building located at 300 N. Third Street. The sale of these assets resulted in a gain of approximately $1.9 million in 2004. In addition, the Bank sold approximately $786,000 of its available-for-sale portfolio for a gain of approximately $31,000. The amount of the Bank's noninterest income also reflects the volume of transactional and other accounts handled by the Bank and includes such fees and charges as low balance account charges, overdrafts, account analysis, and other customer service fees. Customer service fees decreased $202,000 in 2004 compared to 2003 and decreased $275,000 in 2003 compared to 2002 primarily because of a reduction in activity fees on deposits and lower surcharge income on the Bank's ATM network. There was a $3.9 million decline in the Bank's deposit levels that resulted in less overdraft fees, activity service charges and low balance fees. Also, in December 2003, to avoid the necessity to escheat the balances of inactive customer accounts, the Bank made an extensive effort to contact customers to re-activate their accounts. The Commonwealth of Pennsylvania requires that accounts that are inactive for five years or more be closed and escheated to the state. This resulted in a reduction in ongoing activity/dormant account service charges in 2004. 22 During 2004, surcharge income on the Bank's ATM network declined by $100,000, or 14.30%, compared to 2003. Some of the Bank's ATMs have experienced a drop in volume as competitors placed machines in close proximity to existing high volume ATMs of the Bank and several of the Bank's high volume ATM's were replaced with those of competitors that paid significantly higher transactional fees to site owners. Management continues to seek potentially high volume locations to place machines. Beginning in 2002, the Bank began developing a new core line of business--serving as arranger/agent for loan syndications for four major corporations throughout the country. In this capacity, the Bank syndicates back-up lines/letters of credit with other minority banks throughout the country for the corporations for which it receives agent fees. In 2004 these fees totaled $178,000 compared to $86,000 in 2003 and $25,000 in 2002. These fees will be received annually for the administration of the credit facilities. Management plans to continue to develop this core line of business to generate fee income to support the Bank's profitability goals. Noninterest Expense Noninterest expense decreased $489,000, or 8.52% in 2004 compared to 2003 and decreased $363,000, or 5.96%, in 2003 compared to 2002. Salaries and benefits decreased $269,000, or 12.21%, in 2004 compared to 2003 and decreased $140,000, or 5.98%, in 2003 compared to 2002. As part of the Bank's continued implementation of its Profit Restoration Plan, there have been strategic reductions in staff, job consolidations, and a reduction in salaries for certain employees to lower the level of personnel expense. Also, in conjunction with the closure of its Two Penn Center branch office in July 2004, there was attrition and layoffs that resulted in staff reductions. Management continues its review of its staff to ensure the Bank is operating with the most efficient organizational structure. Occupancy and equipment expense decreased approximately $122,000, or 9.97%, in 2004 compared to 2003 and decreased $69,000, or 5.34%, during 2003 compared to 2002. Management continued the implementation of strategies to reduce its occupancy expense including the closure/consolidation of its Two Penn Center City branch office. The cost of the lease was scheduled to double at expiration. As part of the Bank's profit restoration plan, upon expiration of the lease in July 2004, this branch was closed and consolidated with other branches in the network to further reduce operating costs. In addition, there was a reduction in depreciation expense related to the Two Penn Center branch office for which leasehold-related improvements and furniture became fully depreciated. Also, in August 2003, the Bank purchased its 38th and Lancaster Street Branch as a measure to reduce its occupancy expense. This branch had been leased on a "triple net" basis where the Bank bore all expenses related to the facility. The annual savings on this transaction was approximately $20,000. Data processing expenses are a result of the management decision to outsource a majority of its data processing operations to third party processors. Such expenses are reflective of the high level of accounts being serviced for which the Bank is charged a per account charge by processors. The Bank experiences a higher level of data processing expenses relative to its peer group because of the nature of its deposit base -- low average balance and high transaction volume. In addition, the Bank uses outside loan servicing companies to service its mortgage, credit card, and student loan portfolios. Data processing expenses decreased by $99,000, or 15.00%, in 2004 compared to 2003 and increased by $40,000, or 6.45%, during 2003 compared to 2002. The decline in 2004 is primarily the result of the conversion/consolidation of the consumer loan account processing (previously outsourced to EDS) with its core vendor, FISERV. This conversion resulted in a monthly savings of approximately $6,000. The Bank continues to study methods by which it may further reduce its data processing cost. 23 Marketing and public relations expense decreased by $31,000, or 27.21% in 2004 compared to 2003 and increased by $31,000, or 37.32%, in 2003 compared to 2002. In 2003, to further enhance its image and encourage business development, the Bank began a re-branding campaign that included, among other things, new brochures and in-branch signage. To reduce expenses in 2004, the Bank began to utilize co-branded marketing materials with its strategic alliances. To reach the goals and objectives of retaining its existing customers and attracting new customers and partners management continues to review a variety of strategies including the following: Advertising |_| Management will seek cost-effective ways to advertise the Bank's products and services. Community-based newspapers and other forms of advertising that include the church bulletins in targeted churches will be utilized. Public Relations |_| The Bank will seek innovative ways to get its story out to the public. It will participate on talk radio programs, and use a variety of methods such as special events to make the Bank's name more visible. Marketing |_| The Bank will retain professional services to assist management in creating a "buzz" about the Bank. Office operations and supplies expense decreased by $41,000, or 9.11%, in 2004 compared to 2003 and increased by $20,000, or 4.53%, in 2003 compared to 2002. In conjunction with the closure/consolidation of the Bank's Two Penn Center financial service center in July 2004, reductions were experienced in this category of expense including supplies and other costs associated with branch operations. Professional services increased by $18,000, or 8.28%, in 2004 compared to 2003 and decreased by $63,000, or 22.18%, in 2003 compared to 2002. The increase in 2004 is primarily related to an increase in the use of consultants. The Bank used external consultants to assist with disaster recovery testing and penetration testing associated with its computer systems. In 2004, the Bank used consultants for human resource-related matters including the development of a new employee performance management system and compensation/contract review for the Bank's two executive officers. Also, in October 2004, the Bank engaged two business development consultants to assist with developing loans and deposits for the Bank. Federal deposit insurance premiums were $72,000 in 2004, $34,000 in 2003, and $36,000 in 2002. 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. While the Bank is "adequately" capitalized, the increase during 2004, is a result of the perceived risk associated with the Bank's operating losses. 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. 24 FINANCIAL CONDITION Sources and Uses of Funds The Bank's financial condition can be evaluated in terms of trends in its sources and uses of funds. The comparison of average balances in Table 3 below indicates how the Bank has managed these elements. Average funding uses decreased approximately $4.5 million, or 6.37%, in 2004 compared to a decrease of $7.6 million, or 9.8%, in 2003. Table 3--Sources and Use of Funds Trends
2004 2003 2002 ------------------------------- ------------------------------- --------- Increase Increase Average (decrease) Average (decrease) Average (Dollars in thousands) balance amount Percent balance amount Percent balance --------- -------- ------- --------- -------- ------- --------- Funding uses: Loans ............................. $46,037 $ 869 1.92% $45,168 $ 2,329 5.44% $42,839 Investment securities.............. Held-to-maturity................. 7,273 794 12.25 6,479 (3,676) (36.20) 10,155 Available-for-sale............... 5,488 (3,905) (41.57) 9,393 (4,390) (25.55) 13,783 Interest-bearing balances with other banks............... 880 11 1.27 869 9 1.03 860 Federal funds sold............... 6,244 (2,254) (26.52) 8,498 (1,908) (18.34) 10,406 ------- ------- ------- ------- ------- Total uses................... $65,922 $(4,485) $70,407 $(7,636) $78,043 ======= ======= ======= ======= ======= Funding sources: Demand deposits: Noninterest-bearing.............. $16,306 $(2,133) (11.57)% $18,439 $(1,126) (5.76)% $19,565 Interest-bearing................. 9,315 (2,609) (21.88) 11,924 (958) (7.44) 12,882 Savings deposits................... 18,693 (1,548) (7.65) 20,241 (1,690) (7.70) 21,931 Time deposits...................... 21,559 (6) (.03) 21,565 (2,147) (9.05) 23,712 ------- ------- ------- ------- ------- Total sources................ $65,873 $(6,296) $72,169 $(5,921) $78,090 ======= ======= ======= ======= =======
* 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. Average investment securities and federal funds sold, in the aggregate, decreased by $5.4 million, or 22.01%, in 2004, compared to a decrease of $9.9 million, or 29.04% in 2003 compared to 2002. The significant decline in investable funds was a result of a $6.3 million reduction in average deposit balances and a $869,000 increase in average loans during the year. To fund the reduction in deposits and the increase in loans, the Bank used federal funds sold as well as proceeds from called agency securities and paydowns on its mortgage-backed securities. The Bank's current investment portfolio primarily consists of mortgage-backed pass-through agency 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 below, the average duration of the portfolio is 3.07 years in 2004 compared to 2.78 years in 2003. In the current rising interest rate environment, the duration of the investment portfolio is slightly extended because of the reduction in the prepayment speed on the Bank's mortgage-backed security portfolio. 25 Approximately 64% 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. Because customers are less likely to refinance in the current rising interest rate environment, the prepayment speed decreased on this component of the portfolio. The constant one year prepayment rate (CPR) at December 31, 2003 was 42.93% compared to 24.06% at December 31, 2004. This translates into only 24.06% of the mortgage-backed pools repaying on an annual basis. This results in significantly less monthly cash flow than was received in 2003. The Bank will continue to take steps to control the level of optionality in the portfolio by identifying replacement loans or securities that diversify risk and provide some level of monthly cashflow to be reinvested in the projected rising rate environments. The Bank's strategy is to invest funds in hybrid mortgage-backed securities that are fixed for three to ten years and then become adjustable with the current market conditions. These securities have average current yields of at least 4.00% and estimated durations of 5 years with monthly cashflow. Table 4--Analysis of Investment Securities
After one but After five but Within one year within five years within ten years After ten years --------------- ----------------- ---------------- --------------- (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Total ------ ----- ------ ----- ------ ----- ------ ----- ------ Other government securities...... $ - - % $3,000 3.46% $1,750 4.09% $ - - % $ 4,750 Mutual funds and other........... - - - - 336 Mortgage-backed securities....... - - - - 8,474 ----- ------ ------ ------ ------- Total securities................. $ - $3,000 $1,750 - $13,560 Average maturity................. 3.07 years
The above table sets forth the maturities of investment securities at December 31, 2004 and the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security). Loans Average loans increased approximately $869,000, or 1.92%, in 2004 compared to 2003 and increased $2.3 million, or 5.44%, in 2003 compared to 2002. During 2004, the Bank funded $11.4 million in new commercial loans. However, growth in the loan portfolio was stymied by payoffs of some large loan participations the Bank had with other financial institutions. In addition, the Bank's mortgage loan portfolio declined by $4.4 million as a result of customers with adjustable rate loans refinancing into fixed rate mortgages to avoid the negative impact of anticipated rate hikes. The Bank has developed relationships with other financial institutions in the region with which it participates in loans as a strategy to stabilize and grow its commercial loan portfolio. This strategy continues to be utilized while the Bank enhances it own business development capacity. Approximately $2.7 million in commercial loan participations were booked during 2004. Most of these participations were secured by commercial real estate. The Bank's commercial loan pipeline remains strong as a result of focused business development efforts. At December 31, 2004, the pipeline totaled $3.8 million. Management continues to seek cost effective methods of developing business including the use of external commissioned strategic business development partners to refer loan transactions. This strategy allows for increased loan origination activity without adding fixed personnel expense. In addition to commercial loans, mortgage loans and other consumer loans including home equity, automobile, student and credit card loans will be sought for growth in the portfolio to allow for risk diversification. 26 The Bank's loan-to-deposit ratio at December 31, 2004 was 73.6%, up from 69.6% at December 31, 2003. The target loan-to-deposit ratio is 75%. This level would allow the Bank to optimize interest income on earning assets while maintaining adequate liquidity. The increase in this ratio is the result of an increase in loans outstanding coupled with a smaller deposit base. As reflected in Table 5 below, because of the purchase of loan participations and a significant level of commercial loan originations in 2004, the Bank's loan portfolio is heavily concentrated in commercial loans (primarily commercial real estate) that comprises approximately $28 million, or 60%, of total loans. Continued payoffs in the residential mortgage loan portfolio resulted in a reduction of this component of the portfolio from $15.1 million at December 31, 2003 to $10.6 million at December 31, 2004. In January 2005, the Bank sold $1,412,000 of its seasoned student loan portfolio and recorded a gain of $25,000. These loans were sold to provide liquidity for the funding of higher yielding less costly to service commercial loans. At December 31, 2004, these loans are recorded as held-for-sale. As reflected in Table 6 below, approximately 41% of the Bank's loan portfolio have scheduled maturities or reprice in five years or more. This position is largely a result of the Bank's relatively high level of residential mortgage loans and the typical five to seven year balloon structure of the commercial real estate portfolio. While scheduled maturities and repricing exceed five years, the actual duration of the portfolio may be much shorter because of changes in market conditions and refinancing activity. Table 5--Loans Outstanding, Net of Unearned Income
December 31, (Dollars in thousands) 2004 2003 2002 2001 2000 ------- ------- ------- ------- ------- Commercial and industrial................... $15,217 $11,361 $10,855 $11,054 $11,429 Commercial real estate...................... 13,070 11,862 11,898 5,504 652 Residential mortgages....................... 10,665 15,110 13,560 18,148 22,316 Consumer loans.............................. 6,729 8,695 7,820 8,294 10,908 ------- ------- ------- ------- ------- - - - - ------- ------- ------- ------- ------- Total loans............................. $45,681 $47,028 $44,133 $43,000 $45,305 ======= ======= ======= ======= =======
Table 6--Loan Maturities and Repricing
Within After one but After (Dollars in thousands) one year within five years five years Total ------------ ----------------- ---------- ------- Commercial and industrial................... $ 7,537 $ 3,789 $ 3,891 $15,217 Commercial real estate...................... 1,575 3,968 7,527 13,070 Residential mortgages....................... 643 3,876 6,146 10,665 Consumer loans.............................. 3,290 1,581 1,857 6,729 ------ ------ ------ ------ Total loans........................... 13,045 13,214 19,421 45,681 Loans maturing after one year with: Fixed interest rates.................... $ 25,865 Variable interest rates................. 6,770
Nonperforming Loans Table 7 reflects the Bank's nonperforming and restructured loans for the last five years. The Bank generally determines a loan to be "nonperforming" when interest or principal is past due 90 days or more. 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 reversed out of income unless adequate collateral from which to collect the principal of, and interest on, the loan appears to be available. 27 Table 7--Nonperforming Loans
(Dollars in thousands) 2004 2003 2002 2001 2000 ------- ------- ------- ------- ------- Nonaccrual loans............................ $1,366 $1,588 $ 651 $ 412 $ 453 Interest income included in net income for the year............................ 22 62 25 25 20 Interest income that would have been recorded under original terms........... 143 120 49 29 28 Loans past due 90 days and still accruing... 65 560 797 526 34 Restructured loans.......................... 1,411 569 1,286 182 632
At December 31, 2004, nonaccrual loans totaled $1,366,000 compared to $1,588,000 at December 31, 2003. The decrease in 2004 is primarily related to the payoff of residential mortgage loans that were non-performing in 2003. The remaining nonaccrual loans are concentrated in the commercial loan sector of the loan portfolio. At December 31, 2004, $888,000 of the Bank's nonaccrual loans carried some level of guarantee from the Small Business Administration ("SBA"). The underlying credit enhancement provided by the SBA minimizes the risk of loss on these loans The balance of impaired loans was $1,034,000 and $1,124,000 as of December 31, 2004 and 2003, respectively. The Bank identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The allowance for loan loss associated with these loans was $259,000 and $75,000 at December 31, 2004 and 2003, respectively. At December 31, 2004, approximately $888,000 of the impaired loans have SBA guarantees. There was no interest recognized on impaired loans in 2004. Interest income recognized on impaired loans in 2003 was $69,000. The Bank recognizes income on impaired loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. If these factors do not exist, the Bank will not recognize income on such loans. From time to time, management will modify or restructure the terms of certain loans to provide relief to borrowers. Restructured loans are those loans whose terms have been modified because of deterioration in the financial condition of a borrower to provide for a reduction of either interest or principal, regardless of whether such loans are secured or unsecured and regardless of whether such credits are guaranteed by the government or by others. As of December 31, 2004, the Bank had approximately $1,411,000 in restructured loans. There is no known information about possible credit problems other than those classified as nonaccrual or impaired that causes management to be uncertain as to the ability of any borrower to comply with present loan terms. 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, 2004, approximately 18% 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, 2004, none of these loans were nonperforming. 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 below presents the allocation of loan losses by major category for the past five years. The specific allocations in any particular category may prove to be excessive or inadequate and consequently may be reallocated in the future to reflect then current conditions. 28 The allowance for loan losses as a percentage of total loans was 1.28% at December 31, 2004 compared to 0.72% at December 31, 2003. In 2004, the Bank recovered $265,000 related to one previously charged-off commercial loan. Of this recovery, the Bank credited $165,000 back to operations and retained $100,000 in the allowance for loan losses. The Bank made provisions to the allowance totaling $210,000 during the year ended December 31, 2004. The Bank continues to proactively monitor its credit quality while working with borrowers in an effort to identify and control credit risk. At December 31, 2004, the Bank's classified loans totaled $1.2 million, or 2.50%, of total loans. Approximately, $888,000 of these loans have guarantees of the SBA. In addition, specific reserves of $324,000 have been allocated to these loans. Table 8--Allocation of Allowance for Loan Losses
2004 2003 2002 2001 2000 ------------------- ------------------- ------------------- ------------------- ------------------- Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans in each in each in each in each in each category to category to category to category to category to Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- (Dollars in thousands) Commercial and industrial......... $ 424 32.31% $ 267 24.16% $ 565 24.60% $ 576 37.30% $ 383 25.23% Commercial real estate............. 49 27.75 -- 25.22 37 26.96 29 1.21 11 1.44 Residential mortgages 14 17.29 35 18.49 45 17.72 30 19.29 102 24.08 Consumer loans........ 110 22.65 37 32.13 28 30.72 73 42.20 66 49.25 Unallocated........... 6 -- -- -- -- -- -- -- -- -- ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ $ 603 100.00% $ 339 100.00% $ 675 100.00% $ 708 100.00% $ 562 100.00% ===== ====== ===== ====== ===== ====== ===== ====== ===== ======
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. Table 9--Analysis of Allowance for Loan Losses
Year ended December 31, ----------------------- (Dollars in thousands) 2004 2003 2002 2001 2000 ------- ------- ------- -------- ------- Balance at January 1....................... $ 339 $ 675 $ 708 $ 562 $ 1,567 Charge-offs: Commercial and industrial.............. (799) -- (61) (321) Commercial real estate................. -- (100) -- (803) Residential mortgages.................. -- - -- -- Consumer loans......................... (240) (174) (261) (261) (597) ------ ------ ------ ------ ------ (240) (973) (361) (322) (1,721) ------ ------ ------ ------ ------ Recoveries--commercial loans................ 265 -- -- -- -- Recoveries--consumer loans.................. 194 72 126 133 151 ------ ------ ------ ------ ------ 459 72 153 133 151 Net recoveries (charge-offs)............... 219 (901) (208) (189) (1,570) Provisions charged to operations........... 45 565 175 335 565 ------- ------ ------ ------ ------- Balance at December 31..................... $ 603 $ 339 $ 675 $ 708 $ 562 ====== ====== ====== ====== ======= Ratio of net (recoveries) charge-offs to average loans outstanding.............. (0.49%) 1.99% 0.49% 0.41% 2.84%
29 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. Deposits Average deposits declined approximately $6.3 million, or 8.72%, in 2004 compared to 2003, and declined $6 million, or 7.70%, in 2003 compared to 2002. The primary area of decline was in demand deposit accounts that decreased on average by $4.7 million, or 15.61%, compared to 2003. This decrease was primarily related to one significant deposit relationship with a quasi-governmental organization. However, the Bank subsequently received deposits in the form of laddered certificates of deposit (maturities ranging from 3 months to 12 months) totaling $3.6 million from the same organization. The Bank also experienced a decline of $1.5 million, or 7.65%, in its average savings deposits during 2004 In July 2004, the Bank closed its 2 Penn Center Office located in Center City Philadelphia. The closure of this branch resulted in some savings passbook account attrition. Because passbook customers must physically enter the branch to complete transactions, electronic banking alternatives including ATMs and e-banking could not be used to help retain the savings account deposits. Average certificates of deposit were relatively unchanged from 2003 to 2004. The Bank experienced the maturity of certificates of deposit related to a Bank Enterprise (BEA) program of the U.S. Treasury Department where it received deposits from other community development financial institutions. These certificates had a term of three years and were non-renewable. However, the laddered certificates of the quasi-governmental organization referred to above offset these maturities. With the increase in the Bank's capital from gains on asset sales, the Bank is now positioned for deposit growth. Current capital levels allow for approximately $25 million in deposit growth and still remain compliant with mandatory capital requirements outlined in its Written Agreement with its regulators (See Regulatory Matters below). New business development strategies have been implemented that include the leveraging the strategic partnerships/alliances the Bank has developed to cross-sell its products and services. In addition, the Bank will engage in a strategic marketing/advertising campaign to generate new business including loans, deposits and other fee-related services. Table 10--Average Deposits by Class and Rate
2004 2003 2002 ----------------- ----------------- ----------------- (Dollars in thousands) Amount Rate Amount Rate Amount Rate ----------------- ----------------- ----------------- Noninterest-bearing demand deposits $16,306 -- % $18,439 -- % $19,565 -- % Interest-bearing demand deposits 9,315 0.53 11,924 0.70 12,882 0.89 Savings deposits 18,695 0.33 20,241 0.44 21,931 0.59 Time deposits 21,559 1.37 21,565 1.74 23,712 2.7
Other Borrowed Funds The Bank did not borrow funds during 2004. Generally, the level of other borrowed funds is dependent on many items such as loan growth, deposit growth, customer collateral/security requirements and interest rates paid for these funds. The Bank's liquidity has been enhanced by loan paydowns/payoffs and called investment securities -- thereby, reducing the need to borrow. 30 Off Balance Sheet Arrangements The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit, which are conditional commitments issued by the Bank to guarantee the performance of an obligation of a customer to a third party. Both arrangements have credit risk essentially the same as that involved in extending loans and are subject to the Bank's normal credit policies. Collateral may be obtained based on management's assessment of the customer. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments is represented by the contractual amount of those instruments. Summaries of the Bank's financial instrument commitments are as follows: 2004 2003 ------------ ------------ Commitments to extend credit..... $13,749,562 $ 8,152,988 Outstanding letters of credit.... -- 32,155 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. 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, 2004, 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 $13 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. 31 Table 11--Maturity of Time Deposits of $100,000 or More (Dollars in thousands) 3 months or less................. $ 8,363 Over 3 through 6 months.......... 5,125 Over 6 months through 1 year..... -- Over 1 through five years........ 153 Over five years.................. -- ------- Total............................ $13,641 ======= The following table sets forth contractual obligation and other commitments representing required and potential cash outflows as of December 31, 2004: Table 12--Contractual Obligations and Other Commitments
Less than One to Four to After (Dollars in thousands) Total one year three years five years five year --------- --------- ----------- ---------- --------- Certificates of Deposit....... $23,807 $22,100 $ 1,543 $ 65 $ 99 Rental Obligations ........... 2,080 183 676 177 1,044 ------- ------- ------- ------ ------- Total .................... $25,887 $22,283 $ 2,219 $ 242 $ 1,143 ======= ======= ======= ====== =======
In February 2005, the Bank entered into a 10-year lease for its new corporate headquarters located at The Graham Building in Center City Philadelphia. As reflected in Table 12 above, this transaction is included in the Bank's long-term rental obligations. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans that are tied to prime or other short-term indices differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits are much more interest-sensitive than passbook savings accounts. The shorter-term interest rate sensitivities are key to measuring the interest sensitivity gap or excess interest-earning assets over interest-bearing liabilities. Management of interest sensitivity involves matching repricing dates of interest-earning assets with interest-bearing liabilities in a manner designed to optimize net interest income within the limits imposed by regulatory authorities, liquidity determinations and capital considerations. Table 13 sets forth the earliest repricing distribution of the Bank's interest-earning assets and interest-bearing liabilities at December 31, 2004, 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, 2004, an asset sensitive position is maintained on a cumulative basis through one year of 0.50%. This level is within the Bank's policy guidelines of +/-15% on a cumulative one-year basis. The current gap position is indicative of the Bank being relatively neutrally positioned for any change in interest rates. Interest rate risk is minimized by the Bank's high level of core deposits that have been placed in shorter repricing intervals. Generally, because of the Bank's slightly positive gap position in shorter time frames, the Bank can anticipate that increases in market rates will have a positive impact on the net interest income, while decreases 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. 32 Table 13--Interest Sensitivity Analysis
Interest rate sensitivity gaps as of December 31, 2004 ------------------------------------------------------ Over Over 1 year Over 3 months 3 through through 3 through Over (Dollars in thousands) or less 12 months 3 years 5 years 5 years Cumulative - ---------------------- -------- --------- ------- ------- ------- ---------- Interest-sensitive assets: Interest-bearing deposits with banks. $ $ 889 $ $ $ $ 889 Investment securities................ 3,662 2,182 2,085 1,491 3800 13,221 Federal funds sold................... 3,727 3,727 Loans held-for-sale.................. 1,412 1,412 Loans................................ 15,350 8,164 7,191 4,322 10,654 45,077 ------ ------ ----- ----- ------ ------- Total interest-sensitive assets.... 24,151 11,235 9,276 5,813 14,454 $64,929 ------ ------ ----- ----- ------ ======= Cumulative totals.................. 24,151 35,386 44,662 50,475 64,929 ------ ------ ------ ------ ------ Interest rate sensitivity gaps as of December 31, 2004 ------------------------------------------------------ Over Over 1 year Over 3 months 3 through through 3 through Over (Dollars in thousands) or less 12 months 3 years 5 years 5 years Cumulative - ---------------------- -------- --------- ------- ------- ------- ---------- Interest-sensitive liabilities: Interest checking accounts........... 2,079 2,079 4,158 Savings accounts..................... 10,884 10,884 21,768 Certificates $100,000 or more....... 8,363 5,125 153 13,641 Certificates of less than $100,000 .. 3,353 5,259 1,163 391 10,166 ------- ------- ------- ------- ------- ------- Total interest-sensitive liabilities $24,679 $10,384 $14,279 $ 391 $ -- $49,733 ======= ======= ======= ======= ======= ======= Cumulative totals.................. $24,679 $35,063 $49,342 $49,733 $49,733 ======= ======= ======= ======= ======= Interest sensitivity gap................. $ (528) $ 851 $(5,003) $ 5,422 $14,454 ======= ======= ======= ======= ======= Cumulative gap........................... (528) 323 (4,680) 742 15,196 Cumulative gap/total earning assets...... 0.81% 0.50% 7.20% 1.14% 23.40% Interest-sensitive assets to interest-sensitive liabilities........ 0.98 1.01 0.65 14.87 --
- ---------- Core deposits such as checking and savings deposits have been placed in repricing intervals based on historical trends and management's estimates. 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, 2004 are as follows: 33 Net interest Percent of Changes in rate income change --------------- ------ ------ (Dollars in thousands) +200 basis points $ 3,310 0.58% +100 basis points 3,291 0.76 Flat rate 3,266 -- -100 basis points 3,223 1.32 -200 basis points 3,151 2.23 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, 2004 are as follows: MV of equity as a % Changes in rate MV equity of MV of assets --------------- --------- --------------- (Dollars in thousands) +200 basis points $ 6,237 9.0% +100 basis points 7,568 10.7 Flat rate 8,857 12.2 -100 basis points 9,832 13.3 -200 basis points 10,570 14.1 The market value of equity may be impacted by the composition of the Bank's assets and liabilities. A shift in the level of variable versus fixed rate assets will create swings in the market value of equity. The Bank's market value of equity declines in a rising rate environment because of the high level of fixed rate loans and investments it has in its portfolio that do not follow market rate changes. The assumptions used in evaluating the vulnerability of the Bank's earnings and equity to changes in interest rates are based on management's consideration of past experience, current position and anticipated future economic conditions. The interest sensitivity of the Bank's assets and liabilities, as well as the estimated effect of changes in interest rates on the earnings and equity, could vary substantially if different assumptions are used or actual experience differs from the assumptions on which the calculations were based. 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, 2004. 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. 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. 34 Capital Resources Total shareholders' equity increased $1.6 million in 2004 compared to 2003. The increase is primarily related to gains realized on the sale of bank-owned real estate totaling $1.9 million. The Bank's Capital Planning Committee, consisting of four outside directors and the Bank's two executive officers, is charged to explore all available options for capital infusion. The Board and management have a heightened sensitivity to this area and recognize that the lack of proper capital levels can threaten the viability and growth of the institution. In 2004, aggressive steps were taken to address this matter. The first step included the sale of a remote bank-owned parking lot in April 2004. This sale resulted in a net gain of $368,000. The second step included the sale of the Bank's Corporate Headquarters Building located at 300 N. Third Street, Philadelphia, PA. This sale was completed in July 2004 on which the Bank realized a gain of $1.5 million. While gains on asset sales were used to re-capitalize the Bank and support growth and profitability strategies, The next phase of capital generation will focus on retained earnings--attaining continuous profitability from the Bank's core operations---loan and deposit growth. 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 (excluding net unrealized holding gains on available for sale securities), 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 14, 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, operating losses and the need for additional provisions to the allowance for loan losses may have an adverse effect on its capital ratios. UBS and the Bank do not anticipate paying dividends in the near future. Table 14--Capital Ratios
(Dollars in thousands) 2004 2003 2002 ------- -------- ------- Total Capital ................................ $ 8,812 $ 7,235 $ 8,263 Less: Intangible Assets/Net unrealized gains (losses) on available for sale ...... (1,578) (1,826) (1,937) -------- -------- -------- Tier I capital ............................... 7,234 5,409 6,326 Tier II capital .............................. 544 339 528 -------- -------- -------- Total qualifying capital ..................... $ 7,778 $ 5,748 $ 6,854 ======== ======== ======== Risk-adjusted total assets (including off-balance-sheet exposures) .... $ 43,436 $ 44,971 $ 42,104 ======== ======== ======== Tier I risk-based capital ratio .............. 16.65% 12.03% 15.02% Total (Tier I and II) risk-based capital ratio 17.91% 12.78% 16.28% Tier I leverage ratio ........................ 9.89% 7.19% 7.46%
35 Regulatory Matters 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. The Agreement required 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: reducing expenses, consolidating branches, and soliciting new and additional sources of capital. Management continues to address all matters outlined in the Agreement. As of December 31, 2003, the Bank's tier one leverage capital ratio fell to 6.81%, below the 7% minimum capital ratio required by the Agreement. However, at February 29, 2004, the tier one leverage ratio had improved to 7.29% as a result of a $265,000 recovery on a previously charged-off loan. At December 31, 2004, the Bank's tier one leverage ratio had further improved to 9.49% as a result of the re-capitalization strategies that included gains on the sale of Bank-owned real estate discussed above. Management continues to review and revise its capital plan to address the development of new equity. The most productive of which is to increase capital through sustained core earnings. The Bank's plan projects this occurrence in 2005. A regulatory examination completed in February 2004 determined that the Bank was not in compliance certain other elements of the Agreement including the implementation of a viable earnings/strategic plan and the timely charge-off/funding of the allowance for loan losses. Management believes that it has implemented corrective action where necessary including the adoption of an achievable strategic plan for 2005. As a result, Management believes that the Bank is "substantially" in compliance with the Agreement's terms and conditions. Failure to comply could result in additional regulatory supervision and/or actions. See also "Regulatory Action" above. Recent Accounting Pronouncements In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with the evidence of deterioration of credit quality since origination acquired by completion of a transfer for which it is probable at acquisition, that the Company will be unable to collect all contractually required payments receivable. SOP 03-3 requires that the Company recognize the excess of all cash flows expected at acquisition over the investor's initial investment in the loan as interest income on a level-yield basis over the life of the loan as the accretable yield. The loan's contractual required payments receivable in excess of the amount of its cash flows excepted at acquisition (nonaccretable difference) should not be recognized as an adjustment to yield, a loss accrual or a valuation allowance for credit risk. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. The Company does not expect the adoption to have a material impact on the consolidated financial statements, results of operations or liquidity. The SEC recently released Staff Accounting Bulletin No.105, Application of Accounting Principles to Loan Commitments. SAB 105 provides guidance about the measurement of loan commitments recognized at fair value under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SAB 105 also requires companies to disclose their accounting policy for those loan commitments including methods and assumptions used to estimate fair value and associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of SAB 105 did not have a material effect on the Company's consolidated financial statements. In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based Payment" ("SFAS No. 123(R)"),establishing accounting standards for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123(R) also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted stock plans, performance-based stock awards, stock appreciation rights, and employee stock purchase plans. SFAS No. 123(R) replaces existing requirements under SFAS No. 123, "Accounting for Stock-Based Compensation," and eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25. The provisions for SFAS No. 123(R) are effective for the Company on July 1, 2005. The Company is currently assessing the financial statement impact of adopting SFAS No. 123(R). 36 In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued EITF Abstract 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1). The quantitative and qualitative disclosure provisions of EITF 03-1 were effective for years ending after December 15, 2003 and were included in the Company's 2003 Form 10-K. In March 2004, the EITF issued a Consensus on Issue 03-1 requiring that the provisions of EITF 03-1 be applied for reporting periods beginning after June 15, 2004 to investments accounted for under SFAS No. 115 and 124. EITF 03-1 establishes a three-step approach for determining whether an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. In September 2004, the FASB issued a proposed Staff Position, EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF 03-1 (EITF 03-1-a). EITF 03-1-a would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of EITF 03-1. In September 2004, the FASB issued a Staff Position, EITF Issue 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1). FSP EITF Issue No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" delays the effective date of certain provisions of EITF Issue 03-1, including steps two and three of the Issue's three-step approach for determining whether an investment is other-than-temporarily impaired. However step one of that approach must still be initially applied for impairment evaluations in reporting periods beginning after June 15, 2004. The delay of the effective date for paragraphs 10-20 of EITF Issue 03-1 will be superseded with the final issuance of proposed FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". The Company is in the process of determining the impact that this EITF will have on its financial statements. ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The financial information required by this Item 7A is incorporated by reference to page 31 of this Report, the Liquidity and Interest Rate Sensitivity Management provisions and pages 32 to 34 of this Report, including Table 13 the Interest Sensitivity Analysis Table of this Report. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Consolidated Financial Statements on pages 53 to 56 hereof. 37 ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Change in Accountants On December 16, 2004, UBS dismissed Grant Thornton, LLP as its independent registered public accounting firm and retained McGladrey & Pullen, Certified Public Accounts, as its new independent registered public accounting firm on December 16, 2004 to audit UBS' financial statements. The decision to change independent accountants was made by the Audit Committee of UBS' Board of Directors, because of the costs savings, which will be realized by appointing McGladrey & Pullen as its independent accountants to audit UBS' financial statements. The independent registered public accounting firm report issued by Grant Thornton, LLP on the financial statements of UBS for the two years ended December 31, 2003 and 2002 did not contain an adverse opinion or a disclaimer of opinion, nor were they modified as to uncertainty, audit scope or accounting principles, except that its report on UBS' financial statements for the year ended December 31, 2003, contained an explanatory paragraph indicating that substantial doubt exists about UBS' ability to continue as a going concern. The decision to change independent public accountants was made by the Audit Committee of UBS' Board of Directors on December 16, 2004. During each of the fiscal years ended December 31, 2002 and 2003 and subsequent interim periods through December 16, 2004, there were no disagreements between UBS and Grant Thornton, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of Grant Thornton, LLP would have caused it to make reference to the subject matter of the disagreement(s) in connection with its reports; and there were no "reportable events" as that term is used in Item 304 (a)(1)(iv) of Regulation S-K occurring within UBS two (2) most recent fiscal years and the subsequent interim periods through December 16, 2004. UBS has provided Grant Thornton, LLP with a copy of the foregoing disclosures and has requested that Grant Thornton, LLP review such disclosures and furnish a letter addressed to the Securities and Exchange Commission stating whether Grant Thornton, LLP agree with such statements. A copy of Grant Thornton, LLP's letter response to such request is attached hereto as Exhibit 16. New Independent Accountants UBS engaged McGladrey & Pullen as its new independent public accountants to audit UBS' financial statements as of December 16, 2004, for the fiscal year ended December 1, 2004 and until a new independent public accounting firm is appointed by UBS' Board of Directors. During the fiscal years ended December 31, 2002 and 2003 and subsequent interim periods through December 16, 2004, neither UBS or any one on UBS' behalf has consulted with McGladrey & Pullen regarding (i) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on UBS' financial statement, or (ii) any matter that was either the subject of a disagreement as that term is used in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K. ITEM 9A--CONTROLS AND PROCEDURES UBS carried out an evaluation, under the supervision and with the participation of the UBS' management, including the UBS' Chief Executive Officer, Evelyn F. Smalls and Chief Financial Officer, Brenda Hudson-Nelson, of the effectiveness of the design and operation of the UBS' disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of December 31, 2004 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that UBS' disclosure controls and procedures as of December 31, 2004, are effective and timely in alerting them to material information relating to UBS (including its consolidated subsidiaries) required to be included in UBS' periodic SEC filings. During the last fiscal quarter, there have not been any significant changes in UBS' internal control over financial reporting that have materially affected or are reasonably likely to materially affect the UBS' internal control over financial reporting. ITEM 9B--OTHER INFORMATION Not Applicable. 38 PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain biographical information. Other than as indicated below, each of the persons named below has been employed in their present principal occupation for the past five years. (a) Directors of the Registrant and Bank
Principal occupation and Year first Term Name Age other directorships became director will expire - ---- --- ----------------------------- --------------- ----------- Bernard E. Anderson 66 Professor of Management/Economist 2002 2006 At the Wharton School, Philadelphia, PA David R. Bright 65 Retired, Executive Vice President Meridian Bancorp 2002 2006 Philadelphia, PA Chief Financial Officer Joseph T. Drennan 59 Universal Capital Management, Inc. 2004 2008 Wilmington, DE L. Armstead Edwards 63 Co-Chairman, 1993 2008 United Bancshares, Inc. Owner and President, Edwards Entertainment, Inc. Philadelphia, Pennsylvania Marionette Y. Wilson (Frazier) 60 Retired as Partner, 1996 2008 John Frazier, Inc. Philadelphia, Pennsylvania Angela M. Huggins 64 Treasurer, 1993 2005 United Bancshares, Inc. Retired as Vice President Real Estate Affairs RMS Technologies, Inc.
39
Principal occupation and Year first Term Name Age other directorships became director will expire - ---- --- --------------------------- --------------- ----------- William B. Moore 62 Secretary, United Bancshares, Inc. Pastor, Tenth Memorial 1993 2007 Baptist Church Philadelphia, Pennsylvania Ashan M. Nasratul1ah 47 President, JNA Capital, Inc. Philadelphia, PA 2004 2005 Steven L. Sanders 44 President and Co-CEO, MDL Capital 2002 2006 Evelyn F. Smalls 59 President and CEO of Registrant 2000 2007 and United Bank of Philadelphia Ernest L. Wright 76 Founder, President and 1993 2008 CEO of Ernest L. Wright Construction Company Philadelphia, Pennsylvania
(b) Executive Officers of Registrant and Bank Name Age Office - ---- --- ------ Evelyn F. Smalls 59 President and Chief Executive Officer Brenda M. Hudson-Nelson 43 Executive Vice President/Chief Financial Officer L. Armstead Edwards 62 Chairman, Board of Directors Steven L. Sanders 44 Vice Chairman, Board of Directors William B. Moore 62 Secretary Marionette Y. Frazier 60 Assistant Secretary Angela M. Huggins 63 Treasurer (c) Family Relationships. There are no family relationships between any director, executive officer or person nominated or chosen by the UBS or 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. 40 INFORMATION ABOUT THE AUDIT COMMITTEES Information about the UBS' Audit/Compliance Committee The Audit/Compliance Committee of UBS' Board of Directors(1) is comprised of Angela M. Huggins (Chairman), Joseph T. Drennan(2), L. Armstead Edwards, Marionette Y. Frazier and William B. Moore, meets when necessary at the call of the Chairman. The Committee meets with the internal auditor to review audit programs and the results of audits of specific areas, as well as other regulatory compliance issues. In addition, the Committee meets with UBS' independent certified public accountants to review the results of the annual audit and other related matters. Each member of the Committee is "independent" as defined in the applicable listing standards of the National Association of Securities Dealers ("NASDAQ"). The Committee held four (4) meetings during 2004. Each member of the Audit/Compliance Committee is independent and financially literate as defined by NASDAQ. The Board of Directors of the Company and the Bank have determined that Joseph T. Drennan is the "Financial Expert," as defined in the SEC's regulations. In 2003, the Compliance Committee was combined with the Audit Committee and is comprised of the same members. On a quarterly basis compliance matters are addressed to included the review of regulatory compliance matters, the Bank's compliance programs and the CRA Act activities. Information about the Bank's Audit/Compliance Committee and Financial Expert The Audit/Compliance Committee of the Bank Board of Directors(1) comprised of Angela M. Huggins (Chairman), Joseph T. Drennan, L. Armstead Edwards, William B. Moore, and Marionette Y. Frazier meets at least quarterly. The Audit/Compliance Committee meets with the internal auditor to review audit programs and the results of audits of specific areas, as well as other regulatory compliance issues. In addition, the Audit/Compliance Committee meets with the Bank's independent registered public accountants to review the results of the annual audit and other related matters, with the internal auditor to review audit programs and the results of audits of specific areas, as well as other regulatory compliance issues. Each member of the Audit/Compliance Committee is "independent" as defined in the applicable listing standards of the NASDAQ. The Committee held four (4) meetings during 2004. In 2003, the Compliance Committee was combined with the Audit Committee and is comprised of the same members. On a quarterly basis compliance matters are addressed to included the review of regulatory compliance matters, the Bank's compliance programs and the CRA Act activities. - ---------- (1) The Audit Committees of UBS and the Bank are operating standing committees established in accordance with Section 3(a)58(A) of the Exchange Act. (2) Please note that Mr. Drennan was elected to the Company's and the Bank's Boards of Directors and the Audit Committees of those Board's of Directors on March 24, 2004, and assumed his duties as a Financial Expert of the Audit Committees of the Company's and the Bank's Boards of Directors Boards on that date. 41 INFORMATION ABOUT THE COMMITTEES OF THE BOARDS Under UBS' By-Laws, persons elected by the Board of Directors to fill a vacancy on the Board serve as directors for the balance of the term of the director who that person succeeds. The Board of Directors of UBS and the Board of Directors of the Bank meet on a monthly basis (except August). The Executive Committee of the Bank meets in those months when the Board of Directors does not meet. The Executive Committees of UBS and the Bank act in the stead of the Boards of Directors of UBS and the Bank, respectively, and exercise the authority and powers of the Boards of Directors at intervals between meetings of the Boards of Directors insofar as may be permitted by law and have responsibility for the nomination of new directors. The Asset and Liability Management Committee of the Bank's Board meets for the purpose of managing and monitoring the Bank's exposure to interest rate risks, market risk and liquidity risk. UBS' and the Bank's Audit/Compliance Committees interface with UBS' and the Bank's independent registered public accountants to review the results of the annual audit as well as regulatory compliance matters. UBS' Board of Directors does not have a Compensation Committee of the Board since it has no employees. General Information About UBS' and Bank's Boards of Directors UBS' Board of Directors meets when necessary and during 2004 held eleven (11) meetings, including UBS' organization meeting. The Bank's Board of Directors was scheduled to meet at least monthly, except in August. The total number of meetings of the Bank's Board of Directors that were held in 2004 was eleven (11). Information About the Committees of UBS' Board of Directors The Committees of UBS' Board of Directors are the Executive Committee and the Audit Committee. The Executive Committee comprised of L. Armstead Edwards (Chairman), Steven L. Sanders (Vice Chairman), Angela M. Huggins, William B. Moore, Evelyn F. Smalls, and Marionette Y. Frazier meets, when necessary, at the call of the Chairman, and to exercise the authority and powers of UBS' Board of Directors at intervals between meetings of the Board of Directors insofar as may be permitted by law. The Executive Committee held eleven (11) meetings during 2004. For information about UBS' and the Bank's Audit/Compliance Committees refer to "INFORMATION ABOUT THE AUDIT COMMITTEES" above. Information About UBS' Nominating Committee The Nominating Committee, comprised of Angela M. Huggins (Chairman), L. Armstead Edwards and Ernest L. Wright, meets at the call of the Chairman. The Committee is responsible for considering and recommending future director nominees to the Board of Directors of UBS and the Bank and the Committee will be independent and meet the requirements for independence of NASDAQ. The Nominating Committee a charter will be made available, without charge, upon written request by the shareholders of UBS to the corporate secretary of UBS and the charter will be attached to the Proxy Statement sent to the UBS shareholders in connection with UBS' next Annual Meeting. The Committee held three (3) meetings in 2004. Meetings of UBS' Board and its Committees The total number of meetings of UBS' Board of Directors that were held in 2004 was eleven (11). All of the incumbent directors, who were directors during 2004 (i) attended at least seventy-five percent (75%) of the total number of meetings of the Board of Directors and (ii) all directors attended at least seventy-five percent (75%) of the aggregate of the total number of meetings held by all committees of the Board on which the director served except William B. Moore, who attended sixty-seven percent (67%) of all Board of Director and Executive Committee meetings. 42 Information About Committees of the Bank's Board of Directors The Committees of the Bank's Board of Directors are the Executive, Asset and Liability Management, the Audit/Compliance Committees, and the Loan Committee. The Executive Committee comprised of L. Armstead Edwards (Chairman), Steven L. Sanders (Vice Chairman), Angela M. Huggins, William B. Moore, Evelyn F. Smalls and Marionette Y. Frazier meets, when necessary, at the call of the Chairman, to discuss and approve certain human resource matters including compensation, to ratify and approve certain of the Bank's loans and to exercise the authority and powers of the Bank's Board of Directors at intervals between meetings of the Board of Directors insofar as may be permitted by law. The Executive Committee held eleven (11) meetings during 2004. The Compensation Committee, comprised of Steven Sanders (Chairman), L. Armstead Edwards, Angela M. Huggins, William B. Moore, and Marionette Y. Wilson, meets to discuss compensation matters. The Compensation Committee of the Bank annually reviews and approves corporate goals and objectives relevant to CEO compensation, evaluates the CEO's performance in light of those goals and objectives and determines and approves the compensation and benefits to be paid or provided to the Evelyn F. Smalls the President of UBS and Brenda M. Hudson-Nelson Executive Vice President and Chief financial Officer. Each member of the Compensation Committee is independent as defined by NASDAQ. During 2004, the Compensation Committee held three (3) meetings. The Asset and Liability Management Committee comprised Bernard E. Anderson (Chairman), L. Armstead Edwards, Angela M. Huggins, Evelyn F. Smalls and Ernest L. Wright meets quarterly to review and manage the Bank's exposure to interest rate risk, market risk and liquidity risk. During 2004, the Asset and Liability Management Committee held three (3) meetings. The Loan Committee, comprised of David R. Bright (Chairman), L. Armstead Edwards, Ernest L. Wright, and Evelyn F. Smalls meets when necessary to review and approve loans that are $200,000 and over and to discuss other related loan matters. The Committee held 11 (eleven) meetings during 2004. For information about UBS' and the Bank's Audit/Compliance Committees refer to "INFORMATION ABOUT THE AUDIT COMMITTEES" above. The Board of Directors of the Company and the Bank has determined that all of its members are independent and meet the independence requirements of NASDAQ except Evelyn F. Smalls. Because Ms. Smalls is the President and Chief Executive Officer of the Company and the Bank she is not independent as defined by NASDAQ. Meetings of Bank's Board and its Committees The total number of meetings of the Bank's Board of Directors that were held in 2004 was eleven (11). All incumbent directors (i) attended at least seventy-five percent (75%) of the total number of meetings of the Board of Directors, and (ii) attended at least seventy-five percent (75%) of the aggregate of the total number of meetings held by all committees of the Board on which the director served except William B. Moore, who attended sixty-seven percent (67%) of all Board of Directors and Executive Committee meetings. 43 BOARDS OF DIRECTORS COMPENSATION Directors Fees The normal non-officer director fee paid by the Bank is Three Hundred Fifty Dollars ($350) for attending each Board meeting and One Hundred Seventy-five Dollars ($175) per quarter for attending the Board of Directors' Committee meetings. Directors' fees are not paid to officer directors for attending Bank Board of Directors or Committee meetings. UBS does not pay any fees to any directors for attending UBS' Board of Directors or Committee meetings. Effective April 1, 2002, the Board of Directors elected to waive all fees for an indefinite period of time. UBS'S AND BANK'S EXECUTIVE OFFICERS The following table sets forth certain information with respect to the current executive officers of UBS and Bank as of March 17, 2005:
UBS Stock Name, Principal Occupation and Age as of Beneficially Business Experience For Past 5 Years March 17, 2005 Office with the UBS and/or Bank Owned - ------------------------------------- --------------- ------------------------------- ----- Evelyn F. Smalls (1)(2) 59 President and Chief Executive Officer 450 and Director of UBS and Bank Brenda M. Hudson-Nelson (3) 43 Executive Vice President and 50 Chief Financial Officer of UBS and Bank
- ------------------ Footnote Information Concerning Executive Officers (1) Ms. Smalls was elected as a director and was appointed as President and Chief Executive Officer in June 2000. Prior to that, Ms. Smalls was Senior Vice President of Human Resources and Compliance from October 1993 to May 2000. (2) The President and Chief Executive Officer, currently Evelyn F. Smalls, acts as Trustee of certain voting trust agreements (the "Voting Trusts") pursuant to which Fahnstock, Inc. deposited 5,209 shares of Common Stock of UBS. (3) Ms. Hudson-Nelson was appointed Senior Vice President and Chief Financial Officer in June 2000. Prior to that, Ms. Hudson-Nelson was Vice President and Controller from January 1992 to May 2000. In May 2002, Ms. Hudson-Nelson was promoted to Executive Vice President and Chief Financial Officer. CODE OF CONDUCT AND ETHICS UBS and the Bank has adopted a Code of Business Conduct and Ethics (the "Code") that applies to all its directors, employees and officers and including its Chief Executive Officer and its Chief Financial Officer. The Code meets the requirement of a code of ethics for the UBS' and the Bank's principal executive officer and principal financial officer or persons performing similar functions under Item 406 of the SEC's Regulation S-K. Any amendments to the Code, or any waivers of the Code for directors or executive officers will be disclosed promptly on a Form 8-K filed with the SEC or by any other means approved by the SEC. The Code complies with requirements of Sarbanes-Oxley Act and the listing standards of NASDAQ and UBS provides a copy of the Code to each director, officer and employee." UBS will provide, without charge, a copy of its Code of Business Conduct and Ethics to any person who requests a copy of the Code. A copy of the Code may be requested by writing to the President of UBS at United Bank of Philadelphia at 30 S. 15th Street, Suite 1200, Philadelphia, PA 19102. 44 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires that UBS' directors and executive officers file reports of their holdings of UBS' Common Stock with the SEC. Based on UBS' records and other information available to UBS believes that the SEC's Section 16(a) reporting requirements applicable to UBS' directors and executive officers were complied with for UBS' fiscal year ended December 31, 2004. There were no reportable transactions during this period. ITEM 11 -- EXECUTIVE COMPENSATION The Compensation Committee, comprised of Steven Sanders (Chairman), L. Armstead Edwards, Angela M. Huggins, William B. Moore, and Marionette Y. Wilson, meets to discuss compensation matters. The Compensation Committee of the Bank annually reviews and approves corporate goals and objectives relevant to CEO compensation, evaluates the CEO's performance in light of those goals and objectives and determines and approves the compensation and benefits to be paid or provided to the Evelyn F. Smalls the President of UBS and Brenda M. Hudson-Nelson Executive Vice President and Chief financial Officer. Each member of the Compensation Committee is independent as defined by NASDAQ. During 2004, the Compensation Committee held three (3) meetings. The following information relates to all plan and non-plan compensation awarded to, earned by, or paid to (i) Evelyn F. Smalls, the President and Chief Executive Officer of the Bank, and (ii) Brenda M. Hudson-Nelson, Executive Vice President and Chief Financial Officer of the Bank, the only persons who were serving as executive officers of the Bank at December 31, 2004 (Ms. Smalls and Ms. Hudson-Nelson are hereinafter sometimes collectively referred to as the "Named Executive Officers"). (1) UBS' executives are not compensated for their services to UBS rather, because the Bank is the principal subsidiary of UBS, they are compensated as officers of the Bank. Summary Compensation Table The disclosure regarding the compensation of the Bank's executives includes the following table that sets forth the compensation paid to the Named Executive Officers during the last three fiscal years.
Annual Compensation(1) ---------------------- Stock All Other Name and Principal Position During 2003 Year Salary Bonus Options Compensation(2) - --------------------------------------- ---- ------ ------ ------- --------------- ($) (#) ($) Evelyn F. Smalls 2004 $149,588 -- -- -- President and Chief Executive Officer 2003 $139,050 -- -- -- of UBS and the Bank 2002 $148,009 -- -- -- -- -- -- Brenda M. Hudson-Nelson 2004 $106,044 -- -- -- Executive Vice President and 2003 $ 97,850 -- -- -- Chief Financial Officer of UBS and the Bank 2002 $102,112 -- -- --
- ------------------ (1) Amounts are not included in the Bonus, Stock Option and All Other Compensation columns of the table because no compensation of this nature was paid by UBS or the Bank and the restricted stock awards and long term incentive payouts columns are not included in the Compensation Table since these benefits are not made available by UBS or the Bank. (2) The SEC's compensation disclosure rules require the use, where applicable, of a series of tables to describe various types of compensation paid to the specified executive officers. The use of a specific table or column in a table is not required by the SEC's rules if no compensation was paid or awarded to the named executives. Only the tables or columns required to be used by the SEC's rules, because of the compensation paid to the specified executive officers, have been used in this report. 45 Executive Employment Agreements The Bank entered into a new Employment Agreement with Evelyn F. Smalls in November 2004 to continue to serve as the Bank's President and Chief Executive Officer. The term of the Employment Agreement is three (3) years, unless extended or terminated. The Employment Agreement provides for an annual base salary of $160,000 that may be increased, but not decreased. Under her Employment Agreement, Ms. Smalls has an opportunity to receive an annual cash bonus based on performance targets specified in the Employment Agreement which are based on the annual earnings of the Bank. The Bank entered into a new Employment Agreement with Brenda M. Hudson-Nelson in November 2004 to continue to serve as the Bank's Executive Vice President and Chief Financial Officer. The term of the Employment Agreement is three (3) years, unless extended or terminated. The Employment Agreement provides for an annual base salary of $115,000 that may be increased, but not decreased. Under her Employment Agreement, Ms. Hudson-Nelson has an opportunity to receive an annual cash bonus based on performance targets specified in the Employment Agreement which are based on the annual earnings of the Bank. Equity Compensation Plan Information 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. Equity Compensation Plan Table - ------------------------------
(a) (b) (c) - ------------------------------------------------------------------------------------------------------------------ Plan Category Number of Securities Weighted average Number of securities to be issued upon exercise price of remaining available exercise of outstanding options, for future issuance outstanding options, warrants, and rights under equity warrants and rights compensation plans (excluding securities reflected in column (a)) - ------------------------------------------------------------------------------------------------------------------ Equity compensation plans 29,694 $8.54 70,306 approved by security holders Equity compensation plans not -- -- -- approved by security holders - ------------------------------------------------------------------------------------------------------------------ Total 29,694 $8.54 70,306 - ------------------------------------------------------------------------------------------------------------------
46 ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to UBS, as of March 17, 2005(1), with respect to the only persons to UBS' knowledge, who may be beneficial owners of more than 5% of UBS' Common Stock. Percentage of Amount and Nature of Outstanding Beneficial Ownership Corporation Name and Address of Corporation Common Stock of Beneficial Owner Common Stock Owned - ------------------- ------------ ----- Philadelphia Municipal 71,667 8.17% Retirement System 2000 Two Penn Center Philadelphia, Pennsylvania 19102 Wachovia Corporation (2) 50,000 5.70% 1 Wachovia Center Charlotte, NC 28288 - ------------------ (1) As of March 17, 2005, there were 876,921 shares of UBS' voting Common Stock outstanding. (2) Wachovia Corporation owns 241,666 shares of UBS Common Stock of which 50,000 are voting shares. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Some of the directors and executive officers of the UBS and Bank and the entities 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 2003. 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 transactions and loan commitments did not involve more than normal risk of collectively or present other unfavorable features. ITEM 14--PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table presents the fees for each of the last two fiscal years for the UBS' principal accountants by category: 2004 2003 --------- --------- Audit Fees.................... $ 62,000 $ -- Audit-related fees............ -- -- Tax fees...................... -- -- All other fees................ -- -- --------- --------- Total fees................. $ 62,000 $ -- ========= ========= Refer to Item 9--Changes in and Disagreements with Accountants on Accounting and Financial Disclosure for further information. The Audit Committee pre-approves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for UBS by its independent auditor, subject to the minimus exceptions for non-audit services described in Section 10A (i) (1) (B) of the Exchange Act which are approved by the Committee prior to the completion of the audit. The Audit Committee may form and delegate authority to subcommittees consisting of one or more members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services, provided that decisions of such subcommittee to grant pre-approvals shall be presented to the full Audit Committee at its next scheduled meeting. 47 PART IV ITEM 15 -- EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES The following documents are filed as part of this report of United Bancshares, Inc.: Page ---- (a) 1. Financial Reports of United Bancshares, Inc. Report of Independent Registered Public Accounting Firm ............ 51 Consolidated Balance Sheets at December 31, 2004 and 2003........... 53 Consolidated Statements of Operations for the three years ended December 31, 2004................................................ 54 Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 2004.............................. 55 Consolidated Statements of Cash Flows for the three years ended December 31, 2004................................................ 56 Notes to Consolidated Financial Statements.......................... 57 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. 4. The following Exhibits are filed herewith or incorporated by reference as a part of this Annual Report: Exhibit Number Item -------------- ---- (3(i)) Articles of Incorporation (Incorporated by reference to Registrant's 1998 Form 10-K). (3(ii)) Bylaws (Incorporated by reference to Registrant's 1997 Form 10-K). (9.1) 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) Material Contracts a) Lease for corporate headquarters office located at The Graham Building, 30 S. 15th Street, Suite 1200, Philadelphia, PA b) Lease for branch office located at 1620 Wadsworth Avenue (Incorporated by reference to Registrant's 2002 Form 10K) c) Lease for branch office located at 3750 Lancaster Avenue (Incorporated by reference to Registrant's 2002 Form 10K) d) Lease for branch office located at 1015 North Broad Street (Incorporated by reference to Registrant's 2002 Form 10K) e) Evelyn F. Smalls' Employment Agreement, dated November 1, 2004 f) Brenda Hudson-Nelson's Employment Agreement, dated November 1, 2004 g) Long Term Incentive Compensation Plan (Incorporated by reference to Registrant's 1992 Form 10) 48 (11) Statement of Computation of Earnings Per Share. Included at Footnote 17 of the Financial Statements hereof. (12) Statement of Computation of Ratios. Included at Footnote 15 of the Financial Statements hereof. c) Not applicable. (14) Code Conduct and Ethics (attached hereto as Exhibit 14) (16) Letter re Change of Accountant (21) Subsidiaries of Registrant Name State of Incorporation ---- ---------------------- United Bank of Philadelphia Pennsylvania (31) Certification of the Annual Report (31.1) Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32) Certification Pursuant to issue of Section 1350 (A) Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer attached hereto as Exhibit 31.1. (B) Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer attached hereto as Exhibit 31.2. (99) Additional Exhibits (A) Exhibit 99 Registrants Proxy Statement for its Annual Shareholders Meeting held on November 23, 2004 is attached hereto as Exhibit 99(A). 49 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 - ------------------------------------------------------------- April 14, 2005 Evelyn F. Smalls, President & CEO, Director /s/ Brenda M. Hudson-Nelson - ------------------------------------------------------------- April 14, 2005 Brenda M. Hudson-Nelson, EVP, CFO /s/ L. Armstead Edwards - ------------------------------------------------------------- April 14, 2005 L. Armstead Edwards, Chairman, Director /s/ Steven L. Sanders - ------------------------------------------------------------- April 14, 2005 Steven L. Sanders, Vice Chairman, Director /s/ Marionette Y. Wilson (Frazier) - ------------------------------------------------------------- April 14, 2005 Marionette Y. Wilson (Frazier), Assistant Secretary, Director /s/ Angela M. Huggins - ------------------------------------------------------------- April 14, 2005 Angela M. Huggins, Treasurer, Director /s/ William B. Moore - ------------------------------------------------------------- April 14, 2005 William B. Moore, Secretary, Director /s/ Bernard E. Anderson - ------------------------------------------------------------- April 14, 2005 Bernard E. Anderson, Director /s/ David R. Bright - ------------------------------------------------------------- April 14, 2005 David R. Bright, Director /s/ Joseph T. Drennan - ------------------------------------------------------------- April 14, 2005 Joseph T. Drennan, Director /s/ Ashan M. Nasratullah - ------------------------------------------------------------- April 14, 2005 Ashan M. Nasratullah, Director /s/ Ernest L. Wright - ------------------------------------------------------------- April 14, 2005 Ernest L. Wright, Director
50 McGladrey & Pullen, LLP Certified Public Accountants McGladrey & Pullen, LLP One Valley Square, Ste. 250 512 Township Line Road Blue Bell, PA 19422-2700 O 215-641-8600 F 215-641-8680 Report of Independent Registered Public Accounting Firm To the Board of Directors United Bancshares, Inc. Philadelphia, Pennsylvania We have audited the consolidated balance sheet of United Bancshares, Inc. and Subsidiary (the "Company") as of December 31, 2004, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Bancshares, Inc. and Subsidiary as of December 31, 2004, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Blue Bell, Pennsylvania March 29, 2005 McGladrey & Pullen, LLP is a member firm of RSM International an affiliation of separate and independent legal entities. 51 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and Board of Directors United Bancshares, Inc. and Subsidiary We have audited the accompanying consolidated balance sheet of United Bancshares, Inc. and Subsidiary as of December 31, 2003, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2003. 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 the standards of the Public Company Accounting Oversight Board (United States). 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. 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, 2003, and the consolidated results of their operations and cash flows for the each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming the Bank will continue as a going concern. As discussed in Note 2 to the financial statements the Bank entered into a written agreement (Agreement) with its primary regulators dated February 23, 2000. As of December 31, 2003 the Bank was not in compliance with certain requirements of the Agreement. Not meeting these requirements, losses incurred in the current year and the results of a recent regulatory examination, could expose the Bank to possible further regulatory actions. As more fully discussed in Note 2, these matters raise substantial doubt about the Bank's ability to continue as a going concern. The ability of the Bank to continue as a going concern is dependent on many factors, including achieving the required capital levels, earnings and fully complying with the Agreement. Management's plans with respect to these matters are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Grant Thornton LLP Philadelphia, Pennsylvania January 22, 2004 52 United Bancshares, Inc. and Subsidiary CONSOLIDATED BALANCE SHEETS December 31,
Assets 2004 2003 ------------- ------------ Cash and due from banks...................................................... $ 4,317,645 $ 4,318,584 Interest-bearing deposits with banks......................................... 888,924 874,362 Federal funds sold........................................................... 3,727,000 1,500,000 ----------- ---------- Cash and cash equivalents.......................................... 8,933,569 6,692,946 Investment securities: Available-for-sale, at fair market value................................. 4,797,549 8,933,216 Held-to-maturity, at amortized cost (fair market value of $8,784,495 and $6,703,476 in 2004 and 2003, respectively)........................ 8,762,796 6,703,476 Loans held-for-sale (market value of $1,437,274)............................ 1,412,554 -- Loans, net of unearned discount of $21,781 and $43,181 in 2004 and 2003, respectively................................................... 45,680,014 47,028,397 Less allowance for loan losses............................................... ( 602,939) 338,574) ------------ ----------- Net loans.......................................................... 45,077,075 46,689,823 Bank premises and equipment, net............................................. 1,074,855 2,772,153 Accrued interest receivable.................................................. 328,354 380,583 Intangible assets............................................................ 1,560,358 1,738,436 Prepaid expenses and other assets............................................ 353,789 806,734 ----------- ----------- Total assets....................................................... $72,300,899 $74,717,367 =========== =========== Liabilities and Shareholders' Equity Liabilities: Demand deposits, noninterest-bearing..................................... $13,439,567 $16,112,983 Demand deposits, interest-bearing........................................ 8,333,631 10,430,349 Savings deposits......................................................... 17,591,982 19,309,126 Time deposits, under $100,000............................................ 13,641,202 10,349,830 Time deposits, $100,000 and over......................................... 10,165,837 10,914,535 ----------- ----------- Total deposits..................................................... 63,172,219 67,116,823 Accrued interest payable................................................. 78,196 77,775 Accrued expenses and other liabilities................................... 239,156 287,876 ----------- ----------- Total liabilities.................................................. 63,489,571 67,482,474 ----------- ----------- Commitments and Contingencies (Notes 6, 11, and 15) Shareholders' equity: Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000 shares authorized; 136,842 issued in 2004 and 2003, respectively; 6,308 shares held in treasury at December 31, 2004 and 2003............................................ 1,368 1,368 Common stock, $0.01 par value; 1,750,000 shares authorized; 876,921 issued at December 31, 2004 and 2003 ......................... 8,769 8,769 Class B Non-voting Common Stock; 250,000 shares authorized; $0.01 par value; 191,667 issued and outstanding at December 31, 2004 and 2003.......... 1,917 1,917 Treasury Stock, 33,500 shares at December 31, 2004 and 2003, at cost..... -- -- Additional paid-in-capital............................................... 14,749,852 14,749,852 Accumulated deficit...................................................... (5,968,140) (7,614,662) Accumulated other comprehensive income .................................. 17,562 87,649 ----------- ----------- Total shareholders' equity......................................... 8,811,328 7,234,893 ----------- ----------- Total liabilities and shareholders' equity......................... $72,300,899 $74,717,367 =========== ===========
The accompanying notes are an integral part of these statements. 53 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31,
2004 2003 2002 ------------ ------------ ------------ Interest income: Interest and fees on loans................................. $ 3,008,532 $ 2,912,547 $ 3,006,367 Interest on investment securities.......................... 560,255 805,655 1,446,072 Interest on federal funds sold............................. 86,935 97,599 169,071 Interest on time deposits with other banks................. 30,087 21,002 10,921 ------------ ------------ ------------ Total interest income................................ 3,685,809 3,836,803 4,632,431 ------------ ------------ ------------ Interest expense: Interest on time deposits.................................. 294,863 374,297 662,493 Interest on demand deposits................................ 48,602 83,267 114,399 Interest on savings deposits............................... 62,464 89,020 129,227, ------------ ------------ ------------ Total interest expense............................... 405,929 546,584 906,119 ------------ ------------ ------------ Net interest income.................................. 3,279,880 3,290,219 3,726,312 Provision for loan losses...................................... 45,000 565,000 175,000 ------------ ------------ ------------ Net interest income after provision for loan losses.. 3,234,880 2,725,219 3,551,312 ------------ ------------ ------------ Noninterest income: Gain on sale of loans...................................... 6,299 57,061 - Customer service fees...................................... 852,806 955,284 1,109,335 ATM Fee Income............................................. 597,965 697,724 818,503 Loan Syndication Fee Income................................ 178,802 86,000 25,000 Gain on sale of investments................................ 31,115 - 25,789 Gain on sale of fixed assets............................... 1,874,203 - 48,054 Other income............................................... 113,837 94,837 300,337 ------------ ------------ ------------ Total noninterest income............................. 3,655,027 1,890,906 2,327,018 ------------ ------------ ------------ Noninterest expense: Salaries, wages and employee benefits...................... 1,935,421 2,204,583 2,344,746 Occupancy and equipment.................................... 1,102,627 1,224,719 1,293,803 Office operations and supplies............................. 411,920 453,202 433,557 Marketing and public relations............................. 82,652 113,552 82,692 Professional services...................................... 239,050 220,765 283,671 Data processing............................................ 562,655 661,939 639,854 Deposit insurance assessments.............................. 72,238 33,501 36,258 Other operating............................................ 836,822 819,329 980,332 ------------ ------------ ------------ Total noninterest expense............................ 5,243,385 5,731,590 6,094,913 ------------ ------------ ------------ Net income (loss).................................... $ 1,646,522 $ (1,115,465) $ (216,583) ============ ============ ============ Net income (loss) per common share--basic ..................... $ 1.54 $ (1.03) $ (0.20) ============ ============ ============ Net income per common share--diluted............................ $ 1.50 $ (1.03) $ (0.20) ============ ============ ============ Weighted average number of common shares....................... 1,068,588 1,084,694 1,101,247 ============ ============ ============
The accompanying notes are an integral part of these statements. 54 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 2004, 2003 and 2002
Series A Accumulated Total Compre- preferred stock Common stock Additional other share- hensive ---------------- ------------------ paid-in Accumulated comprehensive holders' income Shares Amount Shares Amount capital deficit income (loss) equity (loss) -------- ------ -------- -------- ----------- ------------ ------------ --------- ------ Balance at December 31, 2001........ 143,150 $1,432 1,100,388 $11,004 $14,729,070 $(6,282,614) $ 98,819 $8,557,711 Proceeds from issuance of common stock....... 1,700 17 20,383 20,400 Unrealized gains on investment securities. 138,613 138,613 $ 138,613 Net loss.............. (216,583) (216,583) (216,583) ------- ------ --------- ------- ----------- ----------- --------- ---------- ----------- Total comprehensive income (loss)............ $ (77,970) =========== Balance at December 31, 2002........ 143,150 1,432 1,102,088 11,021 14,749,453 (6,499,197) 237,432 8,500,141 Treasury Stock......... (6,408) (64) (33,500) (335) 399 -- Unrealized losses on investment securities. (149,783) (149,783) $ (149,783) Net loss.............. (1,115,465) (1,115,465) (1,115,465) ------- ------ --------- ------- ----------- ----------- ---------- ---------- ----------- Total comprehensive income (loss)............ $(1,265,248) =========== Balance at December 31, 2003........ 136,842 1,368 1,068,588 10,686 14,749,852 (7,614,662) 87,649 7,234,893 ======= ====== ========= ======= =========== ============ ========= ========== Unrealized losses on investment securities. (70,087) (70,087) $ (70,087) Net income............. 1,646,522 1,646,522 1,646,522 ------- ------ --------- ------- ----------- ----------- --------- ---------- ----------- Total comprehensive income (loss).......... $ 1,576,435 =========== Balance at December 31, 2004....... 136,842 $1,368 1,068,588 $ 10,686 $14,749,852 $(5,968,140) $ 17,562 $8,811,328 ======= ====== ========= ======= =========== ============ ========= ==========
The accompanying notes are an integral part of these statements. 55 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, ------------------------ 2004 2003 2002 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss).......................................... $ 1,646,522 $ (1,115,465) $ (216,583) Adjustments to reconcile net loss to net cash (used in provided by operating activities: Provision for loan losses............................... 45,000 565,000 175,000 Gain on sale of loans................................... (6,299) (57,061) Gain on sale of fixed assets............................ (1,874,203) -- (48,054) (Gain) loss on sale of investment securities............ (31,115) -- (25,789) Depreciation and amortization........................... 610,440 688,247 673,361 (Increase) decrease in accrued interest receivable and other assets................................................ 505,173 (198,518) 702,412 Decrease in accrued interest payable and other liabilities...................................... (48,299) (249,024) (73,151) ----------- ------------- ----------- Net cash provided by (used in) operating activities.. 847,219 (366,821) 1,187,196 ---------- ------------- ---------- Cash flows from investing activities: Purchase of available-for-sale investments................. (496,421) (3,200,237) (10,792,294) Purchase of held-to-maturity investments................... (3,986,354) (3,510,938) (2,247,096) Proceeds from maturity and principal reductions of available-for-sale investments.......................... 3,774,398 8,414,626 9,936,68501 Proceeds from maturity and principal reductions of held-to-maturity investments............................ 1,917,765 3,967,709 6,568,297 Proceeds from sale of investments available-for-sale....... 786,526 -- 1,091,063 Proceeds from the sale of fixed assets..................... 3,283,536 -- -- Proceeds from sale of student loans........................ -- 3,054,429 -- Purchase of loans from other financial institutions........ -- (9,325,656) -- Net (increase) decrease in loans........................... 161,493 2,532,105 (1,341,919) Purchase of premises and equipment......................... (102,935) (588,878) (182,004) ----------- ----------- ----------- Net cash used in investing activities................ 5,338,008 1,343,161 3,032,732 ---------- ------------ ---------- Cash flows from financing activities: Net decrease in deposits................................... (3,944,604) (9,812,482) (2,493,218) Net proceeds from issuance of common stock................. -- -- 20,400 ----------- ------------- ----------- Net cash used in financing activities................ (3,944,605) (9,812,482) (2,472,818) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents. 2,240,623 (8,836,142) 1,747,110 ---------- ----------- ---------- Cash and cash equivalents at beginning of year................. 6,692,946 15,529,088 13,781,978 ----------- ---------- ---------- Cash and cash equivalents at end of year....................... $ 8,933,569 $ 6,692,946 $15,529,088 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the year for interest..................... $ 405,508 $ 468,141 $ 1,013,450 =========== =========== ===========
The accompanying notes are an integral part of these statements. 56 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004, 2003, and 2002 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. The Bank adopted EITF 03-1, The Meaning of Other than Temporary Impairment and Its Application to Certain Investments, as of December 31, 2003. EITF 03-1 includes certain disclosures regarding quantitative and qualitative disclosures for investment securities accounted for under FAS 115, Accounting for Certain Investments in Debt and Equity Securities, that are impaired at the balance sheet date, but an other-than-temporary impairment has not been recognized. The disclosures under EITF 03-1 are required for financial statements for years ending after December 15, 2003 and are included in these financial statements. The cost of investment securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization or accretion is included in interest income from investments. Interest and dividends are included in interest income from investments. Realized gains and losses and declines in value judged to be other-than-temporary are included in realized gains (losses) on investment securities. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or that management would not have the intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value. The cost of securities sold is based on the specific-identification method. (Continued) 57 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Loans The Bank has both the positive intent and ability to hold the majority of 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. 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. In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with the evidence of deterioration of credit quality since origination acquired by completion of a transfer for which it is probable at acquisition, that the Company will be unable to collect all contractually required payments receivable. SOP 03-3 requires that the Company recognize the excess of all cash flows expected at acquisition over the investor's initial investment in the loan as interest income on a level-yield basis over the life of the loan as the accretable yield. The loan's contractual required payments receivable in excess of the amount of its cash flows excepted at acquisition (nonaccretable difference) should not be recognized as an adjustment to yield, a loss accrual or a valuation allowance for credit risk. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. The Company does not expect adoption to have a material impact on the Company's consolidated financial statements. The Company adopted FASB Interpretation ("FIN") 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others on January 1, 2003. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. From time to time the Company has financial and performance letters of credit. Financial letters of credit require the Company to make payment if the customer's financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Company to make payments if the customer fails to perform certain non-financial contractual obligation. The Company previously did not record a liability when guaranteeing obligations unless it became probable that the Company would have to perform under the guarantee. FIN 45 applies prospectively to guarantees the Company issues or modifies subsequent to December 31, 2002. At December 31, 2004, the Company had no outstanding letters of credit for which it would be contingently liable. (Continued) 58 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued The Securities and Exchange Commission (SEC) recently released Staff Accounting Bulletin No.105, Application of Accounting Principles to Loan Commitments. SAB 105 provides guidance about the measurement of loan commitments recognized at fair value under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SAB 105 also requires companies to disclose their accounting policy for those loan commitments including methods and assumptions used to estimate fair value and associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of SAB 105 did not have a material effect on the Company's consolidated financial statements. Loans Held-for-Sale The Bank accounts for its transfers and servicing financial assets in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 revises the standards for accounting for transfers of financial assets and collateral. Transfers of financial assets, for which the Bank has surrendered control, are accounted for as sales to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. Retained interests in a sale of financial assets are measured at the date of transfer by allocating the previous carrying amount between the assets transferred and based on their relative estimated fair values. The fair values of retained servicing rights and any other retained interests are determined based on the present value of expected future cash flows associated with those interests and by reference to market prices for similar assets. Loans held-for-sale are carried at the aggregate of lower of cost or market value. The Bank had student loans held for sale totaling $1,412,554 as of December 31, 2004. 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 that 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. The allowance is an accounting estimate subject to short-term changes based on the outcome of periodic analysis. (Continued) 59 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. 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. Earnings (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. Stock-based Compensation The Bank accounts for stock options under SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. At December 31, 2004, the Company had one stock-based employee compensation plan, which is more fully described in note 13. The Bank accounts for this plan under the recognition and measurement principles of APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. Stock-based employee compensation (Continued) 60 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued costs are not reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) per share if the Bank had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation (in thousands, except per share amounts).
Year ended December 31, --------------------------------- (In thousands) 2004 2003 2002 -------- -------- -------- Net income (loss) As reported....................................................... $ 1,647 $(1,115) (217) Less: Stock-based compensation costs determined under fair value-based method for all awards............... -- Pro forma......................................................... $ 1,647 $(1,115) (217) Basic income (loss) per share As reported....................................................... $ 1.54 $ (1.03) $(0.20) Pro forma......................................................... $ 1.54 $ (1.03) $(0.20) Diluted income (loss) per share As reported....................................................... $ 1.50 $ (1.03) $(0.20) Pro forma......................................................... $ 1.50 $ (1.03) $(0.20)
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. 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. 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 (Continued) 61 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. Intangible Assets On September 24, 1999, the Bank acquired four branches from First Union Corporation with deposits totaling $31.5 million. As a result of the acquisition, the Bank recorded a core deposit intangible of 2,449,488. The core deposit intangible is being amortized over 14 years. Amortization totaled $178,078 for each of the years ended December 31, 2004, 2003, and 2002, respectively. The amortization of the intangible will be $178,078 for each of the next five years. The core deposit intangible was tested for impairment. No impairment has been recognized. On October 1, 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 147, "Acquisitions of Certain Financial Institutions." SFAS No. 147 removes acquisitions of financial institutions from the scope of SFAS 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," and requires that those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations and SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 147 also requires that the acquisition of a less-than-whole financial institution, such as a branch, be accounted for as a business combination if the transferred assets and activities constitute a business. In addition, SFAS No. 147 amends SFAS 144, "Accounting for the Impairment of Disposal of Long-Lived Assets," to include within its scope long-term customer relationship intangible assets of financial institutions such as depositor-relationship intangible assets. 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. (Continued) 62 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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 year's financial statements to conform to the 2004 presentation. Comprehensive Income The Bank follows SFAS No. 130, which establishes standards for reporting comprehensive income that includes net income as well as certain other items that result in a change to equity during the period. These financial statements reflect the provisions of SFAS No. 130. The income tax effects allocated to comprehensive income (loss) are as follows: (Continued) 63 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 2004 ------------------------------------------- Before tax Tax benefit Net of tax amount (expense) amount ------ --------- ------ Unrealized losses on securities Unrealized holding losses arising during period $ (74,015) $ 24,776 $ (49,240) Less: reclassification adjustment for gains realized in net income 31,115 (10,267) 20,847 ---------- -------- --------- Other comprehensive income (loss), net $ (105,130) $ 35,043 $ (70,087) ========== ======== ========= December 31, 2003 -------------------------------------------- Before tax Tax benefit Net of tax amount (expense) amount ------ --------- ------ Unrealized losses on securities Unrealized holding losses arising during period $ (223,555) $ 73,772 $(149,783) Less: reclassification adjustment for gains realized in net income -- -- -- ---------- -------- --------- Other comprehensive income (loss), net $ (223,555) $ 73,772 $(149,783) ========== ======== ========= December 31, 2002 -------------------------------------------- Before tax Tax benefit Net of tax amount (expense) amount ------ --------- ------ Unrealized gains on securities Unrealized holding gains arising during period $ 232,674 $(76,782) $155,892 Less: reclassification adjustment for gains realized in net income 25,789 (8,510) 17,279 ---------- -------- -------- Other comprehensive income, net $ 206,885 $(68,272) $138,613 ========== ======== ========
Variable Interest Entities In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but it which it has a significant variable interest. Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation, FIN 46(R), the provisions were required to be applied to certain variable interest entities by March 31, 2004. The adoption of FIN 46 (R) did not have an impact on the financial condition or results of operations of the Company. 64 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 2. REGULATORY AGREEMENT 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. Failure to comply could result in additional regulatory supervision and/or actions. As of December 31, 2003, the Bank's tier one leverage capital ratio fell to 6.81%, below the 7% minimum capital ratio required by the Agreement. However, at February 29, 2004, the tier one leverage ratio had improved to 7.29% primarily as a result of a $265,000 recovery on a previously charged-off loan. Subsequently, as a result of a re-capitalization plan including the sale of bank-owned real estate for a gain of $1.9 million, the Bank's tier one leverage ratio further improved to 9.49%. A regulatory examination completed in February 2004 determined that the Bank was not in compliance with certain other elements of the Agreement including the implementation of a viable earnings/strategic plan and the timely charge-off/funding of the allowance for loan losses. Not meeting these requirements in addition could expose the Bank to possible further regulatory actions. In 2004, these matters raised substantial doubt about the Bank's ability to continue as a going concern. Management believes that it has implemented corrective action where necessary including the adoption of an achievable strategic plan for 2005. A profit restoration plan was developed and continues to be implemented. It includes among other things staff reductions/consolidations, salary reductions, reduction in branch operating hours, continued elimination of director fees, and the reduction of other operating expenses. Also, as part of the Bank's profit restoration plan, upon expiration of the lease in July 2004, the Bank's Two Penn Center was closed and consolidated with other branches in the network to further reduce occupancy, personnel, and other operating cost. While expense reductions continue to be achieved, management believes that a greater impact will be realized with increased deposit levels and loan originations that build the Bank's loan-to-deposit ratio. It is anticipated that increased loan volume will result in a higher net interest margin and therefore increased revenues. Thus, while continuing to control expenses, management will place more focus on the implementation of business development strategies to increase the level of loans outstanding to achieve profitability. Also, revenue enhancement strategies have been employed to expand opportunities for fee income through the implementation of new products and services including corporate loan syndications where the Bank serves in the role of arranger and/or administrative agent. As a result of all of the actions referred to above, Management strongly believes that the Bank is now "substantially" in compliance with the Agreement's terms and conditions and will continue to operate as an independent financial institution for the foreseeable future. 65 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 3. CASH AND DUE FROM BANK BALANCES The Bank maintains various deposit accounts with other banks to meet normal fund 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, 2004. 4. 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, 2004 and 2003 are as follows:
2004 ----------------------------------------------------------- Gross Gross Amortized unrealized unrealized Market cost gains losses value ----------- -------- --------- ----------- Available-for-sale: U.S. Government agency securities $ 250,000 $ -- $ (702) $ 249,298 Mortgage-backed securities ..... 4,183,980 54,149 (27,233) 4,210,896 ----------- -------- --------- ----------- Total debt securities .......... 4,433,980 54,149 (27,935) 4,460,194 Investments in mutual funds .... 108,905 108,905 Other investments .............. 228,450 228,450 ----------- -------- --------- ----------- $ 4,771,335 $ 54,149 $ (27,935) $ 4,797,549 =========== ======== ========= =========== Held-to-maturity: U.S. Government agency securities $ 4,499,892 $ 1,355 $ (30,030) $ 4,471,217 Mortgage-backed securities ..... 4,262,904 63,702 13,328 4,313,278 ----------- -------- --------- ----------- $ 8,762,796 $ 65,057 $ (43,358) $ 8,784,495 =========== ======== ========= ===========
66 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 4. INVESTMENTS - Continued
2003 ----------------------------------------------------------- Gross Gross Amortized unrealized unrealized Market cost gains losses value ----------- -------- --------- ----------- Available-for-sale: U.S. Government agency securities $ 2,250,000 $ 5,705 $ $ 2,255,705 Mortgage-backed securities ..... 6,157,392 130,575 (5,459) 6,282,508 ----------- ----------- --------- ----------- Total debt securities .......... 8,407,392 136,280 (5,459) 8,538,213 Investments in mutual funds .... 107,653 107,653 Other investments .............. 287,350 287,350 ----------- ----------- --------- ----------- $ 8,802,395 $ 136,280 $ (5,459) $ 8,933,216 =========== =========== ========= =========== Held-to-maturity: U.S. Government agency securities $ 2,250,000 $ 7,907 $ (24,845) $ 2,233,062 Mortgage-backed securities ..... 4,453,476 93,147 (6,923) 4,539,700 ----------- ----------- --------- ----------- $ 6,703,476 $ 101,054 $ (31,768) $ 6,772,762 =========== =========== ========= ===========
The table below indicates the length of time individual securities, both held-to-maturity and available-for-sale, have been in a continuous unrealized loss position at December 31, 2004 (in thousands):
Less than 12 months 12 months or longer Total ---------------------- ---------------------- ---------------------- Number Description of of Fair Unrealized Fair Unrealized Fair Unrealized Securities securities value losses value losses value losses - ------------------- ------------ -------- ----------- -------- ----------- -------- ------------ U.S. Government agency securities 10 $3,481 $ (19) 488 (12) $3,969 $(31) Mortgage backed securities 11 3,833 (35) 222 (5) 4,055 (40) ------- ------ ------ ------- ------- ------ ---- Total temporarily impaired investment securities 21 $7,314 $ (54) $ 710 $ (17) $ 8,024 $(71) ====== ====== ======= ======= ======= ======= ====
(Continued) 67 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 4. INVESTMENTS - Continued The table below indicates the length of time individual securities, both held-to-maturity and available-for-sale, have been in a continuous unrealized loss position at December 31, 2003 (in thousands):
Less than 12 months 12 months or longer Total ---------------------- ---------------------- ---------------------- Number Description of of Fair Unrealized Fair Unrealized Fair Unrealized Securities securities value losses value losses value losses - ------------------- ------------ -------- ----------- -------- ----------- -------- ------------ U.S. Government agency securities 3 $1,475 ($25) -- -- $ 1,475 ($25) Mortgage backed securities 7 2,445 (12) -- -- 2,445 (12) --------- ------ ----- ------- ------- ------ ---- Total temporarily impaired investment securities 10 $ 3,920 ($37) $ -- $ -- $ 3,920 ($37) ======== ======= ===== ======= ======== ======= ====
Management has considered factors regarding other than temporarily impaired securities and determined that there are no securities that are impaired as of December 31, 2004. Maturities of investment securities classified as available-for-sale and held-to-maturity at December 31, 2004 were as follows. Expected maturities may differ from contractual maturities. Amortized Market cost value ----------- ---------- Available-for-sale: Due after one month through three years .. $ -- $ -- Due after three year through five years .. 250,000 249,298 Due after five years through fifteen years -- -- Mortgage-backed securities ............... 4,183,980 4,210,896 ---------- ---------- Total debt securities .................... 4,433,980 4,460,194 Investments in mutual funds .............. 108,905 108,905 Other investments ........................ 228,450 228,450 ---------- ---------- $4,771,335 $4,797,549 ========== ========== Held-to-maturity: Due in one month through three years ..... $ -- $ -- Due after three years through five years . 2,749,892 2,737,387 Due after five years through fifteen years 1,750,000 1,733,830 Mortgage-backed securities ............... 4,262,904 4,313,278 ---------- ---------- $8,762,796 $8,784,495 ========== ========== (Continued) 68 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 4. INVESTMENTS - Continued The Bank recorded a gain of $31,115 on the sale of investments during the year ended December 31, 2004. No securities were sold during 2003. The Bank recorded a gain of $25,789 on the sale of investments during the year ended December 31, 2002. As of December 31, 2004 and 2003, investment securities with a book value of $11,459,636 and $7,451,203, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. 5. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of the net loans is as follows: 2004 2003 ------------ ------------ Commercial and industrial........ $ 15,217,162 $ 11,361,087 Commercial real estate........... 13,070,128 11,862,638 Residential mortgages............ 10,664,750 15,109,802 Consumer loans................... 6,727,974 8,694,870 ------------ ------------ Total loans................... 45,680,014 47,028,397 Less allowance for loan losses... (602,939) (338,574) ------------ ------------ Net loans..................... $ 45,077,075 $ 46,689,823 ============ ============ As of December 31, 2004, the Bank had student loans with a book value of $1,412,554 that were held-for-sale. As of December 31, 2004 and 2003, the Bank had loans to certain officers and directors and their affiliated interests in aggregate dollar amounts of $1,074,000 and $808,000, respectively. During 2004, there were $236,000 in new loans to related parties and repayments amounted to $81,000. During 2003 there were no new loans to related parties and repayments amounted to $65,000 and $249,000, respectively. The balance of impaired loans was $1,034,000 and $1,124,000 as of December 31, 2004 and 2003, respectively. The Bank identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The entire balance of impaired loans were in a non-accrual status at December 31, 2004 and 2003. The allowance for loan loss associated with the impaired loans was $259,000 at December 31, 2004. A portion of impaired loans, $888,000, is guaranteed by the SBA. No interest was recognized on impaired loans in 2004. Interest income recognized on impaired loans during 2003 was $67,000. The Bank recognizes income on impaired loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. If these factors do not exist, the Bank will not recognize income on such loans. At December 31, 2004 and 2003, unamortized deferred fees and costs totaled $139,296 and $107,676, respectively. (Continued) 69 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 5. LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued Changes in the allowance for possible loan losses are as follows: 2004 2003 2002 ---- ---- ---- Balance, beginning of year... $ 338,574 $ 674,550 $ 708,156 Provision.................... 45,000 565,000 175,000 Charge-offs.................. (239,757) (972,938) (361,656) Recoveries................... 459,122 71,962 153,050 --------- --------- --------- Balance, end of year......... $ 602,939 $ 338,574 $ 674,550 ========= ========= ========= 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, 2004, approximately 18% of the Bank's commercial loan portfolio was concentrated in loans made to religious organizations. 6. BANK PREMISES AND EQUIPMENT The major classes of bank premises and equipment and the total accumulated depreciation are as follows:
Estimated useful life 2004 2003 ----------- ---- ---- Buildings and leasehold improvements... 10-15 years $ 1,355,086 $ 3,181,656 Furniture and equipment................ 3- 7 years 1,753,307 1,542,140 ----------- ----------- 3,108,393 4,723,796 Less accumulated depreciation.......... (2,033,538) (1,951,643) ----------- ----------- $ 1,074,855 $ 2,772,153 =========== ===========
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, 2004, 2003, and 2002 was $277,850, $329,878, and $364,469. Future minimum lease payments under operating leases are as follows: Operating Year ending December 31, leases ------------------------ ------ 2005................................ $ 182,903 2006................................ 226,434 2007................................ 229,005 2008................................ 220,787 Thereafter.......................... 1,220,558 ----------- Total minimum lease payments........ $ 2,079,687 =========== 70 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 7. DEPOSITS At December 31, 2004, the scheduled maturities of time deposits (certificates of deposit) are as follows (dollars in thousands): 2005......................... $ 22,100 2006......................... 920 2007......................... 396 2008......................... 227 Thereafter................... 164 --------- $ 23,807 ========= 8. BORROWINGS As of December 31, 2004, the Bank has two borrowing arrangements available 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, 2004, the Bank had no borrowings outstanding. 9. CAPITAL STOCK There were no capital stock transaction in 2004. In June 2003, a shareholder of the Bank returned 33,500 shares of common stock and 6,308 shares of preferred Series A stock. These shares were returned for no consideration and were recorded as treasury stock by the Bank. In June 2002, the Bank received $20,400 and issued 1,700 shares 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. 10. INCOME TAXES At December 31, 2004, the Bank has net operating loss carryforwards of approximately $4,130,000 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 $1,930,062 and $2,352,209 as of December 31, 2004 and 2003, 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: (Continued) 71 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 10. INCOME TAXES - Continued
2004 2003 ---- ---- Deferred tax assets: Provision for loan losses ....................... $ 72,243 $ (31,349) Unrealized (gains) losses on investment securities (8,909) (43,172) Depreciation ..................................... 436,223 369,277 Net operating loss carryforwards ................. 1,405,875 2,135,303 Other ...................................... 24,630 (77,850) Valuation allowance for deferred tax assets ...... (1,930,062) (2,352,209) ----------- ----------- Net deferred tax assets ................ $ -- $ -- =========== ===========
2004 2003 2002 ---- ---- ---- Effective rate reconciliation: Tax at statutory rate ................... $ 559,817 $(379,258) $ (73,638) Nondeductible expenses .................. 5,401 4,325 3,152 (Decrease) Increase in valuation allowance (422,447) 494,737 70,486 Other ................................... (142,771) (119,804) -- --------- --------- --------- Total tax expense ................... $ -- $ -- $ -- ========= ========= =========
11. 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. Summaries of the Bank's financial instrument commitments are as follows: 2004 2003 ------------ ------------ Commitments to extend credit...... $13,749,562 $ 8,152,988 Outstanding letters of credit..... -- 32,155 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. 72 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 12. 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.
2004 2003 ------------------------- ------------------------- Carrying Fair Carrying Fair amount value amount value ---------- ---------- ----------- ---------- (Dollars in thousands) Assets: Cash and cash equivalents..................... $ 8,934 $ 8,934 $ 6,693 $ 6,693 Investment securities......................... 13,560 13,582 15,637 15,706 Loans held-for-sale........................... 1,412 1,437 Loans, net of allowance for loan losses....... 45,077 45,366 46,690 46,587 Liabilities: Demand deposits............................... 21,773 21,773 26,543 26,543 Savings deposits.............................. 17,591 17,591 19,309 19,309 Time deposits................................. 23,807 23,807 21,264 21,264
13. EMPLOYEE COMPENSATION In November 2004, the Bank renewed the employment agreements of its chief executive officer and its chief financial officer covering such items as salaries, bonuses and benefits for three years. These agreements provide for guaranteed minimum annual compensation over the term of the contracts. In 1998, the Company adopted a Stock Option Plan with the approval of its shareholders. In accordance with the contractual terms with its former chief executive officer, the Bank granted the right 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. 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. Those options remain outstanding at December 31, 2004. These options expire in 2008. The Company made no stock-based compensation awards to any employee during 2004, 2003 and 2002. 73 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 14. CONSOLIDATED FINANCIAL INFORMATION--PARENT COMPANY ONLY Condensed Balance Sheets December 31, ------------ (Dollars in thousands) 2004 2003 --------- --------- Assets: Due from banks (subsidiary) .............. $ 289 $ 289 Investment in United Bank of Philadelphia 8,522 6,946 -------- -------- Total assets ......................... $ 8,811 $ 7,235 ======== ======== Shareholders' equity: Series A preferred stock ................. $ 1 $ 1 Common stock ............................. 11 11 Additional paid-in capital ............... 14,750 14,750 Accumulated deficit ...................... (5,968) (7,615) Net unrealized holding gains on securities available-for-sale ................... 17 88 -------- -------- Total shareholders' equity ........... $ 8,811 $ 7,235 ======== ======== Condensed Statements of Operations Years ended December 31, ----------------------------- (Dollars in thousands) 2004 2003 2002 ------- ------- ------ Equity in net income (loss) of subsidiary.... $ 1,646 $(1,115) $ (217) ------ ------- ------ Net income (loss)............................ $ 1,646 $(1,115) $ (217) ======= ======= ====== Condensed Statements of Cash Flows
Years ended December 31, ------------------------------------ (Dollars in thousands) 2004 2003 2002 ------ ------ ------ Cash flows from operating activities: Net income (loss) ........................... $ 1,646 $(1,115) $ (217) Equity in net (income) loss of subsidiary ... (1,646) 1,115 217 ------- ------- ------- Net cash provided by operating activities -- -- -- ------- ------- ------- Cash flows from investing activities: Investment in subsidiary ....................... -- -- (20) ------- ------- ------- Net cash used in investing activities .......... -- -- (20) ------- ------- ------- Cash flows from financing activities: Issuance of common stock .................... -- -- 20 ------- ------- ------- Net cash provided by financing activities -- -- 20 ------- ------- ------- Net increase in cash and cash equivalents -- -- -- Cash and cash equivalents at beginning of year . 289 289 289 ------- ------- ------- Cash and cash equivalents at end of year ....... $ 289 $ 289 $ 289 ======= ======= =======
74 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 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). The most recent notification dated March 3, 2005, 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 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. (Also see Footnote 2. REGULATORY AGREEMENT) (Continued) 75 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 15. REGULATORY MATTERS - Continued The Bank's actual capital amounts and ratios are as follows:
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions --------------------- -------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio --------- --------- --------- --------- --------- --------- As of December 31, 2004: Total capital to risk-weighted assets: Consolidated...................... $ 7,778 17.91% $ 3,498 8.00% N/A Bank.............................. 7,489 17.24 3,475 8.00 $ 4,344 10.00% Tier I capital to risk-weighted assets: Consolidated...................... 7,234 16.65 1,749 4.00 N/A Bank.............................. 6,945 15.99 1,737 4.00 $ 2,606 6.00% Tier I capital to average assets: Consolidated...................... 7,234 9.89 2,938 4.00 N/A Bank.............................. 6,945 9.49 2,926 4.00 $ 3,658 5.00% As of December 31, 2003: Total capital to risk-weighted assets: Consolidated...................... $ 5,748 12.78% $ 3,621 8.00% N/A Bank.............................. 5,459 12.14 3,598 8.00 $ 4,497 10.00% Tier I capital to risk-weighted assets: Consolidated...................... 5,409 12.03 1,810 4.00 N/A Bank.............................. 5,120 11.39 1,799 4.00 $ 2,698 6.00% Tier I capital to average assets: Consolidated...................... 5,409 7.19 3,020 4.00 N/A Bank.............................. 5,120 6.81 3,008 4.00 $ 3,760 5.00%
76 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 15. COMMITMENTS AND CONTINGENCIES 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. 16. EARNINGS PER SHARE COMPUTATION In accordance with SFAS No. 128, income (loss) per share is calculated as follows:
Year ended December 31, 2004 --------------------------------------------- Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------ Net income................................ $1,646,522 ========== Basic and fully diluted EPS Income available to stockholders... $1,646,522 1,068,588 $ 1.54 ========== ========= ====== Fully Diluted EPS Income available to stockholders... $1,646,522 1,098,282 $ 1.50 ========== ========= ====== Year ended December 31, 2003 ----------------------------------------------- Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------ Net loss................................. $ 1,115,465) =========== Basic and fully diluted EPS Income available to stockholders.. $(1,115,465) 1,084,694 $ (1.03) =========== ========= ======= Year ended December 31, 2002 ----------------------------------------------- Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------ Net loss................................. $ (216,583) ========== Basic EPS and fully diluted EPS Income available to stockholders.. $ (216,583) 1,101,247 $ (0.20) ========== ========= =======
Options to purchase 29,694 shares of common stock were not included in the computation of diluted EPS for the years ended December 31, 2003 and 2002 because the Company is in a loss position. The Company's preferred stock is non-cumulative and the Bank is restricted from paying dividends. Therefore, no effect of the preferred stock is included in the earnings per share calculations. 77 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2004, 2003, and 2002 17. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) The following summarizes the consolidated results of operations during 2004 and 2003, on a quarterly basis, for United Bancshares, Inc. and Subsidiary: (Dollars in thousands)
2004 ---------------------------------------------- Fourth Third Second First quarter quarter quarter quarter ------- ------- ------- ------- Interest income ................................ $ 933 $ 947 $ 882 $ 924 Interest expense ............................... 110 94 96 105 ------- ------- ------- ------- Net interest income ......................... 823 853 786 818 Provisions for loan losses ..................... 39 36 111 (141) ------- ------- ------- ------- Net interest after provisions for loan losses 784 817 675 959 Non-interest income ............................ 403 1,908 888 456 Non-interest expense ........................... 1,288 1,237 1,322 1,397 ------- ------- ------- ------- Net (loss) income ........................... $ (102) $ 1,489 $ 241 $ 18 ======= ======= ======= ======= 2003 ---------------------------------------------- Fourth Third Second First quarter quarter quarter quarter ------- ------- ------- ------- Interest income ................................ $ 913 $ 925 $ 990 $ 1,008 Interest expense ............................... 115 129 149 153 ------- ------- ------- ------- Net interest income ......................... 798 796 841 855 Provisions for loan losses ..................... 385 60 60 60 ------- ------- ------- ------- Net interest after provisions for loan losses 413 736 781 795 Non-interest income ............................ 557 462 409 462 Non-interest expense ........................... 1,451 1,453 1,422 1,404 ------- ------- ------- ------- Net (loss) income ........................... $ (481) $ (255) $ (232) $ (147) ======= ======= ======= =======
78 NEW SECTION FOR EXHIBITS Commission File No. 0-25976 SECURITIES AND EXCHANGE COMMISSION - -------------------------------------------------------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Year Ended December 31, 2004 - -------------------------------------------------------------------------------- UNITED BANCSHARES, INC. EXHIBITS Exhibit 10(a) -- Lease for corporate headquarters office located at The Graham Building, 30 S. 15th Street, Suite 1200, Philadelphia, PA Exhibit 10(e) -- Evelyn F. Smalls' Employment Agreement, dated November 1, 2004 Exhibit 10(f) -- Brenda Hudson-Nelson's Employment Agreement, dated November 1, 2004 Exhibit 14 -- Code Conduct and Ethics Exhibit 16 -- Letter re Change of Accountant Exhibit 31.1 -- Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 -- Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1(a) -- Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer attached hereto as Exhibit 31.1. Exhibit 32.2(b) -- Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer attached hereto as Exhibit 31.2. Exhibit 99(a) -- Registrants Proxy Statement for its Annual Shareholders Meeting held on November 23, 2004 EX-10 2 ex10-a.txt EXHIBIT 10(A) GROSS LEASE Exhibit 10(a) Lease for corporate headquarters office located at The Graham Building, 30 S. 15th Street, Suite 1200, Philadelphia, PA GROSS LEASE (w/Base Amounts) THIS LEASE (this "Lease") is made as of January ___, 2005, by and between "Landlord" The Multi-Employer Property Trust, a trust organized under 12 C.F.R. Section 9.18 and "Tenant" United Bank of Philadelphia, a corporation organized under the laws of Pennsylvania. TABLE OF CONTENTS SECTION 1: DEFINITIONS ........................................................1 Access Laws..............................................................1 Additional Rent..........................................................1 Base Amount Allocable to the Premises....................................1 Base Rent................................................................1 Brokers..................................................................2 Building.................................................................2 Business Day.............................................................2 Claims ..................................................................2 Commencement Date........................................................2 ERISA ...................................................................2 Estimated Operating Costs Allocable to the Premises......................2 Events of Default .......................................................2 Governmental Agency .....................................................2 Governmental Requirements................................................2 Hazardous Substance(s): .................................................2 Land.....................................................................2 Landlord.................................................................2 Landlord's Agents .......................................................2 Landlord's Transaction Costs ............................................2 Lease Memorandum.........................................................2 Lease Term...............................................................2 Lender...................................................................3 Manager..................................................................3 Manager's Address........................................................3 Operating Costs..........................................................3 Operating Costs Allocable to the Premises ...............................3 Permitted Use ...........................................................3 Plans and Specifications.................................................3 Prepaid Rent.............................................................3 Premises.................................................................3 Prime Rate...............................................................3 Property Taxes...........................................................3 Punch List Work..........................................................3 Restrictions.............................................................3 Space Plans..............................................................3 Substantial Completion...................................................4 Telecommunication Facilities.............................................4 Telecommunication Services...............................................4 i Tenant...................................................................4 Tenant Alterations.......................................................4 Tenant Expenditures......................................................4 Tenant Improvement Allowance ............................................4 Tenant Improvements......................................................4 Tenant's Agents..........................................................4 Tenant's Pro Rata Share of Operating Costs ..............................5 Tenant's Pro Rata Share of Property Taxes................................5 Use and Occupancy Taxes..................................................5 Year.....................................................................5 SECTION 2: PREMISES AND TERM.................................................. 5 2.1 Lease of Premises ..................................................5 2.2 Lease Term...........................................................5 2.3 Plans and Specifications\Selection of General Contractor ............6 2.4 Commencement Date ...................................................6 2.5 Tenant's Contribution to Tenant Improvement Costs ...................7 2.6 Lease Memorandum ....................................................8 2.7 Use and Conduct of Business..........................................8 2.8 Compliance with Governmental Requirements and Rules and Regulations..9 SECTION 3: BASE RENT, ADDITIONAL RENT AND OTHER SUMS PAYABLE UNDER LEASE ..... 9 3.1 Payment of Rental....................................................9 3.2 Base Rent............................................................9 3.3 Lease Security Provisions............................................9 3.4 Additional Rent.....................................................10 3.5 Utilities...........................................................15 3.6 Holdover............................................................16 3.7 Late Charge.........................................................16 3.8 Default Rate........................................................16 SECTION 4: MANAGEMENT AND LEASING PROVISIONS ................................ 16 4.1 Maintenance and Repair by Landlord .................................16 4.2 Maintenance and Repair by Tenant....................................17 4.3 Common Areas/Security ..............................................17 4.4 Tenant Alterations .................................................17 4.5 Tenant's Work Performance ..........................................18 4.6 Surrender of Possession.............................................18 4.7 Removal of Property ................................................18 4.8 Access..............................................................19 4.9 Damage or Destruction...............................................19 4.10 Condemnation.......................................................20 4.11 Intentionally Omitted .............................................21 4.12 Indemnification....................................................21 4.13 Tenant Insurance ..................................................21 4.14 Landlord's Insurance...............................................22 4.15 Waiver of Subrogation..............................................22 4.16 Assignment and Subletting by Tenant ...............................22 4.17 Assignment by Landlord.............................................24 4.18 Estoppel Certificates and Financial Statements ....................24 4.19 Modification for Lender............................................24 4.20 Hazardous Substances...............................................24 ii 4.21 Access Laws .......................................................25 4.22 Quiet Enjoyment....................................................25 4.23 Signs..............................................................26 4.24 Subordination......................................................26 4.25 Workers Compensation Immunity......................................26 4.26 Brokers............................................................26 4.27 Limitation on Recourse.............................................26 4.28 Mechanic's Liens and Tenant's Personal Property Taxes..............26 4.29 Landlord's Security Interest ......................................27 4.30 Occupancy..........................................................27 SECTION 5: DEFAULT AND REMEDIES ..............................................27 5.2 Remedies............................................................28 5.3 Right to Perform....................................................30 5.4 Landlord's Default .................................................30 SECTION 6: MISCELLANEOUS PROVISIONS...........................................30 6.1 Notices.............................................................30 6.2 Attorney's Fees and Expenses .......................................30 6.3 No Accord and Satisfaction..........................................31 6.4 Successors; Joint and Several Liability.............................31 6.5 Choice of Law ......................................................31 6.6 No Waiver of Remedies ..............................................31 6.7 Offer to Lease......................................................31 6.8 Force Majeure ......................................................31 6.9 Landlord's Consent .................................................31 6.10 Severability; Captions ............................................31 6.11 Interpretation.....................................................32 6.12 Incorporation of Prior Agreement; Amendments ......................32 6.13 Authority..........................................................32 6.14 Time of Essence ...................................................32 6.15 Survival of Obligations ...........................................32 6.16 Consent to Service.................................................32 6.17 Landlord's Authorized Agents ......................................32 6.18 Waiver of Jury Trial ..............................................32 6.19 Guaranty...........................................................32 LISTING OF EXHIBITS Exhibit A Legal Description of the Land Exhibit B Drawing Showing Location and Configuration of the Premises Exhibit C Part I, Space Plan, Part II, Listing of Plans and Specifications for Tenant Improvements Exhibit D Form of Lease Memorandum Exhibit E Rules and Regulations iii SECTION 1: DEFINITIONS Access Laws: The Americans With Disabilities Act of 1990 (including the Americans with Disabilities Act Accessibility Guidelines for Building and Facilities) and all other Governmental Requirements relating to the foregoing. Additional Rent: Defined in paragraph captioned "Additional Rent". Base Amount Allocable to the Premises: Defined in paragraph captioned "Additional Rent". Base Rent: The monthly amount of Base Rent and the portion of the Lease Term during which such monthly amount of Base Rent is payable shall be determined from the following table. For convenience and ease of reference, the annual rental rate for the computation of Base Rent and the annual Base Rent are also set forth in tabular form with the annual Base Rent equaling the monthly Base Rent installment multiplied by twelve. In the case of any conflict or inconsistency between the monthly Base Rent installment and the other illustrative figures set forth in tabular form or in any computations utilizing such figures, the monthly Base Rent installment so specified shall be controlling and conclusive.
- -------------------------------------------------------------------------------- Rate Monthly Base Per/Rentable Rent Sq. Ft./ Annual Base Installment Applicable Portion of Lease Term Annum Rent (Annual/12) - -------------------------------- ----- ---- ----------- Months 01 through 12 $16.75 $150,750.00* $12,562.50* Months 13 through 24 $17.25 $155,250.00* $12,937.50* Months 25 through 36 $17.75 $159,750.00* $13,312.50* Months 37 through 48 $18.25 $187,482.25 $15,623.52 Months 49 through 60 $18.75 $192,618.75 $16,051.56 Months 61 through 72 $19.25 $197,755.25 $16,479.60 Months 73 through 84 $19.75 $202,891.75 $16,907.65 Months 85 through 96 $20.25 $208,028.25 $17,335.69 Months 97 through 108 $20.75 $213,164.75 $17,763.73 Months 109 through 120 $21.25 $218,301.25 $18,191.77 Months 121 through 122 $21.75 $223,437.75 $18,619.81 - --------------------------------------------------------------------------------
* Note: Annual and monthly Base Rent for months 01 through 36 of the Lease Term as set forth in the above table have been calculated as if the Premises contained only nine thousand (9,000) rentable square feet, but is subject to the terms and conditions set forth below. Except for the partial abatement of Base Rent as provided within this definition of "Base Rent", all of Tenant's rights and obligations with respect to the Premises during months 01 through 36 of the Lease Term extend to the entire ten thousand two hundred seventy-three (10,273) rentable square feet included within the definition of the "Premises" as defined in Section 1 of this Lease. The above rent schedule begins on the first day of the first full month of the Lease Term. If the Commencement Date is a date other than the first day of a calendar month, Base Rent for the partial month in which the Commencement Date occurs shall be at the same rate as months 01 through 12, but 1shall be prorated as provided in Paragraph 3.2 hereof and shall be payable on the Commencement Date. Notwithstanding the foregoing, provided that all Base Rent and Additional Rent then due has been paid and no Event of Default then exists, then subject to the terms and conditions set forth below Landlord shall abate (a) all Base Rent applicable to the Premises for (i) months 01 and 02 (but not for the partial month, if any, preceding the first full calendar month of the Lease Term), (ii) month 37, (iii) month 49, (iv) month 61, and (v) month 73 (collectively, the "Full Abatement Periods"). Notwithstanding anything herein to the contrary, (a) although the Premises consist of ten thousand two hundred seventy-three (10,273) rentable square feet, Tenant shall pay Base Rent during months 01 through 36 (the "Partial Abatement Period") of the Lease Term calculated as if the Premises contained only nine thousand rentable square feet (9,000), and the Base Rent in excess thereof which would otherwise be payable hereunder based upon the Base Rent rate per rentable square foot set forth in the above table shall be abated subject to and in accordance with the terms hereof, and (b) if this Lease is terminated prior to the expiration of the Lease Term as a result of a default by 1 Tenant, in addition to all other damages to which Landlord may be entitled under the Lease and applicable law, Tenant immediately and without notice shall pay Landlord the full amount of all Base Rent which had been abated as aforesaid for the Full Abatement Periods and the Partial Abatement Period, and Landlord's damages for future rent shall be calculated as if any future Full Abatement Periods and Partial Abatement Period did not exist. Tenant acknowledges and agrees that Tenant shall be liable for all Additional Rent payable during the Full Abatement Periods and the Partial Abatement Period, including, without limitation, Use and Occupancy Taxes. Brokers: Tenant was represented in this transaction by CRESA Partners of Pennsylvania, a licensed real estate broker. Landlord was represented in this transaction by CB Richard Ellis, a licensed real estate broker. Building: The building located on the Land at 30 South 15th Street, Philadelphia, Pennsylvania 19102, commonly known as One Penn Square West and containing approximately 240,594 rentable square feet. Business Day: Calendar days, except for Saturdays and Sundays and holidays when anks are closed in Philadelphia, Pennsylvania. Claims: An individual and collective reference to any and all claims, demands, damages, injuries, losses, liens, liabilities, penalties, fines, lawsuits, actions, other proceedings and expenses (including attorneys' fees and expenses incurred in connection with the proceeding whether at trial or on appeal). Commencement Date: The earlier to occur of: (a) the date of Substantial Completion; or (b) the date on which Tenant takes possession of all or part of the Premises. ERISA: The Employee Retirement Income Security Act of 1974, as now or hereafter amended, and the regulations promulgated under it. Estimated Operating Costs Allocable to the Premises: Defined in paragraph captioned "Additional Rent". Events of Default: One or more of those events or states of facts defined in the paragraph captioned "Events of Default". Governmental Agency: The United States of America, the state in which the Land is located, any county, city, district, municipality or other governmental subdivision, court or agency or quasigovernmental agency having jurisdiction over the Land and any board, agency or authority associated with any such governmental entity, including the fire department having jurisdiction over the Land. Governmental Requirements: Any and all statutes, ordinances, codes, laws, rules, regulations, orders and directives of any Governmental Agency as now or later amended. Hazardous Substance(s): Asbestos, PCBs, petroleum or petroleum-based chemicals or substances, urea formaldehyde or any chemical, material, element, compound, solution, mixture, sub-stance or other matter of any kind whatsoever which is now or later defined, classified, listed, designated or regulated as hazardous, toxic or radioactive by any Governmental Agency. Land: The land upon which the Building is located in Philadelphia County, Commonwealth of Pennsylvania, as legally described in Exhibit A attached to this Lease. Landlord: The trust named on the first page of this Lease, or its successors and assigns as provided in paragraph captioned "Assignment by Landlord". Landlord's Agents: The trustee of and consultants and advisors to the Landlord and employees of the foregoing, and contractors and licensees of the Landlord. Landlord's Transaction Costs: All costs and expenses incurred by Landlord as a direct result of this Lease, including, without limitation, the Tenant Improvement Allowance, any usual and customary brokerage fees or commissions, reasonable architectural and engineering fees, and reasonable attorneys' fees and expenses. Lease Memorandum: Defined in paragraph entitled "Lease Memorandum". Lease Security Deposit: The cash sum of Fourteen Thousand Three Hundred Thirty-Nine and 40/100 Dollars ($14,339.40). Lease Term: Commencing on the Commencement Date and ending on the last day of that calendar month which is one hundred twenty-two (122) months after the Commencement Date, provided that, if the Commencement Date 2 is the first day of a calendar month, the Lease Term shall end on the last day of the one hundred twenty-second (122nd) calendar month beginning on, and including, the Commencement Date. Lender: Defined in paragraph entitled "Landlord's Default". Manager: CB Richard Ellis, or its replacement as specified by written notice from Landlord to Tenant. Manager's Address: 30 South 15th Street, Fourth Floor, Suite 401, Philadelphia, Pennsylvania 19102, which address may be changed by written notice from Landlord to Tenant. Operating Costs: Defined in paragraph captioned "Additional Rent". Operating Costs Allocable to the Premises: Defined in paragraph captioned "Additional Rent". Permitted Use: General business office uses, so long as such use is consistent with Governmental Requirements and with first-class buildings of the same or similar use as the Building located in the metropolitan area in which the Building is located. Plans and Specifications: (a) Those certain plans and specifications for the Tenant Improvements, if any, as listed in Exhibit C - Part II and any modifications to them approved in writing by Landlord and Tenant; or (b) if Exhibit C - Part II does not include a listing of such plans and specifications, then such plans and specifications shall be prepared by Landlord (the "Preparing Party") and delivered to Tenant (the "Receiving Party") and approved by Tenant as set forth in the paragraph entitled "Plans and Specifications". Prepaid Rent: Twelve Thousand Five Hundred Sixty-Two and 50/100 Dollars ($12,562.50), to be applied toward Base Rent for the first full calendar month of the Lease Term. Premises: The portion of the Building consisting of the entire twelfth floor and designated as Suite 1200, depicted on the plan attached as Exhibit B and agreed by Landlord and Tenant for all purposes under this Lease to consist of approximately ten thousand two hundred seventy-three (10,273) rentable square feet. The number of rentable square feet recited herein shall be final, conclusive and controlling. Prime Rate: Defined in paragraph captioned "Default Rate". Property Taxes: (a) Any form of ad valorem real or personal property tax or assessment imposed by any Governmental Agency on the Land, Building, related improvements or any personal property owned by Landlord associated with such Land, Building or improvements; (b) any other form of tax or assessment, license fee, license tax, tax or excise on rent or any other levy, charge, expense or imposition made or required by any Governmental Agency on any interest of Landlord in such Land, Building, related improvements or personal property; (c) any fee for services charged by any Governmental Agency for any services such as fire protection, street, sidewalk and road maintenance, refuse collection, school systems or other services provided or formerly provided to property owners and residents within the general area of the Land; (d) any governmental impositions allocable to or measured by the area of any or all of such Land, Building, related improvements or personal property or the amount of any base rent, additional rent or other sums payable under any lease for any or all of such Land, Building, related improvements or personal property; (e) any gross receipts or other excise tax allocable to, measured by or a function of any one or more of the matters referred to in clause (d); (f) any impositions by any Governmental Agency on any transaction evidenced by a lease of any or all of such Land, Building, related improvements or personal property or charge with respect to any document to which Landlord is a party creating or transferring an interest or an estate in any or all of such Land, Building, related improvements or personal property; (g) any increase in any of the foregoing based upon construction of improvements or change of ownership of any or all of such Land, Building, related improvements or personal property, and (h) tax consultant fees and expenses and costs of appeals of any Property Taxes. Property Taxes shall not include taxes on Landlord's net income. Property Taxes also shall not include Use and Occupancy Taxes (which are payable separately by Tenant in accordance with subparagraph 3.4.8 hereof). Punch List Work: Minor items of repair, correction, adjustment or completion as such phrase is commonly understood in the construction industry in the metropolitan area in which the Land is located. Restrictions: Any covenants, conditions and restrictions applicable to the Land which are recorded with the office for the recording of deeds, in and for the City of Philadelphia. 3 Space Plan: The Space Plan attached to this Lease as Exhibit C - Part I prepared by Cubellis Associates and designated as Plan SP-3 dated September 30, 2004. Substantial Completion: The date that the Tenant Improvements have been completed substantially in accordance with the Plans and Specifications, subject to Punch List Work. Notwithstanding the above, the Tenant Improvements shall be considered substantially complete even though (a) there remains to be completed Punch List Work, the lack of which will not materially interfere with Tenant's permitted use of the Premises including, without limitation, minor or insubstantial details of construction, decoration or mechanical adjustment, or (b) there is a delay in substantial completion due to Tenant's failure to meet its obligations under this Lease or "Tenant Delay" as such term is defined in this Lease, or (c) there are any undelivered or uninstalled long lead items previously identified as such. Without limiting the foregoing, if the Landlord or the general contractor is delayed in substantially completing the Tenant Improvements as a result of the occurrence of Tenant Delay, then for purposes of determining the Commencement Date, the date of substantial completion shall be deemed to be the date that the Tenant Improvements would have been substantially completed absent any Tenant Delay. As used herein, the phrase "long lead item" shall mean any item of the Tenant Improvements or material element thereof which Landlord specifically itemizes at the time Landlord reviews Tenant's proposed Plans and Specifications as provided in paragraph 2.3 as unavailable at the Premises in time to be completed and installed prior to the anticipated Commencement Date. Telecommunication Facilities: Equipment, facilities, apparatus and other materials utilized for the purpose of electronic telecommunication, including cable, switches, wires, conduit and sleeves. Telecommunication Services: Services associated with electronic telecommunications, whether in a wired or wireless mode. Basic voice telephone services are included within this definition. Tenant: The person or entity(ies) named on the first page of this Lease. Tenant Alterations: Defined in paragraph captioned "Tenant Alterations". Tenant Delay: Any delay in the completion of construction of Tenant Improvements resulting from (i) Tenant's failure to comply with the provisions of this Lease, including without limitation, Tenant's failure to meet any time deadlines established herein, provided that Tenant shall be excused for the period of any actual delay caused by events of force majeure, including war and acts of God, (ii) any additional time as reasonably determined by Landlord required for ordering, receiving, fabricating and/or installing long lead items or items of materials or other components of the construction of Tenant Improvements, including, without limitation, mill work, which are not used in the construction of Tenant Improvements in accordance with Landlord's building standards and which causes a delay in the Substantial Completion of the Tenant Improvements beyond the time when such improvements would otherwise be completed if constructed in accordance with the standards used in the remainder of the Building, (iii) delay in work caused by submission by Tenant of a request for any change order, (iv) any additional time, as reasonably determined by Landlord, required for implementation of any change order with respect to the Tenant Improvements, (v) any other delay arising from the act or omission of Tenant or Tenant's Agents, and/or (vi) the occurrence of any other act, omission, failure, or event which this Lease describes as "Tenant Delay. Tenant Expenditures: Any and all reasonable costs and expenses incurred by Tenant in connection with Tenant's move into the Premises, including but not limited to the expenses (if applicable) of a moving company and/or a move coordinator. Tenant Improvement Allowance: The maximum amount, if any, to be expended by Landlord for the cost of Tenant Improvements (including architectural, engineering, permitting and space planning fees, and the Construction Management Fee), which maximum shall not exceed Two Hundred Five Thousand Four Hundred Sixty and 00/100 Dollars ($205,460.00) or Twenty and 00/100 Dollars ($20.00) per rentable square foot of the Premises. 4 Tenant Improvements: Those alterations or improvements to the Premises as appear and are depicted in the Plans and Specifications. Tenant's Agents: Any and all officers, partners, contractors, subcontractors, consultants, licensees, agents, concessionaires, subtenants, servants, employees, customers, guests, invitees or visitors of Tenant. Tenant's Pro Rata Share of Operating Costs: is 10,273/238,865 = four and three hundred one One thousandths percent (4.301%), which shall be final, conclusive and controlling during the Lease Term for all purposes. Tenant's Pro Rata Share of Property Taxes: is 10,273/240,594 = four and two hundred seventy one thousandths percent (4.270%), which shall be final, conclusive and controlling during the Lease Term for all purposes. Use and Occupancy Taxes: Any use and occupancy tax or assessment imposed by any Governmental Agency on the Land, the Building or any personal property owned by the Landlord associated with the Building or the Land. Year: A calendar year commencing January 1 and ending December 31 or that portion of the calendar year within the Lease Term. SECTION 2: PREMISES AND TERM 2.1 Lease of Premises. 2.1.1 Initial Premises. Landlord leases the Premises to Tenant, and Tenant leases the Premises from Landlord, upon the terms and conditions set forth in this Lease. 2.1.2 Retail Space - Right of First Opportunity. During the twelve (12) month period beginning on the date of this Lease, provided the Tenant is not in default of any of the terms, covenants and conditions thereof, beyond any applicable notice and cure periods, and further provided that United Bank of Philadelphia is itself occupying all of the Premises then demised to Tenant, in the event that the retail space on the ground floor of the Building which is presently leased to Citizens Bank (the "Retail Space") shall become available for lease, subject to any prior rights of renewal, first offer and/or first refusal held by third parties, Landlord shall first offer the Retail Space to Tenant on an "AS IS" basis for the balance of the Lease Term at a triple net annual rent of $50.00 per rentable square foot with annual increases of $1.00 per rentable square foot. Tenant shall have ten (10) days from notification of Landlord within which to accept Landlord's offer in writing. If Tenant has not accepted Landlord's offer in writing within said ten (10) day time period and/or has not executed an amendment to this Lease (or a separate lease) in form and substance satisfactory to Landlord within five (5) days after Landlord's delivery of same to the Tenant, this right of first opportunity shall expire, and the Landlord shall be free to lease the Retail Space to any third party on the same terms and conditions as offered to Tenant or on such other terms and conditions as Landlord shall determine in its sole discretion. 2.2 Lease Term. 2.2.1 Initial Lease Term. The Lease Term shall be for the period stated in the definition of that term, unless earlier terminated as provided in this Lease. 2.2.2 Option to Extend. While the Lease is in full force and effect, provided the Tenant is not in default of any of the terms, covenants and conditions thereof, beyond any applicable notice and cure periods, and further provided that United Bank of Philadelphia is itself occupying all of the Premises then demised to Tenant, in each case both as of the time of option exercise and as of the commencement of the herein additional term, Tenant shall have the right or option (the "Extension Option") to extend the original term of this Lease for one (1) period of five (5) years (the "Option Period"). Such extension of the Lease Term shall be on the same terms, covenants and conditions as provided for in the original term except that (a) Tenant shall have no further option to extend the Lease Term, (b) the Base Rent shall be ninety-five percent (95%) of the fair market rental value of the Premises, as determined by Landlord, taking into account new leases then currently being negotiated or executed in comparable space located in the Building, including provisions for subsequent increases and other adjustments, allowances for tenant improvements and other market incentives, or if no new leases are then being negotiated or executed in the Building, the fair market rental value shall be determined by Landlord taking into account new leases then being negotiated or executed for comparable space located elsewhere in similar office properties or equivalent buildings located in Philadelphia, Pennsylvania (the fair market rental value as determined by Landlord in accordance with this clause (b) is referred to herein as the "Fair Market Rental Value"), provided, however, that in no event shall the Base Rent on account of any additional term be less than the annual Base Rent payable for the Premises as of the date immediately preceding the commencement of such additional term, and (c) Landlord shall have no obligation to prepare, refurbish or construct the Premises or any part thereof prior to the 5 commencement of the Option Period or otherwise provide any amount of improvement allowance in respect of the Premises. Notice (the "Option Notice") of Tenant's intention to exercise the Extension Option must be given to Landlord, in writing, at least twelve (12) months prior to the then current expiration of the Lease Term or the Extension Option shall lapse and be of no further force or effect, time being of the essence. 2.2.3 Early Termination Right. Notwithstanding any other provision of this Lease to the contrary, Tenant shall have the right to terminate this Lease effective as of the last day of the eighty-fourth (84th) full month of the Lease Term (the "Early Termination Date"), provided that (a) Tenant provides Landlord with written notice of its election to terminate not later than the date which is twelve (12) months prior to the Early Termination Date, which notice shall be binding and irrevocable (the "Early Termination Notice"), (b) Tenant pays Landlord a buyout amount equal to the aggregate of (i) the unamortized balance of Landlord's Transaction Costs, and (ii) an amount equal to three (3) months Base Rent and Additional Rent at the rate which would be in effect beginning with month 85 of the Lease Term if the Lease was not terminated (the aggregate of the foregoing items (i) and (ii) is referred to herein as the "Early Termination Payment"), one-half of which Early Termination Payment shall be payable contemporaneously with the delivery of the Termination Notice and one-half at least ninety (90) days prior to the Early Termination Date (provided that the Additional Rent component of such payment shall be based upon Landlord's reasonable estimate and subject to adjustment when such amount is finally determined), and (c) no Event of Default exists both as of the date of the Early Termination Notice and as of the Early Termination Date. In the event of any such early termination, Tenant shall remain liable for any obligations or expenses arising or accruing hereunder prior to the Early Termination Date. Time is of the essence for all of the dates set forth in this Paragraph 2.2.3. The rights granted to Tenant under this subparagraph 2.2.3 are personal to United Bank of Philadelphia, and shall not inure to the benefit of any sublessee or assignee of Tenant, but rather shall be deemed null and void and of no further legal force or effect immediately upon any assignment of this Lease. 2.3 Plans and Specifications\Selection of General Contractor. 2.3.1 Landlord shall retain Cubellis Associates or another licensed architect (the "Architect") reasonably satisfactory to Landlord and Tenant to prepare the Plans and Specifications for the Tenant Improvements based upon the Space Plan. The Plans and Specifications shall be subject to Tenant's approval, which approval shall not be unreasonably withheld or conditioned. The Architect may consult with Landlord's engineer in preparing the Plans and Specifications, and incorporate such engineer's requirements into the Plans and Specifications. The reasonable fees of such engineer shall be a Tenant Improvement Cost (as hereafter defined). Within two (2) Business Days after receipt of a copy of the Plans and Specifications (or any revisions hereto) from Landlord or the Architect, Tenant shall provide Landlord with its written approval of the Plans and Specifications or any specific objections thereto, provided that Tenant may not make any objection which is inconsistent with the Space Plan. If Tenant does not provide its written approval of, or specific objections to, the Plans and Specifications (or any revisions hereto) within two (2) Business Days after its receipt thereof, then the period from the date of Tenant's receipt of such Plans and Specifications (or revisions thereto) until the date Tenant approves same or provides any specific objections thereto shall be deemed "Tenant Delay" and the Commencement Date shall be deemed to have occurred on the date that Substantial Completion would have been achieved absent such Tenant Delay. Without limiting the foregoing, any delay in completion of the Tenant Improvements caused in whole or in part by any objections made by Tenant to the Plans and Specifications that are inconsistent with the Space Plan shall constitute Tenant Delay. 2.3.2 Landlord shall obtain fixed price bids for the Tenant Improvements from at least two (2) general contractors that are mutually acceptable to Landlord and Tenant, provided that the general contractor and the respective subcontractors of any tier performing the Tenant Improvements in all events must: (a) be parties to, and bound by, a collective bargaining agreement with a labor organization affiliated with the Building and Construction Trades Council of the AFL-CIO applicable to the geographic area in which the Building is located and to the trade or trades in which the work under the contract is to be performed and (b) employ only members of such labor organizations to perform work within their respective jurisdictions. Landlord and Tenant agree that D'Lauro & Rodgers and The Sullivan Company are mutually acceptable general contractors. Landlord shall have the right in its sole discretion to select the general contractor for the Tenant Improvements from any of the mutually acceptable contractors which has submitted a fixed price bid to the Landlord as provided above. 6 2.4 Commencement Date. 2.4.1 Landlord shall complete the Tenant Improvements in accordance with the Plans and Specifications. Landlord's completion of the Tenant Improvements shall be performed by Landlord's contractor selected by Landlord as provided in Paragraph 2.3.2 hereof, and the Tenant Improvement Allowance shall be applied against the cost thereof as provided in paragraph 2.5 hereof. Landlord shall notify Tenant in writing of Substantial Completion. If Tenant believes that Substantial Completion has not occurred, Tenant shall notify Landlord in writing of its objections within five (5) Business Days after its receipt of the Landlord's notice described in the preceding sentence. Landlord shall have a reasonable time after its receipt of Tenant's notice in which to take such action as may be necessary to achieve Substantial Completion, and shall notify Tenant in writing when such has been achieved. Taking of possession by Tenant shall establish the Commencement Date as specified in the definition of that term even if Tenant disputes whether Substantial Completion has occurred or attempts to condition or qualify the taking of possession. Taking of possession shall further establish that the Premises are in good and satisfactory condition on the Commencement Date and any alleged defects or deficiencies are waived by the Tenant except for any incomplete Punch List Work and latent defects. Tenant shall notify Landlord of any latent defects in the Tenant Improvements within six (6) months after the Commencement Date or Tenant shall be deemed to have waived any rights on account thereof. Landlord shall correct any latent defects in the Tenant Improvements of which Tenant notifies Landlord in writing within six (6) months after the Commencement Date. With the exception of the Tenant Improvements to be made by Landlord, Tenant acknowledges that the Premises shall be delivered AS IS and that no representations as to the condition of the Premises have been made by Landlord. In the event of any dispute as to whether Substantial Completion has occurred, a certificate of Landlord's architect or general contractor shall be deemed conclusive. If on the Commencement Date, Punch List Work remains to be completed, Landlord and Tenant shall agree on such Punch List Work prior to occupancy by Tenant and Landlord will work diligently to complete it within thirty (30) days after the Commencement Date. In no event shall Tenant's refusal or failure to agree on the nature and extent of Punch List Work or the existence of items of Punch List Work delay or postpone the occurrence of the Commencement Date. Tenant shall make no changes to the Plans and Specifications or the work reflected in the Plans and Specifications without the consent of Landlord, which consent shall not be unreasonably withheld. 2.4.2 Notwithstanding anything to the contrary contained herein, in the event that Landlord has not achieved Substantial Completion of the Tenant Improvements within one hundred twenty (120) days after the date of this Lease (subject to extension for Tenant Delay and for events of force majeure as provided in Paragraph 6.8), then Tenant shall receive a credit against Base Rent equal to the number of days of delay multiplied by Four Hundred Dollars ($400.00), which credit (the "Late Delivery Credit") shall be applied against Base Rent commencing on the first day of the third full calendar month of the Lease Term. 2.5 Tenant's Contribution to Tenant Improvement Costs. 2.5.1 Tenant shall be responsible for all costs to prepare the Premises for Tenant's occupancy, including all hard and soft costs, such as and without limitation, labor and materials, architectural, engineering, project management, cabling and wiring costs, permitting and space planning fees (collectively, the "Tenant Improvement Costs"). Tenant further agrees to pay the Landlord a construction management fee (the "Construction Management Fee") equal to three percent (3%) of the Tenant Improvement Costs . The Tenant Improvement Allowance shall be applied against the Tenant Improvement Costs and the Construction Management Fee. If the cost of the Tenant Improvements and Construction Management Fee exceeds the Tenant Improvement Allowance, Tenant shall pay such excess to Landlord on demand and prior to Landlord's commencement of work on the Tenant Improvements. Any delay in Tenant paying such excess to Landlord shall constitute Tenant Delay. If the cost of the Tenant Improvements and Construction Management Fee subsequently increases (or further increases) above the Tenant Improvement Allowance as a result of change orders requested by Tenant and approved by Landlord, Tenant shall pay to Landlord such excess within five (5) Business Days after Substantial Completion of the Tenant Improvements. If Tenant fails to pay to Landlord the cost of any such excess Tenant Improvements and Construction Management Fee as and when due, Landlord may elect to suspend work on the Tenant Improvements pending such timely payment, and the Commencement Date shall be deemed to have occurred on the date that Substantial Completion would have been achieved absent such suspension of work. If the aggregate of the Tenant Improvement Costs and Construction Management Fee is less than the Tenant Improvement Allowance, upon satisfaction of the conditions set forth below, the unexpended and unapplied balance thereof remaining after payment in full of the Tenant Improvement Costs and Construction Management Fee up to a maximum of Twenty Thousand Five Hundred Forty-Six and 00/100 Dollars ($20,546.00) (based upon Two and 00/100 Dollars ($2.00) per rentable square foot of the Premises) 7 shall be available to Tenant in a single draw (the "Tenant Expenditure Draw") to reimburse Tenant for Tenant Expenditures. Except as expressly provided in the immediately preceding sentence, Tenant shall not be entitled to receive any credit or payment on account of any unexpended portion of the Tenant Improvement Allowance. If applicable, at least fifteen (15) Business Days before the date upon which the Tenant desires the Tenant Expenditure Draw, the Tenant shall submit to Landlord (a) an itemized requisition on a form acceptable to the Landlord stating the amount of the requested advance and the items(s) to be reimbursed from the proceeds thereof, and (b) copies of invoices for all such items and evidence of payment in full thereof. 2.5.2 All Tenant Improvements, regardless of which party constructed or paid for them, shall become the property of Landlord and shall remain upon and be surrendered with the Premises upon the expiration or earlier termination of this Lease; provided that, at Landlord's election and upon notice to Tenant, Tenant shall be required to remove all or any portion of the Tenant Improvements (including Telecommunication Facilities) upon the expiration or earlier termination of this Lease. Notwithstanding the foregoing, if Tenant's approval of the Plans and Specifications submitted to the Landlord is accompanied by a written request that Landlord identify any Tenant Improvements that Landlord may require Tenant to remove upon the expiration or earlier termination of the Lease, Landlord shall identify such Tenant Improvements (if any) by notice to Tenant within five (5) Business Days after Landlord's receipt of Tenant's request. 2.5.3 Notwithstanding Landlord's engagement of the Architect to prepare the Plans and Specifications, Tenant shall be solely responsible for the design of the Tenant Improvements based upon Tenant's review and approval of same. Tenant acknowledges that Landlord's engagement of the Architect was for the convenience of Tenant, and Landlord shall have no liability to Tenant or to any other person for errors or omissions in the Plans and Specifications or in the Tenant Improvements. Tenant shall indemnify, defend, protect and hold Landlord and Landlord's Agents harmless from all Claims which arise in any way, directly or indirectly from or in connection with the design of the Tenant Improvements, including without limitation, claims arising from the work of the Architect, or Landlord's engineer, employees or agents. 2.6 Lease Memorandum. Contemporaneously with Substantial Completion, Landlord shall prepare and submit to the Tenant a Lease Memorandum in the form of Exhibit D, completed in good faith by Landlord, and executed by Landlord. The information inserted on the Lease Memorandum shall be controlling and conclusive and shall prevail over any inconsistent provision in this Lease on (a) the mutual execution of the Lease Memorandum by Landlord and Tenant or (b) the lapse of ten (10) Business Days following delivery of the Lease Memorandum to Tenant without Tenant delivering to Landlord a written objection to all or part of the information in the Lease Memorandum. If Tenant does object in good faith to any information set forth in the Lease Memorandum, it shall execute the Lease Memorandum subject to its specifically-stated, written objections. Tenant must explain the reasons for its objections in reasonable detail. That portion of the Lease Memorandum to which no objection was made shall be conclusive and controlling. Tenant's refusal or failure to execute a Lease Memorandum shall neither prevent nor delay the occurrence of the Commencement Date. In no event shall the Lease Memorandum be recorded. 2.7 Use and Conduct of Business. 2.7.1 The Premises are to be used only for the Permitted Uses, and for no other business or purpose without the prior consent of Landlord. Landlord makes no representation or warranty as to the suitability of the Premises for Tenant's intended use, provided, however, to Landlord's actual knowledge, the Premises and the Building are properly zoned for general office use. Tenant shall, at its own cost and expense, obtain and maintain any and all licenses, permits, and approvals necessary or appropriate for its use, occupation and operation of the Premises for the Permitted Uses. Tenant's inability to obtain or maintain any such license, permit or approval necessary or appropriate for its use, occupation or operation of the Premises shall not relieve it of its obligations under this Lease, including the obligation to pay Base Rent and Additional Rent. 2.7.2 No act shall be done in or about the Premises that is unlawful or that will increase the existing rate of insurance on any or all of the Land or Building. Tenant shall not commit or allow to be committed or exist: (a) any waste upon the Premises, (b) any public or private nuisance, or (c) any act or condition which disturbs the quiet enjoyment of any other tenant in the Building, violates any of Landlord's contracts affecting any or all of the Land or Building, creates or contributes to any work stoppage, strike, picketing, labor disruption or dispute, interferes in any way with the business of Landlord or any other tenant in the Building or with the rights or privileges of any contractors, subcontractors, licensees, agents, concessionaires, subtenants, servants, employees, customers, guests, invitees or visitors or any other persons lawfully in and upon the Land or Building, or causes any impairment or reduction of the good will or reputation of the Land or Building. 8 2.7.3 Tenant shall not, without the prior consent of Landlord, use any apparatus, machinery, device or equipment in or about the Premises which will cause any substantial noise or vibration or any increase in the normal consumption level of electric power. If any of Tenant's apparatus, machinery, devices or equipment should disturb the quiet enjoyment of any other tenant in the Building, then Tenant shall provide, at its sole cost and expense, adequate insulation or take other such action, including removing such apparatus, machinery, devices or equipment, as may be necessary to eliminate the disturbance. No food or beverage dispensing machines shall be installed by Tenant in the Premises without the prior written consent of Landlord, except for those machines which are solely for the use of Tenant. 2.8 Compliance with Governmental Requirements and Rules and Regulations. Tenant shall comply with all Governmental Requirements and Restrictions relating to its use, occupancy and operation of the Premises and shall observe such reasonable rules and regulations as may be adopted and published by Landlord from time to time for the safety, care and cleanliness of the Premises and the Building, and for the preservation of good order in the Building and for the administration and management of the Building. Current Rules and Regulations are attached to this Lease as Exhibit E. SECTION 3: BASE RENT, ADDITIONAL RENT AND OTHER SUMS PAYABLE UNDER LEASE 3.1 Payment of Rental. Tenant agrees to pay Base Rent, Additional Rent and any other sum due under this Lease to Landlord without demand, deduction, credit, adjustment or offset of any kind or nature, in lawful money of the United States when due under this Lease, at the offices of Manager at Manager's Address, or to such other party or at such other place as Landlord may from time to time designate in writing. 3.2 Base Rent. On execution of this Lease, Tenant shall pay to Landlord the amount specified in the definition of Prepaid Rent for the month specified in the definition of that term. Tenant agrees to pay the monthly installments of Base Rent to Landlord, without demand and in advance, on or before the first day of each calendar month of the Lease Term. The monthly Base Rent installment for any partial month at the beginning or end of the Lease Term shall be prorated. Base Rent for any partial month at the beginning of the Lease Term shall be paid by Tenant on the Commencement Date. 3.3 Lease Security Provisions. 3.3.1 On execution of this Lease, Tenant shall pay to Landlord the sum specified in the definition of the term Lease Security Deposit, as security for the full and faithful payment of all sums due under this Lease and the full and faithful performance of every covenant and condition of this Lease to be performed by Tenant. If Tenant shall breach or default with respect to any payment obligation or other covenant or condition of this Lease, Landlord may apply all or any part of the Lease Security Deposit to the payment of any sum in default or any damage suffered by Landlord as a result of such breach or default, and in such event, Tenant shall, upon demand by Landlord, deposit with Landlord the amount so applied so that Landlord shall have the full Lease Security Deposit on hand at all times during the Lease Term. In the event Tenant defaults on its obligations to pay Base Rent, Additional Rent or any other sum as and when due under this Lease on more than two occasions during any twelve (12) month period, Landlord may, at any time thereafter require an increase in the Lease Security Deposit by an amount equal to twenty-five percent (25%) of the amount specified in the definition of the term Lease Security Deposit and Tenant shall immediately deposit such additional amount with Landlord upon Landlord's demand. Following such increase, the definition of the term Lease Security Deposit shall refer to the amount of the Lease Security Deposit prior to the increase plus the increased amount. The remedy of increasing the Lease Security Deposits for Tenant's multiple defaults shall be in addition to and not a substitute for any of Landlord's other rights and remedies under this Lease or applicable Law. Additionally, Landlord's use or application of all or any portion of the Lease Security Deposit shall not preclude or impair any other rights or remedies provided for under this Lease or under applicable law and shall not be construed as a payment of liquidated damages. 9 3.3.2 If Tenant shall have fully complied with all of the covenants and conditions of this Lease, the remaining Lease Security Deposit shall be repaid to Tenant, without interest, within thirty (30) Business Days after the expiration of this Lease. Tenant may not mortgage, assign, transfer or encumber the Lease Security Deposit and any such act on the part of Tenant shall be without force or effect. 3.3.3 In the event any bankruptcy, insolvency, reorganization or other creditor-debtor proceedings shall be instituted by or against Tenant, the Lease Security Deposit shall be deemed to be applied first to the payment of Base Rent, Additional Rent and all other sums payable under this Lease to Landlord for all periods prior to the institution of such proceedings and the balance, if any, may be retained by Landlord and applied against Landlord's damages. 3.3.4 In the event of a sale or transfer of Landlord's estate or interest in the Land and Building, Landlord shall have the right to transfer the Lease Security Deposit to the vendee or the transferee, and Landlord shall be considered released by Tenant from all liability for the return of the Lease Security Deposit. Tenant shall look solely to the transferee for the return of the Lease Security Deposit, and it is agreed that all of the foregoing shall apply to every transfer or assignment made of the Lease Security Deposit to a new transferee. No mortgagee or purchaser of any or all of the Building at any foreclosure proceeding brought under the provisions of any mortgage shall (regardless of whether the Lease is at the time in question subordinated to the lien of any mortgage) be liable to Tenant or any other person for any or all of such sum (or any other or additional Lease Security Deposit or other payment made by Tenant under the provisions of this Lease), unless Landlord has actually delivered it in cash to such mortgagee or purchaser, as the case may be. 3.3.5 In the event of any rightful and permitted assignment of Tenant's interest in this Lease, the Lease Security Deposit shall be deemed to be held by Landlord as a deposit made by the assignee, and Landlord shall have no further liability to the assignor with respect to the return or the Lease Security Deposit. 3.4 Additional Rent. Definitions of certain terms used in this paragraph are set forth in the last subparagraph of this paragraph entitled "Additional Rent". Tenant agrees to pay to Landlord Additional Rent as computed in this paragraph (individually and collectively the "Additional Rent"): 3.4.1 Estimated Operating Costs. Tenant shall pay to Landlord as Additional Rent one-twelfth (1/12) of the amount, if any, by which the Estimated Operating Costs Allocable to the Premises exceeds the Base Amount Allocable to the Premises. This sum shall be paid in advance on or before the first day of each calendar month of the Lease Term. Landlord shall furnish Tenant a written statement of Estimated Operating Costs Allocable to the Premises in advance of the commencement of each Year. If such written statement is furnished after the commencement of the Year (or as to the first Year during the Lease Term, after the Commencement Date), Tenant shall also make a retroactive lump-sum payment to Landlord equal to the monthly payment amount multiplied by the number of months during the Year (or as to the first Year during the Lease Term, after the Commencement Date) for which no payment was paid. Notwithstanding the foregoing, Landlord reserves the right, from time to time during each Year, to revise the Estimated Operating Costs Allocable to the Premises and upon notice to Tenant of such revision, Tenant shall adjust its payment to Landlord under this subparagraph 3.4.1 accordingly. 3.4.2 Actual Costs. After the close of each Year, Landlord shall deliver to Tenant a written statement setting forth the Operating Costs Allocable to the Premises during the preceding Year. If such Operating Costs Allocable to the Premises for any Year exceed the Estimated Operating Costs Allocable to the Premises paid by Tenant to Landlord pursuant to subparagraph 3.4.1 for such Year, Tenant shall pay the amount of such excess to Landlord within twenty (20) Business Days after receipt of such statement by Tenant. If such statement shows the Operating Costs Allocable to the Premises to be less than the Estimated Operating Costs Allocable to the Premises paid by Tenant to Landlord pursuant to subparagraph 3.4.1, then the amount of such overpayment shall be paid by Landlord to Tenant within twenty (20) Business Days following the date of such statement or, at Landlord's option, shall be credited towards the installment(s) of Additional Rent next coming due from Tenant. 3.4.3 Determination. The determination of Operating Costs Allocable to the Premises shall be made by Landlord. 3.4.4 Landlord shall maintain records concerning estimated and actual Operating Costs Allocable to the Premises for no less than twelve (12) months following the period covered by the statement or statements furnished Tenant, after which time Landlord may dispose of such records. Provided that Tenant is not then in default of its obligation to pay Base Rent, Additional Rent or other payments required to be made by it under this Lease and provided that Tenant is not otherwise in default under this Lease, Tenant may, at Tenant's sole cost and expense, cause a Qualified Person (defined below) to inspect Landlord's records. Such inspection, if any, shall be conducted no more than once each Year, during Landlord's normal business hours within ninety (90) calendar days after receipt 10 of Landlord's written statement of Operating Costs Allocable to the Premises for the previous year, upon first furnishing Landlord at least twenty (20) calendar days prior written notice. As a condition to Tenant's right to conduct such inspection, Tenant agrees (a) to promptly furnish Landlord (at Tenant's cost) with a copy of all draft and final reports of Tenant's examination of Landlord's records, and (b) that neither Tenant nor any of Tenant's Agents shall divulge the contents of Landlord's records or the results of its examination to any third party. Any errors disclosed by the review shall be promptly corrected by Landlord; provided, however, that if Landlord disagrees with any such claimed errors, Landlord shall have the right to cause another review to be made by an auditor of Landlord's choice. In the event the results of the review of records (taking into account, if applicable, the results of any additional review caused by Landlord) reveal that Tenant has overpaid obligations for a preceding period, the amount of such overpayment shall be credited against Tenant's subsequent installment of Base Rent, Additional Rent or other payments due to Landlord under the Lease. In the event that such results show that Tenant has underpaid its obligations for a preceding period, the amount of such underpayment shall be paid by Tenant to Landlord with the next succeeding installment obligation of estimated Operating Costs Allocable to the Premises. If the actual Operating Costs Allocable to the Premises for any given Year were improperly computed and if the actual Operating Costs Allocable to the Premises are overstated by more than five percent (5%), Landlord shall reimburse Tenant for the reasonable cost of its audit. 3.4.5 End of Term. If this Lease shall terminate on a day other than the last day of a Year, (a) Landlord shall estimate the Operating Costs Allocable to the Premises and Property Taxes Allocable to the Premises for such Year predicated on the most recent reliable information available to Landlord; (b) the amount determined under clause (a) of this sentence shall be prorated by multiplying such amount by a fraction, the numerator of which is the number of days within the Lease Term in such Year and the denominator of which is 360; (c) the Operating Costs Base Amount Allocable to the Premises shall be prorated in the manner described in clause (b); (d) the clause (c) amount (i.e., the prorated Operating Costs Base Amount Allocable to the Premises) shall be deducted from the clause (b) amount (i.e., the prorated Operating Costs Allocable to the Premises); (e) if the clause (d) amount exceeds the Estimated Operating Costs Allocable to the Premises paid by Tenant for the last Year in the Lease Term, then Tenant shall pay the excess to Landlord within twenty (20) Business Days after Landlord's delivery to Tenant of a statement for such excess; and (f) if the Estimated Operating Costs Allocable to the Premises paid by Tenant for the last Year in the Lease Term exceeds the clause (d) amount, then Landlord shall refund to Tenant the excess within the twenty (20) Business Day period described in clause (e) if Tenant is not then in default of any of its obligations under this Lease. Landlord's and Tenant's obligations under this paragraph shall survive the expiration or other termination of this Lease. 3.4.6 Definitions. Each underlined term in this subparagraph shall have the meaning set forth next to that underlined term: Operating Costs Base Amount Allocable to the Premises: The Operating Costs Allocable to the Premises for the year beginning January 1, 2005 and ending December 31, 2005 (the "Base Year"). Estimated Operating Costs Allocable to the Premises: Landlord's written estimate of Operating Costs Allocable to the Premises for a Year to be given by Landlord to Tenant pursuant to subparagraph 3.4.1. Operating Costs (net of Property Taxes): All expenses paid or incurred by Landlord for maintaining, operating, owning and repairing any or all of the Land, Building, Premises, related improvements, and the personal property used in conjunction with such Land, Building, Premises and related improvements, except for Property Taxes. Included are all expenses paid or incurred by Landlord for: (a) utilities, including electricity, water, gas, sewers, fire sprinkler charges, refuse collection, Telecommunication Services, cable television, steam, heat, cooling or any other similar service and which are not payable directly by tenants in the Building; (b) supplies; (c) cleaning, painting and janitorial services (including window washing), landscaping and landscaping maintenance (including irrigating, trimming, mowing, fertilizing, seeding and replacing plants), snow removal and other services; (d) security services, if any; (e) insurance premiums and applicable insurance deductible payments by Landlord; (f) management fees not to exceed five percent (5%) of gross rents; (g) compensation (including employment taxes and fringe benefits) of all persons and business organizations who perform duties in connection with any service, repair, maintenance, replacement or improvement or other work included in this subparagraph; (h) license, permit and inspection fees; (i) assessments and special assessments due to deed restrictions, declarations or owners associations or other means of allocating costs of a larger tract of which the Land is a part; (j) rental of any machinery or equipment; (k) audit fees and 11 accounting services related to the Building, and charges for the computation of the rents and charges payable by tenants in the Building (but only to the extent the cost of such fees and services are in addition to the cost of the management fee); (l) the cost of repairs or replacements; (m) charges under maintenance and service contracts; (n) legal fees and other expenses of legal or other dispute resolution proceedings, other than legal fees incurred by Landlord in connection with the leasing of the Building or the enforcement of tenant leases; (o) maintenance and repair of the roof and roof membranes, (p) costs incurred by Landlord for compliance with any and all Governmental Requirements, including Access Laws, and to increase the efficiency of any electrical, mechanical or other system servicing the Building or the Land; (q) elevator service and repair, if any; (r) business taxes and license fees; and (s) any other expense or charge which in accordance with generally accepted accounting and management principles would be considered an expense of maintaining, operating, owning or repairing the Building. Any capital expenses which may be included in Operating Costs (net of Property Taxes) pursuant to items (p), (q), and (s) above (collectively, the "Includable Capital Expenditures") shall be amortized with interest return at the Prime Rate plus two (2) percentage points over the estimated useful life of the capital improvement as determined by Landlord and the annual amortization of principal and interest attributable to the Lease Term shall be an Operating Cost. Operating Costs which may constitute Includable Capital Expenditures shall include: replacement of roof structure and roof membranes; exterior painting; parking area resurfacing, resealing and restriping parking areas and driveways and upgrading Building common systems and facilities (including HVAC systems, and if owned by Landlord, Telecommunication Facilities). If any facilities, services or utilities used in connection with the Building are provided from another building owned or operated by Landlord or vice versa, the costs incurred by Landlord in connection with them will be allocated to Operating Costs by Landlord on an equitable basis. All Operating Costs will be net of, or have deducted, all discounts or reductions actually received by Landlord. Exclusions from Operating Costs: Operating Costs shall not include any of the following: (a) ground rent; (b) interest and amortization of funds borrowed by Landlord for items other than capital improvements; (c) leasing commissions and advertising, marketing, and space planning expenses incurred in procuring tenants; (d) salaries, wages, or other compensation paid to officers or executives of Landlord in their capacities as officers and executives; (e) costs or expenses required to be capitalized in accordance with generally accepted accounting principles ("Capital Expenditures"), except for Includable Capital Expenditures; (f) rentals for equipment which if purchased, rather than rented, would constitute a Capital Expenditure that is excluded from Operating Expenses under the preceding clause (e), excluding, however, (i) equipment not affixed to the Building that is used in providing janitorial or similar services and (ii) equipment which is otherwise needed in connection with normal repairs and maintenance of the Building, including Building systems; (g) costs of repairs, restoration, replacements or other work made necessary by casualty to the extent Landlord actually receives insurance proceeds on account thereof under policies where the premium for same was paid for and included in Operating Expenses; (h) costs to prepare any leasable space in the Building for current or prospective tenants, including the costs of permits, licenses, inspections, and leasehold improvements (but excluding maintenance and repairs of base building systems); (i) attorneys' fees incurred in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases or assignments incurred in connection with lease, sublease or assignment transactions with present or prospective tenants or other occupants of the Building; (j) expenses in connection with services or other benefits that are not offered to Tenant or for which Tenant is charged for directly; (k) costs incurred by Landlord due to the violation by Landlord or any tenant of the terms and conditions of any lease of space in the Building; 12 (l) above market fees for goods or services provided by any affiliate of Landlord, but only to the extent of the portion thereof which is above market (and, for purposes hereof, Tenant shall have the burden of proving that any such fee is above market based upon comparable first class properties in Philadelphia); (m) Landlord's general corporate overhead and general and administrative expenses which are not specific to the Building; (n) costs of utilities including electricity, water, sewer, and gas furnished to rentable areas of the Building to the extent such utilities are separately metered, other than (a) such types of utilities as are furnished to the Premises without separate charge to Tenant, and (b) to the extent not included in clause (a), such utilities as are necessary to heat, cool, and light any vacant rentable area of the Building to the extent necessary to maintain such space; (o) services and utilities provided, taxes attributable to, and costs incurred in connection with the operation of the retail space on the ground level of the Building, except to the extent the square footage of such retail space is included in the rentable square feet of the Building used to calculate Tenant's Pro Rata Share and do not exceed the services, utility and tax costs that would have been incurred had such retail space been used for general office purposes; (p) costs incurred in connection with upgrading the Building to comply with life, fire and safety codes, ordinances, statutes or other laws in effect prior to the date of this Lease, including penalties or damages incurred due to non-compliance; (q) tax penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments or to file any tax or informational returns when due (unless the same is the result of Tenant's failure to timely make any payment in respect thereof required hereunder); (r) costs arising solely from the gross negligence or willful misconduct of Landlord or Landlord's Agents; (s) costs incurred to comply with laws relating to the removal of Hazardous Substances which were in existence in the Building or on the Land prior to the date hereof (and, for purposes hereof, Tenant shall have the burden of proving that such Hazardous Substances were in existence in the Building or on the Land prior to the date hereof), and was of such a nature that a federal, state or municipal governmental authority, if it had then had knowledge of the presence of such hazardous material, in the state, and under the conditions that it then existed in the Building or on the Land, would have then required the removal of such Hazardous Substances or other remedial or containment action with respect thereto; and costs incurred to remove, remedy, contain, or treat Hazardous Substances, which Hazardous Substances are brought into the Building or onto the Land after the date hereof by Landlord and is of such a nature, at that time, that a federal, state or municipal governmental authority, if it had then had knowledge of the presence of such Hazardous Substances, in the state, and under the conditions, that it then exists in the Building or on the Land, would have then required the removal of such Hazardous Substances or other remedial or containment action with respect thereto; (t) charitable or political contributions; (u) acquisition costs of sculpture, paintings or other objects of art; and (v) costs associated with the operation of the business of the partnership or entity that constitutes Landlord as the same are distinguished from the costs of operation of the Building, including partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except as the actions of Tenant may be in issue), costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interest in the Building, costs of any disputes between Landlord and its employee(s) (if any) not engaged in Building operation, disputes of Landlord with Building management, or outside fees paid in connection with disputes with other tenants. Gross-Up Provision: If less than one hundred percent (100%) of the net rentable area of the Building is occupied by tenants at all times during any Year (including the Base Year), then Operating Costs for such Year shall include all additional costs and expenses that Landlord reasonably determines would have been incurred had one hundred percent (100%) of the Building been occupied at all times during such Year by tenants. Operating Costs Allocable to the Premises: The product of Tenant's Pro Rata Share times Operating Costs (net of Property Taxes). 13 Property Tax Base Amount: Tenant's Pro Rata Share of the Property Taxes payable for the year beginning January 1, 2005 and ending December 31, 2005. Property Taxes Allocable to the Premises: Tenant's Pro Rata Share of Property Taxes. Qualified Person: This means an accountant or other person experienced in accounting for income and expenses of office projects, who is engaged solely by Tenant on terms which do not entail any compensation based or measured in any way upon any savings in Additional Rent or reduction in Operating Costs Allocable to the Premises achieved through the inspection process described in this subparagraph. 3.4.7 Property Tax Escalation. (a) In addition to the payments required by the previous subparagraphs of this paragraph, Tenant shall pay as Additional Rent to Landlord the amount, if any, by which the Property Taxes Allocable to the Premises for the current tax year exceeds the Property Tax Base Amount. This sum shall be paid by Tenant to Landlord within twenty (20) Business Days after receipt of an invoice from Landlord. (b) In lieu of making a single lump sum payment to Landlord as provided in the preceding subparagraph (a) above, at Landlord's option, Tenant shall pay as Additional Rent to Landlord one-twelfth (1/12) of the amount, if any, by which (a) Landlord's estimate of the Property Taxes Allocable to the Premises for the current tax year exceeds the Property Tax Base Amount. This sum shall be paid in advance on or before the first day of each calendar month of the Lease Term. If Landlord exercises such option, after the close of each tax year during the Lease Term, Landlord shall deliver to Tenant a written statement setting forth (1) the actual Property Taxes Allocable to the Premises for the preceding tax year, (2) the difference between the amount referred to in clause (1) and the Property Tax Base Amount and (3) the differential between the amount referred to in clause (2) and the sum of the tentative monthly payments toward such amount made by Tenant. If the differential referred to in clause (3) of the previous sentence represents an underpayment by Tenant, such differential shall be paid to Landlord within twenty (20) Business Days after delivery of Landlord's written statement to Tenant; if such differential represents an overpayment by Tenant, Landlord shall, at its option, either credit such overpayment to the installment(s) of Additional Rent next coming due from Tenant or refund such overpayment to Tenant within twenty (20) Business Days after Tenant's concurrence in the amount due as a refund. (c) If the Lease Term begins or ends on a day other than the beginning or end of a tax year, the amount due as described in subparagraphs (a) or (b) of this subparagraph (as applicable) shall be prorated on a per diem basis with reference to the tax year. (d) The provisions of this subparagraph 3.4.7 shall survive the expiration or other termination of this Lease. 3.4.8 Tenant's Costs. Tenant agrees to reimburse or pay Landlord within twenty (20) Business Days after invoice from Landlord for (a) any cleaning expenses incurred by Landlord, including carpet cleaning, garbage and trash removal expenses, over and above the normal cleaning provided by Landlord, if any, (b) any expense incurred by Landlord for usage in the Premises of heating, ventilating and air conditioning services, elevator services, electricity, water, janitorial services, or any other services or utilities over and above the normal usage for the Premises, (c) any expense incurred by Landlord relating to or arising out of the usage by Tenant or Tenant's Agents of the public or common areas of the Building or Land, or any of the equipment contained therein, which usage is over and above the normal usage for such public or common areas or equipment, and (d) any other direct expense incurred by Landlord on Tenant's behalf. Landlord reserves the right to install and activate separate metering of electricity, water or other utilities to the Premises at Landlord's cost, in which case the Operating Costs Base Amount Allocable to the Premises and Operating Costs shall be adjusted accordingly. Notwithstanding the foregoing, if landlord installs separate metering of electricity, water or other utilities to the Premises due to Tenant's usage thereof which is above normal usage for the Premises, Tenant agrees to reimburse or pay Landlord within twenty (20) Business Days after invoice from Landlord for all costs of such separate metering. 3.4.9 Use and Occupancy Tax. In addition to the payments required by the previous subparagraphs of this paragraph, Tenant shall pay as Additional Rent to Landlord its proportionate share of Use and Occupancy Taxes. Such payments shall be made by Tenant monthly on the same date that Base Rent is due and payable. 14 3.4.10 Payments Deemed Additional Rent. Any sums payable under this Lease pursuant to this paragraph or otherwise shall be Additional Rent and, in the event of nonpayment of such sums, Landlord shall have the same rights and remedies with respect to such nonpayment as it has with respect to nonpayment of the Base Rent due under this Lease. 3.5 Utilities. 3.5.1 Landlord shall have the right from time to time to select the company or companies providing electricity, gas, fuel, one or more categories of Telecommunication Services and any other utility services to the Building. Beginning on the Commencement Date, all electrical usage in the Premises, including HVAC, shall be submetered and the actual charges incurred shall be paid separately as Additional Rent by Tenant pursuant to invoices provided by Landlord. Except as provided above, Tenant shall contract directly and pay for all water, gas, heat, power, Telecommunication Services, sewer, sprinkler charges and other utilities used on or from the Premises together with any taxes, penalties, surcharges or similar charges relating to such utilities. If any such service is not separately metered to the Premises or is not otherwise separately accounted for and billed to Tenant, the cost therefor shall be an Operating Cost under this Lease. Except as provided in subparagraph 3.5.3 hereof and the provision of utility services to the Building by local utility companies, Landlord shall provide Tenant with hot and cold water in the Premises and any common area restroom facilities. 3.5.2 Tenant acknowledges that space on the Building rooftop and in Building risers, equipment rooms and equipment closets is limited. If Tenant requires Telecommunication Services for the Premises other than from the provider or providers of Telecommunication Services selected by Landlord and whose Telecommunication Facilities are installed in or about the Building or on the rooftop of the Building, provision for alternate or supplemental Telecommunication Services or Telecommunication Facilities has been made in a license agreement accompanying and made part of this Lease. Unless otherwise required by law, neither Tenant, nor a provider of Telecommunication Services to Tenant, in the future shall be entitled to locate or install Telecommunication Facilities in, on or about the Building without (a) first obtaining Landlord's advance, written consent (which shall not be unreasonably withheld) and (b) the advance execution by Landlord and Tenant of a satisfactory agreement granting a license to Tenant for such purposes and setting forth the scope, the Additional Rent, if any, royalties and the other terms and conditions of that license, and (c) Tenant negotiating and obtaining the right, if any is required, to bring such Telecommunication Facilities across public or private property to an approved entry point to the Building. The agreement referred to in clause (b) of the previous sentence shall be incorporated in and become part of this Lease. Any future application by Tenant for permission to locate or install Telecommunication Facilities shall (1) be in such form and shall be accompanied by such supporting information as the Landlord may require, (2) be subject to such procedures, regulations and controls as the Landlord may specify and (3) be accompanied by such payment as the Landlord may reasonably request to reimburse Landlord for its costs of evaluating and processing the application and in negotiating and preparing the agreement described earlier in this subparagraph. 3.5.3 Landlord shall in no case be liable or in any way be responsible for damages or loss to Tenant arising from the failure of, diminution of or interruption in electrical power, natural gas, fuel, Telecommunication Services, sewer, water, or garbage collection services, other utility service or building service of any kind to the Premises, unless such interruption in, deprivation of or reduction of any such service was caused by the gross negligence or willful misconduct of Landlord, its agents or contractors or by a failure in facilities, equipment or systems in the Landlord's ownership. To the extent that Landlord bears any responsibility for any such interruption, deprivation or reduction in utility or building services to the Premises, Landlord's responsibility and Tenant's remedy shall be limited to an abatement in Base Rent for the period beginning with (a) the day which is five (5) Business Days after the date on which Tenant delivers notice to Landlord of such interruption, deprivation or reduction and that Tenant is being deprived of all reasonable use of the Premises and ending on (b) the date such interruption, deprivation or reduction which is Landlord's responsibility is not causing Tenant to be deprived of all reasonable use of the Premises. 3.5.4 HVAC service shall be provided to the Premises Monday through Friday (excluding holidays) from 8:00 a.m. to 6:00 p.m. and Saturdays (excluding holidays) from 8:00 a.m. to 1:00 p.m. If Tenant shall require after-hours HVAC, Tenant may request such service by notifying Landlord's Manager not later than 11:00 a.m. of the day prior to the day on which such after-hours service shall be needed, and not later than 2:00 p.m. on the Thursday preceding any 15 weekend for which such after-hours service shall be needed reasonably estimating the number of hours required for such after-hours service. Tenant shall pay for such additional HVAC service at Landlord's hourly rate in effect from time to time and shall pay all charges therefor when and as billed by Landlord. Such charges shall be deemed Additional Rent under the Lease. 3.6 Holdover. Tenant is not authorized to hold over beyond the expiration or earlier termination of the Lease Term. If Landlord consents to a holdover and no other agreement is reached between Tenant and Landlord concerning the duration and terms of the Holdover, Tenant's holdover shall be a month-to-month tenancy. During such tenancy, Tenant shall pay to Landlord one hundred fifty percent (150%) of the rate of Base Rent in effect on the expiration or termination of the Lease Term plus all Additional Rent and other sums payable under this Lease, and shall be bound by all of the other covenants and conditions specified in this Lease, so far as applicable. If the Landlord does not consent to the Tenant's remaining in possession, Landlord shall have all the rights and remedies provided for by law and this Lease, including the right to recover consequential damages suffered by Landlord in the event of Tenant's wrongful refusal to relinquish possession of the Premises. The Base Rent applicable for the period that Tenant wrongfully remains in possession shall in be increased to one hundred fifty percent (150%) of the rate of Base Rent in effect on the expiration or termination of the Lease Term for the first two (2) months of such unauthorized holdover and thereafter to two hundred percent (200%) of the rate of Base Rent in effect on the expiration or termination of the Lease Term. 3.7 Late Charge: If Tenant fails to make any payment of Base Rent, Additional Rent or other amount when due under this Lease, a late charge is immediately due and payable by Tenant equal to five percent (5%) of the amount of any such payment. Landlord and Tenant agree that this charge compensates Landlord for the administrative costs caused by the delinquency. The parties agree that Landlord's damage would be difficult to compute and the amount stated in this paragraph represents a reasonable estimate of such damage. Assessment or payment of the late charge contemplated in this paragraph shall not excuse or cure any Event of Default or breach by Tenant under this Lease or impair any other right or remedy provided under this Lease or under law. Notwithstanding anything to the contrary contained in this Paragraph 3.7, Landlord shall waive the late charge which would otherwise be imposed for Tenant's failure to timely pay any Base Rent or Additional Rent for the first two (2) such failures in each Year as long as such failure does not continue for more than five (5) days. 3.8 Default Rate. Any Base Rent, Additional Rent or other sum payable under this Lease which is not paid when due shall bear interest at a rate equal to the lesser of: (a) the Prime Rate published from time to time in The Wall Street Journal in its general guide to money rates as the base rate on corporate loans at large United States money center commercial banks (or if said Prime Rate is reported as a range of rates, the highest of such rates) (the "Prime Rate"), then in effect, plus three (3) percentage points, or (b) the maximum rate of interest per annum permitted by applicable law (the "Default Rate"), but the payment of such interest shall not excuse or cure any Event of Default or breach by Tenant under this Lease or impair any other right or remedy provided under this Lease or under law. SECTION 4: MANAGEMENT AND LEASING PROVISIONS 4.1 Maintenance and Repair by Landlord. 4.1.1 Subject to the paragraphs captioned "Damage or Destruction" and "Condemnation", Landlord shall endeavor to maintain the public and common areas of the Building in reasonably good order and condition subject to reasonable wear and tear. Landlord shall make such repairs thereto as become necessary after obtaining actual knowledge of the need for such repairs. All repair costs shall be included in Operating Costs, except for (a) damage occasioned by the act or omission of Tenant or Tenant's Agents which shall be paid for entirely by Tenant upon demand by Landlord, and (b) damage occasioned by the act or omission of another tenant of the Building, provided such other tenant does not dispute that it caused such damage. In the event any or all of the Building becomes in need of maintenance or repair which Landlord is required to make under this Lease, Tenant shall immediately give written notice to Landlord, and Landlord shall not be obligated in any way to commence such maintenance or repairs until a reasonable time elapses after Landlord's receipt of such notice. 4.1.2 Landlord shall not be liable by reason of any injury to or interference with Tenant/s business arising from the making of any repairs, alterations, additions or improvements in or to the Premises or the Building or to any appurtenances or equipment therein; provided however, that Landlord agrees to use reasonable efforts to minimize any interference with Tenant's business. The foregoing shall not require Landlord to pay overtime rates to make any such repairs, alterations, additions or improvements. There shall be no abatement of rent because of such repairs, alterations, additions or improvements or because of any delay by Landlord in making the same. 16 4.2 Maintenance and Repair by Tenant. 4.2.1 Except as is expressly set forth as Landlord's responsibility pursuant to the paragraph captioned "Maintenance and Repair by Landlord," Tenant shall at Tenant's sole cost and expense keep, clean and maintain the Premises in good condition and repair, subject to reasonable wear and tear, including interior painting, cleaning of the interior side of all exterior glass, plumbing and utility fixtures and installations, carpets and floor coverings, all interior wall surfaces and coverings (including tile and paneling), interior window replacement (if any), exterior and interior doors, roof penetrations and membranes in connection with any Tenant installations on the roof, light bulb replacement and interior preventative maintenance. If Tenant fails to maintain or repair the Premises in accordance with this paragraph, then Landlord may, but shall not be required to, enter the Premises upon five (5) Business Days prior written notice to Tenant (or immediately without any notice in the case of an emergency) to perform such maintenance or repair at Tenant's sole cost and expense. Tenant shall pay to Landlord the cost of such maintenance or repair plus a ten percent (10%) administration fee within ten (10) Business Days of written demand from Landlord. 4.2.2 Without limiting the generality of paragraph 4.2.1 hereof, Tenant shall be responsible at Tenant's sole cost and expense for the maintenance, repair and/or replacement of any special heating, ventilating, air conditioning, plumbing, electrical or other systems and fixtures installed solely to service the Premises, whether installed or paid for by Landlord or Tenant. 4.3 Common Areas/Security. 4.3.1 The common areas of the Building shall be subject to Landlord's sole management and control. Without limiting the generality of the immediately preceding sentence, Landlord reserves the exclusive right as it deems necessary or desirable to install, construct, remove, maintain and operate lighting systems, facilities, improvements, equipment, Telecommunication Facilities and signs on, in or to all parts of the common areas; change the number, size, height, layout, or locations of walks, driveways and truckways or parking areas now or later forming a part of the Land or Building; make alterations or additions to the Building or common area; close temporarily all or any portion of the common areas to make repairs, changes or to avoid public dedication; grant easements to which the Land will be subject; replat, subdivide, or make other changes to the Land; place or relocate or cause to be placed or located utility lines and Telecommunication Facilities through, over or under the Land and Building; and use or permit the use of all or any portion of the roof of the Building. Landlord reserves the right to relocate parking areas and driveways (if any) and to build additional improvements in the common areas. 4.3.2 Landlord has no duty or obligation to provide any security services in, on or around the Premises, Land or Building, and Tenant recognizes that security services, if any, provided by Landlord will be for the sole benefit of Landlord and the protection of Landlord's property and under no circumstances shall Landlord be responsible for, and Tenant waives any rights with respect to, Landlord providing security or other protection for Tenant or Tenant's Agents or property in, on or about the Premises, Land or Building. Subject to Landlord's prior approval, Tenant may, at its sole cost and expense, install, establish and maintain security services within the Premises; provided that, such security services (including any apparatus, facilities, equipment or people utilized in connection with the provision of such security services) comply with the Governmental Requirements and shall not cause the Building to be out of compliance with the Governmental Requirements. Notwithstanding the foregoing, any such security services installed, established or maintained by Tenant must not affect or impact any portion of the Building or the Land other than the Premises and shall not in any way limit or interfere with Landlord's ability to exercise its rights as provided in the paragraph captioned "Access". Tenant's rights under this subparagraph are subject to all the obligations, limitations and requirements as set forth in the paragraphs captioned "Tenant Alterations" and "Tenant's Work Performance". 4.4 Tenant Alterations. Tenant shall not make any alterations, additions or improvements in or to the Premises, or make changes to locks on doors, or add, disturb or in any way change any floor covering, wall covering, fixtures, plumbing, wiring or Telecommunication Facilities (individually and collectively "Tenant Alterations"), without first obtaining the consent of Landlord, which consent shall not be unreasonably withheld provided such alterations, additions or improvements are entirely within the Premises and do not impact any structural components of the Building or any building systems. Tenant shall deliver to Landlord full and complete plans and specifications for any proposed Tenant Alterations and, if consent by Landlord is given, all such work shall be performed at Tenant's expense by Landlord or by Tenant at Landlord's election. Tenant shall pay to Landlord all costs incurred by Landlord for any 17 architecture, engineering, supervisory and/or legal services in connection with any Tenant Alterations, including, without limitation, Landlord's review of the Plans and Specifications. Without limiting the generality of the foregoing, Landlord may require Tenant (if Landlord has elected to require Tenant to perform the Tenant Alterations), at Tenant's sole cost and expense, to obtain and provide Landlord with proof of insurance coverage and a payment and performance bond, in forms, amounts and by companies acceptable to Landlord. Should Tenant make any alterations without Landlord's prior written consent, or without satisfaction of any conditions established by Landlord, Landlord shall have the right, in addition to and without limitation of any right or remedy Landlord may have under this Lease, at law or in equity, to require Tenant to remove some or all of Tenant Alterations, or at Landlord's election, Landlord may remove such Tenant Alterations and restore the Premises at Tenant's expense. Nothing contained in this paragraph or the paragraph captioned "Tenant's Work Performance" shall be deemed a waiver of the provisions of the paragraph captioned "Mechanic's Liens". 4.5 Tenant's Work Performance. If Landlord elects to require Tenant to perform the Tenant Alterations, Landlord may, in its absolute discretion, require that Tenant provide a payment and performance bond to cover the entire work to be performed, which bond must be in form, amount and by a company acceptable to Landlord. Notwithstanding the foregoing, Landlord shall not require Tenant to obtain a payment and performance bond if the aggregate cost of the Tenant Alterations (including all related Tenant Alterations which may be part of a larger project or a series of related projects) is less than Twenty-Five Thousand Dollars ($25,000.00). Any Tenant Alterations to be performed under this paragraph shall be performed by contractors employed by Tenant under one or more construction contracts, in form and content approved in advance in writing by Landlord. Approval shall be subject to Landlord's discretion and shall include a requirement that the prime contractor and the respective subcontractors of any tier performing the Tenant Alterations: (a) be parties to, and bound by, a collective bargaining agreement with a labor organization affiliated with the Building and Construction Trades Council of the AFL-CIO applicable to the geographic area in which the Building is located and to the trade or trades in which the work under the contract is to be performed and (b) employ only members of such labor organizations to perform work within their respective jurisdictions. Tenant's contractors, workers and suppliers shall work in harmony with and not interfere with workers or contractors of Landlord or other tenants of Landlord. If Tenant's contractors, workers or suppliers do, in the opinion of Landlord, cause such disharmony or interference, Landlord's consent to the continuation of such work may be withdrawn upon written notice to Tenant. All Tenant Alterations shall be (1) completed in accordance with the plans and specifications approved by Landlord; (2) completed in accordance with all Governmental Requirements; (3) carried out promptly in a good and workmanlike manner; (4) of all new materials or materials otherwise satisfactory to Landlord; and (5) free of defect in materials and workmanship. Tenant shall pay for all damage to the Premises, Building and Land caused by Tenant or Tenant's Agents. Tenant shall indemnify, defend and hold harmless Landlord and Landlord's Agents from any Claims arising as a result of the Tenant Alterations or any defect in design, material or workmanship of any Tenant Alterations. 4.6 Surrender of Possession. Subject to the last subparagraph of the paragraph captioned "Insurance", Tenant shall, at the expiration or earlier termination of this Lease, surrender and deliver the Premises to Landlord in as good condition as when received by Tenant from Landlord or as later improved, reasonable use and wear excepted, and free from all tenancies or occupancies by any person. 4.7 Removal of Property. Unless otherwise agreed to in writing by Landlord, Tenant agrees that there are and shall be no trade fixtures in the Premises owned by Tenant. Upon expiration or earlier termination of this Lease, Tenant may remove its personal property, office supplies and office furniture and equipment if (a) such items are readily moveable and are not attached to the Premises; (b) such removal is completed prior to the expiration or earlier termination of this Lease; (c) Tenant is not in default of any covenant or condition of this Lease at the time of such removal; and (d) Tenant immediately repairs all damage caused by or resulting from such removal. All other property in the Premises and any Tenant Alterations (including, wall-to-wall carpeting, paneling, wall covering, lighting fixtures and apparatus or Telecommunication Facilities or any other article affixed to the floor, walls, ceiling or any other part of the Premises or Building) shall become the property of Landlord and shall remain upon and be surrendered with the Premises; provided, however, at Landlord's sole election, Tenant shall be obligated, at its sole cost and expense, to remove all (or such portion as Landlord shall designate) of the Tenant Alterations (including Telecommunication Facilities), repair any damages resulting from such removal and return the Premises to the same condition as 18 existed prior to such Tenant Alterations. Notwithstanding the foregoing, if Tenant's submission of its plans and specifications to Landlord for approval of any Tenant Alterations is accompanied by a written request that Landlord identify any Tenant Alterations that Landlord may require Tenant to remove upon the expiration or earlier termination of this Lease, Landlord shall identify such Tenant Alterations (if any) by notice to Tenant given at the time of Landlord's approval of such Tenant Alterations. Tenant waives all rights to any payment or compensation for such Tenant Alterations (including Telecommunication Facilities). If Tenant shall fail to remove any of its property from the Premises, Building or Land at the expiration or earlier termination of this Lease or when Landlord has the right of re-entry, Landlord may, at its option, remove and store such property at Tenant's expense without liability for loss of or damage to such property, such storage to be for the account and at the expense of Tenant. Tenant shall pay all costs incurred by Landlord within five (5) Business Days after demand for such payment. If Tenant fails to pay the cost of storing any such property, Landlord may, at its option, after it has been stored for a period of twenty (20) Business Days or more, sell or permit to be sold, any or all such property at public or private sale (and Landlord may become a purchaser at such sale), in such manner and at such times and places as Landlord in its sole discretion may deem proper, without notice to Tenant, and Landlord shall apply the proceeds of such sale: first, to the cost and expense of such sale, including reasonable attorney's fees actually incurred; second, to the payment of the costs or charges for storing any such property; third, to the payment of any other sums of money which may then be or later become due Landlord from Tenant under this Lease; and, fourth, the balance, if any, to Tenant. 4.8 Access. Tenant shall permit Landlord and Landlord's Agents to enter into the Premises at any time on at least one (1) Business Day's notice (except in case of emergency in which case no notice shall be required), for the purpose of inspecting the same or for the purpose of repairing, altering or improving the Premises or the Building. Nothing contained in this paragraph shall be deemed to impose any obligation upon Landlord not expressly stated elsewhere in this Lease. When reasonably necessary, Landlord may temporarily close Building or Land entrances, Building doors or other facilities, without liability to Tenant by reason of such closure and without such action by Landlord being construed as an eviction of Tenant or as relieving Tenant from the duty of observing or performing any of the provisions of this Lease, provided that, except in the event of an emergency, Tenant and its employees, agents, invitees, and guests are provided with reasonable alternative access to the Land, the Building, and the Premises. Landlord shall have the right to enter the Premises at any time that an Event of Default exists and at any time during the last twelve (12) months of the Lease Term for the purpose of showing the Premises to prospective tenants and to erect on the Premises a suitable sign indicating the Premises are available. Tenant shall give reasonable written notice to Landlord prior to vacating the Premises and shall arrange to meet with Landlord for a joint inspection of the Premises prior to vacating. In the event of Tenant's failure to give such notice or arrange such joint inspection, Landlord's inspection at or after Tenant's vacating the Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. Landlord shall not admit by passkey Tenant or any of Tenant's Agents or other persons without proper identification or Tenant's consent. Landlord shall not be liable for the consequences of admitting by passkey Tenant or any of Tenant's Agents or other persons who present identification which Landlord in good faith believes to be proper identification. 4.9 Damage or Destruction. 4.9.1 If the Premises are damaged by fire, earthquake or other casualty, Tenant shall give immediate written notice (the "Casualty Notice") thereof to Landlord. Within sixty (60) days after Landlord's receipt of such Casualty Notice, Landlord shall make a determination, in its sole judgment, whether the damage can be repaired in accordance with the then-existing Governmental Requirements within one hundred eighty (180) Business Days after Landlord's receipt of the Casualty Notice, and Landlord shall so notify Tenant of such determination. If Landlord's determination is that the Premises cannot be restored in such time period, then either party, for a period of thirty (30) calendar days thereafter shall have the right to terminate this Lease by notice to the other, as of the date specified in such notice, which termination date shall be no later than thirty (30) days after the date of such notice. Landlord also shall have the right to terminate this Lease by notice to Tenant if, in Landlord's estimation, there are or will be insufficient insurance proceeds available to repair such damage. If this Lease is not terminated as aforesaid, then Landlord shall proceed with reasonable diligence to restore the Premises to substantially the condition which existed prior to the damage and this Lease shall continue. If Landlord restores the Premises under this paragraph, then Landlord shall use commercially reasonable efforts to proceed toward completion 19 of the restoration and (1) the Lease Term shall be extended for the time required to complete such restoration, (2) Tenant shall pay to Landlord, upon demand, Tenant's Pro Rata Share of any applicable deductible amount specified under Landlord's insurance and (3) notwithstanding anything to the contrary contained herein, Landlord shall not be required to repair or restore Tenant Alterations (including Telecommunication Facilities), or any or all furniture, fixtures, equipment, inventory, improvements or other property which was in or about the Premises at the time of the damage and was not owned by Landlord. In the case of damage to the Premises not caused by the willful misconduct, negligence or other tortuous acts of the Tenant which is of a nature or extent that (a) such damage materially interferes with Tenant's use of a portion (but not all) of the Premises (such portion being referred to herein as the "Materially Affected Premises"), Base Rent and Additional Rent otherwise payable hereunder shall be abated by the percentage that the rentable area of the Materially Affected Premises bears to the total rentable area of the Premises, for the period beginning on the date of the Casualty Notice and ending on the earlier of (i) the date that Landlord has substantially completed its repairs to the Materially Affected Premises and (ii) the date that Tenant uses any portion of the Materially Affected Premises for the conduct of its business, and (b) it is impracticable for the Tenant to carry on any of its business in the Premises, all Base Rent and Additional Rent otherwise payable hereunder shall be abated for the period beginning on the date of the Casualty Notice and ending on the earlier of (i) the date that Landlord has substantially completed its repairs to the Premises and (ii) the date that Tenant uses any portion of the Premises for the conduct of its business. Except for the abatement of rent if and to the extent provided herein, Tenant agrees to look to the provider of Tenant's insurance for coverage for the loss of Tenant's use of the Premises and any other related losses or damages incurred by Tenant during any reconstruction period. The validity and effect of this Lease shall not be impaired in any way by the failure of Landlord to complete repairs and restoration of the Premises or the Building within one hundred eighty (180) Business Days after Landlord's receipt of the Casualty Notice, even if Landlord had in good faith notified Tenant that repair and restoration could be completed within such period, provided that Landlord proceeds diligently with such repair and restoration. 4.9.2 If the Building is damaged by fire, earthquake or other casualty and more than fifty percent (50%) of the Building is rendered untenantable, without regard to whether the Premises are affected by such damage, Landlord may in its absolute discretion and without limiting any other options available to Landlord under this Lease or otherwise, elect to terminate this Lease by notice in writing to Tenant within forty (40) Business Days after the occurrence of such damage if Landlord is also terminating the leases of other tenants in the Building who are similarly situated to Tenant. Such notice shall be effective twenty (20) Business Days after receipt by Tenant unless a later date is set forth in Landlord's notice. 4.9.3 Notwithstanding anything contained in this Lease to the contrary, if there is damage to the Premises or Building and the holder of any indebtedness secured by a mortgage or deed of trust covering any such property requires that the insurance proceeds be applied to such indebtedness or if the insurance proceeds are otherwise inadequate to complete the repair of the damages to the Premises, the Building or both, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) Business Days after Landlord is notified of such requirement. 4.9.4 Notwithstanding the foregoing, if the Premises or the Building are wholly or partially damaged or destroyed within the final six (6) months of the Term, Landlord may, at its option, elect to terminate this Lease upon written notice to Tenant within thirty (30) days following such damage or destruction. 4.10 Condemnation. If all of the Premises, or such portions of the Building as may be required for the Tenant's reasonable use of the Premises, are taken by eminent domain or by conveyance in lieu thereof, this Lease shall automatically terminate as of the date the physical taking occurs, and all Base Rent, Additional Rent and other sums payable under this Lease shall be paid to that date. In case of taking of a part of the Premises or a portion of the Building not required for the Tenant's reasonable use of the Premises, then this Lease shall continue in full force and effect and the Base Rent shall be equitably reduced based on the proportion by which the floor area of the Premises is reduced, such reduction in Base Rent to be effective as of the date the physical taking occurs. Additional Rent and all other sums payable under this Lease shall not be abated but Tenant's Pro Rata Share may be redetermined as equitable under the circumstances. Landlord reserves all rights to damages or awards for any taking by eminent domain relating to the Premises, Building, Land and the unexpired term of this Lease. Tenant assigns to Landlord any right Tenant may have to such damages or award and Tenant shall make no claim against Landlord for damages for termination of its leasehold interest or interference with Tenant's business. Tenant shall have the right, however, to claim and recover 20 from the condemning authority compensation for any loss to which Tenant may be entitled for Tenant's moving expenses or other relocation costs; provided that, such expenses or costs may be claimed only if they are awarded separately in the eminent domain proceedings and not as a part of the damages recoverable by Landlord. 4.11 Intentionally Omitted. 4.12 Indemnification. 4.12.1 Tenant shall indemnify, defend and hold harmless Landlord and Landlord's Agents from and against any and all Claims, arising in whole or in part out of (a) the possession, use or occupancy of the Premises or the business conducted in the Premises, (b) any act, omission or negligence of Tenant or Tenant's Agents, or (c) any breach or default under this Lease by Tenant. 4.12.2 Except as specified in the next sentence, neither Landlord nor Landlord's Agents shall, to the extent permitted by law, have any liability to Tenant, or to Tenant's Agents, for (1) any Claims arising out of any cause whatsoever, including repair to any portion of the Premises; (2) interruption in or interference with the use of the Premises or any equipment therein; (3) any accident or damage resulting from any use or operation by Landlord, Tenant or any person or entity of heating, cooling, electrical, sewerage or plumbing equipment or apparatus or Telecommunication Facilities; (4) termination of this Lease by reason of damage to the Premises or Building; (5) fire, robbery, theft, vandalism, mysterious disappearance or a casualty of any kind or nature; (6) actions of any other tenant of the Building or of any other person or entity; (7) inability to furnish any service required of Landlord as specified in this Lease; or (8) leakage in any part of the Premises or the Building from rain, ice or snow, or from drains, pipes or plumbing fixtures in the Premises or the Building. Landlord shall be responsible only for Claims arising solely out of the gross negligence or willful misconduct of Landlord in failing to repair or maintain the Building as required by this Lease after notice by Tenant as required by the paragraph captioned "Maintenance and Repair by Landlord"; but in no event shall Landlord's responsibility extend to any interruption to Tenant's business or any indirect or consequential losses suffered by Tenant or Tenant's Agents or extend beyond Landlord's responsibility as set forth in the paragraph entitled "Utilities" when that paragraph is applicable. The obligations of this paragraph shall be subject to the paragraph captioned "Waiver of Subrogation". 4.13 Tenant Insurance. 4.13.1 Tenant shall, throughout the Lease Term, at its own expense, keep and maintain in full force and effect the following policies, each of which shall be endorsed as needed to provide that the insurance afforded by these policies is primary and that all insurance carried by Landlord is strictly excess and secondary and shall not contribute with Tenant's liability insurance: (a) A policy of commercial general liability insurance, including a contractual liability endorsement covering Tenant's obligations under the paragraph captioned "Indemnification", insuring against claims of bodily injury and death or property damage or loss with a combined single limit at the Commencement Date of this Lease of not less than Two Million Dollars ($2,000,000.00), which limit shall be reasonably increased during the Lease Term at Landlord's request to reflect both increases in liability exposure arising from inflation as well as from changing use of the Premises or changing legal liability standards, which policy shall be payable on an "occurrence" rather than a "claims made" basis, and which policy names Landlord, Kennedy Associates Real Estate Counsel, Inc., the Manager and, at Landlord's request, Landlord's trustee(s), mortgage lender(s) and/or investment advisors, as additional insureds; (b) A policy of extended property insurance (which is commonly called "all risk") covering Tenant Improvements, Tenant Alterations (including Telecommunication Facilities), and any and all furniture, fixtures, equipment, inventory, improvements and other property in or about the Premises which is not owned by Landlord, for one hundred percent (100%) of the then current replacement cost of such property; (c) Business interruption insurance in an amount sufficient to cover costs, damages, lost income, expenses, Base Rent, Additional Rent and all other sums payable under this Lease, should any or all of the Premises not be usable for a period of up to twelve (12) months; (d) A policy of worker's compensation insurance as required by applicable law and employer's liability insurance with limits of no less than One Million Dollars ($1,000,000.00); and 21 (e) A policy of comprehensive automobile liability insurance, including loading and unloading, and covering owned, non-owned and hired vehicles, with limits of no less than One Million Dollars ($1,000,000.00) per occurrence. 4.13.2 All insurance policies required under this paragraph shall be with companies reasonably approved by Landlord and each policy shall provide that it is not subject to cancellation, lapse or reduction in coverage except after thirty (30) days' written notice to Landlord. Prior to the Commencement Date and from time to time thereafter, Tenant shall deliver to Landlord, Kennedy Associates Real Estate Counsel, Inc., the Manager, and, at Landlord's request, any other parties hereunder required to be named as additional insureds, certificates evidencing the existence and amounts of all such policies. 4.13.3 If Tenant fails to acquire or maintain any insurance or provide any certificate required by this paragraph, Landlord may, but shall not be required to, obtain such insurance or certificates and the costs associated with obtaining such insurance or certificates shall be payable by Tenant to Landlord on demand. 4.14 Landlord's Insurance. Landlord shall, throughout the Lease Term, keep and maintain in full force and effect: 4.14.1 A policy of commercial general liability insurance, insuring against claims of bodily injury and death or property damage or loss with a combined single limit at the Commencement Date of not less than One Million Dollars ($1,000,000.00) per occurrence and Two Million Dollars ($2,000,000.00) in the aggregate, which policy shall be payable on an "occurrence" rather than a "claims made" basis; 4.14.2 A policy of extended property insurance (what is commonly called "all risk") covering the Building and Landlord's personal property, if any, located on the Land in the amount of one hundred percent (100%) of the then current replacement value of such property; and 4.14.3 Landlord may, but shall not be required to, maintain other types of insurance as Landlord deems appropriate, including but not limited to, property insurance coverage for earthquakes and floods in such amounts as Landlord deems appropriate. Such policies may be "blanket" policies which cover other properties owned by Landlord. 4.15 Waiver of Subrogation. Notwithstanding anything in this Lease to the contrary, Landlord and Tenant hereby each waive and release the other from any and all Claims or any loss or damage that may occur to the Land, Building, Premises, or personal property located therein, by reason of fire or other casualty regardless of cause or origin, including the negligence or misconduct of Landlord, Tenant, Landlord's Agents or Tenant's Agents, but only to the extent of the insurance proceeds paid to such releasor under its policies of insurance or, if it fails to maintain the required policies, the insurance proceeds that would have been paid to such releasor if it had maintained such policies. Each party to this Lease shall promptly give to its insurance company written notice of the mutual waivers contained in this subparagraph, and shall cause its insurance policies to be properly endorsed, if necessary, to prevent the invalidation of any insurance coverages by reason of the mutual waivers contained in this subparagraph. 4.16 Assignment and Subletting by Tenant. 4.16.1 Tenant shall not have the right to assign, transfer, mortgage or encumber this Lease in whole or in part, nor sublet the whole or any part of the Premises, nor allow the occupancy of all or any part of the Premises by another, without first obtaining Landlord's written consent, which consent shall not be unreasonably withheld. Notwithstanding any permitted assignment or subletting, Tenant shall at all times remain directly, primarily and fully responsible and liable for the payment of all sums payable under this Lease and for compliance with all of its other obligations as tenant under this Lease. Landlord's acceptance of Base Rent, Additional Rent or any other sum from any assignee, sublessee, transferee, mortgagee or encumbrance holder shall not be deemed to be Landlord's approval of any such conveyance. Upon the occurrence of an Event of Default, if the Premises or any part of the Premises are then subject to an assignment or subletting, Landlord may, at its option, collect directly from such assignee or subtenant all rents becoming due to Tenant under such assignment or sublease and apply such rents against any sums due to Landlord from Tenant under this Lease. No such collection shall be construed to constitute a novation or release of Tenant from the further performance of Tenant's obligations under this Lease. Landlord's right of direct collection shall be in addition to and not in limitation of any other rights and remedies provided for in this Lease or at law. Tenant makes an absolute assignment to Landlord of such assignments and subleases and any rent, lease security deposits and other sums payable under such assignments and subleases as collateral to secure the performance of the obligations of Tenant under this Lease. 22 4.16.2 In the event Tenant desires to assign this Lease or to sublet all or any portion of the Premises, Tenant shall give written notice of such desire to Landlord setting forth the name of the proposed subtenant or assignee, the proposed term, the nature of the proposed subtenant's or assignee's business to be conducted on the Premises, the rental rate, and any other particulars of the proposed subletting or assignment that Landlord may reasonably request. Without limiting the preceding sentence, Tenant shall also provide Landlord with: (a) such financial information as Landlord may request concerning the proposed subtenant or assignee, including recent financial statements certified as accurate and complete by a certified public accountant and by the president, managing partner or other appropriate officer of the proposed subtenant or assignee; (b) proof satisfactory to Landlord that the proposed subtenant or assignee will immediately occupy and thereafter use the entire Premises (or any sublet portion of the Premises) for the remainder of the Lease Term (or for the entire term of the sublease, if shorter) in compliance with the terms of this Lease; and (c) a copy of the proposed sublease or assignment or letter of intent. Tenant shall pay to Landlord, upon Landlord's demand therefor, Landlord's reasonable attorneys' fees incurred in the review of such documentation and in documenting Landlord's consent, plus an administrative fee of $500.00 as Landlord's fee for processing such proposed assignment or sublease. Receipt of such fee shall not obligate Landlord to approve the proposed assignment or sublease. 4.16.3 In determining whether to grant or withhold consent to a proposed assignment or sublease, Landlord may consider, and weigh, any factor it deems relevant, in its reasonable discretion. Without limiting the foregoing and notwithstanding anything herein to the contrary, in no event shall Tenant be permitted to assign this Lease or sublet any portion of the Premises to a then existing tenant of the Building or to any person or entity with which Landlord has had written negotiations in the six (6) months preceding Tenant's request, regarding the leasing of space by such proposed assignee or subtenant in the Building. 4.16.4 Within fifteen (15) Business Days after Landlord's receipt of all required information to be supplied by Tenant pursuant to this paragraph, Landlord shall notify Tenant of Landlord's approval, disapproval or conditional approval of any proposed assignment or subletting or of Landlord's election to recapture as described below. Landlord shall have no obligation to respond unless and until all required information has been submitted. In the event Landlord approves of any proposed assignment or subletting, Tenant and the proposed assignee or sublessee shall execute and deliver to Landlord an assignment (or subletting) and assumption agreement in form and content satisfactory to Landlord. 4.16.5 Any transfer, assignment or hypothecation of any of the stock or interest in Tenant, or the assets of Tenant, or any other transaction, merger, reorganization or event, however constituted which (a) results in fifty percent (50%), or more of such stock, interest or assets going into different ownership, or (b) is a subterfuge denying Landlord the benefits of this paragraph, shall be deemed to be an assignment within the meaning and provisions of this paragraph and shall be subject to the provisions of this paragraph. 4.16.6 If Landlord consents to any assignment or sublease and Tenant receives rent or any other consideration, either initially or over the term of the assignment or sublease, in excess of the Base Rent and Additional Rent (or, in the case of a sublease of a portion of the Premises, in excess of the Base Rent paid by Tenant on a square footage basis under this Lease), Tenant shall pay to Landlord fifty percent (50%) of such excess. 4.16.7 Landlord shall have the right to recapture the Premises or the applicable portion thereof (a "Recapture") by giving written notice of such Recapture to Tenant within fifteen (15) Business Days after receipt of Tenant's written request for Landlord's consent to such proposed assignment or subletting. Tenant shall have no right to retract its request for Landlord's consent to assign or sublease once such request has been made. Such Recapture shall terminate this Lease as to the applicable space effective on the prospective effective date of assignment or subletting, which shall be the last day of a calendar month and shall not be earlier than twenty (20) Business Days after receipt of Tenant's request hereunder. If less than the entire Premises are recaptured, this Lease shall remain in full force and effect with respect to that remaining area not recaptured by Landlord. Tenant shall surrender that portion of the Premises recaptured by Landlord in accordance with the terms and conditions of this Lease. Notwithstanding the first sentence of this subparagraph, Landlord shall have no right to Recapture the Premises or applicable portion thereof if Tenant's proposed assignment or sublet is to an affiliate or wholly-owned subsidiary or is to a reorganized entity under which no change in ownership has occurred. 23 4.16.8 Notwithstanding any contrary provision in the previous subparagraphs of this paragraph, Landlord shall consent to and approve a proposed assignment or subletting of the Premises where (a) the assignment or subletting is to an affiliate or wholly-owned subsidiary of the Tenant or a reorganized entity under which no change of ownership has occurred, provided that Tenant has delivered to Landlord satisfactory evidence of the foregoing, (b) the proposed assignee or subtenant has delivered to Landlord satisfactory evidence of financial worth (less goodwill) equal to or greater than that of Tenant as of the execution date of this Lease, and (c) Tenant has satisfied the requirements of Section 4.16.2. hereof. 4.17 Assignment by Landlord. Landlord shall have the right to transfer and assign, in whole or in part, its rights and obligations under this Lease and in any and all of the Land or Building. If Landlord sells or transfers any or all of the Building, including the Premises, Landlord and Landlord's Agents shall, upon consummation of such sale or transfer, be released automatically from any liability relating to obligations or covenants under this Lease to be performed or observed after the date of such transfer, and in such event, Tenant agrees to look solely to Landlord's successor-in-interest with respect to such liability; provided that, as to the Lease Security Deposit and Prepaid Rent, Landlord shall not be released from liability therefor unless Landlord has delivered (by direct transfer or credit against the purchase price) the Lease Security Deposit or Prepaid Rent to its successor-in-interest. 4.18 Estoppel Certificates and Financial Statements. Tenant shall, from time to time, upon the written request of Landlord, execute, acknowledge and deliver to Landlord or its designee a written statement stating: (a) the date this Lease was executed and the date it expires; (b) the date Tenant entered into occupancy of the Premises; (c) the amount of monthly Base Rent and Additional Rent and the date to which such Base Rent and Additional Rent have been paid; and (d) certifying that (1) this Lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (or specifying the date of the agreement so affecting this Lease); (2) Landlord is not in breach of this Lease (or, if so, a description of each such breach) and that no event, omission or condition has occurred which would result, with the giving of notice or the passage of time, in a breach of this Lease by Landlord; (3) this Lease represents the entire agreement between the parties with respect to the Premises; (4) all required contributions by Landlord to Tenant on account of Tenant Improvements have been received; (5) on the date of execution, there exist no defenses or offsets which the Tenant has against the enforcement of this Lease by the Landlord; (6) no Base Rent, Additional Rent or other sums payable under this Lease have been paid in advance except for Base Rent and Additional Rent for the then current month; (7) no security has been deposited with Landlord (or, if so, the amount of such security); (8) it is intended that any Tenant's statement may be relied upon by a prospective purchaser or mortgagee of Landlord's interest or an assignee of any such mortgagee; and (9) such other information as may be reasonably requested by Landlord. If Tenant fails to respond within ten (10) Business Days of its receipt of a written request by Landlord as provided in this paragraph, such failure shall constitute an Event of Default. In addition, Tenant shall, from time to time, upon the written request of Landlord, deliver to or cause to be delivered to Landlord or its designee then current financial statements (including a statement of operations and balance sheet and statement of cash flows) certified as accurate by a certified public accountant and prepared in conformance with generally accepted accounting principles for (i) Tenant, (ii) any entity which owns a controlling interest in Tenant, (iii) any entity the controlling interest of which is owned by Tenant, (iv) any successor entity to Tenant by merger or operation of law, and (v) any guarantor of this Lease. 4.19 Modification for Lender. If, in connection with obtaining construction, interim or permanent financing for the Building or Land, Landlord's lender, if any, shall request reasonable modifications to this Lease as a condition to such financing, Tenant will not unreasonably withhold or delay its consent to such modifications; provided that, such modifications do not increase the obligations of Tenant under this Lease or materially adversely affect Tenant's rights under this Lease. 4.20 Hazardous Substances. 4.20.1 Neither Tenant, any of Tenant's Agents nor any other person shall store, place, generate, manufacture, refine, handle, or locate on, in, under or around the Land or Building any Hazardous Substance, except for storage, handling and use of reasonable quantities and types of cleaning fluids and office supplies in the Premises in the ordinary course and the prudent conduct of Tenant's business in the Premises. Tenant agrees that (a) the storage, handling and use of such permitted Hazardous Substances must at all times conform to all Governmental Requirements and to applicable fire, safety and insurance requirements; (b) the types and quantities of permitted Hazardous Substances which are stored in the Premises must be reasonable and appropriate to the nature and size of Tenant's operation in the Premises and reasonable and appropriate for a first-class building of the same or similar use and in the same market area as the Building; and (c) no Hazardous Substance shall be spilled or disposed of on, in, under or around the Land or Building or otherwise discharged from the Premises or any area adjacent to the Land or Building. In no event will Tenant be permitted to store, handle or use on, in, under 24 or around the Premises any Hazardous Substance which will increase the rate of fire or extended coverage insurance on the Land or Building, unless: (1) such Hazardous Substance and the expected rate increase have been specifically disclosed in writing to Landlord; (2) Tenant has agreed in writing to pay any rate increase related to each such Hazardous Substance; and (3) Landlord has approved in writing each such Hazardous Substance, which approval shall be subject to Landlord's discretion. 4.20.2 Tenant shall indemnify, defend and hold harmless Landlord and Landlord's Agents from and against any and all Claims arising out of any breach of any provision of this paragraph, which expenses shall also include laboratory testing fees, personal injury claims, clean-up costs and environmental consultants' fees. Tenant agrees that Landlord may be irreparably harmed by Tenant's breach of this paragraph and that a specific performance action may appropriately be brought by Landlord; provided that, Landlord's election to bring or not bring any such specific performance action shall in no way limit, waive, impair or hinder Landlord's other remedies against Tenant. 4.20.3 As of the execution date of this Lease, Tenant represents and warrants to Landlord that, except as otherwise disclosed by Tenant to Landlord, Tenant has no intent to bring any Hazardous Substances on, in or under the Premises except for the type and quantities authorized in the first paragraph of the paragraph captioned "Hazardous Substances". 4.21 Access Laws. 4.21.1 Tenant agrees to notify Landlord immediately if Tenant receives notification or otherwise becomes aware of: (a) any condition or situation on, in, under or around the Land or Building which may constitute a violation of any Access Laws or (b) any threatened or actual lien, action or notice that the Land or Building is not in compliance with any Access Laws. If Tenant is responsible for such condition, situation, lien, action or notice under this paragraph, Tenant's notice to Landlord shall include a statement as to the actions Tenant proposes to take in response to such condition, situation, lien, action or notice. 4.21.2 Tenant shall not alter or permit any assignee or subtenant or any other person to alter the Premises in any manner which would violate any Access Laws or increase Landlord's responsibilities for compliance with Access Laws, without the prior approval of the Landlord. In connection with any such approval, Landlord may require a certificate of compliance with Access Laws from an architect, engineer or other person acceptable to Landlord. Tenant agrees to pay the reasonable fees incurred by such architect, engineer or other third party in connection with the issuance of such certificate of compliance. Landlord's consent to any proposed Tenant Alteration shall (a) not relieve Tenant of its obligations or indemnities contained in this paragraph or this Lease or (b) be construed as a warranty that such proposed alteration complies with any Access Law. 4.21.3 Tenant shall be solely responsible for all costs and expenses relating to or incurred in connection with: (a) failure of the Premises to comply with the Access Laws; and (b) bringing the Building and the common areas of the Building into compliance with Access Laws, if and to the extent such noncompliance arises out of or relates to: (1) Tenant's use of the Premises, including the hiring of employees; (2) any Tenant Alterations to the Premises; or (3) any Tenant Improvements constructed in the Premises at the request of Tenant, regardless of whether such improvements are constructed prior to or after the Commencement Date. 4.21.4 Landlord shall be responsible for all costs and expenses relating to or incurred in connection with bringing the common areas of the Building into compliance with Access Laws, unless such costs and expenses are Tenant's responsibility as provided in the preceding subparagraph. Any cost or expense paid or incurred by Landlord to bring the Premises or common areas of the Building into compliance with Access Laws which is not Tenant's responsibility under the preceding subparagraphs shall be amortized over the useful economic life of the improvements (not to exceed ten (10) years) with interest at the Prime Rate plus three (3) percentage points compounded daily, and shall be an Operating Cost for purposes of this Lease. 4.21.5 Tenant agrees to indemnify, defend and hold harmless Landlord and Landlord's Agents from and against any and all Claims arising out of or relating to any failure of Tenant or Tenant's Agents to comply with Tenant's obligations under this paragraph. 4.21.6 The provisions of this paragraph shall supersede any other provisions in this Lease regarding Access Laws, to the extent inconsistent with the provisions of any other paragraphs. 4.22 Quiet Enjoyment. Landlord covenants that Tenant, upon paying Base Rent, Additional Rent and all other sums payable under this Lease and performing all covenants and conditions required of Tenant under this Lease shall and may peacefully have, hold and enjoy the Premises without hindrance or molestation by Landlord subject to the provisions of this Lease. 25 4.23 Signs. Tenant shall be permitted to have its entity name listed on the main directory sign for the Building situated in the main lobby of the Building. Tenant also shall be permitted to install next to Tenant's entryway into the Premises, as part of the preparation of the Premises for Tenant's occupancy (with the cost thereof included in the Tenant Improvement Costs), one (1) entryway sign bearing Tenant's name. Said sign shall be of a size, design and coloration, and in a location consistent with Landlord's standard tenant entryway signage for the Building. 4.24 Subordination. Tenant subordinates this Lease and all rights of Tenant under this Lease to any mortgage, deed of trust, ground lease or vendor's lien, or similar instrument which may from time to time be placed upon the Premises (and all renewals, modifications, replacements and extensions of such encumbrances), and each such mortgage, deed of trust, ground lease or lien or other instrument shall be superior to and prior to this Lease. Notwithstanding the foregoing, the holder or beneficiary of such mortgage, deed of trust, ground lease, vendor's lien or similar instrument shall have the right to subordinate or cause to be subordinated any such mortgage, deed of trust, ground lease, vendor's lien or similar instrument to this Lease or to execute a non-disturbance agreement in favor of Tenant on the standard form utilized by such lender or ground lessor. At the request of Landlord, the holder of such mortgage or deed of trust or any ground lessor, Tenant shall execute, acknowledge and deliver promptly in recordable form any instrument or subordination agreement that Landlord or such holder may request. Landlord shall exercise reasonable efforts to obtain a non-disturbance agreement from the holder of any mortgage or deed of trust. Tenant further covenants and agrees that if the lender or ground lessor acquires the Premises as a purchaser at any foreclosure sale or otherwise, Tenant shall recognize and attorn to such party as landlord under this Lease, and shall make all payments required hereunder to such new landlord without deduction or set-off and, upon the request of such purchaser or other successor, execute, deliver and acknowledge documents confirming such attornment. Tenant waives the provisions of any law or regulation, now or hereafter in effect, which may give or purport to give Tenant any right to terminate or otherwise adversely affect this Lease or the obligations of Tenant hereunder in the event that any such foreclosure or termination or other proceeding is prosecuted or completed. 4.25 Workers Compensation Immunity. If and to the extent that Tenant is obligated to indemnify, defend or hold harmless Landlord or Landlord's Agents from any Claims arising from its use of the Premises or any act or failure to act by Tenant or Tenant's Agents or otherwise, Tenant expressly waives, to and in favor of Landlord and Landlord's Agents, its statutory workers compensation act employers immunity relative to any injury to an employee or employees of Tenant. 4.26 Brokers. Each party to this Lease shall indemnify, defend and hold harmless the other party from and against any and all Claims asserted against such other party by any real estate broker, finder or intermediary relating to any act of the indemnifying party in connection with this Lease. 4.27 Limitation on Recourse. Landlord has executed this Lease by its authorized representative signing solely in a representative capacity. Notwithstanding anything contained in this Lease to the contrary, Tenant confirms that the covenants of Landlord are made and intended, not as personal covenants of the Landlord's authorized representative or trustee, or for the purpose of binding such authorized representative or trustee personally, but solely in the exercise of the representative powers conferred upon such authorized representative and trustee by their principal. Liability with respect to the entry and performance of this Lease by or on behalf of Landlord, however it may arise, shall be asserted and enforced only against Landlord's estate and equity interest in the Building. Neither Landlord nor any of Landlord's Agents shall have any personal liability in the event of any claim against Landlord arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Premises. Further, in no event whatsoever shall any Landlord's Agent have any liability or responsibility whatsoever arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Premises. Any and all personal liability, if any, beyond that which may be asserted under this paragraph, is expressly waived and released by Tenant and by all persons claiming by, through or under Tenant. 4.28 Mechanic's Liens and Tenant's Personal Property Taxes. 4.28.1 Tenant shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord or Tenant in the Premises or to charge the rentals payable under this Lease for any Claims in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Tenant shall immediately pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Premises on which any lien is or can be validly and legally asserted against its leasehold interest in the Premises and Tenant shall indemnify, defend and hold harmless Landlord from any and all Claims arising out of any such asserted Claims. Tenant agrees to give Landlord immediate written notice of any such Claim. 26 4.28.2 Tenant shall be liable for all taxes levied or assessed against personal property, furniture or fixtures placed by Tenant in the Premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and Landlord elects to pay them or if the assessed value of Landlord's property is increased by inclusion of such personal property, furniture or fixtures and Landlord elects to pay the taxes based on such increase, Tenant shall reimburse Landlord for the sums so paid by Landlord, upon demand by Landlord. 4.29 Landlord's Security Interest. In addition to any statutory lien for rent in Landlord's favor, Landlord shall have and Tenant hereby grants to Landlord a continuing security interest for all Base Rent, Additional Rent and other sums becoming due under this Lease from Tenant, upon all goods, wares, equipment, fixtures, furniture, inventory, accounts, intangibles, chattel paper and other personal property of Tenant situated in or arising out of the Premises, and such property shall not be removed therefrom without the consent of Landlord until all arrearages in Base Rent, Additional Rent and other sums due under this Lease shall first have been paid and discharged. Landlord is hereby authorized by the Tenant to file (including pursuant to the applicable terms of the Uniform Commercial Code) from time to time any financing statements, continuations, or amendments covering the collateral, whether or not the Tenant's signature appears thereon. On the occurrence of an Event of Default, Landlord shall have, in addition to any other remedies provided herein or by law, all rights and remedies under the Uniform Commercial Code, including, the right to sell the property described in this paragraph at public or private sale upon five (5) Business Days notice to Tenant. Tenant hereby agrees to execute such financing statements and other instruments necessary or desirable in Landlord's discretion to perfect the security interest hereby created and shall deliver such financing statement to Landlord for filing with the appropriate Secretary of State. Any statutory lien for rent is not waived, and the express contractual lien granted in this paragraph constitutes a security agreement and is in addition and supplementary to such statutory lien. 4.30 Occupancy. Prior to the expiration or earlier termination of the Lease Term, Tenant shall not vacate the Premises without providing Landlord with at least twenty-one (21) days advance notice. Tenant's furnishing of such notice shall not relieve Tenant of any of its obligations under this Lease. Without limiting any of such obligations, Tenant shall inspect the Premises no less than once every other week during the remainder of the Lease Term to ensure that the Premises are in good order and condition. SECTION 5: DEFAULT AND REMEDIES 5.1 Events of Default. 5.1.1 The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Tenant ("Event of Default"): (a) abandonment of all or any portion of the Premises; (b) failure by Tenant to make any payment of Base Rent, Additional Rent or any other sum payable by Tenant under this Lease within five (5) Business Days after its due date; (c) failure by Tenant to observe or perform any covenant or condition of this Lease, other than the making of payments, where such failure shall continue for a period of fifteen (15) Business Days after written notice from Landlord, provided, however, if cure is not reasonably capable of being completed within such time period, Tenant shall have such additional reasonable time (not to exceed an additional sixty (60) calendar days) as is required to cure such default as long as Tenant promptly commences such cure within said fifteen (15) Business Day period and thereafter diligently pursues such cure to completion; (d) the failure of Tenant to surrender possession of the Premises at the expiration or earlier termination of this Lease in the condition required by this Lease; (e) (1) the making by Tenant of any general assignment or general arrangement for the benefit of creditors; (2) the filing by or against Tenant of a petition in bankruptcy, including reorganization or arrangement, unless, in the case of a petition filed against Tenant, unless the same is dismissed within twenty (20) Business Days; (3) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located in the Premises or of Tenant's interest in this Lease; (4) any execution, levy, attachment or other process of law against any property of Tenant or Tenant's interest in this Lease, unless the same is dismissed within twenty (20) Business Days; (5) adjudication that Tenant is bankrupt; (6) the making by Tenant of a transfer in fraud of creditors; or (7) the failure of Tenant to generally pay its debts as they become due; 27 (f) any information furnished by or on behalf of Tenant to Landlord in connection with the entry of this Lease is determined to have been materially false, misleading or incomplete when made; or (g) the failure of the Tenant to deliver the Lease Security Deposit within the time period specified in the paragraph captioned "Lease Security Provisions". 5.1.2 Tenant shall notify Landlord promptly of any Event of Default or any facts, conditions or events which, with the giving of notice or passage of time or both, would constitute an Event of Default. 5.1.3 If a petition in bankruptcy is filed by or against Tenant, and if this Lease is treated as an "unexpired lease" under applicable bankruptcy law in such proceeding, then Tenant agrees that Tenant shall not attempt nor cause any trustee to attempt to extend the applicable time period within which this Lease must be assumed or rejected. 5.2 Remedies. If any Event of Default occurs, Landlord may at any time after such occurrence, with or without notice or demand except as stated in this paragraph, and without limiting Landlord in the exercise of any right or remedy at law which Landlord may have by reason of such Event of Default, exercise the rights and remedies, either singularly or in combination, as are specified or described in the subparagraphs of this paragraph. 5.2.1 Landlord may terminate this Lease and all rights of Tenant under this Lease either immediately or at some later date by giving Tenant written notice that this Lease is terminated. If Landlord so terminates this Lease, then Landlord may recover from Tenant the sum of: (a) the unpaid Base Rent, Additional Rent and all other sums payable under this Lease which have been earned at the time of termination; (b) interest at the Default Rate on the unpaid Base Rent, Additional Rent and all other sums payable under this Lease which have been earned at the time of termination; plus (c) the amount by which the unpaid Base Rent, Additional Rent and all other sums payable under this Lease which would have been earned after termination until the time of award exceeds the amount of such rental loss, if any, as Tenant affirmatively proves could have been reasonably avoided and interest on such excess at the Default Rate; plus (d) the amount by which the aggregate of the unpaid Base Rent, Additional Rent and all other sums payable under this Lease for the balance of the Lease Term after the time of award exceeds the amount of such rental loss, if any, as Tenant affirmatively proves could be reasonably avoided, with such difference being discounted to present value at the Prime Rate at the time of award; plus (e) any other amount necessary to compensate Landlord for the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease or which, in the ordinary course of things, would be likely to result from such failure, including, leasing commissions, tenant improvement costs, renovation costs and advertising costs; plus (f) all such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. 5.2.2 Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises. Landlord may cause property so removed from the Premises to be stored in a public warehouse or elsewhere at the expense and for the account of Tenant. 5.2.3 Landlord shall also have the right, without terminating this Lease, to accelerate and recover from Tenant the sum of all unpaid Base Rent, Additional Rent and all other sums payable under the then remaining term of the Lease, discounting such amount to present value at the Prime Rate. 5.2.4 If Tenant vacates, abandons or surrenders the Premises without Landlord's consent, or if Landlord re-enters the Premises as provided in subparagraph 5.2.2 or takes possession of the Premises pursuant to legal proceedings or through any notice procedure provided by law, then, if Landlord does not elect to terminate this Lease, Landlord may, from time to time, without terminating this Lease, either (a) recover all Base Rent, Additional Rent and all other sums payable under this Lease as they become due or (b) relet the Premises or any part of the Premises on behalf of Tenant for such term or terms, at such rent or rents and pursuant to such other provisions as Landlord, in its sole discretion, may deem advisable, all with the right, at Tenant's cost, to make alterations and repairs to the Premises and recover any deficiency from Tenant as set forth in subparagraph 5.2.6. 28 5.2.5 None of the following remedial actions, singly or in combination, shall be construed as an election by Landlord to terminate this Lease unless Landlord has in fact given Tenant written notice that this Lease is terminated: (a) an act by Landlord to maintain or preserve the Premises; (b) any efforts by Landlord to relet the Premises; (c) any repairs or alterations made by Landlord to the Premises; (d) reentry, repossession or reletting of the Premises by Landlord pursuant to this paragraph; or (e) the appointment of a receiver, upon the initiative of Landlord, to protect Landlord's interest under this Lease. If Landlord takes any of the foregoing remedial action without terminating this Lease, Landlord may nevertheless at any time after taking any such remedial action terminate this Lease by written notice to Tenant. 5.2.6 If Landlord relets the Premises, Landlord shall apply the revenue from such reletting as follows: first, to the payment of any indebtedness of Tenant to Landlord other than Base Rent, Additional Rent or any other sums payable by Tenant under this Lease; second, to the payment of any cost of reletting (including finders' fees and leasing commissions); third, to the payment of the cost of any alterations, improvements, maintenance and repairs to the Premises; and fourth, to the payment of Base Rent, Additional Rent and other sums due and payable and unpaid under this Lease. Landlord shall hold and apply the residue, if any, to payment of future Base Rent, Additional Rent and other sums payable under this Lease as the same become due, and shall deliver the eventual balance, if any, to Tenant. Should revenue from letting during any month, after application pursuant to the foregoing provisions, be less than the sum of the Base Rent, Additional Rent and other sums payable under this Lease and Landlord's expenditures for the Premises during such month, Tenant shall be obligated to pay such deficiency to Landlord as and when such deficiency arises. 5.2.7 Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies provided in this Lease or by law (all such remedies being cumulative), nor shall pursuit of any remedy provided in this Lease constitute a forfeiture or waiver of any Base Rent, Additional Rent or other sum payable under this Lease or of any damages accruing to Landlord by reason of the violation of any of the covenants or conditions contained in this Lease. 5.2.8 UPON AN EVENT OF DEFAULT OR THE EXPIRATION OF THE TERM, IT SHALL BE LAWFUL FOR ANY ATTORNEY OF ANY COURT OF RECORD TO APPEAR AS ATTORNEY FOR TENANT AS WELL AS FOR ALL PERSONS CLAIMING BY, THROUGH OR UNDER TENANT AND TO SIGN AN AGREEMENT FOR ENTERING IN ANY COMPETENT COURT AN ACTION IN EJECTMENT AGAINST TENANT AND ALL PERSONS CLAIMING BY, THROUGH OR UNDER TENANT AND THEREIN CONFESS JUDGMENT FOR THE RECOVERY BY LANDLORD OF POSSESSION OF THE PREMISES, FOR WHICH THIS LEASE SHALL BE ITS SUFFICIENT WARRANT, WHEREUPON, IF LANDLORD SO DESIRES, A WRIT OF POSSESSION OR OTHER APPROPRIATE WRIT UNDER THE PENNSYLVANIA RULES OF CIVIL PROCEDURE THEN IN EFFECT MAY ISSUE FORTHWITH, WITHOUT ANY PRIOR WRIT OR PROCEEDINGS; PROVIDED, HOWEVER, IF THIS LEASE IS TERMINATED AND POSSESSION OF THE PREMISES REMAIN IN OR BE RESTORED TO TENANT, LANDLORD SHALL HAVE THE RIGHT FOR THE SAME EVENT OF DEFAULT AND UPON ANY SUBSEQUENT EVENT OF DEFAULT OR EVENTS OF DEFAULT, TO BRING ONE OR MORE FURTHER ACTION OR ACTIONS AS HEREINBEFORE SET FORTH TO RECOVER POSSESSION OF THE PREMISES AND CONFESS JUDGMENT FOR THE RECOVERY OF POSSESSION OF THE PREMISES AS HEREINABOVE PROVIDED. 5.2.9 IN ANY ACTION OF EJECTMENT, LANDLORD SHALL FIRST CAUSE TO BE FILED IN SUCH ACTION AN AFFIDAVIT MADE BY IT OR SOMEONE ACTING FOR IT, SETTING FORTH THE FACTS NECESSARY TO AUTHORIZE THE ENTRY OF JUDGMENT, AND, IF A TRUE COPY OF THIS LEASE (AND OF THE TRUTH OF THE COPY SUCH AFFIDAVIT SHALL BE SUFFICIENT EVIDENCE) BE FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL AS A WARRANT OF ATTORNEY, ANY RULE OF COURT, CUSTOM OR PRACTICE TO THE CONTRARY NOTWITHSTANDING. TENANT RELEASES TO LANDLORD AND TO ANY AND ALL ATTORNEYS WHO MAY APPEAR FOR TENANT, ALL PROCEDURAL ERRORS IN SAID PROCEEDINGS AND ALL LIABILITY THEREOF. IF PROCEEDINGS SHALL BE COMMENCED BY LANDLORD TO RECOVER POSSESSION UNDER THE PENNSYLVANIA ACTS OF ASSEMBLY AND RULES OF CIVIL PROCEDURE UPON AN EVENT OF DEFAULT, TENANT SPECIFICALLY WAIVES THE RIGHT TO THE THREE MONTHS' NOTICE AND TO THE 15 OR 30 DAYS, NOTICE REQUIRED BY THE PENNSYLVANIA LANDLORD AND TENANT ACT OF 1951, AND AGREES THAT 5 DAYS NOTICE SHALL BE SUFFICIENT IN EITHER OR ANY SUCH CASE. 29 5.2.10 TENANT CONFIRMS TO LANDLORD THAT (I) THIS LEASE AND THE FOREGOING WARRANT OF ATTORNEY HAVE BEEN NEGOTIATED AND AGREED UPON IN A COMMERCIAL CONTEXT; (II) TENANT IS A BUSINESS ENTITY AND ITS PRINCIPALS ARE KNOWLEDGEABLE IN COMMERCIAL MATTERS; (III) TENANT HAS CONSULTED WITH ITS OWN SEPARATE COUNSEL REGARDING THIS LEASE; (IV) ON THE ADVICE OF ITS OWN SEPARATE COUNSEL, TENANT HAS AGREED TO THE AFORESAID WARRANT OF ATTORNEY TO CONFESS JUDGMENT AGAINST TENANT; AND (V) TENANT UNDERSTANDS THAT IT IS WAIVING CERTAIN RIGHTS WHICH IT WOULD OTHERWISE POSSESS. 5.3 Right to Perform. If Tenant shall fail to pay any sum of money, other than Base Rent or Additional Rent, required to be paid by it under this Lease or shall fail to perform any other act on its part to be performed under this Lease, and such failure shall continue for ten (10) Business Days after notice of such failure by Landlord, or such shorter time if reasonable under the circumstances, Landlord may, but shall not be obligated to, and without waiving or releasing Tenant from any obligations of Tenant, make such payment or perform such other act on Tenant's part to be made or performed as provided in this Lease. Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of the nonpayment of sums due under this paragraph as in the case of default by Tenant in the payment of Base Rent. 5.4 Landlord's Default. Landlord shall not be in default under this Lease unless Landlord fails to perform obligations required of Landlord within twenty (20) Business Days after written notice is delivered by Tenant to Landlord and to the holder of any mortgages or deeds of trust (collectively, "Lender") covering the Premises whose name and address shall have theretofore been furnished to Tenant in writing, specifying the obligation which Landlord has failed to perform; provided, however, that if the nature of Landlord's obligation is such that more than twenty (20) Business Days are required for performance, then Landlord shall not be in default if Landlord or Lender commences performance within such twenty (20) Business Day period and thereafter diligently prosecutes the same to completion. All obligations of Landlord hereunder shall be construed as covenants, not conditions. In the event of any default, breach or violation of Tenant's rights under this Lease by Landlord, Tenant's exclusive remedy shall be either an action for specific performance or an action for actual damages. Tenant hereby waives the benefit of any laws granting it the right to perform Landlord's obligation, a lien upon the property of Landlord and/or upon Rent due Landlord, or the right to terminate this Lease or withhold Rent on account of any Landlord default. SECTION 6: MISCELLANEOUS PROVISIONS 6.1 Notices. Any notice, request, approval, consent or written communication required or permitted to be delivered under this Lease shall be: (a) in writing; (b) transmitted by personal delivery, express or courier service, United States Postal Service in the manner described below, or electronic means of transmitting written material; and (c) deemed to be delivered on the earlier of the date received or four (4) Business Days after having been deposited in the United States Postal Service, postage prepaid. Such writings shall be addressed to Landlord or Tenant, as the case may be, at the respective designated addresses set forth opposite their signatures, or at such other address(es) as they may, after the execution date of this Lease, specify by written notice delivered in accordance with this paragraph, with copies to the persons at the addresses, if any, designated opposite each party's signature. Those notices which contain a notice of breach or default or a demand for performance may be sent by any of the methods described in clause (b) above, but if transmitted by personal delivery or electronic means, shall also be sent concurrently by certified or registered mail, return receipt requested. 6.2 Attorney's Fees and Expenses. In the event either party requires the services of an attorney in connection with enforcing the terms of this Lease, or in the event suit is brought for the recovery of Base Rent, Additional Rent or any other sums payable under this Lease or for the breach of any covenant or condition of this Lease, or for the restitution of the Premises to Landlord or the eviction of Tenant during the Lease Term or after the expiration or earlier termination of this Lease, the non-breaching party shall be entitled to a reasonable sum for attorney's and paralegal's fees, expenses and court costs, including those relating to any appeal. 30 6.3 No Accord and Satisfaction. No payment by Tenant or receipt by Landlord of an amount less than the Base Rent or Additional Rent or any other sum due and payable under this Lease shall be deemed to be other than a payment on account of the Base Rent, Additional Rent or other such sum, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, nor preclude Landlord's right to recover the balance of any amount payable or Landlord's right to pursue any other remedy provided in this Lease or at law. 6.4 Successors; Joint and Several Liability. Except as provided in the paragraph captioned "Limitation on Recourse" and subject to the paragraph captioned "Assignment and Subletting by Landlord", all of the covenants and conditions contained in this Lease shall apply to and be binding upon Landlord and Tenant and their respective heirs, executors, administrators, successors and assigns. In the event that more than one person, partnership, company, corporation or other entity is included in the term "Tenant", then each such person, partnership, company, corporation or other entity shall be jointly and severally liable for all obligations of Tenant under this Lease. 6.5 Choice of Law. This Lease shall be construed and governed by the laws of the state in which the Land is located. 6.6 No Waiver of Remedies. The waiver by Landlord of any covenant or condition contained in this Lease shall not be deemed to be a waiver of any subsequent breach of such covenant or condition nor shall any custom or practice which may develop between the parties in the administration of this Lease be construed to waive or lessen the rights of Landlord to insist on the strict performance by Tenant of all of the covenants and conditions of this Lease. No act or thing done by Landlord or Landlord's Agents during the Lease Term shall be deemed an acceptance or a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless made in writing and signed by Landlord. The mention in this Lease of any particular remedy shall not preclude Landlord from any other remedy it might have, either under this Lease or at law, nor shall the waiver of or redress for any violation of any covenant or condition in this Lease or in any of the rules or regulations attached to this Lease or later adopted by Landlord, prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of Base Rent, Additional Rent or any other sum payable under this Lease with knowledge of a breach of any covenant or condition in this Lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of the rules and regulations attached to this Lease or later adopted, against Tenant or any other tenant in the Building, shall not be deemed a waiver. Any waiver by Landlord must be in writing and signed by Landlord to be effective. 6.7 Offer to Lease. The submission of this Lease in a draft form to Tenant or its broker or other agent does not constitute an offer to Tenant to lease the Premises. This Lease shall have no force or effect until: (a) it is executed and delivered by Tenant to Landlord; and (b) it is executed and delivered by Landlord to Tenant. 6.8 Force Majeure. In the event that Landlord shall be delayed, hindered in or prevented from the performance of any act or obligation required under this Lease by reason of acts of God, strikes, lockouts, labor troubles or disputes, inability to procure or shortage of materials or labor, failure of power or utilities, delay in transportation, fire, vandalism, accident, flood, severe weather, other casualty, Governmental Requirements (including mandated changes in the Plans and Specifications or the Tenant Improvements resulting from changes in pertinent Governmental Requirements or interpretations thereof), riot, insurrection, civil commotion, sabotage, explosion, war, natural or local emergency, acts or omissions of others, including Tenant, or other reasons of a similar or dissimilar nature not solely the fault of, or under the exclusive control of, Landlord, then performance of such act or obligation shall be excused for the period of the delay and the period for the performance of any such act or obligation shall be extended for the period equivalent to the period of such delay. 6.9 Landlord's Consent. Unless otherwise provided in this Lease, whenever Landlord's consent, approval or other action is required under the terms of this Lease, such consent, approval or action shall be subject to Landlord's judgment or discretion exercised in good faith and shall be delivered in writing. 31 6.10 Severability; Captions. If any clause or provision of this Lease is determined to be illegal, invalid, or unenforceable under present or future laws, the remainder of this Lease shall not be affected by such determination, and in lieu of each clause or provision that is determined to be illegal, invalid or unenforceable, there be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. Headings or captions in this Lease are added as a matter of convenience only and in no way define, limit or otherwise affect the construction or interpretation of this Lease. 6.11 Interpretation. Whenever a provision of this Lease uses the term (a) "include" or "including", that term shall not be limiting but shall be construed as illustrative, (b) "covenant", that term shall include any covenant, agreement, term or provision, (c) "at law", that term shall mean as specified in any applicable statute, ordinance or regulation having the force of law or as determined at law or in equity, or both, and (d) "day", that uncapitalized word shall mean a calendar day. This Lease shall be given a fair and reasonable interpretation of the words contained in it without any weight being given to whether a provision was drafted by one party or its counsel. 6.12 Incorporation of Prior Agreement; Amendments. This Lease contains all of the agreements of the parties to this Lease with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties to this Lease or their respective successors in interest. 6.13 Authority. 6.13.1 If Tenant is a partnership, company, corporation or other entity, each individual executing this Lease on behalf of Tenant represents and warrants to Landlord that he or she is duly authorized to so execute and deliver this Lease and that all partnership, company, corporation or other entity actions and consents required for execution of this Lease have been given, granted or obtained. If Tenant is a partnership, company, corporation or other business organization, it shall, within ten (10) Business Days after demand by Landlord, deliver to Landlord satisfactory evidence of the due authorization of this Lease and the authority of the person executing this Lease on its behalf. 6.13.2 Landlord represents and warrants to Tenant that the individual executing this Lease on behalf of Landlord is authorized to execute and deliver this Lease and that all partnership, company, corporation or other entity actions and consents required for execution of this Lease have been given, granted or obtained. 6.14 Time of Essence. Time is of the essence with respect to the performance of every covenant and condition of this Lease. 6.15 Survival of Obligations. Notwithstanding anything contained in this Lease to the contrary or the expiration or earlier termination of this Lease, any and all obligations of either party accruing prior to the expiration or termination of this Lease shall survive the expiration or earlier termination of this Lease, and either party shall promptly perform all such obligations whether or not this Lease has expired or terminated. Such obligations shall include any and all indemnity obligations set forth in this Lease. 6.16 Consent to Service. Tenant irrevocably consents to the service of process of any action or proceeding at the address of the Premises. Nothing in this paragraph shall affect the right to serve process in any other manner permitted by law. 6.17 Landlord's Authorized Agents. Notwithstanding anything contained in the Lease to the contrary, including without limitation, the definition of Landlord's Agents, only officers of Landlord's authorized representative, Kennedy Associates Real Estate Counsel, Inc., and officers of Riggs Bank N.A., the trustee of Landlord, are authorized to amend, renew or terminate this Lease, or to compromise any of Landlord's claims under this Lease or to bind Landlord in any manner. Without limiting the effect of the previous sentence, no property manager or broker shall be considered an authorized agent of Landlord to amend, renew or terminate this Lease, to compromise any of Landlord's claims under this Lease or to bind Landlord in any manner. 6.18 Waiver of Jury Trial. Landlord and Tenant irrevocably waive the respective rights to trial by jury in any action, proceeding or counterclaim brought by either against the other (whether in contract or tort) on any matter arising out of or relating in any way to this Lease, the relationship of Landlord and Tenant or Tenant's use or occupancy of the Premises. 6.19 Guaranty. Contemporaneously with the execution of this Lease, Tenant shall cause United Bancshares, Inc. to execute and deliver to the Landlord a Guaranty of Tenant's obligations under this Lease, which Guaranty shall be in form and substance satisfactory to Landlord. 32 IN WITNESS WHEREOF, this Lease has been executed the day and year first above set forth. Designated Address for Landlord: LANDLORD: - -------------------------------- --------- Multi-Employer Property Trust MULTI-EMPLOYER PROPERTY TRUST, c/o Kennedy Associates Real Estate a trust organized under Counsel, Inc. 12 C.F.R. Section 9.18 Attention: Senior Vice President - Asset Management By: Kennedy Associates Real Estate 1215 Fourth Ave., Counsel, Inc., Suite 2400 Authorized Signatory Seattle, WA 98161 Facsimile: (206) 682-4769 By:______________________________ Name:____________________________ with a copy to: Its:_____________________________ Multi-Employer Property Trust c/o Kennedy Associates Real Estate Counsel, Inc. Attn: Vice President - Asset Management 7315 Wisconsin Avenue, Suite 350 West Bethesda, MD 20814 Facsimile: (301) 656-9339 and with a copy to: Multi-Employer Property Trust c/o Riggs Bank N.A. Attn: Senior Vice President/MEPT or Patrick O. Mayberry 808-17th St. N.W., 7th Floor Washington, D.C., 20006-3944 Facsimile: (202) 835-6887 with a copy to Manager at: - -------------------------- CB Richard Ellis One Penn Square West 30 South 15th Street, Suite 401 Philadelphia, Pennsylvania 19102 Facsimile: 215-761-9138 Designated Address for Tenant: TENANT: - ------------------------------ ------- United Bank of Philadelphia United Bank of Philadelphia, a One Penn Square West Pennsylvania corporation 30 South 15th Street, Suite 1200 Philadelphia, Pennsylvania 19102 By:___________________________ Facsimile: __________________ Name: Evelyn F. Smalls Its: President With a copy to: - --------------- Love and Long, L.L.P. 108 Washington Street Newark, NJ 07102 Facsimile: 973-643-4333 33 LANDLORD ACKNOWLEDGEMENT ) ) ss. ) On this _____ day of January, 2005, before me personally appeared _________________________, to me known to be a _____________________ of Kennedy Associates Real Estate Counsel, Inc., the corporation that executed the within and foregoing instrument as authorized signatory of the Multi-Employer Property Trust, and acknowledged said instrument to be the free and voluntary act and deed of corporation as such authorized signatory, for the uses and purposes therein mentioned, and on oath stated that __________(he or she) was authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. Name: _________________________________________ NOTARY PUBLIC in and for the _____________________, residing at ____________________. My appointment expires: ______________________. [NOTARIAL SEAL] TENANT ACKNOWLEDGEMENT (CORPORATION) ) ) ss. ) On this _______ day of January, 2005, before me, a Notary Public in and for the__________________ of ___________________________, personally appeared Evelyn F. Smalls, the President of United Bank of Philadelphia, the Pennsylvania corporation that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that s/he/they was/were authorized to execute said instrument. WITNESS my hand and official seal hereto affixed the day and year first as above written. Name: _________________________________________ NOTARY PUBLIC in and for the State of , residing at ____________________. My appointment expires: ______________________. [NOTARIAL SEAL] 34 EXHIBIT A to Lease LEGAL DESCRIPTION OF LAND ------------------------- ALL THAT CERTAIN lot or piece of ground and real estate, described according to a certain Plan and Survey prepared for Linpro Philadelphia Center City Office One Limited, dated May 26, 1983 and last revised April 12, 1984, said Plan and Survey prepared by Barton & Martin, Engineers, as follows, to wit: SITUATE on the West side of Fifteenth Street at the distance of eighty-three feet Northward from the North side of Chestnut Street (sixty feet wide as per Ordinance of Councils, March 31st, 1884) in the Eighth (formerly the Ninth) Ward of the City of Philadelphia. CONTAINING in front or breadth on the said Fifteenth Street ninety feet and extending of that width in length of depth Westward, the North line thereof along the South side of Ranstead Street (twenty feet wide) and the South line thereof along the center line of a certain ten feet wide Court extending Westward from the said Fifteenth Street one hundred and thirty-two feet. BEING No. 30-36 South 15th Street. TOGETHER with the free use and privileges of the said ten feet wide Court as and for a passageway in common with the owners, tenants and occupiers of the lots of ground immediately to the South of the aforesaid premises. BEING the same premises which Philadelphia Authority for Industrial Development by Indenture dated January 3, 1984 and recorded in the Office for the Recording of Deeds, in and for the City of Philadelphia in Deed Book ALO No. 7, page 160, granted and conveyed unto Linpro Philadelphia Center City Office One Limited, a Pennsylvania Limited Partnership, in fee. Ex. A-1 EXHIBIT B to Lease [ GRAPHIC DRAWING SHOWING LOCATION OF THE PREMISES ] Ex. B-1 EXHIBIT C to Lease PART I - SPACE PLAN - ------------------- (SEE ATTACHED) PART II - LISTING OF PLANS AND SPECIFICATIONS FOR TENANT IMPROVEMENTS [ GRAPHIC DRAWING SHOWING LOCATION OF THE PREMISES ] Ex. C-2 EXHIBIT D to Lease FORM OF LEASE MEMORANDUM The Multi-Employer Property Trust, a trust organized under 12 C.F.R. Section 9.18, as Landlord, and United Bank of Philadelphia, as Tenant, executed that Lease dated as of January ___, 2005 (the "Lease"). The Lease contemplates that this document shall be delivered and executed as set forth in the paragraph entitled "Lease Memorandum". This Lease Memorandum shall become part of the Lease. Landlord and Tenant agree as follows: 1. The Commencement Date of the Lease is ___________________________. 2. The end of the Lease Term and the date on which this Lease will expire is ___________________________. 3. The Lease is in full force and effect as of the date of this Lease Memorandum. By execution of this Lease Memorandum, Tenant confirms that as of the date of the Lease Memorandum (a) Tenant has no claims against Landlord and (b) Landlord has fulfilled all of its obligations under the Lease required to be fulfilled by Landlord. 4. The Premises consist of approximately ten thousand two hundred seventy-three (10,273) rentable square feet. 5. The amount of Base Rent and the portion of the Lease Term during which such Base Rent is payable shall be determined from the following table:
Applicable Portion of Lease Rate Monthly Base --------------------------- Per/Rentable Rent Sq. Ft./ Annual Installment Beginning Ending Annum Base Rent (Annual / 12) --------- ------ ----- --------- ------------- $16.75 $150,750.00* $12,562.50* $17.25 $155,250.00* $12,937.50* $17.75 $159,750.00* $13,312.50* $18.25 $187,482.25 $15,623.52 $18.75 $192,618.75 $16,051.56 $19.25 $197,755.25 $16,479.60 $19.75 $202,891.75 $16,907.65 $20.25 $208,028.25 $17,335.69 $20.75 $213,164.75 $17,763.73 $21.25 $218,301.25 $18,191.77 $21.75 $223,437.75 $18,619.81
- ---------- * Note: Annual and monthly Base Rent for months 01 through 36 of the Lease Term as set forth in the above table have been calculated as if the Premises contained only nine thousand rentable square feet (9,000), but is subject to the terms and conditions set forth below. The above rent schedule begins on the first day of the first full month of the Lease Term. If the Commencement Date is a date other than the first day of a calendar month, Base Rent for the partial month in which the Commencement Date occurs shall be at the same rate as months 01 through 12, but shall be prorated as provided in Paragraph 3.2 hereof and shall be payable on the Commencement Date. Notwithstanding the foregoing, provided that all Base Rent and Additional Rent then due has been paid and no Event of Default then exists, then subject to the terms and conditions set forth below Landlord Ex. D-1 shall abate (a) all Base Rent applicable to the Premises for (i) the period from __________ through ___________ [insert months 01 and 02], (ii) the period from __________ through ___________ [insert month 37], (iii) the period from __________ through ___________ [insert month 49], (iv) the period from __________ through ___________ [insert month 61], and (v) the period from __________ through ___________ [insert month 73] (collectively, the "Full Abatement Periods"). Notwithstanding anything herein to the contrary, (a) although the Premises consist of ten thousand two hundred seventy-three (10,273) rentable square feet, Tenant shall pay Base Rent during the period from [insert months 01 through 36] (the "Partial Abatement Period") of the Lease Term calculated as if the Premises contained only nine thousand rentable square feet (9,000), and the Base Rent in excess thereof which would otherwise be payable hereunder based upon the Base Rent rate per rentable square foot set forth in the above table shall be abated subject to and in accordance with the terms hereof, and (b) if this Lease is terminated prior to the expiration of the Lease Term as a result of a default by Tenant, in addition to all other damages to which Landlord may be entitled under the Lease and applicable law, Tenant immediately and without notice shall pay Landlord the full amount of all Base Rent which had been abated as aforesaid for the Full Abatement Periods and the Partial Abatement Period, and Landlord's damages for future rent shall be calculated as if any future Full Abatement Periods and Partial Abatement Period did not exist. Tenant acknowledges and agrees that Tenant shall be liable for all Additional Rent payable during the Full Abatement Periods and the Partial Abatement Period, including, without limitation, Use and Occupancy Taxes. 6. Tenant's Pro Rata Share of Operating Costs is 10,273/238,865 = four and three hundred one one-thousandths percent (4.301%), which shall be final, conclusive and controlling during the Lease Term for all purposes. 7. Tenant's Pro Rata Share of Property Taxes is 10,273/240,594 = four and two hundred seventy one-thousandths percent (4.270%), which shall be final, conclusive and controlling during the Lease Term for all purposes. Dated:______________________________ Dated:_____________________________ LANDLORD: TENANT: - --------- ------- MULTI-EMPLOYER PROPERTY TRUST, a trust United Bank of Philadelphia, organized under 12 C.F.R. Section 9.18 a Pennsylvania corporation By: Kennedy Associates Real Estate By:________________________________ Counsel, Inc., Authorized Signatory Name: Evelyn F. Smalls Its: President By:______________________________ Name:____________________________ Ex. D-3 LANDLORD ACKNOWLEDGEMENT ) ) ss. ) On this _____ day of _______, 2005, before me personally appeared _________________________, to me known to be a _____________________ of Kennedy Associates Real Estate Counsel, Inc., the corporation that executed the within and foregoing instrument as authorized signatory of the Multi-Employer Property Trust, and acknowledged said instrument to be the free and voluntary act and deed of corporation as such authorized signatory, for the uses and purposes therein mentioned, and on oath stated that __________(he or she) was authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. Name: _________________________________________ NOTARY PUBLIC in and for _______________________, residing at ____________________. My appointment expires: ______________________. [NOTARIAL SEAL] TENANT ACKNOWLEDGEMENT (CORPORATION) ) ) ss. ) On this _______ day of _______________, 2005, before me, a Notary Public in and for the ________________ of ___________________________, personally appeared Evelyn F. Smalls, the President of United Bank of Philadelphia, the Pennsylvania corporation that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that s/he/they was/were authorized to execute said instrument. WITNESS my hand and official seal hereto affixed the day and year first as above written. Name: ___________________________________________ NOTARY PUBLIC in and for the State of ___________, residing at ____________________. My appointment expires: ______________________. [NOTARIAL SEAL] Ex. D-3 EXHIBIT E to Lease RULES AND REGULATIONS --------------------- 1. No sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building or Land without the prior written consent of the Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person chosen by Landlord. 2. If Landlord objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, Tenant shall immediately discontinue such use. No awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 3. Tenant shall not obstruct any sidewalk, halls, passages, exits, entrances, elevators, escalators, or stairways of the Building. The halls, passages, exits, entrances, elevators, escalators and stairways are not open to the general public. Landlord shall in all cases retain the right to control and prevent access to such areas of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Land, Building and the Building's tenants; provided that, nothing in this Lease contained shall be construed to prevent such access to persons with whom any Tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. Tenant shall not go upon the roof of the Building. 4. The directory of the Building will be provided exclusively for the display of the name and location of tenants only, and Landlord reserves the right to exclude any other names therefrom. 5. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively by contractors approved by Landlord and shall be an Operating Expense unless otherwise agreed by Landlord and Tenant. Except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Cleaning and janitorial services shall be provided five (5) days per week. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. Landlord shall not in any way be responsible to any Tenant for any loss of property on the Premises, however occurring, or for any damage to any Tenant's property by the janitor, any of Landlord's Agents or any other person. 6. Landlord will furnish Tenant, free of charge, two (2) keys to each door lock in the Premises. Landlord may make a reasonable charge for any additional keys. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install a new additional lock or bolt on any door of its Premises. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefor. 7. HVAC service shall be provided to the Premises Monday through Friday (excluding holidays) from 8:00 a.m. to 6:00 p.m. and Saturday (excluding holidays) from 8:00 a.m. to 1:00 p.m. If Tenant shall require after-hours HVAC, Tenant may request such service by notifying Landlord's Manager not later than 11:00 a.m. of the day prior to the day on which such after-hours service shall be needed, and not later than 2:00 p.m. on the Thursday preceding any weekend for which such after-hours service shall be needed. Tenant shall pay for such additional HVAC service at Landlord hourly rate in effect from time to time and shall pay all charges therefor when and as billed by Landlord. Such charges shall be deemed Additional Rent under the Lease. 8. If Tenant requires Telecommunication Services, computer circuits, burglar alarm or similar services or other utility services, it shall first obtain Landlord's approval of the construction or installation of such services. Application for such services shall be made in accordance with the procedure prescribed by Landlord in subsection 3.5.2 of the Lease. 9. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by Governmental Requirements. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the Ex. E-2 weight. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space in the Building or to any other tenant in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Building must be acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities permitted by the Lease. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations nor shall Tenant bring into or keep in or about the Premises any birds or animals. 11. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord or approved in writing by Landlord. 12. Tenant shall not waste any utility provided by Landlord and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air-conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice. 13. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 14. Landlord reserves the right to exclude from the Building between the hours of 6 p.m. and 7 a.m. the following day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays, any person unless that person is known to the person or employee in charge of the Building and has a pass or is properly identified. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord shall not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. 15. Tenant shall close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and electricity, gas or air outlets, other than that needed to maintain critical business processes, before Tenant and its employees leave the Premises. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 16. Tenant shall not obtain for use on the Premises ice, drinking water, food, beverage, towel or other similar services, except at such hours and under such regulations as may be fixed by Landlord and are commercially reasonable. 17. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be deposited in them. The expenses of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by Tenant if it or its employees or invitees shall have caused it. 18. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any room-to-room solicitation of business from other tenants in the Building. Tenant shall not use the Premises for any business or activity other than that specifically provided for in the Lease. 19. Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. Other than the usual and customary cellular telephones, Tenant shall not install or utilize any wireless Telecommunication Facilities, including antenna and satellite receiver dishes within the Premises or on, in, or about the Building without first obtaining Landlord's prior written consent and Landlord at its option may require the entry of a supplemental agreement with respect to such construction or installation. Tenant shall comply with all instructions for installation and shall pay or shall cause to be paid the entire cost of such installations. Application for such facilities shall be made in the same manner and shall be subject to the same requirements as specified for Telecommunication Services and Telecommunication Facilities in the paragraph of the Ex. E-2 Lease entitled "Utilities". Supplemental rules and regulations may be promulgated by Landlord specifying the form of and information to be included with the application and establishing procedures, regulations and controls with respect to the installation and use of such wireless Telecommunication Facilities. 20. With the exception of hanging pictures and the like on the walls, Tenant shall not mark, drive nails, screws or drill into the partitions, woodwork or plaster or in any way deface the Premises. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule. Tenant also shall repair any damage resulting from hanging pictures and the like on the walls. 21. Tenant shall not install, maintain or operate upon the Premises any vending machine without the written consent of Landlord. 22. Canvassing, soliciting and distribution of handbills or any other written material, and peddling in the Building or Land are prohibited, and Tenant shall cooperate to prevent the same. 23. Landlord reserves the right to exclude or expel from the Building and Land any person who, in Landlord's judgment, is intoxicated, under the influence of liquor or drugs or in violation of any of these Rules and Regulations. 24. Tenant shall store all of its trash and garbage within the Premises. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. 25. The Premises shall not be used for lodging or any improper or immoral or objectionable purpose. No cooking shall be done or permitted by Tenant, except that use by Tenant of Underwriters' Laboratory approved equipment for microwaves and brewing coffee, tea, hot chocolate and similar beverages shall be permitted; provided that, such equipment and its use is in accordance with all Governmental Requirements. 26. Tenant shall not use in the Premises or in the public halls of the Building any hand truck except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. 27. Without the prior written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 28. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 29. Tenant assumes any and all responsibility for protecting the Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 30. The requirements of Tenant will be attended to only upon appropriate application to the Manager of the Building by an authorized individual. Employees of Landlord are not required to perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord is required to admit Tenant to any space other than the Premises without specific instructions from Landlord. 31. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other person, nor prevent Landlord from thereafter revoking such waiver and enforcing any such Rules and Regulations against any or all of the tenants of the Building. 32. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the covenants and conditions of any lease of premises in the Building. If any provision of these Rules and Regulations conflicts with any provision of the Lease, the terms of the Lease shall prevail. 33. Landlord reserves the right to make such other and reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, the care and cleanliness of the Building and Land, the preservation of good order in the Building and the maintenance or enhancement of the value of the Building as a rental property. Tenant agrees to abide by all the Rules and Regulations stated in this exhibit and any additional rules and regulations which are so made by Landlord. 34. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant and Tenant's Agents. Ex. E-3 EX-10 3 exh10-e.txt EXHIBIT 10(E) EVELYN SMALLS' EMPLOYMENT CONTRACT Exhibit 10(e) Evelyn F. Smalls' Employment Agreement, dated November 1, 2004 Exhibit 10(e) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, effective as of November 1, 2004 (the "Effective Date") 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 "Executive"), who resides at __________________________________________. WITNESSETH: WHEREAS, the Bank is a Pennsylvania bank, incorporated on September 17, 1990 as a Pennsylvania-charted commercial bank; and WHEREAS, the Executive is currently serving as President and Chief Executive Officer of the Bank; and WHEREAS, the Bank desires to continue to have the benefits of the Executive's services as President and Chief Executive Officer and the Executive desires to continue to serve in such capacity for the Bank; WHEREAS, the parties desire to enter into this Employment Agreement setting forth the terms and conditions of the employment relationship between the Bank and the Executive; NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein the Bank and the Executive, each intending to be legally bound hereby, agree as follows: EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 1 of 7 1. Duties and Term. a. Duties and Authority. The Bank hereby employs the Executive to serve in the capacity of President and Chief Executive Officer of the Bank and the Executive agrees to continue in employment in such capacity with the Bank from the Effective Date hereof through the term of this Agreement. As President and Chief Executive Officer, the Executive shall 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 perform such additional duties of a managerial or executive nature consistent with her title as will promote the profitability and growth of the Bank or as the Board of Directors of the Bank (the "Board") may from time to time reasonably direct. b. Devotion to Duties. During the term of this Agreement, the Executive will devote substantially all of her skill, knowledge and working time to the conscientious performance of her duties, except for vacation time in accordance with the Employer's vacation policies and Section 2(e), absence for sickness or similar disability in accordance with the Employer's paid time off policies, and authorized leaves of absence. To the extent that it does not significantly interfere with the performance of the Executive's duties hereunder, it shall not be a violation of this Agreement for the Executive to (i) serve on corporate, civic or charitable boards or committees, if and to the extent approved by the Board, and (ii) manage personal investments. c. Term of Agreement. The term of the Executive's employment under this Agreement shall commence upon the Effective Date of this Agreement and shall continue until October 31, 2007 unless the employment of the Executive is sooner terminated pursuant to Section 3, 4, or 5 of this Agreement. The term of this Agreement shall be extended upon agreement of the parties at any time prior to the expiration date. The period during which the Executive is employed pursuant to this Agreement shall be referred to as the "Employment Term." EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 2 of 7 2. Compensation. a. Base Salary. During the first year of the Employment Term, the Bank shall pay the Executive an annual base salary ("Base Salary") of $160,000 payable in equal bi-weekly installments or as the parties otherwise agree. The Board will review the Executive's Base Salary annually during the Executive's Employment Period and, at its discretion, may increase (but not decrease) such Base Salary from time to time based upon the performance of the Executive, the financial condition of the Employer, prevailing industry salary scales and such other factors as the Board shall consider relevant. Any increase in annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. b. Annual Bonus. During each year of the Employment Term, the Executive shall have the opportunity to receive an annual cash bonus ("Annual Bonus") for each fiscal year. The target Annual Bonus potential each year applicable to the Executive shall be 30% of her Base Salary, and the maximum Annual Bonus shall not exceed 45% of her Base Salary. The Annual Bonus for each fiscal year shall be determined by the Board based on the Bank's achievement of specified financial performance targets for such fiscal year, which are set in advance of such fiscal year by the Board. c. Employee Benefit Plans. During the Employment Term, the Executive shall be entitled to participate in all retirement, health and other welfare plans maintained by the Bank, as they may be established or amended from time to time, at levels commensurate with her then current period of service, compensation, and position. EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 3 of 7 d. Life Insurance. The Bank shall provide term life insurance on the life of the Executive payable to the beneficiary designated by the Executive in an amount equal to two times her Base Salary. e. Vacation. The Executive shall be entitled to four (4) weeks of vacation per year, which shall be taken at such time or times as the Executive and the Bank reasonably agree. f. Reimbursement of Expenses. The Bank shall reimburse the Executive for all items of travel, entertainment and other expense reasonably incurred by her on behalf of the Bank upon presentation to the Bank of appropriate documentation reflecting such items of expense. g. Automobile Allowance. The Bank shall reimburse the Executive for the cost of leasing an automobile and the cost of insurance on such automobile up to a maximum amount of $500 per month. 3. Death or Total Disability of the Executive. a. Death. In the event of the death of the Executive during the Employment Term, this Agreement shall terminate effective as of the date of the Executive'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 Executive for a period of 90 consecutive days during the Employment Term, the Bank shall have the right to terminate the Executive's employment hereunder after such 90 consecutive days of Total Disability by giving the Executive 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 Executive unable to perform the principal duties, functions and responsibilities required of her hereunder. EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 4 of 7 4. Discharge for Cause. The Bank may immediately discharge the Executive and terminate her employment hereunder for the following reasons: (i) conviction for commission of any felony, or an equivalent offense involving dishonesty with respect to the Bank, during the Employment Term; (ii) the willful engaging by the Executive in conduct or willfully failing to act in accordance with her duties, which is demonstrably and materially injurious to the Bank, whether monetarily or otherwise, including acts and omissions that constitute gross negligence; (iii) the Executive's commission of an act of material dishonesty or fraud in her duties; (iv) the continual and willful failure to perform her duties after being given a 30-day written notice thereof and a reasonable opportunity to be heard and improve; or (v) her breach of any fiduciary duty owing to the Bank. No act or failure to act by an Executive shall be considered "willful" unless done or not done by the Executive in bad faith and without reasonable belief that the Executive's action or omission was in the best interest of the Bank. Upon discharge by the Bank in accordance with this Section 4, 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. Termination of this Agreement for Reasons Other than Discharge for Cause. a. General. Except as otherwise provided in Section 5(b), upon termination of this Agreement, all obligations of the Bank and the Executive shall immediately cease; provided, however, the Bank shall pay the Executive the unpaid portion, if any, of the Executive's Base Salary accrued for the period up to the date of termination and payable to the Executive pursuant to Section 2(a) hereof, and all vested, nonforfeitable amounts owing and accrued at the date of termination under any compensation or benefit plan, program, or arrangements in which the Executive theretofore participated, under the terms and conditions of such plans, programs, and arrangements. EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 5 of 7 b. Discharge by the Bank Other than For Cause. In addition to any amounts due the Executive under Section 5(a), if the Bank discharges the Executive other than for "cause" as described in Section 4, the Bank shall make a cash payment to the Executive in the amount of her annual Base Salary at the time of discharge, payable in equal monthly installments for a period of 12 months, beginning on the date of termination. 6. Amendments. No provisions of the Agreement may be modified, waived, or discharged unless such modification, waiver or discharge is approved by the Board or a person authorized thereby and is agreed to in writing by the Executive and such officer as may be specifically designated by the Board. No waiver by any party hereto at any time of any breach by any other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No waiver of any provision of this Agreement shall be implied from any course of dealing between or among the parties hereto or from any failure by any party hereto to assert its rights hereunder on any occasion or series of occasions. 7. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. 8. Construction. This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania, without regard to conflicts of law principles, except as insofar as federal law may be applicable. EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 6 of 7 9. Assignment. This Agreement is personal to each of the parties. Neither party may assign or delegate any of its, or her, rights or obligations without the prior written consent of the other. 10. 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. 11. Entire Agreement. Except as otherwise expressly provided herein, this Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof, and all promises, representations, understandings, arrangements and prior agreements relating to such subject matter (including those made to or with the Executive by any other person or entity) are merged herein and superseded hereby. IN WITNESS WHEREOF, this Agreement has been executed by the Bank and by the Executive this ___________ day of ________________, 2004. UNITED BANK OF PHILADELPHIA BY: ------------------------------------------- Chairman of the Board ------------------------------------------- Evelyn Smalls EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 7 of 7 EX-10 4 exh10-f.txt EXHIBIT 10(F) BRENDA HUDSON-NELSONS' CONTRACT Exhibit 10(f) Brenda Hudson-Nelson's Employment Agreement, dated November 1, 2004 Exhibit 10(f) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, effective as of November 1, 2004 (the "Effective Date") 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 "Executive"), who resides at ________________________________ . WITNESSETH: WHEREAS, the Bank is a Pennsylvania bank, incorporated on September 17, 1990 as a Pennsylvania-charted commercial bank; and WHEREAS, the Executive is currently serving as Senior Vice President and Chief Financial Officer of the Bank; and WHEREAS, the Bank desires to continue to have the benefits of the Executive's services as Senior Vice President and Chief Financial Officer and the Executive desires to continue to serve in such capacity for the Bank; WHEREAS, the parties desire to enter into this Employment Agreement setting forth the terms and conditions of the employment relationship between the Bank and the Executive; NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein the Bank and the Executive, each intending to be legally bound hereby, agree as follows: EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 1 of 7 1. Duties and Term. a. Duties and Authority. The Bank hereby employs the Executive to serve in the capacity of Senior Vice President and Chief Financial Officer of the Bank and the Executive agrees to continue in employment in such capacity with the Bank from the Effective Date hereof through the term of this Agreement. As Senior Vice President and Chief Financial Officer, the Executive shall be responsible for financial and operational matters of the Bank and perform such additional duties of a managerial or executive nature consistent with her title as will promote the profitability and growth of the Bank or as the President and Chief Executive Officer or the Board of Directors of the Bank (the "Board") may from time to time reasonably direct. b. Devotion to Duties. During the term of this Agreement, the Executive will devote substantially all of her skill, knowledge and working time to the conscientious performance of her duties, except for vacation time in accordance with the Employer's vacation policies and Section 2(e), absence for sickness or similar disability in accordance with the Employer's paid time off policies, and authorized leaves of absence. To the extent that it does not significantly interfere with the performance of the Executive's duties hereunder, it shall not be a violation of this Agreement for the Executive to (i) serve on corporate, civic or charitable boards or committees, if and to the extent approved by the Board, and (ii) manage personal investments. c. Term of Agreement. The term of the Executive's employment under this Agreement shall commence upon the Effective Date of this Agreement and shall continue until October 31, 2007, unless the employment of the Executive is sooner terminated pursuant to Section 3, 4, or 5 of this Agreement. The term of this Agreement shall be extended upon agreement of the parties at any time prior to the expiration date. The period during which the Executive is employed pursuant to this Agreement shall be referred to as the "Employment Term." EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 2 of 7 2. Compensation. a. Base Salary. During the first year of the Employment Term, the Bank shall pay the Executive an annual base salary ("Base Salary") of $115,000 payable in equal bi-weekly installments or as the parties otherwise agree. The Board will review the Executive's Base Salary annually during the Executive's Employment Period and, at its discretion, may increase (but not decrease) such Base Salary from time to time based upon the performance of the Executive, the financial condition of the Employer, prevailing industry salary scales and such other factors as the Board shall consider relevant. Any increase in annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. b. Annual Bonus. During each year of the Employment Term, the Executive shall have the opportunity to receive an annual cash bonus ("Annual Bonus") for each fiscal year. The target Annual Bonus potential each year applicable to the Executive shall be 22% of her Base Salary, and the maximum Annual Bonus shall not exceed 33% of her Base Salary. The Annual Bonus for each fiscal year shall be determined by the Board based on the Bank's achievement of specified financial performance targets for such fiscal year, which are set in advance of such fiscal year by the Board. c. Employee Benefit Plans. During the Employment Term, the Executive shall be entitled to participate in all retirement, health and other welfare plans maintained by the Bank, as they may be established or amended from time to time, at levels commensurate with her then current period of service, compensation, and position. d. Life Insurance. The Bank shall provide term life insurance on the life of the Executive payable to the beneficiary designated by the Executive in an amount equal to two times her Base Salary. EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 3 of 7 e. Vacation. The Executive shall be entitled to four (4) weeks of vacation per year, which shall be taken at such time or times as the Executive and the Bank reasonably agree. f. Reimbursement of Expenses. The Bank shall reimburse the Executive for all items of travel, entertainment and other expense reasonably incurred by her on behalf of the Bank upon presentation to the Bank of appropriate documentation reflecting such items of expense. g. Automobile Allowance. The Bank shall reimburse the Executive for the cost of leasing an automobile and the cost of insurance on such automobile up to a maximum amount of $500 per month. 3. Death or Total Disability of the Executive. a. Death. In the event of the death of the Executive during the Employment Term, this Agreement shall terminate effective as of the date of the Executive'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 Executive for a period of 90 consecutive days during the Employment Term, the Bank shall have the right to terminate the Executive's employment hereunder after such 90 consecutive days of Total Disability by giving the Executive 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 Executive unable to perform the principal duties, functions and responsibilities required of her hereunder. EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 4 of 7 4. Discharge for Cause. The Bank may immediately discharge the Executive and terminate her employment hereunder for the following reasons: (i) conviction for commission of any felony, or an equivalent offense involving dishonesty with respect to the Bank, during the Employment Term; (ii) the willful engaging by the Executive in conduct or willfully failing to act in accordance with her duties, which is demonstrably and materially injurious to the Bank, whether monetarily or otherwise, including acts and omissions that constitute gross negligence; (iii) the Executive's commission of an act of material dishonesty or fraud in her duties; (iv) the continual and willful failure to perform her duties after being given a 30-day written notice thereof and a reasonable opportunity to be heard and improve; or (v) her breach of any fiduciary duty owing to the Bank. No act or failure to act by an Executive shall be considered "willful" unless done or not done by the Executive in bad faith and without reasonable belief that the Executive's action or omission was in the best interest of the Bank. Upon discharge by the Bank in accordance with this Section 4, 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. Termination of this Agreement for Reasons Other than Discharge for Cause. a. General. Except as otherwise provided in Section 5(b), upon termination of this Agreement, all obligations of the Bank and the Executive shall immediately cease; provided, however, the Bank shall pay the Executive the unpaid portion, if any, of the Executive's Base Salary accrued for the period up to the date of termination and payable to the Executive pursuant to Section 2(a) hereof, and all vested, nonforfeitable amounts owing and accrued at the date of termination under any compensation or benefit plan, program, or arrangements in which the Executive theretofore participated, under the terms and conditions of such plans, programs, and arrangements. EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 5 of 7 b. Discharge by the Bank Other than For Cause. In addition to any amounts due the Executive under Section 5(a), if the Bank discharges the Executive other than for "cause" as described in Section 4, the Bank shall make a cash payment to the Executive in the amount of her annual Base Salary at the time of discharge, payable in equal monthly installments for a period of 12 months, beginning on the date of termination. 6. Amendments. No provisions of the Agreement may be modified, waived, or discharged unless such modification, waiver or discharge is approved by the Board or a person authorized thereby and is agreed to in writing by the Executive and such officer as may be specifically designated by the Board. No waiver by any party hereto at any time of any breach by any other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No waiver of any provision of this Agreement shall be implied from any course of dealing between or among the parties hereto or from any failure by any party hereto to assert its rights hereunder on any occasion or series of occasions. 7. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. 8. Construction. This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania, without regard to conflicts of law principles, except as insofar as federal law may be applicable. 9. Assignment. This Agreement is personal to each of the parties. Neither party may assign or delegate any of its, or her, rights or obligations without the prior written consent of the other. EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 6 of 7 10. 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. 11. Entire Agreement. Except as otherwise expressly provided herein, this Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof, and all promises, representations, understandings, arrangements and prior agreements relating to such subject matter (including those made to or with the Executive by any other person or entity) are merged herein and superseded hereby. IN WITNESS WHEREOF, this Agreement has been executed by the Bank and by the Executive this ___________ day of ________________, 2004. UNITED BANK OF PHILADELPHIA BY: ------------------------------------------- Chairman of the Board ------------------------------------------- Brenda Hudson-Nelson EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 7 of 7 EX-14 5 exh14.txt CODE OF ETHICS Exhibit 14 UNITED BANK OF PHILADELPHIA CODE OF BUSINESS CONDUCT AND ETHICS Adopted by the Board of Directors on March 24, 2004 Introduction This Code of Business Conduct and Ethics (the "Code") of United Bank of Philadelphia (the "Bank") covers a wide range of business practices and procedures. It does not cover every issue that may arise, but it sets out basic principles to guide all employees of the Bank, including our executive and senior financial officers. All of our employees must conduct themselves accordingly and seek to avoid even the appearance of improper behavior. The Code should also be provided to and followed by the Bank's agents and representatives, including consultants. If a law conflicts with a policy in this Code, you must comply with the law. If you have any questions about these conflicts, you should ask your supervisor how to handle the situation. Those who violate the standards in this Code will be subject to disciplinary action, up to (and including) termination of employment. If you are in a situation that you believe may violate or lead to a violation of this Code, follow the guidelines described in Section 14 of this Code. 1. Compliance with Laws, Rules and Regulations Obeying the law, both in letter and in spirit, is the foundation on which the Bank's ethical standards are built. All employees must respect and obey the laws of the cities, states and country in which we operate. Although not all employees are expected to know the details of these laws, it is important to know enough to determine when to seek advice from supervisors, managers or other appropriate personnel. If requested, the Bank will hold information and training sessions to promote compliance with laws, rules and regulations, including insider-trading laws. 2. Conflicts of Interest A "conflict of interest" exists when a person's private interest interferes in any way with the interests of the Bank. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her work for the Bank objectively and effectively. Conflicts of interest may also arise when an employee, officer or director, or members of his or her family, receives improper personal benefits as a result of his or her position in the Bank. Loans to, or guarantees of obligations of, employees and their family members may also create conflicts of interest. It is almost always a conflict of interest for a Bank employee to work simultaneously for a competitor, customer or supplier. You are not allowed to work for a competitor as a consultant or board member. The best policy is to avoid any direct or indirect business connection with our customers, suppliers or competitors, except on our behalf. Conflicts of interest are prohibited as a matter of Bank policy, except under guidelines approved by the Board of Directors. Conflicts of interest may not always be clear-cut, so if you have a question, you should consult with higher levels of management. Any employee, officer or director who becomes aware of a conflict or potential conflict should bring it to the attention of a supervisor, manager or other appropriate personnel or consult the procedures described in Section 14 of this Code. 1 3. Insider Trading Employees who have access to confidential information are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of our business. All non-public information about the Bank should be considered confidential information. To use non-public information for personal financial benefit or to "tip" others who might make an investment decision on the basis of this information is not only unethical but also illegal. In order to assist with compliance with laws against insider trading, the Bank has adopted a specific policy governing employees' trading in securities of the Bank. This policy has been distributed to every employee. If you have any questions, please contact President and CEO to discuss. 4. Corporate Opportunities Employees, officers and directors are prohibited from taking for themselves personally opportunities that are discovered through the use of corporate property, information or position without the consent of the Board of Directors. No employee may use corporate property, information, or position for improper personal gain, and no employee may compete with the Bank directly or indirectly. Employees, officers and directors owe a duty to the Bank to advance its legitimate interests when the opportunity to do so arises. 5. Competition and Fair Dealing We seek to outperform our competition fairly and honestly. Stealing proprietary information, possessing trade secret information that was obtained without the owner's consent, or inducing such disclosures by past or present employees of other companies is prohibited. Each employee should endeavor to respect the rights of and deal fairly with the Bank's customers, suppliers, competitors and employees. No employee should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice. The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain unfair advantage with customers. No gift or entertainment should ever be offered, given, provided or accepted by any Bank employee, family member of an employee or agent unless it: (1) is not a cash gift, (2) is consistent with customary business practices, (3) is not excessive in value, (4) cannot be construed as a bribe or payoff, and (5) does not violate any laws or regulations. Please discuss with your supervisor any gifts or proposed gifts which you are not certain are appropriate. 6. Discrimination and Harassment The diversity of the Bank's employees is a tremendous asset. We are firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment of any kind. Examples include, but are not limited to, derogatory comments based on racial or ethnic characteristics and unwelcome sexual advances. 7. Health and Safety The Bank strives to provide each employee with a safe and healthy work environment. Each employee has responsibility for maintaining a safe and healthy workplace for all employees by following safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions. Violence and threatening behavior are not permitted. Employees should report to work in condition to perform their duties, free from the influence of illegal drugs or alcohol. The use of illegal drugs in the workplace will not be tolerated. 2 8. Record-Keeping The Bank requires honest and accurate recording and reporting of information in order to make responsible business decisions. For example, only the true and actual number of hours worked should be reported. Many employees regularly use business expense accounts, which must be documented and recorded accurately. If you are not sure whether a certain expense is legitimate, ask your supervisor or your Chief Financial Officer. All of the Bank's books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Bank's transactions and must conform both to applicable legal requirements and to the Bank's system of internal controls. Unrecorded or "off the books" funds or assets should not be maintained unless permitted by applicable law or regulation. Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guesswork or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e-mail, internal memos and formal reports. Records should always be retained or destroyed according to the Bank's record retention policies. In accordance with those policies, in the event of litigation or governmental investigation please consult the highest level of management. 9. Confidentiality Employees must maintain the confidentiality of confidential information entrusted to them by the Bank or its customers, except when required by laws or regulations. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Bank or its customers, if disclosed. It also includes information that suppliers and customers have entrusted to us. The obligation to preserve confidential information continues even after employment ends. 10. Protection and Proper Use of Bank Assets All employees should endeavor to protect the Bank's assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Bank's profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. Bank equipment should not be used for non-Bank business, though incidental personal use may be permitted. The obligation of employees to protect the Bank's assets includes its proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks and copyrights, as well as business, marketing and service plans, engineering and manufacturing ideas, designs, databases, records, salary information and any unpublished financial data and reports. Unauthorized use or distribution of this information would violate Bank policy. It could also be illegal and result in civil or even criminal penalties. 11. Payments to Government Personnel The U.S. Foreign Corrupt Practices Act prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. It is strictly prohibited to make illegal payments to government officials of any country. In addition, the U.S. government has a number of laws and regulations regarding business gratuities which may be accepted by U.S. government personnel. The promise, offer or delivery to an official or employee of the U.S. government of a gift, favor or other gratuity in violation of these rules would not only violate Bank policy but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules. 3 12. Waivers of the Code of Business Conduct and Ethics Any waiver of this Code for executive officers or directors maybe made only by the Board of Directors or the Audit Committee of the Board of Directors responsible for ethics oversight and will be promptly disclosed as required by law or stock exchange regulation. 13. Reporting any Illegal or Unethical Behavior Employees are encouraged to talk to supervisors, managers or other appropriate personnel about observed illegal or unethical behavior and when in doubt about the best course of action in a particular situation. It is the policy of the Bank not to allow retaliation for reports of misconduct by others made in good faith by employees. Employees are expected to cooperate in internal investigations of misconduct. Further, any employee may submit a good-faith concern regarding questionable accounting or auditing matters without fear of dismissal or retaliation of any kind. 14. Compliance Procedures We must all work to ensure prompt and consistent action against violations of this Code. However, in some situations it is difficult to know if a violation has occurred. Since we cannot anticipate every situation that will arise, it is important that we have a way to approach a new question or problem. These are the steps to keep in mind: o Make sure you have all the facts. In order to reach the right solutions, we must be as fully informed as possible. o Ask yourself: What specifically am I being asked to do? Does it seem unethical or improper? This will enable you to focus on the specific question you are faced with, and the alternatives you have. Use your judgment and common sense; if something seems unethical or improper, it probably is. o Clarify your responsibility and role. In most situations, there is shared responsibility. Are your colleagues informed? It may help to get others involved and discuss the problem. o Discuss the problem with your supervisor. This is the basic guidance for all situations. In many cases, your supervisor will be more knowledgeable about the question and will appreciate being brought into the decision-making process. Remember that it is your supervisor's responsibility to help solve problems. o Seek help from Bank resources. In the rare case where it may not be appropriate to discuss an issue with your supervisor, or where you do not feel comfortable approaching your supervisor with your question, discuss it with your supervisor superior. o You may report ethical violations in confidence and without fear of retaliation. If your situation requires that your identity be kept secret, your anonymity will be protected. The Bank does not permit retaliation of any kind against employees for good faith reports of ethical violations. o Always ask first, act later: If you are unsure of what to do in any situation, seek guidance before you act. 15. Special Considerations for Chief Executive and Senior Financial Officers In addition to the foregoing provisions of this Code, the Chief Executive Officer and the Chief Financial Officer are subject to the following additional specific policies: o The Chief Executive Officer and the Chief Financial Officer are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the Bank with the Securities and Exchange Commission. Accordingly, it is the responsibility of the Chief Executive Officer and the Chief Financial Officer promptly to bring to the attention of the Board any material information of which he or she may become aware that affects the disclosures made by the Bank in its public filings or otherwise assist the Board in fulfilling its responsibilities. 4 o The Chief Executive Officer and the Chief Financial Officer shall promptly bring to the attention of the Board of Directors and the Audit Committee any information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls which could adversely affect the Bank's ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Bank's financial reporting, disclosures or internal controls. o The Chief Executive Officer and the Chief Financial Officer shall promptly bring to the attention of the Board of Directors and the Audit Committee any information he or she may have concerning any violation of this Code, including any actual or apparent conflicts of interest between personal and professional relationships, involving any management or other employees who have a significant role in the Bank's financial reporting, disclosures or internal controls. o The Chief Executive Officer and the Chief Financial Officer shall promptly bring to the attention of the Board of Directors and the Audit Committee any information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Bank and the operation of its business, by the Bank or any agent thereof, or of violation of this Code. o The Board of Directors shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of this Code by the Chief Executive Officer and the Chief Financial Officer of the Bank. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to this Code, and shall include written notices to the individual involved that the Board of Directors has determined that there has been a violation, censure by the Board of Directors, demotion or re-assignment of the individual involved, suspension with or without pay or benefits (as determined by the Board of Directors) and termination of the individual's employment. In determining what action is appropriate in a particular case, the Board of Directors or such designee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether or not the individual in question had committed other violations in the past. * * * * * 5 EX-16 6 exh16.txt CHANGE OF CERTIFYING ACCOUNTANT FOR UBS Exhibit 16 Letter re Change of Accountant Exhibit 16 Accountants and Management Advisors Grant Thornton {logo} December 21, 2004 U.S. Securities and Exchange Commission Office of the Chief Accountant 450 Fifth Street, NW Washington, DC 20549 Re: United Bancshares, Inc. File No. 0-25976 Dear Sirs or Madams: We have read Item 4.01 of Form 8-K of United Bancshares, Inc. dated December 21, 2004 and agree with the statements concerning our Firm in paragraphs (i), (ii), (iv), and (v); however, we are not in a position to agree or disagree with the statement in the last sentence of paragraph (i) as to the reason for changing independent accountants. Very truly yours, /s/ Grant Thornton LLP - ----------------------- Grant Thornton LLP Philadelphia, Pennsylvania December 21, 2004 - -------------------------------------------------------------------------------- Suite 3100 Two Commerce Square 2001 Market Street Philadelphia, PA 19103-7080 T 215.561.4200 F 215.561.1066 W www.grantthornton.com Grant Thornton LLP US Member of Grant Thornton International EX-31 7 exh31-1.txt EXHIBIT 31.1 Exhibit 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sabanes-Oxley Act of 2002. EXHIBIT (31.1) CERTIFICATIONS I, Evelyn F. Smalls, Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of United Bancshares, Inc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) disclosed in this annual report, any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 14, 2005 /s/ Evelyn F. Smalls ----------------------------------------- Evelyn F. Smalls, Chief Executive Officer EX-31 8 exh31-2.txt EXHIBIT 31.2 Exhibit 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. EXHIBIT (31.2) CERTIFICATIONS I, Brenda Hudson-Nelson, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of United Bancshares, Inc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) disclosed in this annual report, any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 14, 2005 /s/ Brenda Hudson-Nelson -------------------------------------------- Brenda Hudson-Nelson, Chief Financial Officer EX-32 9 exh32a.txt EXHIBIT 32(A) Exhibit 32.1(a) Certification Pursuant to 18U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer attached hereto as Exhibit 31.1. EXHIBIT 32(A) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of United Bancshares, Inc. (the "Company") on Form 10-K for the year ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Evelyn F. Smalls, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Evelyn F. Smalls - ---------------------------- Evelyn F. Smalls Chief Executive Officer April 14, 2005 EX-32 10 exh32b.txt EXHIBIT 32(B) Exhibit 32.2(b) Certification Pursuant to 18U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer attached hereto as Exhibit 31.2. EXHIBIT 32 (B) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of United Bancshares, Inc. (the "Company") on Form 10-K for the year ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brenda M. Hudson-Nelson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Brenda M. Hudson-Nelson - ---------------------------- Brenda M. Hudson-Nelson Chief Financial Officer April 14, 2005 EX-99 11 exh99a.txt ADDITIONAL EXHIBITS Exhibit 99(a) Registrants Proxy Statement for its Annual Shareholders Meeting held on November 23, 2004 EXHIBIT 99 URGENT IMMEDIATE RESPONSE REQUESTED October 15, 2004 Dear Shareholder: On behalf of the Board of Directors and management of United Bancshares, Inc., I am pleased to invite you to the 2004 Annual Meeting of Shareholders of United Bancshares, Inc. which is to be held on Tuesday, November 23, 2004, at 9:00 A.M., local time, at the A.M.E First Episcopal District Headquarters, 3801 Market Street, 3rd Floor, Philadelphia, PA 19104. Accompanying this letter is a Notice of Meeting, a Proxy Statement and a Proxy Card. Also accompanying this letter is United Bancshares, Inc.'s Annual Report to its shareholders for the year 2003. Shareholders who need directions to the location of the Annual Meeting should call (215) 351-4600 between the hours of 8:30 A.M. and 4:30 P.M., local time, on any business day. I urge you to read the enclosed material carefully and to complete, sign and mail promptly the proxy card accompanying this letter so that your vote will be counted. For your convenience, a self-addressed stamped envelope is enclosed to return the completed proxy form. The officers, directors and staff of United Bank sincerely appreciate your continuing support. Sincerely, Evelyn F. Smalls President and Chief Executive Officer Enclosures UNITED BANCSHARES, INC. 300 North Third Street Philadelphia, PA 19106 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON NOVEMBER 23, 2004 Dear Shareholders, The Annual Meeting of the Shareholders of United Bancshares, Inc. will be held at 9:00 A.M., local time, on Tuesday, November 23, 2004 at the A.M.E. First Episcopal District Headquarters at 3801 Market Street, 3rd Floor, Philadelphia, PA 19104 for the following purposes: 1. To re-elect three (3) Class A directors to serve until the expiration of their four (4) year terms and one (1) Class B and one (1) Class C director to serve until the expiration of the balance of the terms of directors that retired in 2003. 2. To ratify the appointment of Grant Thornton LLP as United Bancshares, Inc.'s independent certified public accountants for the year 2004. In their discretion, the proxies are authorized to act upon such other matters as may properly come before the meeting. Reference is made to the accompanying Proxy Statement for details with respect to the foregoing matters. Only shareholders of record at the close of business on September 20, 2004, who hold shares with voting rights, are entitled to notice of and to vote at the Annual Meeting and any adjournment or postponement thereof. Such shareholders may vote in person or by proxy. By Order of the Board of Directors William B. Moore, Secretary Philadelphia, Pennsylvania October 15, 2004 IMPORTANT NOTICE To assure your representation at the Annual Meeting, please complete, date, sign, and promptly mail the enclosed Proxy Card in the return envelope. No postage is necessary if mailed in the United States. Any shareholder giving a proxy has the power to revoke it at any time prior to its use for any purpose. Shareholders who are present at the meeting may withdraw their proxy prior to its use for any purpose and vote in person. ANNUAL MEETING OF SHAREHOLDERS United Bancshares, Inc. PROXY STATEMENT INTRODUCTION Matters to be Considered at the Annual Meeting of Shareholders This Proxy Statement is being furnished to shareholders of United Bancshares, Inc. ("UBS" or "the Corporation") in connection with the solicitation of proxies by UBS for use at UBS' Annual Meeting of Shareholders to be held on Tuesday, November 23, 2004, at 9:00 A.M., or any adjournment or postponement thereof (the "Annual Meeting"). At the Annual Meeting, the shareholders will consider and vote upon (i) the re-election of three (3) Class A directors to serve until the expiration of their four (4) year terms and one (1) Class B and one (1) Class C director to serve until the expiration of the balance of the term of directors that retired in 2003, and; (ii) the ratification of the appointment of Grant Thornton LLP as the independent certified public accountants for UBS for the year 2004. The proxies are authorized to transact such other business as may properly come before the Annual Meeting or any adjournment or postponement thereof. The approximate date upon which this Proxy Statement and the Proxy are to be mailed to shareholders is October 15, 2004. The address of the executive office of UBS is 300 North Third Street, Philadelphia, Pennsylvania 19106. Date, Time and Place of Annual Meeting The Annual Meeting will be held on Tuesday, November 23, 2004, at 9:00 A.M. local time, at the A.M.E. First Episcopal District Headquarters, 3801 Market Street, 3rd Floor, Philadelphia, PA 19104. Record Date and Voting The Board of Directors of UBS has fixed the close of business on September 20, 2004 as the record date for determining holders of record of UBS' Common Stock, par value $0.01 per share, entitled to notice of and to vote at the Annual Meeting or any adjournment or postponement thereof. Each holder of record, of a voting share, is entitled to one vote per share on the matters to be considered at the Annual Meeting. The holders of a majority of the outstanding shares of UBS' Common Stock, with voting rights, present either in person or by proxy, will constitute a quorum for the transaction of business at the Annual Meeting. As of September 20, 2004, there were 873,192 shares of UBS' Common Stock outstanding with voting rights. Shares represented by properly executed proxies will be voted in accordance with the directions indicated in the proxies, unless such proxies have previously been revoked. Each properly executed proxy on which no voting directions are indicated will be voted in favor of the adoption of the proposals recommended by management of UBS, and in the discretion of the proxy agents as to any other matters which may properly come before the Annual Meeting. A proxy may be revoked by a shareholder at any time prior to its use for any purpose by giving written notice of such revocation to William B. Moore, the Secretary of UBS, at the executive office of UBS at 300 North Third Street, Philadelphia, Pennsylvania 19106 or by appearing in person at the Annual Meeting and asking to withdraw the proxy prior to its use for any purpose so that the shareholder can vote in person. A later dated proxy revokes an earlier dated proxy. UBS does not know at this time of any business, other than that stated in this Proxy Statement, which will be presented for consideration at the Annual Meeting. If any unanticipated business is properly brought before the Annual Meeting, the proxy agents will vote in accordance with their best judgment. 1 Other Matters UBS will bear the entire cost of soliciting proxies for the Annual Meeting. In addition to the use of the mail, proxies may be solicited by personal interview, telephone, telefax and telegram, by the directors, officers and employees of UBS and by UBS' wholly-owned subsidiary United Bank of Philadelphia (the "Bank"). Arrangements have been made with brokerage houses and other custodians, nominees and fiduciaries for forwarding proxy material to beneficial owners of UBS' Common Stock held of record by such persons, and UBS will reimburse them for their expenses in doing so. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth certain information known to UBS, as of September 20, 20041, with respect to the only persons to UBS' knowledge, who may be beneficial owners of more than 5% of UBS' Common Stock. Amount and Nature of Percentage of Beneficial Outstanding Ownership Corporation Name and Address of Corporation Common Stock of Beneficial Owner Common Stock Owned - ------------------- ------------ ------- Philadelphia Municipal 71,667 8.20% Retirement System 2000 Two Penn Center Philadelphia, Pennsylvania 19102 Wachovia Corporation, (formerly, First Union Corporation)(2) 50,000 5.73% 1 First Union Center Charlotte, NC 28288 - ------------------- (1) As of September 20, 2004, there were 873,192 shares of UBS' voting Common Stock outstanding. (2) Wachovia Corporation owns 241,667 shares of UBS Common Stock of which 50,000 are voting shares. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that UBS' directors and executive officers file reports of their holdings of UBS' Common Stock with the Securities and Exchange Commission (the "Commission"). Based on UBS' records and other information available to it, UBS believes that the Commission's Section 16(a) reporting requirements applicable to UBS' directors and executive officers were complied with for UBS' fiscal year ended December 31, 2003. UBS' AND BANK'S BOARD OF DIRECTORS The bylaws of UBS provide that a Board of Directors of not less than five (5) and not more than twenty-five (25) directors shall manage UBS' business. UBS' Board, as provided in the bylaws, is divided into four classes of directors: Class A, Class B, Class C and Class D, with each class being as nearly equal in number as possible. The Board of Directors has fixed the number of directors at eleven (11), with three (3) members in Class A, two (2) members in Class B, four (4) members in Class C, and two (2) members in Class D. (SEE PROPOSAL 1--ELECTION OF DIRECTORS) Under UBS' bylaws, persons elected by the Board of Directors to fill a vacancy on the Board serve as directors for the balance of the term of the director who that person succeeds. 2 The Board of Directors of UBS and the Board of Directors of the Bank meet when necessary. The Executive Committee of the Bank meets in those months when the UBS Board of Directors does not meet. The Executive Committees of UBS and the Bank act in the stead of the Boards of Directors of UBS and the Bank, respectively, and exercise the authority and powers of the Boards of Directors at intervals between meetings of the Boards of Directors insofar as may be permitted by law and have responsibility for the nomination of new directors. The Asset and Liability Management Committee of the Bank's Board meets for the purpose of managing and monitoring the Bank's exposure to interest rate risks, market risk and liquidity risk. UBS' and the Bank's Audit Committees interface with UBS' and the Bank's independent certified public accountants to review the results of the annual audit. The Bank's Compliance addresses the Bank's regulatory compliance matters. UBS has a nominating committee. UBS' Board of Directors does not have a Compensation Committee of the Board since it has no employees. Directors' Qualifications In considering any individual nominated to be a director on UBS' and the Bank's Board of Directors', the Board of Directors considers a variety of factors, including whether the candidate is recommended by executive management, the individual professional or personal qualifications, including business experience, education and community and charitable activities and the individual's familiarity with the communities in which UBS or the Bank is located or is seeking to locate. Procedures for Shareholder Nominations Section 3.4 of Article 3 UBS' bylaws provides that no shareholder shall be permitted to nominate a candidate for election as a director, unless such shareholder shall provide to the Secretary of UBS information about such candidate as is equivalent to the information concerning candidates nominated by the Board of Directors, that was contained in the UBS Proxy Statement for the immediately preceding Annual Meeting of shareholders in connection with election of directors. Such information consists of the name, age, any position or office held with UBS or the Bank, a description of any arrangement between the candidate and any other person(s), naming such persons pursuant to which he or she was nominated as a director, his/her principal occupation for the five (5) years prior to the meeting, the number of shares of UBS stock beneficially owned by the candidate and a description of any material transactions or series of transactions to which UBS or the Bank is a party and in which the candidate or any of his affiliates has a direct or indirect material interest, which description should specify the amount of the transaction and where practicable the amount of the candidates interest in the transaction. Such information shall be provided in writing not less than one hundred twenty (120) days before the first anniversary preceding the annual meeting of UBS' shareholders. The of Chairman of the Board of Directors is required to determine whether the director nominations have been made in accordance with the provisions of the bylaws, and if any nomination is defective, the nomination and any votes cast for the nominee(s) shall be disregarded. Code of Conduct UBS has a Code of Conduct ("Code") that governs the conduct of the directors, officers and employees. The Code complies with requirements of Sarbanes - Oxley Act of 2002 and the listing standards of NASDAQ and UBS provides a copy of the Code to each director, officer and employee. General Information About UBS' and Bank's Boards of Directors UBS' Board of Directors meets when necessary and during 2003 held eleven (11) meetings, including UBS' organization meeting. In 2003, the Bank's Board of Directors was scheduled to meet at least monthly, except in August and during 2003 held eleven (11) meetings. The independent directors of the UBS' and the Bank's Board of Directors will hold regularly scheduled executive sessions on a regular basis, but, in any event, not less than twice a year. Effective with the Annual Meeting in 2004, UBS has adopted a policy of requiring all of its directors to attend UBS's annual meeting. At the annual meeting held on July 29, 2003, nine (9) of UBS's twelve (12) directors attended the meeting. Information About the Committees of UBS' Board of Directors The Committees of UBS' Board of Directors are the Executive Committee and the Audit/Compliance Committee. The Executive Committee, comprised of L. Armstead Edwards (Chairman), Steven L. Sanders (Vice-Chairman), James F. Bodine, 3 Angela M. Huggins, William B. Moore, Evelyn F. Smalls, and Marionette Y. Wilson meets, when necessary, at the call of the Chairman, and to exercise the authority and powers of UBS' Board of Directors at intervals between meetings of the Board of Directors insofar as may be permitted by law. The Executive Committee held eleven (11) meetings during 2003. Information about UBS' Audit/Compliance Committee and Financial Expert The Audit/Compliance Committee, comprised of Angela M. Huggins (Chairman), James F. Bodine, L. Armstead Edwards, William B. Moore and Marionette Y. Wilson meets when necessary at the call of the Chairman. The Committee meets with the internal auditor to review audit programs and the results of audits of specific areas, as well as other regulatory compliance issues. In addition, the Committee meets with UBS' independent certified public accountants to review the results of the annual audit and other related matters. Each member of the Committee is "independent" as defined in the applicable listing standards of the National Association of Securities Dealers ("NASDAQ"). The Committee held ten (10) meetings during 2003. In February 2003, the Compliance Committee was combined with the Audit Committee and is comprised of the same members. On a quarterly basis compliance matters are addressed to included the review of regulatory compliance matters, the Bank's compliance programs and the Community Reinvestment Act (CRA) activities. The Committee held four (4) meetings in 2003. Each member of the Audit/Compliance Committee is independent and financially literate as defined by NASDAQ. The Board of Directors of the Company and the Bank have determined that Joseph T. Drennan4 is the "Financial Expert," as defined in the Securities and Exchange Commission's regulations. Information About UBS' Nominating Committee The Nominating Committee, comprised of Angela M. Huggins (Chairman), L. Armstead Edwards and Ernest L. Wright, meets at the call of the Chairman. The Committee is responsible for considering and recommending future director nominees to the Board of Directors of UBS and the Bank and the Committee will be independent and meet the requirements for independence of the NASDAQ Stock market ("NASDAQ"). The Nominating Committee a charter will be made available, without charge, upon written request by the shareholders of UBS to the corporate secretary of UBS and the charter will be attached to the Proxy Statement sent to the UBS shareholders in connection with UBS' next Annual Meeting. The Committee held three (3) meetings in 2003. Meetings of UBS' Board and its Committees The total number of meetings of UBS' Board of Directors that were held in 2003 was eleven (11). All of the incumbent directors, who were directors during 2003 (i) attended at least seventy-five percent (75%) of the total number of meetings of the Board of Directors, except Luis A. Cortes5, who attended fifty percent (50%); and (ii) all directors attended at least seventy-five percent (75%) of the aggregate of the total number of meetings held by all committees of the Board on which the director served except as follows: o William B. Moore, who attended seventy percent (70%) of all Audit Committee meetings; o Steven L. Sanders, who attended fifty-five percent (55%) of all Executive Committee meetings; o Luis A. Cortes, who did not attend any of the Compliance Committee meetings. - ---------------- Footnote Information Concerning Board Committees and Members (3) James F. Bodine was a director and served on the Board and various Board Committees until he retired in July 2003. (4) Please note that Mr. Drennan was elected to the Company's and the Bank's Boards of Directors and the Audit Committees of those Boards of Directors on March 24, 2004, and assumed his duties as a Financial Expert of the Audit Committees of the Company's and Bank's Boards of Directors on that date. (5) Luis A. Cortes was a director and served on the Board and various Board Committees until he began a leave of absence in April 2003, due to expanded work related obligations. He resigned from the Board of Directors on January 1, 2004 Information About Committees of the Bank's Board of Directors The Committees of the Bank's Board of Directors are the Executive, Asset Liability Management, Audit/Compliance Committees and the Loan Committee. 4 The Executive Committee, comprised of L. Armstead Edwards (Chairman), Steven L. Sanders (Vice-Chairman), James F. Bodine, Angela M. Huggins, William B. Moore, Evelyn F. Smalls and Marionette Y. Wilson meets, when necessary, at the call of the Chairman, to discuss and approve certain human resource matters including compensation, to ratify and approve certain of the Bank's loans and to exercise the authority and powers of the Bank's Board of Directors at intervals between meetings of the Board of Directors insofar as may be permitted by law. The Executive Committee held eleven (11) meetings during 2003. The Bank's Board of Directors does not have a Compensation Committee; the Executive Committee performs that function. The Asset Liability Management Committee, comprised of Bernard E. Anderson (Chairman), L. Armstead Edwards, James F. Bodine, Angela M. Huggins, Evelyn F. Smalls and Ernest L. Wright meets, when necessary, at the call of the Chairman, and to review and manage the Bank's exposure to interest rate risk, market risk and liquidity risk. During 2003, the Asset and Liability Management Committee held four (4) meetings. Information about the Bank's Audit/Compliance Committee The Audit/Compliance Committee comprised of Angela M. Huggins (Chairman), James F. Bodine, L. Armstead Edwards, William B. Moore, and Marionette Y. Wilson meets at least quarterly. The Audit/Compliance Committee meets with the internal auditor to review audit programs and the results of audits of specific areas, as well as other regulatory compliance issues. In addition, the Audit/Compliance Committee meets with the Bank's independent certified public accountants to review the results of the annual audit and other related matters, with the internal auditor to review audit programs and the results of audits of specific areas, as well as other regulatory compliance issues. Each member of the Audit/Compliance Committee is "independent" as defined in the applicable listing standards of the National Association of Securities Dealers. The Committee held ten (10) meetings during 2003. In February 2003, the Compliance Committee was combined with the Audit Committee and is comprised of the same members. On a quarterly basis compliance matters are addressed to include the review of regulatory compliance matters, the Bank's compliance programs and the Community Reinvestment Act (CRA) activities. The Committee held four (4) meetings during 2003. The Loan Committee, comprised of David R. Bright (Chairman), James F. Bodine, L. Armstead Edwards, Wanda M. Richards6, and Evelyn F. Smalls meets when necessary to review and approve loans that are $200,000 and over and to discuss other loan-related matters. During 2003, the Loan Committee held nine (9) meetings. Meetings of Bank's Board and its Committees The total number of meetings of the Bank's Board of Directors that were held in 2003 was eleven (11). All incumbent directors (i) attended at least seventy-five percent (75%) of the total number of meetings of the Board of Directors, except Luis A. Cortes who attended fifty percent (50%); and (ii) attended at least seventy-five percent (75%) of the aggregate of the total number of meetings held by all committees of the Board on which the director served except as follows: o William B. Moore, who attended seventy percent (70%) of all Audit Committee meetings; o Steven L. Sanders, who attended fifty-five percent (55%) of all Executive Committee meetings; and o Luis A. Cortes who did not attend any Compliance Committee meetings. - ----------- Footnote Information Concerning Board Committee Members (6) Wanda M. Richards was a director and served on the Board and various Board Committees until she resigned in June 2003. 5 BOARDS OF DIRECTORS COMPENSATION Directors Fees The normal non-officer director fee paid by the Bank is Three Hundred Fifty Dollars ($350) for attending each of the Board meeting and One Hundred Seventy-five Dollars ($175) per quarter for attending the Board of Directors' Committee meetings. Directors' fees are not paid to officer directors for attending Bank Board of Directors or Committee meetings. UBS does not pay any fees to any directors for attending UBS' Board of Directors or Committee meetings. Effective April 1, 2002, the Board of Directors elected to waive all fees for an indefinite period of time. BIOGRAPHICAL INFORMATION ABOUT CORPORATION'S DIRECTORS The following table sets forth certain biographical information. Other than as indicated below, each of the persons named below has been employed in their present principal occupation for the past five years. Age as of Name, Principal Occupation and September 20, Director Business Experience For Past Five Years 2004 Since(7) - ---------------------------------------- ------------- -------- DIRECTORS STANDING FOR RE-ELECTION Class A The terms of the following directors expire in 2008: 1. L. Armstead Edwards 62 1993 Owner and President, Edwards Entertainment, Inc. Philadelphia, PA from 1978 until the present time 2. Marionette Y. Wilson 59 2000 Retired, formerly Co-Founder/Partner, John Frazier, Inc., Philadelphia, PA from 1981 - 2002 3. Ernest L. Wright 74 1993 Founder, President and CEO of Ernest L. Wright Construction Company, Philadelphia, PA from 1976 until 2000 CONTINUING DIRECTORS Class B The terms of the following directors expire in 2005: 1. Angela M. Huggins 64 1993 Retired, formerly Vice President of Corporate Real Estate RMS Technologies, Inc., from 1990 until 1995 and currently is President and CEO of RMS Technologies Foundation since 1993 STANDING FOR ELECTION TO REMAINDER OF UNEXPIRED TERM 2. Ahsan M. Nasratullah 47 ----- President, JNA Capital, Inc. Philadelphia, PA from April 1994 to present - ------------------- Footnote Information Concerning Directors (7) Reference to service on the Boards of Directors refers to the Bank only prior to 1993 and to the Bank and UBS since 1993. 6 CONTINUING DIRECTORS Class C The terms of the following directors expire in 2006: 1. Bernard E. Anderson 66 2002 Professor of Management/Practicing Economist at the Wharton School, University of Pennsylvania, Philadelphia, PA 2. David R. Bright 65 2002 Retired, Executive Vice President, Meridian Bancorp Philadelphia, PA 3. Steven L. Sanders 44 2002 President and Co-CEO, MDL Capital Management Philadelphia, PA STANDING FOR ELECTION TO REMAINDER OF UNEXPIRED TERM 4. Joseph T. Drennan 59 ---- Retired Executive Vice President, CoreStates Bank, 1995 Currently co-founder and partner of Mulberry Consulting Group, LLC from 2001 to present CONTINUING DIRECTORS Class D The terms of the following directors expire in 2007: 1. William B. Moore 61 1993 Pastor Tenth Memorial Baptist Church, Philadelphia, PA since 1971 and Deputy Executive Director, Philadelphia Parking Authority from 2000 to present 2. Evelyn F. Smalls 59 2000 President and Chief Executive Officer of the Bank and UBS Since June of 2000; Senior Vice President of the Bank from October 1993 to May 2000 New Directors for 2004 Ahsan M. Nasratullah, President JNA Capital, Inc., of Philadelphia, Pennsylvania was recommended to be nominated to UBS' Board of Directors by James F. Bodine. Joseph T. Drennan, a former Executive Vice President of CoreStates Bank, and currently a cofounder and partner of Mulberry Consulting Group, LLC was recommended to be nominated to the UBS Board of Directors by Evelyn F. Smalls. 7 BENEFICIAL OWNERSHIP OF STOCK BY DIRECTORS, NOMIMEES AND EXECUTIVES The following table lists the beneficial ownership of shares of the UBS' Common Stock as of September 20, 2004 for each of the UBS' director, nominees and executive officers. The table also shows the total number of shares of Common Stock ownership by the director, nominees and executive officers of UBS as a group.
Common Percent of Name Stock (8,9,10) Outstanding Stock - ---- ------------- ----------------- Current Directors L. Armstead Edwards....................................... 10,833 1.0138% Marionette Y. Wilson (Frazier)............................ 21,050 1.9699% Ernest L. Wright.......................................... 7,084 * Angela M. Huggins......................................... 8,368 * Bernard E. Anderson....................................... 850 * David B. Bright........................................... 850 * Joseph T. Drennan......................................... 683 * Ahsan M. Nasratullah...................................... 833 * Steven L. Sanders......................................... 1,000 * William B. Moore.......................................... 1,834 * Evelyn F. Smalls.......................................... 450 * Certain Executive Officers Evelyn F. Smalls.......................................... 450** * Brenda M. Hudson-Nelson................................... 50 * All Current Directors and Executive Officers as a Group .. 4.9506% ***
- ------------------ Footnotes Concerning Beneficial Ownership of Stock * Less than one percent. ** Ms. Smalls is also a Director; see listing above. *** Calculated by adding the Common Stock owned plus exercisable options and dividing by the actual number of shares outstanding on September 20, 2004, plus the shares subject to the exercisable option. (8) Stock ownership information is given as of September 20, 2004, and includes shares that the individual has the right to acquire (other than by exercise of stock options) within sixty (60) days of September 20, 2004. Unless otherwise indicated, each director and each such named executive officer holds sole voting and investment power over the shares listed. (9) The number of shares "beneficially owned" in each case includes, when applicable, shares owned beneficially, directly or indirectly, by the spouse or minor children of the director, and shares owned by any other relatives of the director residing with the director. None of the directors holds title to any shares of UBS of record that such director does not own beneficially. (10) UBS does not know of any person having or sharing voting power and/or investment power with respect to more than 5% of the UBS' Common Stock other than Wachovia Corporation (formerly First Union Corporation) and Philadelphia Municipal Retirement System. (SEE SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.) 8 UBS'S AND BANK'S EXECUTIVE OFFICERS The following table sets forth certain information with respect to the current executive officers of UBS and the Bank as of September 20, 2004:
Name, Principal Occupation Age as of UBS Stock and Business Experience September 20, Office with the UBS Beneficially For Past 5 Years 2004 and/or Bank Owned -------------------------- ------------- ------------------------- ----------- Evelyn F. Smalls (11,12) 59 President and Chief Executive Officer and 450 Director of UBS and Bank Brenda M. Hudson-Nelson (13) 42 Executive Vice President and Chief Financial Officer 50 of UBS and Bank
- ------------------- Footnote Information Concerning Executive Officers (11) Ms. Smalls was elected as a director and was appointed as President and Chief Executive Officer in June 2000. Prior to that, Ms. Smalls was Senior Vice President of Human Resources and Compliance from October 1993 to May 2000. (12) The President and Chief Executive Officer, currently Evelyn F. Smalls, acts as Trustee of certain voting trust agreements (the "Voting Trusts") pursuant to which Fahnstock, Inc deposited 5,209 shares of Common Stock of UBS, to be voted by the current president and chief executive officer pursuant to the terms of the Voting Trusts. The term of the Voting Trusts is ten (10) years. (13) Ms. Hudson-Nelson was appointed Senior Vice President and Chief Financial Officer in June 2000. Prior to that, Ms. Hudson-Nelson was Vice President and Controller from January 1992 to May 2000. In May 2002, Ms. Hudson-Nelson was promoted to Executive Vice President. 9 EXECUTIVE COMPENSATION General Disclosure Considerations Concerning Executive Compensation UBS believes that its shareholders should be provided clear and concise information about the compensation of the Bank's executives and the reasons the Bank's Board of Directors1 made decisions concerning their executive compensation, consistent with the Commission's proxy statement disclosure rules regarding disclosure of executive compensation. The format and content of the information set forth below is intended to enable UBS' shareholders to understand the rationale and criteria for the Bank's executive compensation programs and the compensation paid to the named executives and its other executives and key employees. UBS welcomes shareholder comment on whether the objective, to provide information to UBS' shareholders that is useful and clearly stated, has been met. Please send any comments or suggestions for further improvements in disclosure to William B. Moore, the Secretary of UBS, at the executive office of UBS, 300 North Third Street, Philadelphia, Pennsylvania 19106. Executive Compensation The following information relates to all plan and non-plan compensation awarded to, earned by, or paid to (i) Evelyn F. Smalls, the President and Chief Executive Officer of the Bank, and (ii) Brenda M. Hudson-Nelson, Executive Vice President and Chief Financial Officer of the Bank, the only persons who were serving as executive officers of the Bank at December 31, 2003 (Ms. Smalls and Ms. Hudson-Nelson are hereinafter sometimes collectively referred to as the "Named Executive Officers"). Any compensation earned by the Named Executive Officers during 2003 will be reported in the proxy statement for UBS' 2004 Annual Meeting of Shareholders. UBS' executives are not compensated for their services to UBS rather, because the Bank is the principal subsidiary of UBS, they are compensated as officers of the Bank.14 Summary Compensation Table The disclosure regarding the compensation of the Bank's executives includes the following table that sets forth the compensation paid to the Named Executive Officers during the last three (3) fiscal years.
Annual Compensation (15) ------------------------ Stock All Other Name and Principal Position During 2003 Year Salary Bonus Options Compensation - --------------------------------------- ---- ------ ----- ------- ------------ ($) (#) ($) Evelyn F. Smalls 2003 $139,050 -- -- -- President and Chief Executive Officer 2002 $148,009 -- -- -- of UBS and the Bank 2001 $141,000 -- -- -- Brenda M. Hudson-Nelson 2003 $ 97,850 -- -- -- Executive Vice President and 2002 $102,112 -- -- -- Chief Financial Officer 2001 $100,900 -- -- -- of UBS and the Bank
- ------------------- Footnote Information Concerning Executive Compensation (14) Amounts are not included in the Bonus, Stock Option and All Other Compensation columns of the table because no compensation of this nature was paid by UBS or the Bank and the restricted stock awards and long term incentive payouts columns are not included in the Compensation Table since these benefits are not made available by UBS or the Bank. (15) The Commission's compensation disclosure rules require the use, where applicable, of a series of tables to describe various types of compensation paid to the specified executive officers. The use of a specific table or column in a table is not required by the Commission's rules if no compensation was paid or awarded to the named executives. Only the tables or columns required to be used by the Commission's rules, because of the compensation paid to the specified executive officers, have been used in this Proxy Statement. 10 Executive Employment Agreements The Bank entered into an Employment Agreement with Evelyn F. Smalls dated June 12, 2000 to serve as the Bank's President and Chief Executive Officer. The initial term of the Employment Agreement is two (2) years, unless extended or terminated. In June 2002, the Employment Agreement was extended for two (2) years. The Employment Agreement provides for an annual base salary of $135,000 that may be increased, but not decreased. Under her Employment Agreement, Ms. Smalls has an opportunity to receive an annual initial cash bonus (the "Initial Cash Bonus") of 12% of her annual base salary and an annual additional cash bonus (the "Additional Cash Bonus") of 12% of her annual base salary, based on performance targets specified in the Employment Agreement which are based on the annual earnings of the Bank. The Bank entered into an Employment Agreement with Brenda M. Hudson-Nelson dated June 12, 2000 to serve as the Bank's Senior Vice President, now Executive Vice President, and Chief Financial Officer. The initial term of the Employment Agreement is two (2) years, unless extended or terminated. In June 2002, the Employment Agreement was extended for two (2) years. The Employment Agreement provides for an annual base salary of $95,000 that may be increased, but not decreased. Under her Employment Agreement, Ms. Hudson-Nelson has an opportunity to receive an annual initial cash bonus (the "Initial Cash Bonus") of 12% of her annual base salary and an annual additional cash bonus (the "Additional Cash Bonus") of 12% of her annual base salary, based on performance targets specified in the Employment Agreement which are based on the annual earnings of the Bank. Long Term Incentive Stock Option Plan One hundred thousand shares (100,000) of UBS' Common Stock are subject to a Long Term Incentive Compensation Plan (the "Plan") under which options to purchase UBS' Common Stock may be granted to key employees at 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 Executive Committee of the UBS Board of Directors 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 Executive Committee of the UBS Board of Directors 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 Executive Committee of the UBS Board of Directors 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 2003 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. Employee Stock Ownership Plan ("ESOP") At its Annual Shareholders Meeting held May 6, 1994, the shareholders of UBS approved the establishment of an Employee Stock Ownership Plan ("ESOP"). The ESOP has not been formally activated by UBS. No purchases have been made pursuant to the ESOP. 11 Audit Committee Report In connection with the preparation and filing of UBS' Annual Report on Form 10-K for the year ended December 31, 2003, the Audit Committee (i) reviewed and discussed the audited financial statements with UBS' management, (ii) discussed with Grant Thornton LLP, UBS' independent auditors, the matters required to be discussed by Statement on Auditing Standards No. 61 (as modified or supplemented), (iii) discussed the independence of Grant Thornton LLP with Grant Thornton LLP, and (iv) has received the written disclosures and the letter from Grant Thornton LLP required by Independence Standards Board Standard No. 1 (as modified or supplemented). Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in UBS' Annual Report on Form 10-K for the year ending December 31, 2003. UBS' Audit Committee is composed of Angela M. Huggins (Chairman), Joseph T. Drennan, L. Armstead Edwards, William B. Moore, and Marionette Y. Wilson who each endorsed this report. Respectfully submitted: /s/ Angela M. Huggins ---------------------------- Angela M. Huggins (Chairman) Joseph T. Drennan L. Armstead Edwards William B. Moore Marionette Y. Wilson Certain Relationships and Related Transactions Some of the directors 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 2003. 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 loans and commitments did not involve more than a normal risk of collectability or present other unfavorable features. Directors' Independence The Boards of Directors of UBS and the Bank have determined that all of its members are independent and meet the requirements for independence of the NASDAQ Stock market ("NASDAQ"), except for Evelyn F. Smalls, because Ms. Smalls is the President and Chief Executive Officer of the UBS and the Bank, she is not independent as defined by NASDAQ. Communicating with the Board of Directors Shareholders may communicate with any member or Committee of UBS or the Bank by writing to United Bancshares, Inc., Attention: Board of Directors, P.O. Box 54212, Philadelphia, PA 19105. The written communications will be provided to William D. Moore, a director and Corporate Secretary of the Board of Directors, who will determine the further distribution of the communications which are appropriate based on the nature of the information contained in the communications. For example, communications concerning accounting internal controls and auditing matters will be shared with the Chairman of the Audit/Compliance Committee of UBS' Board of Directors. 12 PROPOSAL 1 ELECTION OF DIRECTORS (Item 1 on the Proxy Card) The Board of Directors of UBS has nominated the persons listed below for election as Class D directors, each to hold office until the expiration of their term and until his or her successor is elected and qualified. Nominees for Directors The following persons have been nominated by UBS' Board of Directors for election as directors to serve as follows: Class A - Term Expires in 2008 ------------------------------ (1) L. Armstead Edwards (2) Marionette Y. Wilson (3) Ernest L. Wright Class B - Term Expires in 2005 ------------------------------ (1) Ahsan M. Nasratullah Class C - Term Expires in 2006 ------------------------------ (1) Joseph T. Drennan and until their successors are elected and take office. The persons named as proxies in the accompanying form of proxy have advised UBS that, unless otherwise instructed, they intend at the meeting to vote the shares covered by proxies for the election of the nominees named in this Proxy Statement. If one or more of the nominees should, at the time of the Annual Meeting, be unavailable or unable to serve as a director, the shares represented by the proxies will be voted to elect any remaining nominee. The Board of Directors knows of no reason why the nominees will be unavailable or unable to serve as directors. UBS expects all nominees to be willing and able to serve as directors. The affirmative vote of the holders of at least a majority of UBS' shares of Common Stock entitled to vote present in person or by proxy at the Annual Meeting is required for the election of the nominees for directors. Proxies solicited by the Board of Directors will be voted for nominees listed above, unless the shareholders specify a contrary choice in their proxies. The Board of Directors recommends a vote FOR the nominees listed above. 13 PROPOSAL 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS (Item 2 on the Proxy Card) The firm of Grant Thornton LLP has been appointed by the Board of Directors to serve as UBS' independent certified public accountants for the fiscal year beginning January 1, 2004. The Board of Directors of UBS is requesting shareholder approval of the appointment. A representative of the firm will be present at the meeting to answer questions and will have the opportunity to make a statement, if he so desires. The firm is presently serving UBS and the Bank, as their independent certified public accountants. Management recommends approval of this appointment. If the appointment is not approved by a majority of the shares of Common Stock of UBS present in person or by proxy and entitled to vote at the Annual Meeting, the appointment of the independent certified public accountants will be reconsidered by the Board of Directors. The following table presents the fees for each of the last two fiscal years for the principal accounts of UBS by category: 2003 2002 --------- --------- Audit Fees.............................. $ 83,500 $ 73,500 Audit-related fees...................... 15,750 13,500 Tax fees................................ 7,000 4,500 All other fees.......................... -- -- --------- --------- Total fees.......................... $ 106,250 $ 91,500 ========= ========= The Audit Committee pre-approves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for UBS by its independent auditor, subject to the minimus exceptions for non-audit services described in Section 10A (I) (1) (B) of the Exchange Act which are approved by the Committee prior to the completion of the audit. The Audit Committee may form and delegate authority to subcommittees consisting of one or more members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services, provided that decisions of such subcommittee to grant pre-approvals shall be presented to the full Audit Committee at its next scheduled meeting. The Audit Committee of UBS' Board of Directors has considered whether the provision of the non-audit services is compatible with maintaining the independence of Grant Thornton LLP. The resolution being voted on is as follows: RESOLVED, that the shareholders of UBS ratify and confirm the appointment of Grant Thornton LLP as UBS' independent certified public accountants for the year 2004. The ratification of the selection of the independent certified public accountants requires the affirmation by vote of at least a majority of the outstanding voting shares of Common Stock of UBS present in person or by proxy and entitled to vote at the Annual Meeting. Proxies solicited by the Board of Directors will be voted for the foregoing resolution, unless shareholders specify a contrary choice in their proxies. The Board of Directors recommends a vote FOR the resolution ratifying the appointment of Grant Thornton LLP as UBS' independent certified public accountants for the year 2004. 14 ADJOURNMENT If sufficient votes in favor of any of the proposals set forth herein are not received by the time scheduled for the meeting, the persons named as proxies may propose one or more adjournments of the meeting for two (2) periods of not more than fifteen (15) days in the aggregate to permit further solicitation of proxies with respect to any such proposal. Any adjournment will require the affirmative vote of a majority of the votes cast on the question in person or by proxy at the session of the meeting to be adjourned. The persons named as proxies will vote in favor of such adjournment those proxies that they are entitled to vote in favor of such proposals. They will vote against any such adjournment those proxies required to be voted against any such proposals. UBS will pay the costs of any additional solicitation and of any adjournment session. OTHER MATTERS The Board of Directors knows of no other business to be brought before the meeting. However, if any other matters come before the meeting, it is the intention that the proxies that do not contain specific restrictions to the contrary will be voted on such matters in accordance with the judgement of the persons named on the enclosed form of proxy. FINANCIAL STATEMENTS The consolidated financial statements of UBS are not set forth in this Proxy Statement. However, they are contained in the accompanying Annual Report of UBS for the year ended December 31, 2003. OTHER BUSINESS Management does not know at this time of any other matters that will be presented for action at the Annual Meeting. If any unanticipated business is properly brought before the meeting, the proxies will vote in accordance with their best judgment. SHAREHOLDER PROPOSALS FOR 2005 UBS' Annual Meeting of Shareholders will be held on or about November 23 2005. Any shareholder desiring to submit a proposal to UBS for inclusion in the proxy and proxy statement relating to that meeting must submit such proposal or proposals in writing to UBS before July 1, 2005. It is suggested that the proposal or proposals be submitted by certified mail-return receipt requested to the attention of William B. Moore, the Secretary of UBS, at the executive office of UBS, 300 North Third Street, Philadelphia, Pennsylvania 19106. ADDITIONAL INFORMATION A copy of UBS' Annual Report for the fiscal year ended December 31, 2003, containing, among other things, financial statements examined by its independent certified public accountants, was mailed with this Proxy Statement on or about October 15, 2004 to the shareholders of record as of the close of business on September 20, 2004. Upon written request of any shareholder, a copy of UBS' Annual Report on Form 10-K for its fiscal year ended December 31, 2003, including the financial statements and schedules thereto, required to be filed with the Securities and Exchange Commission may be obtained, without charge, from UBS' Secretary, William B. Moore, at the executive office of UBS, 300 North Third Street, Philadelphia, Pennsylvania 19106. By Order of the Board of Directors of United Bancshares, Inc. William B. Moore, Secretary 15 EXHIBIT A UNITED BANCSHARES, INC. AUDIT COMMITTEE CHARTER The purpose of the Audit Policy of United Bancshares, Inc., (the "Bank") is to formally establish and provide guidance for the independent audit function, which complies with regulatory requirements. The function is in accordance with the Interagency Policy Statement on Internal Auditing. Since this function with the Bank is outsourced, an engagement letter is obtained that sets forth adherence to the Interagency Policy Statement. The Internal Auditor, The Outsourcing Partnership, will report directly to the Audit Committee of the Board of Directors. In addition, the Internal Auditor will attend the Audit Committee meeting quarterly to report on audits and to keep abreast of the Written Agreement. The following will accomplish the purpose of the roles and responsibilities of the independent audit function: AUDIT COMMITTEE CHARTER The Audit Committee of the Bank is a standing committee of the Board of Directors that has established a comprehensive Audit Charter setting forth the following: membership requirements, roles and responsibilities regarding internal controls and financial reporting, compliance with laws and regulations, code of conduct, internal audit, external audit, meetings and reporting. The Audit Charter is enclosed. AUDIT RISK ASSESSMENT PLAN The Audit Committee will obtain from the auditor an audit risk assessment and internal audit plan that will set forth the frequency of the audits to be performed which will be reported to and monitored by the Audit Committee. The audits will be conducted in accordance with standards established by the Institute of Internal Audit Standards and the auditor will be evaluated periodically by the Audit Committee relative to the completion of the Plan. The auditor will obtain approval from the Audit Committee if the Audit Plan is adjusted. Audit findings as well as appropriate follow-up will be reported to the Audit Committee. The Chairman of the Audit Committee will make a report to the full board. MISSION STATEMENT: The Audit Committee is appointed by the Board of Directors to assist the Board in fulfilling its oversight responsibilities. The Audit Committee's primary duties and responsibilities are to: o Monitor the integrity of the Bank's financial reporting process and systems of internal controls regarding finance, accounting, risk management and regulatory compliance. o Monitor the independence and performance of the Bank's independent auditors and internal auditing program. o Provide an avenue of communication among the independent auditors, management, the internal auditing department and the Board of Directors. To effectively perform his or her role, each Committee member will obtain an understanding of the detailed responsibilities of Audit Committee membership. 16 ORGANIZATION: The Audit Committee of United Bancshares, Inc. (the "Committee"), defined to include the holding company and other subsidiaries is appointed by the Corporation's Board of Directors. The Committee is composed of at least three independent Directors. One of the members of the Committee has been designated its Chairman. The Committee is designated by the Board to oversee the audit affairs of the Corporation, Bank and subsidiaries to perform such specific audit function reviews as may be determined by the Committee. Each committee member will be both independent and financially literate. No committee member shall simultaneously serve on the audit committees of more than two other public companies. The Committee will meet quarterly and hold additional meetings, as the Chairman shall require in order to satisfy its duties and responsibilities. ROLES AND RESPONSIBILITIES Internal Control o Evaluate whether management is setting the appropriate tone at the top by communicating the importance of internal control and ensuring that all individuals possess an understanding of their roles and responsibilities; o Gain an understanding of whether internal control recommendations made by internal and external auditors have been implemented by management; and o Ensure that the external auditors and internal auditors keep the Audit Committee informed about fraud, illegal acts, deficiencies in internal control, and certain other matters. FINANCIAL REPORTING General o Review and report to the full board significant accounting and reporting issues, including recent professionals and regulatory pronouncements, and understand their impact on the financial statements; and o Discuss with management and the internal and external auditors significant risks and exposures and the plans to minimize such risks. Annual Financial Statements o Review and report to the full board the annual financial statements and determine whether they are complete and consistent with the information known to Committee members, and assess whether the financial statements reflect appropriate accounting principles; o Focus on judgmental areas such as those involving valuation of assets and liabilities, including, for example, the accounting for and disclosure of loan losses; litigation reserves; and other commitments and contingencies; o Review with management and the external auditors to review the financial statements and the results of the audit: This review will include any restrictions on the scope of the independent auditor's activities or on access to requested information, and any significant disagreements with management. o Consider management's handling of proposed audit adjustments identified by the external auditors. o Review the Annual Report and other sections of the form 10-K before its release consider whether the information is adequate and consistent with Committee members' knowledge about the company and its operations. o Review disclosures made by CEO and CFO during the Forms 10-K and 10-Q certification process about significant deficiencies in the design or operation of internal controls or any fraud that involves management or other employees who have a significant role in the Bank's internal controls. 17 Interim Financial Statements o Be briefed on how management develops and summarizes quarterly financial the extent of external auditors review of quarterly financial information, and whether that review is performed on a pre- or post-issuance basis; and o To gain insight into the fairness of the interim statements and disclosures, obtain explanations from management and from the internal and external auditors regarding: -- Generally accepted accounting principals have been consistently applied; -- There are any actual or proposed changes in accounting or financial reporting practices; -- There are any significant or unusual events or transactions; -- The interim financial statements contain adequate and appropriate disclosures. -- The ALLL is adequate and in accordance with the Bank's policy. Compliance with Laws and Regulations o Review and report to the full board the effectiveness of the system for monitoring compliance with laws and regulations and the results of management's investigation and follow-up (including disciplinary action) on any fraudulent acts or accounting irregularities; o Periodically obtain updates from internal compliance auditors regarding compliance; and o Review the findings of any examinations by regulatory agencies and any auditor observations. Compliance with the Code of Conduct o Ensure that a code of conduct is formalized in writing and that all employees are aware of it; o Review the program for monitoring compliance with the code of conduct; and -- Periodically obtain updates from management regarding compliance. INTERNAL AUDIT o Review with management and the internal auditors the committee charter, audit schedule and approach, recommendation follow-up matrix, staffing and organizational structure of the internal audit function. o Ensure there are no unjustified restrictions or limitations, and review and concur in the appointment, replacement or dismissal of the chief audit executive. o Review the effectiveness of the internal audit function, including the audit risk assessment and compliance with internal audit policy and procedures manual. o On a periodic basis, meet separately with internal auditors to discuss any matters that the committee or internal auditors believe should be discussed privately. EXTERNAL AUDIT o Review the external auditors' audit scope and approach, including coordination of audit effort with internal audit. o Review the performance of the external auditors, and exercise final approval on the appointment or discharge of the auditors. In performing this review, the committee will: -- At least annually, obtain and review a report by the independent auditor describing the firm's internal quality-control procedures; any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; and (to assess the auditor's independence) all relationships between the independent auditor and the Bank. 18 -- Take into account the opinions of management and internal audit. -- Review and evaluate the lead partner of the independent auditor. -- Present its conclusions with respect to the external auditor to the Board. -- Ensure the rotation of the lead audit partner every five years and other audit partners every seven years, and consider whether there should be regular rotation of the audit firm itself. -- Present its conclusions with respect to the independent auditor to the full Board. -- Set clear hiring policies for employees or former employees of the independent auditors. -- On a regular basis, meet separately with the external auditors to discuss any matters that the committee or auditors believe should be discussed privately. -- Review and discuss with the independent accountants, as may be required by law or regulation, (1) all critical accounting policies and practices to be used; (2) all alternative treatments of financial information within GAAP that have been discussed with management, ramifications or the use of such alternative disclosures and treatments, and the treatment preferred by the independent accountant, and (3) other material written communications between the independent accountant and management, such as any management letter or schedule of unadjusted differences. -- Review and confirm the independence of the external auditors by reviewing the non-audit services provided and the auditors' assertion of their independence in accordance with professional standards. OTHER RESPONSIBILITIES o Meet with the external auditors, regulatory examiners, lead internal auditor, and management in separate executive sessions to discuss any matters that the Committee or these groups believe should be discussed privately; o Ensure that significant findings and recommendations made by the internal and external auditors are received and discussed on a timely basis; o Perform other oversight functions as requested by the full Board; and o Review and assess the adequacy of the committee charter annually, requesting Board approval for proposed changes, and ensure appropriate disclosure as may be required by law or regulation. REPORTING RESPONSIBILITIES o Regularly report to the Board of Directors about committee activities and issues that arise with respect to the quality or integrity of the Bank's financial statements, and Bank's compliance with legal or regulatory requirements, the performance and independence of the Bank's independent auditors, and the performance of the internal audit function. o Report annually to the shareholders, describing the committee's composition, responsibilities and how they were discharged, and any other information required by rule, including approval of non-audit services. o Review any other reports the Bank issues that relate to committee responsibilities. 19 ---------------------------------------------------------------------------- REVOCABLE PROXY UNITED BANCSHARES, INC. ANNUAL MEETING OF SHAREHOLDERS TO BE HELD NOVEMBER 23, 2004 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF UNITED BANCSHARES, INC. The undersigned hereby constitutes and appoints L. Armstead Edwards, William B. Moore, or Evelyn F. Smalls, individually, proxy of the undersigned, each with full power of substitution to represent the undersigned and to vote all of the shares of United Bancshares, Inc. that the undersigned may be entitled to vote at the Annual Meeting of Shareholders of United Bancshares, Inc. to be held at A.M.E. First Episcopal District Headquarters, 3801 Market Street, 3rd Floor, Philadelphia, PA 19104 at 9:00 a.m., prevailing time, and any adjournments thereof. All powers may be exercised by said proxy holders or substitutes voting or acting or, if only one votes and acts, then by that one. This Proxy shall be voted on the proposals described in the Proxy Statement as specified below. Receipt of the Notice of the Meeting, the accompanying Proxy Statement and Annual Report for the Year 2003 are hereby acknowledged. The Board of Directors recommends a vote FOR each of the following proposals: 1. PROPOSAL FOR ELECTION OF CLASS A DIRECTORS. To elect the three nominees listed below: Class A -- Term Expires in 2008 L. Armstead Edwards [ ] FOR [ ] WITHHOLD AUTHORITY Marionette Y. Wilson [ ] FOR [ ] WITHHOLD AUTHORITY Ernest L. Wright [ ] FOR [ ] WITHHOLD AUTHORITY PROPOSAL FOR ELECTION OF (1) CLASS B DIRECTOR AND (1) CLASS C DIRECTOR. To elect the two nominees below: Class B -- Term Expires in 2005 / Class C -- Term expires in 2006 Ahsan M. Nasratullah (Class B) [ ] FOR [ ] WITHHOLD AUTHORITY Joseph T. Drennan (Class C) [ ] FOR [ ] WITHHOLD AUTHORITY 2. PROPOSAL FOR RATIFICATION OF INDEPENDENT AUDITORS. To ratify the section of Grant Thorton LLP as independent auditors for 2004: [ ] FOR [ ] AGAINST [ ] ABSTAIN In their discretion, the proxies are authorized to vote upon such other business as may properly come before the Annual Meeting and any adjournment thereof. (Continued and to be SIGNED on Reverse Side) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE ABOVE PROPOSALS. THIS PROXY SHOULD BE DATED, SIGNED BY THE SHAREHOLDER EXACTLY AS HIS OR HER NAME APPEARS ON HIS OR HER STOCK CERTIFICATE AND RETURNED PROMPTLY TO UNITED BANCSHARES, INC. IN THE ENCLOSED ENVELOPE. PERSONS SIGNING IN A FIDUCIARY CAPACITY SHOULD SO INDICATE. Dated: ________, 2004 ------------------------------------------ Signature(s) (Title(s), if applicable) ------------------------------------------ Please print name MEETING RESERVATION DO YOU PLAN TO ATTEND THE ANNUAL MEETING ON TUESDAY, NOVEMBER 23, 2004? Yes_________ No________ NOTE: PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ON THIS PROXY. WHEN SIGNING IN A FIDUCIARY CAPACITY, SUCH AS EXECUTOR, ADMINISTRATOR, TRUSTEE, ATTORNEY, GUARDIAN, ETC., PLEASE SO INDICATE. CORPORATE AND PARTNERSHIP PROXIES SHOULD BE SIGNED BY AN AUTHORIZED PERSON INDICATING THE PERSON'S TITLE. - ------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----