-----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, A8/iW7qiAchhJxk3pSXG1HoQRotN7z1NGQCpJ2k3UYdkGYC24+caucBGb6MJIf8d i0UpmRtVAGQE8/1yUpZWPA== 0000950159-06-000517.txt : 20060419 0000950159-06-000517.hdr.sgml : 20060419 20060331174341 ACCESSION NUMBER: 0000950159-06-000517 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060331 DATE AS OF CHANGE: 20060419 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: 06730410 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 united10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 OR |-| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to -------------------- -------------------- Commission file number: 0-25976 UNITED BANCSHARES, INC. (Exact name of registrant as specified in its charter) 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, 19102 Philadelphia, Pennsylvania - ------------------------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) (215) 351-4600 [Registrant's telephone number, including area code] Name and fiscal year not changed, but former address was 300 North 3rd Street Philadelphia, PA 19106 (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $ .01 Par Value (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes [ ] No [ ] Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [ ] 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 [ ] 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 the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One): Large Accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X| Indicate by checkmark whether the Registrant is a shell company (as defined by Rule 126-2 of the Exchange Act): Yes |_| No |X| The aggregate market value of shares of common stock held by non-affiliates of Registrant (including fiduciary accounts administered by affiliates) was [_______________] on June 30, 2005. Not applicable the Registrant shares are not publicly traded United Bancshares, Inc. (sometimes herein also referred to as the "Company" or "UBS") has two classes of capital stock authorized 2,000,000 shares of $.01 par value Common Stock and 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 10, 2006 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 10, 2006. DOCUMENTS INCORPORATED BY REFERENCE: Document Parts Into Which Incorporated -------- ----------------------------- None The exhibit index is on pages 47 through 48. There are 76 pages in this report.
FORM 10-K United Bancshares, Inc. Index Item No. Page PART I 1. Business....................................................................................... 4 1A. Risk Factors................................................................................... 12 1B. Unresolved Staff Comments...................................................................... 14 2. Properties..................................................................................... 14 3. Legal Proceedings.............................................................................. 14 4. Submission of Matters to a Vote of Security Holders............................................ 15 PART II 5. Market for Registrant's Common Equity, Related Stockholder Matters............................. 15 6. Selected Financial Data........................................................................ 17 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 17 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........... 37 9A. Controls and Procedures........................................................................ 37 9B. Other Information ............................................................................. 37 PART III 10. Directors and Executive Officers of Registrant................................................. 37 11. Executive Compensation......................................................................... 43 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 44 13. Certain Relationships and Related Transactions................................................. 45 14. Principal Accountant Fees and Services......................................................... 46 PART IV 15. Exhibits and Financial Statements Schedules.................................................... 47 UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 10, 2006.
1 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 including the war in Iraq; (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 10, 2006, UBS and the Bank had a total of 34 employees. 2 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 August 2005, the Bank leased, and simultaneously subleased to a mortgage brokerage alliance, retail space on the bottom floor of its Center City Graham Building corporate office. The Bank placed one business development officer in this space with joint signage and an automated teller machine. This relationship allows the Bank to have presence in Center City Philadelphia without incurring additional occupancy expense. Through its locations, the Bank offers a broad range of commercial and consumer banking services. At December 31, 2005, the Bank had total deposits aggregating approximately $63.3 million and had total net loans outstanding of approximately $46.0 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. Among the greatest challenges facing inner city communities is their lack of stability and transience. The Bank represents consistency to these communities. It 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 it creates economic profit by making comprehensive products and services 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. 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 10, 2006, the Bank's maximum legal lending limit was approximately $1,122,000 per borrower. However, the Bank's internal Loan Policy limits the Bank's lending to $500,000 per borrower in order to diversify the credit risk in the loan portfolio. The Board of Directors of the Bank maintains the ability to waive its internal lending 3 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 regional mortgage brokerage 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. In 2006, the Bank will introduce new products/strategies aimed at attracting a significant level of core deposits. These strategies include the introduction of a new "signature" savings account with a premium interest rate and remote deposit capture services. Coupled with internet banking, these products are designed to attract customers throughout the Philadelphia region without the additional cost of new brick and mortar. The Bank will work together with its Clergy Advisory Council, formed in May 2005, to roll these products out to churches and congregations in the Philadelphia region. The Bank will continue to develop relationships with corporate entities in the region that have a commitment to community and economic development in the urban sector to ensure that the communities it serves have full access to financial products and services. Strategic alliances and partnerships are key to the economic strength of inner city neighborhoods. Access to the Bank's Website and the United States Securities and Exchange Commission Website Reports filed electronically by United Bancshares, Inc.'s with the Securities and Exchange Commission including proxy statements, reports on Form 10-K, reports on Form 10-Q, and current event reports on Form 8-K, as well as any amendment of those reports, and other information about UBS and the Bank are accessible at no cost on the Bank's web site at www.unitedbankofphiladelphia.com under the "shareholders corner" section. These files are also accessible on the Commission's web site@www.sec.gov " 4 Competition There is substantial competition among financial institutions in the Bank's service area. The Bank competes with local, regional and national commercial banks, as well as savings banks and savings and loan associations. Many of these banks and financial institutions have an amount of capital that allows them to do more advertising and promotion and to provide a greater range of services to customers 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. 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 business development 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 has 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. To help remain competitive and attract a significant level of new core customers, the Bank will introduce a premium rate signature savings account and new "Check 21" technology--remote deposit capture. This service will allow customers who are not located in close proximity to the Bank's branches to scan and transmit deposit information remotely versus physically depositing paper checks. Remote deposit capture will put the Bank on the cutting edge of technology in the financial services arena. 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. 5 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. 6 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 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. 7 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 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 Bank is insured by the FDIC, which currently insures the Bank's deposits to a maximum of $100,000 per depositor. For this protection, each insured bank pays a semiannual statutory insurance assessment and is subject to certain rules and regulations of the FDIC. The amount of FDIC assessments paid by individual insured depository institutions, such as the Bank, is based on their relative risk as measured by regulatory capital ratios and certain other factors. Under this system, in establishing the insurance premium assessment for each bank, the FDIC will take into consideration the probability that the deposit insurance fund will incur a loss with respect to an institution, and will charge an institution with perceived higher inherent risks a higher insurance premium. The FDIC will also consider the different categories and concentrations of assets and liabilities of the institution, the revenue needs of the deposit insurance fund, and any other factors the FDIC deems relevant. A significant increase in the assessment rate or a special additional assessment with respect to insured deposits could have an adverse impact on the results of operations and capital levels of the Bank and/or UBS. In February 2006, Congress passed the Federal Deposit Insurance Reform Act of 2005. This legislation will merge the Bank Insurance Fund and the Savings Association Insurance Fund into one fund, increase insurance coverage for retirement accounts to $250,000, adjust the maximum deposit insurance for inflation after March 31, 2010 and give the FDIC greater flexibility in setting insurance assessments. 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 8 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. 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. In March of 2006 the Patriot Act, which was about to expire, was extended. The provisions in the Patriot Act concerning anti-terrorism were extended and provisions were added to the Patriot Act to curb certain of the criminal investigation powers that were in the original Patriot Act. 9 The Sarbanes-Oxley Act The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") stated goals 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 Sarbanes-Oxley Act and its implementing regulations 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. 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 Section 404 ("SOX-404") of the Sarbanes-Oxley Act 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 postponed the effective date of SOX-404 for companies, such as UBS, with less than $75,000,000 in market capitalization until July 15, 2007. 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 10 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, 2007. The rules and regulations, discussed above, which implement the Sarbanes-Oxley Act could have a significant economic impact on the compliance costs of the UBS and all publicly held companies. 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, 11 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 one leverage capital ratio had fallen to 6.81%, below the 7% minimum capital ratio required by the Agreement. However, by February 2004, the tier one leverage ratio had improved to 7.29%. 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 improved to 9.49% at December 31, 2004. At December 31, 2005, the Bank's tier one leverage ratio increased to 9.47%. With the stabilization of the Bank's capital position, management has turned its attention to increasing core profitability. A strategic plan has been adopted for 2006 that focuses on growth strategies for loans and deposits. These strategies include the introduction of "signature" deposit products with premium interest rates coupled with alternative service delivery channels including internet banking and remote deposit capture. In addition, the Bank has designated regional business development officers in the areas surrounding each of its three branches to solicit loan and deposit business. These strategies will allow the Bank to penetrate the marketplace without adding additional branches to its network. While expense reductions will continue to be sought, management believes that a greater impact will be realized with increased deposit levels and loan originations that result increased net interest income. As a result of the actions referred to above, 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 1A--RISK FACTORS Below is a list of the significant risks that concern UBS, the Bank and the banking industry. The list may not be a complete listing and has not been prepared in a certain order. Changes in the economy could have an adverse affect on the Bank and UBS - ----------------------------------------------------------------------- The strength of the U.S. economy and the local economy in which the Bank operates may be different than expected. The business and earnings of the Bank are directly affected by general conditions in the U.S. and in particular, economic conditions in the Philadelphia region. These conditions include legislative and regulatory changes, inflation, and changes in government and monetary and fiscal policies, all of which are beyond the Bank's control. A downturn in the economy could result in a decrease in products and service demand, an increase in loan delinquencies and increases in problem assets. Real estate pledged as collateral for loans made by the Bank may decline in value, reducing the value of assets and collateral associated with the Bank's existing loans. These factors could result in an increase in the provision for loan losses. Future loan losses may exceed the Bank's allowance for loan losses - ------------------------------------------------------------------ The Bank is subject to credit risk, which is the risk of losing principal or interest due to borrowers' failure to repay loans in accordance with their terms. A downturn in the economy or the real estate market in Bank's market area or a rapid change in interest rates could have a negative effect on collateral values and borrowers' ability to repay. This deterioration in economic conditions could result in losses to UBS in excess of loan loss allowances. To the extent loans are not paid timely by borrowers, the loans are placed on non-accrual, thereby reducing interest income. To the extent loan charge-offs exceed the Bank's projections, increased amounts allocated to the provision for loan losses would reduce income. Changing interest rates could reduce the Bank's net interest margin, net - ------------------------------------------------------------------------ interest income, fee income and net income - ------------------------------------------ Interest and fees on loans and securities, net of interest paid on deposits and borrowings, are a large part of the Bank's net income. Interest rates are key drivers of the Bank's net interest margin and subject to many factors beyond the control of the Bank's management. As interest rates change, net interest income is affected. Rapidly changing interest rates in the future could result in interest expense increasing faster than interest income because of mismatches in financial instrument maturities and/or competitive pressures. Further, substantially higher interest rates generally reduce loan demand and may result in slower loan growth. Decreases or increases in interest rates could have a negative effect 12 on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore decrease net interest income. Government regulation can result in limitations on operations - ------------------------------------------------------------- The Bank operates in a highly regulated environment and is subject to supervision and regulation by a number of governmental regulatory agencies. Regulations adopted by these agencies are generally intended to provide protection for depositors and customers rather than for the benefit of the shareholders, establish permissible activities for the Bank to engage in, maintenance of adequate capital levels, and other aspects of operations. The laws and regulations applicable to the banking industry could change at any time, and cannot predict the effect of these changes on the Bank's business and profitability. Increased regulation could increase the cost of compliance and adversely affect profitability. In addition, the Bank is currently operating under a regulatory agreement that requires the maintenance of minimum capital levels. Losses from operations may result in deterioration of the Bank's capital levels below required levels and could result in more severe regulatory action. (See "Regulatory Action" above) The financial services industry is very competitive - --------------------------------------------------- The Bank faces competition in attracting and retaining deposits, making loans, and providing other financial services such as trust and investment management services throughout the Bank's market area. The Bank's competitors include other community banks, larger banking institutions, trust companies and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies and other non-bank businesses. Many of these competitors have substantially greater resources than the Bank and are able to expend greater funds for advertising and marketing. If the Bank' is unable to compete effectively, the Bank will lose market share and income from deposits, loans, and other products may be reduced. Inadequate liquidity - -------------------- The Bank may not be able to meet the cash flow requirements of its customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. While the Bank actively manages its liquidity position and is required to maintain minimum levels of liquid assets, rapid loan growth or unexpected deposit attrition may negatively impact the Bank's ability to meet its liquidity requirements. Ability to attract and retain management and key personnel may affect future - ---------------------------------------------------------------------------- growth and earnings - ------------------- The Company's success will be influenced by its ability to attract and retain management experienced in banking and financial services and familiar with the communities in the Bank's market areas. The Bank's ability to retain executive officers, management team, and support staff is important to the successful implementation of the Bank's strategic plan. It is critical, as the Bank grows, to be able to attract and retain qualified staff with the appropriate level of experience and knowledge in community banking. The unexpected loss of services of key personnel, or the inability to recruit and retain qualified personnel in the future could have an adverse effect on the Bank's business, financial condition, and results of operations. Additional, risk factors also include the following all of which may reduce - --------------------------------------------------------------------------- revenues and/or increase expenses and/or pull the Bank's management attention - ----------------------------------------------------------------------------- away from core banking operations which may ultimately reduce the Bank's net - ---------------------------------------------------------------------------- income - ------ >> New developments in the banking industry >> Variations in quarterly or annual operating results >> Revision of or the issuance of additional regulatory actions affecting UBS or the Bank >> Litigation involving UBS or the Bank >> Changes in accounting policies or procedures Investments in UBS common shares involve risk. There is no trading market for UBS' common shares. 13 ITEM 1B--UNRESOLVED STAFF COMMENTS None. ITEM 2 -- PROPERTIES Corporate Headquarters In February 2005, United Bank of Philadelphia's corporate offices re-located to The Graham Building, 30 S. 15th Street, Suite 1200, Center City Philadelphia. 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. In August 2005, the Bank assumed the remaining term from another financial institution of a lease for retail space on the ground level of the Graham Building. The Bank formed an alliance with a regional mortgage brokerage company and simultaneously subleased all except the lobby in which the automated teller machine (ATM) is located. The Bank occupies one desk in the space for the purpose of business development/cross-referrals. The lease expires in September 2009. The Bank's average aggregate gross monthly rental is $4,858 of which the tenant pays an average monthly rent of $3,358. In addition, the Bank pays $1,500 per month for the ATM lobby plus one third of common area maintenance. 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 $3,843. 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 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 has been notified by the landlord that extensive improvements to the shopping plaza in which this branch is located are planned for 2006. The Bank will be relocated within the shopping plaza in a space to be constructed by the Fall of 2006. It is currently leasing this facility on a month-to-month basis. However, a proposed new lease is currently under negotiation for the new location. 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. 14 ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A shareholders annual meeting of UBS was held on November 14, 2005. Proxies for the annual meeting were solicited pursuant to Regulation 14A of the Exchange Act and there were no solicitation in opposition to the management's nominees as listed in the proxy statement and all such nominees were elected. The matters voted upon at shareholders annual meeting of UBS were the reelection of one (1) Class B director to serve a four year term and the ratification of the appointment of McGladrey and Pullen LLP as UBS' independent registered 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: - ------------------------------------------------ ------------------------------- 53.679% Shares Voted 468,716.99 of 873,192.32 Shares - ------------------------------------------------ ------------------------------- 14.898% Accounts Voted 469 of 3,148 Accounts - ------------------------------------------------ ------------------------------- - --------------------------------- ------------ ------- -------------------- Question YES NO WITHHOLD/ABSTAIN - --------------------------------- ------------ ------- -------------------- Ahsan M. Nasratullah 99.093% 0.00% 0.907% (CLASS B) 464,466.99 0.00 4,250.00 - --------------------------------- ------------ ------- -------------------- Ratify McGladrey and Pullen, LLP 99.208% 0.00% 0.642% 465,006.99 0.00 3,010.00 - --------------------------------- ------------ ------- -------------------- 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. There were no capital stock transactions during 2004 and 2005. 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. As of March 10, 2006 there were 3,148 shareholders of record of UBS' voting Common Stock and two 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 15 declaration of any dividend, if the surplus of a bank is less than the amount of its capital, the bank shall, until surplus is equal to such amount, transfer to surplus an amount which is at least ten percent of the net earnings of the bank for the period since the end of the last fiscal year or any shorter period since the declaration of a dividend. If the surplus of the Bank is less than 50% of the amount of its capital, no dividend may be declared or paid by the Bank without the prior approval of the Pennsylvania Department of Banking. Under the Federal Reserve Act, if a bank has sustained losses equal to or exceeding its undivided profits then on hand, no dividend shall be paid, and no dividends can ever be paid in an amount greater than such bank's net profits less losses and bad debts. Cash dividends must be approved by the 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" above.) 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. 16 ITEM 6 -- SELECTED FINANCIAL DATA Selected Financial Data
Year ended December 31, (Dollars in thousands, except per share data) 2005 2004 2003 2002 2001 ------------------------------------------------------------ Net interest income.............................. $3,570 $ 3,280 $ 3,290 $ 3,726 $ 4,060 Provision for loan losses........................ 558 45 565 175 335 Noninterest income............................... 1,582 3,655 1,891 2,327 2,443 Noninterest expense.............................. 4,864 5,243 5,732 6,095 7,038 Net (loss)income ................................ (269) 1,647 (1,115) (217) (870) Net (loss) income per share - basic.............. (0.25) 1.54 (1.03) (0.20) (0.79) Net (loss) income per share - fully diluted (0.25) 1.50 (1.03) (0.20) (0.79) Balance sheet totals: Total assets................................. $72,210 $ 72,301 $74,717 $86,044 $88,668 Net loans........................................ 45,950 46,490 46,690 43,459 42,292 Investment securities............................ 13,706 13,560 15,637 21,518 25,806 Deposits......................................... 63,324 63,172 67,117 76,929 79,423 Shareholders' equity............................. 8,492 8,811 7,235 8,500 8,558 Ratios: Tangible Equity to assets................. 9.87% 9.89% 6.85% 7.45% 7.67% Return on assets......................... (0.37)% 2.38% (1.38)% (0.25)% (0.95)% Return on equity................................. (3.78)% 26.96% (13.03)% (2.55)% (9.63)%
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 net deferred tax asset has been recognized to offset the net 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 the net deferred tax asset to the expected realizable amount. 17 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. In 2002, management consolidated the Bank's product offerings to make them more customer/sales friendly. 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 its current capital position (9.47% tier one leverage at December 31, 2005), the Bank is positioned for growth. Another fundamental problem for the Bank's business model was its expense profile. Major cuts were made including staff reductions and the consolidation the branch network (from 8 offices to 3). While there was a conscientious effort to dismantle the original business model, management recognized the positive aspects of the model - low cost of funds, loyal customer base, and strong net interest margins. These strengths can be built upon as a new, productive model is formulated and implemented. The Bank's Goals With the stabilization of the Bank's capital position and operating structure, the primary focus of management is to increase core profitability and build franchise/shareholder value. As a result of an internal assessment, the Bank will focus on the following goals to build value: o Growing and diversifying the deposit mix o Growing and diversifying the loan mix o Growing and diversifying noninterest income o Controlling expenses o Enhancing the branch network and alternative delivery options To accomplish these goals management will focus on the implementation of three (3) critical strategies as follows: o Implementation of a Signature Savings Product--A new statement savings ----------------------------------------------- product will be introduced in 2006 that will have a constant premium interest rate (initial rate of 3.25%). The product will be rolled out via a targeted direct mail campaign, newspaper advertisements, and distribution in church bulletins. The Bank will work together with its Clergy Advisory Council to generate interest in the product and encourage congregants as well as churches to establish "Rainy Day Savings Funds" at the Bank. While the introduction of this product will result in an increased cost of funds, it allows for the creation of new core customers and the generation of significant deposits to fund loans and/or investments. This strategy is projected to generate increased net interest income that will result in increased core profitability for the Bank. 18 o Implementation of Remote Deposit Capture--New technology evolved from ------------------------------------------ the introduction of "Check 21" in October 2004. This new banking legislation allows for expedited clearing of check deposits through the use of images. The Bank is currently working with its core service provider to implement a remote deposit capture service delivery option in 2006. This new technology will allow customers near and far from the Bank's branch network to conveniently make deposits using a scanner. The initial target market for this product will be religious organizations to allow for expedited deposit processing and availability of tithes and offerings. Again, the Bank will utilize its Clergy Advisory Council to introduce this product. Remote deposit capture is projected to increase the level of core noninterest-bearing checking accounts. o Hire Business Development Officers/Lenders--The Bank will seek to hire an experienced business development officer/lender to drive business to its branch network and build its loan portfolio. This person will "get the Bank's name out" as a critical player in Philadelphia's financial services arena. Substantial loan volume is projected to be generated by this individual. In addition, the Bank reallocated three (3) staff positions to become regional business development officers. These individuals will work to cultivate relationships in and around the areas surrounding the Bank's branches. In addition, the Bank will continue to develop relationships with corporate entities in the region 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. 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 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 it mortgage brokerage 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. o Home Equity Loans--This product will receive heightened attention with the co-branded advertising in conjunction with a the Bank's mortgage brokerage alliance. 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 continue to be the "bread and butter" of loans for the Bank. The Bank is working in collaborative relationships to enhance volume. Some of these relationships include Small Business Development Centers, religious adjudicators, the newly formed Clergy Advisory Council and various local banks. 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. 19 Results of Operations In 2005, the Company recorded a net loss of approximately $269,000 ($0.25 per share) compared to net income of approximately $1,647,000 ($1.54 per share) in 2004 and a net loss of approximately $1,115,000 in 2003 ($1.03 per share). The financial results for 2005 were adversely impacted by increased provisions to allowance for loan losses totaling $558,000 compared to $45,000 in 2004. In addition, 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. A detailed explanation for each component of earnings is included in the sections below.
Table 1--Average Balances, Rates, and Interest Income and Expense Summary December 31, 2005 2004 2003 -------------------------- -------------------------- ------------------------ Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) balance Interest rate balance Interest rate balance Interest rate ------------------------------------------------------------------------------------ Assets: Interest-earning assets: Loans .................................... $ 47,861 3,429 7.16% $ 46,037 $ 3,009 6.54% $ 45,168 2,913 6.45% Investment securities held-to-maturity ... 8,636 357 4.13 7,273 308 4.23 6,479 273 4.21 Investment securities available-for-sale 3,852 180 4.67 5,488 252 4.59 9,393 532 5.66 Interest bearing balances with other banks 584 10 1.71 880 30 3.41 869 21 2.99 Federal funds sold ........................... 5,482 180 3.29 6,244 87 1.39 8,498 98 1.15 -------- -------- ------- -------- -------- ----- -------- ------ ------ Total interest-earning assets....... 66,415 4,156 6.26 65,922 3,685 5.59 70,407 3,837 5.45 Noninterest-earning assets: Cash and due from banks .................. 3,772 3,708 4,433 Premises and equipment, net .............. 1,073 2,006 2,679 Other assets ............................. 2,648 2,726 3,922 Less allowance for loan losses ........... (683) (542) (713) ---- ---- ---- Total............................... $ 73,225 $73,820 $ 80,728 ======== ======= ======== Liabilities and shareholders' equity: Interest-bearing liabilities: Demand deposits .......................... $ 9,204 64 0.71% $ 9,315 $ 49 0.53% 11,924 83 0.70% Savings deposits.......................... 17,069 58 0.34 18,693 62 0.33 20,241 89 0.44 Time deposits............................. 23,344 463 1.98 21,559 295 1.37 21,565 375 1.74 ------ --- ---- ------ --- ---- ------ --- ---- Total interest-bearing liabilities.. 49,617 585 1.18 49,567 406 0.82 53,730 547 1.02 Noninterest-bearing liabilities: Demand deposits .......................... 14,668 16,306 18,439 Other .................................... 444 193 -- Shareholders' equity ......................... 8,496 7,754 8,559 ----- ----- ----- Total 73,225 $ 73,820 $ 80,728 ====== ======== ======== Net interest earnings ........................ $ 3,571 $ 3,280 3,290 Net yield on interest-earning assets ......... 5.38% 4.98% 4.67% 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 20 income result primarily from increases or decreases in the average balances of interest-earning assets, the availability of particular sources of funds and changes in prevailing interest rates. Net interest income totaled $3,571,000 in 2005, an increase of $291,000, or 8.87%, compared to 2004. Net interest income was $3,280,000 in 2004, a decrease of $11,000, or .31%, compared to 2003.
Table 2--Rate-Volume Analysis of Changes in Net Interest Income 2005 compared to 2004 2004 compared to 2003 --------------------- --------------------- Increase (decrease) due to Increase (decrease) due to -------------------------- -------------------------- (Dollars in thousands) Volume Rate Net Volume Rate Net ------ ----- ----- ------ ----- ----- Interest earned on: Loans ........................................ $ 133 $ 287 $ 420 $ 57 $ 39 $ 96 Investment securities held-to-maturity ....... 56 (7) 49 33 2 35 Investment securities available-for-sale ..... (77) 5 (72) (219) (61) (280) Interest-bearing deposits with other banks ... (5) (15) (20) 5 4 9 Federal funds sold ........................... (25) 118 93 8 (19) (11) --- --- -- - --- --- Total interest-earning assets ............. 82 388 470 (116) (35) (151) -- --- --- ---- --- ---- Interest paid on: Demand deposits .............................. $ (2) 17 15 (13) (21) (34) Savings deposits ............................. (6) 2 (4) (5) (22) (27) Time deposits ................................ 36 132 168 (1) (78) (79) -- --- --- -- --- --- Total interest-bearing liabilities ........ 28 151 179 (19) (121) (140) -- --- --- --- ---- ---- Net interest income ....................... $ 54 $ 237 $ 291 $ (97) $ 86 $ (11) ===== ===== ===== ===== ===== ===== 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 2005, there was an increase in net interest income of $54,000 due to changes in volume and an increase of $237,000 due to changes in rate. 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. Average earning assets increased slightly to $66.4 million in 2005 from $65.9 million in 2004 and decreased from $71 million in 2003 to $66 million in 2004. With the sale of its corporate headquarters in July 2004, the Bank converted approximately $1.2 million in nonearning assets to liquid earning assets. 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 Action above). The net interest margin of the Bank was 5.38% in 2005, 4.98% in 2004, and 4.67% in 2003. 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 175 basis points) by the Federal Reserve in 2005, 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 2005, the average federal funds yield was 3.29%, compared to 1.39% in 2004 and 1.15% in 2003. During 2005, the average investment in federal funds decreased by $762,000. The reduction was a result of a $1.8 million increase in average loan fundings. The yield on the investment portfolio decreased 9 basis points to 4.30% in 2005 compared to 4.39% in 2004 and 4.81% in 2003. The reduction in yield is primarily a result of the purchase of short-term (average 2 year duration) agency securities in late September 2004 that were used as collateral for quasi-governmental deposit customers. These securities had an average yield of 4.00%. In addition, some of the Bank's floating rate mortgage-backed securities that had Treasury and LIBOR indices repriced in 2004 in a lower interest rate environment. The yield is projected to increase in 2006 as many of the floating rate securities repriced in late 2005 in a higher interest rate environment. The cost of interest-bearing liabilities increased to 1.18% in 2005 compared to 0.82% in 2004 and 1.02% in 2003. 21 Consistent with market conditions through mid-year 2004, the Bank reduced the rates it paid on many of its interest-bearing products. Although short-term interest rates increased in 2005 by 175 basis points, 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. With the introduction of its new signature savings account in 2006 (minimum initial rate of 3.25%), the Bank is projecting an increase in its cost of funds to 1.98%. While increasing, this cost of funds remains below the Bank's peer group average cost of funds of 2.50%. 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 2005 was $558,000 compared to $45,000 in 2004 and $565,000 in 2003. The increase in the provision in 2005 was due to a review and analysis of the Bank's loan portfolio and an increase in the level of classified loans and charge-offs during the year. The Bank charged-off the un-guaranteed portion of three (3) Small Business Administration ("SBA") loans totaling $107,000. The un-guaranteed portion of the loans ranged between 10 and 25 percent of the outstanding loan balances. The Bank also charged-off the guaranteed portion of two (2) of these loans totaling $187,000 because of the unlikely collection from the SBA. In addition, the Bank charged-off forty-seven (47) loans totaling $368,000 related to an improperly administered mirco-loan fund in which it was a participant. The Bank made net provisions to the allowance totaling $45,000 for the year ended December 31, 2004. The level of required provision was reduced by the recovery of $265,000 related to one previously charged-off commercial loan. 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-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. In 2003, loans to this borrower totaled $1.3 million. In 2005, the Bank collected the guaranteed portion of the loans that totaled $569,000. 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, 2005. Noninterest Income Noninterest income decreased $2,072,000 in 2005 compared to 2004 and increased $1,764,000 in 2004 compared to 2003. 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 non-recurring gain of approximately $1,874,000 million in 2004. 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. During 2005, customer service fees declined by $171,000, or 20.03%, compared to 2004. In 2005, there was a $1.6 million decline in the Bank's average noninterest bearing demand deposits 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 beginning in 2004. During 2005, surcharge income on the Bank's ATM network declined by $28,000, or 4.63%, compared to 2004. 22 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. 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 2005 these fees totaled $202,000 compared to $178,000 and $85,000 in 2004 and 2003, respectively. 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 $379,000, or 7.23%, in 2005 compared to 2004 and decreased $488,000, or 8.52% in 2004 compared to 2003. Salaries and benefits decreased $105,000, or 5.42% in 2005 compared to 2004 and decreased $269,000, or 12.21%, in 2004 compared to 2003. As part of the Bank's continued effort to reduce/control expenses, there have been strategic reductions in staff and job consolidations. 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 staffing model to ensure the Bank is operating with the most efficient organizational structure. Occupancy and equipment expense decreased approximately $108,000, or 9.79%, compared to 2004 and decreased $122,000, or 9.97%, in 2004 compared to 2003. Management continued the implementation of strategies to reduce its occupancy expense including the closure/consolidation of its Two Penn Center Center City branch office in 2004. 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. The Bank realized a full year expense benefit in 2005 related to the closure of this branch. Also contributing to the reduction in occupancy expense was the sale of the Bank's corporate headquarters in July 2004. This building was sold to generate gains as part of the Bank's re-capitalization plan. The sale of the building resulted in a reduction in property taxes, insurance, repairs and maintenance, and depreciation expense on leasehold improvements associated with the building. In February 2005, the Bank began the lease of its new corporate headquarters on a 10,000 square foot floor of a full service high rise office building located in center city Philadelphia. Office operations and supplies expense decreased by $67,000, or 16.18%, in 2005 compared to 2004 and decreased $41,000, or 9.11%, in 2004 compared to 2003. 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 security guards, supplies and other costs associated with branch operations. Marketing and public relations expense increased by $18,000, or 21.5%, in 2005 compared to 2004 and decreased by $31,000, or 27.21% in 2004 compared to 2003. In April 2005, the Bank engaged a public relations firm to assist with re-acquainting the leaders in the Philadelphia region with the services of the Bank in effort to stimulate business development activity. Activities of this firm yielded in excess of $1 million in new deposit balances in 2005. Management will continue to seek cost-effective methods to sell its brand and products including the use of co-branded marketing materials with its strategic alliances and advertising in community-based newspapers and church bulletins. Professional services increased by $26,000, or 11.06%, in 2005 compared to 2004 and increased $18,000, or 8.28%, in 2004 compared to 2003. The increase in 2005 is primarily related to the use of consultants to assist the Bank with the preparation of a five-year strategic plan. In addition, 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 23 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. 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 $155,000, or 27.61%, in 2005 compared to 2004 and decreased $99,000, or 15.00%, in 2004 compared to 2003. The reduction in 2005 is primarily a result of a decline in processing costs associated with the Bank's automated teller machine network because of fewer machines in service as well as a contract re-negotiation with its service provider. In addition, the Bank experienced a reduction the in monthly processing cost of its core processor, FISERV, as a result of the removal of closed deposit accounts from the account database as well as a line-by-line review of the invoice to identify other areas of savings. 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 including the consolidation of its mortgage loan service providers in 2006. Federal deposit insurance premiums were $113,000 in 2005, $72,000 in 2004, and $34,000 in 2003. 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. By typical regulatory guidelines the Bank is considered "well" capitalized, however, because it is operating with a Written Agreement (Refer to "Regulatory Action" above), it is only considered to be "adequately" capitalized. The increase during 2005, 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 increased $493,000, or 0.75% in 2005 compared to 2004 and decreased approximately $4.5 million, or 6.37%, in 2004 compared to 2003.
Table 3--Sources and Use of Funds Trends 2005 2004 2003 ---------------------------- --------------------------- ---- Increase Increase Average (decrease) Average (decrease) Average (Dollars in thousands) balance amount Percent balance amount Percent balance -------- ------- ------- --------- ------- ------ ------- Funding uses: Loans ............................. $ 47,861 $ 1,824 3.96% $46,037 $ 869 1.92% $ 45,168 Investment securities.............. Held-to-maturity................. 8,636 1,363 18.74 7,273 794 12.25 6,479 Available-for-sale............... 3,852 (1,636) (29.81) 5,488 (3,905) (41.57) 9,393 Interest-bearing balances with other banks...................... 584 (296) (33.64) 880 11 1.27 869 Federal funds sold............... 5,482 (762) (12.20) 6,244 (2,254) (26.52) 8,498 ----- ---- ------ ----- ------ ------ ----- Total uses................... 66,415 493 $ 65,922 $(4,485) $ 70,407 ------ --- ======== ======== ======== Funding sources: Demand deposits: Noninterest-bearing.............. $ 14,668 $(1,638) (10.05)% $ 16,306 $(2,133) (11.57)% $ 18,439 Interest-bearing................. 9,204 (111) (1.19) 9,315 (2,609) (21.88) 11,924 Savings deposits................... 17,069 (1,624) (8.69) 18,693 (1,548) (7.65) 20,241 Time deposits...................... 23,344 1,785 8.28 21,559 (6) (.03) 21,565 ------ ----- ---- ------ -- ---- ------ Total sources................ 64,285 (1,588) $65,873 $(6,296) $ 72,169 -------- ------- ======= ======== ======== *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, decreased by $273,000, or 2.14%, in 2005 compared to 2004, and decreased $3.1 million, or 19.60%, in 2004 to 2003. The decrease in investments was primarily a result of paydowns in the Bank's mortgage-backed securities portfolio. 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 maturity of the portfolio is 3.25 years compared to 3.07 years in 2004. 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. At December 31, 2005, approximately 48% 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 25 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, 2005 was 20.60% compared to 24.06% at December 31, 2004. This translates into 20.60% of the mortgage-backed pools repaying on an annual basis. This results in less monthly cash flow than was received in 2004. 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 current rising rate environment.
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 .... $ 1,246 3.93% $ 5,498 4.26% $ 500 4.03% $ -- % $ 7,244 Mutual funds and other ......... -- -- -- 340 Mortgage-backed securities ..... -- -- -- -- 6,121 ------- ------- ----- ------ ------- Total securities ............... $ 1,246 $ 5,498 $ 500 -- $13,705 ======= ======= ====== ======= Average maturity ............... 3.25 years ==========
The above table sets forth the maturities of investment securities at December 31, 2005 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 $1,824,000, or 3.96%, in 2005 compared to 2004 and increased $869,000, or 1.92%, in 2004 compared to 2003. During 2005, the Bank funded $12 million in new commercial loans. However, growth in the loan portfolio was offset by payoffs of some large loan participations the Bank had with other financial institutions. In addition, the Bank's mortgage loan portfolio declined by $3.1 million as a result of customers with adjustable rate loans refinancing into fixed rate mortgages to avoid the negative impact of interest rate increases that occurred during the year. The Bank has developed relationships with other financial institutions in the region with which it participates in loans as a strategy to grow its commercial loan portfolio. This strategy continues to be utilized while the Bank enhances it own business development capacity. Approximately $1.6 million in commercial loan participations were booked during 2005. Most of these participations were secured by commercial real estate. To increase the level of loan originations management will add a business development officer/lender and retail sales manager to its staff in 2006. In addition, three (3) existing staff positions will be re-allocated to business development. Individuals in these positions will drive loan and deposit growth for the Bank. The Bank's loan-to-deposit ratio at December 31, 2005 was 72.8%---slightly lower than 2004 at 73.6%. 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 decrease in this ratio is the result of a slightly larger deposit base. As reflected in Table 5 below, the Bank's loan portfolio is heavily concentrated in commercial real estate loans that comprise approximately $25.8 million, or 55.60%, of total loans. Of the $12 million in 2005 of new commercial loan originations, $8.4 million were commercial real estate transactions, including $3.8 million in loans made to religious organizations. The Bank also continued to fund construction financing from prior year's loan originations. Continued payoffs resulted in a reduction of the residential mortgage loan component of the portfolio from $10.6 million at December 31, 2004 to $7.5 million at December 31, 2005. 26 In January 2005, the Bank sold $1,412,000 of its student loan portfolio and recorded a gain of $25,000. At December 31, 2004, these loans were recorded as held-for-sale. In December 2005, the Bank sold $363,000 of its student loan portfolio and recorded a gain of $6,000. These loans were sold to provide liquidity for the funding of higher yielding less costly to service commercial loans. Student loans are typically held in the consumer loan portfolio. As reflected in Table 6 below, approximately 54.08% 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) 2005 2004 2003 2002 2001 ------- -------- ------- ------- -------- Commercial and industrial................... $ 7,176 $ 15,217 $11,361 $10,855 $ 11,054 Commercial real estate...................... 25,809 13,070 11,862 11,898 5,504 Residential mortgages....................... 7,546 10,665 15,110 13,560 18,148 Consumer loans.............................. 5,891 6,729 8,695 7,820 8,294 ------- ------ ------- ------- ----- - - - - ------ ------- ------- ----- Total loans............................. $46,422 $ 45,681 $47,028 $44,133 $ 43,000 ------- ======= ====== ====== ======= 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................... $ 779 $ 3,734 $ 2,663 $ 7,176 Commercial real estate...................... 4,510 5,854 15,445 25,809 Residential mortgages....................... 467 2,008 5,071 7,546 Consumer loans.............................. 2,637 1,330 1,924 5,891 -------- ------ ----- ------ Total loans........................... $ 8,393 $12,926 $25,103 $ 46,422 Loans maturing after one year with: Fixed interest rates.................... $35,261 Variable interest rates................. 11,161
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) 2005 2004 2003 2002 2001 ------- -------- ------- ------- -------- Nonaccrual loans............................ $ 683 $ 1,366 $ 1,588 $ 651 $ 412 Interest income included in net income for the year............................ 37 22 62 25 25 Interest income that would have been recorded under original terms........... 56 143 120 49 29 Loans past due 90 days and still accruing... - 65 560 797 526 Restructured loans.......................... 554 1,411 569 1,286 182
At December 31, 2005, nonaccrual loans totaled $683,000 compared to $1,366,000 at December 31, 2004. The decrease in 2005 is primarily related to the $569,000 collection of the SBA guaranteed portion of one problem loan and the charge-off of $294,000 related to three (3) other SBA guaranteed loans for which collection is uncertain. At December 31, 2005, $191,000 of the Bank's nonaccrual loans carried some level of guarantee from the SBA that provide credit enhancement to these loans. The balance of impaired loans was $386,000 and $1,034,000 at of December 31, 2005 and 2004, 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 $113,000 and $259,000 at December 31, 2005 and 2004, respectively. In February 2006, the Bank reached a compromise agreement with the borrower on one real estate secured impaired loan totaling $127,000. The borrower has entered an agreement of sale for $185,000 on the underlying collateral property for which the Bank has received a deposit of $50,000. Full collection of principal balance is expected by April 1, 2006. Interest income recognized on impaired loans in 2005 was $37,000. There was no interest recognized on impaired loans in 2004. 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, 2005, the Bank had $554,000 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, 2005, approximately 25% of the commercial loan portfolio of the Bank was concentrated in loans 28 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, 2005, 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. The allowance for loan losses as a percentage of total loans was 1.02% at December 31, 2005 compared to 1.28% at December 31, 2004. The decline in this ratio is a result of charge-offs and a reduction in the level of classified loans. In 2005, the Bank charged-off the un-guaranteed portion of three (3) SBA loans totaling $107,000. The Bank also charged-off the guaranteed portion of two (2) of these loans totaling $187,000 because of the unlikely collection from the SBA. In addition, the Bank charged-off forty-seven (47) loans totaling $368,000 related to an improperly administered mirco-loan fund in which it was a participant. As a result of the charge-offs and the $569,000 collection from the SBA of the guaranteed portion of a problem loan, the level of classified loans significantly declined in 2005. At December 31, 2005, the Bank's classified loans totaled $694,000, or 1.50% of total loans, compared to $1.2 million, or 2.50%, of total loans at December 31, 2004. Approximately $191,000 of the Bank's classified loans are guaranteed by the SBA. The Bank continues to proactively monitor its credit quality while working with borrowers in an effort to identify and control credit risk. Table 8--Allocation of Allowance for Loan Losses
2005 2004 2003 2002 2001 --------------------------------------------------------------------------------------------------- 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 category category category category total total total total total Amount loans Amount loans Amount loans Amount loans Amount loans (Dollars in thousands) Commercial and industrial ....... $ 267 15.46% $ 424 32.31% $267 24.16% $ 565 24.60% $ 576 37.30% Commercial real estate ........... 66 55.59 49 27.75 - 25.22 37 26.96 29 1.21 Residential mortgages 17 16.25 14 17.29 35 32.13 45 17.72 30 19.29 Consumer loans ...... 79 12.69 110 22.65 37 18.49 28 30.72 73 42.20 Unallocated ......... 43 - 6 - - - - - - - --------- ------ ----- ------ ---- ------ ------ ------ ------ ------ $ 472 100.00% $ 603 100.00% $339 100.00% $ 675 100.00% $ 708 100.00% ========= ====== ===== ====== ==== ====== ====== ====== ====== ======
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. 29 Table 9--Analysis of Allowance for Loan Losses
Year ended December 31, (Dollars in thousands) 2005 2004 2003 2002 2001 Balance at January 1 ................................. $ 603 $ 339 $ 675 $ 708 $ 562 Charge-offs: Commercial and industrial ........................ (762) -- (799) -- (61) Commercial real estate ........................... -- -- -- (100) -- Residential mortgages ............................ -- -- -- -- -- Consumer loans ................................... (219) (240) (174) (261) (261) ----- ----- ----- ----- ----- (981) (240) (973) (361) (322) ----- ----- ----- ----- ----- Recoveries--commercial loans ......................... 165 265 -- 27 -- Recoveries--consumer loans ........................... 127 194 72 126 133 ----- ----- ----- ----- ----- 292 459 72 153 133 Net recoveries(charge-offs) .......................... (689) 219 (901) (208) (189) Provisions charged to operations ..................... 558 45 565 175 335 ----- ----- ----- ----- ----- Balance at December 31 ............................... $ 472 $ 603 $ 339 $ 675 $ 708 ===== ===== ===== ===== ===== Ratio of net (recoveries) charge-offs to average loans outstanding ...................................... 1.50% (0.48)% 1.99% 0.49% 0.41%
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 $1.6 million, or 2.41%, in 2005 compared to 2004 and declined $6.3 million, or 8.72%, in 2004 compared to 2003. One of the primary areas of decline was in demand deposit accounts that decreased on average by $1.6 million, or 10.05%, compared to 2004. This decrease was primarily related to one significant deposit relationship with a quasi-governmental organization that converted its deposit relationship from a noninterest bearing checking account to certificates of deposit for which there was a corresponding increase in the average balance. The Bank also experienced a decline of $1.6 million, or 8.69%, in its average savings deposits during 2005. 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. 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 Action above). 30 The Bank is in the process of implementing business development strategies including a signature savings account and remote deposit capture to increase the level of core deposits. In addition, the Bank will leverage the strategic partnerships/alliances it has developed to cross-sell its products and services. Table 10--Average Deposits by Class and Rate
2005 2004 2003 ---- ---- ---- (Dollars in thousands) Amount Rate Amount Rate Amount Rate ----------------- ---------------- ------------------ Noninterest-bearing demand deposits $14,668 -% $16,306 - % $18,439 -% Interest-bearing demand deposits 9,204 0.71 9,315 0.53 11,924 0.70 Savings deposits 17,069 0.34 18,695 0.33 20,241 0.44 Time deposits 23,344 1.98 21,559 1.37 21,565 1.74
Other Borrowed Funds The Bank did not borrow funds during 2005. 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. 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:
2005 2004 ----------- ----------- Commitments to extend credit.............................................. $12,727,370 $13,749,562 Outstanding letters of credit............................................. 10,000 --
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and unused credit card lines. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. 31 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, 2005, 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. At December 31, 2005, approximately $8.2 million in loans are scheduled to mature within one year. The Bank's overall liquidity has been enhanced by a significant level of core deposits which management has determined are less sensitive to interest rate movements. The Bank has avoided reliance on large-denomination time deposits as well as brokered deposits. Table 11 provides a breakdown of the maturity of time deposits of $100,000 or more. Table 11--Maturity of Time Deposits of $100,000 or More (Dollars in thousands) 3 months or less..................................... $10,485 Over 3 through 6 months.............................. 2,520 Over 6 months through 1 year......................... - Over 1 through five years............................ Over five years...................................... - ------- Total................................................ $13,005 ======= The following table sets forth contractual obligation and other commitments representing required and potential cash outflows as of December 31, 2005: 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 years Certificates of Deposit........ $ 22,670 $ 21,296 $ 954 $ 343 $ 77 Rental Obligations............. 2,338 310 630 468 930 -------- -------- ------- ------- -------- -- -- -- Total $ 25,008 $ 21,606 $ 1,584 $ 811 $ 1,007 ======== ======== ======= ======= ========
32 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, 2005, 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, 2005, an asset sensitive position is maintained on a cumulative basis through one year of 5.50%. This level is within the Bank's policy guidelines of +/-15% on a cumulative one-year basis. 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 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. Table 13--Interest Sensitivity Analysis
Interest rate sensitivity gaps as of December 31, 2005 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. $ -- $ 290 $ -- $ -- $ -- $ 290 Investment securities................ 2,360 2,632 3,071 3,232 2,410 13,705 Federal funds sold................... 5,292 - - - - 5,292 Loans................................ 17,039 10,389 5,684 3,513 9,797 46,422 Total interest-sensitive assets.... 24,691 13,311 8,755 6,745 12,207 $65,709 Cumulative totals.................. 24,691 38,002 46,757 53,502 65,709 Interest-sensitive liabilities: Interest checking accounts........... 1,960 - 1,960 - - 3,920 Savings accounts..................... 11,132 - 11,132 - - 22,264 Certificates $100,000 or more....... 10,485 2,520 - - - 13,005 Certificates of less than $100,000 .. 3,404 4,887 954 420 - 9,665 ................................... ------- -------- ------- ------- -------- ------- Total interest-sensitive liabilities $26,981 $ 7,407 $14,046 $ 420 $ - $48,854 ======= ======== ======= ======= ======== ======= Cumulative totals.................. $26,981 $ 34,388 $48,434 $48,854 $ 48,854 ======= ======== ======= ======= ======== Interest sensitivity gap................. $(2,290) $ 5904 $(5,292) $ 6,325 $ 12,207 ======= ======== ======= ======= ======== Cumulative gap........................... (2,290) 3,614 (1,677) 4,648 16,855 Cumulative gap/total earning assets...... 3.49% 5.50% 2.55% 7.07% 25.65% Interest-sensitive assets to interest-sensitive liabilities.......................... 0.92 1.80 0.62 16.06 -- --
33 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, 2005 are as follows: Net interest Percent of Changes in rate income risk (Dollars in thousands) +200 basis points $ 3,471 0.73% +100 basis points 3,463 0.49 Flat rate 3,446 -- -100 basis points 3,410 1.04 -200 basis points 3,345 2.93 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, 2005 are as follows: MV of equity Changes in rate MV equity Risk change (Dollars in thousands) +200 basis points $ 6,479 (14.7)% +100 basis points 7,377 (7.9) Flat rate 8,205 - -100 basis points 8,853 4.8 -200 basis points 9,413 21.0 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. 34 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 within the policy limits of the Bank at December 31, 2005. 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. Capital Resources Total shareholders' equity decreased $320,000 in 2005 compared to 2004 and increased $1.6 million in 2004 compared to 2003. The decline in capital in 2005 is primarily attributable to the net loss of $269,000 for the year as well as a decline in other comprehensive income related to an increase in the unrealized loss on securities classified as available-for-sale. The increase in 2004 was primarily related to gains realized on the sale of bank-owned real estate totaling $1.9 million. Aggressive steps were taken to infuse additional capital to ensure the continued viability and growth of the institution. 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. Management will seek to leverage capital down to industry levels through growth generated by its strategic initiatives--signature savings and remote deposit capture. 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 and operating losses may have an adverse effect on its capital ratios. UBS and the Bank do not anticipate paying dividends in the near future. 35 Table 14--Capital Ratios
(Dollars in thousands) 2005 2004 2003 Total Capital ....................................... $ 8,491 $ 8,812 $ 7,235 Less: Intangible Assets/Net unrealized gains (losses) on available for sale .............................. (1,382) (1,578) (1,826) Tier I capital ...................................... 7,109 7,234 5,409 Tier II capital ..................................... 472 544 339 Total qualifying capital ............................ $ 7,581 $ 7,778 $ 5,748 Risk-adjusted total assets (including off-balance-sheet exposures) ....................... $ 44,503 $ 43,436 $ 44,971 Tier I risk-based capital ratio ..................... 15.97% 16.65% 12.03% Total (Tier I and II) risk-based capital ratio ...... 17.03 17.91% 12.78% Tier I leverage ratio ............................... 9.87 9.89% 7.19%
See "Regulatory Action" above for a description of and status of compliance with the regulatory Agreement under which the Bank is currently operating. Recent Accounting Pronouncements In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement No. 154, ("SFAS No. 154") "Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3." This new standard replaces Accounting Principles Board ("APB") Opinion No. 20, "Accounting Changes", and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements." Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a "restatement. " The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. UBS does not anticipate this revision will have a material effect on its financial statements. In December 2004, the FASB issued Statement No. 123 (Revised 2004) ("SFAS No. 123R") "Share-Based Payment," which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. SFAS No. 123R replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." Share-based compensation arrangements include share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS No. 123R requires all share-based payments to employees be valued using a fair valued method on the date of grant and expensed based on that fair value over the applicable vesting period. SFAS No. 123R also amends SFAS No. 95 "Statement of Cash Flows," requiring the benefits of tax deductions in excess of recognized compensation cost be reported as financing instead of operating cash flows. The Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 107, ("SAB No. 107") which expresses the SEC's views regarding the interaction between SFAS No. 123R and certain SEC rules and regulations. Additionally, SAB No. 107 provides guidance related to share-based payment transactions for public companies. UBS will be required to apply SFAS No. 123R as January 1, 2006. UBS does not anticipate this revision will have a material effect on its financial statements. In November 2004, the Emerging Issues Task Force ("EITF") published Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The Task Force discussed the meaning of other-than-temporary impairment and its application to certain investments carried at cost. The Task Force requested that the FASB staff consider other impairment models within U.S. Generally Accepted Accounting Principles ("GAAP") when developing its views. The Task Force also requested that the scope of the impairment issue be expanded to include equity investments and investments subject to FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and that the issue be addressed by the Task Force as a separate EITF issue. At the EITF meeting, the Task Force reached a consensus on one issue that certain quantitative and qualitative disclosures should be required for securities accounted for under Statement 115 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The APB ratified the consensus on that one issue at its November 25, 2004 meeting. In September 2004, the Financial Accounting Standards Board ("FASB") directed the FASB staff to issue two proposed FASB Staff Positions ("FSP"): Proposed FSP EITF Issue 03-1-a, which provides guidance for the application of paragraph 16 of EITF Issue 03-1 to debt securities that are 36 impaired because of interest rate and/or sector spread increases, and Proposed FSP EITF Issue 03-1-b, which delays the effective date of Issue 03-1 for debt securities that are impaired because of interest rate and/or sector spread increases. In June 2005, the FASB reached a decision whereby they declined to provide additional guidance on the meaning of other-than-temporary impairment. The Board directed the FASB staff to issue EITF 03-1a as final and to draft a new FSP that will replace EITF 03-01. The final FSP (retitled FAS 115-1, "The Meaning of Other-Than-Temporary Impairment and it Application to Certain Investments") is effective for reporting periods beginning after December 15, 2005. UBS does not anticipate this revision will have a material effect 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 33 of this Report, the Liquidity and Interest Rate Sensitivity Management provisions and pages 33 to 37 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 52 to 78 hereof. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure during the year ended December 31, 2005. 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, 2005 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, 2005, 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 None. 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. 37 (a) Directors of the Registrant and Bank
Principal occupation and Year first Term Name Age other directorships became director will expire Bernard E. Anderson 67 Professor of Management/Economist 2002 2006 At the Wharton School, Philadelphia, PA David R. Bright 66 Retired, Executive Vice President Meridian Bancorp 2002 2006 Philadelphia, PA Joseph T. Drennan 60 Universal Capital Management, Inc. 2004 2008 Wilmington, DE L. Armstead Edwards 63 Chairman, 1993 2008 United Bancshares, Inc. Owner and President, Edwards Entertainment., Inc. Philadelphia, Pennsylvania Marionette Y. Wilson(Frazier) 61 Retired as co-Founder, 1996 2008 John Frazier, Inc. Philadelphia, Pennsylvania William B. Moore 63 Secretary, United Bancshares, Inc. Pastor, Tenth Memorial 1993 2007 Baptist Church Philadelphia, Pennsylvania Ashan M. Nasratullah 48 President, JNA Capital, Inc. Philadelphia, PA 2004 2009 Evelyn F. Smalls 60 President and CEO of Registrant 2000 2007 and United Bank of Philadelphia Ernest L. Wright 77 Founder, President and 1993 2008 CEO of Ernest L. Wright Construction Company Philadelphia, Pennsylvania
38 (b) Executive Officers of Registrant and Bank
Name Age Office Evelyn F. Smalls 60 President and Chief Executive Officer Brenda M. Hudson-Nelson 44 Executive Vice President/Chief Financial Officer L. Armstead Edwards 63 Chairman, Board of Directors William B. Moore 62 Secretary Marionette Y. Frazier 61 Assistant Secretary Joseph Drennan 60 Treasurer*
*Please note that Mr. Drennan was elected as Treasurer of the Registrant and the Bank and serves as Chairman of the Audit Committees of those Board's of Directors beginning on November 14, 2005. (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. INFORMATION ABOUT THE AUDIT COMMITTEES Information about the UBS' Audit/Compliance Committee and Financial Expert The Audit/Compliance Committee of UBS' Board of Directors(1) comprised of Angela M. Huggins(3) (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 2005. 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 a "Financial Expert," as defined in the SEC's regulations. The Compliance Committee is 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 The Audit/Compliance Committee of the Bank Board of Directors(1) comprised of Angela M. Huggins(3) (Chairman), Joseph T. Drennan(2), 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 2005. 39 In 2003, the Compliance Committee was combined with the Audit Committee and is comprised of the same members. On a quarterly basis, in addition to the audit matters outlined above, 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)Mr. Drennan was elected as Treasurer of the Registrant and the Bank and serves as Chairman of the Audit Committees of those Board's of Directors beginning on November 14, 2005 (3)Angela M. Huggins retired from the Registrant's and Bank's Boards of Directors and their Audit Committee in November 2005 upon the expiration of her term. 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 2005 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 2005 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(4) (Vice Chairman)(1), Angela M. Huggins(3), 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 2005. 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(3) (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. 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 did not hold any meetings during 2005. 40 Meetings of UBS' Board and its Committees The total number of meetings of UBS' Board of Directors that were held in 2005 was eleven (11). All of the incumbent directors, who were directors during 2005 (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 seventy-three percent (73%) and Steven Sanders(4) who attended fifty-five percent (55%) of all Board of Director and Executive Committee meetings. (3)Angela M. Huggins retired from the Board of Directors in November 2005 upon the expiration of her term. (4)Steve Sanders resigned from the Board of directors in January 2006 because of a change in his work schedule that precluded him from attending board meetings. 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(4) (Vice Chairman), Angela M. Huggins(3), 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 2005. The Compensation Committee, comprised of Steven Sanders (Chairman)(1), L. Armstead Edwards, Angela M. Huggins(3) , 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 2005, the Compensation Committee did not hold any meetings as there were no changes in the contracts of the executive officers or other matters for discussion. The Asset and Liability Management Committee comprised Bernard E. Anderson (Chairman), L. Armstead Edwards, Angela M. Huggins(3) , 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 2005, 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 2005. 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. 41 Meetings of Bank's Board and its Committees The total number of meetings of the Bank's Board of Directors that were held in 2005 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 seventy-three percent (73%), and Steven Sanders(4) who attended fifty-five percent (55%) of all Board of Directors and Executive Committee meetings. (3)Angela M. Huggins retired from the Board of Directors in November 2005 upon the expiration of her term. (4)Steve Sanders resigned from the Board of directors in January 2006 because of a change in his work schedule that precluded him from attending board meetings. 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 10, 2006:
UBS Stock Name, Principal Occupation and Age as of Beneficially Business Experience For Past 5 Years March 10, 2006 Office with the UBS and/or Bank Owned Evelyn F. Smalls(1)(2) 60 President and Chief Executive Officer and 600 Director of UBS and Bank Brenda M. Hudson-Nelson (3) 44 Executive Vice President and Chief Financial Officer 50 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.
42 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. 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, 2005. 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 2005, the Compensation Committee did not hold any 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, 2005 (Ms. Smalls and Ms. Hudson-Nelson are hereinafter sometimes collectively referred to as the "Named Executive Officers"). 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) (3) Stock All Other Name and Principal Position During 2005 Year Salary Bonus Options Compensation(2) ($) (#) ($) Evelyn F. Smalls 2005 $169,077 -- -- -- President and Chief Executive Officer 2004 $149,588 -- -- -- of UBS and the Bank 2003 $139,050 -- -- -- -- -- -- Brenda M. Hudson-Nelson 2005 $124,096 -- -- -- Executive Vice President and Chief Financial 2004 $106,044 -- -- -- Officer of UBS and the Bank 2003 $97,850 -- -- -- __________________ (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. (3) 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.
43 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 to be Weighted average exercise Number of securities issued upon exercise of price of outstanding remaining available for outstanding options, options, warrants, and future issuance under warrants and rights rights equity 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 - ----------------------------------------------------------- ---------------------------- ----------------------------
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to UBS, as of March 10, 2006 (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 10, 2006, 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.
44 The following table lists the beneficial ownership of shares of the UBS' Common Stock as of March 10, 2006 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 Stock(9,10,11) Outstanding Stock Name Current Directors L. Armstead Edwards.................................................... 10,833 1.23% Marionette Y. Wilson (Frazier)......................................... 17,900 2.04% Ernest L. Wright....................................................... 7,084 * Bernard E. Anderson.................................................... 850 * David R. Bright........................................................ 850 * Joseph T. Drennan...................................................... 783 * Ahsan M. Nasratullah................................................... 833 * William B. Moore....................................................... 1,834 * Evelyn F. Smalls....................................................... 600 * Certain Executive Officers Evelyn F. Smalls....................................................... 600** * Brenda M. Hudson-Nelson................................................ 50 * All Current Directors and Executive Officers as a Group ............... 41,617 4.7400% *** __________________ 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 March 10, 2006, plus the shares subject to the exercisable option. (9) Stock ownership information is given as of March 10, 2006, and includes shares that the individual has the right to acquire (other than by exercise of stock options) within sixty (60) days of March 10. 2006. Unless otherwise indicated, each director and each such named executive officer holds sole voting and investment power over the shares listed. (10) 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. (11) 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.
45 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 2005. 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: 2005 2004 Audit Fees..................................$ 86,703 $ 62,000 Audit-related fees.......................... - - Tax fees.................................... 8,304 - All other fees.............................. - - Total fees...............................$ 95,007 $ 62,000 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. 46 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. 52 Consolidated Balance Sheets at December 31, 2005 and 2004. 54 Consolidated Statements of Operations for the three years ended December 31, 2005. 55 Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 2005. 56 Consolidated Statements of Cash Flows for the three years ended December 31, 2005. 57 Notes to Consolidated Financial Statements 58
2. Financial Statement Schedules Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto. 3. The following Exhibits are filed herewith or incorporated by reference as a part of this Annual Report: 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). 47 (10) Material Contracts a) Lease for corporate headquarters office located at The Graham Building, 30 S. 15th Street, Suite 1200, Philadelphia, PA (Incorporated by reference to Registrant's 2004 Form 10-K) b) Lease for branch office located at 1620 Wadsworth Avenue(Incorporated by reference to Registrant's 2002 Form 10-K) c) Lease for branch office located at 3750 Lancaster Avenue(Incorporated by reference to Registrant's 2002 Form 10-K) d) Lease for branch office located at 1015 North Broad Street(Incorporated by reference to Registrant's 2002 Form 10-K) e) Evelyn F. Smalls' Employment Agreement, dated November 1, 2004, is attached hereto as Exhibit 10e. f) Brenda Hudson-Nelson's Employment Agreement, dated November 1, 2004, is attached hereto as Exhibit 10f. g) Long Term Incentive Compensation Plan (Incorporated by reference to Registrant's 1992 Form 10) h) Lease for Retail office located at The Graham Building, 30 S. 15th Street, Philadelphia, PA, is attached hereto as Exhibit 10h. i) Sublease for Retail office located at The Graham Building, 30 S. 15th Street, Philadelphia, PA, is attached hereto as Exhibit 10i. (11) Statement of Computation of Earnings Per Share. Included at Note 16 of the Financial Statements hereof. (12) Statement of Computation of Ratios. Included at Note 15 of the Financial Statements hereof. (14) Code of Conduct and Ethics (Incorporated by reference to Registrant's 2004 10-K) (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 Sabanes-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 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 99.1. (B) Exhibit 32.2 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 99.2. (99)Additional Exhibits (A) Exhibit 99 Registrants Proxy Statement for its Annual Shareholders Meeting held on November 14, 2005 is attached hereto as Exhibit 99(A). 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized UNITED BANCSHARES, INC. DATE /s/ Evelyn F. Smalls _________________________________________ March 31, 2006 Evelyn F. Smalls, President & CEO, Director /s/ Brenda M. Hudson-Nelson _________________________________________ March 31, 2006 Brenda M. Hudson-Nelson, EVP, CFO /s/ L. Armstead Edwards ___________________________________ March 31, 2006 L. Armstead Edwards, Chairman, Director /s/ Marionette Y. Wilson(Frazier) _________________________________________ March 31, 2006 Marionette Y. Wilson(Frazier), Assistant Secretary, Director /s/ William B. Moore _________________________________________ March 31, 2006 William B. Moore, Secretary, Director /s/ Bernard E. Anderson ________________________________________ March 31, 2006 Bernard E. Anderson, Director /s/ David R. Bright ________________________________________ March 31, 2006 David R. Bright, Director /s/ Joseph T. Drennan ________________________________________ March 31, 2006 Joseph T. Drennan, Treasurer, Director /s/ Ashan M. Nasratullah _________________________________________ March 31, 2006 Ashan M. Nasratullah, Director /s/ Ernest L. Wright _________________________________________ March 31, 2006 Ernest L. Wright, Director 49 Report of Independent Registered Public Accounting Firm To the Board of Directors United Bancshares, Inc. Philadelphia, Pennsylvania We have audited the consolidated balance sheets of United Bancshares, Inc. and Subsidiary (the "Company") as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years 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 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 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, 2005 and 2004, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Blue Bell, Pennsylvania March 10, 2006 50 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and Board of Directors United Bancshares, Inc. and Subsidiary We have audited the accompanying consolidated statement of operations, changes in shareholders' equity, and cash flows of United Bancshares, Inc. and its Subsidiary, United Bank of Philadelphia ("Bank"), for the year 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 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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 provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of United Bancshares, Inc. and Subsidiary as of 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 Company will continue as a going concern. As discussed in Note 2 to the December 31, 2003 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 Company's ability to continue as a going concern. The ability of the Company 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. /s/ Grant Thornton LLP Philadelphia, Pennsylvania February 27, 2004 51
UNITED BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, Assets 2005 2004 ------------- ------------ Cash and due from banks ....................................................... $ 3,657,763 $ 4,317,645 Interest-bearing deposits with banks .......................................... 290,030 888,924 Federal funds sold ............................................................ 5,292,000 3,727,000 ------------ ------------ Cash and cash equivalents ........................................... 9,239,793 8,933,569 Investment securities: Available-for-sale, at fair market value .................................. 3,627,425 4,797,549 Held-to-maturity, at amortized cost (fair market value of $9,906,420 and $8,784,495 in 2005 and 2004, respectively) ......................... 10,078,441 8,762,796 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 2005 and 2004, respectively .................................................... 46,422,378 45,680,014 Less allowance for loan losses ................................................ (472,198) (602,939) ------------ ------------ Net loans ................................................................. 45,950,180 45,077,075 Bank premises and equipment, net .............................................. 1,038,081 1,074,855 Accrued interest receivable ................................................... 336,466 328,354 Other real estate owned ....................................................... 164,500 -- Intangible assets ............................................................. 1,382,279 1,560,358 Prepaid expenses and other assets ............................................. 392,564 353,789 ------------ ------------ Total assets .............................................................. $ 72,209,729 $ 72,300,899 ============ ============ Liabilities and Shareholders' Equity Liabilities: Demand deposits, noninterest-bearing ...................................... $ 14,469,063 $ 13,439,567 Demand deposits, interest-bearing ......................................... 9,788,131 8,333,631 Savings deposits .............................................................. 16,396,073 17,591,982 Time deposits, under $100,000 ................................................................ 9,665,743 10,165,837 Time deposits, $100,000 and over .............................................. 13,004,506 13,641,202 ------------ ------------ Total deposits ................................................................ 63,323,516 63,172,219 Accrued interest payable ...................................................... 150,777 78,196 Accrued expenses and other liabilities ........................................ 243,657 239,156 ------------ ------------ Total liabilities ................................................... 63,717,950 63,489,571 ------------ ------------ 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; 6,308 shares held in treasury 1,368 1,368 Common stock, $0.01 par value; 1,750,000 shares authorized; 876,921 issued ......................................................... 8,769 8,769 Class B Non-voting Common Stock; 250,000 shares authorized; $0.01 par value; 191,667 issued and outstanding ........................................ 1,917 1,917 Treasury Stock, 33,500 shares, at cost ........................................ -- -- Additional paid-in-capital .................................................... 14,749,852 14,749,852 Accumulated deficit ........................................................... (6,237,557) (5,968,140) Accumulated other comprehensive income(loss) .................................. (32,570) 17,562 ------------ ------------ Total shareholders' equity ............................................. 8,491,779 8,811,328 ------------ ------------ Total liabilities and shareholders' equity ............................. $ 72,209,729 $ 72,300,899 ============ ============ The accompanying notes are an integral part of these statements ...............
52
UNITED BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2005 2004 2003 ----------- ----------- ----------- Interest income: Interest and fees on loans ................ $ 3,428,778 $ 3,008,532 $ 2,912,547 Interest on investment securities ......... 537,077 560,255 805,655 Interest on federal funds sold ................ 180,258 86,935 97,599 Interest on time deposits with other banks .... 9,717 30,087 21,002 ----------- ----------- ----------- Total interest income .................. 4,155,830 3,685,809 3,836,803 Interest ...................................... -- -- -- expense: Interest on time deposits ................. 462,910 294,863 374,297 Interest on demand deposits .................. 64,224 48,602 83,267 Interest on savings deposits .................. 57,940 62,464 89,020 ----------- ----------- ----------- Total interest expense ................. 585,074 405,929 546,584 ----------- ----------- ----------- Net interest income ........................... 3,570,756 3,279,880 3,290,219 Provision for loan losses ................... 45,000 565,000 558,000 Net ........................................... -- -- -- interest income after provision for loan losses 3,012,756 3,234,880 2,725,219 ----------- ----------- ----------- Noninterest income: Gain on sale of loans ..................... 33,679 6,299 57,061 Customer service fees ......................... 681,919 852,806 955,284 ATM Fee Income ............................... 570,274 597,965 697,724 Loan Syndication Fee Income ................... 202,171 178,802 86,000 Gain on sale of investments .................. -- 31,115 -- Gain on sale of fixed assets .................. -- 1,874,203 -- Other income .................................. 94,011 113,837 94,837 ----------- ----------- ----------- Total noninterest income ...................... 1,582,054 3,655,027 1,890,906 ----------- ----------- ----------- Noninterest expense: Salaries, wages and employee benefits ..... 1,830,572 1,935,421 2,204,583 Occupancy and equipment ....................... 994,690 1,102,627 1,224,719 Office operations and supplies ................ 345,265 411,920 453,202 Marketing and public relations ............... 100,421 82,652 113,552 Professional services ......................... 265,487 239,050 220,765 Data processing .............................. 407,324 562,655 661,939 Deposit insurance assessments ................ 113,144 72,238 33,501 Other operating ............................... 807,324 836,822 819,329 ----------- ----------- ----------- Total noninterest expense .............. 4,864,227 5,243,385 5,731,590 ----------- ----------- ----------- Net (loss) income before income taxes .. $ (269,417) $ 1,646,522 $(1,115,465) Provision for income taxes ................ -- -- -- ----------- ----------- ----------- Net (loss) income ...................... $ (269,417) $ 1,646,522 $(1,115,465) =========== =========== =========== Net (loss) income per common share--basic ..... $ (0.25) $ 1.54 $ (1.03) =========== =========== =========== Net (loss) income per common share--diluted ... $ (0.25) $ 1.50 $ (1.03) =========== =========== =========== Weighted average number of common shares ...... 1,068,588 1,068,588 1,084,694 =========== =========== =========== The accompanying notes are an integral part of these statements.
53
UNITED BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 2005, 2004 and 2003 Series A Accumulated Compre- preferred stock Common stock Additional other Total hensive ----------------- --------------------- paid-in Accumulated comprehensive shareholders' income Shares Amount Shares Amount capital deficit income (loss) equity (loss) ------------------------------------------------------------------------------------------------------ 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 (6,308) (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 ======================================================================================== Unrealized loses on investment securities (50,132) (50,132) $ (50,132) Net loss (269,417) (269,417) (269,417) ------------------------------------------------------------------------------------------------------ Total comprehensive loss $(319,549) ============== Balance at December 31, 2005 136,842 $1,368 1,068,588 $ 10,686 $14,749,852 $(6,237,557) $(32,570) $ 8,491,779 ======================================================================================== The accompanying notes are an integral part of these statements.
54 UNITED BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31,
2005 2004 2003 ------------ ------------ ------------ Cash flows from operating activities: Net (loss) income......................................... $ (269,417) $ 1,646,522 $ (1,115,465) Adjustments to reconcile net (loss) income to net cash (used in)provided by operating activities: Provision for loan losses............................... 558,000 45,000 565,000 Gain on sale of loans................................... (33,679) (6,299) (57,061) Gain on sale of fixed assets............................ - (1,874,203) - Gain on sale of investment securities................... - (31,115) - Depreciation and amortization........................... 480,976 610,440 688,247 (Increase) decrease in accrued interest receivable and other assets......................................... (211,387) 505,173 (198,518) Increase (decrease) in accrued interest payable and other liabilities.................................... 77,082 (48,299) (249,024) ----------- ------------ ------------- Net cash provided by (used in) operating activities.. 601,575 847,219 (366,821) ------------ ------------ ------------- Cash flows from investing activities: Purchase of available-for-sale investments................. - (496,421) (3,200,237) Purchase of held-to-maturity investments................... (4,762,327) (3,986,354) (3,510,938) Proceeds from maturity and principal reductions of available-for-sale investments.......................... 1,084,929 3,774,398 8,414,626 Proceeds from maturity and principal reductions of held-to-maturity investments............................ 3,440,765 1,917,765 3,967,709 Proceeds from sale of investments available-for-sale....... - 786,526 - Proceeds from the sale of fixed assets..................... - 3,283,536 - Proceeds from sale of student loans........................ 1,806,173 - 3,054,429 Purchase of loans from other financial institutions........ - - (9,325,656) Net (increase)decrease in loans............................ (1,771,882) 161,493 2,532,105 Purchase of premises and equipment......................... (244,306) (102,935) (588,878) ----------- ------------ ------------ Net cash (used in) provided by investing activities.. (446,648) 5,338,008 1,343,161 ------------ ----------- ------------ Cash flows from financing activities: Net increase (decrease) in deposits........................ 151,297 (3,944,604) (9,812,482) ------------ ------------- ------------ Net cash provided by (used in) financing activities.. 151,297 (3,944,604) (9,812,482) ---------- ------------- ------------ Net increase (decrease) in cash and cash equivalents. 306,224 2,240,623 (8,836,142) ---------- ------------ ------------ Cash and cash equivalents at beginning of year................. 8,933,569 6,692,946 15,529,088 ---------- ------------- ------------ Cash and cash equivalents at end of year....................... $ 9,239,793 $ 8,933,569 $ 6,692,946 ============ =========== ============ Supplemental disclosure of cash flow information: Cash paid during the year for interest..................... $ 512,493 $ 405,508 $ 468,141 ============= =========== ===========
The accompanying notes are an integral part of these statements. 55 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004, and 2003 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. Changes in loans made to and deposits received from customers are reported on a net 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. Securities classified as available for sale or held to maturity are considered to be impaired when a decline in the fair value is judged to be other-than temporary. The Bank evaluates the securities for the other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. The Bank employs a systematic methodology that considers available evidence in evaluating potential impairment of its investments. In the event that the cost of an investment exceeds its fair value, the Bank evaluates, among other factors, the magnitude and duration of the decline in fair value; for equity and debt securities the financial health of and business outlook of the issuer; the performance of the underlying assets in interests in securitized assets; and the Bank's intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in investment income and a new cost basis in the investment is established. (Continued) 56 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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. 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. Loans Held-for-Sale 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. Allowance for Loan Losses 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 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. (Continued) 57 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued The allowance for loan losses is maintained at a level considered adequate to provide for potential losses in the 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. 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 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 SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, 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, 2005, 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) 58 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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) 2005 2004 2003 ---- ----- ---- Net (loss) income As reported................................................. $ (269) $ 1,647 $ (1,115) Less: Stock-based compensation costs determined under... -- -- -- fair value-based method for all awards Pro forma................................................... $ (269) $ 1,647 $ (1,115) Basic (loss) income per share As reported................................................. $(0.25) $ 1.54 $ (1.03) Pro forma................................................... $(0.25) $ 1.54 $ (1.03) Fully Diluted (loss) income per share As reported................................................. $(0.25) $ 1.50 $ (1.03) Pro forma................................................... $(0.25) $ 1.50 $ (1.03)
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. The carrying amount of accrued interest receivable approximates fair market value. (Continued) 59 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Loans held-for-sale: Fair values are estimated using quoted rates based upon secondary market sources for similar loans. Loans: The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated prepayments and amortizations. Prepayments and discount rates were based on current marketplace estimates and pricing. Residential mortgage loans were discounted at the current effective yield, including fees, of conventional loans, adjusted for their maturities with a spread to the Treasury yield curve. The carrying amount of accrued interest receivable approximates fair market value. 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. The carrying amount of accrued interest payable approximates fair market value. 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, 2005, 2004, and 2003, respectively. The amortization of the intangible will be $178,078 for each of the next five years. Intangible assets are reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the net asset. Such reviews include an analysis of current results and take into consideration the discounted value of projected operating cash flows. The core deposit intangible was tested for impairment. No impairment has been recognized. 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) 60 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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. Material estimates which are particularly susceptible to significant change in the near term relate to the market value of investment securities, the determination of the allowance for loan losses, valuation of other real estate, and consideration of impairment of other intangible assets. 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 2005 presentation. Comprehensive Income Comprehensive income includes net income as well as certain other items that result in a change to equity during the period. The components of other comprehensive income (loss) are as follows: (Continued) 61 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 2005 -------------------------------------------- Before tax Tax Net of tax amount benefit(expense) amount ----- ---------------- ------ Unrealized losses on securities Unrealized holding losses arising during period $ (75,958) $ 25,826 $ (50,132) Less: reclassification adjustment for gains realized in net income - - - ---------- ---------- ---------- Other comprehensive income(loss), net $ (75,958) $ 25,826 $ (50,132) ============ =========== ============ December 31, 2004 -------------------------------------------- Before tax Tax Net of tax amount benefit(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 Net of tax amount benefit(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) ============ =========== ============
62 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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. At December 31, 2003, the Bank's tier one leverage capital ratio had fallen to 6.81%, below the 7% minimum capital ratio required by the Agreement. However, by February 2004, the tier one leverage ratio had improved to 7.29%. 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 improved to 9.49% at December 31, 2004. At December 31, 2005, the Bank's tier one leverage ratio was 9.47%. With the stabilization of the Bank's capital position, management has turned its attention to increasing profitability. A strategic plan has been adopted for 2006 that focuses on core growth strategies for loans and deposits. These strategies include the introduction of "signature" deposit products with attractive interest rates coupled with alternative delivery channels including internet banking and remote deposit capture. In addition, the Bank has designated regional business development officers in the regions surrounding each of its three branches to solicit loan and deposit business, These strategies allow the Bank to penetrate the market place without adding additional branches to the network. While expense reductions will continue to be sought, management believes that a greater impact will be realized with increased deposit levels and loan originations that result increased net interest income. As a result of all of the actions referred to above, Management believes that the Bank is substantially in compliance with the Agreement's terms and conditions. Management continues to address all matters outlined in the Agreement. Failure to comply could result in additional regulatory supervision and/or actions. 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, 2005. 63 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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, 2005 and 2004 are as follows:
2005 Gross Gross Amortized unrealized unrealized Market cost gains losses value ------------- ------------- ------------- ------------- Available-for-sale: U.S.Government agency securities....... $ 250,000 $ $ (3,515) $ 246,485 Mortgage-backed securities............. 3,085,436 18,348 (63,445) 3,040,339 --------- -------------- ----------- ------------ Total debt securities.................. 3,335,436 18,348 (66,960) 3,286,824 Investments in mutual funds............ 112,151 112,151 Other investments...................... 228,450 228,450 ------- ----------- ----------- ---------- $ 3,676,037 $ 18,348 $ (66,960) $ 3,627,425 ========= ======== ============ ========= Held-to-maturity: U.S.Government agency securities....... $ 6,997,720 $ 235 $ (133,292) $ 6,864,663 Mortgage-backed securities............. 3,080,721 23,875 (62,839) 3,041,757 --------- -------------- ----------- ------------ $10,078,441 $ 24,110 $ (196,131) $ 9,906,420 ========= ======== ============ ========= 2004 Gross Gross Amortized unrealized unrealized Market cost gains losses value ------------- ------------- ------------- ------------- Available-for-sale: U.S.Government agency securities....... $ 250,00 $ - $ (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 =========== ========== =========== =========
64 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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, 2005 (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 17 $1,723 $(25) $2,569 $ (172) $ 4,555 $ (197) Mortgage backed securities 20 970 (12) 7,441 (54) 8,411 (66) ---- ---- ---- ------- ----- ------ ----- Total temporarily impaired investment securities 37 $2,693 $(37) $10,010 $ (226) $ 12,966 $ (263) === ====== ==== ====== ===== ====== ====== 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) === ====== ==== ====== ======== ======= ====
Management does not believe any individual unrealized loss as of December 31, 2005 and 2004 represents other-than-temporary impairment. The unrealized losses on these securities are caused by the changes in general market interest rates. All securities with unrealized losses are reviewed by management at least quarterly to determine whether the unrealized losses are other-than-temporary. The Company believes it will collect all amounts contractually due on these securities as they are backed by the full faith and credit of the U.S. Government or are guaranteed by an agency of the U.S. Government. The Company has the ability and the intent to hold these securities until market price recovery or maturity. (Continued) 65 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 4. INVESTMENTS - Continued Maturities of investment securities classified as available-for-sale and held-to-maturity at December 31, 2005 were as follows. Expected maturities may differ from contractual maturities.
Amortized Market cost value ------------- ------------- Available-for-sale: Due after one month through three years................................ $ 250,000 $ 246,485 Due after three year through five years................................ - - Due after five years through fifteen years............................. - - Mortgage-backed securities............................................. 3,085,436 3,040,339 ----------- ------------ Total debt securities.................................................. 3,335,436 3,286,824 Investments in mutual funds............................................ 112,151 112,151 Other investments...................................................... 228,450 228,450 ----------- ------------ $ 3,676,037 $ 3,627,425 ============ ============ Held-to-maturity: Due in one month through three years................................... $ 3,749,438 $ 3,696,815 Due after three years through five years............................... 2,748,282 2,692,848 Due after five years through fifteen years............................. 500,000 475,000 Mortgage-backed securities............................................. 3,080,721 3,041,757 ----------- ----------- $ 10,078,441 $ 9,906,420 ============ ============
No securities were sold during 2005. The Bank recorded a gross gain of $31,115 on the sale of investments during the year ended December 31, 2004. No securities were sold during 2003. As of December 31, 2005 and 2004, investment securities with a book value of $11,780,583 and $11,459,636, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. 66 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 5. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of the net loans is as follows:
2005 2004 ------------- ------------- Commercial loans.......................................................... $ 32,985,265 $ 28,287,290 Residential mortgages..................................................... 7,545,858 10,664,750 Consumer loans............................................................ 5,891,256 6,727,974 ----------- ----------- Total loans............................................................ 46,422,378 45,680,014 Less allowance for loan losses............................................ (472,198) ( 602,939) ------------ ------------ Net loans.............................................................. $ 45,950,180 $ 45,077,075 ============ ============
As of December 31, 2004, the Bank had student loans with a book value of $1,412,554 that were held-for-sale. At December 31, 2005 and 2004, unamortized deferred fees and costs totaled $127,714 and $139,296, respectively. As of December 31, 2005 and 2004, the Bank had loans to certain officers and directors and their affiliated interests in aggregate dollar amounts of $856,473 and $1,074,000, respectively. During 2005, there were $125,000 in new loans to related parties and repayments amounted to $258,000. During 2004, there were $236,000 in new loans to related parties and repayments amounted to $81,000. 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 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. Details on the Bank's non-performing loans are as follows:
2005 2004 2003 ------------ ------------ ------------ Total non-accrual loans................................. $ 683,000 $ 1,366,000 $ 1,588,000 Total impaired loans.................................... 386,000 1,034,000 1,124,000 Average impaired loans.................................. 903,000 1,079,000 1,124,000 Specific allowance allocated to impaired loans.......... 113,000 259,000 75,000 Non-accrual/impaired loans with SBA Guarantees.......... 190,000 888,000 888,000 Interest recognized on impaired loans................... 37,000 - 67,000 Loans past due 90 days and still accruing............... - 65,000 560,000
(Continued) 67 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 5. LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued Changes in the allowance for possible loan losses are as follows:
2005 2004 2003 ------------ ------------ ------------ Balance, beginning of year.............................. $ 602,939 $ 338,574 $ 674,550 Provision............................................... 558,000 45,000 565,000 Charge-offs............................................. (981,355) ( 239,757) (972,938) Recoveries.............................................. 292,614 459,122 71,962 ---------- ---------- ---------- Balance, end of year.................................... $ 472,198 $ 602,939 $ 338,574 =========== =========== ===========
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, 2005, approximately 25% 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 2005 2004 ------------- ------------ ------------ Buildings and leasehold improvements.................... 10-15 years $ 853,066 1,355,086 Furniture and equipment................................. 3-7 years 1,068,223 1,753,307 --------- ---------- 1,921,289 3,108,393 Less accumulated depreciation........................... (833,208) (2,033,538) ----------- ------------- $ 1,038,081 $ 1,074,855 =========== ===========
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, 2005, 2004, and 2003 was $340,638, $277,850, and $329,878. Future minimum lease payments under operating leases are as follows: Operating Year ending December 31, leases 2006................................................. $ 310,227 2007................................................. 316,808 2008................................................. 312,599 2009................................................. 266,389 2010................................................. 202,530 Thereafter........................................ 929,916 ---------- Total minimum lease payments......................... $ 2,338,469 =========== 68 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 6. BANK PREMISES AND EQUIPMENT-Continued In August 2005, the Bank assumed the remaining term from another financial institution of a lease for retail space on the ground level of its corporate headquarters. The Bank formed an alliance with a regional mortgage brokerage company and simultaneously subleased all except the lobby in which the automated teller machine (ATM) is located. The lease expires in September 2009. The Bank's average aggregate gross monthly rental is $4,858 of which a tenant pays an average monthly rent of $3,358. 7. DEPOSITS At December 31, 2005, the scheduled maturities of time deposits (certificates of deposit) are as follows (dollars in thousands): 2006............................... $ 21,296 2007............................... 647 2008............................... 307 2009............................... 90 2010............................... 253 Thereafter......................... 77 ---------- $ 22,670 8. BORROWINGS As of December 31, 2005, 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, 2005 and 2004, the Bank had no borrowings outstanding. 9. CAPITAL STOCK There were no capital stock transactions in 2005 and 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. 10. INCOME TAXES At December 31, 2005, the Bank has net operating loss carryforwards of approximately $4,610,000 for income tax purposes that expire in 2008 through 2025. 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 $2,088,508 and $1,930,062 as of December 31, 2005 and 2004, 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) 69 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 10. INCOME TAXES - Continued
2005 2004 -------- ------------ Deferred tax assets(liabilities): Provision for loan losses.............................................. $ (13,058) $ 72,243 Unrealized (gains) losses on investment securities..................... 16,528 (8,909) Depreciation........................................................... 435,472 436,223 Net operating loss carryforwards....................................... 1,634,822 1,405,875 Other.................................................................. 154,623 24,630 Valuation allowance for deferred tax assets............................... (2,228,388) ( 1,930,062) ------------ ------------- Net deferred tax assets............................................ $ - $ - =========== =========== 2005 2004 2003 ------------ ------------ ------------ Effective rate reconciliation: Tax at statutory rate(34%)........................... $ (91,601) $ 559,817 $ (379,258) Nondeductible expenses............................... 4,513 5,401 4,325 (Decrease)Increase in valuation allowance............ 298,326 (422,447) 494,737 Other................................................ (211,238) (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: 2005 2004 ------------ ------------ Commitments to extend credit............ $ 12,727,370 $ 13,749,562 Outstanding letters of credit........... 10,000 - Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and unused credit card lines. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. 70 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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.
2005 2004 ------------------------- ------------------------- Carrying Fair Carrying Fair amount value amount value ---------- ---------- ----------- ---------- (Dollars in thousands) Assets: Cash and cash equivalents..................... $ 9,240 $ 9,240 $ 8,934 $ 8,934 Investment securities......................... 13,705 13,533 13,560 13,582 Loans held-for-sale........................... - - 1,412 1,437 Loans, net of allowance for loan losses....... 45,950 45,998 45,077 45,366 Interest receivable........................... 336 336 328 328 Liabilities: Demand deposits............................... 24,257 24,257 21,773 21,773 Savings deposits.............................. 16,396 16,396 17,591 17,591 Time deposits................................. 22,670 22,670 23,807 23,807 Interest Payable.............................. 150 150 78 78
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, 2005. These options expire in 2008. The Company made no stock-based compensation awards to any employee during 2005, 2004, and 2003. 71 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 14. CONSOLIDATED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Condensed Balance Sheets December 31, ------------ (Dollars in thousands) 2005 2004 --------- --------- Assets: Due from banks (subsidiary).................................................. $ 289 $ 289 Investment in United Bank of Philadelphia.................................... 8,202 8,522 ------- ------- Total assets............................................................. $ 8,491 $ 8,811 ======== ======== Shareholders' equity: Series A preferred stock..................................................... $ 1 $ 1 Common stock................................................................. 11 11 Additional paid-in capital................................................... 14,750 14,750 Accumulated deficit.......................................................... (6,238) (5,968) Net unrealized holding gains on securities available-for-sale................ (33) 17 -------- ------- Total shareholders' equity............................................... $ 8,491 $ 8,811 ======== ======== Condensed Statements of Operations ..... Years ended December 31, -------------------------------------- (Dollars in thousands) 2005 2004 2003 --------- --------- --------- Equity in net (loss) income of subsidiary........................ $ (269) $ 1,646 $ (1,115) --------- -------- --------- Net (loss) income ............................................... $ (269) $ 1,646 $ (1,115) ========= ======== ======== Condensed Statements of Cash Flows ..... Years ended December 31, -------------------------------------- (Dollars in thousands) 2005 2004 2003 --------- --------- --------- Cash flows from operating activities: Net (loss) income............................................. $ (269) $ 1,646 $ (1,115) Equity in net loss (income) of subsidiary..................... 269 (1,646) 1,115 ------- -------- ------- Net cash provided by operating activities................. - - - ------- ------- ------- Cash flows from investing activities: Investment in subsidiary......................................... - - ------- ------- ------- Net cash used in investing activities............................ - - ------- ------- ------- Cash flows from financing activities: Issuance of common stock.................................. - - ------- ------- ------- Net cash provided by financing activities................. - - ------- ------- ------- 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 ======== ======== ========
72 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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 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. By typical regulatory guidelines the Bank is considered "well" capitalized, however, because it is operating with a Written Agreement, it is only considered to be "adequately" capitalized. The Bank's growth and other operating factors may have an adverse effect on its capital ratios.(Also see Note 2. REGULATORY AGREEMENT) (Continued) 73 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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, 2005: Total capital to risk-weighted assets: Consolidated...................... $ 7,581 17.03% $ 3,583 8.00% N/A Bank.............................. 7,292 16.39 3,560 8.00 $ 4,450 10.00% Tier I capital to risk-weighted assets: Consolidated...................... 7,109 15.97 1,792 4.00 N/A Bank.............................. 6,820 15.32 1,780 4.00 $ 2,670 6.00 Tier I capital to average assets: Consolidated...................... 7,109 9.87 2,891 4.00 N/A Bank.............................. 6,820 9.47 2,880 4.00 $ 3,600 5.00 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%
Under the framework, the Bank's capital levels do not allow the Bank to accept brokered deposits without prior approval from regulators. Historically, the Bank has not accepted brokered deposits and management believes this restriction does not significantly limit the Bank's ability to attract deposits and maintain adequate liquidity. 74 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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, 2005 ----------------------------------------------- Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------ Net loss.............................................. $ (269,417) ============ Basic and fully diluted EPS Income available to stockholders................. $ (269,417) 1,068,588 $ (0.25) ============ ============ ========= Year ended December 31, 2004 ----------------------------------------------- Loss Shares Per share (numerator) (denominator) amount ----------- ------------- ------ Net income.............................................. $ 1,646,522 =========== Basic 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 ----------------------------------------------- Loss 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) ============ ============ =========
Options to purchase 29,694 shares of common stock are included in the computation of diluted EPS for the years ended December 31, 2004. The preferred stock is non cumulative and the Company is restricted from paying dividends. Therefore, no effect of the preferred stock is included in the earnings per share calculations. 75 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 17. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) The following summarizes the consolidated results of operations during 2005 and 2004, on a quarterly basis, for United Bancshares, Inc. and Subsidiary:
(Dollars in thousands) 2005 --------------------------------------------------------- Fourth Third Second First quarter quarter quarter quarter ----------- ----------- ----------- ----------- Interest income $ 1,063 $ 1,075 $ 1,031 $ 986 Interest expense 183 157 130 115 --------- --------- --------- --------- Net interest income 880 918 901 871 Provisions for loan losses 398 50 70 40 --------- --------- ---------- --------- Net interest after provisions for loan losses 482 868 831 831 Non-interest income 390 362 416 414 Non-interest expense 1,239 1,193 1,197 1,234 --------- --------- --------- --------- Net (loss) income $ (367) $ 37 $ 50 $ 11 =========== ========== ========== ========== 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 =========== ========== ========== ==========
76 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 10. INCOME TAXES - Continued
2005 2004 ------------ ------------ Deferred tax assets(liabilities): Provision for loan losses.............................................. $ (4,749) $ 72,243 Unrealized (gains) losses on investment securities........................... 16,528 (8,909) Depreciation................................................................. 435,472 436,223 Net operating loss carryforwards............................................. 1,568,931 1,405,875 Other.................................................................. 72,325 24,630 Valuation allowance for deferred tax assets.................................. (2,088,508) ( 1,930,062) ------------ ------------ Net deferred tax assets............................................ $ - $ - ============ ============ 2005 2004 2003 ------------ ------------ ------------ Effective rate reconciliation: Tax at statutory rate(34%)........................... $ (91,601) $ 559,817 $ (379,258) Nondeductible expenses............................... 4,513 5,401 4,325 (Decrease)Increase in valuation allowance............ 158,446 (422,447) 494,737 Other................................................ (71,358) (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:
2005 2004 Commitments to extend credit.............................................. $ 12,727,370 $ 13,749,562 Outstanding letters of credit............................................. 10,000 -
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and unused credit card lines. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. 77 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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.
2005 2004 ------------------------- ------------------------- Carrying Fair Carrying Fair amount value amount value ---------- ----------- ----------- ---------- (Dollars in thousands) Assets: Cash and cash equivalents..................... $ 9,240 $ 9,240 $ 8,934 $ 8,934 Investment securities......................... 13,705 13,533 13,560 13,582 Loans held-for-sale................................. - - 1,412 1,437 Loans, net of allowance for loan losses....... 45,950 45,998 45,077 45,366 Interest receivable........................... 336 336 328 328 Liabilities: Demand deposits............................... 24,257 24,257 21,773 21,773 Savings deposits.............................. 16,396 16,396 17,591 17,591 Time deposits................................. 22,670 22,670 23,807 23,807 Interest Payable.............................. 150 150 78 78
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, 2005. These options expire in 2008. The Company made no stock-based compensation awards to any employee during 2005, 2004, and 2003. 78 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 14. CONSOLIDATED FINANCIAL INFORMATION--PARENT COMPANY ONLY Condensed Balance Sheets
December 31, (Dollars in thousands) 2005 2004 --------- --------- Assets: Due from banks (subsidiary).................................................. $ 289 $ 289 Investment in United Bank of Philadelphia.................................... 8,202 8,522 --------- --------- Total assets............................................................. $ 8,491 $ 8,811 ========= ========= Shareholders' equity: Series A preferred stock..................................................... $ 1 $ 1 Common stock................................................................. 11 11 Additional paid-in capital................................................... 14,750 14,750 Accumulated deficit.......................................................... (6,238) (5,968) Net unrealized holding gains on securities available-for-sale................ (33) 17 --------- --------- Total shareholders' equity............................................... $ 8,491 $ 8,811 ========= =========
Condensed Statements of Operations Years ended December 31, (Dollars in thousands) 2005 2004 2003 --------- --------- --------- Equity in net (loss) income of subsidiary........................ $ (269) $ 1,646 $ (1,115) --------- --------- --------- Net (loss) income ............................................... $ (269) $ 1,646 $ (1,115) ========= ========= ========= Condensed Statements of Cash Flows Years ended December 31, (Dollars in thousands) 2005 2004 2003 --------- --------- --------- Cash flows from operating activities: Net (loss) income............................................. $ (269) $ 1,646 $ (1,115) Equity in net loss (income) of subsidiary..................... 269 (1,646) 1,115 --------- --------- --------- Net cash provided by operating activities................. - - - --------- --------- --------- Cash flows from investing activities: Investment in subsidiary......................................... - - --------- --------- --------- Net cash used in investing activities............................ - - --------- --------- --------- Cash flows from financing activities: Issuance of common stock.................................. - - --------- --------- --------- Net cash provided by financing activities................. - - --------- --------- --------- 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 ========= ========= =========
79 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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 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. By typical regulatory guidelines the Bank is considered "well" capitalized, however, because it is operating with a Written Agreement, it is only considered to be "adequately" capitalized. The Bank's growth and other operating factors may have an adverse effect on its capital ratios.(Also see Note 2. REGULATORY AGREEMENT) (Continued) 80 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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, 2005: Total capital to risk- weighted assets: Consolidated...................... $ 7,581 17.03% $ 3,583 8.00% N/A Bank.............................. 7,292 16.39 3,560 8.00 $ 4,450 10.00% Tier I capital to risk- weighted assets: Consolidated...................... 7,109 15.97 1,792 4.00 N/A Bank.............................. 6,820 15.32 1,780 4.00 $ 2,670 6.00 Tier I capital to average assets: Consolidated...................... 7,109 9.87 2,891 4.00 N/A Bank.............................. 6,820 9.47 2,880 4.00 $ 3,600 5.00 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%
Under the framework, the Bank's capital levels do not allow the Bank to accept brokered deposits without prior approval from regulators. Historically, the Bank has not accepted brokered deposits and management believes this restriction does not significantly limit the Bank's ability to attract deposits and maintain adequate liquidity. 81 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 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, 2005 ----------------------------------------------- Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------ Net loss.............................................. $ (269,417) ============ Basic and fully diluted EPS Income available to stockholders................. $ (269,417) 1,068,588 $ (0.25) ============ ========= ========= Year ended December 31, 2004 ----------------------------------------------- Income Shares Per share (numerator) (denominator) amount ----------- ------------- ------ Net income.............................................. $ 1,646,522 Basic 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) ============ ========= =========
Options to purchase 29,694 shares of common stock are included in the computation of diluted EPS for the years ended December 31, 2004. The preferred stock is non cumulative and the Company is restricted from paying dividends. Therefore, no effect of the preferred stock is included in the earnings per share calculations. 82 UNITED BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2005, 2004, and 2003 17. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) The following summarizes the consolidated results of operations during 2005 and 2004, on a quarterly basis, for United Bancshares, Inc. and Subsidiary: (Dollars in thousands)
2005 ----------------------------------------------------- Fourth Third Second First quarter quarter quarter quarter ------- ------- ------- ------- Interest income $ 1,063 $ 1,075 $ 1,031 $ 986 Interest expense 183 157 130 115 ----------- ----------- ----------- ----------- Net interest income 880 918 901 871 Provisions for loan losses 398 50 70 40 ----------- ----------- ----------- ----------- Net interest after provisions for loan losses 482 868 831 831 Non-interest income 390 362 416 414 Non-interest expense 1,239 1,193 1,197 1,234 ----------- ----------- ----------- ----------- Net (loss) income $ (367) $ 37 $ 50 $ 11 =========== =========== =========== =========== 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 =========== =========== =========== ===========
83 EX-10 2 ex10-e.txt EXHIBIT 10(E) Exhibit 10.e Smalls Employment Agreement 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"). 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 EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 2 of 7 Executive is employed pursuant to this Agreement shall be referred to as the "Employment Term." 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 lie 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 EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 4 of 7 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, 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 EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 5 of 7 Executive theretofore participated, under the terms and conditions of such plans, programs, and arrangements. 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. 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 EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 6 of 7 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 21st day of December 2004. UNITED BANK OF PHILADELPHIA BY: /s/ Chairman of the Board /s/ Evelyn Smalls - ------------------- Evelyn Smalls EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 7 of 7 EX-10 3 ex10-f.txt EXHIBIT 10(F) Exhibit 10.f Hudson-Nelson Employment Agreement 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"). 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 Disabilitv 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 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. 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. EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 6 of 7 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 21st day of December , 2004. UNITED BANK OF PHILADELPHIA BY: /s/ Chairman of the Board /s/ Brenda Hudson-Nelson - ---------------------------- Brenda Hudson-Nelson EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 7 of 7 EX-10 4 ex10-h.txt EXHIBIT 10(H) SUB-LEASE AGREEMENT by and between CITIZENS BANK OF PENNSYLVANIA (as Landlord) and UNITED BANK OF PHILADELPHIA (as Tenant) Date: July 1, 2005 Page ---- TABLE OF CONTENTS 1. Definitions......................................................1 2. Prime Lease and Premises.........................................3 3. As Is Condition of Premises......................................4 4. Use of Premises..................................................4 5. Fixed Basic Rent.................................................4 6. Additional Rent; Tenant's Personalty.............................4 7. Operating Costs; Real Estate Taxes...............................4 8. Interest and Late Charge.........................................5 9. Indemnification..................................................5 10. Insurance........................................................5 11. Repairs and Maintenance..........................................8 12. Utilities and Services...........................................8 13. Governmental Regulations.........................................9 14. Alterations, Additions and Fixtures..............................9 15. Mechanic's Liens................................................10 16. Landlord's Right of Entry.......................................11 17. Damage by Fire or Other Casualty; Condemnation..................11 18. Non-Abatement of Rent...........................................12 19. Quiet Enjoyment.................................................12 20. Rules and Regulations...........................................12 21. Assignment and Sublease.........................................12 22. Subordination...................................................12 23. Curing Tenant's Defaults........................................13 24. Surrender.......................................................13 25. Defaults-Remedies...............................................13 26. Condition of Premises...........................................17 27. Hazardous Substances............................................17 28. Recording.......................................................18 29. Broker..........................................................18 30. Prime Landlord Consent..........................................18 31. Notices.........................................................18 32. Irrevocable Offer: No Option...................................19 33. Inability to Perform............................................19 34. Survival........................................................19 35. Corporate Tenants...............................................19 36. Waiver of Invalidity of Lease...................................19 37. Rights Reserved by Landlord.....................................19 38. Miscellaneous...................................................20 EXHIBIT A - PREMISES EXHIBIT B - PRIME LEASE -i- SUB-LEASE AGREEMENT ------------------- THIS SUB-LEASE AGREEMENT (the "Lease") is made as of July 1, 2005 by and between CITIZENS BANK OF PENNSYLVANIA, a Pennsylvania banking corporation ("Landlord") whose address is 801 Market Street, Philadelphia, Pennsylvania 19101, and UNITED BANK OF PHILADELPHIA, a Pennsylvania banking corporation ( "Tenant") whose address is 30 South 15th Street, Suite 1200, Philadelphia, Pennsylvania 19102. Background: ----------- A. Landlord leases certain space located on the first floor of the building commonly known as the Graham Building, located at 30 South 15th Street, Philadelphia, Pennsylvania, from Riggs & Co., a division of Riggs Bank N.A., as trustee of the Multi-Employer Property Trust, a trust organized under 12 C.F.R. Section 9.18 ("Prime Landlord") pursuant to the terms of that certain Lease dated September 8, 1999 by and between Landlord and Prime Landlord. B. Landlord desires to sub-lease the Premises to Tenant and Tenant desires to accept same from Landlord in accordance with and subject to the terms and conditions hereinafter set forth. Agreement: ---------- For and in consideration of the covenants contained in this Lease and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant, intending to be legally bound hereby, agree as follows: 1. Definitions. In addition to other terms elsewhere defined in this Lease, the following terms whenever used in this Lease shall have only the meanings set forth in this Section, unless such meanings are expressly modified, limited or expanded elsewhere in this Lease. A. Additional Rent shall mean all sums defined as Additional Rent in or pursuant to the Prime Lease and any and all other sums, in addition to Fixed Basic Rent payable by Tenant to Landlord or to third parties pursuant to the provisions of the Lease. B. Broker shall mean CB Richard Ellis. C. Building shall mean the building known as the Graham Building with an address of 30 South 15th Street, Philadelphia, Pennsylvania. D. Commencement Date shall mean July 1, 2005. E. Exhibits shall be the following, attached to this Lease and incorporated in this Lease and made a part of this Lease: Exhibit A Premises Exhibit B Prime Lease F. Expiration Date shall mean September 29, 2005. -1- G. Fixed Basic Rent shall mean, with respect to each Lease Year, the following amounts: --------------------------------- ----------- ------------------- Lease Year Annual Rent Monthly Installment --------------------------------- ----------- ------------------- July 1, 2005 - June 30, 2006 $52,124.00 $4,344.00 --------------------------------- ----------- ------------------- July 1, 2006 - June 30, 2007 $56,133.00 $4,678.00 --------------------------------- ----------- ------------------- July 1, 2007 - June 30, 2008 $60,143.00 $5,012.00 --------------------------------- ----------- ------------------- July 1, 2008 - June 30, 2009 $64,152.00 $5,346.00 --------------------------------- ----------- ------------------- July 1, 2009 - September 29, 2009 $68,162.00 $5,680.00 --------------------------------- ----------- ------------------- H. Guarantor shall mean United Bancshares Inc., a Pennsylvania banking corporation. I. Guaranty shall mean that certain Sub-Lease Guaranty dated as of ____________, 2005 between Guarantor and Landlord. J. Lease Year shall mean each consecutive twelve (12) month period during the Term commencing on the Commencement Date. K. Permitted Use shall mean use as a branch bank and other general office use and for no other purpose, subject to all applicable laws and all rules and regulations of the Building and insurers of the Building. L. Person shall mean a natural person, a partnership, a corporation, an association, and any other form of business association or entity. M. Premises shall be approximately 2,673 rentable square feet on the first floor of the Building as set forth on Exhibit A. N. Prime Landlord shall have the meaning ascribed to such term in the Background. O. Prime Lease shall mean that certain Lease dated September 8, 1999 by and between Landlord and Prime Landlord, whereby Landlord has leased the Premises from the Prime Landlord, a copy of such Prime Lease being attached hereto and incorporated herein as Exhibit B. P. Rent shall mean all Fixed Basic Rent and Additional Rent and any other rent or other sums due under this Lease reserved under this Lease. Q. Tenant's Pro Rata Share shall mean an amount equal to one and twelve hundredths percent (1.12%), which percentage has been determined pursuant to the Prime Lease. -2- R. Term shall mean the period of time commencing on the Commencement Date and ending on the Expiration Date, unless otherwise terminated pursuant to the terms of this Lease. 2. Prime Lease and Premises. a) Landlord hereby demises and subleases the Premises to Tenant and Tenant hereby leases and takes the Premises from Landlord for the Term and upon the terms, covenants, conditions, and provisions set forth in this Lease. The Tenant's interest in the Premises as subtenant shall include the right, subject to the Prime Lease, in common with Prime Landlord, Landlord and other occupants of the Building, to use sidewalks, lobbies, hallways, entranceways, lavatory facilities and other facilities which are located within the Building and which are designated by Landlord or Prime Landlord from time to time for the use of all of the tenants of the Building (the "Common Facilities"). b) Tenant acknowledges and agrees that this Lease is a sublease and is under and subject to all of the terms, covenants, conditions and agreements of the Prime Lease and the operation of the same. In the event of any termination of the Prime Lease, for any reason whatsoever or howsoever, notwithstanding anything to the contrary in this Lease, this Lease shall terminate absolutely without liability to Landlord or Prime Landlord. A true and correct copy of the Prime Lease is attached to this Lease and incorporated herein as Exhibit B. The terms, provisions, covenants and conditions of the Prime Lease are hereby incorporated herein by reference and made a part hereof and are and shall be superior to this Lease to the extent they impose duties or obligations on Landlord, as tenant. During the Term, as between Tenant and Landlord, Tenant hereby assumes and agrees to perform and be bound by all of the foregoing provisions of the Prime Lease which are incorporated herein as if Tenant were the "Tenant" under the Prime Lease, Landlord were the "Landlord" thereunder and the Premises were the "Premises" thereunder (except that Tenant shall also afford Prime Landlord any rights granted to Landlord in such provisions including any approval rights). Landlord shall have all of rights and remedies of the Prime Landlord under the Prime Lease as against Tenant. Tenant shall have none of the privileges, benefits or rights granted to Landlord, as tenant, under the Prime Lease unless expressly granted to Tenant herein (including, without limitation, any renewal options or rights of first offer). c) Tenant acknowledges that Landlord, Prime Landlord and/or Prime Landlord's lender may have different interests in some circumstances; therefore, Tenant agrees that Landlord shall not be bound by any approval or consent provided by Prime Landlord and/or Prime Landlord's lender and that Landlord shall not be liable or responsible for any denial, delay or condition of approval or consent by Prime Landlord and/or Prime Landlord's lender, which if not given, shall automatically result in the demand by Landlord of its consent or approval. d) Except as otherwise expressly provided in this Lease, in the event of a conflict between the terms of the Prime Lease and the provisions of this Lease, the applicable provision which is more restrictive on Tenant, or which imposes the greater obligation on Tenant, shall control. Any capitalized terms used in this Lease and not otherwise defined herein, shall have the meanings prescribed for such terms in the Prime Lease. -3- 3. As Is Condition of Premises. The Premises are being leased to Tenant in "AS-IS" condition without any obligation of the Landlord to make any alterations, improvements, or repairs. Tenant acknowledges that it has inspected the Premises and agrees to accept the same as of the date hereof in its current state of condition and repair and releases the Landlord from any and all claims in connection therewith. 4. Use of Premises. Tenant shall occupy the Premises throughout the Term and shall use the same solely for the Permitted Use. Tenant shall not make, or permit to be made, any unseemly or disturbing noises or odors and shall not interfere with other tenants or those having business with them. Tenant shall keep all mechanical apparatus in the Premises free of vibration and noise which may be transmitted beyond the limits of the Premises. Tenant shall not overload any floor or part thereof in the Premises or the Building, including any public corridors or elevators therein, by bringing in, placing, storing, installing or removing any large or heavy articles and Landlord may prohibit or may direct and control the location and size of safes and all other heavy articles and may require, at Tenant's sole cost and expense, supplementary supports of such material and dimensions as Landlord or Prime Landlord may deem necessary to properly distribute the weight. 5. Fixed Basic Rent. Commencing on the Commencement Date and throughout the Term, Tenant shall pay to Landlord at the address listed in Section 31 hereof the Fixed Basic Rent, without notice or demand and without setoff or deduction, in equal monthly installments specified in Section 1(G), in advance, on the first day of each calendar month during the Term. If the Commencement Date falls on a day other than the first day of a calendar month, the Fixed Basic Rent shall be due and payable for such month, apportioned on a per diem basis for the period between the Commencement Date and the first day of the next first full calendar month in the Term and such apportioned sum shall be paid on the Commencement Date. 6. Additional Rent; Tenant's Personalty. a) Commencing on the Commencement Date, Tenant shall pay to Landlord as rent, all Additional Rent. Additional Rent shall be payable on or before the date when such payment is first due, either as provided for hereunder or pursuant to the Prime Lease. If no date or time is specified, then all such Additional rent shall be due upon invoicing, without any deduction, offset or counterclaim of any kind for any reason whatsoever and without prior notice or demand. b) Tenant shall pay all taxes imposed upon Tenant's occupancy, business, furnishings, trade fixtures, equipment or other personal property. If any such taxes are levied or assessed against Landlord or Prime Landlord or their respective interests in the Premises or the Building, or if the personal property located within the Premises causes an increase in the assessed value of the Premises or the Building, and Landlord elects to pay such taxes or such increase in taxes, Tenant shall reimburse Landlord for same upon demand. 7. Operating Costs; Real Estate Taxes. a) Tenant shall pay to Landlord, as Additional Rent, the Estimated Operating Costs Allocable to the Premises payable by Landlord under the Prime Lease. Such payments shall be -4- due and payable on the first day of each calendar month during the Term, together with Fixed Basic Rent. b) Tenant shall pay to Landlord, as Additional Rent, the Estimated Property Taxes Allocable to the Premises payable by Landlord under the Prime Lease. Such payments shall be due and payable on the first day of each calendar month during the Term, together with Fixed Basic Rent. 8. Interest and Late Charge. Landlord may charge a late payment charge of five percent (5%) of any installment of Fixed Basic Rent or Additional Rent that is not paid on or before the due date thereof. Any amount due from Tenant to Landlord which is not paid when due shall bear interest ("Interest") at an interest rate equal to the Prime Rate published from time to time in the Money Rates column of the Wall Street Journal (East Coast Edition) plus 3% (or, if lower, the highest rate then allowed under the usury laws of the Commonwealth of Pennsylvania) from the date due until the date paid. The right of Landlord to charge a late charge and interest with respect to past due installments of Fixed Basic Rent and Additional Rent is in addition to Landlord's rights and remedies upon an event of default. 9. Indemnification. Tenant shall fully reimburse Landlord upon demand for any costs or expenses incurred by Landlord in connection with the terms and conditions set forth in Section 4.12 of the Prime Lease by reason of or arising, directly or indirectly, from (i) Tenant's possession, use or occupancy of the Premises or the business conducted at the Premises, (ii) any act, omission or negligence of Tenant, or any of Tenant's agents, business invitees or customers, or (iii) any breach or default by Tenant under this Lease. This indemnity shall survive the expiration of the Term or earlier termination of this Lease and shall apply to any early entry to the Premises by or on behalf of Tenant. 10. Insurance. a) Tenant's Insurance. (i) Tenant covenants and represents, such covenants and representations being specifically designed to induce Landlord to execute this Lease, that during the entire Term, at its sole cost and expense, Tenant shall obtain, maintain and keep in full force and effect the following insurance: (1) "All Risk" property insurance against fire, theft, vandalism, malicious mischief, sprinkler leakage and such additional perils as are now, or hereafter may be, included in a standard extended coverage endorsement from time to time in general use in the Commonwealth of Pennsylvania upon property of every description and kind owned by Tenant and or under Tenant's care, custody or control located in the Building or within the Premises or for which Tenant is legally liable or installed by or on behalf of Tenant, including by way of example and not by way of limitation, alterations, equipment, inventory, furniture, fixtures, fittings, installations and any other personal property in an amount equal to the full replacement cost thereof. (2) Commercial General Liability Insurance coverage to include an endorsement covering Tenant's obligations pursuant to Section 9 hereof, covering personal -5- injury, bodily injury and death and broad form property damage naming Landlord, Prime Landlord and Prime Landlord's mortgagee or trust deed holder and ground lessors (if any) as additional insureds in combined single limits of not less than Two Million Dollars ($2,000,000.00), which policy shall be payable on an "occurrence" basis and which limit shall be reasonably increased during the Term hereof at Landlord's request to reflect both increases in liability exposure arising from inflation as well as from any changed used of the Premises. (3) Business interruption insurance in such amounts as will cover costs, damages, lost income, expenses, Fixed Basic Rent, Additional Rent and all other sums payable under this Lease and such other perils commonly insured against by prudent tenants or attributable to prevention or denial of access to the Premises or Building as a result of such perils. (4) Workers' Compensation insurance in form and amount as required by law. (5) Any other form or forms of insurance or any increase in the limits of any of the aforesaid enumerated coverages or other forms of insurance as Landlord, Prime Landlord or the mortgagees or ground lessors (if any) of Landlord or Prime Landlord may require from time to time if in the opinion of Landlord, Prime Landlord or said mortgagees or ground lessors said coverage and/or limits become inadequate or less than that commonly maintained by prudent tenants in similar buildings in the area by tenants making similar uses. (ii) All property insurance policies shall be taken out with insurers rated A- or better (or if such ratings are not in effect, the equivalent thereof) by Best Rating Service or any successor thereto (or if there be none, an organization having a National reputation) who are licensed to do business in the state in which the Building is located and shall be in form satisfactory, from time to time, to Landlord and Prime Landlord. A policy or certificate evidencing such insurance together with a paid bill shall be delivered to Landlord prior to the Commencement Date hereof. Such insurance policy or certificate will provide an undertaking by the insurers to notify Landlord, Prime Landlord and the mortgagees or ground lessors (if any) of Landlord and/or Prime Landlord in writing not less than thirty (30) days prior to any material change, reduction in coverage, cancellation, or other termination thereof. Should a certificate of insurance initially be provided, a policy shall be furnished by Tenant within thirty (30) days of the Commencement Date. The aforesaid insurance shall be written with no deductible. (iii) In the event of damage to or destruction of the Building and/or Premises and this Lease is so terminated, Tenant shall immediately pay to Landlord all of its insurance proceeds, if any, relating to the leasehold improvements and alterations (but not Tenant's trade fixtures, equipment, furniture or other personal property of Tenant in the Premises) which have become Landlord's property on installation or would have become Landlord's property at the Term's expiration or sooner termination. If the termination of the Lease, at Landlord's election, is due to damage to the Building and if the Premises have not been so damaged, Tenant will deliver to Landlord in accordance with the provisions of this Lease the improvements and alterations to the Premises which have become an installation or would have become at the Term's expiration, Landlord's property. -6- (iv) Tenant agrees that it will not keep or use or offer for sale (if sales of goods is a permitted use pursuant to this Lease) in or upon the Premises any article which may be prohibited by any insurance policy in force from time to time covering the Premises. In the event Tenant's occupancy or conduct of business in or on the Premises, whether or not Landlord has consented to the same, results in any increase in premiums for insurance carried from time to time by Landlord with respect to the Building, or the Premises, Tenant shall pay such increase in premiums as Additional Rent within ten (10) days after being billed therefor by Landlord. In determining whether increased premiums are a result of Tenant's use and occupancy a schedule issued by the organization computing the insurance rate on the Premises showing the components of such rate shall be conclusive evidence of the items and charges making up such rate. Tenant shall promptly comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Building or Premises. (v) If any insurance policy carried by Tenant, Landlord or Prime Landlord shall be cancelled or cancellation shall be threatened or the coverage thereunder reduced or threatened to be reduced in any way by reason of the use or occupation of the Premises or Building or any part thereof by Tenant or any assignee or subtenant of Tenant or anyone permitted by Tenant to be upon the Premises, and if Tenant fails to remedy the conditions giving rise to such cancellation or threatened cancellation or reduction in coverage on or before the earlier to occur of the following: (i) forty-eight (48) hours after notice thereof from Landlord or Prime Landlord, or (ii) prior to such cancellation or reduction becoming effective, then Tenant shall be in default and an event of default shall occur under this Lease and Landlord shall have all of the remedies available to Landlord pursuant to this Lease. b) Waiver of Subrogation. Any policy or policies of fire, extended coverage or similar casualty insurance, which either party obtains in connection with the Premises or Building shall include a clause or endorsement denying the insurer any rights of subrogation against the other party (i.e. Landlord or Tenant) for all perils covered by such policy. Any and all policies carried by Tenant shall contain a waiver of subrogation as to Prime Landlord and any additional cost for the same shall be Tenant's sole responsibility. Except as aforesaid, should such waiver not be available then the policy for which the waiver is not available must name the other party as an additional insured affording it the same coverage as that provided the party obtaining such coverage. Any provision of this Lease to the contrary notwithstanding, Landlord and Tenant hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise (a) from any and all liability for any loss or damage to the property of the releasing party, (b) for any loss or damage that may result, directly or indirectly, from the loss or damage to such property (including rental value and business interruption), and (c) from legal liability for any loss or damage to property (no matter who the owner of the property may be), all to the extent that the releasing party's loss or damage is insured or, if not insured, was insurable under commercially available "all risk" property insurance policies, including additional coverages typically obtained by owners and tenants of comparable office buildings in the vicinity of the Building, even if such loss or damage or legal liability shall be caused by or result from the fault or negligence of the other party or anyone for whom such party may be responsible and even if the releasing party is self insured in whole or in part or the amount of the releasing party's insurance is inadequate to cover the loss or damage or legal liability. It is the intention of the parties that Landlord and Tenant shall look solely to their respective insurance carriers for recovery against any such property loss -7- or damage or legal liability, without such insurance carriers having any rights of subrogation against the other party and in any and all cases, Tenant and its insurance carriers shall have no rights of subrogation as to Prime Landlord. 11. Repairs and Maintenance. a) Tenant shall, throughout the Term, and at Tenant's sole cost and expense, keep and maintain the Premises in good condition and repair, including performing all of the obligations of Landlord under Section 4.2 of the Prime Lease. Upon expiration of the Term or the earlier termination of this Lease, Tenant shall leave the Premises in good order, condition and repair, ordinary wear and tear excepted. Tenant shall not permit any waste, damage or injury to the Premises. Tenant shall not use or permit the use of any portion of the Common Facilities for other than their intended use as specified by the Landlord and/or Prime Landlord from time to time. b) Notwithstanding the foregoing, repairs and replacements to the Premises and the Building arising out of or caused by Tenant's use, manner of use or occupancy of the Premises, by Tenant's installation of alterations, additions, improvements, trade fixtures or equipment in or upon the Premises or by any act or omission of Tenant or any employee, agent, contractor or invitee of Tenant shall be made at Tenant's sole cost and expense and Tenant shall pay Landlord and/or Prime Landlord the cost of any such repair or replacement, as Additional Rent, upon demand. 12. Utilities and Services. It is the intention of the parties that Tenant be entitled to receive, with respect to Premises, the benefit of any services, utilities (including water and heating) repairs, maintenance, facilities and other ongoing services from Prime Landlord that Landlord, as tenant, receives with respect to the Premises under the Prime Lease and to the extent the foregoing are applicable to the Premises leased hereunder, subject in all cases to the terms of the Prime Lease. In connection with the foregoing, Tenant acknowledges and agrees that the foregoing described services can only be provided by Prime Landlord and that Landlord has no right or ability to control the same. As a result, to the extent Prime Landlord has agreed in the Prime Lease to provide services, utilities, repairs, facilities and other services to Landlord, as tenant, including the services under Sections 3.5, 4.1 and 4.3 of the Prime Lease and provided such services are applicable to the Premises, Landlord agrees, on behalf of Tenant, to enforce, in a reasonable manner and at Tenant's direction and cost, its rights against Prime Landlord under the Prime Lease. Tenant hereby releases and holds Landlord harmless from, and currently waives any claims arising in the future relating to, any damages, interference, costs and expenses incurred or suffered by Tenant as a result of (i) the failure of Prime Landlord to properly maintain, repair or operate the Premises and Building systems, and (ii) the failure of Prime Landlord to supply any utility and other services to be provided to Landlord, as tenant, under the Prime Lease. The payment of Fixed Basic Rent and Additional Rent by Tenant pursuant to this Lease is an absolute and independent covenant and shall not be affected in any way by the failure of Prime Landlord to so maintain, repair or operate or to supply any such utility or services except if and to the extent Landlord's rental obligations to Prime Landlord under the Prime Lease are abated, reduced, suspended or offset with respect to the Premises as a result of the foregoing. -8- 13. Governmental Regulations. Tenant shall comply with all laws, ordinances, notices, orders, rules, regulations and requirements of all federal, state and municipal government or any department, commission, board of officer thereof, or of the National Board of Fire Underwriters or any other body exercising similar functions, relating to the Premises or to the use or manner of use of the Building. Tenant shall not knowingly do or commit, or suffer to be done or committed anywhere in the Building, any act or thing contrary to any of the laws, ordinances, regulations and requirements referred to in this Section. Tenant shall give Landlord prompt written notice of any accident in the Premises and of any breakage, defect or failure in any of the systems or equipment servicing the Premises or the Building or any portion of the Premises or the Building. Tenant shall comply in all respects with Section 4.21 of the Prime Lease as if Tenant were the "Tenant" thereunder, including the obligation to indemnify Landlord and Prime Landlord for all losses, costs, expenses, assessments or fees incurred by Landlord and/or Prime Landlord due to Tenant's failure to completely discharge and comply with its responsibilities and obligations thereunder. 14. Alterations, Additions and Fixtures. Tenant shall not make or permit to be made any alterations, installations, decorations, improvements or additions to the Premises or Building, including the erection or installation of any signs, changing of any locks on doors, disturb any floor covering, wall covering, fixtures, plumbing or wiring (collectively, "Tenant Charges"), without on each occasion first presenting plans and specifications to Landlord and obtaining both Landlord's and Prime Landlord's prior written consent. If Landlord and Prime Landlord consent to any proposed alterations, improvements or additions, then Tenant at Tenant's sole cost and expense, may make the proposed alterations, improvements and additions provided that: (i) Tenant supplies any necessary permits; (ii) such alterations and improvements do not, in Landlord's and Prime Landlord's judgment, impair the structural strength of the Building or any other improvements and are at least equal in quality to the Building's minimum standard tenant improvements; (iii) Tenant takes or causes to be taken all steps that are otherwise required by Section 15 of this Lease and that are required or permitted by law in order to avoid the imposition of any mechanic's, laborer's or materialman's lien upon the Premises or the Building; (iv) Tenant uses contractors and mechanics approved by Landlord and Prime Landlord; (v) the occupants of the Building and of any adjoining real estate owned by Landlord or Prime Landlord are not annoyed or disturbed by such work; (vi) the alterations, improvements or additions shall be installed in accordance with the approved plans and specifications and completed according to a construction schedule approved by Landlord and Prime Landlord; and (vii) Tenant provides payment and performance bonds and proof of insurance of the types and coverage amounts required by Landlord and Prime Landlord and by insurance companies with a policyholder rating of A- or better as rated by "Best's Key Rating Guide" for insurance companies at the time such insurance is procured. Any and all alterations, improvements and additions to the Premises which are constructed, installed or otherwise made by Tenant shall be the property of Tenant until the expiration or sooner termination of this Lease; at that time all such alterations and additions shall remain on the Premises and become the property of Landlord without payment by Landlord unless, upon the termination of this Lease, Landlord instructs Tenant in writing to remove the same in which event Tenant will remove such alterations, improvements and additions, and repair and restore any damage to the Building or the Premises caused by the installation or -9- removal. Tenant shall pay to Landlord, upon demand, the cost and expense incurred by Landlord in reviewing Tenant's plans and specifications, provided however, such cost shall not exceed $800.00. All Tenant Charges shall be performed by contractors employed by Tenant under one or more construction contracts in form and substance approved in advanced in writing by Landlord and Prime Landlord, in their respective discretions. Prime Landlord and Landlord may withdraw consent to the continuation of work on any of the Tenant Charges in the event any of Tenant's general contractors, subcontractors, workers or suppliers cause, in the opinion of Prime Landlord and/or Landlord, any disharmony or any interference in the work of general contractors, subcontractors, workers or suppliers of Landlord, Prime Landlord or any other tenant or subtenant in the Building. All Tenant Charges must be completed in the manner required by the terms of the Prime Lease, including, without limitation, the provisions of Section 4.5 thereof. Tenant shall be responsible for all damage to the Premises or the Building caused by Tenant or any of Tenant's general contractors, subcontractors, workers or suppliers. Tenant agrees to indemnify, defend and hold harmless the Landlord, Prime Landlord, and their respective employees, agents, successors and assigns, from and against any and all damage, claim, liability or loss, including reasonable attorneys' and other fees, arising out of or in any way connected to the Tenant Charges and/or to any defect in design, material or workmanship of any Tenant Charges. 15. Mechanic's Liens. Tenant shall promptly pay any contractors and materialmen who supply labor, work or materials to Tenant at the Premises or the Building so as to minimize the possibility of a lien attaching to the Premises or the Building. Tenant shall take all steps permitted by law in order to avoid the imposition of any mechanic's, laborer's or materialman's lien upon the Premises or the Building. Should any such lien or notice of lien be filed for work performed for Tenant other than by Landlord, Tenant shall cause such lien or notice of lien to be discharged of record by payment, deposit, bond or otherwise within fifteen (15) days after the filing thereof or after Tenant's receipt of notice thereof, whichever is earlier, regardless of the validity of such lien or claim. If Tenant shall fail to cause such lien or claim to be discharged and removed from record within such fifteen (15) day period, then, without obligation to investigate the validity thereof and in addition to any other right or remedy Landlord may have, Landlord may, but shall not be obligated to, contest the lien or claim or discharge it by payment, deposit, bond or otherwise; and Landlord shall be entitled to compel the prosecution of an action for the foreclosure of such lien by the lienor and to pay the amount of the judgment in favor of the lienor with interest and costs. Any amounts so paid by Landlord and all costs and expenses including, without limitation, attorneys' fees incurred by Landlord in connection therewith, together with Interest from the respective dates of Landlord's making such payment or incurring such cost or expense, which shall constitute Additional Rent payable under this Lease promptly upon demand therefor. Nothing in this Lease is intended to authorize Tenant to do or cause any work or labor to be done or any materials to be supplied for the account of Landlord, all of the same to be solely for Tenant's account and at Tenant's risk and expense. Further, notwithstanding anything to the contrary contained in this Lease, nothing contained in or contemplated by this Lease shall be deemed or construed in any way to constitute the consent or request by Landlord for the performance of any work or services or the furnishing of any materials for which any lien could be filed against the Premises or the Building or any part of -10- any thereof, nor as giving Tenant any right, power or authority to contract or permit the performance of any work or services or the furnishing of any materials for which any lien could be filed against the Premises or the Building or any part of any thereof. Throughout this Lease the term "mechanic's lien" is used to include any lien, encumbrance or charge levied or imposed upon the Premises or the Building or any interest therein or income therefrom on account of any mechanic's, laborer's or materialman's lien or arising out of any debt or liability to or any claim or demand of any contractor, mechanic, supplier, materialman or laborer and shall include without limitation any mechanic's notice of intention given to Landlord or Tenant, any stop order given to Landlord or Tenant, any notice of refusal to pay naming Landlord or Tenant and any injunctive or equitable action brought by any person entitled to any mechanic's lien. 16. Landlord's Right of Entry. a) Tenant shall permit Landlord and Prime Landlord and the authorized representatives of each and of any mortgagee or any prospective mortgagee or any prospective tenant or purchaser of the Building to enter the Premises at all reasonable times, with one (1) Business Days' prior notice to Tenant, for the purpose of (i) inspecting the Premises or (ii) making any necessary repairs to the Premises or to the Building and performing any work therein. During the progress of any work on the Premises or the Building, Landlord will attempt not to inconvenience Tenant, but neither Landlord nor Prime Landlord shall not be liable for inconvenience, annoyance, disturbance, loss of business or other damage to Tenant by reason of making any repair or by bringing or storing materials, supplies, tools and equipment in the Premises during the performance of any work, and the obligations of Tenant under this Lease shall not be thereby affected in any manner whatsoever. b) Landlord and/or Prime Landlord shall have the right at all reasonable times, with prior notice to Tenant, to enter and to exhibit the Premises for the purpose of inspection or showing the Premises in connection with a sale or mortgage and to enter upon and to exhibit the Premises to any prospective tenant. c) If the Premises are vacated or abandoned by Tenant, Landlord and/or Prime Landlord shall be permitted to show the Premises at any time and to prepare the Premises for re-occupancy. d) Tenant shall give Landlord thirty (30) days' prior written notice before vacating the Premises at the end of the Term or earlier expiration of this Lease to permit Landlord to meet its obligations under Section 4.8 of the Prime Lease with respect to notice to Prime Landlord and arrangement of a joint inspection. 17. Damage by Fire or Other Casualty; Condemnation. This Lease shall be subject to the operation of the terms and the rights of Prime Landlord and Landlord under and pursuant to the Prime Lease in the event of damage or destruction to the Building or the Premises by fire or other casualty or in the event of a condemnation. In the event Prime Landlord or Landlord has the right to terminate the Prime Lease pursuant thereto, and either elects to do so, this Lease shall automatically terminate upon such termination of the Prime Lease. -11- 18. Non-Abatement of Rent. Except as otherwise expressly provided in the Prime Lease, there shall be no abatement or reduction of the Fixed Basic Rent, Additional Rent or other sums payable under this Lease for any cause whatsoever and this Lease shall not terminate, nor shall Tenant be entitled to surrender the Premises, in the event of fire, casualty or condemnation or any default by Landlord under this Lease or the Prime Landlord under the Prime Lease. 19. Quiet Enjoyment. Tenant, upon paying the Fixed Basic Rent, Additional Rent and other charges herein required and observing and keeping all covenants, agreements and conditions of this Lease, shall quietly have and enjoy the Premises during the Term without hindrance or molestation by anyone claiming by or through Landlord, subject, however, to the exceptions, reservations and conditions of this Lease, the Prime Lease and any and all mortgages now or hereafter existing, to which this Lease shall be subordinate. Tenant acknowledges the provisions of Section 2(b) hereof and agrees that in the event of a termination of this Lease pursuant to a termination of the Prime Lease, Tenant shall have no claim or cause of action against Landlord or Prime Landlord. 20. Rules and Regulations. This Lease is subject to any rules and regulations prescribed by the Prime Landlord, from time to time, at its sole discretion (the "Rules and Regulations"). The Tenant shall comply at all times with the Rules and Regulations and shall cause its agents, employees, invitees, visitors, and guests to do so. Landlord shall not be responsible to Tenant for non-observance or violation of any of the Rules and Regulations by any tenant of the Building. 21. Assignment and Subletting. a) Tenant may not assign this Lease or sublet the whole or any portion of the Premises without Landlord's and Prime Landlord's prior written consent, which may be granted or withheld in their respective sole and exclusive discretions. Tenant shall cooperate with Landlord and shall comply in all respects with Section 4.16 of the Prime Lease, including, without limitation, providing Landlord and Prime Landlord with the information, notices, processing fees, payments of rent and documentation required by such Section. b) Any transfer, assignment or hypothecation of any stock or interest in, or the assets of, Tenant which is either: (i) greater than fifty percent (50%) of such stock, interest or assets, or (ii) intended to avoid the provisions of this Section 21, shall be subject to Section 21(a) hereof in all respects. c) In the event Prime Landlord and Landlord shall consent to any proposed assignment or sublet of the whole or any portion of the Premises, and Tenant receives rent or other payments in connection with such assignment or sublet which, either initially or over the term of such assignment or sublet, equals an amount greater than the sum of Fixed Basic Rent and Additional Rent due annually hereunder, Tenant shall pay to Landlord fifty percent (50%) of such excess. 22. Subordination. This Lease and Tenant's rights under this Lease shall be subject and subordinate at all times in lien, operation and priority to the Prime Lease, any mortgage or other encumbrance now or hereafter placed upon or affecting the Building or the Premises and to all renewals, modifications, consolidations and extensions thereof, without the necessity of any -12- further instrument or act on the part of Tenant. Tenant shall execute and deliver upon demand any further instrument or instruments confirming the subordination of this Lease to the Prime Lease and/or the lien of any mortgage, if requested to do so by Landlord or Prime Landlord, and any further instrument or instruments of attornment that may be desired by any such mortgagee, Prime Landlord or Landlord. Notwithstanding the foregoing, any mortgagee may at any time subordinate its mortgage to this Lease, without Tenant's consent, by giving notice in writing to Tenant and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution and delivery. In that event such mortgagee shall have the same rights with respect to this Lease as though this Lease had been executed prior to the execution and delivery of the mortgage and had been assigned to such mortgagee. 23. Curing Tenant's Defaults. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord may, without any obligation to do so and in addition to any other rights it may have in law or equity, elect to cure such default on behalf of Tenant after written notice (except in the case of emergency) to Tenant. Tenant shall reimburse Landlord upon demand for any sums paid or costs incurred by Landlord in curing such default, including Interest thereon from the respective dates of Landlord's making the payments and incurring such costs, which sums and costs together with interest thereon shall be deemed Additional Rent payable within ten (10) days of demand. 24. Surrender. a) At the expiration of the Term or earlier termination of this Lease, Tenant shall promptly yield up the Premises and all improvements, alterations and additions thereto, and all fixtures and equipment servicing the Premises in a condition which is clean of garbage and debris and broom clean and in the same condition, order and repair in which they are required to be kept throughout the Term, ordinary wear and tear excepted. So long as Tenant is not in default under or pursuant to this Lease, Tenant shall be entitled to remove its furniture, trade fixtures and moveable equipment from the Premises prior to the expiration of the Term or the earlier termination of this Lease, subject to Tenant's repair and restoration obligations pursuant to this Lease. b) If Tenant, or any person claiming through Tenant, continues to occupy the Premises after the expiration of the Term or earlier termination of this Lease or any renewal thereof without prior written consent of Landlord, such holding over by Tenant shall constitute an event of default under this Lease and shall be subject to all the remedies set forth in this Lease. 25. Defaults and Remedies. a) Defaults. It shall be a default or event of default under this Lease if any one or more of the following events occurs: (i) Tenant fails to pay in full, when due and without demand, any and all installments of Fixed Basic Rent or Additional Rent or any other charges or payments due and payable under this Lease whether or not herein included as rent. -13- (ii) Tenant violates or fails to perform or otherwise breaches any agreement, term, covenant or condition contained in this Lease. (iii) Tenant abandons or vacates the Premises without notice and without having first paid to Landlord in full all Fixed Basic Rent, Additional Rent and other charges that have become due as well as all which will become due thereafter through the end of the Term. (iv) Tenant or Guarantor becomes insolvent or bankrupt in any sense or makes an assignment for the benefit of creditors or if a petition in bankruptcy or for reorganization or for an arrangement with creditors under any federal or state law is filed by or against Tenant or Guarantor, or a bill in equity or other proceeding for the appointment of a receiver or similar official for any of Tenant's or Guarantor's assets is commenced, or if any of the real or personal property of Tenant or Guarantor shall be levied upon by any sheriff, marshal or constable. (v) Tenant causes or permits a default to occur, continue or exist under the Prime Lease. (vi) Any information furnished by or on behalf of Tenant to Landlord in connection with this Lease is determined to have been materially false and/or misleading when made. (vii) There is a default under and/or breach of any condition, agreement or obligation set forth in the Guaranty. b) Remedies. Upon the occurrence of an event of default under this Lease, Landlord shall have all of the following rights: (i) Landlord may charge a late payment charge of five (5%) percent of any amount owed to Landlord pursuant to this Lease which is not paid on or before the due date which is set forth in the Lease or, if a due date is not specified in this Lease, within twenty (20) days of the mailing of a bill therefor by Landlord. If Landlord incurs a late charge in connection with any payment which Tenant has failed to make within the times required in this Lease, Tenant shall pay Landlord, in addition to such payment due, the full amount of such late charge incurred by Landlord. Nothing in this Lease shall be construed as waiving any rights of Landlord arising out of any default of Tenant, by reason of Landlord's imposing or accepting any such late charge(s) and/or interest; the right to collect such late charge(s) and/or interest is separate and apart from any rights relating to remedies of Landlord after default by Tenant including, without limitation, the rights and remedies of Landlord provided herein. (ii) Landlord may accelerate the whole or any part of the Fixed Basic Rent and all Additional Rent for the entire unexpired balance of the Term, as well as all other charges, payments, costs and expenses herein agreed to be paid by Tenant, and any Fixed Basic Rent or other charges, payments, costs and expenses so accelerated shall, in addition to any and all installments of rent already due and payable and in arrears and any other charge or payment herein reserved, included or agreed to be treated or collected as rent and any other charge, expense or cost herein agreed to be paid by Tenant which may be due and payable and in arrears, be deemed due and payable as if, by the terms and provisions of this Lease, such accelerated rent and other charges, payments, costs and expenses were on that date payable in advance. -14- (iii) Landlord may re-enter the Premises and, at the option of Landlord, remove all persons and all or any property therefrom, either by summary dispossess proceedings or by any suitable action or proceeding at law or by force or otherwise, without being liable for prosecution or damages therefor, and Landlord may repossess and enjoy the Premises. Upon recovering possession of the Premises by reason of or based upon or arising out of a default on the part of Tenant, Landlord may, at Landlord's option, either terminate this Lease or make such alterations and repairs as may be necessary in order to relet the Premises and may relet the Premises or any part or parts thereof, either in Landlord's name or otherwise, for a term or terms which may, at Landlord's option, be less than or exceed the period which would otherwise have constituted the balance of the Term and at such rent or rents and upon such other terms and conditions as in Landlord's sole discretion may seem advisable and to such person or persons as may in Landlord's discretion seem best; upon each such reletting all rents received by Landlord from such reletting shall be applied as follows: first, to the payment of any costs and expenses of such reletting, including all costs of alterations and repairs; second, to the payment of any indebtedness other than Fixed Basic Rent, Additional Rent or other charges due hereunder from Tenant to Landlord; third, to the payment of Fixed Basic Rent, Additional Rent and other charges due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as it may become due and payable hereunder. If rentals received from reletting during any month are less than that to be paid during that month by Tenant, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No such re-entry or taking possession of the Premises or the making of alterations or improvements thereto or the reletting thereof shall be construed as an election on the part of Landlord to terminate this Lease unless written notice of termination is given to Tenant. Landlord shall in no event be liable in any way whatsoever for failure to relet the Premises or, in the event that the Premises or any part or parts thereof are relet, for failure to collect the rent thereof under such reletting. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. (iv) Landlord may terminate this Lease and the Term without any right on the part of Tenant to waive the forfeiture by payment of any sum due or by other performance of any condition, term or covenant broken. Upon such termination, Landlord shall be entitled to recover, in addition to any and all sums and damages for violation of Tenant's obligations hereunder in existence at the time of such termination, damages for Tenant's default in an amount equal to the amount of the Fixed Basic Rent and Additional Rent reserved for the balance of the Term, as well as all other charges, payments, costs and expenses herein agreed to be paid by Tenant all of which amount shall be immediately due and payable from Tenant to Landlord upon demand therefor. (v) Confession of Judgment. FOR VALUE RECEIVED AND UPON THE OCCURRENCE OF AN EVENT OF DEFAULT HEREUNDER, TENANT DOES HEREBY EMPOWER ANY PROTHONOTARY OR ANY ATTORNEY OR ANY COURT OF RECORD WITHIN THE UNITED STATES OR THE COMMONWEALTH OF PENNSYLVANIA, TO APPEAR FOR TENANT AND WITH OR WITHOUT COMPLAINT FILED, CONFESS JUDGMENT OR A SERIES OF JUDGMENTS AGAINST TENANT AND IN FAVOR OF LANDLORD, ITS SUCCESSORS OR ASSIGNS, AS OF ANY TERM OR TERMS, FOR THE SUM DUE BY REASON OF SAID DEFAULT IN THE PAYMENT OF FIXED BASIC RENT, ADDITIONAL RENT AND OTHER SUMS DUE UNDER THIS -15- LEASE, AND ACCELERATED RENT AND FOR THE SUM DUE BY REASON OF ANY BREACH OF COVENANT OR CONDITION BROKEN BY TENANT, WITH COSTS OF SUIT AND ATTORNEYS' COMMISSION OF TEN PERCENT (10%) FOR COLLECTION, AND FORTHWITH ISSUE A WRIT OR WRITS OF EXECUTION THEREON WITHOUT STAY OF EXECUTION. TENANT WAIVES AND RELEASES ALL ERRORS, DEFECTS AND IMPERFECTIONS IN ENTERING SAID JUDGMENT OR IN ANY WRIT, OR PROCESS OR PROCEEDING THEREON AND FOR THE CONFESSION AND ENTRY OF SUCH JUDGMENT, THIS LEASE OR A TRUE AND CORRECT COPY THEREOF SHALL BE SUFFICIENT WARRANT AND AUTHORITY. THE AUTHORITY AND POWER CONTAINED HEREIN SHALL NOT BE EXHAUSTED BY ONE EXERCISE THEREOF BUT JUDGMENT MAY BE CONFESSED AS AFORESAID FROM TIME TO TIME AS OFTEN AS THERE IS AN OCCURRENCE OF ANY EVENT OF DEFAULT, AND FURTHERMORE SUCH AUTHORITY AND POWER MAY BE EXERCISED DURING THE ORIGINAL TERM AND ANY EXTENSION OR RENEWAL THEREOF, OR AFTER THE EXPIRATION OR EARLIER TERMINATION OF THE TERM HEREOF. FOR VALUE RECEIVED AND UPON THE OCCURRENCE OF AN EVENT OF DEFAULT HEREUNDER, OR UPON TERMINATION OF THE TERM OF THIS LEASE OR OTHER TERMINATION OF THIS LEASE DURING THE TERM OR ANY RENEWAL THEREOF, TENANT FURTHER AUTHORIZES AND EMPOWERS ANY SUCH ATTORNEY OR PROTHONOTARY (EITHER IN ADDITION TO OR WITHOUT SUCH JUDGMENT FOR THE AMOUNT DUE ACCORDING TO THE TERMS OF THIS LEASE) TO APPEAR FOR TENANT AND ANY OTHER PERSON CLAIMING UNDER, BY OR THROUGH TENANT, AND CONFESS JUDGMENT FORTHWITH AGAINST TENANT AND SUCH OTHER PERSONS AND IN FAVOR OF LANDLORD IN AN AMICABLE ACTION OF EJECTMENT FOR THE PREMISES FILED IN THE COMMONWEALTH OF PENNSYLVANIA, WITH RELEASE OF ALL ERRORS AND WITHOUT STAY OF EXECUTION. LANDLORD MAY FORTHWITH ISSUE A WRIT OR WRITS OF EXECUTION FOR POSSESSION OF THE PREMISES AND, AT LANDLORD'S OPTION, FOR THE AMOUNT OF ANY JUDGMENT, AND ALL COSTS, INCLUDING THE FEES OF ATTORNEYS AND OTHER PROFESSIONALS AND EXPERTS, WITHOUT LEAVE OF COURT, AND LANDLORD MAY, BY LEGAL PROCESS, WITHOUT NOTICE RE-ENTER AND EXPEL TENANT FROM THE PREMISES, AND ALSO ANY PERSONS HOLDING UNDER TENANT FOR WHICH THIS LEASE OR A TRUE AND CORRECT COPY THEREOF SHALL BE SUFFICIENT WARRANT, WHEREUPON, IF LANDLORD SO DESIRES, A WRIT OF POSSESSION MAY ISSUE FORTHWITH, WITHOUT ANY PRIOR WRIT OR PROCEEDINGS WHATSOEVER, AND PROVIDED THAT IF FOR ANY REASON AFTER SUCH ACTION SHALL HAVE BEEN COMMENCED THE SAME SHALL BE TERMINATED AND POSSESSION REMAIN IN OR BE RESTORED TO TENANT, LANDLORD SHALL HAVE THE RIGHT UPON ANY SUBSEQUENT EVENT OR EVENTS OF DEFAULT, OR UPON THE TERMINATION OF CANCELLATION OF THIS LEASE AS HEREINBEFORE SET FORTH, TO BRING ONE OR MORE AMICABLE ACTION OR ACTIONS AS HEREINBEFORE SET FORTH TO RECOVER POSSESSION AS AFORESAID. c) Waiver of Jury Trial. IT IS MUTUALLY AGREED BY AND BETWEEN LANDLORD AND TENANT THAT (A) THEY HEREBY WAIVE TRIAL BY JURY IN ANY -16- ACTION, PROCEEDING OR COUNTER-CLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OF OCCUPANCY OF THE PREMISES OR CLAIM OF INJURY OR DAMAGE, AND (B) IN ANY ACTION ARISING HEREUNDER, THE LEGAL FEES OF THE PREVAILING PARTY WILL BE PAID BY THE OTHER PARTY TO THE ACTION. d) Non-Waiver. No waiver by Landlord of any breach by Tenant of any of Tenant's obligations, agreements or covenants herein shall be a waiver of any subsequent breach or of any other obligation, agreement or covenant, nor shall any forbearance by Landlord to seek a remedy for any event of default by Tenant be a waiver by Landlord of any rights and remedies with respect to such or any subsequent event of default. e) Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy provided herein or by law, but each shall be cumulative and in addition to every other right or remedy given herein or now or hereafter existing at law or in equity or by statute. Landlord shall have no duty to mitigate its damages in the event of Tenant's default under this Lease. 26. Condition of Premises. Tenant represents that the Building and the Premises and the present uses and non-uses thereof have been examined by Tenant and Tenant accepts them in the condition or state in which they now are, or any of them now is, without relying on any representation, covenant or warranty, express or implied, in fact or in law, by Landlord and without recourse to Landlord, the nature, condition or usability thereof or the use or uses to which the Premises and the Building or any part thereof may be put under present zoning ordinances or otherwise. Tenant's occupancy of the Premises shall constitute acceptance of the Premises. 27. Hazardous Substances. a) Tenant shall not cause or allow the generation, treatment, storage or disposal of Hazardous Substances on or near the Premises or Building. "Hazardous Substances" shall mean (i) any hazardous substance as that term is now or hereafter defined in the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq., as amended, (ii) any hazardous waste or hazardous substance as those terms are now or hereafter defined in any local, state or Federal law, regulation or ordinance not inapplicable to the Premises and Building, or (iii) petroleum including crude oil or any fraction thereof. In the event Tenant uses any Hazardous Substances, Tenant shall dispose of such substances in accordance with all applicable Federal, state and local laws, regulations and ordinances. b) Tenant agrees to indemnify, defend and hold harmless the Landlord, its employees, agents, successors, and assigns, from and against any and all damage, claim, liability, or loss, including reasonable attorneys' and other fees, arising out of or in any way connected to the generation, treatment, storage or disposal of Hazardous Substances by Tenant, its employees, agents, contractors, or invitees, on or near the Premises or Building. Such duty of indemnification shall include, but not be limited to damage, liability, or loss pursuant to all -17- Federal, state and local environmental laws, rules and ordinances, strict liability and common law. c) Tenant agrees to notify Landlord immediately of any disposal of Hazardous Substances in the Premises or Building, of any discovery of Hazardous Substances in the Premises or the Building, or of any notice by a governmental authority or private party alleging or suggesting that a disposal of Hazardous Substances on or near the Premises or Building may have occurred. Furthermore, Tenant shall provide the Landlord with full and complete access to any documents or information in its possession or control relevant to the question of the generation, treatment, storage, or disposal of Hazardous Substances on or near the Premises or the Building. 28. Recording. Neither this Lease nor a memorandum of this Lease shall be recorded in any public records without the written consent of Landlord. 29. Broker. Tenant represents and warrants to Landlord that Tenant has not dealt with any broker, agent or finder in connection with this Lease, except for Broker, and Tenant hereby agrees to indemnify Landlord against any claim for commission or other compensation in connection with this Lease made against Landlord by any other broker, agent or finder with whom Tenant has dealt, including reasonable attorney's fees incurred by Landlord in the defense of any such claim. Landlord shall pay any commission due to Broker and shall indemnify Tenant against any claim for commission or other compensation in connection with this Lease made against Tenant by the Broker. 30. Prime Landlord Consent. This Lease is subject to Prime Landlord's execution and delivery to Landlord and Tenant of a form of consent to sublease, reasonably acceptable to Prime Landlord, Landlord and Tenant. If Prime Landlord has not executed and delivered such a consent within forty-five (45) days of the execution of this Lease, Landlord may terminate this Lease by fifteen (15) days notice to Tenant. 31. Notices. All notices, demands, requests, consents, certificates, and waivers required or permitted hereunder from either party to the other shall be in writing and sent by United States certified mail, return receipt requested, postage prepaid, or by recognized overnight courier, addressed as follows: If to Landlord: Citizens Bank of Pennsylvania 801 Market Street Philadelphia, Pennsylvania 19101 Attention: Howard Dunn With a copy to: Buchanan Ingersoll PC 1835 Market Street, 14th Floor Philadelphia, PA 19103 Attention: Frederick H. Masters, Esquire -18- If to Tenant: United Bank Of Philadelphia 30 South 15th Street, Suite 1200 Philadelphia, Pennsylvania 19102 Attention: Evelyn F. Smalls With a copy to: ---------------------- ---------------------- ---------------------- Either party may at any time, in the manner set forth for giving notices to the other, specify a different address to which notices to it shall thereafter be sent. All notices shall be effective upon receipt or rejection of receipt by the addressee. 32. Irrevocable Offer: No Option. Although Tenant's execution of this Lease shall be deemed an offer irrevocable by Tenant, the submission of this Lease by Landlord to Tenant for examination shall not constitute a reservation of or option for the Premises. This Lease shall become effective only upon execution thereof by an authorized officer of the Landlord on behalf of Landlord and by an authorized officer of Tenant. 33. Inability to Perform. If Landlord is delayed or prevented from performing any of its obligations under this Lease by reason of strike, labor disharmony, acts of war, acts of terrorism (either domestically or overseas), acts of bioterrorism (either domestically or overseas) or any cause whatsoever beyond Landlord's control, the period of such delay or such prevention shall be deemed added to the time herein provided for the performance of any such obligation by Landlord. 34. Survival. Notwithstanding anything to the contrary contained in this Lease, the expiration of the Term, whether by lapse of time or otherwise, shall not relieve Tenant from its obligations accruing prior to the expiration of the Term. 35. Corporate Tenants. If Tenant is a corporation, the person(s) executing this Lease on behalf of Tenant hereby covenant(s) and warrant(s) that: (i) Tenant is a duly formed corporation in the state in which the Premises is located, (ii) Tenant will remain incorporated in such state or qualified to do business in such state throughout the Term and any renewals thereof, and (iii)such persons are duly authorized by such corporation to execute and deliver this Lease on behalf of the corporation. 36. Waiver of Invalidity of Lease. Each party agrees that it will not raise or assert as a defense to any obligation under the Lease or make any claim that the Lease is invalid or unenforceable due to any failure of this document to comply with ministerial requirements including, without limitation, requirements for corporate seals, attestations, witnesses, notarizations or other similar requirements and each party hereby waives the right to assert any such defenses or make any claim of invalidity or unenforceability due to any of the foregoing. 37. Rights Reserved by Landlord. Landlord waives no rights, except those that may be specifically waived herein, and explicitly retains all other rights including, without limitation, the following rights, each of which Landlord may exercise without notice to Tenant and without -19- liability to Tenant for damage or injury to property, person or business on account of the exercise thereof and the exercise of any such rights shall not be deemed to constitute an eviction or disturbance of Tenant's use or possession of the Premises and shall not give rise to any claim for set-off or abatement of Rent or any other claim: a) To install, affix and maintain any and all signs on the exterior and on the interior of the Building or the Premises; b) To decorate or to make repairs, alterations, additions, or improvements, whether structural or otherwise, in and about the Building, or any part thereof, and for such purposes to enter upon the Premises and during the continuance of any of such work, to temporarily close doors, entry ways, public space and corridors in the Building and to interrupt or temporarily suspend services or use of Common Facilities, all without affecting any of Tenant's obligations hereunder, so long as the Premises are reasonably accessible and usable; c) To furnish door keys for the entry door(s) in the Premises on the Commencement Date and to retain at all times, and to use in appropriate instances, keys to all doors within and into the Premises. Tenant agrees to purchase only from Landlord additional duplicate keys as required, to change no locks and not to affix locks on doors without the prior written consent of the Landlord. Upon the expiration of the Term or Tenant's right to possession, Tenant shall return all keys to Landlord and shall disclose to Landlord the combination of any safes, cabinets or vaults left in the Premises; d) To approve the weight, size and location of safes, vaults and other heavy equipment and articles in and about the Premises and the Building so as not to exceed the legal load per square foot designated by the structural engineers for the Building and to require all such items and furniture and similar items to be moved into or out of the Building and Premises only at such times, in such manner and upon such terms as Landlord shall direct in writing; e) To erect, use and maintain pipes, ducts, wiring and conduits, and appurtenances thereto, in and through the Premises. 38. Miscellaneous. a) Entire Agreement. This Lease represents the entire agreement between the parties hereto and there are no collateral or oral agreements or understandings between Landlord and Tenant with respect to the Premises or the Building. No rights, easements or licenses are acquired in the Premises by Tenant by implication or otherwise except as expressly set forth in the provisions of this Lease. b) Modification. This Lease shall not be modified in any manner except by an instrument in writing executed by the parties. In addition, Tenant agrees to make such changes to this Lease as are required by any mortgagee, provided such changes do not substantially affect Tenant's rights and obligation under this Lease. c) Interpretation. The masculine (or neuter) pronoun, singular number, shall include the masculine, feminine and neuter genders and the singular and plural number. -20- d) Exhibits. Each writing or plan referred to herein as being attached as an Exhibit or otherwise designated herein as an Exhibit hereto is hereby made a part of this Lease. e) Captions and Headings. The captions and headings of sections, subsections and the table of contents herein are for convenience only and are not intended to indicate all of the subject matter in the text and they shall not be deemed to limit, construe, affect or alter the meaning of any provisions of this Lease and are not to be used in interpreting this Lease or for any other purpose in the event of any controversy. f) Severability. If any term or provision of this Lease, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. g) Joint and Several Liability. If two or more individuals, corporations, partnerships or other persons (or any combination of two or more thereof) shall sign this Lease as Tenant, the liability of each such individual, corporation, partnership or other persons to pay the Rent and perform all other obligations under this Lease shall be deemed to be joint and several, and all notices, payments and agreements given or made by, with or to any one of such individuals, corporations, partnerships or other persons shall be deemed to have been given or made by, with or to all of them. In like manner, if Tenant shall be a partnership or other legal entity, the members of which are, by virtue of any applicable law or regulation, subject to personal liability, the liability of each such member shall be joint and several. h) No Representations by Landlord. Landlord and Landlord's agents have made no representations, agreements, conditions, warranties, understandings or promises, either oral or written, other than as expressly set forth in this Lease, with respect to this Lease, the Premises, and/or the Building. i) Relationship of Parties. This Lease shall not create any relationship between the parties other than that of sublandlord and subtenant. j) Counterparts. This Lease may be executed in one or more counterparts, each of which shall be deemed an original, and together shall constitute one in the same instrument. k) Choice of Law. The terms of this Lease shall be construed under the laws of the Commonwealth of Pennsylvania, without regard to its internal conflicts of law principles. l) Time is of the Essence. Time is of the essence in all provisions of this Lease. (Signature Page Follows) -21- IN WITNESS WHEREOF, the parties hereto have executed this Lease on the day and date first above written. LANDLORD: CITIZENS BANK OF PENNSYLVANIA, a Pennsylvania banking corporation, By: ____________________________________ Name: __________________________________ Title: ___________________________________ TENANT: UNITED BANK OF PHILADELPHIA, a Pennsylvania banking corporation, By: ____________________________________ Name: __________________________________ Title: ___________________________________ EXHIBIT A --------- PREMISES A-1 EXHIBIT B --------- PRIME LEASE B-1 EX-10 5 ex10-i.txt EXHIBIT 10(I) Exhibit 10.i SUB-LEASE AGREEMENT by and between UNITED BANK OF PENNSYLVANIA (as Landlord) and U. S. MORTGAGE BANKERS, INC. (as Tenant) Dated: July 1, 2005 Page TABLE OF CONTENTS 1. Definitions...................................................1 2. Prime Lease and Premises......................................3 3. As Is Condition of Premises...................................4 4. Use of Premises...............................................4 5. Fixed Basic Rent..............................................4 6. Additional Rent; Tenant's Personalty..........................4 7. Operating Costs; Real Estate Taxes............................5 8. Interest and Late Charge......................................5 9. Indemnification...............................................5 10. Insurance.....................................................5 11. Repairs and Maintenance.......................................8 12. Utilities and Services........................................8 13. Governmental Regulations......................................9 14. Alterations, Additions and Fixtures...........................9 15. Mechanic's Liens.............................................10 16. Landlord's Right of Entry....................................11 17. Damage by Fire or Other Casualty; Condemnation...............12 18. Non-Abatement of Rent........................................12 19. Quiet Enjoyment..............................................12 20. Rules and Regulations........................................12 21. Assignment and Sublease......................................12 22. Subordination................................................13 23. Curing Tenant's Defaults.....................................13 24. Surrender....................................................13 25. Defaults-Remedies............................................14 26. Condition of Premises........................................17 27. Hazardous Substances.........................................18 28. Recording....................................................18 29. Broker.......................................................18 30. Prime Landlord Consent.......................................18 31. Notices......................................................19 32. Irrevocable Offer: No Option................................19 33. Inability to Perform.........................................19 34. Survival.....................................................19 35. Corporate Tenants............................................19 36. Waiver of Invalidity of Lease................................20 37. Rights Reserved by Landlord..................................20 38. Miscellaneous................................................20 EXHIBIT A - PREMISES EXHIBIT B - SUBLEASE EXHIBIT C - PRIME LEASE -i- SUB-LEASE AGREEMENT THIS SUB-LEASE AGREEMENT (the "Lease") is dated July 1, 2005, by and between UNITED BANK OF PHILADELPHIA, Pennsylvania banking corporation ("Landlord") whose address is 30 South 15th Street, Suite 1200, Philadelphia, Pennsylvania 19102, and, U. S. MORTGAGE BANKERS, INC., a New Jersey corporation ( "Tenant") whose address is 3 United States Avenue, Gibbsboro, New Jersey 08026. Background: A. Landlord leases certain space located on the first floor of the building commonly known as the Graham Building, located at 30 South 15th Street, Philadelphia, Pennsylvania, from Citizens Bank of Pennsylvania a Pennsylvania state-chartered bank ("Sub-Landlord") whose address is 801 Market Street, Philadelphia, Pennsylvania 19101 which said space is leased by the Sub-Landlord from a Riggs & Co., a division of Riggs Bank N.A., as trustee of the Multi-Employer Property Trust, a trust organized under 12 C.F.R. Section 9.18 ("Prime Landlord") pursuant to the terms of that certain Lease dated September 8, 1999 by and between Landlord and Prime Landlord. B. Landlord desires to sub-lease the Premises to Tenant and Tenant desires to accept same from Landlord in accordance with and subject to the terms and conditions hereinafter set forth. Agreement: For and in consideration of the covenants contained in this Lease and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant, intending to be legally bound hereby, agree as follows: 1. Definitions. In addition to other terms elsewhere defined in this Lease, the following terms whenever used in this Lease shall have only the meanings set forth in this Section, unless such meanings are expressly modified, limited or expanded elsewhere in this Lease. A. Additional Rent shall mean all sums defined as Additional Rent in or pursuant to the Prime Lease and any and all other sums, in addition to Fixed Basic Rent payable by Tenant to Landlord or to third parties pursuant to the provisions of the Lease. B. Broker shall mean CB Richard Ellis. C. Building shall mean the building known as the Graham Building with an address of 30 South 15th Street, Philadelphia, Pennsylvania. D. Commencement Date shall mean July 1, 2005. -1- E. Exhibits shall be the following, attached to this Lease and incorporated in this Lease and made a part of this Lease: Exhibit A Premises Exhibit B Sublease Exhibit C Prime Lease F. Expiration Date shall mean September 29, 2009. G. Fixed Basic Rent shall mean, with respect to each Lease Year, the following amounts: ------------------------------------------------------------------------ Lease Year Annual Rent Monthly Installment ------------------------------------------------------------------------ July 1, 2005 - June 30, 2006 $34,923.00 $2,910.25 ------------------------------------------------------------------------ July 1, 2006 - June 30, 2007 $37,609.00 $3,134.08 ------------------------------------------------------------------------ July 1, 2007 - June 30, 2008 $40,296.00 $3,358.00 ------------------------------------------------------------------------ July 1, 2008 - June 30, 2009 $42,982.00 $3,581.83 ------------------------------------------------------------------------ July 1, 2009 - September 29, 2009 $45,669.00 $3,805.75 ------------------------------------------------------------------------ H. Lease Year shall mean each consecutive twelve (12) month period during the Term commencing on the Commencement Date. I. Permitted Use shall mean use as a branch bank and other general office use and for no other purpose, subject to all applicable laws and all rules and regulations of the Building and insurers of the Building. J. Person shall mean a natural person, a partnership, a corporation, an association, and any other form of business association or entity. K. Premises shall be approximately 2,673 rentable square feet on the first floor of the Building as set forth on Exhibit A excluding the ATM Area as defined below. L. Prime Landlord shall have the meaning ascribed to such term in the Background. M. Prime Lease shall mean that certain Lease dated September 8, 1999 by and between Sub-Landlord and Prime Landlord, whereby Sub-Landlord has leased the Premises from the Prime Landlord, a copy of such Prime Lease being attached hereto and incorporated herein as Exhibit C. N. Rent shall mean all Fixed Basic Rent and Additional Rent and any other rent or other sums due under this Lease reserved under this Lease. -2- O. Sublease shall mean that certain Lease dated April 15, 2005 by and between Landlord and Sub-Landlord, whereby Landlord has leased the Premises from the Sub-Landlord, a copy of such Prime Lease being attached hereto and incorporated herein as Exhibit B. P. Tenant's Pro Rata Share shall mean an amount equal to one and twelve hundredths percent (1.12%), which percentage has been determined pursuant to the Prime Lease. Q. Term shall mean the period of time commencing on the Commencement Date and ending on the Expiration Date, unless otherwise terminated pursuant to the terms of this Lease. 2. Prime Lease and Premises. a) Landlord hereby demises and subleases the Premises to Tenant and Tenant hereby leases and takes the Premises from Landlord for the Term and upon the terms, covenants, conditions, and provisions set forth in this Lease. The Tenant's interest in the Premises as subtenant shall include the right, subject to the Prime Lease, in common with Prime Landlord, Landlord and other occupants of the Building, to use sidewalks, lobbies, hallways, entranceways, lavatory facilities and other facilities which are located within the Building and which are designated by Landlord or Prime Landlord from time to time for the use of all of the tenants of the Building (the "Common Facilities"). b) Tenant acknowledges and agrees that this Lease is a sublease and is under and subject to all of the terms, covenants, conditions and agreements of the Sublease and the Prime Lease and the operation of the same. In the event of any termination of either the Sublease or the Prime Lease, for any reason whatsoever or howsoever, notwithstanding anything to the contrary in this Lease, this Lease shall terminate absolutely without liability to Landlord, Sub-Landlord or Prime Landlord. A true and correct copy of the Sublease and the Prime Lease are attached to this Lease and incorporated herein as Exhibit B and Exhibit C respectively. The terms, provisions, covenants and conditions of the Prime Lease are hereby incorporated herein by reference and made a part hereof and are and shall be superior to this Lease to the extent they impose duties or obligations on Landlord, as tenant. During the Term, as between Tenant and Landlord, Tenant hereby assumes and agrees to perform and be bound by all of the foregoing provisions of the Prime Lease which are incorporated herein as if Tenant were the "Tenant" under the Prime Lease, Landlord were the "Landlord" thereunder and the Premises were the "Premises" thereunder (except that Tenant shall also afford Prime Landlord any rights granted to Landlord in such provisions including any approval rights). Landlord shall have all of rights and remedies of the Sub-Landlord under the Sublease and the Prime Landlord under the Prime Lease as against Tenant. Tenant shall have none of the privileges, benefits or rights granted to Landlord, as tenant, under the Prime Lease or under the Sublease unless expressly granted to Tenant herein (including, without limitation, any renewal options or rights of first offer). c) Tenant acknowledges that Landlord, Prime Landlord and/or Prime Landlord's lender may have different interests in some circumstances; therefore, Tenant agrees that Landlord shall not be bound by any approval or consent provided by Sub-Landlord or Prime Landlord, or Prime Landlord's lender and that Landlord shall not be liable or responsible for any denial, delay or condition of approval or consent by Sub-Landlord, Prime Landlord or Prime Landlord's lender, which if not given, shall automatically result in the demand by Landlord of its consent or approval. -3- d) Except as otherwise expressly provided in this Lease, in the event of a conflict between the terms of the Sublease of the Prime Lease and the provisions of this Lease, the applicable provision which is more restrictive on Tenant, or which imposes the greater obligation on Tenant, shall control. Any capitalized terms used in this Lease and not otherwise defined herein, shall have the meanings prescribed for such terms in the Sublease or the Prime Lease. 3. As Is Condition of Premises. The Premises are being leased to Tenant in "AS-IS" condition without any obligation of the Landlord to make any alterations, improvements, or repairs. Tenant acknowledges that it has inspected the Premises and agrees to accept the same as of the date hereof in its current state of condition and repair and releases the Landlord from any and all claims in connection therewith. 4. Use of Premises. Tenant shall occupy the Premises throughout the Term and shall use the same solely for the Permitted Use. Tenant shall not make, or permit to be made, any unseemly or disturbing noises or odors and shall not interfere with other tenants or those having business with them. Tenant shall keep all mechanical apparatus in the Premises free of vibration and noise which may be transmitted beyond the limits of the Premises. Tenant shall not overload any floor or part thereof in the Premises or the Building, including any public corridors or elevators therein, by bringing in, placing, storing, installing or removing any large or heavy articles and Landlord may prohibit or may direct and control the location and size of safes and all other heavy articles and may require, at Tenant's sole cost and expense, supplementary supports of such material and dimensions as Landlord, Sub-Landlord or Prime Landlord may deem necessary to properly distribute the weight. 5. Fixed Basic Rent. Commencing on the Commencement Date and throughout the Term, Tenant shall pay to Landlord at the address listed in Section 31 hereof the Fixed Basic Rent, without notice or demand and without setoff or deduction, in equal monthly installments specified in Section 1(G), in advance, on the first day of each calendar month during the Term. If the Commencement Date falls on a day other than the first day of a calendar month, the Fixed Basic Rent shall be due and payable for such month, apportioned on a per diem basis for the period between the Commencement Date and the first day of the next first full calendar month in the Term and such apportioned sum shall be paid on the Commencement Date. 6. Additional Rent; Tenant's Personalty. a) Commencing on the Commencement Date, Tenant shall pay to Landlord as rent, all Additional Rent. Additional Rent shall be payable on or before the date when such payment is first due, either as provided for hereunder or pursuant to either the Sublease or the Prime Lease. If no date or time is specified, then all such Additional rent shall be due upon invoicing, without any deduction, offset or counterclaim of any kind for any reason whatsoever and without prior notice or demand. -4- b) Tenant shall pay all taxes imposed upon Tenant's occupancy, business, furnishings, trade fixtures, equipment or other personal property. If any such taxes are levied or assessed against Landlord Sub-Landlord or Prime Landlord or their respective interests in the Premises or the Building, or if the personal property located within the Premises causes an increase in the assessed value of the Premises or the Building, and Landlord elects to pay such taxes or such increase in taxes, Tenant shall reimburse Landlord for same upon demand. 7. Operating Costs; Real Estate Taxes. a) Tenant shall pay to Landlord, as Additional Rent, the Estimated Operating Costs Allocable to the Premises and the area adjacent to the Premises consisting of approximately 260 square feet and containing Landlord's automatic teller machines (the "ATM Area") payable by Landlord under the Sublease or by the Sub-Landlord under the Prime Lease. Such payments shall be due and payable on the first day of each calendar month during the Term, together with Fixed Basic Rent. b) Tenant shall pay to Landlord, as Additional Rent, the Estimated Property Taxes Allocable to the Premises payable by Landlord under the Prime Lease. Such payments shall be due and payable on the first day of each calendar month during the Term, together with Fixed Basic Rent. 8. Interest and Late Charge. Landlord may charge a late payment charge of five percent (5%) of any installment of Fixed Basic Rent or Additional Rent that is not paid on or before the due date thereof. Any amount due from Tenant to Landlord which is not paid when due shall bear interest ("Interest") at an interest rate equal to the Prime Rate published from time to time in the Money Rates column of the Wall Street Journal (East Coast Edition) plus 3% (or, if lower, the highest rate then allowed under the usury laws of the Commonwealth of Pennsylvania) from the date due until the date paid. The right of Landlord to charge a late charge and interest with respect to past due installments of Fixed Basic Rent and Additional Rent is in addition to Landlord's rights and remedies upon an event of default. 9. Indemnification. Tenant shall fully reimburse Landlord upon demand for any costs or expenses incurred by Landlord in connection with the terms and conditions set forth in Sublease or Section 4.12 of the Prime Lease by reason of or arising, directly or indirectly, from (i) Tenant's possession, use or occupancy of the Premises or the business conducted at the Premises, (ii) any act, omission or negligence of Tenant, or any of Tenant's agents, business invitees or customers, or (iii) any breach or default by Tenant under this Lease. This indemnity shall survive the expiration of the Term or earlier termination of this Lease and shall apply to any early entry to the Premises by or on behalf of Tenant. 10. Insurance. a) Tenant's Insurance. (i) Tenant covenants and represents, such covenants and representations being specifically designed to induce Landlord to execute this Lease, that during the entire Term, at its sole cost and expense, Tenant shall obtain, maintain and keep in full force and effect the following insurance: -5- (1) "All Risk" property insurance against fire, theft, vandalism, malicious mischief, sprinkler leakage and such additional perils as are now, or hereafter may be, included in a standard extended coverage endorsement from time to time in general use in the Commonwealth of Pennsylvania upon property of every description and kind owned by Tenant and or under Tenant's care, custody or control located in the Building or within the Premises or for which Tenant is legally liable or installed by or on behalf of Tenant, including by way of example and not by way of limitation, alterations, equipment, inventory, furniture, fixtures, fittings, installations and any other personal property in an amount equal to the full replacement cost thereof. (2) Commercial General Liability Insurance coverage to include an endorsement covering Tenant's obligations pursuant to Section 9 hereof, covering personal injury, bodily injury and death and broad form property damage naming Landlord, Prime Landlord and Prime Landlord's mortgagee or trust deed holder and ground lessors (if any) as additional insureds in combined single limits of not less than Two Million Dollars ($2,000,000.00), which policy shall be payable on an "occurrence" basis and which limit shall be reasonably increased during the Term hereof at Landlord's request to reflect both increases in liability exposure arising from inflation as well as from any changed used of the Premises. (3) Business interruption insurance in such amounts as will cover costs, damages, lost income, expenses, Fixed Basic Rent, Additional Rent and all other sums payable under this Lease and such other perils commonly insured against by prudent tenants or attributable to prevention or denial of access to the Premises or Building as a result of such perils. (4) Workers' Compensation insurance in form and amount as required by law. (5) Any other form or forms of insurance or any increase in the limits of any of the aforesaid enumerated coverages or other forms of insurance as Landlord, Prime Landlord or the mortgagees or ground lessors (if any) of Landlord, Sub-Landlord or Prime Landlord may require from time to time if in the opinion of Landlord, Prime Landlord or said mortgagees or ground lessors said coverage and/or limits become inadequate or less than that commonly maintained by prudent tenants in similar buildings in the area by tenants making similar uses. (ii) All property insurance policies shall be taken out with insurers rated A- or better (or if such ratings are not in effect, the equivalent thereof) by Best Rating Service or any successor thereto (or if there be none, an organization having a National reputation) who are licensed to do business in the state in which the Building is located and shall be in form satisfactory, from time to time, to Landlord, Sublandlord and Prime Landlord. A policy or certificate evidencing such insurance together with a paid bill shall be delivered to Landlord prior to the Commencement Date hereof. Such insurance policy or certificate will provide an undertaking by the insurers to notify Landlord, Sub-Landlord, Prime Landlord and the mortgagees or ground lessors (if any) of Landlord and/or Prime Landlord in writing not less than thirty (30) days prior to any material change, reduction in coverage, cancellation, or other termination thereof. Should a certificate of insurance initially be provided, a policy shall be furnished by Tenant within thirty (30) days of the Commencement Date. The aforesaid insurance shall be written with no deductible. -6- (iii) In the event of damage to or destruction of the Building or Premises and this Lease is so terminated, Tenant shall immediately pay to Landlord all of its insurance proceeds, if any, relating to the leasehold improvements and alterations (but not Tenant's trade fixtures, equipment, furniture or other personal property of Tenant in the Premises) which have become Landlord's property on installation or would have become Landlord's property at the Term's expiration or sooner termination. If the termination of the Lease, at Landlord's election, is due to damage to the Building and if the Premises have not been so damaged, Tenant will deliver to Landlord in accordance with the provisions of this Lease the improvements and alterations to the Premises which have become an installation or would have become at the Term's expiration, Landlord's property. (iv) Tenant agrees that it will not keep or use or offer for sale (if sales of goods is a permitted use pursuant to this Lease) in or upon the Premises any article which may be prohibited by any insurance policy in force from time to time covering the Premises. In the event Tenant's occupancy or conduct of business in or on the Premises, whether or not Landlord has consented to the same, results in any increase in premiums for insurance carried from time to time by Landlord with respect to the Building, or the Premises, Tenant shall pay such increase in premiums as Additional Rent within ten (10) days after being billed therefor by Landlord. In determining whether increased premiums are a result of Tenant's use and occupancy a schedule issued by the organization computing the insurance rate on the Premises showing the components of such rate shall be conclusive evidence of the items and charges making up such rate. Tenant shall promptly comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Building or Premises. (v) If any insurance policy carried by Tenant, Landlord Sub-Landlord or Prime Landlord shall be cancelled or cancellation shall be threatened or the coverage thereunder reduced or threatened to be reduced in any way by reason of the use or occupation of the Premises or Building or any part thereof by Tenant or any assignee or subtenant of Tenant or anyone permitted by Tenant to be upon the Premises, and if Tenant fails to remedy the conditions giving rise to such cancellation or threatened cancellation or reduction in coverage on or before the earlier to occur of the following: (i) forty-eight (48) hours after notice thereof from Landlord or Prime Landlord, or (ii) prior to such cancellation or reduction becoming effective, then Tenant shall be in default and an event of default shall occur under this Lease and Landlord shall have all of the remedies available to Landlord pursuant to this Lease. b) Waiver of Subrogation. Any policy or policies of fire, extended coverage or similar casualty insurance, which either party obtains in connection with the Premises or Building shall include a clause or endorsement denying the insurer any rights of subrogation against the other party (i.e. Landlord or Tenant) for all perils covered by such policy. Any and all policies carried by Tenant shall contain a waiver of subrogation as to Prime Landlord and any additional cost for the same shall be Tenant's sole responsibility. Except as aforesaid, should such waiver not be available then the policy for which the waiver is not available must name the other party as an additional insured affording it the same coverage as that provided the party obtaining such coverage. Any provision of this Lease to the contrary notwithstanding, Landlord -7- and Tenant hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise (a) from any and all liability for any loss or damage to the property of the releasing party, (b) for any loss or damage that may result, directly or indirectly, from the loss or damage to such property (including rental value and business interruption), and (c) from legal liability for any loss or damage to property (no matter who the owner of the property may be), all to the extent that the releasing party's loss or damage is insured or, if not insured, was insurable under commercially available "all risk" property insurance policies, including additional coverages typically obtained by owners and tenants of comparable office buildings in the vicinity of the Building, even if such loss or damage or legal liability shall be caused by or result from the fault or negligence of the other party or anyone for whom such party may be responsible and even if the releasing party is self insured in whole or in part or the amount of the releasing party's insurance is inadequate to cover the loss or damage or legal liability. It is the intention of the parties that Landlord and Tenant shall look solely to their respective insurance carriers for recovery against any such property loss or damage or legal liability, without such insurance carriers having any rights of subrogation against the other party and in any and all cases, Tenant and its insurance carriers shall have no rights of subrogation as to Prime Landlord. 11. Repairs and Maintenance. a) Tenant shall, throughout the Term, and at Tenant's sole cost and expense, keep and maintain the Premises in good condition and repair, including performing all of the obligations of Sub-Landlord under Section 4.2 of the Prime Lease. Upon expiration of the Term or the earlier termination of this Lease, Tenant shall leave the Premises in good order, condition and repair, ordinary wear and tear excepted. Tenant shall not permit any waste, damage or injury to the Premises. Tenant shall not use or permit the use of any portion of the Common Facilities for other than their intended use as specified by the Landlord, Sub-Landlord or Prime Landlord from time to time. b) Notwithstanding the foregoing, repairs and replacements to the Premises and the Building arising out of or caused by Tenant's use, manner of use or occupancy of the Premises, by Tenant's installation of alterations, additions, improvements, trade fixtures or equipment in or upon the Premises or by any act or omission of Tenant or any employee, agent, contractor or invitee of Tenant shall be made at Tenant's sole cost and expense and Tenant shall pay Landlord, Sub-Landlord or Prime Landlord the cost of any such repair or replacement, as Additional Rent, upon demand. 12. Utilities and Services. It is the intention of the parties that Tenant be entitled to receive, with respect to Premises, the benefit of any services, utilities (including water and heating) repairs, maintenance, facilities and other ongoing services from Prime Landlord that Landlord, as tenant, receives with respect to the Premises under the Prime Lease and to the extent the foregoing are applicable to the Premises leased hereunder, subject in all cases to the terms of the Prime Lease. In connection with the foregoing, Tenant acknowledges and agrees that the foregoing described services can only be provided by Prime Landlord and that -8- Landlord has no right or ability to control the same. As a result, to the extent Prime Landlord has agreed in the Prime Lease to provide services, utilities, repairs, facilities and other services to Sub-Landlord, as tenant, including the services under Sections 3.5, 4.1 and 4.3 of the Prime Lease and provided such services are applicable to the Premises, and Landlord has rights under the Sublease to enforce that aforementioned provisions of the Prime Lease pursuant to any and all rights of Landlord contained the Sublease Landlord agrees, on behalf of Tenant, to enforce, in a reasonable manner and at Tenant's direction and cost, its rights against Prime Landlord under the Prime Lease. Tenant hereby releases and holds Landlord harmless from, and currently waives any claims arising in the future relating to, any damages, interference, costs and expenses incurred or suffered by Tenant as a result of (i) the failure of Prime Landlord to properly maintain, repair or operate the Premises and Building systems, and (ii) the failure of Prime Landlord to supply any utility and other services to be provided to Landlord, as tenant, under the Prime Lease. The payment of Fixed Basic Rent and Additional Rent by Tenant pursuant to this Lease is an absolute and independent covenant and shall not be affected in any way by the failure of Prime Landlord to so maintain, repair or operate or to supply any such utility or services except if and to the extent Landlord's rental obligations to Prime Landlord under the Prime Lease are abated, reduced, suspended or offset with respect to the Premises as a result of the foregoing. 13. Governmental Regulations. Tenant shall comply with all laws, ordinances, notices, orders, rules, regulations and requirements of all federal, state and municipal government or any department, commission, board of officer thereof, or of the National Board of Fire Underwriters or any other body exercising similar functions, relating to the Premises or to the use or manner of use of the Building. Tenant shall not knowingly do or commit, or suffer to be done or committed anywhere in the Building, any act or thing contrary to any of the laws, ordinances, regulations and requirements referred to in this Section. Tenant shall give Landlord prompt written notice of any accident in the Premises and of any breakage, defect or failure in any of the systems or equipment servicing the Premises or the Building or any portion of the Premises or the Building. Tenant shall comply in all respects with Section 4.21 of the Prime Lease as if Tenant were the "Tenant" thereunder, including the obligation to indemnify Landlord and Prime Landlord for all losses, costs, expenses, assessments or fees incurred by Landlord and/or Prime Landlord due to Tenant's failure to completely discharge and comply with its responsibilities and obligations thereunder. 14. Alterations, Additions and Fixtures. Tenant shall not make or permit to be made any alterations, installations, decorations, improvements or additions to the Premises or Building, including the erection or installation of any signs, changing of any locks on doors, disturb any floor covering, wall covering, fixtures, plumbing or wiring (collectively, "Tenant Changes"), without on each occasion first presenting plans and specifications to Landlord and obtaining both Landlord's and Prime Landlord's prior written consent. If Landlord and Prime Landlord consent to any proposed alterations, improvements or additions, then Tenant at Tenant's sole cost and expense, may make the proposed alterations, improvements and additions provided that: (i) Tenant supplies any necessary permits; (ii) such alterations and improvements do not, in Landlord's, Sub-Landlord or Prime Landlord's judgment, impair the structural strength of the Building or any other improvements and are at least equal in quality to the Building's minimum standard tenant improvements; (iii) Tenant takes or causes to be taken all steps that are otherwise required by Section 15 of this Lease and that are required or permitted by law in order to avoid the imposition of any mechanic's, laborer's -9- or materialman's lien upon the Premises or the Building; (iv) Tenant uses contractors and mechanics approved by Landlord and Prime Landlord; (v) the occupants of the Building and of any adjoining real estate owned by Landlord, Sub-Landlord or Prime Landlord are not annoyed or disturbed by such work; (vi) the alterations, improvements or additions shall be installed in accordance with the approved plans and specifications and completed according to a construction schedule approved by Landlord and Prime Landlord; and (vii) Tenant provides payment and performance bonds and proof of insurance of the types and coverage amounts required by Landlord and Prime Landlord and by insurance companies with a policyholder rating of A- or better as rated by "Best's Key Rating Guide" for insurance companies at the time such insurance is procured. Any and all alterations, improvements and additions to the Premises which are constructed, installed or otherwise made by Tenant shall be the property of Tenant until the expiration or sooner termination of this Lease; at that time all such alterations and additions shall remain on the Premises and become the property of Landlord without payment by Landlord unless, upon the termination of this Lease, Landlord instructs Tenant in writing to remove the same in which event Tenant will remove such alterations, improvements and additions, and repair and restore any damage to the Building or the Premises caused by the installation or removal. Tenant shall pay to Landlord, upon demand, the cost and expense incurred by Landlord in reviewing Tenant's plans and specifications. All Tenant Changes shall be performed by contractors employed by Tenant under one or more construction contracts in form and substance approved in advanced in writing by Landlord and Prime Landlord, in their respective discretions. Prime Landlord and Landlord may withdraw consent to the continuation of work on any of the Tenant Changes in the event any of Tenant's general contractors, subcontractors, workers or suppliers cause, in the opinion of Sub-Landlord, Prime Landlord, or Landlord, any disharmony or any interference in the work of general contractors, subcontractors, workers or suppliers of Landlord, Sub-Landlord, Prime Landlord or any other tenant or subtenant in the Building. All Tenant Changes must be completed in the manner required by the terms of the Sublease and the Prime Lease, including, without limitation, the provisions of Section 4.5 thereof. Tenant shall be responsible for all damage to the Premises or the Building caused by Tenant or any of Tenant's general contractors, subcontractors, workers or suppliers. Tenant agrees to indemnify, defend and hold harmless the Landlord, Prime Landlord, and their respective employees, agents, successors and assigns, from and against any and all damage, claim, liability or loss, including reasonable attorneys' and other fees, arising out of or in any way connected to the Tenant Changes and/or to any defect in design, material or workmanship of any Tenant Changes. 15. Mechanic's Liens. Tenant shall promptly pay any contractors and materialmen who supply labor, work or materials to Tenant at the Premises or the Building so as to minimize the possibility of a lien attaching to the Premises or the Building. Tenant shall take all steps permitted by law in order to avoid the imposition of any mechanic's, laborer's or materialman's lien upon the Premises or the Building. Should any such lien or notice of lien be filed for work performed for Tenant other than by Landlord, Tenant shall cause such lien or notice of lien to be discharged of record by payment, deposit, bond or otherwise within fifteen (15) days after the filing thereof or after Tenant's receipt of notice thereof, whichever is earlier, regardless of the validity of such lien or claim. If Tenant shall fail to cause such lien or claim to be discharged and removed from record within such fifteen (15) day period, then, without obligation to investigate the validity thereof and in addition to any other right or remedy Landlord may have, Landlord may, but shall not be obligated to, contest the lien or claim or discharge it by payment, deposit, -10- bond or otherwise; and Landlord shall be entitled to compel the prosecution of an action for the foreclosure of such lien by the lienor and to pay the amount of the judgment in favor of the lienor with interest and costs. Any amounts so paid by Landlord and all costs and expenses including, without limitation, attorneys' fees incurred by Landlord in connection therewith, together with Interest from the respective dates of Landlord's making such payment or incurring such cost or expense, which shall constitute Additional Rent payable under this Lease promptly upon demand therefor. Nothing in this Lease is intended to authorize Tenant to do or cause any work or labor to be done or any materials to be supplied for the account of Landlord, all of the same to be solely for Tenant's account and at Tenant's risk and expense. Further, notwithstanding anything to the contrary contained in this Lease, nothing contained in or contemplated by this Lease shall be deemed or construed in any way to constitute the consent or request by Landlord for the performance of any work or services or the furnishing of any materials for which any lien could be filed against the Premises or the Building or any part of any thereof, nor as giving Tenant any right, power or authority to contract or permit the performance of any work or services or the furnishing of any materials for which any lien could be filed against the Premises or the Building or any part of any thereof. Throughout this Lease the term "mechanic's lien" is used to include any lien, encumbrance or charge levied or imposed upon the Premises or the Building or any interest therein or income therefrom on account of any mechanic's, laborer's or materialman's lien or arising out of any debt or liability to or any claim or demand of any contractor, mechanic, supplier, materialman or laborer and shall include without limitation any mechanic's notice of intention given to Landlord or Tenant, any stop order given to Landlord or Tenant, any notice of refusal to pay naming Landlord or Tenant and any injunctive or equitable action brought by any person entitled to any mechanic's lien. 16. Landlord's Right of Entry. a) Tenant shall permit Landlord and Prime Landlord and the authorized representatives of each and of any mortgagee or any prospective mortgagee or any prospective tenant or purchaser of the Building to enter the Premises at all reasonable times, with one (1) Business Days' prior notice to Tenant, for the purpose of (i) inspecting the Premises or (ii) making any necessary repairs to the Premises or to the Building and performing any work therein. During the progress of any work on the Premises or the Building, Landlord will attempt not to inconvenience Tenant, but neither Landlord nor Prime Landlord shall not be liable for inconvenience, annoyance, disturbance, loss of business or other damage to Tenant by reason of making any repair or by bringing or storing materials, supplies, tools and equipment in the Premises during the performance of any work, and the obligations of Tenant under this Lease shall not be thereby affected in any manner whatsoever. b) Landlord, Sub-Landlord or Prime Landlord shall have the right at all reasonable times, with prior notice to Tenant, to enter and to exit the Premises for the purpose of inspection or showing the Premises in connection with a sale or mortgage and to enter upon and to exhibit the Premises to any prospective tenant. -11- c) If the Premises are vacated or abandoned by Tenant, Landlord and/or Prime Landlord shall be permitted to show the Premises at any time and to prepare the Premises for re-occupancy. d) Tenant shall give Landlord thirty (30) days' prior written notice before vacating the Premises at the end of the Term or earlier expiration of this Lease to permit Landlord to meet its obligations under the Sublease or to permit Sub-Landlord to meet its obligations under Section 4.8 of the Prime Lease with respect to notice to Prime Landlord and arrangement of a joint inspection. 17. Damage by Fire or Other Casualty; Condemnation. This Lease shall be subject to the operation of the terms and the rights of Prime Landlord, Sub-Landlord and Landlord under and pursuant to the Sublease or the Prime Lease in the event of damage or destruction to the Building or the Premises by fire or other casualty or in the event of a condemnation. In the event Prime Landlord, Sub-Landlord or Landlord has the right to terminate the Prime Lease or the Sublease pursuant thereto, and either elects to do so, this Lease shall automatically terminate upon such termination of the Prime Lease or the Sublease. 18. Non-Abatement of Rent. Except as otherwise expressly provided in the Prime Lease, there shall be no abatement or reduction of the Fixed Basic Rent, Additional Rent or other sums payable under this Lease for any cause whatsoever and this Lease shall not terminate, nor shall Tenant be entitled to surrender the Premises, in the event of fire, casualty or condemnation or any default by Landlord under this Lease or the Sub-Landlord under the Sublease or the Prime Landlord under the Prime Lease. 19. Quiet Enjoyment. Tenant, upon paying the Fixed Basic Rent, Additional Rent and other charges herein required and observing and keeping all covenants, agreements and conditions of this Lease, shall quietly have and enjoy the Premises during the Term without hindrance or molestation by anyone claiming by or through Landlord, subject, however, to the exceptions, reservations and conditions of this Lease, the Prime Lease and any and all mortgages now or hereafter existing, to which this Lease shall be subordinate. Tenant acknowledges the provisions of Section 2(b) hereof and agrees that in the event of a termination of this Lease pursuant to a termination of either the Sublease or the Prime Lease, Tenant shall have no claim or cause of action against Landlord, Sub-Landlord or Prime Landlord. 20. Rules and Regulations. This Lease is subject to any rules and regulations prescribed by the Prime Landlord, from time to time, at its sole discretion (the "Rules and Regulations"). The Tenant shall comply at all times with the Rules and Regulations and shall cause its agents, employees, invitees, visitors, and guests to do so. Landlord shall not be responsible to Tenant for non-observance or violation of any of the Rules and Regulations by any tenant of the Building. 21. Assignment and Subletting. a) Tenant may not assign this Lease or sublet the whole or any portion of the Premises without Landlord's, Sub-Landlord's and Prime Landlord's prior written consent, which may be granted or withheld in their respective sole and exclusive discretions. Tenant shall cooperate with Landlord and shall comply in -12- all respects with Section 4.16 of the Prime Lease, including, without limitation, providing Landlord, Sub-Landlord and Prime Landlord with the information, notices, processing fees, payments of rent and documentation required by such Section. b) Any transfer, assignment or hypothecation of any stock or interest in, or the assets of, Tenant which is either: (i) greater than fifty percent (50%) of such stock, interest or assets, or (ii) intended to avoid the provisions of this Section 21, shall be subject to Section 21(a) hereof in all respects. c) In the event Prime Landlord, Sub-Landlord and Landlord shall consent to any proposed assignment or sublet of the whole or any portion of the Premises, and Tenant receives rent or other payments in connection with such assignment or sublet which, either initially or over the term of such assignment or sublet, equals an amount greater than the sum of Fixed Basic Rent and Additional Rent due annually hereunder, Tenant shall pay to Landlord fifty percent (50%) of such excess. 22. Subordination. This Lease and Tenant's rights under this Lease shall be subject and subordinate at all times in lien, operation and priority to the Prime Lease, any mortgage or other encumbrance now or hereafter placed upon or affecting the Building or the Premises and to all renewals, modifications, consolidations and extensions thereof, without the necessity of any further instrument or act on the part of Tenant. Tenant shall execute and deliver upon demand any further instrument or instruments confirming the subordination of this Lease to the Sublease and to the Prime Lease or the lien of any mortgage, if requested to do so by Landlord, Sub-Landlord or Prime Landlord, and any further instrument or instruments of attornment that may be desired by any such mortgagee, Prime Landlord, Sub-Landlord or Landlord. Notwithstanding the foregoing, any mortgagee may at any time subordinate its mortgage to this Lease, without Tenant's consent, by giving notice in writing to Tenant and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution and delivery. In that event such mortgagee shall have the same rights with respect to this Lease as though this Lease had been executed prior to the execution and delivery of the mortgage and had been assigned to such mortgagee. 23. Curing Tenant's Defaults. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord may, without any obligation to do so and in addition to any other rights it may have in law or equity, elect to cure such default on behalf of Tenant after written notice (except in the case of emergency) to Tenant. Tenant shall reimburse Landlord upon demand for any sums paid or costs incurred by Landlord in curing such default, including Interest thereon from the respective dates of Landlord's making the payments and incurring such costs, which sums and costs together with interest thereon shall be deemed Additional Rent payable within ten (10) days of demand. 24. Surrender. a) At the expiration of the Term or earlier termination of this Lease, Tenant shall promptly yield up the Premises and all improvements, alterations and additions thereto, and all fixtures and equipment servicing the Premises in a condition which is clean of garbage and debris and broom clean and in the same condition, order and repair in which they are required to be kept throughout the -13- Term, ordinary wear and tear excepted. So long as Tenant is not in default under or pursuant to this Lease, Tenant shall be entitled to remove its furniture, trade fixtures and moveable equipment from the Premises prior to the expiration of the Term or the earlier termination of this Lease, subject to Tenant's repair and restoration obligations pursuant to this Lease. b) If Tenant, or any person claiming through Tenant, continues to occupy the Premises after the expiration of the Term or earlier termination of this Lease or any renewal thereof without prior written consent of Landlord, such holding over by Tenant shall constitute an event of default under this Lease and shall be subject to all the remedies set forth in this Lease. 25. Defaults and Remedies. a) Defaults. It shall be a default or event of default under this Lease if any one or more of the following events occurs: (i) Tenant fails to pay in full, when due and without demand, any and all installments of Fixed Basic Rent or Additional Rent or any other charges or payments due and payable under this Lease whether or not herein included as rent. (ii) Tenant violates or fails to perform or otherwise breaches any agreement, term, covenant or condition contained in this Lease. (iii) Tenant abandons or vacates the Premises without notice and without having first paid to Landlord in full all Fixed Basic Rent, Additional Rent and other charges that have become due as well as all which will become due thereafter through the end of the Term. (iv) Tenant becomes insolvent or bankrupt in any sense or makes an assignment for the benefit of creditors or if a petition in bankruptcy or for reorganization or for an arrangement with creditors under any federal or state law is filed by or against Tenant, or a bill in equity or other proceeding for the appointment of a receiver or similar official for any of Tenant's or Guarantor's assets is commenced, or if any of the real or personal property of Tenant shall be levied upon by any sheriff, marshal or constable. (v) Tenant causes or permits a default to occur, continue or exist under the Prime Lease. (vi) Any information furnished by or on behalf of Tenant to Landlord in connection with this Lease is determined to have been materially false and/or misleading when made. b) Remedies. Upon the occurrence of an event of default under this Lease, Landlord shall have all of the following rights: (i) Landlord may charge a late payment charge of five (5%) percent of any amount owed to Landlord pursuant to this Lease which is not paid on or before the due date which is set forth in the Lease or, if a due date is not specified in this Lease, within twenty (20) days of the mailing of a bill -14- therefor by Landlord. If Landlord incurs a late charge in connection with any payment which Tenant has failed to make within the times required in this Lease, Tenant shall pay Landlord, in addition to such payment due, the full amount of such late charge incurred by Landlord. Nothing in this Lease shall be construed as waiving any rights of Landlord arising out of any default of Tenant, by reason of Landlord's imposing or accepting any such late charge(s) and/or interest; the right to collect such late charge(s) and/or interest is separate and apart from any rights relating to remedies of Landlord after default by Tenant including, without limitation, the rights and remedies of Landlord provided herein. (ii) Landlord may accelerate the whole or any part of the Fixed Basic Rent and all Additional Rent for the entire unexpired balance of the Term, as well as all other charges, payments, costs and expenses herein agreed to be paid by Tenant, and any Fixed Basic Rent or other charges, payments, costs and expenses so accelerated shall, in addition to any and all installments of rent already due and payable and in arrears and any other charge or payment herein reserved, included or agreed to be treated or collected as rent and any other charge, expense or cost herein agreed to be paid by Tenant which may be due and payable and in arrears, be deemed due and payable as if, by the terms and provisions of this Lease, such accelerated rent and other charges, payments, costs and expenses were on that date payable in advance. (iii) Landlord may re-enter the Premises and, at the option of Landlord, remove all persons and all or any property therefrom, either by summary dispossess proceedings or by any suitable action or proceeding at law or by force or otherwise, without being liable for prosecution or damages therefor, and Landlord may repossess and enjoy the Premises. Upon recovering possession of the Premises by reason of or based upon or arising out of a default on the part of Tenant, Landlord may, at Landlord's option, either terminate this Lease or make such alterations and repairs as may be necessary in order to relet the Premises and may relet the Premises or any part or parts thereof, either in Landlord's name or otherwise, for a term or terms which may, at Landlord's option, be less than or exceed the period which would otherwise have constituted the balance of the Term and at such rent or rents and upon such other terms and conditions as in Landlord's sole discretion may seem advisable and to such person or persons as may in Landlord's discretion seem best; upon each such reletting all rents received by Landlord from such reletting shall be applied as follows: first, to the payment of any costs and expenses of such reletting, including all costs of alterations and repairs; second, to the payment of any indebtedness other than Fixed Basic Rent, Additional Rent or other charges due hereunder from Tenant to Landlord; third, to the payment of Fixed Basic Rent, Additional Rent and other charges due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as it may become due and payable hereunder. If rentals received from reletting during any month are less than that to be paid during that month by Tenant, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No such re-entry or taking possession of the Premises or the making of alterations or improvements thereto or the reletting thereof shall be construed as an election on the part of Landlord to terminate this Lease unless written notice of termination is given to Tenant. Landlord shall in no event be liable in any way whatsoever for failure to relet the Premises or, in the event that the Premises or any part or parts thereof are relet, for failure to collect the rent thereof under such reletting. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. -15- (iv) Landlord may terminate this Lease and the Term without any right on the part of Tenant to waive the forfeiture by payment of any sum due or by other performance of any condition, term or covenant broken. Upon such termination, Landlord shall be entitled to recover, in addition to any and all sums and damages for violation of Tenant's obligations hereunder in existence at the time of such termination, damages for Tenant's default in an amount equal to the amount of the Fixed Basic Rent and Additional Rent reserved for the balance of the Term, as well as all other charges, payments, costs and expenses herein agreed to be paid by Tenant all of which amount shall be immediately due and payable from Tenant to Landlord upon demand therefor. (v) Confession of Judgment. FOR VALUE RECEIVED AND UPON THE OCCURRENCE OF AN EVENT OF DEFAULT HEREUNDER, TENANT DOES HEREBY EMPOWER ANY PROTHONOTARY OR ANY ATTORNEY OR ANY COURT OF RECORD WITHIN THE UNITED STATES OR THE COMMONWEALTH OF PENNSYLVANIA, TO APPEAR FOR TENANT AND WITH OR WITHOUT COMPLAINT FILED, CONFESS JUDGMENT OR A SERIES OF JUDGMENTS AGAINST TENANT AND IN FAVOR OF LANDLORD, ITS SUCCESSORS OR ASSIGNS, AS OF ANY TERM OR TERMS, FOR THE SUM DUE BY REASON OF SAID DEFAULT IN THE PAYMENT OF FIXED BASIC RENT, ADDITIONAL RENT AND OTHER SUMS DUE UNDER THIS LEASE, AND ACCELERATED RENT AND FOR THE SUM DUE BY REASON OF ANY BREACH OF COVENANT OR CONDITION BROKEN BY TENANT, WITH COSTS OF SUIT AND ATTORNEYS' COMMISSION OF TEN PERCENT (10%) FOR COLLECTION, AND FORTHWITH ISSUE A WRIT OR WRITS OF EXECUTION THEREON WITHOUT STAY OF EXECUTION. TENANT WAIVES AND RELEASES ALL ERRORS, DEFECTS AND IMPERFECTIONS IN ENTERING SAID JUDGMENT OR IN ANY WRIT, OR PROCESS OR PROCEEDING THEREON AND FOR THE CONFESSION AND ENTRY OF SUCH JUDGMENT, THIS LEASE OR A TRUE AND CORRECT COPY THEREOF SHALL BE SUFFICIENT WARRANT AND AUTHORITY. THE AUTHORITY AND POWER CONTAINED HEREIN SHALL NOT BE EXHAUSTED BY ONE EXERCISE THEREOF BUT JUDGMENT MAY BE CONFESSED AS AFORESAID FROM TIME TO TIME AS OFTEN AS THERE IS AN OCCURRENCE OF ANY EVENT OF DEFAULT, AND FURTHERMORE SUCH AUTHORITY AND POWER MAY BE EXERCISED DURING THE ORIGINAL TERM AND ANY EXTENSION OR RENEWAL THEREOF, OR AFTER THE EXPIRATION OR EARLIER TERMINATION OF THE TERM HEREOF. FOR VALUE RECEIVED AND UPON THE OCCURRENCE OF AN EVENT OF DEFAULT HEREUNDER, OR UPON TERMINATION OF THE TERM OF THIS LEASE OR OTHER TERMINATION OF THIS LEASE DURING THE TERM OR ANY RENEWAL THEREOF, TENANT FURTHER AUTHORIZES AND EMPOWERS ANY SUCH ATTORNEY OR PROTHONOTARY (EITHER IN ADDITION TO OR WITHOUT SUCH JUDGMENT FOR THE AMOUNT DUE ACCORDING TO THE TERMS OF THIS LEASE) TO APPEAR FOR TENANT AND ANY OTHER PERSON CLAIMING UNDER, BY OR THROUGH TENANT, AND CONFESS JUDGMENT FORTHWITH AGAINST TENANT AND SUCH OTHER PERSONS AND IN FAVOR OF LANDLORD IN AN AMICABLE ACTION OF EJECTMENT FOR THE PREMISES FILED IN THE COMMONWEALTH OF PENNSYLVANIA, WITH RELEASE OF ALL ERRORS AND WITHOUT STAY OF EXECUTION. LANDLORD MAY FORTHWITH ISSUE A WRIT OR WRITS OF EXECUTION FOR -16- POSSESSION OF THE PREMISES AND, AT LANDLORD'S OPTION, FOR THE AMOUNT OF ANY JUDGMENT, AND ALL COSTS, INCLUDING THE FEES OF ATTORNEYS AND OTHER PROFESSIONALS AND EXPERTS, WITHOUT LEAVE OF COURT, AND LANDLORD MAY, BY LEGAL PROCESS, WITHOUT NOTICE RE-ENTER AND EXPEL TENANT FROM THE PREMISES, AND ALSO ANY PERSONS HOLDING UNDER TENANT FOR WHICH THIS LEASE OR A TRUE AND CORRECT COPY THEREOF SHALL BE SUFFICIENT WARRANT, WHEREUPON, IF LANDLORD SO DESIRES, A WRIT OF POSSESSION MAY ISSUE FORTHWITH, WITHOUT ANY PRIOR WRIT OR PROCEEDINGS WHATSOEVER, AND PROVIDED THAT IF FOR ANY REASON AFTER SUCH ACTION SHALL HAVE BEEN COMMENCED THE SAME SHALL BE TERMINATED AND POSSESSION REMAIN IN OR BE RESTORED TO TENANT, LANDLORD SHALL HAVE THE RIGHT UPON ANY SUBSEQUENT EVENT OR EVENTS OF DEFAULT, OR UPON THE TERMINATION OF CANCELLATION OF THIS LEASE AS HEREINBEFORE SET FORTH, TO BRING ONE OR MORE AMICABLE ACTION OR ACTIONS AS HEREINBEFORE SET FORTH TO RECOVER POSSESSION AS AFORESAID. c) Waiver of Jury Trial. IT IS MUTUALLY AGREED BY AND BETWEEN LANDLORD AND TENANT THAT (A) THEY HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTER-CLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OF OCCUPANCY OF THE PREMISES OR CLAIM OF INJURY OR DAMAGE, AND (B) IN ANY ACTION ARISING HEREUNDER, THE LEGAL FEES OF THE PREVAILING PARTY WILL BE PAID BY THE OTHER PARTY TO THE ACTION. d) Non-Waiver. No waiver by Landlord of any breach by Tenant of any of Tenant's obligations, agreements or covenants herein shall be a waiver of any subsequent breach or of any other obligation, agreement or covenant, nor shall any forbearance by Landlord to seek a remedy for any event of default by Tenant be a waiver by Landlord of any rights and remedies with respect to such or any subsequent event of default. e) Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy provided herein or by law, but each shall be cumulative and in addition to every other right or remedy given herein or now or hereafter existing at law or in equity or by statute. Landlord shall have no duty to mitigate its damages in the event of Tenant's default under this Lease. 26. Condition of Premises. Tenant represents that the Building and the Premises and the present uses and non-uses thereof have been examined by Tenant and Tenant accepts them in the condition or state in which they now are, or any of them now is, without relying on any representation, covenant or warranty, express or implied, in fact or in law, by Landlord and without recourse to Landlord, the nature, condition or usability thereof or the use or uses to which the Premises and the Building or any part thereof may be put under present zoning ordinances or otherwise. Tenant's occupancy of the Premises shall constitute acceptance of the Premises. -17- 27. Hazardous Substances. a) Tenant shall not cause or allow the generation, treatment, storage or disposal of Hazardous Substances on or near the Premises or Building. "Hazardous Substances" shall mean (i) any hazardous substance as that term is now or hereafter defined in the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq., as amended, (ii) any hazardous waste or hazardous substance as those terms are now or hereafter defined in any local, state or Federal law, regulation or ordinance not inapplicable to the Premises and Building, or (iii) petroleum including crude oil or any fraction thereof. In the event Tenant uses any Hazardous Substances, Tenant shall dispose of such substances in accordance with all applicable Federal, state and local laws, regulations and ordinances. b) Tenant agrees to indemnify, defend and hold harmless the Landlord, its employees, agents, successors, and assigns, from and against any and all damage, claim, liability, or loss, including reasonable attorneys' and other fees, arising out of or in any way connected to the generation, treatment, storage or disposal of Hazardous Substances by Tenant, its employees, agents, contractors, or invitees, on or near the Premises or Building. Such duty of indemnification shall include, but not be limited to damage, liability, or loss pursuant to all Federal, state and local environmental laws, rules and ordinances, strict liability and common law. c) Tenant agrees to notify Landlord immediately of any disposal of Hazardous Substances in the Premises or Building, of any discovery of Hazardous Substances in the Premises or the Building, or of any notice by a governmental authority or private party alleging or suggesting that a disposal of Hazardous Substances on or near the Premises or Building may have occurred. Furthermore, Tenant shall provide the Landlord with full and complete access to any documents or information in its possession or control relevant to the question of the generation, treatment, storage, or disposal of Hazardous Substances on or near the Premises or the Building. 28. Recording. Neither this Lease nor a memorandum of this Lease shall be recorded in any public records without the written consent of Landlord. 29. Broker. Tenant represents and warrants to Landlord that Tenant has not dealt with any broker, agent or finder in connection with this Lease, except for Broker, and Tenant hereby agrees to indemnify Landlord against any claim for commission or other compensation in connection with this Lease made against Landlord by any other broker, agent or finder with whom Tenant has dealt, including reasonable attorney's fees incurred by Landlord in the defense of any such claim. Landlord shall pay any commission due to Broker and shall indemnify Tenant against any claim for commission or other compensation in connection with this Lease made against Tenant by the Broker. 30. Prime Landlord Consent. This Lease is subject to Prime Landlord's execution and delivery to Landlord and Tenant of a form of consent to sublease, reasonably acceptable to Prime Landlord, Landlord and Tenant. If Prime Landlord has not executed and delivered such a consent within forty-five (45) days of the execution of this Lease, Landlord may terminate this Lease by fifteen (15) days notice to Tenant. -18- 31. Notices. All notices, demands, requests, consents, certificates, and waivers required or permitted hereunder from either party to the other shall be in writing and sent by United States certified mail, return receipt requested, postage prepaid, or by recognized overnight courier, addressed as follows: If to Landlord: United Bank of Philadelphia 30 South 15th Street, Suite 1200 Philadelphia, Pennsylvania 19101 Attention: Evelyn F. Smalls With a copy to: Love and Long, L.L.P. 108 Washington Street Newark, New Jersey 07102 Attention: Reginald A. Long, Esquire If to Tenant: U. S. Mortgage Bankers, Inc. 3 United States Avenue Gibbsboro, New Jersey 08026 Attention: Charles E. Barry, Jr. With a copy to: ______________________ ______________________ ______________________ Either party may at any time, in the manner set forth for giving notices to the other, specify a different address to which notices to it shall thereafter be sent. All notices shall be effective upon receipt or rejection of receipt by the addressee. 32. Irrevocable Offer: No Option. Although Tenant's execution of this Lease shall be deemed an offer irrevocable by Tenant, the submission of this Lease by Landlord to Tenant for examination shall not constitute a reservation of or option for the Premises. This Lease shall become effective only upon execution thereof by an authorized officer of the Landlord on behalf of Landlord and by an authorized officer of Tenant. 33. Inability to Perform. If Landlord is delayed or prevented from performing any of its obligations under this Lease by reason of strike, labor disharmony, acts of war, acts of terrorism (either domestically or overseas), acts of bioterrorism (either domestically or overseas) or any cause whatsoever beyond Landlord's control, the period of such delay or such prevention shall be deemed added to the time herein provided for the performance of any such obligation by Landlord. 34. Survival. Notwithstanding anything to the contrary contained in this Lease, the expiration of the Term, whether by lapse of time or otherwise, shall not relieve Tenant from its obligations accruing prior to the expiration of the Term. 35. Corporate Tenants. If Tenant is a corporation, the person(s) executing this Lease on behalf of Tenant hereby covenant(s) and warrant(s) that: (i) Tenant is a duly formed corporation in the state in which the Premises is located, (ii) Tenant will remain incorporated in such state or qualified to do -19- business in such state throughout the Term and any renewals thereof, and (iii)such persons are duly authorized by such corporation to execute and deliver this Lease on behalf of the corporation. 36. Waiver of Invalidity of Lease. Each party agrees that it will not raise or assert as a defense to any obligation under the Lease or make any claim that the Lease is invalid or unenforceable due to any failure of this document to comply with ministerial requirements including, without limitation, requirements for corporate seals, attestations, witnesses, notarizations or other similar requirements and each party hereby waives the right to assert any such defenses or make any claim of invalidity or unenforceability due to any of the foregoing. 37. Rights Reserved by Landlord. Landlord waives no rights, except those that may be specifically waived herein, and explicitly retains all other rights including, without limitation, the following rights, each of which Landlord may exercise without notice to Tenant and without liability to Tenant for damage or injury to property, person or business on account of the exercise thereof and the exercise of any such rights shall not be deemed to constitute an eviction or disturbance of Tenant's use or possession of the Premises and shall not give rise to any claim for set-off or abatement of Rent or any other claim: a) To install, affix and maintain any and all signs on the exterior and on the interior of the Building or the Premises; b) To decorate or to make repairs, alterations, additions, or improvements, whether structural or otherwise, in and about the Building, or any part thereof, and for such purposes to enter upon the Premises and during the continuance of any of such work, to temporarily close doors, entry ways, public space and corridors in the Building and to interrupt or temporarily suspend services or use of Common Facilities, all without affecting any of Tenant's obligations hereunder, so long as the Premises are reasonably accessible and usable; c) To furnish door keys for the entry door(s) in the Premises on the Commencement Date and to retain at all times, and to use in appropriate instances, keys to all doors within and into the Premises. Tenant agrees to purchase only from Landlord additional duplicate keys as required, to change no locks and not to affix locks on doors without the prior written consent of the Landlord. Upon the expiration of the Term or Tenant's right to possession, Tenant shall return all keys to Landlord and shall disclose to Landlord the combination of any safes, cabinets or vaults left in the Premises; d) To approve the weight, size and location of safes, vaults and other heavy equipment and articles in and about the Premises and the Building so as not to exceed the legal load per square foot designated by the structural engineers for the Building and to require all such items and furniture and similar items to be moved into or out of the Building and Premises only at such times, in such manner and upon such terms as Landlord shall direct in writing; e) To erect, use and maintain pipes, ducts, wiring and conduits, and appurtenances thereto, in and through the Premises. -20- 38. Miscellaneous. a) Entire Agreement. This Lease represents the entire agreement between the parties hereto and there are no collateral or oral agreements or understandings between Landlord and Tenant with respect to the Premises or the Building. No rights, easements or licenses are acquired in the Premises by Tenant by implication or otherwise except as expressly set forth in the provisions of this Lease. b) Modification. This Lease shall not be modified in any manner except by an instrument in writing executed by the parties. In addition, Tenant agrees to make such changes to this Lease as are required by any mortgagee, provided such changes do not substantially affect Tenant's rights and obligation under this Lease. c) Interpretation. The masculine (or neuter) pronoun, singular number, shall include the masculine, feminine and neuter genders and the singular and plural number. d) Exhibits. Each writing or plan referred to herein as being attached as an Exhibit or otherwise designated herein as an Exhibit hereto is hereby made a part of this Lease. e) Captions and Headings. The captions and headings of sections, subsections and the table of contents herein are for convenience only and are not intended to indicate all of the subject matter in the text and they shall not be deemed to limit, construe, affect or alter the meaning of any provisions of this Lease and are not to be used in interpreting this Lease or for any other purpose in the event of any controversy. f) Severability. If any term or provision of this Lease, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. g) Joint and Several Liability. If two or more individuals, corporations, partnerships or other persons (or any combination of two or more thereof) shall sign this Lease as Tenant, the liability of each such individual, corporation, partnership or other persons to pay the Rent and perform all other obligations under this Lease shall be deemed to be joint and several, and all notices, payments and agreements given or made by, with or to any one of such individuals, corporations, partnerships or other persons shall be deemed to have been given or made by, with or to all of them. In like manner, if Tenant shall be a partnership or other legal entity, the members of which are, by virtue of any applicable law or regulation, subject to personal liability, the liability of each such member shall be joint and several. h) No Representations by Landlord. Landlord and Landlord's agents have made no representations, agreements, conditions, warranties, understandings or promises, either oral or written, other than as expressly set forth in this Lease, with respect to this Lease, the Premises, and/or the Building. i) Relationship of Parties. This Lease shall not create any relationship between the parties other than that of sub-landlord and subtenant. -21- j) Counterparts. This Lease may be executed in one or more counterparts, each of which shall be deemed an original, and together shall constitute one in the same instrument. k) Choice of Law. The terms of this Lease shall be construed under the laws of the Commonwealth of Pennsylvania, without regard to its internal conflicts of law principles. l) Time is of the Essence. Time is of the essence in all provisions of this Lease. (Signature Page Follows) -22- IN WITNESS WHEREOF, the parties hereto have executed this Lease on the day and date first above written. LANDLORD: UNITED BANK OF PHILADELPHIA, a Pennsylvania banking corporation, By: ____________________________________ Name: __________________________________ Title: ___________________________________ TENANT: U. S. MORTGAGE BANKERS, INC., a New Jersey corporation, By: ____________________________________ Name: __________________________________ Title: ___________________________________ -23- EXHIBIT A PREMISES A-1 EXHIBIT B SUBLEASE B-1 EXHIBIT C PRIME LEASE C-1 EX-31 6 ex31-1.txt EXHIBIT 31.1 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: March 31, 2006 /s/__________________________________ Evelyn F. Smalls, Chief Executive Officer EX-31 7 ex31-2.txt EXHIBIT 31.2 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: March 31, 2006 /s/______________________________________ Brenda Hudson-Nelson, Chief Financial Officer EX-32 8 ex32-1.txt EXHIBIT 32.1 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, 2005 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 March 31, 2006 EX-32 9 ex32-2.txt EXHIBIT 32.2 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, 2005 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 March 31, 2006 EX-99 10 united05proxy.txt EXHIBIT 99 URGENT IMMEDIATE RESPONSE REQUESTED October 20, 2005 Dear Shareholder: On behalf of the Board of Directors and management of United Bancshares, Inc., I am pleased to invite you to the 2005 Annual Meeting of Shareholders of United Bancshares, Inc. which is to be held on Monday, November 14, 2005, 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 2004. Shareholders who need directions to the location of the Annual Meeting should call (215) 231-3670 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. A self-addressed stamped envelope is enclosed to return the completed proxy form. For your convenience, telephone and on-line voting are now available. Please follow the instructions on the proxy card if you would like to vote in this manner. The officers, directors and staff of United Bank sincerely appreciate your continuing support. Sincerely, /s/ Evelyn F. Smalls Evelyn F. Smalls President and Chief Executive Officer Enclosures UNITED BANCSHARES, INC. 30 South 15th Street, 12th Floor Philadelphia, PA 19102 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON NOVEMBER 14, 2005 Dear Shareholders, The Annual Meeting of the Shareholders of United Bancshares, Inc. will be held at 9:00 A.M., local time, on Monday, November 14, 2005 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 One (1) Class B director to serve until the expiration of his four (4) year term. 2. To ratify the appointment of McGladrey and Pullen, LLP as United Bancshares, Inc.'s independent registered public accounting firm for the year 2005. 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 October 11, 2005, 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 /s/ William B. Moore William B. Moore, Secretary Philadelphia, Pennsylvania October 20, 2005 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 Monday, November 14, 2005, 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 one (1) Class B director to serve until the expiration of his four (4) year term; and (ii) the ratification of the appointment of McGladrey and Pullen, LLP as the independent registered public accounting firm for UBS for the year 2005. 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 20, 2005. The address of the executive office of UBS is 30 S. 15th Street, 12th Floor, Philadelphia, Pennsylvania 19102. Date, Time and Place of Annual Meeting The Annual Meeting will be held on Monday, November 14, 2005, 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 October 11, 2005 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 October 11, 2005, there were 876,921 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 30 S. 15th Street, 12th Floor, Philadelphia, Pennsylvania 19102 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. 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 October 11, 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 Name and Address Beneficial Ownership Corporation of Beneficial Owner of Corporation Common Stock Common Stock Owned Philadelphia Municipal 71,667 8.17% Retirement System 2000 Two Penn Center Philadelphia, Pennsylvania 19102 1 Wachovia Corporation, (formerly, First Union Corporation)2 50,000 5.70% 1 First Union Center Charlotte, NC 28288 Greater Philadelphia Urban Affairs Coalition 47,500 5.42% 1207 Chestnut Street, Floor 7 Philadelphia, PA 19107 - ------------------ (1) As of October 11, 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.
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, 2004. 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 ten (10), with three (3) members in Class A, one (1) member 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. 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 Bank's independent registered public accounting firm to review the results of the annual audit. The Bank's Compliance Committee has been combined with the Bank's Audit Committee and 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 2 Chairman of the Board of Directors is required to determine whether the director nominations have been made in accordance with the provisions of the UBS' bylaws, and if any nomination is defective, the nomination and any votes cast for the nominee(s) shall be disregarded. 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 and each shareholder upon request. Policy for Attendance at Annual Meetings Effective with the Annual Meeting in 2005, UBS has adopted a policy requiring all of its directors to attend UBS' annual meeting. At the annual meeting held on November 23, 2004, nine (9) of UBS' ten (10) directors attended the meeting. 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. In 2004, the Bank's Board of Directors was scheduled to meet at least monthly, except in August and during 2004 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. Information about the Committees of UBS' Board of Directors The Committees of UBS' Board of Directors are the Executive Committee, Audit/Compliance Committee, and the Nominating Committee. Information about UBS' Executive 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. Wilson (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. Information about UBS' Audit/Compliance Committee and Financial Expert The Audit/Compliance Committee of UBS' Board of Directors(1) is comprised of Angela M. Huggins (Chairman), Joseph T. Drennan, L. Armstead Edwards, Marionette Y. Wilson (Frazier) and William B. Moore, meets when necessary at the call of the Chairman. The Committee meets with the internal auditor to review audit programs and the results of audits of specific areas, as well as other regulatory compliance issues. In addition, the Committee meets with UBS' independent registered 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 six (6) 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 has determined that Joseph T. Drennan is the "Financial Expert," as defined in the SEC's regulations. The Compliance Committee was combined with the Audit Committee and is comprised of the same members. On a quarterly basis compliance matters are addressed to include the review of regulatory compliance matters, the Bank's compliance programs and the CRA Act activities. 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. The Nominating Committee charter will be made available, without charge, upon written request by the shareholders of UBS to the corporate secretary of UBS and the charter is attached to this Proxy Statement. A copy of UBS' Nominating Committee Charter is attached as Exhibit B. A copy of the charter is not available on UBS' website. The Committee held three (3) meetings in 2004. 3 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, except William B. Moore, who attended sixty-seven percent (67%); 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 the Executive Committee meetings. 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. Information about the Bank's Executive 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. 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 2004. The Bank's Board of Directors does not have a Compensation Committee; the Executive Committee performs that function. Information about the Bank's Asset/Liability Committee The Asset Liability Management Committee, comprised of Bernard E. Anderson (Chairman), L. Armstead Edwards, 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 2004, the Asset and Liability Management Committee held five (5) meetings. Information about the Bank's Audit/Compliance Committee The Audit/Compliance Committee comprised of Angela M. Huggins (Chairman), Joseph T. Drennan, 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 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 National Association of Securities Dealers. The Committee held six (6) meetings during 2004. The Compliance Committee is 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. Information about the Bank's Loan Committee The Loan Committee, comprised of David R. Bright (Chairman), L. Armstead Edwards, Evelyn F. Smalls, and Ernest Wright meets when necessary to review and approve loans that are $200,000 and over and to discuss other loan-related matters. During 2004, the Loan Committee held eleven (11) 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 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, except William B. Moore, who attended sixty-seven percent (67%); 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 the Executive Committee meetings. 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 4 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 October 11, Director Business Experience For Past Five Years 2005 Since(7) - ---------------------------------------- ---- -------- CONTINUING DIRECTORS Class A The terms of the following directors expire in 2008: 1. L. Armstead Edwards 63 1993 Owner and President, Edwards Entertainment, Inc. Philadelphia, PA from 1978 until the present time 2. Marionette Y. Wilson (Frazier) 60 2000 Retired, formerly Co-Founder/Partner, John Frazier, Inc., Philadelphia, PA from 1981 - 2002 3. Ernest L. Wright 77 1993 Founder, President and CEO of Ernest L. Wright Construction Company, Philadelphia, PA from 1976 until 2000 DIRECTOR STANDING FOR ELECTION Class B The terms of the following directors expire in 2009: 1. Ahsan M. Nasratullah President, JNA Capital, Inc. Philadelphia, PA from April 1994 48 2004 to present CONTINUING DIRECTORS Class C The terms of the following directors expire in 2006: 1. Bernard E. Anderson 67 2002 Professor of Management/Practicing Economist at the Wharton School, University of Pennsylvania, Philadelphia, PA 2. David R. Bright 66 2002 Retired, Executive Vice President, Meridian Bancorp Philadelphia, PA 3. Steven L. Sanders 45 2002 President, First Genesis/CFG Newtown Square, PA 4. Joseph T. Drennan Chief Financial Officer, Universal Capital Management Inc. 60 2004 Wilmington, DE CONTINUING DIRECTORS Class D The terms of the following directors expire in 2007: 1. William B. Moore 63 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 60 2000
5 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 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. (8) Angela M. Huggins retired from the board in 2005 upon expiration of her term. 6 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 October 11, 2005 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. Name Common Percent of Stock(9,10,11) Outstanding Stock Current Directors -------------- ----------------- L. Armstead Edwards...................... 10,833 1.0138% Marionette Y. Wilson (Frazier)........... 17,900 1.6751% Ernest L. Wright......................... 7,084 * Bernard E. Anderson...................... 850 * David R. Bright.......................... 850 * Joseph T. Drennan........................ 783 * Ahsan M. Nasratullah..................... 833 * Steven L. Sanders........................ 1,000 * William B. Moore......................... 1,834 * Evelyn F. Smalls......................... 500 * (9) Stock ownership information is given as of October 11, 2005, and includes shares that the individual has the right to acquire (other than by exercise of stock options) within sixty (60) days of October 11, 2005. Unless otherwise indicated, each director and each such named executive officer holds sole voting and investment power over the shares listed. (10) 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. (11) 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.) Certain Executive Officers Evelyn F. Smalls......................... 500** * Brenda M. Hudson-Nelson.................. 50 * All Current Directors and Executive Officers as a Group ..................... 42,517 3.9788% *** - ------------------ 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 October 11, 2005, plus the shares subject to the exercisable option.
UBS' 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 October 11, 2005: UBS Stock Name, Principal Occupation and Age as of Office with the UBS and/or Bank Beneficially ------------------------------- Business Experience For Past 5 Years October 11, 2005 Owned ------------------------------------- ---------------- ----- Evelyn F. Smalls(12,13) 60 President and Chief Executive Officer and 500 Director of UBS and Bank Brenda M. Hudson-Nelson(14) 43 Executive Vice President and Chief Financial Officer 50 of UBS and Bank
7 - ------------------ Footnote Information Concerning Executive Officers (12) 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. (13) 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. (14) 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. 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 Directors15 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, 30 South 15th Street, 12th Floor, Philadelphia, Pennsylvania 19102. 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, 2004 (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 2004 will be reported in the proxy statement for UBS' 2005 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. 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 2004 Year Salary Bonus Options Compensation(16) --------------------------------------- ---- ------ - ------ ------- ---------------- ($) (#) ($) 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 Chief Financial 2003 $97,850 -- -- -- Officer of UBS and the Bank 2002 $102,112 -- -- --
- ------------------ Footnote Information Concerning Executive Compensation (15) 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. (16) 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. 8 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. 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 2004 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. Audit Committee Report In connection with the preparation and filing of UBS' Annual Report on Form 10-K for the year ended December 31, 2004, the Audit Committee (i) reviewed and discussed the audited financial statements with UBS' management, (ii) discussed with McGladrey and Pullen, LLP, UBS' independent registered public accounting firm, 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 McGladrey and Pullen, 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, 2004. 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 (Frazier) 9 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 2004. 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 UBS or Bank director or member of a Committee of the Board of Directors of UBS or the Bank by writing to United Bancshares, Inc., Attention: Board of Directors, P.O. Box 54212, Philadelphia, PA 19105. The written communications will be provided to 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. 10 PROPOSAL 1 ELECTION OF DIRECTORS (Item 1 on the Proxy Card) Nominees for Directors The following person has been nominated by UBS' Board of Directors for election as directors to serve as follows: Class B - Term Expires in 2009 ------------------------------ (1) Ahsan M. Nasratullah and until his successor is elected and takes 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 nominee for director. Proxies solicited by the Board of Directors will be voted for the nominee listed above, unless the shareholders specify a contrary choice in their proxies. The Board of Directors recommends a vote FOR the nominee listed above. CHANGE OF INDEPENDENT PUBLIC ACCOUNTING FIRM On December 16, 2004, United Bancshares, Inc. ("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. 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 as Exhibit 16 to UBS' Form 8-K filed with the Commission on December 22, 2004. The Audit Committee of the Board of 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 11 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. AUDIT AND NON-AUDIT FEES The following table presents the fees billed for professional services for each of the last two fiscal years by UBS' independent registered accounting firms by category: McGladrey and Pullen, LLP: 2004 2003 -------- -------- Audit Fees $ 62,500 $-- Audit-related fees -- Tax fees -- -- All other fees -- -------- -------- Total fees $ 62,500 $ -- ======== ======== Grant Thornton LLP: 2004 2003 -------- -------- Audit Fees $ -- $ 83,500 Audit-related fees 15,750 15,750 Tax fees 8,000 7,000 All other fees -- -- -------- -------- Total fees $ 23,750 $106,250 ======== ======== 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 minimum exceptions for non-audit services described in Section 10A (i) (1) (B) of the Securities Exchange Act of 1934 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 McGladrey and Pullen LLP. PROPOSAL 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Item 2 on the Proxy Card) The firm of McGladrey and Pullen LLP has been appointed by the Board of Directors to serve as UBS' independent registered public accounting firm for the fiscal year beginning January 1, 2005. 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 registered public accounting firm. 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 registered public accounting firm will be reconsidered by the Board of Directors. The resolution being voted on is as follows: RESOLVED, that the shareholders of UBS ratify and confirm the appointment of McGladrey and Pullen LLP as UBS' independent registered public accounting firm for the year 2005. 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 McGladrey and Pullen LLP as UBS' independent registered public accounting firm for the year 2005. 12 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, 2004. 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 2006 UBS' Annual Meeting of Shareholders will be held on or about November 14, 2006. 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 June 22, 2006. 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, 30 S. 15th Street, 12th Floor, Philadelphia, Pennsylvania 19102. ADDITIONAL INFORMATION A copy of UBS' Annual Report for the fiscal year ended December 31, 2004, containing, among other things, financial statements examined by its independent registered public accountants, was mailed with this Proxy Statement on or about October 20, 2005 to the shareholders of record as of the close of business on October 11, 2005. Upon written request of any shareholder, a copy of UBS' Annual Report on Form 10-K for its fiscal year ended December 31, 2004, 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, 30 S. 15th Street, Philadelphia, Pennsylvania 19102. By Order of the Board of Directors of United Bancshares, Inc. /s/ William B. Moore William B. Moore, Secretary 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. 13 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. 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 14 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. 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 Allowance for Loan Losses ("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. 15 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. - 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. 16 Exhibit B United Bancshares, Inc. NOMINATING COMMITTEE CHARTER The Nominating Committee (the "Committee") of United Bancshares, Inc. (the "Company") is responsible for the selection, qualification and compensation of Board members and candidates. The Committee acts as a nominating committee for Director candidates and Board committee membership. The Committee assists the Board with oversight of other corporate governance matters. PURPOSE The Committee shall consider and report periodically to the Board of Directors on all matters relating to the selection, qualification, and compensation of members of the Board and candidates nominated to the Board, as well as any other matters relating to the duties of the members of the Board. The Committee shall act as a nominating committee with respect to candidates for Directors and will make recommendations to the full Board concerning the size of the Board and structure of committees of the Board. The Committee shall also assist the Board with oversight of corporate governance matters. COMMITTEE MEMBERSHIP The Committee shall consist of at least three members. All members of the Committee shall be "independent directors" as determined by the Board of Directors pursuant to the Company's Corporate Governance Guidelines and the NASD Listing Standards, and shall meet any other applicable standards of the Securities Exchange Act of 1934 and rules and regulations promulgated thereunder, as they may from time to time be amended. New Committee Members will receive appropriate training and orientation. The members of the Committee shall be appointed by the Board, with one of the members appointed as Committee Chair. Committee members may be appointed or removed by a majority vote of the entire Board of Directors. MEETINGS The Committee shall meet as often as it determines, but not less frequently than quarterly. A majority of the members shall constitute a quorum. Minutes of each meeting will be taken and recorded. COMMITTEE AUTHORITY AND RESPONSIBILITIES The Committee shall: 1. Develop qualification criteria for members of the Board of Directors. 2. Recommend to the Board the individuals to constitute the nominees of the Board of Directors for election at the next annual meeting of stockholders and who will be named as such nominees in the proxy statement used for solicitation of proxies by the Board. 3. Recommend and nominate an individual for Director to fill the unexpired term of any vacancy existing in the Board of Directors or created by an increase in the size of the Board. 4. Recommend and nominate members of standing Committees of the Board. 5. Conduct an annual study of the size and composition of the Board of Directors and from time to time make recommendations to the Board for changes in the size of the Board. 6. Recommend and nominate individuals for election as officers of the Company. 7. Provide oversight of corporate governance matters to the Board. 8. Develop and recommend to the Board the Corporate Governance Guidelines applicable to the Company. Review and reassess at least annually the adequacy of the Board's Charter and Corporate Governance Guidelines and make recommendations to the Board as appropriate. 9. Recommend to the Board a code of business conduct and ethics applicable to employees, officers and directors of the Company and the process for consideration and disclosure of any requested waivers of such codes for directors or executive officers of the Company. 17 10. Oversee annual performance evaluations of the Board of Directors. 11. Oversee the orientation of new Directors. 12. Review competitive practice data regarding non-employee director compensation and make recommendations to the Board with respect to the amount and form of such compensation DELEGATION TO SUBCOMMITTEES The Committee may form and delegate authority to subcommittees when appropriate. REPORTS TO THE BOARD OF DIRECTORS The Committee shall make regular reports to the Board of Directors. OUTSIDE COUNSEL OR OTHER CONSULTANTS In connection with its duties and responsibilities, the Committee shall have the sole authority to retain outside legal, accounting or other advisors or director candidate search firms to assist in fulfilling their responsibilities, including the authority to approve the fees payable by the Company to such advisors and other retention terms. ANNUAL REVIEW OF THE CHARTER AND PERFORMANCE The Committee shall annually review its performance. In addition, the Committee shall review and reassess the adequacy of this Charter annually and recommend to the Board any changes it considers necessary or advisable. 18 -----END PRIVACY-ENHANCED MESSAGE-----