-----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, CBoKULie7dMHT55CFgmD2A8O2RTk61J1mtN6QAc3cVxD+XA60HK7HTJPmGHQEw8f 7ABRqv6UmQ8h6vo/IsbdxA== 0001010410-03-000003.txt : 20030331 0001010410-03-000003.hdr.sgml : 20030331 20030331164911 ACCESSION NUMBER: 0001010410-03-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 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: 03631547 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 ub_10k.txt UNITED BANK 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 UNITED BANCSHARES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) 0-25976 -------------------------- (Registrants' file number) Pennsylvania 23-2802415 ------------------------------- --------------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 North Third Street, Philadelphia, Pennsylvania 19106 -------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 351-4600 Securities registered pursuant to Section 12(b)f of the Act: NONE Securities registered pursuant to Section 12(g)f of the Act: Common Stock, $.01 par value ---------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ___ No [ X ] ================================================================================ United Bancshares, Inc. (sometimes herein also referred to as the "Company" or "UBS") has two classes of capital stock authorized - 2,000,000 shares of $.01 par value Common Stock and Series Preferred Stock (Series A Preferred Stock). The Board of Directors designated a subclass of the common stock, designated Class B Common Stock, by filing of Articles of Amendment to its Articles of Incorporation on September 30, 1998. This Class of stock has all of the rights and privileges of Common Stock with the exception of voting rights. Of the 2,000,000 shares of Common Stock authorized, 250,000 have been designated Class B Common Stock. There is no market for the Common Stock. None of the shares of the Registrant's stock was sold within 60 days of the filing of this Form 10-K. As of March 17, 2003 the aggregate number of the shares of the Registrant's Common Stock outstanding was 1,102,088 (including 191,667 Class B non voting). The Board of Directors of United Bancshares, Inc. designated one series of the Series Preferred Stock (the "Series A Preferred Stock"), 500,000 authorized of which 143,150 shares were outstanding as of March 18, 2002. There are 210 pages in the Form 10-K. FORM 10-K United Bancshares, Inc. Index Item No. Page PART I 1. Business............................................................ 3 2. Properties..........................................................10 3. Legal Proceedings...................................................11 4. Submission of Matters to a Vote of Security Holders.................11 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................12 6. Selected Financial Data.............................................13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................13 7A. Quantitative and Qualitative Disclosures about Market Risk..........28 8. Financial Statements and Supplementary Data.........................28 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................................28 PART III 10. Directors and Executive Officers of Registrant......................29 11. Executive Compensation..............................................30 12. Security Ownership of Certain Beneficial Owners and Management......32 13. Certain Relationships and Related Transactions......................33 14. Controls and Procedures.............................................33 PART IV 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K....34 UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 17, 2003. 2 PART I SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENT Certain of the matters discussed in this document and the documents incorporated by reference herein, including matters discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" may constitute forward looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, and may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of United Bancshares, Inc ("UBS") to be materially different from future results, performance or achievements expressed or implied by such forward looking statements. The words "expect," "anticipate," "intended," "plan," "believe," "seek," "estimate," and similar expressions are intended to identify such forward-looking statements. UBS' actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation: (a) the effects of future economic conditions on UBS and its customers including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and consumer saving patterns; (b) UBS interest rate risk exposure and credit risk; (c) changes in the securities markets with respect to the market values of financial assets and the stability of particular securities markets; (d) governmental monetary and fiscal policies, as well as legislation and regulatory changes; (e) changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral and securities, as well as interest-rate risks; (f) changes in accounting requirements or interpretations; (g) the effects of competition from other commercial banks, thrifts, mortgage companies, consumer finance companies, credit unions securities brokerage firms, insurance company's, money-market and mutual funds and other financial institutions operating in the UBS' trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet; (h) any extraordinary events (such as the September 11, 2001 events and the U.S. Government's response to those events or the U.S. Government becoming involved in a conflict in a foreign country; (i) the failure of assumptions underlying the establishment of reserves for loan losses and estimates in the value of collateral, and various financial assets and liabilities and technological changes being more difficult or expensive than anticipated; (j) UBS' success in generating new business in its existing markets, as well as its success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time; (k) UBS' timely development of competitive new products and services in a changing environment and the acceptance of such products and services by 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 300 North Third Street, Philadelphia, Pennsylvania 19106. The Registrant's telephone number is (215) 351-4600. As of March 17, 2003, UBS and the Bank had a total of 51 employees. 3 United Bank of Philadelphia The Bank, an African-American controlled, state-chartered member bank of the Federal Reserve System is regulated by both the Federal Reserve Board and the Commonwealth of Pennsylvania Department of Banking (the "Department"). The deposits held by the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank conducts all its banking activities through its four offices located as follows: (i) Center City Branch Two Penn Center, Philadelphia, Pennsylvania; (ii) West Philadelphia Branch 37th 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 January 2002, the Bank closed and consolidated its 714 Market Street Branch with its branch located at Two Penn Center to create operating efficiencies. Through its locations, the Bank offers a broad range of commercial and consumer banking services. At December 31, 2002, the Bank had total deposits aggregating approximately $76.9 million and had total net loans outstanding of approximately $43.5 million. Although the Bank's primary service area for Community Reinvestment Act purposes is Philadelphia County, it also services, generally, the Delaware Valley, which consists of portions of Montgomery, Bucks, Chester, and Delaware Counties in Pennsylvania; New Castle County in Delaware; and Camden, Burlington, and Gloucester Counties in New Jersey. The city of Philadelphia is comprised of 353 census tracts and, based on 1990 census data, 204 or 58% of these are designated as low to moderate-income tracts while 105 or 30% are characterized both as low to moderate-income and minority tracts. The Bank's primary service area consists of a population of 1,577,815, which includes a minority population of 752,309. The Bank engages in the commercial banking business, serving the banking needs of its customers with a particular focus on, and sensitivity to, groups that have been traditionally under-served, including Blacks, Hispanics and women. The Bank offers a wide range of deposit products, including checking accounts, interest-bearing NOW accounts, money market accounts, certificates of deposit, savings accounts and Individual Retirement Accounts. The focus of the Bank's lending activities is on the origination of commercial, consumer and residential loans. A broad range of credit products is offered to the businesses and consumers in the Bank's service area, including commercial loans, mortgage loans, student loans, home improvement loans, auto loans, personal loans, and home equity loans. At March 17, 2003, the Bank's maximum legal lending limit was approximately $1,007,000 per borrower. However, the Bank's internal Loan Policy limits the Bank's lending to $500,000 per borrower in order to diversify the loan portfolio. The Board of Directors of the Bank maintains the ability to waive its internal lending limit upon consideration of a loan. The Board of Directors has exercised this power with respect to loans and participations on a number of occasions. The Bank also offers commercial and retail products. In the area of commercial loans, the Bank has flexibility to develop loan arrangements targeted at a customer's objectives. Typically, these loans are term loans or revolving credit arrangements with interest rate, collateral and repayments terms, varying based upon the type of credit, and various factors used to evaluate risk. The Bank participates in the government-sponsored Small Business Administration ("SBA") lending program and when the Bank deems it appropriate, obtains SBA guarantees for up to 90% of the loan amount. This guaranty is intended to reduce the Bank's exposure to loss in its commercial loan portfolio. Commercial loans are typically made 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 also offers residential mortgage loans to its customers. 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 as well as international and trust services through correspondent institutions. 4 Competition There is substantial competition among financial institutions in the Bank's service area. The Bank competes with local, regional and national commercial banks, as well as savings banks and savings and loan associations. Many of these banks and financial institutions have an amount of capital that allows them to do more advertising and promotion and to provide a greater range of services to customers. To date, the Bank has attracted, and believes it will continue to attract its customers from the deposit base of such existing banks and financial institutions largely due to the Bank's mission to service groups of people who have traditionally been un-served and by its devotion to personalized customer service. The Bank's strategy has been, and will continue to be, to emphasize personalized services with special sensitivity to the needs of Blacks, Hispanics and women and to offer competitive rates to borrowers and depositors. In order to compete, the Bank relies upon personal contacts by the officers, directors and employees of the Bank to establish and maintain relationships with Bank customers. The Bank focuses its efforts on the needs of individuals and small and medium-sized businesses. In the event there are customers whose loan demands exceed the Bank's lending limit, the Bank will seek to arrange for such loans on a participation basis with other financial institutions and intermediaries. The Bank will also assist those customers requiring other services not offered by the Bank to obtain such services from its correspondent banks. Registrant believes that a portion of the Bank's customer base is derived from customers who were dissatisfied with the level of service provided at larger financial institutions. While some of such customers have followed officers of those institutions who were hired by the Bank, others were attracted to the Bank by calling programs of its officers and referrals from other customers. The Bank has sought, in the past, and intends to continue in the future, to hire customer contact officers who have good relationships with desirable customers. These personal relationships, provision of a high level of customer services, and referrals from satisfied customers, form the basis of the Bank's competitive approach, as opposed to advertising, rate competition or the development of proprietary banking products, services or programs. In the past, the principal competition for deposits and loans have been other depository institutions. However, now the Bank also competes with other financial intermediaries such as brokerage houses offering investment vehicles to the general public. Other entities, both public and private, seeking to raise capital through the issuance and sale of debt or equity securities are also competitors with banks and savings and loan associations in the acquisition of deposits. United Wealth Management Services ("UWMS"), a division of the Bank, was introduced in September 2002, to provide a full array of non-deposit products including investments, insurance and brokerage services through the Bank's branch network. The Bank's partner in this venture is UVEST Investment Services. UVEST is a registered broker/dealer that has been offering a wide range of investment products and services since 1982. The Bank intends to use UWMS as a vehicle to introduce and market all of its products and services including loans and deposits. 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 registration. 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. 5 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. 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 engagement 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 below. If those requirements are met, a bank holding company may file a certification 6 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 Community Reinvestment Act (the "CRA Act") examination. See the Community Reinvestment Act below. UBS cannot be certain of the future effect of the legislation and regulations, described above, on its business, although there may be consolidation among financial service institutions and increased competition for UBS as well as an increase in the expense of regulatory compliance. Regulation of the Bank The Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and the Federal Reserve Board because the Bank is a member bank of the Federal Reserve System. The FDIC insures the Bank's deposits and thus the Bank is subject to certain FDIC regulations. In addition, the Bank is subject to a variety of local, state and federal laws that affect its operation. Below are summarized those laws and regulations which a have material impact on the operations and expenses of the Bank and thus UBS. Branch Banking The Pennsylvania Banking Code of 1965, as amended, the ("Banking Code"), has been amended to harmonize Pennsylvania law with federal law to enable Pennsylvania banking institutions, such as the Bank, to participate fully in interstate banking and to remove obstacles to out of state banks engaging in banking in Pennsylvania. Federal Reserve Membership Regulations Since the Bank is a member bank of the Federal Reserve System, the Federal Reserve Board possesses the power to prohibit institutions regulated by it, such as the Bank, from engaging in any activity that would be an unsafe and unsound banking practice or violate the law. Moreover, the Board has: (i) empowered the 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. 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. 7 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 to be in the form of Tier I capital, this also will mean that a bank would need to maintain at least 4% Tier I risk-based capital ratio. An institution must meet each of the required minimum capital levels in order to be deemed "adequately capitalized." The most recent notification dated February 26, 2003, from the Federal Reserve authorities categorized the Bank as "adequately capitalized" under the regulatory framework for prompt and corrective action. See Regulatory Action below. An "undercapitalized" institution is one that fails to meet one or more of the required minimum capital levels for an "adequately capitalized" institution. Under the FDIC Act, an "undercapitalized" institution must file a capital restoration plan and is automatically subject to restrictions on dividends, management fees and asset growth. In addition, the institution is prohibited from making acquisitions, opening new branches or engaging in new lines of business without the prior approval of its primary federal regulator. A number of other restrictions may be imposed. The Community Reinvestment Act The Bank is required, by the CRA Act and the implementing regulations, to: (i) meet the credit needs of the community, including the low and moderate-income neighborhoods, which it serves. The Bank's CRA Act record is taken into account by the regulatory authorities in their evaluation of any application made by the Bank for, among other things, approval of a branch or other deposit facility, branch office relocation, a merger or an acquisition. The CRA Act also requires the federal banking agencies to make public disclosure of their evaluation of a bank's record of meeting the credit needs of its entire community, including low and moderate-income neighborhoods. After its most recent CRA Act examination the Bank was given an "outstanding" CRA Act rating." The Bank Secrecy Act Under the Bank Secrecy Act ("BSA"), the Bank and other financial institutions are required to report to the Internal Revenue Service currency transactions, of more than $10,000 or multiple transactions of which the Bank has knowledge exceed $10,000 in the aggregate. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report. Privacy of Consumer Financial Information The FSA Act also contains provisions designed to protect the privacy of each consumer's financial information held in a financial institution. The regulations (the "Regulations") issued pursuant to the FSA Act are designed to prevent financial institutions, such as the Bank, from disclosing a consumer's nonpublic personal information to third parties. However, financial institutions can share a consumer customer's personal information or information about business with affiliated companies. 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. 8 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. New Legislation and Regulations The Patriot Act of 2001 The Patriot Act of 2001 which was enacted in the wake of the September 11, 2001 attacks, include provisions designed to combat international money laundering and advance the U.S. government's war against terrorism. The Patriot Act, and the regulations, which implement it, contains many obligations, which must be satisfied by financial institutions, including the Bank, which involve additional expenses for the Bank. The Sarbanes-Oxley Act of 2002 On July 30, 2002 the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") became law. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, provide enhanced penalties for accounting and auditing improprieties by publicly traded companies and protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities law. The changes required by Sarbanes-Oxley Act and its implementing regulations are intended to allow shareholders to monitor the performance of companies and their directors more easily and effectively. The Sarbanes-Oxley Act generally applies to all domestic companies, such as UBS, that file periodic reports with the SEC under the Securities Exchange Act of 1934, as amended. The 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 Sarbanes-Oxley 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 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 Sarbanes-Oxley 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. 9 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. The rules and regulations, discussed above, which implement the Sarbanes-Oxley Act could have a significant economic impact on the compliance cost of the UBS and all publicly held companies. 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 with its primary regulators with regard to, among other things, achievement of agreed-upon capital levels, implementation of a viable earnings/strategic plan, adequate funding of the allowance for loan losses, the completion of a management review and succession plan, and improvement in internal controls. See, ITEM 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ITEM 2 -- PROPERTIES Corporate Headquarters In August 1999, the Bank moved its corporate headquarters from the branch facility at 714 Market Street to the building at 300 North Third Street, Philadelphia, Pennsylvania. In October 2000, the Bank purchased the building from a former officer in conjunction with the settlement of a legal matter for approximately $1.4 million. Before its purchase, the Bank leased the building from this officer under a 10-year non-cancelable capital lease. The facility consists of 25,000 square feet including executive offices, operations, finance, human resource, security and loss prevention functions. The Bank sublets approximately 2,500 square feet to the African American Interdenominational Ministries. Market Street Branch (closed) The Bank's Market Street Branch was located on the first floor of a multi-tenant retail and commercial office building at 714 Market Street, Philadelphia, Pennsylvania. The Bank occupied approximately 5,700 square feet of space pursuant to a lease that expired on February 28, 2002. In conjunction with the expiration of the lease, the branch operations of this facility were consolidated with the branch located at Two Penn Center in January 2002. The aggregate monthly rent for this location was $14,023. 10 Mt. Airy Branch The Bank operates a branch at 1620 Wadsworth Avenue, in the Mt. Airy section of Philadelphia. This facility, comprising a retail banking lobby, teller area, offices, vault and storage space is currently leased at a monthly rental of $3,517. Center City Branch The Bank operates a branch location at Two Penn Center, 15th Street and JFK Boulevard, Philadelphia, Pennsylvania. The Bank leases approximately 4,769 square feet at its Two Penn Center location. The space includes lobby, teller area, customer service area, primary lending area and administrative offices, as well as a vault. The aggregate monthly rent for this location is $13,115. Frankford Branch and ATM Machine In 1995, the Bank purchased a branch facility at 4806 Frankford Avenue. In September 2000, the Bank closed this facility. In June 2002, the Bank sold this facility. An ATM machine remains operational at this facility. The aggregate monthly rental for the ATM Machine is $500. West Girard Branch and ATM Machine The Bank leased a facility located at 2820 West Girard Avenue. The branch operations of this facility were discontinued in September 2000. An ATM machine remained operational at this facility until February 2002 when it was relocated to 2820 West Girard. The aggregate monthly rental for the ATM Machine at the new location is $500. West Philadelphia Branch On July 22, 1996, the Bank acquired a branch location at 3750 Lancaster Avenue from PNC Bank. The facility is comprised of approximately 3,000 square feet. The main floor houses teller and customer service areas, a drive-up teller facility and automated teller machine. The basement provides storage for the facility. The aggregate monthly rental is $2,875 exclusive of taxes, insurance, utilities and janitorial service. Progress Plaza Branch The Bank leases a branch facility located at 1015 North Broad Street, Philadelphia, Pennsylvania. The facility comprises a teller and customer service area, lobby and vault. The aggregate monthly rental for this facility is $3,875 per month. The Bank has been notified by the landlord that extensive improvements to the shopping plaza in which this branch is located is planned for early 2004. This will result in the temporary relocation of this facility to a yet undetermined nearby location at the beginning of 2004. ITEM 3 -- LEGAL PROCEEDINGS No material claims have been instituted or threatened by or against Registrant or its affiliates other than in the ordinary course of business. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. No matters were submitted to a vote of Registrant's security holders since the Registrant's last periodic filing. 11 PART II ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock As of March 17, 2003 there were 3,168 shareholders of record of UBS's Common Stock. The Common Stock is not traded on any national exchange or otherwise traded in any recognizable market. Prior to December 31, 1993, the Bank conducted a limited offering (the "Offering") pursuant to a registration exemption provided in Section 3(a)(2) of the Securities Exchange Act of 1933 (the "Act"). The price-per-share during the Offering was $12.00. Prior to the Offering, the Bank conducted an initial offering of the Common Stock (the "Initial Offering") at $10.00 per share pursuant to the same registration exemption. In June 2000 and December 2000, respectively, the Bank received $411,809 and $436,212 and issued 34,317 and 36,351 shares, respectively, as a result of the purchase of UBS common stock by members of the Bank's board of directors in a limited offering at a price of $12.00 per share. This offering was exempt from registration under the Act pursuant to the exemption in section 4(2) of the Act. In May 2001 and December 2001, respectively, the Bank received $2,000 and $9,596 and issued 167 and 800 shares, respectively, as a result of the purchase of UBS common stock by two individuals in a limited offering at a price of $12.00 per share. This offering was exempt from registration under the Act pursuant to the exemption in section 4(2) of the Act. In June 2002, the Bank received $20,400 and issued 1,700 shares as a result of the purchase of UBS common stock by new members of the Bank's board of directors in a limited offering at a price of $12.00 per share. This offering was exempt from registration under the Act pursuant to the exemption in section 4(2) of the Act. Dividends UBS has not, during the three most recent fiscal periods declared or paid any cash or stock dividends. The Pennsylvania Banking Code of 1965, as amended, provides that cash dividends may be declared and paid only from accumulated net earnings and that, prior to the declaration of any dividend, if the surplus of a bank is less than the amount of its capital, the bank shall, until surplus is equal to such amount, transfer to surplus an amount which is at least ten percent of the net earnings of the bank for the period since the end of the last fiscal year or any shorter period since the declaration of a dividend. If the surplus of a bank is less than 50% of the amount of its capital, no dividend may be declared or paid by the Bank without the prior approval of the Pennsylvania Department of Banking. Under the Federal Reserve Act, if a bank has sustained losses equal to or exceeding its undivided profits then on hand, no dividend shall be paid, and no dividends can ever be paid in an amount greater than such bank's net profits less losses and bad debts. Cash dividends must be approved by the Board if the total of all cash dividends declared by a bank in any calendar year, including the proposed cash dividend, exceeds the total of the Bank's net profits for that year plus its retained net profits from the preceding two years less any required transfers to surplus or to a fund for the retirement of preferred stock. Under the Federal Reserve Act, the 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 the Registrant, whose only source of income is dividends from the Bank, will be unable to pay any dividends while an accumulated deficit exists. The Registrant does not anticipate that dividends will be paid for the foreseeable future. The Federal Deposit Insurance Act generally prohibits all payments of dividends by a bank, which is in default of any assessment to the FDIC. 12 The information below has been derived from UBS' consolidated financial statements. ITEM 6 -- SELECTED FINANCIAL DATA Selected Financial Data
Year ended December 31, ------------------------------------------------------------ (Dollars in thousands, except per share data) 2002 2001 2000 1999 1998 ------------------------------------------------------------ Net interest income.............................. $ 3,726 $ 4,060 $ 5,415 $ 5,264 $ 5,241 Provision for loan losses........................ 175 335 565 1,007 351 Noninterest income............................... 2,327 2,443 3,197 2,226 1,816 Noninterest expense.............................. 6,095 7,038 8,801 7,714 6,696 Net income (loss)................................ (217) (870) (755) (1,230) 10 Net income (loss) per share - basic (0.20) (0.79) (0.72) (1.24) 0.01 Balance sheet totals: Total assets................................. $86,044 $ 88,668 $93,533 $137,249 $121,983 Net loans.................................... 43,459 42,292 44,743 59,444 57,271 Investment securities........................ 21,518 25,806 35,014 51,433 43,196 Deposits..................................... 76,929 79,423 83,238 124,766 109,063 Shareholders' equity......................... 8,500 8,558 9,350 9,027 8,904 Ratios: Equity to assets.......................... 7.45% 7.67% 7.74% 8.07% 6.40% Return on assets.......................... (0.25)% (0.95)% (0.63)% (1.03)% 0.01% Return on equity.......................... (2.55)% (9.31)% (8.08)% (12.71)% 0.14%
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. Results of Operations Summary The Company recorded a net loss of approximately $217,000 thousand for 2002 ($0.20 per share) compared to a net loss of approximately $870,000 ($0.79 per share) for 2001 and net loss of approximately $755,000 ($0.72 per share) in 2000. In 2002, the Bank was awarded a $198,000 grant from the U.S. Treasury Department's Bank Enterprise Award (BEA) Fund which is included in other income on the consolidated statement of operations. These funds are awarded to financial institutions that demonstrate community development through loan and deposit activity. The financial results for 2002 were also positively impacted by the continued implementation of the Bank's profit restoration plan that resulted in reductions in noninterest expenses of $943,000 compared to 2001. Components of the plan included among other things staff reductions/consolidations, salary reductions, reduction in branch operating hours, elimination of director fees, and the reduction of other operating expenses. In addition, revenue enhancement strategies were employed to generate expanded opportunities for fee income through the implementation of new products and services including the debit card and wealth management services. The marketing of consumer loan products including home equity, automobile, student, and credit card loans, and; the installation of additional high volume automated teller machines are also expected to contribute to increased revenues. During 2002, while expense reductions were achieved, a greater impact is expected to be realized with increased loan originations that build the Bank's loan-to-deposit ratio. Increased loan volume will result in a higher net interest margin and therefore increased revenues. Thus, while continuing to control expenses, management will place more focus on the implementation of business development strategies to increase the level of loans outstanding to achieve profitability. 13 During 2003, to build momentum around business development and to generate interest and enthusiasm in the marketplace, management will embark on a re-branding campaign for the Bank. The campaign will focus on a re-introduction of the Bank and emphasize its commitment to the community. This campaign will include among other things, in-branch marketing of the Bank's products and services, direct mail advertising/solicitation, and the use of newspaper and television media . A major focus will be placed on the Bank's new division, United Wealth Management Services, as a lead-in to cross-sell the Bank's other products and services. A more 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, 2002 2001 2000 ----------------------- ----------------------- ------------------------ Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) balance Interest rate balance Interest rate balance Interest rate ----------------------- ----------------------- ------------------------ Assets: Interest-earning assets: Loans........................... $ 42,839 $3,006 7.02% $ 45,828 $3,595 7.85% $ 55,262 $4,655 8.42% Investment securities held-to-maturity 10,155 626 6.16 14,669 987 6.73 28,659 1,875 6.54 Investment securities available-for-sale 13,783 831 6.03 11,758 772 6.57 18,044 1,284 7.12 Federal funds sold.............. 10,406 169 1.62 7,726 282 3.65 5,518 339 6.15 ------- ------ ------- ------ ------- ------ Total interest-earning assets 77,183 4,632 6.00 79,981 5,636 7.05 107,483 8,153 7.59 Noninterest-earning assets: Cash and due from banks......... 4,542 4,801 5,339 Premises and equipment, net..... 2,613 3,214 3,671 Other assets.................... 2,926 4,028 4,494 Less allowance for loan losses.. (674) (576) (562) -------- -------- -------- Total........................ $ 86,590 $ 91,448 $120,425 ======== ======== ======== Liabilities and shareholders' equity: Interest-bearing liabilities: Demand deposits................. $ 12,882 114 0.89% $ 13,802 178 1.29% $ 19,851 602 3.03% Savings deposits................ 21,931 129 0.59 24,480 317 1.29 30,776 497 1.61 Time deposits................... 23,712 662 2.79 24,089 1,081 4.49 28,531 1,387 4.86 Other borrowed funds............ - - - 1 - - 1,925 252 13.09 -------- ------ -------- ------ -------- ------ Total interest-bearing liabilities 58,525 906 1.55 62,372 1,576 2.53 81,083 2,738 3.38 Noninterest-bearing liabilities: Demand deposits................. 19,565 19,612 27,567 Other........................... - 431 3,233 Shareholders' equity................ 8,500 9,033 8,542 -------- ------ -------- ------ -------- ------ Total........................ $ 86,590 $ 91,448 $120,425 ======== ======== ======== Net interest earnings............... $3,726 $4,060 $5,415 Net yield on interest-earning assets 4.83% 5.08% 5.04%
For purposes of computing the average balance, loans are not reduced for nonperforming loans. Net Interest Income Net interest income is an effective measure of how well management has balanced the Bank's interest rate-sensitive assets and liabilities. Net interest income, the difference between (a) interest and fees on interest-earning assets and (b) interest paid on interest-bearing liabilities, is a significant component of the Bank's earnings. Changes in net interest income result primarily from increases or decreases in the average balances of interest-earning assets, the availability of particular sources of funds and changes in prevailing interest rates. 14 Net interest income in 2002 totaled $3.7 million, a decrease of $334,000, or 8.22%, compared to 2001. Net interest income for 2001 totaled $4.1 million, a decrease of $1.3 million or 25%, compared to 2000. Table 2--Rate-Volume Analysis of Changes in Net Interest Income
2002 compared to 2001 2001 compared to 2000 ----------------------------- ----------------------------- Increase (decrease) due to Increase (decrease) due to ----------------------------- ----------------------------- (Dollars in thousands) Volume Rate Net Volume Rate Net ------- ------- ------- ------- ------- ------- Interest earned on: Loans............................................... $ (209) $ (380) $(589) $ (742) $(317) $(1,059) Investment securities held-to-maturity.............. (277) (84) (361) (942) 55 (887) Investment securities available-for-sale............ 122 (63) 59 (412) (100) (512) Federal funds sold.................................. 44 (157) (113) 81 (138) (57) ----- ----- ----- ------- ----- ------- Total interest-earning assets.................... (320) (684) (1004) (2,015) (500) (2,515) ----- ----- ----- ------- ----- ------- Interest paid on: Demand deposits..................................... (8) (55) (63) (78) (345) (423) Savings deposits................................... (16) (172) (188) (83) (96) (179) Time deposits....................................... (9) (410) (419) (200) (107) (307) Other borrowed funds................................ - - - (252) - (252) ----- ----- ----- ------- ----- ------- Total interest-bearing liabilities............... (33) (637) (670) (613) (548) (1,161) ----- ----- ----- ------- ----- ------- Net interest income.............................. $ (287) $ (47) $(334) $(1,402) $ 48 $(1,354) ====== ====== ===== ======= ===== =======
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 2002, there was a decrease in net interest income of $334,000 due to changes in volume but a decrease of $47,000 due to changes in rate. In 2001, there was a decrease in net interest income of $1.4 million due to changes in volume but an increase of $48,000 due to changes in rate. Average earning assets decreased from $80 million in 2001 to $77 million in 2002 and decreased from $107.5 million in 2000 to $80 million in 2001. To meet capital requirements mandated in its Written Agreement with regulators (Refer to Regulatory Matters below) the Bank implemented an asset reduction/capital improvement plan in 2000 that included the reduction of deposits. Beginning in June 2000, the Bank sold higher yielding certificates of deposit to other financial institutions, encouraged some large deposit account holders to remove deposits, and consolidated three branches in its branch network. The Bank's core deposit base was stable during 2002 and represented 84% of total deposits. Until additional capital is raised, the Bank will not seek to significantly increase its level of deposits. The net interest margin of the Bank was 4.83% in 2002, 5.08% in 2001, 5.04% in 2000. Management actively manages its exposure to interest rate changes. While the prime rate decreased 400 basis points during 2001 and another 150 basis points in 2002, the Bank did not experience a similar decline in yield on its earning assets. This is because much of the Bank's loan portfolio is fixed rate in nature and not related to prime. In addition, 65% of the Bank's investment portfolio is fixed rate. These characteristics of the Bank's earning assets coupled with the Bank's significant level of core deposits resulted in minimal impact to the Bank's net interest margin during the declining rate environment. During 2002, the average federal funds yield was 1.62% compared to 3.65% in 2001 and 6.15% in 2000. During 2002, the average investment in federal funds increased by $2.7 million. Because of the declining rate environment, the Bank experienced a high level of payoffs/paydowns in its loan portfolio as well as a significant level of calls of its higher yielding government agency securities. Alternate investment strategies were developed and continue to be implemented to place liquid funds into longer-term securities including mortgage-backed (MBS) and other agency securities to decrease the level of investment in low yielding Federal Funds Sold. 15 The yield on the investment portfolio decreased 57 basis points to 6.09% in 2001 compared to 6.66% in 2002 compared to 6.76% in 2000. As indicated above, the Bank experienced a significant level of called agency securities that were re-invested in a lower interest rate environment--thereby, reducing the yield on the portfolio. The cost of interest-bearing liabilities declined to 1.55% in 2002 compared to 2.53% in 2001. Consistent with market conditions during 2002, the Bank reduced the rates it pays on many of its interest-bearing products. Because most of the Bank's deposits are considered core, they were not sensitive to declining rates. Provision for Loan Losses The provision is based on management's estimate of the amount needed to maintain an adequate allowance for loan losses. This estimate is based on the review of the loan portfolio, the level of net credit losses, past loan loss experience, the general economic outlook and other factors management feels are appropriate. The provision for loan losses charged against earnings in 2002 was $175,000 compared to $335,000 in 2001 and $565,000 in 2000. Significant provisions were made for the year ended December 31, 2001 for one commercial borrower that the Bank added to its classified loans and provided a specific reserve of $357,000. This borrower is in the telecommunications industry with loans totaling approximately $1.3 million and is experiencing severe financial difficulty. Guarantees from the Small Business Administration (SBA) reduce the Bank's exposure to approximately $714 thousand. Management continues to work closely with this borrower to develop a workout plan to minimize the risk of loss. These loans have been modified to provide for a moratorium on principal payments until January 2004. The borrower is in compliance with the modified terms. During the current unstable economic environment, the Bank monitors 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 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, 2002. Noninterest Income Noninterest income decreased $116,000 in 2002 compared to 2001 and decreased $754,000 in 2001 compared to 2000. The amount of the Bank's noninterest income generally reflects the volume of the transactional and other accounts handled by the Bank and includes such fees and charges as low balance account charges, overdrafts, account analysis, and other customer service fees. Customer service fees decreased $275,000 in 2002 compared to 2001 primarily because of a reduction in activity fees on deposits and lower surcharge income on the Bank's ATM network. The Bank's lower deposit levels in 2002 compared to 2001 result in less overdraft fees, activity service charges and low balance fees. Surcharges from the Bank's ATM network declined because of the 714 Market Street branch closure in January 2002 and another ATM location lease expiration. In addition, the Bank had two high-volume ATMs out of service for lengthy periods during the year due to an accident and a relocation. Management continues the process of identifying other potentially high volume locations. The decline in customer service fees was partially offset by a $198,000 grant the Bank received from the U.S. Treasury Department's Bank Enterprise Award (BEA) Fund. The Bank received this grant as a result of certificates of deposit it placed with other Community Development Financial Institutions (CDFI) throughout the country. (Note: United Bank of Philadelphia also has a CDFI designation and periodically receives such deposits to support its community development mission.) Also, in 2002, the Bank syndicated a $60 million back-up line of credit with other minority banks throughout the country for a major corporation for which it received an agent fee. This fee will be received annually for the administration of this line of credit. During 2002, the Bank sold its former Frankford branch facility for a gain of $48,000. In addition, the Bank sold approximately $1.1 million of its available-for-sale portfolio for a gain of approximately $26,000. 16 During 2001, the Bank sold its former West Girard branch facility for a gain of $78,000. In addition, the Bank sold approximately $3.5 million of its available-for-sale portfolio for a gain of approximately $78,000. Noninterest Expense Noninterest expense decreased $943,000, or 13.4% in 2002 compared to a decrease of $1.8 million, or 20% in 2001 compared to 2000. Salaries and benefits decreased $320,000, or 12.01% in 2002 compared to a decrease of $411,000, or 13.4%, in 2001. In April 2002, as part of its Profit Restoration Plan, the Bank made strategic reductions in staff, job consolidations, and reduced salaries for certain employees to lower the level of personnel expense. Management continues its review to ensure the Bank is operating with the most efficient organizational structure. Occupancy and equipment expense decreased approximately $316,000, or 19.62%, during 2002 compared to a decrease of approximately $181,000, or 10.1%, during 2001. The decrease is primarily attributable to the closure/consolidation of the Bank's 714 Market Street branch in January 2002. In addition, the Bank's former West Girard branch was sold in June 2001 and the Bank's former Frankford branch office was sold on June 8, 2002. The sale of these branches results in occupancy expense savings. In addition, many of the fixed assets initially acquired in 1992 when the Bank opened for business are now fully depreciated (10 year life). This results in a reduction in monthly depreciation expense. Data processing expenses are a result of the management decision of the Bank to outsource a majority of its data processing operations to third party processors. Such expenses are reflective of the high level of accounts being serviced for which the Bank is charged a per account charge by processors. In addition, the Bank uses outside loan servicing companies to service its mortgage, credit card, installment and student loan portfolios. Data processing expenses decreased by $168,000, or 20.81%, during 2002 compared to a decrease of $163,000 or 16.8%, during 2001. The decrease is primarily attributable to a reduction in deposit levels for which the Bank pays an outside servicer to process transactions and provide statement rendering. In addition, during 2002, the Bank received a $75,000 credit from its core service provider to cover projected cost savings that were lost due to delays in conversion of its core processing system. In November 2002, the Bank converted its core data processing to a new vendor, FISERV. This conversion will reduce monthly data processing expense by at least $7,500 and result in other efficiencies that may allow further reductions in personnel expense. The Bank continues to study methods by which it may reduce its data processing costs, including but not limited to a consolidation of servicers, in-house loan servicing options and the re-negotiation of existing contracts with servicers. Marketing and public relations expense decreased by $27,000, or 24.39% in 2002 compared to a decrease of $49,000, or 31.1% in 2001. The Bank does not use a significant amount of traditional marketing and advertising. Management seeks to use innovative methods to market the Bank's products and services through its corporate alliances and strong ties to the religious community to enhance its visibility and expand channels of distribution for its products and services for minimal cost. Professional services increased by $51,000, or 21.92% in 2002. During 2002, the Bank worked with outside attorneys to settle two outstanding legal matters. In addition, the legal review and implementation of the Sarbanes-Oxley Act that was enacted in 2002, resulted in increased legal fees. Office operations and supplies expense decreased by $21,000, or 4.54%, in 2002. Savings were realized as a result of the closure/consolidation of the Bank's 714 Market Street branch due to reductions in branch operating cost (i.e. security guards, supplies, etc.). In addition, in conjunction with the Bank's earnings enhancement / profit restoration plan, all other operating expenses are tightly controlled. Federal deposit insurance premiums were $36,000 in 2002 compared to $150,000 in 2001 and $169,000 in 2000. FDIC insurance premiums are applied to all financial institutions based on a risk based premium assessment system. 17 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 15 basis points for BIF (Bank Insurance Fund) assessable deposits and SAIF (Savings Insurance Fund) assessable deposits. The decrease during 2002 is a result of a reduction in the Bank's level of deposits as well as improvement in the Bank's risk rating. All other expenses are reflective of the general cost to do business and compete in the current regulatory environment and maintenance of adequate insurance coverage. FINANCIAL CONDITION Sources and Uses of Funds The Bank's financial condition can be evaluated in terms of trends in its sources and uses of funds. The comparison of average balances in Table 3 below indicates how the Bank has managed these elements. Average funding uses decreased approximately $2.8 million, or 3.50% in 2002 compared to approximately $27.5 million, or 25.6%, in 2001. Table 3--Sources and Use of Funds Trends
2002 2001 2000 ------------------------------- ------------------------------- --------- Increase Increase Average (decrease) Average (decrease) Average (Dollars in thousands) balance amount Percent balance amount Percent balance --------- -------- ------- --------- -------- ------- --------- Funding uses: Loans ............................. $42,839 $(2,989) (6.52)% $45,828 $ (9,434) (17.07)% $ 55,262 Investment securities Held-to-maturity................. 10,155 (4,514) (30.77) 14,669 (13,990) (48.82) 28,659 Available-for-sale............... 13,783 2,025 17.22 11,758 (6,286) (34.84) 18,044 Federal funds sold............... 10,406 2,680 34.69 7,726 2,208 40.01 5,518 ------- ------- ------- -------- -------- Total uses................... $77,183 $(2,798) $79,981 $(27,502) $107,483 ======= ======= ======= ======== ======== Funding sources: Demand deposits: Noninterest-bearing.............. $19,565 $ (47) (0.09)% $19,612 $ (7,955) (28.86)% $ 27,567 Interest-bearing................. 12,882 (920) (6.67) 13,802 (6,049) (30.47) 19,851 Savings deposits................... 21,931 (2,549) (10.41) 24,480 (6,296) (20.46) 30,776 Time deposits...................... 23,712 (377) (1.57) 24,089 (4,442) (15.57) 28,531 Other borrowed funds............... - (1) (100.00) 1 (1,924) (99.95) 1,925 ------- ------- ------- -------- -------- Total sources................ $78,090 $(3,894) $81,984 $(26,666) $108,650 ======= ======= ======= ======== ========
*Includes held-to-maturity and available-for-sale securities Investment Securities and Other Short-Term Investments The Bank's investment portfolio is classified as either held-to-maturity or available-for-sale. Investments classified as held-to-maturity are carried at amortized cost and are those securities the Bank has both the intent and ability to hold to maturity. Investments classified as available-for-sale are those investments the Bank intends to hold for an indefinite amount of time, but not necessarily to maturity, and are carried at fair value, with the unrealized holding gains and losses reported as a component of shareholders' equity on the balance sheet. Average investment securities and federal funds sold, in the aggregate, increased by $191,000, or .56%, in 2002 compared to a decrease of $18 million, or 34.6%, in 2001. The bulk of the increase was in the category of Federal Funds Sold that increased on average by $2.7 million. During 2002, because of the declining rate environment, the Bank experienced a high level of payoffs/paydowns in its loan portfolio as well as a significant level of calls of its higher yielding government agency securities. These funds are temporarily held in Federal Funds Sold until loans and/or investments can be originated or purchased. 18 The Bank's current investment portfolio primarily consists of mortgage-backed pass-through agency securities and other government-sponsored agency securities. The Bank does not invest in high-risk securities or complex structured notes As reflected in Table 4 below, the average duration of the portfolio is 2.62 years. In the current low interest rate environment, the duration of the investment portfolio is significantly shortened because of the of callable government agency securities.- approximately 21.4%. Approximately $10.8 million in securities were called during the year. The average yield of called securities was 6.00%. Calls will likely continue as the rate environment remains at historically low levels. The result is additional liquidity and a reduction in yield on the portfolio. Approximately 78.6% of the portfolio consist of mortgage-backed pass-through securities that have longer-term contractual maturities but are sometimes paid off/down before maturity or have repricing characteristics that occur before final maturity. The Bank has attempted to minimize the repayment risk (risk of very fast or very slow repayment) associated with these types of securities by investing primarily in a number of seasoned mortgage pools for which there is a repayment history. This history better enables the Bank to project the repayment speeds of these pools. In addition, the Bank has minimized the interest rate risk associated with these mortgage-backed securities by investing in a variety of pools, many of which have variable rates with indices that track closely with the current interest rate environment. The Bank will continue to take steps to combat the impact of the high 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 future rising rate environments. In 2002, a strategy to invest $4 million in variable rate mortgage-backed securities was implemented. These securities have average current yields of approximately 4.00% and estimated durations of 4 years with monthly cashflow. These securities will adjust at various intervals ranging from one to seven years. 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...... $ % $1,000 4.66% $3,862 5.90% $ % $ 4,862 Mutual funds..................... 106 1.35 106 Other investments................ 288 6.00 288 Mortgage-backed securities....... 16,262 ----- ------ ------ ------ ------- Total securities................. $ 106 $1,000 $4,150 $21,518 Average maturity................. 2.62 years
The above table sets forth the maturities of investment securities at December 31, 2002 and the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security). Loans Average loans decreased approximately $3 million, or 6.52%, in 2002 compared to a decrease of $9.4 million, or 17.07%, in 2001. The Bank has developed relationships with other financial institutions in the region with which it participates in loans as a strategy to stabilize and grow its commercial loan portfolio. This strategy continues to be utilized while the Bank enhances it own business development capacity. Approximately $10 million in commercial loan participations were booked during 2002. Most of these participations were secured by commercial real estate. Increases in the commercial loan portfolio were offset by significant levels of repayments in the Bank's residential mortgage loan portfolio as consumers refinance existing loans or sell existing homes to purchase new homes to take advantage of the current low interest rate environment. Because the Bank is not a competitive player in the mortgage loan origination market, it does not generate sufficient mortgage loan volume to cover these payoffs. The Bank's loan-to-deposit ratio at December 31, 2002 was 56.5% up from 53.2% at December 31, 2001. 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. Management will continue to implement loan growth strategies including the purchase of additional commercial loan participations and the origination of small business loans and consumer loans including home equity, automobile, student and credit card loans. 19 As reflected in Table 5 below, during 2002, because of the purchase of loan participations, commercial real estate loans increased by $6.4 million to 27% of total loans. Conversely, the rapid repayments in the mortgage loan portfolio resulted in a reduction of $4.6 million, or 25.3%--thereby creating a significant shift in the composition of the overall loan portfolio. As reflected in Table 6 below, approximately 55% of the Bank's loan portfolio have scheduled maturities of five years or more. This position is largely a result of the Bank's relatively high level of residential mortgage loans. While scheduled maturities exceed five years, due to the high level of refinancing in this portfolio, the actual duration of the portfolio may be much shorter. Table 5--Loans Outstanding, Net of Unearned Income
December 31, ------------------------------------------------------------------ (Dollars in thousands) 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- Commercial and industrial................... $10,855 $11,054 $11,429 $13,664 $13,643 Commercial real estate...................... 11,898 5,504 652 1,288 1,518 Residential mortgages....................... 13,560 18,148 22,316 26,237 31,365 Consumer loans.............................. 7,820 8,294 10,908 19,822 11,424 ------- ------- ------- ------- ------- Total loans............................. $44,133 $43,000 $45,305 $61,011 $57,950 ======= ======= ======= ======= =======
Table 6--Loan Maturities and Interest Sensitivity
Within After one but After (Dollars in thousands) one year within five years five years Total ------------ ----------------- ---------- ------- Commercial and industrial................... $ 7,622 $ 1,908 $ 1,325 $10,855 Commercial real estate...................... 1,520 2,028 8,350 11,898 Residential mortgages....................... 13,560 13,560 Consumer loans.............................. 522 5,027 2,271 7,820 ------- ------- ------- ------- Total loans........................... 9,664 8,963 25,506 44,133 Loans maturing after one year with: Fixed interest rates.................... $32,787 Variable interest rates................. 1,682
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. Table 7--Nonperforming Loans
(Dollars in thousands) 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- Nonaccrual loans............................ $ 651 $ 412 $ 453 $2,027 $1,720 Interest income included in net income for the year............................ 25 25 20 67 37 Interest income that would have been recorded under original terms........... 49 29 28 113 189 Loans past due 90 days and still accruing... 797 526 34 53 125 Restructured loans.......................... 1,286 182 632 580 -
20 The balance of impaired loans was $ 1,951,000 and $412,000 as of December 31, 2002 and 2001, 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 impaired loan balance included $651,000 and $412,000 of non-accrual loans at December 31, 2002 and 2001, respectively. The allowance for loan loss associated with the $1,951,000 of impaired loans was $402,000 at December 31, 2002. Interest income recognized on impaired loans during 2002 and 2001 was $104,000 and $25,000, respectively. 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, 2002, the Bank had approximately $1.3 million in restructured loans consisting primarily of three loans to one borrower in the technology industry. 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, 2002, approximately 18.71% of the commercial loan portfolio of the Bank was concentrated in loans made to religious organizations. From inception, the Bank has received support in the form of investments and deposits and has developed strong relationships with the Philadelphia region's religious community. Loans made to these organizations were primarily for expansion and repair of church facilities. At December 31, 2002, none of these loans were nonperforming. During 2002, nonaccrual loans totaled $651,000, compared to $412,000 at December 31, 2001. At December 31, 2002, approximately $66,000 of the total nonaccrual loans was residential mortgages and $342,000 carried some level of guarantee from the Small Business Administration. The underlying real estate collateral and credit enhancement provided by the SBA minimizes the risk of loss. Allowance for Loan Losses The allowance for loan losses reflects management's continuing evaluation of the loan portfolio, assessment of economic conditions, the diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount and quality of nonperforming loans. Table 8 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 1.53% at December 31, 2002 compared with 1.65% at December 31, 2001. During the past two years, there has been an economic downturn and economic uncertainty continues. Because the impact on the borrowers may lag the current economic conditions, the Bank proactively monitors its credit quality while working with borrowers in an effort to identify and control credit risk. At December 31, 2002, the Bank's classified loans totaled $2.7 million , or 6.1%, of total loans. Specific reserves of $608,000 have been allocated to these loans. Approximately $357 thousand was allocated to one loan for which full collectibility is uncertain. (Refer to Provision for Loan Losses above for further discussion on this loan.) 21 Table 8--Allocation of Allowance for Loan Losses
2002 2001 2000 1999 1998 ------------------- ------------------- ------------------- ------------------- ------------------- 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 to category to category to category to Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- (Dollars in thousands) Commercial and industrial.......... $ 565 24.60% $ 576 37.30% $ 383 25.23% $ 263 22.40% $ 272 23.55% Commercial real estate.............. 37 26.96 29 1.21 11 1.44 877 2.11 132 2.62 Residential mortgages. 45 17.72 30 19.29 102 24.08 144 43.00 55 54.12 Consumer loans........ 28 30.72 73 42.20 66 49.25 283 32.49 188 19.71 Unallocated........... - - - - - - - - 32 - ----- ------- ----- ------- ----- ------- ------ ------- ----- ------- $ 675 100.00% $ 708 100.00% $ 562 100.00% $1,567 100.00% $ 679 100.00% ===== ======= ===== ======= ===== ======= ====== ======= ===== =======
Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of the examination. Table 9--Analysis of Allowance for Loan Losses
Year ended December 31, ------------------------------------------------------------------ (Dollars in thousands) 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- Balance at January 1....................... $ 708 $ 562 $ 1,567 $ 679 $ 468 Charge-offs: Commercial and industrial.............. (61) (321) (25) - Commercial real estate................. (100) (803) - - Residential mortgages.................. - (47) - Consumer loans......................... (261) (261) (597) (315) (180) ------ ------ ------- ------- ------ (361) (322) (1,721) (387) (180) ------ ------ ------- ------- ------ Recoveries--commercial loans................ 27 - - - - Recoveries--consumer loans.................. 126 133 151 268 41 ------ ------ ------- ------- ------ 153 133 151 268 41 Net charge-offs............................ (208) (189) (1,570) (119) (139) Provisions charged to operations........... 175 335 565 1,007 350 ------ ------ ------- ------- ------ Balance at December 31..................... $ 675 $ 708 $ 562 $ 1,567 $ 679 ====== ====== ======= ======= ====== Ratio of net charge-offs to average loans outstanding............................. 0.49% 0.41% 2.84% 0.17% 0.19%
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. 22 Deposits Average deposits declined approximately $3.9 million, or 4.71%, in 2002 compared to a decline of $24.7 million, or 23.2%, in 2001. The decline is primarily attributable to the maturity of certificates of deposits the Bank held on deposit from a special deposit program of the Commonwealth of Pennsylvania. This program was eliminated in 2002. Because of mandatory capital requirements outlined in the Bank's Written Agreement with its regulators (See Regulatory Matters below), aggressive deposit retention or new business development strategies have not been implemented. Table 10--Average Deposits by Class and Rate
2002 2001 2000 ------------------ ------------------ ------------------ (Dollars in thousands) Amount Rate Amount Rate Amount Rate ------------------ ------------------ ------------------ Noninterest-bearing demand deposits $19,565 - % $19,612 - % $27,567 - % Interest-bearing demand deposits 12,882 0.89 13,802 1.29 19,851 3.03 Savings deposits 21,931 0.59 24,480 1.30 30,776 1.61 Time deposits 23,712 2.79 24,089 4.49 28,531 4.86
Other Borrowed Funds The Bank did not borrow funds during 2002. 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. 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, 2002, management believes the Bank's liquidity is satisfactory and in compliance with FRB regulations. The Bank's principal sources of asset liquidity include investment securities consisting primarily of U.S. Government and agency issues, particularly those of shorter maturities, and mortgage-backed securities with monthly repayments of principal and interest. There are no securities maturing in one year or less. However, other types of assets such as federal funds sold, as well as maturing loans, are sources of liquidity. Approximately $9.2 million in loans are scheduled to mature within one year. 23 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.......................... $ 7,754 Over 3 through 6 months................... 769 Over 6 months through 1 year.............. 1,114 Over 1 through five years................. 1,246 Over five years........................... - ------- Total................................ $10,883 ======= Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans that are tied to prime or other short-term indices differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits are much more interest-sensitive than passbook savings accounts. The shorter-term interest rate sensitivities are key to measuring the interest sensitivity gap or excess interest-earning assets over interest-bearing liabilities. Management of interest sensitivity involves matching repricing dates of interest-earning assets with interest-bearing liabilities in a manner designed to optimize net interest income within the limits imposed by regulatory authorities, liquidity determinations and capital considerations. Table 12 sets forth the earliest repricing distribution of the Bank's interest-earning assets and interest-bearing liabilities at December 31, 2002, 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, 2002, a slight asset sensitive position is maintained on a cumulative basis through one year of 5.26%. This level is within the Bank's policy guidelines of +/-15% on a cumulative one-year basis. The current gap position is relatively evenly matched as a result of the number of loans either repricing or maturing in 12 months closely matching certificate of deposit maturities. Interest rate risk is minimized by the Bank's high level of core deposits that have been placed in longer repricing intervals. Generally, because of the Bank's 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 increases will have the opposite effect. For purposes of the gap analysis, such deposits (savings, MMA, NOW) which do not have definitive maturity dates and do not readily react to changes in interest rates have been placed in longer repricing intervals versus immediate repricing time frames, making the analysis more reflective of the Bank's historical experience. 24 Table 12--Interest Sensitivity Analysis
Interest rate sensitivity gaps as of December 31, 2002 -------------------------------------------------------------------------- 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. $ $ 865 $ $ $ $ 865 Investment securities................ 9,410 830 438 1,026 9,419 21,123 Federal funds sold................... 10,122 10,122 Loans................................ 14,630 4,939 5,764 4,046 14,754 44,133 ------ ------ ----- ----- ------ ------ Total interest-sensitive assets.... 34,162 6,634 6,202 5,072 24,173 $76,243 ------ ------ ----- ------ ------ ======= Cumulative totals.................. 34,162 40,796 46,998 52,070 76,243 ------ ------ ------ ------ ------
Interest rate sensitivity gaps as of December 31, 2002 -------------------------------------------------------------------------- Over Over 1 year Over 3 months 3 through through 3 through Over (Dollars in thousands) or less 12 months 3 years 5 years 5 years Cumulative -------- --------- --------- --------- --------- ---------- Interest-sensitive liabilities: Interest checking accounts........... 2,927 2,927 5,854 Savings accounts..................... 13,739 13,739 27,478 Certificates less than $100,000...... 4,117 6,362 1,167 615 12,261 Certificates of $100,000 or more..... 6,332 3,306 1,245 10,883 Other borrowed funds................. - - - - - ------- ------- -------- ------- ------- ------- Total interest-sensitive liabilities $27,115 $ 9,668 $ 19,078 $ 615 $ - $56,476 ======= ======= ======== ======= ======= ======= Cumulative totals.................. $27,115 $36,783 $ 55,861 $56,476 $56,476 ======= ======= ======== ======= ======= Interest sensitivity gap................. $ 7,046 $(3,034) $(12,876) $ 4,457 $24,173 ======= ======= ======== ======= ======= Cumulative gap........................... 7,046 4,012 (8,863) (4,406) 19,767 Cumulative gap/total earning assets...... 9.24% 5.26% 11.63% 5.78% 25.93% Interest-sensitive assets to interest-sensitive liabilities.......................... 1.26 1.11 0.84 0.92 1.35
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, 2002 are as follows: 25 Net interest Percent of Changes in rate income change --------------- ----------- ---------- (Dollars in thousands) +200 basis points $ 3,835 2.43% +100 basis points 3,790 1.23 Flat rate 3,744 - -100 basis points 3,696 (1.28) -200 basis points 3,638 (2.83) 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, 2002 are as follows: Percent of Changes in rate MV equity change --------------- ----------- ---------- (Dollars in thousands) +200 basis points $ 3,335 52.03% +100 basis points 5,136 26.13 Flat rate 6,953 - -100 basis points 8,836 27.08 -200 basis points 10,571 52.03 The assumptions used in evaluating the vulnerability of the Bank's earnings and equity to changes in interest rates are based on management's consideration of past experience, current position and anticipated future economic conditions. The interest sensitivity of the Bank's assets and liabilities, as well as the estimated effect of changes in interest rates on the earnings and equity, could vary substantially if different assumptions are used or actual experience differs from the assumptions on which the calculations were based. The Bank's Board of Directors and management consider all of the relevant factors and conditions in the asset/liability planning process. Interest rate exposure is not significant and is within the policy limits of the Bank at December 31, 2002. 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 declined $58,000 in 2002 compared to 2001. The decrease in 2002 is a result of the net loss of $217,000 which resulted in an increase in the accumulated deficit offset by an increase in other comprehensive income for the fair market value of available for sale investment securities, net of taxes. 26 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 13, the Company's risk-based capital ratios are above the minimum requirements. Management continues the objective of raising additional capital by offering additional stock (preferred and common) for sale in a private offering as well as increasing the rate of internal capital growth as a means of maintaining the required capital ratios. However, the Bank's growth, continued losses and the additional provisions to the allowance for loan losses may have an adverse effect on its capital ratios. The Company and the Bank do not anticipate paying dividends in the near future. Table 13--Capital Ratios (Dollars in thousands) 2002 2001 2000 ------- ------- ------- Total Capital................................. $ 8,263 $ 8,459 $ 9,317 Less: Intangible Assets......................... (1,937) (2,119) (2,298) ------- ------- ------- Tier I capital................................ 6,326 6,340 7,019 Tier II capital............................... 528 510 537 ------- ------- ------- Total qualifying capital...................... $ 6,854 $ 6,850 $ 7,556 ======= ======= ======= Risk-adjusted total assets (including off-balance-sheet exposures)..... $42,104 $41,624 $42,949 ======= ======= ======= Tier I risk-based capital ratio................ 15.02% 15.23% 16.34% Total (Tier I and II) risk-based capital ratio. 16.28% 16.46% 17.59% Tier I leverage ratio.......................... 7.46% 7.12% 7.39% Regulatory Matters In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written Agreement (herein sometimes referred to as 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 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: reducing expenses, consolidating branches, and soliciting new and additional sources of capital. Management continues to address all matters outlined in the Agreement. 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. As of December 31, 2001, the Bank's tier one leverage capital ratio fell to 6.80% , below the 7% minimum capital ratio required by the Agreement. However, at December 31, 2002, the tier one leverage ratio had improved to 7.12% as a result of the smaller average asset size of the Bank. Management continues to review and revise its capital plan to address the development of new equity. In addition, a profit restoration plan was developed and implemented during 2002 to include numerous expense reduction and profit enhancement strategies. 27 Recent Accounting Pronouncements On January 1, 2002 the Bank adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. However, SFAS No. 144 makes changes to the scope and certain measurement requirements of existing accounting guidance. SFAS No. 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. The adoption of this statement did not have an impact on the financial condition or results of operations of the Bank. SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," amends the disclosure and certain transition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. For entities that use the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, to account for employee stock compensation for any period presented, their accounting policies note should include certain disclosures. The expanded annual disclosure requirements and the transition provisions are effective for fiscal years ending after December 15, 2002. The new interim period disclosures are required in financial statements for interim periods beginning after December 15, 2002. The expanded annual disclosures are provided in the 2002 financial statements. In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest entity to be consolidated by a a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but it which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. The Company is in the process of determing what impact, if any, the adoption of the provisions of FIN 46 will have upon its financial condition or results of operations. ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The financial information required by this Item 7A is incorporated by reference to page 25 of this Report, the Liquidity and Interest Rate Sensitivity Management provisions and pages 23 to 26 of this Report including Table --12 the Interest Sensitivity Analysis Table of this Report. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Consolidated Financial Statements on pages 39 to 63 hereof. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 28 PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Directors of the Registrant and Bank ------------------------------------
Principal occupation and Year first Term Name Age other directorships became director will expire - ---- --- --------------------------- --------------- ----------- James F. Bodine 81 Co-Chairman, 1993 2003 United Bancshares, Inc. Retired as Managing Partner, Urban Affairs Partnership Philadelphia, Pennsylvania Bernard E. Anderson 65 Professor of Management/Economist 2002 2006 At the Wharton School, Philadelphia, PA David R. Bright 63 Retired, Executive Vice President Meridian Bancorp 2002 2006 Philadelphia, PA Luis A. Cortes, Jr. 45 President, Nueva Esperanza 2002 2006 Philadelphia, PA L. Armstead Edwards 61 Co-Chairman, 1993 2004 United Bancshares, Inc. Owner and President, P.A.Z., Inc. Philadelphia, Pennsylvania Marionette Y. Wilson(Frazier) 58 Retired as Partner, 1996 2004 John Frazier, Inc. Philadelphia, Pennsylvania Angela M. Huggins 61 Treasurer, 1993 2005 United Bancshares, Inc. Retired as Vice President Real Estate Affairs RMS Technologies, Inc. William B. Moore 60 Secretary, United Bancshares, Inc. Pastor, Tenth Memorial 1993 2003 Baptist Church Philadelphia, Pennsylvania Wanda M. Richards 37 Senior Counsel, FCCS 2001 2005 Steven L. Sanders 42 President and Co-CEO, MDL Capital 2002 2006 29 Principal occupation and Year first Term Name Age other directorships became director will expire - ---- --- ------------------- --------------- ----------- Evelyn F. Smalls 57 President and CEO of Registrant 2000 2003 and United Bank of Philadelphia Ernest L. Wright 74 Founder, President and 1993 2004 CEO of Ernest L. Wright Construction Company Philadelphia, Pennsylvania
(b) Executive Officers of Registrant and Bank Name Age Office - ---- --- ------ Evelyn F. Smalls 57 President and Chief Executive Officer Brenda M. Hudson-Nelson 41 Executive Vice President/Chief Financial Officer James F. Bodine 81 Co-Chairman, Board of Directors L. Armstead Edwards 61 Co-Chairman, Board of Directors William B. Moore 60 Secretary Marionette Y. Frazier 58 Assistant Secretary Angela M. Huggins 62 Treasurer (c) Family Relationships. -------------------- There are no family relationships between any director, executive officer or person nominated or chosen by the UBS or the Bank to become a director or executive officer. (d) Other There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the past five years. ITEM 11 -- 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, 2002 (Ms. Smalls and Ms. Hudson-Nelson are hereinafter sometimes collectively referred to as the "Named Executive Officers"). (1) UBS' executives are not compensated for their services to UBS rather, because the Bank is the principal subsidiary of UBS, they are compensated as officers of the Bank. 30 Summary Compensation Table The disclosure regarding the compensation of the Bank's executives includes the following table that sets forth the compensation paid to the Named Executive Officers during the last three fiscal years.
Annual Compensation(1) ---------------------- Stock All Other Name and Principal Position During 2002 Year Salary Bonus Options Compensation(2) - --------------------------------------- ---- ------ ------- ------- --------------- ($) (#) ($) Evelyn F. Smalls 2002 $148,009 -- -- -- President and Chief Executive Officer 2001 $141,000 -- -- -- of UBS and the Bank 2000 $118,921 -- -- -- -- -- -- Brenda M. Hudson-Nelson 2002 $102,112 -- -- -- Executive Vice President and Chief Financial 2001 $100,900 -- -- -- Officer of UBS and the Bank 2000 $ 96,445 -- -- --
- ------------------ (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 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 Executive Employment Agreements The Bank entered into an Employment Agreement with Evelyn F. Smalls dated June 12, 2000 to serve as the Bank's President and Chief Executive Officer. The initial term of the Employment Agreement is two (2) years, unless extended or terminated. In June 2002, the Employment Agreement was extended for two (2) years. The Employment Agreement provides for an annual base salary of $135,000 which may be increased, but not decreased. Under her Employment Agreement, Ms. Smalls has an opportunity to receive an annual initial cash bonus (the "Initial Cash Bonus") of 12% of her annual base salary and an annual additional cash bonus (the "Additional Cash Bonus") of 12% of her annual base salary in calendar years 2002 and 2003, based on performance targets specified in the Employment Agreement which are based on the annual earnings of the Bank. The Bank entered into an Employment Agreement with Brenda M. Hudson-Nelson dated June 12, 2000 to serve as the Bank's Senior Vice President and Chief Financial Officer. The initial term of the Employment Agreement is two (2) years, unless extended or terminated. In June 2002, the Employment Agreement was extended for two (2) years. The Employment Agreement provides for an annual base salary of $95,000 which may be increased, but not decreased. Under her Employment Agreement, Ms. Hudson-Nelson has an opportunity to receive an annual initial cash bonus (the "Initial Cash Bonus") of 12% of her annual base salary and an annual additional cash bonus (the "Additional Cash Bonus") of 12% of her annual base salary in calendar years 2000 and 2001, 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. 31 Equity Compensation Plan Table
- -------------------------------------------------------------------------------------------------- (a) (b) (c) - -------------------------------------------------------------------------------------------------- Plan Category Number of Securities Weighted average Number of securities to be issued upon exercise price remaining available for exercise of of outstanding future issuance under equity outstanding options, options, warrants, compensation plans warrants and rights and rights (excluding securities reflected in column (a)) - -------------------------------------------------------------------------------------------------- Equity compensation plans approved by 29,694 $8.54 70,306 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 17, 2003 (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 7.87% Retirement System 2000 Two Penn Center Philadelphia, Pennsylvania 19102 First Union Corporation(2) 50,000 5.49% 1 First Union Center Charlotte, NC 28288 - ------------------ (1) As of March 17, 2003, there were 907,542 shares of UBS' voting Common Stock outstanding. (2) First Union Corporation owns 241,666 shares of UBS Common Stock of which 50,000 are voting shares. The following table sets forth certain information with respect to the current executive officers of UBS and Bank as of March 17, 2003: Name, Principal Occupation UBS Stock and Business Experience Office with the UBS Beneficially For Past 5 Years and/or Bank Owned - -------------------------------------------------------------------------------- Evelyn F. Smalls President and Chief Executive Officer and 350 Director of UBS and Bank Brenda M. Hudson-Nelson Executive Vice President and 50 Chief Financial Officer of UBS and Bank 32 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 2002. 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--CONTROLS AND PROCEDURES Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer, Evelyn F. Smalls, and Chief Financial Officer, Brenda Hudson-Nelson, of the effectiveness of the design and operation of the UBS' and the Bank's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the UBS' and the Bank's disclosure controls and procedures are effective in timely alerting them to material information relating to the UBS (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. As of the date of this report, there have not been any significant changes in the UBS' and the Bank's internal controls or in any other factors that could significantly affect those controls subsequent to the date of the evaluation. 33 PART IV ITEM 15 -- EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of this report of United Bancshares, Inc.: (a) 1. Financial Reports of United Bancshares, Inc. Page -------------------------------------------- ---- Report of Independent Certified Public Accountants, March 12, 2003.. 39 Consolidated Balance Sheets at December 31, 2002 and 2001........... 40 Consolidated Statements of Operations for the three years ended December 31, 2002............................................... 41 Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 2002............................. 42 Consolidated Statements of Cash Flows for the three years ended December 31, 2002............................................... 43 Notes to Consolidated Financial Statements.......................... 44 2. Financial Statement Schedules Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto. 4. The following Exhibits are filed herewith or incorporated by reference as a part of this Annual Report: Exhibit Number Item -------------- ---- (3(i)) Articles of Incorporation (Incorporated by reference to Registrant's 1998 Form 10-K). (3(ii)) Bylaws (Incorporated by reference to Registrant's 1997 Form 10-K). (9.1) Voting Trust Agreement with NationsBank (Incorporated by reference to Registrant's 1997 Form 10-K). (9.2) Voting Trust Agreement with Fahnstock (Incorporated by reference to Registrant's 1997 Form 10-K). (10) Material Contracts a) Lease for branch office located at Two Penn Center b) Lease for branch office located at 1620 Wadsworth Avenue c) Lease for branch office located at 3750 Lancaster Avenue d) Lease for branch office located at 1015 North Broad Street e) Evelyn F. Smalls' Employment Agreement f) Brenda Hudson-Nelson's Employment Agreement g) Brokerage Services Agreement (Dual Employee Program) by and between UVEST Financial Services Group, Inc. and the United Bank of Philadelphia, dated July 17, 2002 h) Long Term Incentive Compensation Plan (incorporated by reference to Registrant's 1992 Form 10) (11) Statement of Computation of Earnings Per Share. Included at Item 8 hereof. (12) Statement of Computation of Ratios. Included at Item 8 hereof. 34 c) Not applicable. (13) Annual Report to Security Holders (21) Subsidiaries of Registrant Name State of Incorporation ---- ---------------------- United Bank of Philadelphia Pennsylvania (99) Additional Exhibits (A) Exhibit 99 Registrants Proxy Statement for its Annual Shareholders Meeting held on July 26, 2002 is attached hereto as Exhibit 99(A). (B) Exhibit 99.1 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. (C) Exhibit 99.2 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. b) No reports on Form 8-K have been filed during the last quarter covered by this report. 35 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, 2003 - ------------------------------------------- Evelyn F. Smalls, President & CEO, Director /s/ Brenda M. Hudson-Nelson March 31, 2003 - ----------------------------------------- Brenda M. Hudson-Nelson, EVP, CFO /s/ James F. Bodine March 31, 2003 - ----------------------------------------- James F. Bodine, Co-Chairman, Director /s/ L. Armstead Edwards March 31, 2003 - ------------------------------------------ L. Armstead Edwards, Co-Chairman, Director /s/ Marionette Y. Wilson(Frazier) March 31, 2003 - ----------------------------------------- Marionette Y. Wilson(Frazier), Assistant Secretary, Director /s/ Angela M. Huggins March 31, 2003 - ----------------------------------------- Angela M. Huggins, Treasurer, Director /s/ William B. Moore March 31, 2003 - ----------------------------------------- William B. Moore, Secretary, Director /s/ Bernard E. Anderson March 31, 2003 - ----------------------------------------- Bernard E. Anderson, Director /s/ David R. Bright March 31, 2003 - ----------------------------------------- David R. Bright, Director /s/ Luis A. Cortes March 31, 2003 - ----------------------------------------- Luis A. Cortes, Director /s/ Wanda M. Richards March 31, 2003 - ----------------------------------------- Wanda M. Richards, Director /s/ Steven L. Sanders March 31, 2003 - ----------------------------------------- Steven L. Sanders, Director /s/ Ernest L. Wright March 31, 2003 - ----------------------------------------- Ernest L. Wright, Director 36 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-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Evelyn F. Smalls ----------------------------------------- Evelyn F. Smalls, Chief Executive Officer 37 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-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Brenda Hudson-Nelson ----------------------------------------- Brenda Hudson-Nelson, Chief Financial Officer 38 Report of Independent Certified Public Accountants Shareholders and Board of Directors United Bancshares, Inc. and Subsidiary We have audited the accompanying consolidated balance sheets of United Bancshares, Inc. and Subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Bancshares, Inc. and Subsidiary as of December 31, 2002 and 2001, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in note 14 to the financial statements, the Bank entered into a written agreement with the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking dated February 23, 2000. /s/ Grant Thornton LLP - -------------------------- Philadelphia, Pennsylvania March 12, 2003 39 United Bancshares, Inc. and Subsidiary CONSOLIDATED BALANCE SHEETS December 31,
Assets 2002 2001 ------------ ------------ Cash and due from banks...................................................... $ 4,541,667 $ 5,747,131 Interest-bearing deposits with banks......................................... 865,421 256,847 Federal funds sold........................................................... 10,122,000 7,778,000 ------------ ------------ Cash and cash equivalents.......................................... 15,529,088 13,781,978 Investment securities: Available-for-sale, at fair market value................................. 14,334,360 14,339,643 Held-to-maturity, at amortized cost (fair market value of $7,442,870 and $11,735,146 in 2002 and 2001, respectively)....................... 7,183,403 11,466,372 Loans, net of unearned discount of $87,124 and $141,267 in 2002 and 2001, respectively................................................... 44,133,190 42,999,877 Less allowance for loan losses............................................... (674,550) (708,156) ------------ ------------ Net loans.......................................................... 43,458,640 42,291,721 Bank premises and equipment, net............................................. 2,612,608 2,978,265 Accrued interest receivable.................................................. 555,006 911,470 Foreclosed real estate....................................................... - 45,000 Intangible assets............................................................ 1,937,221 2,118,868 Prepaid expenses and other assets............................................ 433,793 734,741 ------------ ------------ Total assets....................................................... $ 86,044,119 $ 88,668,058 ============ ============ Liabilities and Shareholders' Equity Liabilities: Demand deposits, noninterest-bearing..................................... $ 20,453,455 $ 19,471,758 Demand deposits, interest-bearing........................................ 12,837,464 12,613,507 Savings deposits......................................................... 20,494,208 23,227,604 Time deposits, under $100,000............................................ 10,882,722 10,313,657 Time deposits, $100,000 and over......................................... 12,261,455 13,795,997 ------------ ------------ 76,929,304 79,422,523 Accrued interest payable................................................. 156,219 263,550 Accrued expenses and other liabilities................................... 458,455 424,274 ------------ ------------ Total liabilities.................................................. 77,543,978 80,110,347 ------------ ------------ Shareholders' equity: Series A preferred stock, noncumulative, 6%, $0.01 par value, 500,000 shares authorized; 143,150 issued and outstanding in 2002 and 2001...................................................... 1,432 1,432 Common stock, $0.01 par value; 2,000,000 shares authorized; 1,102,088 and 1,100,388 issued and outstanding in 2002 and 2001, respectively.................................................... 11,021 11,004 Additional paid-in-capital............................................... 14,749,453 14,729,070 Accumulated deficit...................................................... (6,499,197) (6,282,614) Accumulated other comprehensive income .................................. 237,432 98,819 ------------ ------------ Total shareholders' equity......................................... 8,500,141 8,557,711 ------------ ------------ Total liabilities and shareholders' equity......................... $ 86,044,119 $ 88,668,058 ============ ============
The accompanying notes are an integral part of these statements. 40 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31,
2002 2001 2000 ------------ ------------ ------------ Interest income: Interest and fees on loans................................. $3,006,367 $3,595,477 $4,655,329 Interest on investment securities.......................... 1,446,072 1,750,549 3,150,160 Interest on federal funds sold............................. 169,071 281,540 339,348 Interest on time deposits with other banks................. 10,921 8,701 8,469 ---------- ---------- ---------- Total interest income................................ 4,632,431 5,636,267 8,153,306 ---------- ---------- ---------- Interest expense: Interest on time deposits.................................. 662,493 1,080,533 1,387,091 Interest on demand deposits................................ 114,399 178,059 602,194 Interest on savings deposits............................... 129,227 317,489 496,764 Interest on borrowed funds................................. - 75 252,515 ---------- ---------- ---------- Total interest expense............................... 906,119 1,576,156 2,738,564 ---------- ---------- ---------- Net interest income.................................. 3,726,312 4,060,111 5,414,742 Provision for loan losses...................................... 175,000 335,000 565,000 ---------- ---------- ---------- Net interest income after provision for loan losses.. 3,551,312 3,725,111 4,849,742 ---------- ---------- ---------- Noninterest income: Gain on sale of loans...................................... - - 18,931 Customer service fees...................................... 1,927,838 2,202,489 2,617,845 Gain (loss) on sale of investments......................... 25,789 78,456 (200,070) Gain on sale of deposits................................... - - 253,527 Gain on sale of fixed assets............................... 48,054 84,090 329,237 Other income............................................... 325,337 77,998 177,464 ---------- ---------- ---------- Total noninterest income............................. 2,327,018 2,443,033 3,196,934 ---------- ---------- ---------- Noninterest expense: Salaries, wages and employee benefits...................... 2,344,746 2,664,660 3,075,523 Occupancy and equipment.................................... 1,293,803 1,609,539 1,790,356 Office operations and supplies............................. 433,557 454,200 777,112 Marketing and public relations............................. 82,692 109,367 158,698 Professional services...................................... 283,671 232,662 544,083 Data processing............................................ 639,854 808,012 971,503 Deposit insurance assessments.............................. 36,258 150,042 169,102 Other operating............................................ 980,332 1,009,165 1,315,019 ---------- ---------- ---------- Total noninterest expense............................ 6,094,913 7,037,647 8,801,396 ---------- ---------- ---------- Net loss............................................. $ (216,583) $ (869,503) $ (754,720) ========== ========== ========== Net loss per common share--basic and diluted.................... $ (0.20) $ (0.79) $ (0.72) ========== ========== ========== Weighted average number of common shares....................... 1,101,247 1,099,520 1,049,166 ========== ========== ==========
The accompanying notes are an integral part of these statements. 41 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 2002, 2001 and 2000
Series A Accumulated Total Compre- preferred stock Common stock Additional other share- hensive ---------------- ------------------ paid-in Accumulated comprehensive holders' income Shares Amount Shares Amount capital deficit income (loss) equity (loss) -------- ------ -------- -------- ----------- ------------ ------------ --------- ------ Balance at December 31, 1999........ 143,150 $1,432 1,028,753 $10,288 $13,870,169 $(4,658,391) $(196,183) $9,027,315 Proceeds from issuance of common stock....... - - 70,668 706 847,315 - - 848,021 Unrealized gains on investment securities - - - - - - 228,893 228,893 228,893 Net loss................ - - - - - (754,720) - (754,720) (754,720) ------- ------ --------- ------- ----------- ----------- ---------- ---------- --------- Total comprehensive income (loss)........... $(525,827) ========= Balance at December 31, 2000........ 143,150 $1,432 1,099,421 $10,994 $14,717,484 $(5,413,111) $ 32,710 $9,349,509 Proceeds from issuance of common stock...... 967 10 11,586 11,596 Unrealized gains on investment securities 66,109 66,109 $ 66,109 Net loss................ (869,503) (869,503) (869,503) ------- ------ --------- ------- ----------- ----------- ---------- ---------- --------- Total comprehensive income (loss)........... $(803,394) ========= Balance at December 31, 2001........ 143,150 1,432 1,100,388 11,004 14,729,070 (6,282,614) 98,819 8,557,711 Proceeds from issuance of common stock....... 1,700 17 20,383 20,400 Unrealized gains on investment securities. 138,613 138,613 138,613 Net loss................ (216,583) (216,583) (216,583) ------- ------ --------- ------- ----------- ----------- ---------- ---------- --------- Total comprehensive income (loss)........... $ (77,970) ========= Balance at December 31, 2002....... 143,150 $1,432 1,102,088 $11,021 $14,749,453 $(6,499,197) $ 237,432 $8,500,141 ======= ====== ========= ======= =========== =========== ========== ==========
The accompanying notes are an integral part of this statement. 42 United Bancshares, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ----------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Cash flows from operating activities: Net loss................................................... $ (216,583) $ (869,503) $ (754,720) Adjustments to reconcile net loss to net cash used in operating activities: Provision for loan losses............................... 175,000 335,000 565,000 Gain on sale of loans................................... - (18,931) Gain on sale of fixed assets............................ (48,054) (84,090) (329,237) (Gain)loss on sale of investment securities............. (25,789) (78,456) 200,070 Depreciation and amortization........................... 673,361 772,742 959,158 (Increase) decrease in accrued interest receivable and other assets.......................................... 702,412 (35,995) 1,470,150 Decrease in accrued interest payable and other liabilities..................................... (73,151) (257,763) (1,065,172) ---------- ---------- ---------- Net cash provided by (used in) operating activities.. 1,187,196 (218,065) 1,026,318 ---------- ---------- ---------- Cash flows from investing activities: Purchase of available-for-sale investments................. (10,792,294) (14,859,870) (1,737,678) Purchase of held-to-maturity investments................... (2,247,096) (3,145,558) (2,636,746) Proceeds from maturity and principal reductions of available-for-sale investments.......................... 9,936,685 8,674,401 951,885 Proceeds from maturity and principal reductions of held-to-maturity investments............................ 6,568,297 15,315,665 982,708 Proceeds from sale of investments available-for-sale....... 1,091,063 3,487,208 18,888,327 Proceeds from sale of student loans........................ - 2,574,775 Proceeds from sale of deposits to other financial institutions - (6,544,666) Net (increase)decrease in loans............................ (1,341,919) 2,116,573 11,580,215 Purchase of premises and equipment......................... (182,004) (78,265) (1,566,672) ----------- ----------- ----------- Net cash used in investing activities................ 3,032,732 11,510,154 22,492,148 ----------- ----------- ----------- Cash flows from financing activities: Net decrease in deposits................................... (2,493,218) (3,815,587) (34,983,620) Repayments on long-term debt............................... - (9,203) Net proceeds from issuance of common stock................. 20,400 11,596 848,021 ----------- ----------- ----------- Net cash used in financing activities................ (2,472,818) (3,803,991) (33,144,802) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents. 1,747,110 7,488,098 (10,626,336) ----------- ----------- ----------- Cash and cash equivalents at beginning of year................. 13,781,978 6,293,880 16,920,216 ----------- ----------- ----------- Cash and cash equivalents at end of year....................... $15,529,088 $13,781,978 $ 6,293,880 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the year for interest..................... $ 1,013,450 $ 1,542,963 $ 3,108,753 =========== =========== ===========
The accompanying notes are an integral part of these statements. 43 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001, and 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of United Bancshares, Inc. (the Company) and its wholly owned subsidiary, United Bank of Philadelphia (the Bank). All significant intercompany transactions and balances have been eliminated. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold on an overnight basis. Securities Held-to-Maturity Bonds, notes, and debentures for which the Bank has both the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Securities Available-for-Sale Available-for-sale securities consist of bonds, notes and debentures, and certain equity securities for which the Bank does not have positive intent to hold to maturity. These securities are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried as a separate component of shareholders' equity net of related income tax effects. Gains and losses on the sale of available-for-sale securities are determined by the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Loans The Bank has both the positive intent and ability to hold its loans to maturity. These loans are stated at the amount of unpaid principal, reduced by net unearned discount and an allowance for loan losses. Interest income on loans is recognized as earned based on contractual interest rates applied to daily principal amounts outstanding and accretion of discount. It is the Bank's policy to discontinue the accrual of interest income when a default of principal or interest exists for a period of 90 days except when, in management's judgment, the collection of principal and interest is reasonably anticipated or adequate collateral exists. Interest received on nonaccrual loans is either applied against principal or reported as interest income according to management's judgment as to collectibility of principal. When interest accruals are discontinued, interest credited to income is reversed and the loan is classified as nonperforming. Unearned discount is amortized over the weighted average maturity of the mortgage loan portfolio. (Continued) 44 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2001, 2000, and 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield. The Bank is amortizing these amounts over the contractual life of the loan. Loans Held-for-Sale Loans held-for-sale are carried at the aggregate of lower of cost or market value. The Bank had no loans held for sale as of December 31, 2002. For purchased loans, the discount remaining after the loan loss allocation is being amortized over the remaining life of the purchased loans using the interest method. Allowance for Loan Losses The Bank adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan Income Recognition and Disclosures." Under SFAS No. 114, the allowance for loan losses related to "impaired loans" is based on the discounted cash flows using the impaired loans' initial effective interest rate as the discount rate, or the fair value of the collateral for collateral-dependent loans. A loan is impaired when it meets the criteria to be placed on nonaccrual status. Loans that are evaluated for impairment pursuant to SFAS No. 114 are assessed on a loan-by-loan basis and include only commercial nonaccrual loans. Large groups of smaller, homogeneous loans, such as credit cards, student loans, residential mortgages, and other student loans, are evaluated collectively for impairment. The allowance for loan losses is maintained at a level considered adequate to provide for potential losses in the loan portfolio. The allowance is increased by provisions charged to operating expenses and reduced by charge-offs net of recoveries. Management's determination of the adequacy of the allowance is based on continuous credit reviews of the loan portfolio, consideration of the current economic conditions, review of specific problem loans, and other relevant factors. This evaluation is subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. However, actual losses on specific loans, which are encompassed in the analysis, may vary from estimated losses. 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. On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. However, SFAS No. 144 makes changes to the scope and certain measurement requirements of existing accounting guidance. SFAS No. 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. The adoption of this statement did not have an impact on the financial condition or results of operations of the Company. 45 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2001, 2000, and 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Income Taxes The liability method is used in accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Earnings (Loss) Per Share The Company follows the provisions of SFAS No. 128, which eliminates primary and fully diluted earnings per share (EPS) and requires presentation of basic and diluted EPS in conjunction with the disclosure of the methodology used in computing such EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Stock-based Compensation The Bank accounts for stock options under SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. At December 31, 2002, the Company had one stock-based employee compensation plan, which is more fully described in note 12. The Bank account 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 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. (Continued) 46 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001, and 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued The following table illustrates the effect on net income and earnings (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) 2002 2001 -------- -------- Net loss As reported.................................. $ (217) $ (870) Less: Stock-based compensation costs determined under fair value-based Method for all awards ................. - - Pro forma.................................... $ (217) $ (870) Basic and Diluted loss per share As reported.................................. $ (0.20) $ (0.79) Pro forma.................................... $ (0.20) $ (0.79) 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. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June, 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and in June, 2000, by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS No. 133). SFAS No. 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. (Continued) 47 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001, and 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Under SFAS No. 133, an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized assets or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized as hedge accounting are recognized in current year earnings. SFAS No. 133 is required for all fiscal quarters or fiscal years beginning after June 15, 2000. On April 1, 2000, the Company adopted SFAS No. 133. Concurrent with the adoption, the Company reclassified approximately $6.1 million of investment securities from held-to-maturity to available-for-sale. Subsequent to the reclassification, the Company transferred approximately $9.5 million of investment securities from available-for-sale to trading. In June 2000, the Company recorded a loss on the sale of these securities of $127,000. Statement of Financial Accounting Standards No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments," (SFAS No. 119) requires disclosures about financial instruments, which are defined as futures, forwards, swap and option contracts and other financial instruments with similar characteristics. On-balance sheet receivables and payables are excluded from this definition. The Company did not hold any derivative financial instruments as defined by SFAS No. 119 at December 31, 2002 or 2001. Loans held-for-sale: Fair values are estimated using quoted rates based upon secondary market sources for similar loans. Loans: The fair value of loans was estimated using a discounted cash flow analysis, which considered estimated prepayments and amortizations. Prepayments and discount rates were based on current marketplace estimates and pricing. Residential mortgage loans were discounted at the current effective yield, including fees, of conventional loans, adjusted for their maturities with a spread to the Treasury yield curve. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are equal to the amounts payable on demand at the reporting date (e.g., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate the fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation. The Treasury Yield Curve was utilized for discounting cash flows as it approximates the average marketplace certificate of deposit rates across the relevant maturity spectrum. Commitments to extend credit: The carrying amounts for commitments to extend credit approximate fair value as such commitments are not substantially different from the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparts. (Continued) 48 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001, and 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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, $178,078 and $176,818 for the year ended December 31, 2002, 2001 and 2000, respectively. The Bank tested the core deposit intangible for impairment. No impairment has been recognized On October 1, 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 147, "Acquisitions of Certain Financial Institutions." SFAS No. 147 removes acquisitions of financial institutions from the scope of SFAS 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," and requires that those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations and SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 147 also requires that the acquisition of a less-than-whole financial institution, such as a branch, be accounted for as a business combination if the transferred assets and activities constitute a business. In addition, SFAS No. 147 amends SFAS 144, "Accounting for the Impairment of Disposal of Long-Lived Assets," to include within its scope long-term customer relationship intangible assets of financial institutions such as depositor-relationship intangible assets. Foreclosed Real Estate Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value less the cost to sell. Revenue and expenses from operations and changes in valuation allowance are charged to operations. The historical average holding period for such properties is 24 months. 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. (Continued) 49 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001, and 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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 2002 presentation. Comprehensive Income The Bank follows SFAS No. 130, which establishes new standards for reporting comprehensive income that includes net income as well as certain other items that result in a change to equity during the period. These financial statements have been reclassified to reflect the provisions of SFAS No. 130. The income tax effects allocated to comprehensive income (loss) are as follows: (Continued) 50 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001, and 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 2002 -------------------------------------------- Before tax Tax Net of tax amount benefit(expense) amount ---------- --------------- ---------- Unrealized gains on securities Unrealized holding losses arising during period $ 232,674 $ (76,782) $ 155,892 Less: reclassification adjustment for gains realized in net income 25,789 (8,510) 17,279 --------- --------- --------- Other comprehensive income, net $ 206,885 $ (68,272) $ 138,613 ========= ========= =========
December 31, 2001 -------------------------------------------- Before tax Tax Net of tax amount benefit(expense) amount ---------- --------------- ---------- Unrealized gains on securities Unrealized holding gains arising during period $ 177,126 $ (58,451) $ 118,675 Less: reclassification adjustment for gains realized in net income 78,456 (25,890) 52,566 --------- --------- --------- Other comprehensive income, net $ 98,670 $ (32,561) $ 66,109 ========= ========= =========
December 31, 2000 -------------------------------------------- Before tax Tax Net of tax amount benefit(expense) amount ---------- --------------- ---------- Unrealized gains on securities Unrealized holding gains arising during period $ 543,166 $(180,826) $ 362,340 Less reclassification adjustment for losses realized in net income (200,070) 66,623 (133,447) --------- --------- --------- Other comprehensive income, net $ 343,096 $(114,203) $ 228,893 ========= ========= =========
New Accounting Pronouncements In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest entity to be consolidated by a a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but it which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. The Company is in the process of determing what impact, if any, the adoption of the provisions of FIN 46 will have upon its financial condition or results of operations. 51 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001 and 2000 2. 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, 2002. 3. INVESTMENTS The amortized cost, gross unrealized holding gains and losses, and estimated market value of the available-for-sale and held-to-maturity investment securities by major security type at December 31, 2002 and 2001 are as follows:
2002 ------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Market cost gains losses value ----------- ---------- ---------- ----------- Available-for-sale: Other Government securities............ $ 4,299,596 $ 62,189 $ $ 4,361,785 Mortgage-backed securities............. 9,286,548 292,187 9,578,735 ----------- ---------- ---------- ----------- Total debt securities.................. 13,586,144 354,376 13,940,520 Investments in mutual funds............ 106,490 106,490 Other investments...................... 287,350 287,350 ----------- ---------- ---------- ----------- $13,979,984 $ 354,376 $ - $14,334,360 =========== ========== ========== =========== Held-to-maturity: Other Government securities............ $ 500,000 $ 8,985 $ $ 508,985 Mortgage-backed securities............. 6,683,403 250,482 6,933,885 ----------- ---------- ---------- ----------- $ 7,183,403 $ 259,467 $ - $ 7,442,870 =========== ========== ========== ===========
2001 ------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Market cost gains losses value ----------- ---------- ---------- ----------- Available-for-sale: Other Government securities............ $ 5,048,639 $ 49,241 $ $ 5,097,880 Mortgage-backed securities............. 8,751,555 98,250 8,849,805 ----------- ---------- ---------- ----------- Total debt securities.................. 13,800,194 147,491 13,947,685 Investments in mutual funds............ 104,608 104,608 Other investments...................... 287,350 287,350 ----------- ---------- ---------- ----------- $14,192,152 $ 147,491 $ - $14,339,643 =========== ========== ========== =========== Held-to-maturity: Other Government securities............ $ 3,735,435 $ 117,612 $ $ 3,853,047 Mortgage-backed securities............. 7,730,937 151,162 7,882,099 ----------- ---------- ---------- ----------- $11,466,372 $ 268,774 $ - $11,735,146 =========== ========== ========== ===========
(Continued) 52 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001 and 2000 3. INVESTMENTS - Continued Maturities of investment securities classified as available-for-sale and held-to-maturity at December 31, 2002 were as follows. Expected maturities may differ from contractual maturities.
Amortized Market cost value ------------- ----------- Available-for-sale: Due after one month through three years....... $ - $ - Due after three year through five years....... 750,000 750,000 Due after five years through fifteen years.... 3,549,596 3,611,785 Mortgage-backed securities.................... 9,286,548 9,578,735 ----------- ----------- Total debt securities......................... 13,586,144 13,940,520 Investments in mutual funds................... 106,490 106,490 Other investments............................. 287,350 287,350 ----------- ----------- $13,979,984 $14,334,360 =========== =========== Held-to-maturity: Due in one month through three years.......... $ - $ - Due after three years through five years...... 250,000 255,625 Due after five years through fifteen years.... 250,000 253,360 Mortgage-backed securities.................... 6,683,403 6,933,885 ----------- ----------- $ 7,183,403 $ 7,442,870 =========== ===========
The Bank recorded a gain of $25,789 on the sale of investments during the year ended December 31, 2002. The Bank recorded a gain of $78,456 on the sale of investments during the year ended December 31, 2001. The Bank recorded a loss of $200,070 on the sale of investments during the year ended December 31, 2000. As of December 31, 2002 and 2001, investment securities with a book value of $7,250,989 and $12,839,925, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. 4. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of the net loans is as follows: Assets 2002 2001 ----------- ----------- Commercial and industrial............... $10,854,697 $11,053,584 Commercial real estate.................. 11,897,622 5,504,474 Residential mortgages................... 13,560,602 18,147,893 Consumer loans.......................... 7,820,269 8,293,926 ----------- ----------- Total loans.......................... 44,133,190 42,999,877 Less allowance for loan losses.......... (674,550) (708,156) ----------- ----------- Net loans............................ $43,458,640 $42,291,721 =========== =========== (Continued) 53 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001 and 2000 4. LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued As of December 31, 2002 and 2001, the Bank had loans to certain officers and directors and their affiliated interests in aggregate dollar amounts of $839,000 and $1,088,000, respectively. During 2002 and 2001, there were no new loans to related parties and repayments amounted to $249,000 and $375,900, respectively. The balance of impaired loans was $ 1,951,000 and $412,000 as of December 31, 2002 and 2001, 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 impaired loan balance included $651,000 and $412,000 of non-accrual loans at December 31, 2002 and 2001, respectively . The allowance for loan loss associated with the $1,951,000 of impaired loans was $402,000 at December 31, 2002. Interest income recognized on impaired loans during 2002 and 2001 was $104,000 and $25,000, respectively. The Bank recognizes income on impaired loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. If these factors do not exist, the Bank will not recognize income on such loans. At December 31, 2002 and 2001, unamortized deferred fees and costs totaled $108,670 and $93,853, respectively. Changes in the allowance for possible loan losses are as follows: 2002 2001 2000 --------- --------- ----------- Balance, beginning of year..... $ 708,156 $ 562,174 $ 1,566,642 Provision...................... 175,000 335,000 565,000 Charge-offs.................... (361,656) (321,681) (1,720,755) Recoveries..................... 153,050 132,663 151,287 --------- --------- ----------- Balance, end of year........... $ 674,550 $ 708,156 $ 562,174 ========= ========= =========== 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, 2002, approximately 18.71% of the Bank's commercial loan portfolio was concentrated in loans made to religious organizations. 5. BANK PREMISES AND EQUIPMENT The major classes of bank premises and equipment and the total accumulated depreciation are as follows:
Estimated useful life 2002 2001 ------------ ----------- ------------ Buildings and leasehold improvements.... 10-15 years $ 2,870,558 $ 3,617,403 Furniture and equipment................. 3- 7 years 1,411,250 3,140,428 ----------- ----------- 4,281,808 6,757,831 Less accumulated depreciation........... (1,669,200) (3,779,566) ----------- ----------- $ 2,612,608 $ 2,978,265 =========== ===========
(Continued) 54 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001 and 2000 5. BANK PREMISES AND EQUIPMENT - Continued 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, 2002, 2001 and 2000 was $364,469, $465,825 and $511,836. Future minimum lease payments under operating leases are as follows: Operating Year ending December 31, leases ------------------------ ------------ 2003...................................... $ 277,278 2004...................................... 240,163 2005...................................... 84,090 2006...................................... 70,433 2007...................................... 47,504 Thereafter................................ 48,929 ---------- Total minimum lease payments.............. $ 768,397 ========== 6. DEPOSITS At December 31, 2002, the scheduled maturities of time deposits (certificates of deposit) are as follows (dollars in thousands): 2003...................................... $ 20,678 2004...................................... 1,308 2005...................................... 971 2006...................................... 182 2007...................................... - Thereafter................................ 5 ---------- $ 23,144 ========== 7. BORROWINGS As of December 31, 2002, the Bank has outstanding two borrowing arrangements with financial institutions, collateralized by investment securities. One arrangement is a fully secured Federal Funds line of credit with a correspondent bank totaling $2 million, the second is a Master Repurchase Agreement with another financial institution. Borrowings under these agreements have interest rates that fluctuate based on market conditions. As of December 31, 2002, the Bank had no borrowings outstanding. 55 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001 and 2000 8. CAPITAL STOCK OFFERINGS In June 2002, the Bank received $20,400 and issued 1,700 shares as a result of the purchase of common stock by members of the Bank's board of directors in a limited offering at a price of $12.00 per share. In May 2001 and December 2001, respectively, the Bank received $2,000 and $9,596 and issued 167 and 800 shares, respectively, as a result of the purchase of common stock by two individuals in a limited offering at a price of $12.00 per share. In June 2000 and December 2000, respectively, the Bank received $411,809 and $436,212 and issued 34,317 and 36,351 shares, respectively, as a result of the purchase of common stock by members of the Bank's board of directors in a limited offering at a price of $12.00 per share. 9. INCOME TAXES At December 31, 2002, the Bank has net operating loss carryforwards of approximately $4,680,000 for income tax purposes that begin to expire in 2008 through 2020. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. For financial reporting purposes, a valuation allowance of $1,783,520 and $1,781,306 as of December 31, 2002 and 2001, 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:
2002 2001 ----------- ----------- Deferred tax assets: Provision for loan losses................................ $ 105,778 $ 139,875 Unrealized (gains) losses on investment securities....... (116,944) (48,672) Depreciation............................................. 308,844 189,844 Net operating loss carryforwards......................... 1,592,020 1,597,884 Other.................................................... (106,178) (97,625) Valuation allowance for deferred tax assets.............. (1,783,520) (1,781,306) ----------- ----------- Net deferred tax assets.............................. $ - $ - =========== ===========
2002 2001 2000 --------- ----------- ----------- Effective rate reconciliation: Tax at statutory rate................ $ (73,638) $ (295,631) $ (256,073) Nondeductible expenses............... 3,152 2,416 4,903 Increase in valuation allowance...... 70,486 174,938 155,997 Other................................ - 118,277 95,173 --------- ----------- ----------- Total tax expense................ $ - $ - $ - ========= =========== ===========
56 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001 and 2000 10. FINANCIAL INSTRUMENT COMMITMENTS The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit, which are conditional commitments issued by the Bank to guarantee the performance of an obligation of a customer to a third party. Both arrangements have credit risk essentially the same as that involved in extending loans and are subject to the Bank's normal credit policies. Collateral may be obtained based on management's assessment of the customer. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments is represented by the contractual amount of those instruments. Summaries of the Bank's financial instrument commitments are as follows: 2002 2001 ----------- ----------- Commitments to extend credit............ $ 7,939,136 $ 5,325,662 Outstanding letters of credit........... 57,155 64,625 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and unused credit card lines. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. 11. FAIR VALUES OF FINANCIAL INSTRUMENTS Fair value information about financial instruments is required to be disclosed, whether or not recognized in the balance sheet, where it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flows or other valuation techniques. Those techniques are significantly affected by assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank. (Continued) 57 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001 and 2000 11. FAIR VALUES OF FINANCIAL INSTRUMENTS-Continued
2002 2001 ----------------------- ---------------------- Carrying Fair Carrying Fair (Dollars in thousands) amount value amount value -------- -------- -------- -------- Assets: Cash and cash equivalents..................... $ 15,529 $ 15,529 $ 13,781 $ 13,781 Investment securities......................... 21,518 21,777 25,806 26,075 Loans, net of allowance for loan losses....... 43,459 41,942 42,291 41,866 Liabilities: Demand deposits............................... 33,291 33,291 32,085 32,085 Savings deposits.............................. 20,494 20,494 23,228 23,228 Time deposits................................. 23,144 23,144 24,110 25,127 Off-balance-sheet: Commitments to extend credit.................. 7,939 7,939 5,326 5,326 Outstanding letters of credit................. 57 57 65 65
12. EMPLOYEE COMPENSATION In June 2000, the Bank entered into two-year employment agreements with its chief executive officer and its chief financial officer covering such items as salaries, bonuses and benefits. The agreements expired in 2002 and were renewed for two more years. These agreements provide for guaranteed minimum annual compensation over the term of the contracts. The Company made no stock-based compensation awards to any employee during 2002, 2001 and 2000. 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. 58 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001 and 2000 13. CONSOLIDATED FINANCIAL INFORMATION--PARENT COMPANY ONLY Condensed Balance Sheets
December 31, ----------------------- (Dollars in thousands) 2002 2001 -------- -------- Assets: Due from banks (subsidiary)........................... $ 289 $ 289 Investment in United Bank of Philadelphia............. 8,211 8,278 -------- -------- Total assets...................................... $ 8,500 $ 8,567 ======== ======== Shareholders' equity: Series A preferred stock.............................. $ 1 $ 1 Common stock.......................................... 11 11 Additional paid-in capital............................ 14,750 14,729 Accumulated deficit................................... (6,499) (6,283) Net unrealized holding gains (losses) on securities available-for-sale.................... 237 99 -------- -------- Total shareholders' equity........................ $ 8,500 $ 8,557 ======== ========
Condensed Statements of Operations
Year ended December 31, ------------------------------ (Dollars in thousands) 2002 2001 2000 ------- ------- ------ Equity in net loss of subsidiary................... $ (217) $ (870) $ (755) ------- ------- ------- Net loss........................................... $ (217) $ (870) $ 755) ======= ======= =======
Condensed Statements of Cash Flows
Year ended December 31, ------------------------------ (Dollars in thousands) 2002 2001 2000 ------- ------- ------ Cash flows from operating activities: Net loss........................................ $ (217) $ (870) $ (755) Equity in net loss of subsidiary................ 217 870 755 ------ ------ ------ Net cash provided by operating activities... - - - ------ ------ ------ Cash flows from investing activities: Investment in subsidiary........................... (20) (12) (847) ------ ------ ------ Net cash used in investing activities.............. (20) (12) (847) ------ ------ ------ Cash flows from financing activities: Issuance of preferred stock..................... - - - Issuance of common stock........................ 20 12 847 ------ ------ ------ Net cash provided by financing activities... 20 12 847 ------ ------ ------ 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 ====== ====== ======
59 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001, and 2000 14. 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). In February 2000, as a result of a regulatory examination completed in December 1999, the Bank entered into a Written Agreement (Agreement) with its primary regulators with regard to, among other things, achievement of agreed-upon capital levels, implementation of a viable earnings/strategic plan, adequate funding of the allowance for loan losses, the completion of a management review and succession plan, and improvement in internal controls. The current Agreement requires the Bank to increase its capital ratio to 6.5% by June 30, 2000 and to 7% at all times thereafter. As of December 31, 2000, the Bank had met the required ratios by implementing strategies that included: increasing profitability, consolidating branches, and soliciting new and additional sources of capital. Management continues to address all matters outlined in the Agreement. 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. As of December 31, 2001, the Bank's tier one leverage capital ratio fell to 6.80% , below the 7% minimum capital ratio required by the Agreement. However, at December 31, 2002, the tier one leverage ratio had improved to 7.12% as a result of the smaller average asset size of the Bank. Management continues to review and revise its capital plan to address the development of new equity. In addition, a profit restoration plan was developed and implemented during 2002 to include numerous expense reduction and profit enhancement strategies. (Continued) 60 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001, and 2000 14. REGULATORY MATTERS - Continued The most recent notification dated February 26, 2003, from the Federal Reserve Bank categorized the Bank as "adequately capitalized" under the regulatory framework for prompt and corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. The Bank's growth, continued losses and the additional provisions to the allowance for loans losses may have an adverse effect on its capital ratios. 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, 2002: Total capital to risk-weighted assets: Consolidated........................ $ 6,854 16.28% $ 3,391 => 8.00% N/A N/A Bank................................ 6,565 15.59 3,368 8.00 $ 4,210 10.00% Tier I capital to risk-weighted assets: Consolidated........................ 6,326 15.02 1,696 4.00 N/A N/A Bank................................ 6,037 14.34 1,684 4.00 $ 2,526 >6.00% Tier I capital to average assets: Consolidated........................ 6,326 7.46 3,402 4.00 N/A N/A Bank................................ 6,037 7.12 3,390 4.00 $ 4,238 >5.00%
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions --------------------- -------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio --------- --------- --------- --------- --------- --------- As of December 31, 2001: Total capital to risk-weighted assets: Consolidated........................ $ 6,850 16.46% $ 3,353 => 8.00% N/A N/A Bank................................ 6,561 15.76 3,330 8.00 $ 4,162 10.00% Tier I capital to risk-weighted assets: Consolidated........................ 6,340 15.23 1,665 4.00 N/A N/A Bank................................ 6,051 14.90 1,625 4.00 $ 2,497 >6.00% Tier I capital to average assets: Consolidated........................ 6,340 7.12 3,573 4.00 N/A N/A Bank................................ 6,051 6.80 3,562 4.00 $ 4,452 >5.00%
61 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001, and 2000 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. The Bank had a One Million Dollar ($1,000,000) unsecured loan participation in a $40.4 million ($40,400,000) line of credit to KMART Corporation. The Bank was repaid the One Million Dollar ($1,000,000) loan participation in full on January 8, 2002. KMART Corporation filed for protection under Chapter 11 of the federal bankruptcy laws on January 22, 2002. The bankruptcy filing by KMART Corporation could expose the Bank to a future claim that the repayment to the Bank of its loan participation was a preference payment. If the preference claim is made and is successful, the Bank may be required to return the One Million Dollar ($1,000,000) loan repayment and incur a loss in that amount to the extent that the Bank can not obtain repayment of the loan participation from KMART Corporation or as an unsecured creditor in the bankruptcy proceeding. As of March 12, 2003, the Bank has not received any notification in regard to this matter. Management does not believe it is probable that the Bank will have to repay the $1,000,000 loan repayment to the bankruptcy court. 16. EARNINGS PER SHARE COMPUTATION In accordance with SFAS No. 128, income (loss) per share is calculated as follows:
Year ended December 31, 2002 --------------------------------------------- Loss Shares Per share (numerator) (denominator) amount ----------- ------------- --------- Net loss.................................. $ (216,583) ========== Basic EPS Income available to stockholders... $ (216,583) 1,101,247 $ (0.20) ========== ========== ========
Year ended December 31, 2001 -------------------------------------------- Loss Shares Per share (numerator) (denominator) amount ----------- ------------- --------- Net loss.................................. $ (869,503) ========== Basic loss per share Loss available to stockholders..... $ (869,503) 1,099,520 $ (0.79) ========== ========= ========
Year ended December 31, 2000 -------------------------------------------- Loss Shares Per share (numerator) (denominator) amount ----------- ------------- ---------- Net loss.................................. $ (754,720) ========== Basic loss per share Loss available to stockholders..... $ (754,720) 1,049,166 $ (0.72) ========== ========= ========
Options to purchase 29,694 shares of common stock were not included in the computation of diluted EPS for the years ended December 31, 2002, 2001 and 2000 because the Company is in a loss position. 62 United Bancshares, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002, 2001, and 2000 17. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) The following summarizes the consolidated results of operations during 2002 and 2001, on a quarterly basis, for United Bancshares, Inc. and Subsidiary:
2002 (Dollars in thousands) ------------------------------------------------ Fourth Third Second First quarter quarter quarter quarter --------- -------- -------- -------- Interest income $ 1,131 $ 1,157 $ 1,169 $ 1,175 Interest expense 201 208 232 265 -------- -------- -------- -------- Net interest income 930 949 937 910 Provisions for loan losses 63 37 38 37 --------- -------- -------- -------- Net interest after provisions for loan losses 867 912 899 873 Non-interest income 492 760 544 531 Non-interest expense 1,482 1,487 1,508 1,618 -------- -------- -------- -------- Net (loss) income $ (123) $ 185 $ (65) $ (214) ======== ======== ======== ========
2001 ------------------------------------------------ Fourth Third Second First quarter quarter quarter quarter --------- -------- -------- -------- Interest income $ 1,247 $ 1,351 $ 1,514 $ 1,524 Interest expense 317 402 412 445 -------- -------- -------- -------- Net income 930 949 1,102 1,079 Provisions for loan losses 275 30 20 10 -------- -------- -------- -------- Net interest after provisions for loan losses 655 919 1,082 1,069 Non-interest income 630 576 652 585 Non-interest expense 1,769 1,768 1,779 1,722 -------- -------- -------- -------- Net loss $ (484) $ (273) $ (45) $ (68) ======== ======== ======== ========
63 EX-10 3 exh10a.txt EX 10.A LEASE FOR BRANCH OFFICE - 2 PENN CENTER Exhibit 10(a) LEASE FOR BRANCH OFFICE LOCATED AT TWO PENN CENTER ORESTES REAL ESTATE CORPORATION H V (LESSOR) -------------------------------------------- UNITED BANK OF PHILADELPHIA (LESSEE) ------------------------------------ SPACE: APPROXIMATELY 4,769 RENTABLE SQUARE FEET ON GROUND FLOOR, ---------------------------- TWO PENN CENTER PLAZA ---------------------------- INITIAL TERM: TEN (10) YEARS ---------------------------- TABLE OF CONTENTS Article Page 1. Term . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Rent . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3. Security Deposit . . . . . . . . . . . . . . . . . . . . 8 4. Condition of Premises and Lessee's Work . . . . . . . . 9 5. Use . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6. Occupancy, Assignment and Subletting . . . . . . . . . .17 7. Alterations . . . . . . . . . . . . . . . . . . . . . . 18 8. Rules and Regulations . . . . . . . . . . . . . . . . . 19 9. Fire or Other Casualty; Waiver of Subrogation . . . . . 20 10. Lessor's Right to Enter . . . . . . . . . . . . . . . . 22 11. Insurance . . . . . . . . . . . . . . . . . . . . . . . 22 12. Release of Lessor . . . . . . . . . . . . . . . . . . . 24 13. Indemnity . . . . . . . . . . . . . . . . . . . . . . . 24 14. Repair and Maintenance; Other Services . . . . . . . . 25 15. Utilities . . . . . . . . . . . . . . . . . . . . . . . 26 16. Events of Default-Remedies . . . . . .. . . . . . . . . 27 17. Intentionally Omitted . . . . . . . . . . . . . . . . . 32 18. Subordination . . . . . . . . . . . . . . . . . . . . . 32 19. Condemnation . . . . . . . . . . . . . . . . . . . . . 32 20. Limitation on Lessor's Liability . . . . . . . . . . . 33 21. Parties Bound . . . . . . . . . . . . . . . . . . . . . 33 22. Notices . . . . . . . . . . . . . . . . . . . . . . . 34 23. Condition of Premises . . . . . . . . . . . . . . . . 34 24. Number and Gender . . . . . . . . .. . . . . . . . . . 35 25. Captions . . . . . . . . . . . . . . . . . . . . . . . 35 26. Amendments . . . . . . . . . . . . . . . . . . . . . . 35 27. Partial Invalidity . . . . . . . . . . . . . . . . . . 35 28. Lessee's Estoppel Certificate . . . . . . . . . . . . . 35 29. Holding Over . . . . . . . . . . . . . . . . . . . . . 36 30. Entire Agreement . . . . . . . . . . . . . . . . . . . 36 31. Changes to Building . . . . . . . . . . . . . . . . . . 36 32. Brokers . . . . . . . . . . . . . . . . . . . . . . . . 37 33. Liens . . . . . . . . . . . . . . . . . . . . . . . . . 37 34. Existing Lease . . . . . . . . . . . . . . . . . . . . 38 35. Untenantability . . . . . . . . . . . . . . . . . . . . 39 36. Lessor's Additional Representations and Warranties . . 39 37. Lessor's Additional Covenants . . . . . . . . . . . . . 40 38. Lessor's Default . . . . . . . . . . . . . . . . . . . 40 39. Communications Antenna or Dish . . . . . . . . . . . . 41 40. Consents and Approvals . . . . . . . . . . . . . . . . 41 41. Authority . . . . . . . . . . . . . . . . . . . . . . . 41 42. Condition Precedent . . . . . . . . . . . . . . . . . . 41 Exhibits "A" = Location of the premises. "C" = Rules and Regulations. LEASE THIS LEASE made this 2nd day of February, 1994, between Orestes Real Estate Corporation B.V., a Netherlands corporation ("Lessor"), and United Bank of Philadelphia, a banking corporation organized under the laws of the Commonwealth of Pennsylvania ("Lessee"). W I T N E S S E T H: Lessor hereby demises and lets unto Lessee all that certain space constituting a portion of the ground floor level (such portion, the "premises"), as shown on the plan marked Exhibit "All attached hereto and made a part hereof, in the building known as Two Penn Center Plaza (the "building") in Philadelphia County, Philadelphia, Pennsylvania, TOGETHER WITH, and appurtenant to the premises, the right to `use in common with Lessor and other tenants, occupants and visitors to the building, the building lobby and the common walkways and sidewalks of the lot on which the building is located. Lessor and Lessee agree that the premises consists of approximately 4,769 rentable square feet of space (the "Floor Area"). The Floor Area is measured from the outside of exterior walls, shaft walls or corridors or the center of any common walls, as the case may be. This lease is made on and is subject to the following terms and conditions: Article 1. Term. (A) The term of this lease shall, in addition to the preoccupancy period described below, consist of an initial term and, subject to the provisions of clause (C) of this Article 1, up to two (2) extended terms of five (5) years each. As used in this lease, the phrase "preoccupancy period" shall mean the period beginning on the date hereof and ending on the earlier of the date on which Lessee opens for business with the public at the premises or the date which is four (4) months after the date on which Lessee has delivered this lease, as executed by Lessee, to Lessor, subject to extension as provided below. Lessor shall promptly execute and deliver this lease to Lessee following its receipt, and shall confirm to Lessee Lessor's obligation to advance the Allowance (as defined below) pending such execution and delivery by Lessor. During the preoccupancy period, no rent or other sums shall be due from Lessee hereunder but Lessee shall, in common with Lessor, have access to the premises for the purpose of designing and constructing Lessee's Work (as hereinafter defined). Lessor and Lessee shall cooperate in scheduling the construction of Lessee's Work and Lessor's Work (as hereinafter defined), which shall also be completed during the preoccupancy period, so that all such work may be completed in timely fashion within four (4) months from the date on which Lessee delivers this lease to Lessor; provided, however, that Lessee's Work shall in no event interfere with the completion of Lessor's Work. The initial term of this lease shall be ten (10) years beginning on the date (the "Commencement Date") which is the day immediately following the expiration of the preoccupancy period, and ending on the last day of the 120th full calendar month following the Commencement Date (such date, the "Expiration Date") (or until such term shall sooner cease and terminate as hereinafter provided). It is understood and agreed that if the term of this lease commences on a day other than the first day of a calendar month, regardless of the reason therefor, the term hereof shall end on the last day of the calendar month immediately preceding the month in which the term hereof would expire if the full stated terns hereof were measured from the actual Commencement Date of the lease. When the Commencement and Expiration Dates have been determined as herein provided, either party hereto shall, at the written request of the other, join in the execution of a written addendum to this lease confirming such Commencement and Expiration Dates. (B) For the purposes of this lease, the term "lease year" shall mean a period of 12 consecutive calendar months, the first full lease year commencing on the Commencement Date, and each succeeding lease year shall commence on the anniversary date of the first lease year. Any portion of a lease year which is less than a full lease year shall be a partial lease year. (C) Provided that there is no outstanding and uncured event of default (as defined below) under this lease, Lessee shall have the option, subject to the terms and conditions of this clause (C), to extend the term of this lease for two (2) additional consecutive renewal periods of five (5) years each, the first renewal period commencing on the first day following the day on which the initial term expires and terminating sixty (60) calendar months thereafter, and the second renewal period (which shall only be available if Lessee has properly exercised the first renewal period) commencing on the first day following the day on which the first renewal period expires and terminating sixty (60) calendar months thereafter, such renewal periods being upon all the same terms and conditions contained herein (except that no further renewal options shall be created in favor of Lessee) or then in effect, except that the minimum rent due for -2- such renewal periods, determined separately for each renewal period, shall be determined as provided in Article 2, below. In the event Lessee desires to exercise the foregoing renewal options, Lessee shall notify Lessor, in writing (the "First Notice"), not less than nine (9) calendar months before the expiration date of the then-current term. Promptly following Lessor's receipt of Lessee's First Notice, the Market Rent (as defined in Article 2 hereof) shall be determined pursuant to provisions of Article 2 for the applicable renewal period. Lessee may only exercise the renewal options provided herein by sending the Second Notice (as defined in Article 2 hereof) to Lessor on or before the date which is six (6) months prior to the expiration date of the then-current term, time being of the essence, which Second Notice shall constitute formal exercise of the applicable renewal option. If Lessee fails to send the Second Notice in the manner and within the time herein set forth or cancels the First Notice as provided in Article 2 hereof in timely fashion, this lease shall expire on the expiration date of the then-current term. If Lessee properly exercises the renewal option by sending the Second Notice, this lease shall continue through the applicable renewal period on the terms and conditions herein set forth but at the new minimum rent determined pursuant to Article 2 hereof, and such change in minimum rent shall not impair or affect in any manner Lessee's obligations with respect to additional rent hereunder. Lessee's Second Notice shall constitute an amendment to this lease and no further amendment shall be necessary in order to confirm the terms of such renewal option, but Lessee shall, at Lessor's written request, enter into an appropriate written amendment to this lease confirming the exercise of such renewal option, the minimum rent due hereunder for the applicable renewal period and the new Expiration Date of this lease. If Lessee does so exercise said renewal option, the minimum rent shall be determined pursuant to Article 2 hereof and shall be binding on both parties when so determined. Lessee shall have no other right or option to extend the term of this lease except as expressly set forth in this clause (C). Article 2. Rent. (A) Minimum Rent. (i) Lessee covenants and agrees to pay to Lessor annual minimum rent in the amounts set forth below for the periods indicated, which annual minimum rent shall be paid by Lessee without notice, demand or, except as otherwise expressly provided to the contrary in this lease, set-off in the respective monthly installments set forth below, in advance, on or before the first day of each calendar month of the germ of this lease. - 3 - Minimum rent for the first full month of the term and any preceding partial calendar month shall be payable upon execution of this lease. If there is a partial calendar month at the beginning of the initial term of this lease, the minimum rent for such partial month, prorated on a per diem basis, shall be paid on the Commencement Date. (ii) The annual minimum rent due under this lease, and the monthly installments thereof, shall be in the following amounts for the periods indicated: Portion of Lease Term Annual Minimum Rent Monthly Installment lease year 1 $ 88,226.50 $ 7,352.21 lease year 2 $ 92,995.50 $ 7,749.63 lease year 3 $104,918.00 $ 8,743.17 lease year 4 $138,301.00 $11,525.08 lease year 5 $147,839.00 $12,319.92 lease year 6 through 10; $157,377.00 $13,114.75 inclusive lease year 11 through 15, 90% of Market Rent (as defined and inclusive (the determined below) first renewal period) if applicable, and lease years 16 through 20, inclusive, (the second renewal period), if applicable If minimum rent is charged at more than one rate during any calendar month, it shall be prorated on a per diem basis. As used herein the phrase "Market Rent" shall mean the amount determined by reference to the market for space in the building and in comparable buildings in center city Philadelphia that a willing landlord would offer and a willing tenant would accept in an arms length transaction for a new lease of such space (a) commencing on the first day of the relevant renewal term, (b) expiring on the fifth anniversary of such commencement, (c) providing for no free rent, no work to be done by the landlord to prepare the premises for the tenant, no contribution by the landlord toward the tenant's cost to so prepare the premises, and no other allowances or lease concessions, and (d) having a 1994 base year for purposes of determining real estate tax escalations. In determining the Market Rent, consideration shall also be given to applicable measurement and loss factors, lengths -4- of lease term, differences in size of the space demised, the age and location of the buildings, the amenities in the buildings, differences in base years or stop amounts and other factors normally taken into account in determining fair market rent. The Market Rent shall be determined as follows (and determined separately for the first and second renewal periods, if applicable): Within thirty (30) days following Lessor's receipt of Lessee's First Notice, Lessor will notify Lessee in writing (the "Lessor's Notice") of Lessor's determination of the Market Rent for the applicable renewal period, with the minimum annual rent for such renewal period being equal to 900 of the Market Rent, as aforesaid. Within thirty (30) days after receipt of the Lessor's Notice, Lessee shall notify Lessor in writing (the "Second Notice") that Lessee (A) rescinds the First Notice, in which case Lessee's exercise of the relevant option shall be null, void arid of no force or effect, (B) accepts Lessor's determination of the Market Rent, or (C) elects to have the Market Rent determined by appraisal. If Lessee elects to have the Market Rent determined by appraisal, Lessee shall in the Second Notice appoint a qualified and experienced real estate appraiser holding the MAI designation or its equivalent. Lessor, within ten (10) days following receipt of such notice, shall designate a second appraiser having such qualifications. If Lessor fails to appoint an appraiser within said 10-day period, the single appraiser selected by Lessee shall determine the Market Rent for the applicable renewal period. The two appraisers, if so selected, shall appoint a third appraiser having such qualifications, and the three appraisers so selected shall be instructed to meet and, within thirty (30) days following the appointment of the third appraiser, to determine by majority vote the fair market. rental value of the premises for the applicable renewal period, taking into account all relevant factors, and to advise the parties hereto in writing of their decision. The decision of such appraisers shall be conclusive and binding on the parties hereto, provided always that Lessee sends the Second Notice to Lessor as herein provided. The fees and expenses of such appraisers shall be paid by Lessor and Lessee in equal shares. Following the -5- determination of the minimum annual rent for the applicable renewal term pursuant to this Article 2, either party shall upon the request of the other enter into an appropriate written amendment to this lease confirming the exercise of the renewal option, the minimum rent due hereunder for the applicable renewal period and the new Expiration Date of this lease. Notwithstanding anything contained in this Lease to the contrary, if Market Rent is to be determined by appraisal, Lessee shall have the right, exercisable in writing at any time prior to the determination of the Market Rent by the appraisers, to withdraw the exercise of the applicable option, and in such case the prior exercise of such option shall be null and void and of no force or effect. If Lessee withdraws the exercise of any option as aforesaid, then, Lessee shall be responsible for all of the fees and expenses of the appraisers, including the appraiser appointed by Lessor. (iii) All rent and other sums to be paid by Lessee to Lessor hereunder shall be sent to Post Office Box 7777 W2930, Philadelphia, Pennsylvania 19175, or to such other address as Lessor may from time to time designate in writing. (B) Real Estate Taxes; Other Business Taxes. (i) Lessee will pay to Lessor, as additional rent, 0.958% of the real estate taxes assessed against the land and building of which the premises are a part iii excess of the real estate taxes for 1994 (the "base year"), such amounts to be paid in equal monthly installments of one-twelfth (1/12th) of the amount due on the date when minimum rent is due hereunder beginning with the month of January, 1995, at the earliest. Lessor hereby confirms to Lessee that the foregoing percentage has been determined by dividing the rentable square footage of the premises by 497,834, the total rentable square footage of the building. Lessor agrees with Lessee that if the real estate taxes for the base year are reduced by reason of any tax appeal brought by Lessor or otherwise, Lessor shall nevertheless use the real estate taxes as originally billed and assessed by the City of Philadelphia for the base year in determining Lessee's obligations hereunder, but Lessee shall not be entitled to any refund as a result of such reduction in base year real estate taxes. -6- For purposes of this paragraph, a tax bill issued by the applicable governmental authorities shall be sufficient evidence of the real estate taxes assessed against the land and building of which the premises are a part and the amount shown on such bill shall be used for calculation of the amount to be paid by Lessee. Any adjustment of rent made pursuant to this paragraph (a) shall be based upon the gross amount (i.e., not discounted) of such taxes for the base year and all subsequent years and (b) shall not include any interest or penalties arising from any late payment by Lessor. If adjustment of rent becomes necessary, pursuant to this paragraph, Lessor shall so notify Lessee, and all monthly installments of rent due thereafter (from and after January 1, 1995) shall reflect 1/12 of the amount of such adjustment (which will be calculated on an annual basis) until a new adjustment becomes effective pursuant to this paragraph. If the adjustment applies to a period for which rent has already been paid, Lessee will pay Lessor the difference in rent for such period promptly upon demand. Any such adjustment applicable to any period less than a full month will be prorated. (ii) The amount of special taxes or special assessments to be included shall be limited to the amount of the installment (plus any interest, other than penalty interest, payable thereon) of such special tax or special assessment required to be paid during the year in respect of which such taxes are being determined, if such special tax or assessment is permitted to be paid in installments. (iii) There shall be excluded from real estate taxes all income taxes, excess profit taxes, gross receipt taxes, excise taxes, franchise taxes, stock taxes, gift taxes, estate, succession, inheritance and transfer taxes. (iv) If Lessor receives a refund of real estate taxes for any year after the base year, the real estate taxes for such year shall be recalculated to reflect the amount of the refund received by Lessor in excess of base year taxes, and Lessor shall pay to Lessee (or credit against the installments of rent next due under this lease) the difference between the amount paid by Lessee pursuant to this Article and the amount which was actually due, taking the refund into account. (v) Lessee has advised Lessor that Lessee does not intend to pay use and occupancy tax under this lease. In lieu of the payment of such tax, Lessee shall timely complete all forms and documents required to comply with all Philadelphia Code Sections and Philadelphia Department of Use and Occupancy Tax Regulation Sections setting forth filing requirements for -7- landlords whose tenants fail to pay use and occupancy tax (which is presently Philadelphia Code Section 19-01906(5)(b) and Regulation Section 405(i)), and submit all required forms and documents to Lessor in form complete and adequate for filing as necessary prior to the date on which they are required to be filed with the appropriate office. Lessee agrees to indemnify, defend and hold harmless Lessor from and against any and all claims, liabilities, damages, fines, penalties, costs and expenses which may be incurred or suffered by Lessor arising out of Lessee's failure to pay use and occupancy tax. In the event that a final and unappealable order is entered against Lessee with regard to its liability under Philadelphia Code Section 1901906(5)(b) and Regulation Section 405(i), or any other Philadelphia Code Section of Philadelphia Department of Use and Occupancy Regulation Section, which would require the payment of use and occupancy taxes due under the Lease, then Lessee shall promptly pay all such taxes, including overdue tax payments, penalties and late charges. Notwithstanding the foregoing, Lessee shall have no obligation to indemnify Lessor for any costs or expenses arising 'by virtue of Lessor's failure to file the forms and documents provided by Lessee as set forth above in a timely fashion. Article 3. Security Deposit. As security for the faithful performance and observance by Lessee of the covenants and conditions of this lease, Lessee shall, within fifteen (15) days after the date on which Lessee and Lessor have executed and delivered this lease, deliver to Lessor an irrevocable commercial letter of credit in form and issued by a commercial bank satisfactory to Lessor in Lessor's reasonable commercial discretion (together with and amendments thereto or replacements thereof, the "Letter of Credit"), which Letter of Credit shall (i) have an initial expiry date of not less than one (1) year from the date issued, (ii) identify Lessor as the beneficiary thereunder, (iii) be in the initial face amount of $75,000.00, (iv) permit partial draws thereunder, and (v) be drawable on Lessor's sight draft specifying that such amounts are due from Lessee hereunder. Lessee shall maintain such Letter of Credit by causing it to be renewed or replaced not less than thirty (30) days prior to its then-current expiry date, all in accordance with the requirements set forth above except that (i) upon ~the expiration of lease year'3, the face amount of the Letter of Credit shall be reduced to $37,500.00, and (ii) upon the expiration of lease year 5 and provided no event of default has occurred which is continuing hereunder, the Letter of Credit shall be returned to Lessee and no further Letter of Credit shall be required hereunder. Lessee shall take all -8- actions required in connection with obtaining and maintaining the Letter of Credit, except that Lessor will pay the actual and reasonable fees of the issuer of the Letter of Credit in issuing, renewing or replacing the same, such amounts to be paid within ten (10) days following written request to Lessor. Lessor may draw on the Letter of Credit (a) upon the occurrence of any event of default under this lease, (b) upon Lessee's failure to renew or replace the Letter of Credit as herein provided, or (c) upon the termination of this lease pursuant to Article 42 hereof, with Lessor, under clauses (a) and (c), entitled to draw the amount then due and owing by Lessee hereunder and, under clause (b), the entire face amount of the Letter of Credit to be held as a cash security deposit hereunder without interest. Upon a draw on the Letter of Credit, Lessor may apply the amount drawn toward the payment of any rent and additional rent and any other charge as to which Lessee is in default or on account of any sum which Lessor may expend or may be required to expend by reason of Lessee's default in respect of any of the covenants or conditions of this lease, with the balance, if applicable as provided above, held as a cash security deposit. Lessor shall refund any cash security deposit held by Lessor hereunder at the end of Lease Years 3 and 5, respectively, to the extent such deposit exceeds the face amount of the Letter of Credit then required hereunder. In the event of a sale of the premises to a bona fide purchaser who shall, in writing, assume the obligations of Lessor under this lease, Lessor shall have the right to transfer the Letter of Credit to such purchaser and Lessor shall thereupon be released by Lessee from all liability for the return of such security, and Lessee agrees to look only to the new landlord for the return thereof. Article 4. Condition of Premises and Lessee's Work. (A) Lessee acknowledges that Lessee has inspected the premises and, except as otherwise expressly provided herein, has agreed to lease the same in their present "as is" condition, with Lessor under no obligation, express or implied, to make any alterations to the premises in connection with Lessee's intended use and occupancy thereof; provided, however, that Lessor shall, at Lessor's sole cost and expense, replace the upper level cracked glass in the premises and cause a sprinklering system ("Lessor's Work") to be installed in the premises following the execution of this lease. All sprinkler heads will be the concealed type with an escutcheon plate, with the distribution loop installed in accordance with the requirements of Lessee's Plans and Specifications (as defined below). -9- Lessor shall complete Lessor's Work promptly during the preoccupancy period and within ten (10) business days following Lessor's approval of the Plans and Specifications, with such work to be commenced following approval of Lessee's Plans and Specifications (as defined below). Lessor's Work shall be diligently completed in a good and workmanlike manner in accordance with all applicable legal requirements. Lessor and Lessee shall cooperate in coordinating the construction of Lessor's Work and Lessee's Work, with Lessor having the final decision on such matters but with both parties agreeing to proceed in good faith so that all such work may be completed during the preoccupancy period. The completion of all such work shall be subject to clause (C) of this Article 4. In addition to Lessor's Work, Lessor shall make available to Lessee an allowance in an amount up to $150,000.00 (the "Allowance"), to be applied towards Lessee's costs in designing and constructing Lessee's Work, including, without limitation, a1l architectural and design fees, costs of labor, material, contractor's overhead and profit, and permit `fees. The Allowance (or so much thereof as shall have been expended by Lessee) shall be advanced from time to time by Lessor to or for the benefit of Lessee within thirty (30) days following Lessee's submission to Lessor of appropriate vouchers, cancelled checks and other evidence establishing the cost of Lessee's Work for which Lessee is then requesting reimbursement or direct payment by Lessor to the party designated by Lessee hereunder, with all costs of such work in excess of the Allowance to be paid by Lessee. If the amount of the Allowance exceeds the costs incurred by Lessee for the design and construction of Lessee's Work, the amount of such excess shall be applied to pay the installments of rent thereafter coming due under this lease up to a maximum allowance of $47,650.00. In the event that Lessor shall fail to advance all or any portion of the Allowance which it is obligated to advance pursuant to this lease, Tenant shall have the right, but not the obligation, to pay the costs of construction and installation of the Lessee's Work which Lessor was obligated but failed to pay. In such case, Lessee shall be entitled to a credit against the installments of rent thereafter coming due under this lease equal to the sum of all amounts paid by Tenant for such purpose, together with interest at the Default Rate from the date of each such payment by Lessee to the effective date of such credit. Lessor further agrees that in delivering the premises to Lessee in "as is" condition (subject to the completion of Lessor's Work), it is expressly understood and agreed that the vault, teller equipment, security equipment and any other -10- furniture, fixtures and equipment currently in the premises (collectively, the "Equipment") are, as to Lessor's entire right, title and interest therein, hereby transferred to Lessee, Lessor making no representation or warranty, express or implied, as to the condition or quality of any of such property, all of which was installed by a prior tenant which has abandoned the same following the termination of such tenant's lease. In the event the Equipment or any of it is hereafter removed from the premises by a party other than Lessee under a claim of title superior to Lessor's title, Lessor shall, at Lessor's cost and expense, promptly replace all Equipment so removed with items of comparable quality and condition. (B) Lessor acknowledges that Lessee desires to make certain alterations and improvements to the premises in connection with Lessee's intended use and occupancy thereof for the purposes provided in Article 5 hereof, and Lessor agrees that Lessee may make such alterations and improvements subject to Lessee's compliance with all of the following terms and conditions: (i) Promptly following the execution of this lease, Lessee shall cause to be produced, at, subject to the Allowance, Lessee's sole cost and expense, plans and specifications (the "Plans and Specifications") showing in detail the alterations and improvements which Lessee desires to make to the premises, and Lessee shall deliver a set of the Plans and Specifications to Lessor for Lessor's review and approval, which approval shall not be unreasonably withheld. Lessor shall give notice to Lessee within five (5) business days from the date of submission either approving or disapproving the Plans and Specifications. If Lessor fails to give notice within such five-day period, the Plans and Specifications shall be deemed approved. Any notice of disapproval shall state the particular reason for such disapproval. If Lessor disapproves the Plans and Specifications, Lessee shall resubmit revised Plans and Specifications, making such modifications as Lessor may reasonably request, and the same approval procedure as set forth above shall apply to the modifications, except that Lessor shall have two (2) business days after receipt of the Plans and Specifications to approve or disapprove the modifications. Lessee agrees to retain the firm of Wolfe, Stasul & Steinberg Engineers or other engineering firm satisfactory to Lessor in Lessor's reasonable discretion to prepare all engineering drawings included within the Plans and Specifications and to supervise and perform all engineering and building systems work included in Lessee's Work. Upon such approval, the parties shall initial copies of the Plans and Specifications and attach the same as Exhibit "B" hereto. No work shall be commenced by Lessee -11- prior to Lessor's approval of the Plans and Specifications and following such approval, no material changes shall be made in the Plans and Specifications without Lessor's prior written approval, which shall not be unreasonably withheld or delayed. (ii) Following Lessor's approval of the Plans and Specifications, Lessee shall, at, subject to the Allowance, Lessee's sole cost and expense, apply for all building and other governmental permits and approvals for the work to be performed by or on behalf of Lessee as described in the Plans and Specifications (such work, collectively, "Lessee's Work"). Upon receipt of all required permits, Lessee shall cause a waiver of liens to be executed and filed of record by Lessee's contractor or contractors waiving for such contractor and all of its subcontractors the right to file or maintain a mechanics' lien against the premises, following which Lessee shall commence the performance of Lessee's Work in accordance with the Plans and Specifications and cause such Lessee's Work to be diligently completed. All costs of designing, constructing and installing Lessee's Work shall, subject to the Allowance, be paid by Lessee, including all building permits and the cost of the certificate of occupancy upon the completion of such work. (iii) Lessee's Work shall be performed with union labor, in a good and workmanlike manner, lien free, and in compliance with all applicable governmental laws, ordinances, rules and regulations and in accordance with 411 of the other terms and conditions of this lease. Lessee agrees to cause any mechanics' lien or claim filed in connection with Lessee's Work to be promptly discharged or bonded within forty-five (45) days after Lessee has notice thereof and to indemnify Lessor against and hold Lessor harmless from any loss, claim, damage, cost or expense in connection with any such lien or claim. Any contractor which Lessee elects to have perform work in the premises is subject to Lessor's prior written approval, which shall not be unreasonably withheld or delayed. Lessor hereby approves Clemens Construction Company as the general contractor for Lessee's Work. Lessee shall cause each contractor to obtain insurance in connection with Lessee's Work for worker's compensation (in the amount required by statute) and comprehensive general liability insurance for personal injury and property damage in an amount of not less than $1,000,000.00. All construction signs used at the premises shall be in accordance with the requirements for the installation, design and size of signs given by Lessor to Lessee, as the same may be revised by Lessor from time to time, and in accordance with all applicable legal requirements, said signs not to be installed prior to written approval in each instance by Lessor. -12- (iv) During any period of construction, Lessee agrees to conduct its labor relations and its relations with its employees in such a manner as to avoid all strikes, picketing and boycotts of, on, or about the premises and/or the building. Lessee further agrees that if, during the period of construction of the premises, any of its employees strike, or if picket lines or boycotts or other visible activities objectionable to Lessor are established or conducted or carried out against Lessee or its employees, or any of them, on or about the premises or the building, Lessee shall immediately close the premises and remove or cause to be removed all employees therefrom until the dispute giving rise to such strike, picket line, boycott or objectionable activity has been settled to Lessor's satisfaction. Notwithstanding the foregoing, it is understood and agreed that Lessee shall not be held responsible for general strikes or similar events within the construction industry or specific trades. For the purposes of this paragraph only, the employees of Lessee's contractors and their subcontractors shall be deemed to be Lessee's employees. (v) If there is a material defect in the items supplied by or on behalf of Lessee or if Lessee is not performing Lessee's Work consistent with Lessee's Plans and Specifications as approved by Lessor, and Lessee fails to cure such defect or defects in the items to be supplied or in the performance of Lessee's Work within ten (10) days written notice thereof from Lessor, Lessor shall, if the defect constitutes a dangerous Condition, have the right, in addition to all other rights and remedies of Lessor and without affecting the rent commencement date or in any manner affecting the validity or continued effectiveness of this lease, to take possession of the premises and physically prevent the continuation of the performance of Lessee's work until such time as Lessor in its sole judgement has determined that the performance by Lessee hereunder will proceed in accordance with the terms hereof. (vi) Upon the expiration or sooner termination of this lease, all alterations and improvements made to the premises as a part of Lessee's Work shall become the property of Lessor and shall not be removed by Lessee, but Lessee may remove all fixtures and the Equipment provided Lessee restores all damage caused by such removal. Lessee expressly acknowledges and agrees that the completion of Lessee's Work is not a condition precedent to the commencement of the term of this lease or of Lessee's obligation to pay minimum and additional rent hereunder. (C) It is contemplated by Lessor and Lessee that the total time to design and construct both Lessor's Work and -13- Lessee's Work, which will be constructed concurrently, will be four (4) months, ending co-terminously with the end of the preoccupancy period, but the parties hereto desire to provide for certain contingencies which could extend such preoccupancy period. Accordingly, Lessor and Lessee hereby expressly agree, anything to the contrary in this lease notwithstanding, as follows: (1) The time for completion of Lessor's and Lessee's Work shall be extended for a period equal to any time lost by reason of strikes, war, acts of God or other causes beyond the reasonable control of the party responsible for such work, provided that such extension shall not exceed (a) ten (10) business days, with respect to Lessor's Work and (b) sixty (60) days, with respect to Lessee's Work; (2) Pursuant to Article 42, hereof, Lessee's obligations hereunder are contingent upon certain approvals as provided therein. To the extent Lessee causes Lessee's Work to be performed hereunder prior to the satisfaction of such contingencies, Lessor will not be obligated to advance more than $75,000.00 of the Allowance towards such costs (including, for purposes of this clause (2) only, two-thirds of the cost of Lessor's Work in such total) prior to the satisfaction of such contingency, but in such event (a) Lessor may, upon the termination of this Lease by Lessee pursuant to Article 42, draw on the Letter, of Credit to the extent of th4 Allowance so advanced, with Lessor reimbursed from the proceeds of such draw for the amount of the Allowance so advanced, (b) Lessor shall not be obligated to advance more than $75,000.00 from the Allowance until such contingency is satisfied, and (c) Lessee may by written notice to Lessor extend the preoccupancy period for an additional thirty (30) days in order to satisfy such contingency, which shall be in addition to any extension pursuant to the preceding clause (1); and (3) If Lessor fails to complete Lessor's Work within the time period herein provided for any reason other than a delay caused by Lessee, the preoccupancy period shall automatically be extended for a period of time equal to Lessor's delay and, in addition, if such delay by Lessor is willful, lessee shall be entitled to equitable relief and to terminate this lease by written notice to Lessor if Lessor's delay exceeds sixty (60) days. -14- Article 5. Use. (A) The premises shall be occupied and used only for the conduct of Lessee's banking business and uses accessory thereto and for no other purpose. (B) Lessee agrees to operate the premises at all times during the term of this lease unless prevented from doing so because of fire, accident, governmental regulation, acts of God or other circumstances beyond the reasonable control of Lessee. Lessee agrees to keep open the premises during such hours and on such days and evenings of the week as may be determined by Lessee and in accordance with applicable governmental regulations. Lessee agrees to keep the premises in good condition and Lessee agrees that storage and office space in the premises shall be limited to that necessary for, and used in conjunction with, Lessee's business at the premises. Lessee shall not use the areas adjacent to the premises for business purposes except as approved by Lessor. Lessee shall: (a) clean the windows and doors (including, in each case, the frames therefor) in the premises and in the perimeter walls thereof whenever in the reasonable judgment of Lessor necessary and Lessee will not require, permit, suffer or allow any such window or door to be cleaned in violation of the Labor Law of the State of Pennsylvania or of any, other law or ordinance or of any rule, order or regulation of any governmental authority having jurisdiction thereover; (b) keep the premises clean, remove all rubbish and other debris from the premises to such location as may be specified by Lessor from time to time and under conditions approved by Lessor; (c) promptly replace any and all glass (including mirrors) in the premises and in the perimeter walls thereof, the frames for such glass, and any lettering and ornamentation on such glass which may be broken or damaged, regardless of the cause of such damage, even though the same may be occasioned by the negligence of Lessor, its servants or agents; (d) place no fixtures in the premises except such as are satisfactory to, and, prior to being installed or placed therein, shall have been approved by, Lessor, such approval not to be unreasonably withheld, and Lessor shall advise -15- Lessee of any such approval or disapproval within 10 days after the same has been requested by Lessee, with no such approval being required for standard banking fixtures and equipment such as teller window, ATM's, vault and similar items; (e) display no lettering, sign, advertisement, notice or object and permit no such display on the windows or doors or on the outside of the perimeter walls of the premises except with the prior written consent of Lessor; (f) from time to time after the initial term hereof and at Lessee's expense redecorate the premises and refinish, renew and/or replace the fixtures, furnishings, decorations and equipment therein as in the reasonable judgment of Lessor may be necessary to preserve the good appearance of the premises in keeping with the general standard maintained in similar areas in the building; (g) not install, place or permit any awning on the perimeter walls of the premises unless provided, or consented to in writing by Lessor and each such awning so provided or consented to shall, to the reasonable satisfaction of Lessor, be kept clean and in good order and state of repair and appearance by Lessee, including, whenever necessary in the reasonable judgment of Lessor, the replacement of awning coverings with materials reasonably approved by Lessor; and (h) at all times during the term of this lease, Lessee shall maintain its entrance to the premises and such entrance shall remain unlocked and accessible to the public during the business hours of Lessee. (C) Lessee agrees promptly to comply with all laws, ordinances, orders, rules and regulations affecting the premises (excluding, however, the installation of a sprinkler system, which shall be Lessor's responsibility) and the cleanliness, safety, operation and use thereof. Lessee also agrees to comply with the recommendations of any insurance company, inspection bureau or similar agency with respect to the premises. Lessee agrees not to install any electrical equipment or permit any use that overloads the applicable utility lines servicing the premises, which Lessor agrees shall provide at least 6 watts per rentable square foot. (D) Lessee agrees not to (a) make any use of or allow the premises to be used in any manner or for any purpose that might invalidate or increase the rate of insurance thereon (with the operation of a banking business excluded from the foregoing); (b) keep or use or permit to be kept or used on said -16- premises any flammable fluids or explosives without in each instance obtaining the prior written approval of Lessor; (c) use the premises for any purpose whatsoever which might create a nuisance; (d) deface or intentionally injure the building or premises; (e) overload the floors; (f) commit or suffer any waste; (g) install any vending machines or amusement devices (video or otherwise) without Lessor's prior written approval; or (h) use, store, install or distribute on or from the premises any hazardous or toxic chemicals, wastes, substances or materials. Lessee agrees to pay any increase in the cost of insurance to Lessor as a result of any unauthorized use of the premises by Lessee, but such payment shall not constitute in any manner a waiver by Lessor of its right to enforce all of the covenants and provisions of this lease. Notwithstanding the foregoing provisions of this Article 5(D), Lessee may use cleaning materials and office supplies in the ordinary course of its business, in reasonable quantities and provided that such materials and supplies are used, stored and disposed of in compliance with all applicable laws, ordinances and regulations. Nothing in this Article 5(D) or in any other provision of this lease shall be construed to limit or otherwise affect the provisions of Article 9(F) of this lease. Article 6. Occupancy, Assignment and Subletting. (A) Lessee shall not occupy nor permit others to occupy the premises, or any part thereof, other than as hereinbefore specified, nor shall Lessee voluntarily, involuntarily or by operation of law assign its leasehold interest, or mortgage or pledge this lease, without the prior written consent of Lessor. In addition, Lessee shall not assign or sublet the premises or any part thereof, without (i) the prior written consent of Lessor and (ii) first offering such space to Lessor in accordance with Paragraph (B) hereof. If Lessor does consent in writing to any assignment or sublease, such consent shall not in any way release Lessee from liability under any of the covenants or conditions of this lease, and no such consent shall apply to any future or further assignment or sublease nor bind Lessor to give consent to any further or future assignment or sublease. Any assignee or sublessee will be bound by the terms of this lease and any modifications hereof as though such assignee or sublessee were an original party hereto, all as confirmed in a written instrument satisfactory to Lessor. Lessor hereby agrees that Lessor will not unreasonably withhold or delay its consent to any assignment or subletting to another banking institution for the same use of the premises as permitted hereunder, but any other request for consent to a sublease or assignment shall be within Lessor's sole discretion. -17- (B) If Lessee wishes to assign or sublease the premises or any part thereof, Lessee must first offer to return the premises (in the case of an assignment) or portion thereof (in the case of a sublease) to Lessor (which offer shall be made in writing). If Lessor elects to take back the premises or such portion thereof, it shall so notify Lessee in writing, within thirty (30) days after receipt of Lessee's offer, specifying the date on which this lease shall terminate (in the case of an assignment) or the date on which such portion of this lease shall terminate (in the case of a sublease), and Lessee shall pay to Lessor all rent due through such termination date. If Lessor does not accept Lessee's offer, Lessee may sublease that portion of the premises offered to Lessor or assign this lease but only upon Lessor's prior written consent, it being understood and agreed that such consent shall still be required notwithstanding Lessor's election not to take back such space. (C) Notwithstanding anything to the contrary set forth herein, Lessor's consent shall not be required for (and Lessor shall not have a right of re-capture with respect to) an assignment of this lease or a sublease of all or any portion of the premises to (i) any person or entity which, directly or indirectly, controls Lessee or is controlled by Lessee or is under common control with Lessee, (ii) any successor to Lessee by merger or consolidation, or (iii) any person or entity to whom all or substantially all of the assets of Lessee are conveyed. Article 7. Alterations. Lessee will make no Material Alteration to the premises without first submitting a detailed description thereof to Lessor and obtaining Lessor's prior written approval, which approval shall be within Lessor's reasonable commercial discretion. The term "Material Alteration" shall mean any (i) any alteration which could adversely affect any structural component of the building or any of the building systems or equipment, or the operation or effectiveness thereof, or the exterior appearance of the building; or (ii) any alteration which is not consistent with the operation of the premises as a bank; or (iii) any alteration which costs more than $50,000 (other than an alteration which is cosmetic or decorative in nature, such as painting). Although Lessor's consent shall not be required for any alteration which is not a Material Alteration, Lessee shall nonetheless notify Lessor of such alteration before it is made. Lessee's Work and all other alterations, additions or improvements made by Lessee and all fixtures attached to the premises shall, if not removed by Lessee, become the property of Lessor and remain on the premises upon the expiration or -18- termination of this lease. Lessor may require, as a condition of giving its approval of any Material Alteration, that Lessee remove the same upon the expiration or termination of this lease, in which case Lessee shall, at its sole cost and expense remove such Material Alteration and restore the premises to the condition which existed prior to the installation of such Material Alteration. In no event shall Lessee be required to remove (a) the vault or any other fixtures, (b) any portion of Lessee's Work, (c) any alteration or improvement which is consistent with the operation of the premises as a bank, or (d) any Material Alteration as to which Lessor did not indicate at the time it approved such Material Alteration that removal would be required. Lessee shall have the right, however, at its election to remove from the premises upon the expiration of the term all of the Equipment, Lessee's Work and any other alterations and improvements made by Lessee, and all furniture, fixtures and equipment which Lessee has relocated from its existing space, as described in Article 34 of this lease. Lessee shall not erect or place, or cause or allow to be erected or placed, 'any sign, advertising matter, showcase or other article or matter in or upon the stairways, lobbies, passages, outside walls, windows or sidewalks or any other areas in, on or about the building (not including the interior of the premises) without the prior written consent of Lessor. Lessor shall provide building standard lobby directory signage for Lessee, and Lessor shall permit lobby signage on Lessee's entrance door to the premises. Subject to Lessor's prior review and approval of the proposed placard, which shall not be unreasonably withheld or delayed, Lessor will permit the placement of a placard on the northeast stone wall in the lobby next to the passageway leading to the entrance to the premises, the exact location of said placard to be designated by lessor. Subject to the prior review and approval of Lessor, which approval shall not be unreasonably withheld or delayed, Lessee shall also be permitted to place signage on both the interior and exterior surfaces of the northern, southern and eastern exterior walls of the premises. Article 8. Rules and Regulations. The rules and regulations attached to this lease as Exhibit "C" and such reasonable additions or modifications thereof as mad from time to time be made by Lessor, upon written notice to Lessee, shall be deemed a part of this lease with the same effect as though set forth herein, provided the same do not materially increase Lessee's obligations or decrease Lessee's rights hereunder and do not contradict any express provisions of this lease. Lessee agrees that said rules and regulations will be faithfully observed by Lessee and Lessee's employees and -19- invitees, and Lessor agrees that Lessor will not enforce such rules and regulations against Lessee in a manner which discriminates against Lessee versus other ground floor tenants. To the extent of any conflict between the rules and regulations and the express provisions of this lease, the provisions of this lease shall be controlling. Lessor hereby: (i) waives the right to approve Lessee's advertising; (ii) Lessee's antenna permitted by Article 39 shall not be subject to removal by Lessor, and Lessee's security cameras are hereby approved by Lessor; and (iii) "Seeing eye" or guide dogs are not excluded by the rules and regulations. Article 9. Fire or Other Casualty Waiver of Subrogation. (A) In the event of damage to or destruction of the premises caused by fire or other casualty, or of the entrances and other common facilities necessary to provide normal access to the premises, or to other portions of the building or its equipment which portions and equipment are necessary to provide services to the premises in accordance herewith (collectively the "Base Building"), Lessor shall make repairs and restorations (the "Restoration") as hereinafter, provided, unless this lease is terminated by Lessor or Lessee as hereinafter provided. (B) Within thirty (30) days after the occurrence of any casualty, Lessor shall give written notice to Lessee (the "Repair Period Notice") advising Lessee of the length of time that Lessor will require for Restoration of the part of the premises or Base Building which has been damaged (the "Estimated Restoration Period"). Lessor's determination of the Estimated Restoration Period shall be accompanied by a written certification of an independent architect, engineer or general contractor. If (i) the damage is of such nature or extent, in the reasonable judgment of Lessor's independent architect, engineer or general contractor, that the Estimated Restoration Period would be more than one-hundred eighty (180) days after the date of the casualty, (with normal work crews and hours and in the normal course of Restoration of the entire building), or (ii) less than one year of the lease term would remain at the end of the Estimated Restoration Period, then either party may terminate this lease within sixty (60) days after the occurrence of the casualty. Notwithstanding the foregoing, in the event that Lessor terminates this lease pursuant to ArticlE~9(B)(ii) above -20- at a time when Lessee still has the right to exercise an extension option, then provided that Lessee exercises such extension option within thirty (30) days after receipt of Lessor's notice of termination, Lessor's notice of termination shall be null and void and of no force or effect. (C) In the event of such fire or other casualty, if this lease is not terminated pursuant to the terms of this Section 9, Lessor shall proceed diligently to restore the premises and the Base Building to substantially its condition prior to the occurrence of the damage. (D) In the event that Lessor does not complete the restoration of the premises and Base Building within the Estimated Restoration Period then, in such event, Lessee may at any time prior to substantial completion of such work, terminate this lease whereupon this lease shall become null and void as of the date of the casualty and neither party shall have any further liability or obligation hereunder. (E) In the case of damage to the premises which is of a nature or extent that Lessee's continued occupancy is substantially impaired, the annual minimum rent otherwise payable by Lessee hereunder shall be equitably abated or adjusted for the duration of such impairment. (F) Notwithstanding any other provision herein, Lessor and Lessee hereby release each other from liability for loss or damage to the property of the party granting such release, even if the loss or damage occurred through the negligence of such other party or its agents, servants, invitees or employees, provided that this release shall be effective only with respect to loss or damage (i) covered by insurance and (ii) occurring during such time as the relevant insurance policy of the party granting such release contains a clause to the effect that such release does not affect such policy or the right of the insured to recover thereunder. Each party will use its best efforts to obtain such a clause, but if an additional premium is charged therefore, the party benefiting therefrom, if it desires to have the waiver, will pay to the other the amount of such additional premium promptly upon being billed therefore. For purposes of this Article, any deductible amount and the difference between full replacement cost and the percentage of replacement cost actually insured shall be treated as if it were recoverable under such policies and as if such policies included a waiver of subrogation. Lessor hereby releases Lessee from liability for loss or damage to the property of Lessor, even if the loss or -21- damage occurred through the negligence of Lessee or its agents, servants, invitees or employees, which loss or damage would be covered under an "all risk" policy of insurance on the building, whether or not such insurance is actually maintained. Article 10. Lessor's Right to Enter. Lessee will permit Lessor, Lessor's agents or employees or any other person or persons authorized by Lessor to inspect the premises at any time during Lessee's normal business hours, and to enter the premises during Lessee's normal business hours, if necessary, to make alterations, improvements or repairs to the building, or for any other purpose related to the operation of maintenance of the building, including showing the space to prospective tenants (during the last six (6) months of the term), purchasers and mortgagees; provided, however, that except in an emergency situation which threatens life or property, where no notice shall be required and when entry may be made at any time, Lessor will not exercise such right of entry except upon one business day's prior notice (which may be given by telephone) to Lessee and with Lessee having the right to have a representative accompany Lessor's representative during any such entry. Lessor shall exercise its rights under this Article in such manner as not to interfere in any way with the conduct of Lessee's business in the premises. Lessor shall promptly repair any damage to the premises caused by the exercise of Lessor's rights under this Article, except to the extent covered by Lessee's insurance. In connection with any entry into the premises by Lessor, Lessor will cooperate with Lessee in recognizing Lessee's special security concerns in its banking business and shall comply with all security measures established by Lessee with respect to the premises. Notwithstanding anything to the contrary contained in the lease, Lessor shall under no circumstances have the right to enter, repair, inspect, attach, distrain upon or in any way interfere with Lessee's vaults) or safe deposit boxes, or the checks, drafts or other property of Lessee's customers. Article 11. Insurance. (A) Lessee, at its sole cost and expense, agrees to purchase and keep in full force and effect during the term hereof insurance under policies issued by insurers reasonably acceptable to Lessor on its contents, fixtures, furnishings, equipment and other items of personal property located in the premises, protecting Lessee from danger or other loss caused by fire or other casualty including, but not limited to, vandalism, -22- perils covered by extended coverage, theft, sprinkler leakage, water damage (however caused), explosion of heating and cooling or similar apparatus, and other similar risks in amounts not less than the full insurable replacement value of such property. Lessee shall obtain plate glass insurance coverage, which insurance shall be satisfactory to and name Lessor as an insured. (B) Lessee agrees to deliver, or cause to be delivered to Lessor by Lessee's general contractor(s) at least ten (10) days prior to the commencement of Lessee's Work under Article 4, hereof, or the commencement of any work under Article 7 hereof, a policy or certificate of insurance from a company reasonably satisfactory to Lessor providing public liability and property damage coverage in the minimum amount of one million dollars ($1,000,000) for each occurrence and in the aggregate or in such greater amounts as Lessor may reasonably require naming Lessee, its general contractor, all subcontractors, and Lessor, its employees and agents, as additional insured parties endorsed so as to cover any and all liability arising out of, or in any manner connected with, the work to be performed on the premises by or for Lessee and a policy or certificate of insurance evidencing workmen's compensation coverage in the minimum amount required by Lessor from time to time. (C) Lessee agrees to maintain during the term hereof, effective on the date Lessee takes possession of the premises, insurance coverage with respect to the premises in companies satisfactory to Lessor for bodily, injury, including death, property damage and personal injury liability and contractual liability insurance, each with a limit of liability of one million dollars ($1,000,000) for each occurrence and in the aggregate, all such insurance to include Lessor and its employees and agents as additional insured parties. (D) Lessee shall provide Lessor with copies of policies or certificates evidencing such insurance prior to the date Lessee takes possession of the premises and from time to time thereafter as required by Lessor evidencing that the aforesaid insurance is in full force and effect. All policies and certificates shall provide that a minimum of twenty (20) days written notice shall be given to Lessor by any such insurance company prior to the cancellation, termination or change of such coverage. All insurance herein required shall be deemed to be additional obligations of Lessee and not in discharge of, or a limitation to, Lessee's obligation to indemnify Lessor and its employees and agents under Article 13 hereof. (E) Lessor shall be responsible for insuring or self-insuring the building, the operation thereof and the other -23- liabilities which may be incurred by an owner of property in such manner as Lessor shall determine, and Lessee shall not be responsible for insuring such risks. (F) Neither Lessor nor Lessee will do or commit, or suffer or permit to be done or committed, any act or thing which shall cause the other party's policies (or any such policy) to become void or suspended, or which shall cause the building or the premises to be considered a more hazardous risk. Article 12. Release of Lessor. Lessor shall not be held responsible for, and is hereby expressly relieved from, any and all liability by reason of any injury, loss, or damage to persons or property in, on or about the premises or the building, whether the same be due to fire, breakage, leakage, water flow, steam, gas, use, misuse, abuse of elevators or defects therein, hatches, openings, defective construction or physical conditions anywhere in the building, failure of water supply, light or power defects in electrical wiring, plumbing or other equipment or mechanisms, wind, lightning, storm or any other cause whatsoever, whether the loss, injury or damage be to the person or property of Lessee or any other person, unless such injury, loss or damage is the direct result solely of the negligence of Lessor, its agents or its employees occurring entirely after the date of this lease. Article 13. Indemnity. Subject to Article 9(F) hereof, Lessee agrees to indemnify, defend and hold harmless Lessor, excepting for Lessor's negligence or the negligence of Lessor( 'I agents and employees, from and against all claims, liabilities, losses, damages, expenses, actions or causes of action for injury to or death of any person or loss of or damage to property in or upon the premises and including the person and property of Lessee, its employees, agents, invitees, licensees or others, it being understood and agreed that all property kept, stored or maintained in or upon the premises or in the building shall be at the risk of Lessee. The foregoing indemnity shall be in addition to Lessee's obligation to supply the insurance as required by Article 11 hereof and not in discharge of or substitution for the same. If any damage to the premises or other property of Lessor results from any act or neglect of Lessee, its agents or employees, Lessor may at its option repair such damage, and -24- Lessee shall promptly on demand reimburse Lessor for the cost thereof, subject to Article 9(F) hereof. Article 14. Repair and Maintenance; Other Services. (A) Except as otherwise provided in Article 9 hereof, Lessee, at its sole cost and expense, shall make repairs to or on the premises and to utility lines to the point of connection for Lessee which may be required to keep the same in good order, condition and repair, and sanitary, clean, safe, and in sightly appearance at all times during the term hereof, including those required by any public utility, unless specifically made Lessor's responsibility under subparagraph 14(B), below. Any such work by Lessee shall be subject to Lessor's prior written approval and Lessor may, as agent for and on account of Lessee, but shall not be obligated to, deal directly with any such public utility respecting their requirements for additions, improvements, alterations and repairs. Lessee's responsibility hereunder shall include, without limitation and at its sole cost, replacement of mechanical equipment required for the premises and included within Lessee's Work, fixtures, glass (with glass of the same size and quality), floor covering and ceiling materials, doors and door hardware and the decoration of the interior and storefront of the premises in order to maintain the same at all times in a clean and sightly appearance. If Lessee refuses or neglects to make such repairs or to maintain the premises as herein provided and such inaction by Lessee results in a dangerous condition, Lessor, using reasonable judgment, shall have the right, upon giving Lessee ten (10) days written notice (except in situations deemed to be an emergency by Lessor, in which case said notice provision is hereby waived), if it elects to do so, may make such repairs or perform such maintenance on behalf of and for the account of Lessee and Lessee shall pay Lessor's cost in performing such work promptly upon receipt of a bill therefor. (B) Lessor agrees, at its expense, to keep the foundations, utility lines from the point of connection for Lessee perimeter HVAC system, sprinkler system, exterior walls, and structural systems of the building in good condition and repair. Lessor shall not be liable to Lessee for any damages caused by the items mentioned in the previous sentence being out of repair unless Lessor has had a reasonable opportunity to have the same repaired after Lessee has notified Lessor, in writing, of the need for such repair. (C) During the term of this lease, Lessee agrees to employ a union contractor reasonably acceptable to Lessor to -25- perform annual maintenance and/or preventive maintenance to the cooling and ventilating units on the premises and any heating units or equipment in the premises. Lessee further agrees to provide and to pay for (i) regular nightly cleaning and janitorial services for the premises, and (ii) window washing for the interior and exterior of the premises at least once every quarter. Article 15. Utilities. (A) Electricity for Lessee's operation of the premises will be furnished to Lessee by Lessor, shall be metered pursuant to a separate meter for the premises, and shall be paid for by Lessee as additional rent monthly within fifteen (15) days following Lessee's receipt of Lessor's invoice therefor at the rate paid by Lessor to the public utility furnishing electricity to the building. Lessor shall provide electrical service to the premises having a capacity of at least six (6) watts per rentable square foot for lighting, business equipment and convenience outlets, and Six (6) watts per rentable square foot for the operation of Lessee's HVAC system, Lessor shall provide perimeter HVAC on the same basis as currently supplied on the ground floor and other utilities necessary for the operation of the premises, including: (a) hot and cold water for normal lavatory purposes and for the operation of Lessee's employee kitchen; (b) cold water for drinking fountains; (b) sewer; and (c) chilled water, condenser water, hot crater and steam as required or the operation of Lessee's HVAC system. Lessee shall supply all air handlers and supplementary air conditioning. With the exception of electricity, Lessor shall not charge Lessee for the cost of such other utility services` used or consumed at the premises. (B) Lessee shall comply with all' reasonable rules and regulations which from time to time may be promulgated by Lessor to conserve fuel and/or energy. Lessor shall not be liable to Lessee for any loss, damage or expense which Lessee may sustain or incur if either the quantity or character of utility service is changed, is no longer available or suitable for Lessee's requirements or is interrupted, provided that Lessor promptly undertakes any repairs necessary to restore such service(s). Any riser or risers to supply Lessee's requirements, upon written request of Lessee, will be installed by Lessor, at the sole cost and expense of Lessee, if, in Lessor's sole judgment, the same are necessary and will not cause permanent damage or injury to the building or the premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations or repairs or interference with other -26- building occupants. In addition to the installation of such riser or risers, Lessor will, at the sole cost and expense of Lessee, install all other equipment proper and/or necessary in connection therewith, subject to the aforesaid terms and conditions. Lessee covenants and agrees that at all times its use of electric current shall never exceed the capacity of existing feeders to the building or the risers' wiring installations, of not less than six watts per rentable square foot. Article 16. Events of Default-Remedies. (A) The following events, or any one or more of them, shall constitute events of default under this lease: (i) Lessee shall fail to pay any minimum rent, additional rent or other sum payable hereunder within ten (10) days after written notice that the same is due and payable; provided, however, that Lessor shall not be responsible for giving such notice and Lessee shall not be entitled to such opportunity to cure more than four (4) times in any period of twelve (12) consecutive months; or (ii) Lessee shall fail to perform or comply with any of the other terms, covenants, agreements or conditions hereof and such failure shall continue for more than thirty (30) days after written notice thereof from Lessor; provided, however, that if the default is of such a nature that 2t cannot be cured within thirty (30) days, Lessee shall not be considered in default if Lessee shall, within such period, have commenced with due diligence and dispatch to cure such default and shall thereafter complete with due diligence and dispatch the curing of such default; or (iii) Lessee shall fail to keep the premises open for business in accordance with the terms of this lease; or (iv) Lessee shall vacate or desert the premises or remove or attempt to remove Lessee's goods or property from the premises, except in the ordinary and usual course of business; or (v) Lessee shall make a general assignment for the benefit of creditors, or shall admit in writing Lessee's inability to pay Lessee's debts as they become due, or shall file a petition under any of Chapters 7, 11 or 13 of the Bankruptcy Code, or shall be adjudicated insolvent, or shall file a petition seeking any reorganization, arrangement, composition, -27- readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation relating to bankruptcy or insolvency, or shall file an answer admitting or not contesting the material allegations of a petition against Lessee in any such proceeding, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of Lessee or any material part of Lessee's properties, or shall be seized by any governmental agency or authority having jurisdiction over Lessee. If there is any guarantor or surety of this lease, then subparagraph (v) shall apply to any such guarantor or surety as if the word Lessee in said subparagraph had been amended to read "Lessee and Lessee's guarantor and/or surety or some or any of them". The notice and grace period provisions in subparagraphs (i) and (ii) above shall have no application to the defaults referred to in subparagraphs (iii), (iv) and (v) above. (B) Upon the occurrence of any such event of default (regardless of the pendency of any proceeding which has or might have the effect of preventing Lessee from complying with the terms of this lease), Lessor at any time thereafter may exercise any one or more of the following remedies: (i) Termination of Lease. Lessor may terminate this lease, without any right by Lessee to reinstate Lessee's rights by payment of rent due or other performance of the terms and conditions hereof. Upon such termination, Lessee shall immediately surrender possession of the premises to Lessor, and Lessor shall immediately become entitled to receive from Lessee liquidated and agreed damages for the unexpired balance of the term equal to the difference between the aggregate rentals reserved for the balance of the then current term, and the fair rental value of the premises for that period, determined as of the date of such termination; provided, that the amount of such damages shall be discounted at the rate of 5o per annum for the period from the date of payment by Lessee to Lessor to the date of expiration of the term. (ii) Reletting. With or without terminating this lease, as Lessor may elect, Lessor may re-enter. and repossess the premises, or any part thereof, breaking open locked doors if necessary, and lease them to any other person upon such terms as Lessor shall deem reasonable, for a term within or beyond the then current term of this lease; provided, that any such reletting prior to termination shall be for the account of Lessee and Lessee shall remain liable for (a) all minimum rent, -28- percentage rent, additional rent and other sums which would be payable under the lease by Lessee in the absence of such termination or repossession, less (b) the net proceeds, if any, of any reletting effected for the account of Lessee after deducting from such proceeds all of Lessor's reasonable expenses in connection with such reletting (including, without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys' fees and expenses, employee's expenses, alteration costs, and expenses of preparation for such reletting). Lessor shall use commercially reasonable efforts to mitigate its damages. If the premises are at the time of an event of default occupied by a subtenant or assignee, Lessor may, as Lessee's agent, collect rents due from such occupant and apply such rents to the rent and other amounts due hereunder without in any way affecting Lessee's obligation to Lessor hereunder. Such agency, being given for security, is hereby declared to be irrevocable. (C) No expiration or termination of this lease pursuant to subparagraph (B)(i) above or by operation of law, and no repossession of the premises or any part thereof pursuant to paragraph (B) above or otherwise shall relieve Lessee of Lessee's liabilities and obligations hereunder, all of which shall survive such expiration, termination or repossession, and Lessor may, at its option, sue for and collect rent and other charges due hereunder at any time and from time to time as and when such charges accrue. (D) Lessor may remove all persons and property from the premises, and store such property in a public warehouse or elsewhere at the cost of and for the account of Lessee, without service of notice or resort to legal process (all of which Lessee expressly waives,) and without being` deemed guilty of trespass or becoming liable for any loss or damage which may be occasioned thereby. (E) The parties hereto hereby waive trial by jury in any action, proceedings, or counterclaim brought by either of them against the other for any matters arising out of or in any way connected with this lease, the relationship of Lessor and Lessee, Lessee's use or occupancy of the premises, and/or any claim of injury or damage. This shall not be construed, however, as a waiver of Lessee's right to assert any such claims in any separate action brought by Lessee. (F) Lessee hereby expressly waives any and all rights of redemption granted by or under any present or future -29- law in the event this lease is terminated or Lessee is evicted or dispossessed by reason of violation by Lessee of any of the provisions of this lease. (G) In the event of breach or threatened breach by either party of any provision of this lease, the other party shall have the right of injunction as if other remedies were not provided for herein. (H) No right or remedy herein conferred upon or reserved to either party is intended to be exclusive of any other right or remedy herein or by law provided, but they shall be cumulative and each shall be in addition to every other right or remedy given herein or now or hereafter existing at law or in equity or by statute; and all such rights and remedies may be pursued singularly, cumulatively and successively, as the other party hereto may elect. (I) Any rent (including percentage rent and all charges and other sums collectible as additional rent), overdue for a period of more than ten (10) days shall bear interest at the rate (the "Default Rate") of two percent (20) per annum above the prime rate of interest announced from time to time by CoreStates Bank, N.A. of Philadelphia, Pennsylvania (or its successor) (or the highest rate allowed by law, if less) until paid. Such interest shall be considered additional rent and shall be payable on demand. (J) If an event of default by Lessee hereunder shall occur, Lessor may perform the same for and at the expense of Lessee, after first giving notice to Lessee of its intention to do so, except that no such notice shall be required in the event of an emergency requiring immediate action. If Lessor at any is compelled to pay, or elects to pay, any sum of money, or to do any act which will require the payment of any sum of money, by reason of the failure of Lessee to comply with any provisions hereof, or if Lessor is compelled to incur any expense, including reasonable counsel fees, in instituting, prosecuting or defending against any action or proceeding instituted by reason of any default by Lessee hereunder, the amount of such payments or expenses shall be paid by Lessee to Lessor as additional rent on the next day following such payment or the incurring of such expenses upon which a regular monthly rental payment. is due, together with interest thereon at the Default Rate. (K) No waiver by either party of any breach by the other party of any of such other party's obligations, agreements or covenants, hereunder shall be a waiver of any subsequent breach or of any other obligation, agreement or -30- covenant, nor shall any forbearance by either party to seek a remedy for any breach by the other party be a waiver by such party of its rights and remedies with respect to such breach or any subsequent breach. (L) Both parties expressly waive any right of defense which it may have based on any purported merger of any cause of action, and neither the commencement of any action or proceeding nor the settlement thereof or entering of judgment therein shall bar either party from bringing subsequent actions or proceedings from time to time. (M) Upon the expiration of the then current term of this lease or the earlier termination or surrender hereof as provided in this lease, it shall be lawful for any attorney to appear as attorney for Lessee as well as for all persons claiming by, through or under Lessee and to sign an agreement for entering, in any competent Court an action in ejectment against Lessee and all persons claiming by, through or under Lessee and therein confess judgment for the recovery by Lessor of possession of the premises, for which this lease (or a copy thereof) shall be a sufficient warrant, whereupon, if Lessor so desires, a writ of possession or other appropriate writ under the Rules of Civil Procedure then in effect may issue forthwith, without any prior writ or proceedings; provided, however, that if for any reason after such action shall have been commenced, the same shall be determined and possession of the premises remain in or be restored to Lessee, Lessor shall have the right for the same event or events of default and upon any subsequent event or events of default, or upon expiration of the term of this lease, to bring one or more further action or actions as hereinbefore set forth to recover possession of the premises and confess judgment for the recovery of possession of the premises as hereinabove provided. (N) In any action of ejectment, Lessor shall first cause to be filed in such action an affidavit made by Lessor or someone acting for Lessor, setting forth the facts necessary to authorize the entry of judgment, and, if a true copy of this lease (and of the truth of such copy such affidavit shall be sufficient evidence) be filed in such action, it shall not be necessary to file the original as a warrant of attorney, any rule of Court, custom or practice to the contrary notwithstanding. Lessee hereby releases to Lessor and to any and all attorneys who may appear for Lessee all procedural errors in said proceedings and all liability therefor. If proceedings shall be commenced by Lessor to recover possession under the Acts of Assembly and Rules of Civil Procedure, either at the end of the term or earlier termination of this lease, or for nonpayment of rent or any other -31- reason, Lessee specifically waives the right to the three (3) months' notice required by the Landlord and Tenant Act of 1951, and agrees that five (5) days' notice shall be sufficient in either or any such case. (0) Lessor expressly waives the right to distrain against the goods or property of the Lessee which at any time may be located upon the premises. Furthermore, in the event that Lessor shall at any time and in any manner acquire possession of the premises, Lessor agrees that in the event there are located at the premises safe deposit boxes that contain the property of customers of Lessee, that possession of the premises by Lessor shall in no way include the right to claim or assert any lien against the property of the third parties that is located in such safe deposit boxes and Lessor agrees to fully cooperate in efforts to assist such parties to recover their assets held in said safe deposit boxes. Lessee covenants and agrees to reimburse Lessor for any and all costs incurred by Lessor in connection with its efforts in assisting such third parties to recover their assets held in safe deposit boxes, as aforesaid. Article 17. Intentionally Omitted. Article 18. Subordination. Lessor represents to Lessee that there are no mortgages, ground leases or other encumbrances now existing on or against the building or the lot on which it is located. Lessee agrees, upon written request of Lessor, to execute, acknowledge and deliver such instruments as shall be desired by any subsequent mortgagee or proposed mortgagee or by any person holding or about to acquire a ground rent or other encumbrance, to subordinate this lease to such lien or other encumbrance and to attorn to the holder thereof, provided always that such holder grants to Lessee rights of non-disturbance and attornment pursuant to an instrument in form and substance satisfactory to Lessee in Lessee's reasonable discretion. Article 19. Condemnation. (A) In the event of exercise of the power of eminent domain whereby (i) such portion of the building is taken that Lessor is unable to provide the services under this lease or access to the premises is permanently impaired, or (ii) all or substantially all of the premises or the building is taken, or (iii) if less than substantially all of the building is taken but -32- Lessor, acting in good faith, determines that it is economically unfeasible to continue to operate the condemned portion as a first-class office building, or (iv) if less than substantially all of the premises is taken, but Lessee, acting in good faith, determines that because of such taking it is economically unfeasible to continue to conduct its business in the uncondemned portion of the premises, then in the case of (i) or (ii), either party and in the case of (iii) Lessor, and in the case of (iv), Lessee, shall have the right to terminate this lease as of the date that possession of that part which was taken is required to be delivered or surrendered to the condemning authority in which event all rent and other charges shall be adjusted to the date of termination. (B) In the event of any total or partial taking of the premises, Lessor shall be entitled to receive the entire award in any such proceeding and Lessee hereby assigns any and all right, title and interest of Lessee now or hereafter arising in or to any such award or any part thereof and Lessee hereby waives all rights against Lessor and the condemning authority, except that to the extent permitted by applicable law, Lessee shall have the right to claim and prove in any such proceeding and to receive any award which may be made to Lessee, specifically for loss of good will, trade fixtures, equipment and moving expenses and the unamortized cost of any improvements made by Lessee at its sole cost so long as the same do not reduce the award otherwise payable to Lessor. Article 20. Limitation on Lessor's Liability. The Lessor named in the first paragraph of this lease and any subsequent owner of the building shall be liable only for obligations accruing during the period of its ownership or interest in the building, and the liability of any such Lessor and all of its officers, directors, employees, agents and/or partners, as the case may be, shall be limited to such Lessor's estate or other title to or interest in the building and the proceeds thereof following sale, condemnation or casualty. Article 21. Parties Bound. This lease shall be binding upon, and shall inure to the benefit of, the parties hereto, their respective personal representatives, successors and assigns, subject to the provisions of this lease restricting assignment without consent. Notwithstanding the foregoing, or anything else herein contained, in the event that Lessor's interest or estate in the premises -33- shall terminate by operation of law or foreclosure sale or for any other reason, or if for any reason Lessor ceases to be entitled to the rentals hereunder, then in any such event Lessor shall be released and relieved from all liability and responsibility thereafter accruing to Lessee in connection with any of the terms, covenants or conditions to be performed by Lessor under this lease or by operation of law, and Lessee shall look only to the purchaser or other successor or assignee of Lessor for such performance. Article 22. Notices. Any notices required or permitted to be given hereunder by either party to the other shall be in writing and delivered personally or sent by United States registered or certified mail, postage prepaid, addressed as follows: if to Lessor, c/o Sann & Howe, 200 Park Avenue, New York, New York 10166, Attention: Edwin A. Howe, Jr., Esquire, with copies to CB Commercial Real Estate Group, Inc. Two Penn Center Plaza, Suite 600, Philadelphia, Pennsylvania 19102, Attention: Building Manager, and to Argus Realty Services, Inc., 450 Lexington Avenue, Suite 1970, New York, New York 10017-3904, and if to Lessee, at the premises (or Lessee's address as hereinafter set forth if mailed to Lessee prior to Lessee's occupancy of the premises), with copies to Mr. Sharnia Buford, 714 Market Street, Philadelphia, PA 19106-2397 and David Felder, Esquire, Saul Ewing Remick & Saul, 3800 Centre Square West, Philadelphia, PA 19102, or if the address of such other party for notices shall have been changed as hereinafter provided, to such other party at such changed address. Either party may at any time change the address for such notices by delivering or mailing to the other party, as aforesaid, a notice advising of the change and setting forth the new address. If the term "Lessee" as used in this lease refers to more than one person or entity, any notice, consent, approval, request, communication, bill, demand or statement given as aforesaid to any one of such persons shall be deemed to have been duly given to Lessee. Article 23. Condition of Premises. Lessee hereby acknowledges that Lessee has examined the premises and that taking possession of the premises shall be an acknowledgement by Lessee that the premises are in good and tenantable condition, and satisfactory to Lessee, at the beginning of the term hereof. Lessor is under no duty to make repairs or alterations at the time of letting or at any time thereafter except" as specially set forth elsewhere herein. -34- Article 24. Number and Gender. For the purposes of this lease, the singular shall include the plural and the plural shall include the singular, and the masculine shall include the feminine and the neuter, and the neuter shall include the masculine and the feminine, as the context may require. Article 25. Captions. The captions contained herein are for the convenience of the parties only. They do not in any way modify, amplify, alter or give full notice of the provisions hereof. Article 26. Amendments. This lease may be modified or amended only by an instrument in writing signed by the party against which enforcement of such modification or amendment is sought. Article 27. Partial Invalidity. If any clause or provision of this lease, or the application thereof to any person or in any circumstance, shall to any extent be invalid or unenforceable, the remainder of this lease, or the application of such clause or provision to persons or in circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each clause and provision of this lease shall be valid and enforceable to the fullest extent permitted by law. Article 28. Lessee's Estoppel Certificate. Lessee shall deliver to Lessor, within ten (10) days after request therefor (but not more often than twice in any twelve month period), a certificate to such person as Lessor may designate, certifying that this lease is unamended and in full force and effect and that there are no defaults by Lessor or setoffs against rent hereunder, and the date to which rent has been paid; provided, that in the event this lease has been amended or if there are any alleged defaults or set-offs as aforesaid, such certificate shall specify in precise detail the nature thereof. Lessor shall deliver to Lessee, within ten (10) days after request therefor (but not more frequently than twice in any -35- twelve month period), a certificate to such person as Lessee may designate, certifying that this lease is unamended and in full force and effect and that there are no defaults by Lessee hereunder, and the date to which rent has been paid; provided, that in the event this lease has been amended or if there are any alleged defaults as aforesaid, such certificate shall specify in precise detail the nature thereof. Article 29. Holding Over. If Lessee shall fail to surrender possession of the premises and remove all of its property therefrom upon termination of this lease, then Lessor may at its option treat Lessee as a tenant from month to month on all the terms and conditions in effect during the final month of the lease term, except that the minimum monthly rent during any such holdover period shall be 125% of the minimum rent payable by Lessee during the final month of the lease term plus all additional rent at the rate then in effect. For purposes of this clause, the word "rent" shall include minimum rent, percentage rent and all additional rent, including, without limitation, any amounts payable under applicable escalation clauses; if escalation clauses involve annualized calculations, a pro rata portion of rent escalation charges for the last year of the lease term shall be considered an item of additional rent payable during the holdover period. Article 30. Entire Agreement. This lease constitutes the entire agreement between the parties hereto. Except as set forth herein, there are no promises, representations or understandings between the parties of any kind or nature whatsoever. Article 31. Chances to Building Except as hereinafter set forth, Lessor reserves the right to make any alterations, modifications, changes or additions to the building and common areas it deems necessary or appropriate (excluding the premises); to change the identity and type of stores and tenancies and the dimensions thereof; to change the name of the building in which the premises are located; to change the address or designation of the building in which the premises are located; to convert common areas into leasable areas (including installation of kiosks) or construct temporary or permanent buildings or improvements in the common -36- areas and change the location or character of or make alterations in or additions to the common areas; provided, however, that no such changes will interfere with the location of, or access to, the premises herein demised or otherwise interfere with or adversely affect Lessee's business. Lessor acknowledges that the ability to obtain open, unimpeded and visible frontage on three sides of the building and access to and from the main lobby of the building is a material inducement to Lessee's entering into this lease with Lessor. Lessor shall not, in the exercise of its rights under this Article, take any action which would adversely affect any of the foregoing. Article 32. Brokers. Each party hereto represents and warrants to the other that it has dealt with no broker or other real estate agent so as to entitle such agent to a commission or fee with respect to this lease other than CB Commercial Real Estate Group, Inc. (the "Broker"). The Broker's fee shall be paid by Lessor. Each party hereto covenants and agrees to indemnify and hold the other party hereto harmless from any and all claims for fees and commissions claimed by any other broker with whom the indemnifying party has had any dealings or negotiations with respect to this lease, including attorney's fees arising in connection therewith: Lessor shall indemnify Lessee and hold Lessee harmless against any claims by the Broker. Article 33. Liens. Provided Lessor advances the Allowance in accordance with the terms and conditions hereof, Lessee agrees promptly to pay for any work done or materials furnished by or on behalf of Lessee in, on or about the premises arid will not permit or suffer any lien to attach to the premises or all or any part of the building by reason thereof, and Lessee shall have no authority or power, express or implied, to create or cause any lien, charge or encumbrance of any kind to be filed against the premises or all or any apart of the building. In the event any lien shall at any time be filed against the premises or any part of the building by reason of work, labor, services or materials alleged to have been performed or furnished by, for or to Lessee or to anyone holding the premises through or under Lessee (excluding Lessor's Work or any other work for which Lessor is responsible hereunder), Lessee shall forthwith cause the same to be discharged of record or bonded to the satisfaction of Lessor. If Lessee shall fail to cause such lien forthwith to be so discharged or bonded within forty-five (45) days after being -37- notified of the filing thereof, then, in addition to any other right or remedy of Lessor, Lessor may discharge the same by paying the amount claimed to be due, and the amount so paid by Lessor and all costs and expenses, including reasonable attorney's fees incurred by Lessor in procuring the discharge of such lien, shall be due and payable by Lessee to Lessor as additional rent on the first day of the next following month. Article 34. Existing Lease. Lessee is currently occupying other space in the building pursuant to a lease between Penn Center Plaza No. Two, Ltd., an Ohio limited partnership and Lessor's predecessor in interest as the owner of the building, as landlord, and Home Unity Savings & Loan Association, as tenant, dated February 13, 1986, as thereafter amended (as so amended, the "Existing Lease"), Lessee having succeeded to the tenant's interest thereunder effective as of August 27, 1993. Lessor, as a material inducement to Lessee to enter into this lease, hereby agrees with Lessee, and Lessee hereby agrees with Lessor, that the Existing Lease and the respective rights and obligations of the parties thereunder shall continue in full force and effect upon all of its terms and conditions (except as to its expiration date) until the Commencement Date and shall automatically and without the necessity of any further action by Lessor or Lessee terminate on the Commencement Date of the initial term of this lease (or, if this lease is for any reason terminated prior to the Commencement Date, the Existing Lease shall automatically terminate on the later of the date on which this lease terminates or February 28, 1994), except for liabilities accrued to the date of such termination, including, without limitation, Lessee's liability for all minimum and additional rent due under the Existing Lease through the date of such termination and Lessee's obligation to surrender the premises demised by the Existing Lease to Lessor. Lessor further agrees with Lessee that (i) Lessee shall have the right (but not the obligation) to relocate and utilize all of said former tenant's trade fixtures, furniture and equipment, including safety deposit boxes, ATM's arid night depositories, acquired by Lessee from The Resolution Trust Corporation, 4nd (ii) Lessee shall have no obligation to (a) restore or repair the premises demised pursuant to the Existing Lease at the termination thereof, (b) remove the vault or any other fixtures or equipment from such space, or (c) remove the vault or any other fixtures from the premises demised hereunder at the expiration of this lease. -38- Untenantability. Notwithstanding any other provision of this lease, if the premises or any part thereof shall be rendered untenantable for any reason (other than by reason of any failure by Lessee to perform any of its obligations under this lease), then except in the case of damage by fire or other casualty (where Article 9 controls): (A) all annual minimum rent and additional rent shall abate for the period that the premises remain untenantable (or, in the event that part but less than all of the premises is rendered untenantable, minimum and additional rent shall abate for such period with respect to the portion of the premises that is rendered untenantable); and (B) in any case that any such untenantability shall continue for a period of thirty (30) consecutive days, Lessee shall have the right to terminate this lease at anytime after the expiration of such 30-day period and prior to resumption of tenantability, by serving Lessor with written notice thereof, provided that if Lessor is unable to restore the premises to a tenantable condition by reason of factors beyond Lessor's reasonable control, such 30-day period shall be extended until Lessor is able to undertake the necessary actions but not beyond a maximum of five (5) months. Article 36. Lessor's Additional Representations and Warranties. In addition to all representations and warranties set forth elsewhere in this lease, Lessor represents and warrants that to Lessor's knowledge: (A) The building is zoned C-5 Commercial, and that the use of the premises for operation of a retail bank is legal. (B) There are no uncured notices of violation issued by any governmental authority with respect to the premises. (C) There is no asbestos and no other hazardous, dangerous or toxic materials or substances in the premises or the building other than customary solvents and other materials used in cleaning and maintenance of the building. -39- Article 37. Lessor's Additional Covenants In addition to all covenants and agreements of Lessor set forth elsewhere in this lease, Lessor hereby covenants and agrees as follows: (A) Lessee, upon paying rent and observing and keeping all covenants, agreements and conditions of this lease on its part to be kept, shall quietly have and enjoy the premises during the term without hindrance or molestation by anyone claiming by or through Lessor, subject, however, to the exceptions, reservations and conditions of this Lease. (B) In connection with any financing obtained by Lessee for the acquisition of furniture and equipment, Lessor shall, without unreasonable delay execute a waiver of lien (in form reasonably acceptable to Lessor) to enable Lessee to procure such financing. (C) Lessor shall operate, maintain and manage the building in a manner consistent with the operation, maintenance and management of first-class office buildings in center city Philadelphia. (D) Lessor shall provide a security guard or similar security at the front desk located in the lobby at all times, including weekends, holidays and after business hours. (E) Lessor will maintain the building common areas in good condition and repair, and will maintain the sidewalks surrounding the building in good condition and repair, substantially free of accumulations of trash and reasonably free of snow and ice. Article 38. Lessor's Default. If after the Commencement Date Lessor shall continuously be in default for 10 consecutive days following written notice from Lessee in the performance of any of its obligations to provide any service to the premises after written notice thereof from Lessee (unless the default is not susceptible of cure within 10 days after such notice, in which event Lessor shall have failed to commence curing the default within such 10day period after written notice thereof and to diligently prosecute such cure until completion), then in addition to any other rights Lessee may have in law or equity, Lessee may (but shall not be obligated to) cure such default on behalf of Lessor, and Lessor shall reimburse Lessee upon demand for all reasonable out-of-pocket costs incurred by Lessee in curing such default, -40- together with interest at the Default Rate from the date such costs were incurred by Lessee to the date of reimbursement. In the event that Lessor fails to pay such amounts to Lessee within ten (10) days after Lessee has made request for payment, Lessee may at its election set off the amounts due against the payments of rent thereafter coming due under this lease. Notwithstanding the foregoing, Lessee shall not have any right in exercising its remedies under the preceding sentence to make any repairs or modifications to the building systems except those within or solely affecting the premises. Article 39. Communications Antenna or Dish. Lessee shall be permitted to install at its expense a communications antenna or dish on the roof of the building, without payment to Lessor of any additional rent or charge therefor, provided (i) the size, wiring, electronics, location, material and color of the communications antenna or dish shall be subject to Lessor's prior written approval, which approval shall not be unreasonably withheld or delayed; and (ii) Lessee shall have obtained necessary approvals for the communications antenna or dish from all governmental authorities having jurisdiction over the building. Article 40. Consents and Approvals. Where pursuant to any provision of this lease the consent or approval of Lessor or Lessee is required with respect to any matter or thing, such consent or approval shall, unless otherwise expressly provided to the contrary in specific sections of this lease, not be unreasonably withheld or delayed. Article 41. Authority. Each individual executing this lease on behalf of Lessor and Lessee represents and warrants that he or she is duly authorized to execute and deliver this lease on behalf of Lessor arid Lessee respectively and that this lease is binding upon Lessor and Lessee respectively in accordance with its terms. Article 42. Condition Precedent. Notwithstanding anything contained in this' lease to the contrary, it is agreed that this lease is specifically conditioned upon Lessee's receipt of all necessary approvals from the Pennsylvania Department of Banking and the Federal Reserve Board for Lessee's use of the premises as a commercial branch bank and any other regulatory authority having jurisdiction over the use of the premises by Lessee as a commercial branch bank. -41- Lessee shall use reasonable efforts and shall diligently proceed to obtain such approvals promptly; if the same shall not have been obtained within ninety (90) days from the execution of the lease, either party by notice to the other may terminate this lease, and neither party shall have any liability to the other after such termination is effective. IN WITNESS WHEREOF, the parties hereto have executed this lease, under seal, the day and year first above written. LESSEE: UNITED BANK OF PHILADELPHIA By: /s/ Emma C. Chappell ----------------------------------- Emma C. Chappell Title: Chairman, President & CEO [Corporate Seal] Attest: /s/ Sharnia Buford ------------------------------- Sharnia Buford Title: Executive Vice President LESSOR: ORESTES REAL ESTATE CORPORATION B.V. By: /s/__________________________ /s/_____________________________ Managing Director Managing Director -42- MAP 1ST FLOOR PLAN EXHIBIT "C" RULES AND REGULATIONS Lessee covenants and agrees with Lessor that: 1. Lessee shall not affix or maintain outside the premises, including the exterior of the glass panes and supports of the show windows (and within twenty-four (24) inches of any window), door and the exterior walls of the premises, or any place within the premises, if intended to be seen from the exterior of the premises, any signs, advertising placards, names, insignia, notices, trademarks, descriptive material or any other such like item or items except such as shall have first received written approval of Lessor as to size, type, color, location, copy, nature and display qualities. No symbol, design, name, mark or insignia adopted by Lessor for the building shall be used without the prior written consent of Lessor. No illuminated signs in the interior of the premises which are visible from outside the premises shall advertise any product. All signs located in the interior of the premises shall be in good taste so as not to detract from the general appearance of the premises or the building. Lessee shall not use handbills or other forms of advertising without the prior written approval of Lessor. 2. No awning or other projection shall be attached to the exterior walls of the premises or the building. 3. No furniture, packages, equipment, supplies or merchandise of Lessee will be received into the building, or carried up or down in the elevators of stairways, except during such hours as shall be designated by Lessor, and Lessor in all cases shall have the exclusive right to prescribe the method and manner in which the same shall be brought into or taken out of the building. Lessor shall in all cases have the right to exclude heavy furniture, safes, merchandise, and other articles from the building which may be hazardous or to require them to be located at designated places in the premises. The cost of repairing any damage to the building caused by taking in or out furniture, safes, merchandise or any article, or any damage caused while the same shall be in the premises, shall be paid by Lessee. 4. All garbage and refuse shall be kept in the kind of container specified by Lessor, shall be placed in the areas specified by Lessor and prepared for collection in the manner and at the times and placed specified by Lessor. If Lessor shall provide or designate a service for picking up refuse and garbage, Lessee shall use same at Lessee's cost, provided such cost shall be competitive to any similar service available to Lessee. 5. No radio or television or other similar device shall, be installed, and no aerial shall be erected on the roof, on exterior walls of the premises or the building, or on the grounds, without the prior written consent of Lessor. Any such device shall be subject to removal without notice, at any time. Any costs for such removal shall be borne by Lessee. 6. No loudspeakers, television sets, phonographs, radios or other devices shall be used in a manner so as to be heard or to be seen outside the premises, without the prior written consent of Lessor. 7. Sales using the auction method of selling, fire sales (except for those solely involving merchandise damaged at the premises), and closing out or going out of business sales (except for those conducted by Lessee itself for a reasonable period of time which are an integral part of Lessee's conclusion of business at the premises and the termination of Lessee's lease for the premises), shall not be conducted on or about the premises without the prior written consent of Lessor. 8. Lessee shall keep its display windows illuminated and :signs and lights on the storefront lighted each and every day of the term hereof during the hours designated by Lessor. 9. Lessee shall not place nor permit any obstructions or merchandise in the service corridors, sidewalks, entrances, passages, courts, corridors, elevators or stairways. 10. Lessee shall use such pest extermination contractor as Lessor may direct and at such intervals as Lessor may require, provided the cost thereof is competitive to any similar service available to Lessee. 11. Lessee will cooperate and participate in all security programs affecting the building. 12. Lessee shall not do or commit, or suffer or permit to be done or committed, any act or thing whereby, or in consequence whereof, the rights of other tenants will be obstructed or interfered with, or other tenants will in any other way be injured or annoyed. Lessee shall not use nor keep nor permit to be used or kept in the store any matter having an offensive odor, nor any kerosene, gasoline, benzine, fuel, or other explosive of highly flammable material. No birds, fish or animals shall be brought into or kept in or about the premises. In addition, no person shall use the premises as sleeping quarters. -2- 13. Lessee shall obtain all permits or licenses necessary to conduct its business. 14. Except for those exclusively for use by employees of Lessee which are not visible from the sales area of the premises or the exterior of the premises, Lessee shall not operate any coin or token operated vending machine or similar device for the sale of any goods, wares, merchandise, food beverages, or services, including, but not limited to, pay telephones, pay lockers, pay toilets, scales, amusement devices and machines for the sale of beverages, food, candy, cigarettes or other commodities, without the prior written consent of Lessor. 15. Lessee shall not place or maintain any temporary fixture for the display of merchandise in front of or within any entrance to the premises which is within. six (6) feet of the front lease line of the premises or within three (3) feet of any recessed entry of the premises, except such as shall have first received the written approval of Lessor as to size, color, location, nature and display qualities. 16. Lessee shall not make noise, cause disturbances or vibrations or use or operate any electrical or electronic devices or other devices that emit sound or other waves or disturbances, or create odors (any of which may be offensive to other tenants and occupants of the building) or that would interfere with the operation of any device or equipment or radio or television broadcasting or reception from or within the building or elsewhere. 17. These rules and regulations are not intended to give Lessee any rights or claims in the event that Lessor does not enforce any of them against other tenants or, if Lessor does not have the right to enforce them against any other tenants, and such non-enforcement will not constitute a waiver as to Lessee. 18. Smoking is not permitted in the common areas of the building, including the restrooms, elevators and elevator lobbies, ground floor lobby, corridors and fire towers. 19. No bicycles or portions thereof are permitted in the building, including the common areas thereof, and Lessor is not responsible for bicycles left outside the building. The foregoing covenants and agreements in this Exhibit "C" shall be referred to collectively as "Rules and Regulations". -3- Lessee agrees that Lessor may amend, modify and delete present rules and regulations or add new and additional reasonable rules and regulations for the use and care of the premises, the building of which the premises are a part, the common areas and all of the Concourse. Lessee understands and agrees that such rules and regulations are necessary in order to maintain a high quality center although they may affect Lessee's method of operating and merchandising its store at the premises and Lessee agrees to comply with all such rules and regulations upon notice to Lessee from Lessor or upon the posting of the same in such place within the Concourse as Lessor may designate. In the event of any breach of any of the rules and regulations herein set forth or any amendments or additions thereto, Lessor shall have all remedies in this lease provided for default of Lessee. -4- EX-10 4 exh10b.txt EX 10.B LEASE BRANCH OFFICE - 1620 WADSWORTH AVE Exhibit 10(b) LEASE FOR BRANCH OFFICE LOCATED AT 1620 WADSWORTH AVENUE AMENDMENT TO LEASE This Amendment to Lease Agreement ("Lease Amendment") dated as of December 14, 1998 between Wadsworth Realty LLC ("Landlord") with an address c/o Andrell Properties, Inc., Southport Place, 30 Jelliff Lane, Southport, CT 06490 (successor in interest to M.H. Tyson and Bertha Tyson, his wife, and A.H. Weiss and Helen Weiss, his wife, co-partners trading as Eastern Realty Company; Alfred P. Orleans, Morris Caplan, Marvin Orleans, Bernard Flitter and M.P. Potamkin, co-partners trading as Orleans Construction Company (collectively, the "Initial Landlord")), as landlord, and first Union National Bank ("Tenant") with an office at 1345 Chestnut Street, 18th Floor, Philadelphia, PA 19107, Mail Drop: PA 4121 (successor in interest to Industrial Trust Company (the "Initial Tenant")), as tenant. W I T N E S S E T H WHEREAS Initial Landlord and Initial Tenant entered into a Lease Agreement dated August 8, 195$ (the "Lease") with respect to the leased premises (as defined in the Lease) (any terns used in this Lease Amendment and not otherwise defined herein shall have the meaning ascribed to such term in the Lease) which Lease is set to expire (with no further options held by Tenant to extend the term of the Lease) on December 14, 1998. WHEREAS Landlord and Tenant, as successors in interest to Initial Landlord and Initial Tenant, respectively seek to extend the term of the Lease from the date hereof (the "Lease Amendment Rent Commencement Date") and further modify the Lease asset forth in this Lease Amendment, NOW, THEREFORE, intending to be legally bound and for other good and valuable consideration, Landlord and Tenant hereby agree as follows: 1. The language "the buildings and improvements to be constructed thereon by Landlord in accordance with this Lease" in the thirteenth and fourteenth lines of Section 101 of the Lease is hereby deleted and the language "the buildings and improvements situate on the leased premises as of the date of the commencement of the Amended Lease Term (hereinafter defined in Section 201)" is hereby inserted in its place. 2. The first two sentences of Section 102 of the Lease are hereby deleted and the following language is hereby inserted in its place: 1 Except as provided in the next sentence, all buildings, improvements, fixtures and building equipment situate on the leased premises shall be and remain the property of Landlord. 3. Sections 201, 202 and 203 of the Lease shall be deleted in their entirety and replaced with the following: Section 201. Term. Tenant shall have and hold the leased premises for the term to commence on the Lease Amendment Rent Commencement Date and shall end on December 31, 2003 (the "Amended Lease Term"). Section 202. Renewal Option-Exercise. Tenant, if not in default under the terms of this Lease after giving effect to any applicable notice and cure periods, and if Tenant is in possession and occupancy of the leased premises and conducting business therein at the time thereof, is hereby given the option (the "Renewal Option's to extend the term of this Lease for a further period of five (5) years following the expiration of the Amended Lease Term. The Renewal Option may only be exercised by Tenant giving Landlord notice in writing, by registered or certified mail, addressed to Landlord at the place provided under this Lease and received by Landlord at least 180 days prior to the expiration of the Amended Lease Term. Such extended term (the "Renewal Term") shall be at the rents determined, as hereinafter set forth, and upon the terms and conditions set out hereinafter for such renewal and there shall be no right or option for further renewals. 4. Sections 301, 302, 303, 304 and 305 if the Lease shall be deleted in their entirety and replaced with the following: Section 301. Minimum Annual Rent. Tenant shall pay to Landlord the following guaranteed minimum annual rent ("Minimum Rent" or "Minimum Annual Rent"), payable in monthly installments in advance on January 1, 1999 and on the first day of each month during the term of this Lease: TIME ANNUAL MONTHLY PERIOD AMOUNT AMOUNT 1/1/99-12/31/99 $37,500.00 $ 3,125.00 1/1/00-12/31/00 $38,625.00 $ 3,218.75 1/1/01-12/31/01 $39,783.75 $ 3,315.31 1/1/02-12/31/02 $40,977.26 $ 3,414.77 1/1/03-12/31/03 $42,206.58 $ 3,517.22 2 There shall also be payable as Minimum Rent on the date of this Lease Amendment the amount of $1,814.51 for the period 12/14/98-12/31/98. RENEWAL OPTION: 1/l/04-12/31/04 $43,472.78 $ 3,622.73 1/1/05-12/31/05 $44,776.96 $ 3,731.41 1/1/06-12/31/06 $46,120.27 $ 3,843.36 1/l/07-12/31/07 $47,503.88 $ 3,958.66 1/1/08-12/31/08 $48,929.00 $ 4,077.42 Each such installment shall be sent to the Landlord at: c/o Andrell Properties, Inc., Southport Place, 30 Jelliff Lane, Southport, CT 06490 or to such other person or entity or at such other place as may be designated by Landlord from time to time, without any prior notice or demand therefor and without any deduction or setoff whatsoever, except as expressly set forth in this Lease. Section 302. Common Area Maintenance. Tenant agrees to pay as rent, in addition to the minimum rental herein reserved certain additional operating expenses with respect to the leased premises ("CAM Costs' which costs shall include, without limitation, the cost of the following; casualty and liability insurance and other coverage carried by Landlord with respect to the leased premises; sweeping, snow removal and subject to the limitations set forth herein, general maintenance and repair of the parking lot and roof of the leased premises; lighting the parking lot of the leased premises; security and traffic control services (if deemed necessary by Landlord); and an annual administrative fee equal to 15% of such CAM Costs. The amount due hereunder on account of such CAM Costs shall be apportioned for that part of the first and last calendar years covered by the term hereof. Landlord will deliver to Tenant a statement showing in reasonable detail Tenant's CAM Costs and, within 30 days after delivery of such statement, Tenant will pay Tenant's CAM Costs as additional rent. Landlord may at any time during the term of this Lease require Tenant to pay monthly installments along with Minimum Rent equal to one-twelfth (1/12th) of Tenant's CAM Costs for the preceding year; provided however, that Tenant shall pay any deficiency (or Landlord shall refund any overpayment) within 30 days after delivery of the aforementioned statement by Landlord. Any Landlord's statement of Tenant's CAM Costs shall be conclusive and binding on Tenant unless Tenant shall object to such statement, specifying the specific areas in which it disputes such 3 statement, within one hundred eighty (180) days after receipt of such statement. The CAM Costs shall not include: a. any charge for depreciation, interest, leasehold amortization or rents (including ground rents) and non-cash items paid, booked or incurred by Landlord; b. items and services for which Tenant reimburses Landlord or pays third parties; c. repairs or other work needed because of fire, windstorm or other casualty or cause insured against by Landlord pursuant to the casualty and insurance provisions of the Lease, or to the extent Landlord's insurance would have provided insurances, which is the greater coverage; d. any costs, fines or penalties, incurred because Landlord violated any, governmental law, statute or ordinance; e. costs incurred by Landlord to test, survey, cleanup, contain, abate, remove, or otherwise remedy any currently classified hazardous wastes or asbestos containing materials from the leased premises or related land, unless the Tenant caused such wastes or asbestos containing materials to be in, on, or around the leased premises; f. other expenses which under GAAP, consistently applied, would not be considered normal maintenance, repair, management ox operating expenses; g. costs of electrical energy furnished and metered directly to Tenant; h. salaries, expenses, fringe benefits and other compensation except to the extent reasonable and directly allocable to the operation of the leased premises; i. increased insurance premiums caused by acts of any party other than Tenant; j. costs incurred by the negligence or willful acts of the Landlord; or k. costs of repair or replacement incurred by fire or other casualty or caused by the right or eminent domain. 4 Tenant shall be permitted to audit Landlord's books and records pertaining to CAM Costs at a mutually convenient time, following reasonable advance notice to Landlord. If it is mutually determined through an audit of the Landlord's books that amounts paid to Landlord are in excess of amounts due, then Landlord shall repay such excess to Tenant within thirty (30) days after demand following such determination. Section 303. Real Estate Taxes. Tenant agrees to pay as rent in addition to the minimum rental herein reserved, all real estate taxes, charges or other assessments assessed or imposed upon the leased premises during the term of this Lease (including, but not limited to, charges for water and sewer rents). The amount due hereunder on account of such taxes ("Tenant's Tax Payment") shall be apportioned for that part of the first and the last calendar years covered by the term hereof. Landlord will deliver to Tenant a statement showing in reasonable detail Tenant's Tax Payment and, within 30 days after delivery of such statement, Tenant will pay Tenant's Tax Payment to Landlord as additional rent. Landlord may at any time during the term of this Lease require Tenant to pay monthly installments along with Minimum Rent equal to one-twelfth (1/12th) of Tenant's Tax Payment for the preceding year; provided, however, that Tenant shall pay any deficiency (or Landlord refund any overpayment) within 30 days after delivery of the aforementioned statement by Landlord. Tenant agrees to pay Tenant's share of any Use and Occupancy Tax or similar tax imposed by the City of Philadelphia, if applicable. Any Landlord's statement of Tenant's Tax Payment or Use and Occupancy Tax shall be conclusive and binding on Tenant unless Tenant shall object to such statement, specifying the specific areas in which it disputes such statement, within ninety (90) days after receipt of such statement. Notwithstanding anything to the contrary, contained in this Section 303, neither the term "real estate taxes" nor "Tenants Tax Payment" shall include any inheritance, estate, succession, transfer, gross receipts, franchise, corporation net income or profit tax or capital levy imposed upon Landlord. 5. The language (subject to Tenants obligation to reimburse Landlord therefor as set forth in Section 302 above)" is hereby inserted after the word "Landlord" on the second line of Section 401 of the Lease and after the word "insurance" on the eleventh line of Section 401 of the Lease. 6. Section 501 through 507 of the Lease shall be deleted in their entirety and replaced with the following: Section 501. Condition of Leased Premises. Tenant has fully inspected the leased premises and is satisfied in all respects with the condition of the leased premises. Tenant hereby accepts delivery of possession of the 5 leased premises in their present "as is, where is" condition and state of repair as of the date hereof. 7. The language in the first sentence of Section 602 (a) of the Lease on the first four lines thereof (beginning with the work "Subject" and ending with the language "Section 602") is hereby deleted. 8. Section 602 (b) shall be deleted in its entirety and replaced with the following (b) Landlord shall maintain and repair the roof, the exterior of the building, landscaping and the hard surface parking for any parking spaces as may exist on the leased premises as of the date of commencement of the Amended Lease Term, and all water, sewer and utility lines exterior to the building on the leased premises. Landlord shall not be obligated to rebuild, replace, repair, or maintain the leased premises except as specifically provided herein, but in the event Landlord receives money or property in reimbursement of or in compensation for damage or loss to the leased premises for which Tenant is obliged to make repairs as herein set forth, Landlord shall apply all such money and property, to the extent required therefor, to the repair and restoration of such damage or loss. Landlord has no responsibility for supplying any utilities to the leased premises and Tenant shall make such arrangements as Tenant shall desire for the provisions of such utilities directly )with the appropriate utility companies and Tenant shall be responsible for paying any and all charges in connection with Tenant's utility consumption at the leased premises. Nothing in this Section 602 is intended to limit Tenant's obligation to pay CAM Costs as provided in this Lease. 9. Section 604 of the Lease shall be deleted in its entirety and replaced with the following: Section 604. Landlord's Title. Landlord warrants that it has good and marketable title to the leased premises, subject to all matters of record, and has the exclusive right to lease such premises. 10. Section 701 of the Lease shall be deleted in its entirety. 11. Section. 801 of the Lease shall be deleted in its entirety and replaced with 6 the following: Section 801. Assignment or Sublease Permitted. Tenant shall not have the right to assign or transfer this Lease or sublet the whole or any part of the leased premises without first obtaining the written consent of the Landlord, which consent shall not be unreasonably withheld or delayed. Notwithstanding any such assignment or transfer of this Lease or subletting of the leased premises, Tenant shall nevertheless remain liable to Landlord for the performance of all of the terms, agreements, provisions and conditions of this Lease. Notwithstanding anything in this Lease to the contrary, in the event Tenant assigns this Lease or sublets the whole or any part of the leased premises at any time during the Amended Lease Term, the Renewal Option will deem to have been exercised by the Tenant as of the date of such assignment or subletting. Notwithstanding anything to the contrary contained herein, Tenant shall have the right, without Landlord's prior consent, to assign this Lease, sublet the leased premises (or any portion thereof) and/or permit the use of the leased premises (or any portion thereof) by or to an Affiliate or Successor of Tenant, provided, however, that such Affiliate or Successor uses the Premises solely for the uses permitted by this Lease. For purposes hereof, and "Affiliate" or "Successor" of Tenant is an entity controlling, under common control with or controlled by First Union National Bank, including an entity resulting from an internal reorganization, a merger or a consolidation by or with Tenant. For purposes of this definition, the work "control", as used above, means with respect to a Person (as hereinafter defined) that is a corporation, the right; to direct or cause the direction of the management or policies of the controlled Person. The word "Person" means an individual partnership, trust, corporation, firm or other entity. Tenant shall promptly notify Landlord in writing in the event of art assignment or subletting to an Affiliate or Successor. 12. Section 903 of the Lease shall be deleted in its entirety and replaced with the following: Section 903. Confession in Ejectment. In addition to, and not in lieu of any of the foregoing rights granted to Landlord: WHEN THIS LEASE OR TENANT'S RIGHT OF POSSESSION SHALL BE TERMINATED BY COVENANT OR CONDITION BROKEN, OR FOR ANY OTHER REASON, EITHER DURING THE TERM OF THIS LEASE, AND ALSO WHEN AND AS SUCH TERM SHALL HAVE EXPIRED OR BEEN TERMINATED, TENANT HEREBY IRREVOCABLY AUTHORIZES AND 7 EMPOWERS ANY ATTORNEY OF ANY COURT OF RECORD AS ATTORNEY FOR TENANT AND ANY PERSONS CLAIMING THROUGH OR UNDER TENANT TO CONFESS JUDGMENT IN EJECTMENT AGAINST TENANT AND ALL PERSONS CLAIMING THROUGH OR UNDER TENANT FOR THE RECOVERY BY LANDLORD OF POSSESSION OF THE LEASED PREMISES, FOR WHICH THIS LEASE SHALL BE SUFFICIENT WARRANT, WHEREUPON, IF LANDLORD SO DESIRES, A WRIT OF EXECUTION OR 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 DETERMINED, CANCELLED OR SUSPENDED AND POSSESSION OF THE LEASED PREMISES HEREBY DEMISED REMAIN IN OR BE RESTORED TO TENANT OR ANY PERSON CLAIMING THROUGH OR UNDER TENANT, LANDLORD SHALL HAVE THE RIGHT, UPON ANY SUBSEQUENT DEFAULT OR DEFAULTS, OR UPON ANY SUBSEQUENT TERMINATION OR EXPIRATION OF THIS LEASE OR ANY RENEWAL OR EXTENSION HEREOF, OR OF TENANT'S RIGHT OF POSSESSION, AS HEREINBEFORE SET FORTH, TO CONFESS JUDGMENT IN EJECTMENT AS HEREINBEFORE SET FORTH ONE OR MORE ADDITIONAL TIMES TO RECOVER POSSESSION OF THE SAID LEASED PREMISES. IN ANY ACTION OF OR FOR EJECTMENT, IF LANDLORD SHALL FIRST CAUSE TO BE FILED IN SUCH ACTION AN AFFIDAVIT MADE BY IT OR SOMEONE ACTING FOR IT SETTING FORTH THE FACTS NECESSARY TO AUTHORIZE THE ENTRY OF JUDGMENT, SUCH AFFIDAVIT SHALL BE PRESUMPTIVE EVIDENCE SUCH FACTS; AND IF A TRUE COPY OF THIS LEASE (AND OF THE TRUTH OF THE COPY SUCH AFFIDAVIT SHALL BE SUFFICIENT EVIDENCE) BE FILED FN SUCH ACTION, IT SHALL NOT HE NECESSARY TO FILE THE ORIGINAL AS A WARRANT OF ATTORNEY, ANY RULE OF COURT, CUSTOM OR PRACTICE TO THE CONTRARY NOTWITHSTANDING. TENANT RELEASES TO LANDLORD, AND TO ANY AND ALL ATTORNEYS WHO MAY APPEAR FOR TENANT, ALL PROCEDURAL ERRORS IN ANY PROCEEDINGS TAKEN BY LANDLORD, WHETHER BY VIRTUE OF THE WARRANTS OF ATTORNEY CONTAINED IN THIS LEASE OR NOT, AND ALL LIABILITY THEREFOR. 8 13. The language "(other than as set forth in Section 1106)" is hereby inserted after the word Tenant on the fourth line of Section 906 of the Lease. 14. Section 1001 of the Lease shall be deleted in its entirety. 15. The second sentence of Section 1102 of the Lease shall be deleted and replaced with the following: No assignment or transfer of this Lease shall relieve any of the parties hereto of duties and obligations under this Lease; provided, however, in the event Landlord transfers and conveys the leased premises, or any premises of which the leased premises are a part, to another party, other than an agent or nominee of Landlord, and in the further event that such transferee assumes and agrees to perform all of the obligations of Landlord set forth in this Lease as Landlord accruing following such transfer; then in such event such third party shall become bound by the provisions of this Lease accruing following such transfer and Landlord shall be discharged and released of all. obligations under this Lease accruing following such transfer. 16. Section 1103 of the Lease shall be deleted in its entirety and replaced with the following: Section 1103. Notices: Whenever in this Lease notice or demand is required or permitted to be given or served by either patty to the other, such notice or demand shall not be deemed to have been given or served unless in writing and either personally delivered, sent by overnight courier, or forwarded by registered or certified mail, return receipt requested, postage prepaid, addressed to such party at its address set forth in that certain Amendment to Lease dated as of December 14, 1998. Such addresses may be changed from time to time by either party by serving notice as above provided. Time shall be of the essence with respect to any such notice or demand. The date of delivery of any notice provided for herein shall be the date of delivery with respect to any notice transmitted by personal delivery, the first business day following deposit with an overnight courier with respect to notices transmitted by overnight mail, and two days following the date of deposit in the United States mail if given by registered mail ox certified mail. Tenant hereby waives the right to receive any notice to quit contemplated by Section 501 of the Landlord Tenant Act of 1951, as amended. 9 17. The following new sections shall be added to the Lease following Section 1105: Section 1106. Late Charge. If Tenant shall fail to pay all or any part of any installment of Minimum Rent or Additional Rent (such as Tenant's CAM Costs or Tenant's Tax Payments) for more than ten (10) days after the same shall have become due and payable, Tenant shall pay as additional rent hereunder to Landlord a late charge of five (5) cents per month for each dollar of the amount of such Minimum Rent or additional rent which shall not have been paid to Landlord within said ten (10) day period. It is understood and agreed that such charges represent an estimate of damages incurred for late processing and administrative special handling and are not interest or penalty payments. The provisions herein for such charges shall not be construed to extend the date for payment of any sums required to be paid by Tenant hereunder or to relieve Tenant of its obligations to pay all such stuns at the time or times herein stipulated. Notwithstanding the imposition of such charges, Tenant shall be in default under this Lease if all payments required to be made by Tenant are not made at the times herein stipulated under this Lease, subject to Section 906 hereof. Section 1107. Tenant Obligations. (a) Environmental Laws. (i) Tenant shall comply with all applicable federal, state, and local environmental laws, ordinances, orders or regulations affecting the leased premises, the operation of Tenant's business at the leased premises, or the removal of any substances therefrom. Notwithstanding anything in this Lease to the contrary, Tenant shall not, without Landlord's prior written consent and subject to reasonable conditions imposed by Landlord, use, store, manufacture, process or dispose of any oil, grease, or hazardous substances regulated by any public authority. (ii) Tenant shall not permit any on-site disposal of oil, grease or hazardous substances. No hazardous or industrial wastes, contaminated substances or those resulting from manufacturing or processing shall be debited in containers provided for trash removal. All waste materials (including Tenant's construction or remodeling wastes) other than ordinary sanitary commercial trash shall be removed from the leased premises and properly disposed of in compliance with all applicable laws at Tenant's sole cost and expense. (iii) Tenant does hereby indemnify and hold Landlord harmless oft from and against all claims, actions, liens, demands, costs, expenses, fines and judgments (including legal costs and attorney's fees) resulting from or arising by reason of any spills or contamination of air, soil or water by oil, 10 grease or hazardous substances caused by Tenant, its agents or employees at or around the leased premises or upon removal therefrom, or the violation of any other provision of this Section 1107, as a result of negligence, acts or omissions of Tenant. (b) Waste. Tenant shall not commit or suffer to be committed any waste or nuisance or other act or thing upon the leased premises. (c) Compliance with Laws. Tenant shall, at Tenant's sole cost and expense, comply with all laws and other requirements of all municipal, county, state, federal and other governmental authorities, now in force or which may hereafter be in force, applicable to the leased premises or the use thereof or the conduct of Tenant's business therein. Section 1108. Offset Statement Within twenty days after request therefor by Landlord, Tenant agrees to deliver in recordable form a certificate to Landlord or to any proposed mortgagee, lessor or purchaser certifying, among other things: (a) whether this Lease is in full force and effect; (b) whether this Lease has been modified or amended and, if so, identifying and describing any such modification or amendment; (c) the date to which rent and other charges have been paid; and (d) whether Tenant knows of any default on the part of Landlord ox has any claim against Landlord and, if so, specifying the nature of such default or claim. Section 1109. Surrender and Holding Over. Upon expiration or termination of this Lease by lapse of time or otherwise, Tenant shall peaceably surrender the leased premises to Landlord in broom-clean condition and in good repair, reasonable wear and tear, damage caused by a fire or other casualty or damage caused by Landlord, its agents or employees excepted. In the event that Tenant shall fail to surrender the leased premises, Landlord shall have the right to demand and receive, as liquidated damages in addition to all other remedies, an amount equal to 150% of the stated Minimum Rent specified in this Lease for the period of time Tenant shall so retain possession of the Leased /?remises after expiration of the stated term hereof (or if there is no Minimum Rent stated for such time, 150% of the Minimum Rent which is to be in effect from 1/1/08 to 12/31/08). If Tenant remains in possession of the leased premises with Landlord's consent but without a new duly executed written Lease, Tenant shall be deemed to be occupying the leased premises as a tenant at will, subject to all the covenants, conditions and agreements of this Lease. Section 1110. Invalid Provisions. If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall to any extent be held invalid or unenforceable, the remainder of this Lease or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be 11 affected thereby, and each term, covenant or condition of this Lease shall be valid and enforced to the fullest extent permitted by law. Section 1111. Survival of Obligations. All obligations of Tenant which by their nature involve performance in any particular after the end of the term, or which cannot be ascertained to have been fully performed until after the end of the term, shall survive the expiration or sooner termination of the term. Section 1112. Liabilities of Landlord. The liability of Landlord hereunder and any successor to Landlord's estate in and to the leased premises shall be limited to his or its interest in the leased premises, and no other assets of Landlord other than his or its interest in the leased premises shall be affected by reason of any liability which Landlord or his or its successor in interest may have under this Lease. Section 1113. Subordination. (a) Subject to delivery of a reasonably acceptable subordination, nondisturbance and attornment agreement, Tenant agrees that this Lease and all terms, covenants and provisions thereof and all rights, remedies, and options of Tenant thereunder are and shall be subordinate to any mortgage, underlying or master lease now or hereafter placed upon the land of which the leased premises are a part, and to all advances made or hereafter to be made upon the security thereof. Tenant shall, within ten days from the request of Landlord, execute and deliver a subordination, nondisturbance and attornment agreement in a form provided by Landlord and reasonably acceptable to Tenant confirming the subordination provided for in this Lease. The word "mortgage" as used herein includes mortgages, deeds of trust or similar instruments and the word mortgage, underlying or master lease shall include modifications, consolidations, extensions, renewals, replacements or substitutes thereof. (b) Subject to the terms of a reasonably acceptable subordination, nondisturbance and attornment agreement, Tenant agrees that neither the cancellation nor termination of any ground or underlying lease to which this Lease is now or may hereafter become subject or subordinate, nor any foreclosure of a mortgage affecting the Leased Premises, nor the institution of any suit, action, summary or other proceeding by Landlord herein or any successor Landlord, or any foreclosure proceeding brought by the holder of any such mortgage to recover possession of the mortgaged property, shall by operation in law or otherwise result in the cancellation or termination of this Lease or the obligations of the Tenant hereunder. Tenant agrees to attorn to any subsequent owner of the Premises. (c) Tenant shall notify the mortgagee affecting the leased premises ("Lender") of any default by Landlord under the Lease and agrees that, notwithstanding any provisions of the Lease to the contrary, no notice of 12 cancellation thereof or of an abatement shall be effective unless Lender shall have received notice of default giving rise to such cancellation or abatement and shall have failed within thirty (30) days after receipt of such notice to cure such default, or if such default cannot be cured within thirty (30) days, shall have failed within thirty (30) days after receipt of such notice to commence and thereafter diligently pursue any action necessary to cure such default. Notwithstanding the foregoing, Lender shall have no obligation to cure any such default. Section 1114. Custom and Usage. Any law, usage or custom to the contrary notwithstanding, Landlord shall have the right at all times to enforce the covenants and conditions of this Lease in strict accordance with the terms hereof and notwithstanding any conduct or custom on the part of Landlord in refraining from so doing at any time or times. The failure of Landlord at any time or times to enforce its rights under said covenants and provisions strictly in accordance with the same shall not be construed as having created a custom in any way or manner contrary to specific terms, provisions and covenants of this Lease or as having modified or waived the same. Section 1115. Indemnification. Tenant hereby agrees to indemnify, defend and hold Landlord harmless of and from any and all damage, loss cost or expense (including, but not limited to, court costs and reasonable attorneys fees) arising from any damage to personal property occurring on the leased premises or any injury or death to persons occurring on the leased premises unless arising from the negligence or willful misconduct of Landlord. 18. Tenant and Landlord each represent and warrant to the other that it has had no dealings with any broker or agent in connection with this Lease other than Andrell Properties, Inc, and each agrees to indemnify and hold the other party harmless from and against any and all claims, liabilities or expenses (including reasonable attorneys' fees) imposed upon, asserted or incurred by such party as a consequence of any breath of this representation. 19. The submission of this Lease Amendment by Landlord to Tenant for examination shall not be deemed to constitute an offer by Landlord or a reservation to Tenant of an option to lease, and this Lease Amendment shall become effective as a binding instrument only upon the execution and delivery thereof by both Landlord and Tenant. 20. The provisions of this Lease Amendment shall bind the parties hereto and their respective successors and assigns, 13 21. The Lease, as modified by this Lease Amendment, shall continue in full force and effect. 14 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this Lease Amendment to be duly executed as of the day and year first above written. Landlord WADSWORTH REALTY LLC, a Pennsylvania limited liability company By: /s/ John Nelson Print Name: John Nelson Title: Managing Member Witness: /s/ Tenant FIRST UNION NATIONAL BANK By: /s/ Glenn Blumenthal Print Name: Glenn Blumenthal Title: Vice President Witness: /s/ 15 EX-10 5 exh10c.txt EX 10.C LEASE BRANCH OFFICE - 3750 LANCASTER AVE Exhibit 10(c) LEASE FOR BRANCH OFFICE LOCATED AT 3750 LANCASTER AVENUE AGREEMENT RELATING TO ASSIGNMENT, ASSUMPTION AND AMENDMENT OF LEASE THIS AGREEMENT RELATING TO ASSIGNMENT, ASSUMPTION AN AMENDMENT of LEASE (this "Agreement") is made and entered into as of the 22nd day of July, 1996, by and among MIDLANTIC BANK, N.A., a national banking association, successor by merger to Continental Bank and Trust Company ("Assignor"); UNITED BANK OF PHILADELPHIA ("Assignee"); and MAURICE HERTZFELD AND IRWIN HOROWITZ (collectively, the "Landlord"). I. BACKGROUND. A. Reference is hereby made to that certain Agreement of Lease dated March 21, 1968, between Landlord and Assignor, for the "premises" described therein and located at 3750 Lancaster Avenue, Philadelphia, Pennsylvania (the "Premises"). B. Assignor desires to assign the Lease and all of its rights and obligations thereunder to Assignee, and Assignee desires to receive the assignment of the Lease from Assignor, and to assume all of the rights and obligations of Assignee under the Lease, all as more particularly set forth hereinbelow. C. Landlord desires to consent to the assignment of the Lease in accordance with the titans of this Agreement. D. In connection with the assignment of the Lease, Landlord and Assignee desire to amend the Lease in certain respects, as more particularly set forth herein. II. AGREEMENT. Now, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, Assignor, Assignee and Landlord agree, effective as of July 22, 1996 (the "Effective Date"), as follows: B. Assumption. In consideration of the foregoing assignment, Assignee hereby covenants and agrees to perform all of the agreements, covenants and conditions in the Lease which are to be performed and observed on the part of Assignor as lessee thereunder, including, without limitation, the payment of all rent and other sums which become due on or after the Effective Date according to the terms of the Lease. C. Landlord's Consent. Landlord hereby consents to the foregoing assignment of the Lease and agrees to accept Assignee as the lessee under the Lease as amended hereby. D. Assignor's Continuing Obligations. Notwithstanding the assignment of the Lease, Assignor shall remain secondarily liable for the performance by Assignee of the obligations of the lessee under the Lease as amended hereby, provided, however, that Landlord shall first seek performance of such obligations from Assignee. Assignor's liability pursuant to the immediately preceding sentence shall be limited to the terms of the Lease as amended by this Agreement, and in no event shall Assignor's liability hereunder be increased as a result of modifications to the Lease entered into without Assignor's consent. Assignor shall be released from any and all obligations under the Lease on March 31, 1999 without the requirement for the execution of any additional instruments and notwithstanding any extension of the Lease. E. Notice of Default: Cure Rights. In the event Assignee defaults in the performance of its obligations under the Lease (including, without limitation, the payment of monthly base rent or other amounts due) during the period between the Effective Date and March 31, 1999, Landlord may not exercise any of its remedies under the Lease unless (i) Landlord notifies Assignor in accordance with the notice provisions set forth hereinbelow of such default and (ii) Assignor fails to cure such default within thirty (30) days after receiving such notice. F. Regarding Certain Repairs. Assignee acknowledges that Assignor has repaired the roof, replaced ceiling tiles and replaced fluorescent light bulbs in the building on the Premises. Assignor shall be responsible for said repairs, and for any damage resulting from the failure of said repairs, for a period of ninety (90) days from the date hereof, provided that Assignee notifies Assignor of any such failure or damage within said ninety (90) day period. After such ninety (90) day period, Assignor shall have no further responsibility for said repairs. Assignor agrees to cause the repair of the outside retaining wall on the Premises within a reasonable time after the date of this Agreement. 2 G. Amendment to Lease. The Lease is hereby amended as follows: 1. Paragraph 1 of the Lease is hereby amended by deleting the following sentence: "TOGETHER with the building and improvements to be constructed thereon.", and inserting in lieu thereof the following: "TOGETHER with the building constructed thereon containing approximately 3,000 square feet of space, and the other improvements constructed thereon." 2. Paragraph 2 of the Lease is hereby deleted in its entirety. 3. Paragraph 3 of the Lease is hereby deleted in its entirety. 4. Notwithstanding anything contained in paragraph 4 of the Lease to the contrary, the term of the Lease shall expire on July 31, 2006. 5. Notwithstanding anything containers in Paragraph 5 of the Lease to the contrary, minimum monthly rent for the Premises for the period commencing on the Effective Date through and including March 31, 1999 shall be $1,891.50 per month; and minimum monthly rent for the Premises for the period commencing April 1, 1999 through and including July 31, 2006, shall be as follows: Time Period Minimum Monthly Rent ----------- -------------------- 4/01/99 - 3/31/00 $2,500.00 4/01/00 - 3/31/01 2,625.00 4/01/01 - 3/31/02 2,750.00 4/01/02 - 3/31/03 2,875.00 4/01/03 - 3/31/04 3,000.00 4/01/04 - 3/31/05 3,000.00, increased by a factor that is the increase (if any) in CPI from April of 1999 through March of 2004 4/01/05 - 7/31/06 The minimum monthly rent in effect for the, period from increased by a factor that is the increase (if any) in CPI from April of 2004 through March of 2005. 3 For the purposes of this Paragraph 5, the Term "CPI" shall mean the Consumer Price Index for All Urban Consumers (CPI-U), U.S. City Average, All Items (1982-1984 = 100), as compiled and published by the Bureau of Labor Statistics, United States Department of Labor. If this index shall cease to be published, then a successor index or the most nearly comparable index shall be used. 6. Paragraph 21 of the Lease is hereby deleted in its entirety, and the following is inserted in lieu thereof: "21. Lessee's Option to Extend. If Lessee is not in default hereunder, Lessee will have the right to extend the Lease for one five (5) year term commencing on August 1, 2006, and terminating on July 31, 2011, by giving written notice, not later than April 30, 2006, of Lessee's intention to extend the term. Lessee will have no further option to extend the term of this Lease. Said extension term will be on all of the terms and conditions of this Lease, except for minimum monthly rent, which shall, for each month of each year of said extended term, equal the minimum monthly rent in effect during the period front April, 2005 to July 31, 2006 increased by a factor that is the increase in CPI from April of 2005 to July of 2006. For the purposes of this Paragraph 21, the term "CPI" shall mean the Consumer Price Index for All Urban Consumers (CPI-U), U.S. City Average, All Items (1982 - 1984 = 100), as compiled and published by the Bureau of Labor Statistics, United States Department of Labor. If this index shall cease to be published, then a successor index or the most nearly comparable index shall be used." 7. Paragraph 22 of the Lease is hereby deleted in its entirety, and the following is inserted in lieu thereof: "22. Notices. Whenever, by the terms of this Lease, any notice, consent, or other communication relating to this Lease shall or may be given, such notice shall be given in writing and shall be delivered (i) by registered or certified mail, return receipt requested, postage pre-paid, (ii) overnight express mail such as "Federal Express," postage pre-paid, or (iii) by hand delivery with receipt acknowledged, addressed as follows: 4 If to Lessee: United Bank of Philadelphia 714 Market Street Philadelphia, Pennsylvania 19106 Attn: Emma Chappell, CEO If to Lessor: Maurice Hertzfeld c/o Hertzfeld Associates, Inc. 730 East Railroad Avenue Suite 200 Bryn Mawr, Pennsylvania 19010 , or to such other address as such parties shall designate to the other parties in writing." Except as otherwise amended hereby, the Lease shall continue unmodified and in full force and effect. H. Notice of Assignment: Amendment to Memorandum of Lease. Assignor, Assignee and Landlord agree to execute and record an amendment to the Memorandum of Lease between Assignor and Landlord which is on record with the Recorder of Deeds Office of Philadelphia, which amendment shall reflect the assignment of the Lease to Assignee. I. Indemnification. Assignee shall indemnify Assignor and hold Assignor harmless from and against any loss, claim, judgment, action, penalty or liability, of any kind or nature, resulting from (i) Assignee's failure to comply with the terms and conditions of the Lease as amended hereby from and after the Effective Date, (ii) Assignee's failure to comply with applicable laws with respect to the Premises from and, after the Effective Date and (iii) Assignee's possession of the Premises from and after the Effective Date. J. Miscellaneous. 1. Notices. Whenever, by the terms of this Agreement, any notice, consent, or other communication relating to this Agreement shall or may be given, such notice shall be given in writing and shall be delivered (i) by registered or certified mail, return receipt requested, postage pre-paid, (ii) overnight express mail such as "Federal Express", postage pre-paid, or (iii) by hand delivery with receipt acknowledged, addressed as follows: 5 If to Assignor: PNC Realty Holding Corp. P1-POPP - 18-1 One PNC Plaza - 18th Floor 249 Fifth Avenue Pittsburgh, PA 15222-2707 Attn: F.R. Walters with a copy to: Trammell Crow Company 111 South Wood Avenue Suite 201 Iselin, NJ 08830 If to Assignee: United Bank of Philadelphia 714 Market Street Philadelphia, Pennsylvania 19106 Attn: Emma Chappell, CEO If to Landlord: Maurice Hertzfeld c/o Hertzfeld Associates, Inc. 730 East Railroad Avenue Suite 200 Bryn Mawr, Pennsylvania 19010 , or to such other address as such parties shall designate to the other parties in writing. 2. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to its choice of law principles. 3. Brokers. Each party hereby represents and warrants to the others that it has not had any contact with any broker in connection with the transactions contemplated by this Agreement other than Trammell Crow N.E., Inc., and each party agrees to indemnify and hold the other parties harmless if such warranty and representation is untrue. Assignor 6 shall be responsible for any commission due to Trammell Crow N.E., Inc. in connection with this transaction. 4. Counterrparts. This Agreement may be executed in counterparts and all counterparts together shall constitute a single agreement. 5. Successors and Assigns. This Agreement shall inure to the benefit of, and bind, the successors and assigns of the parties hereto. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the day and year first set forth above. ASSIGNOR: Midlantic Bank, N.A. By: _____________________________ F. R. Walters, Vice President ASSIGNEE: United Bank of Philadelphia By: __________________________________ Emma Chappell, Chairperson and CEO LANDLORD: - -------------------------- Maurice Hertzfeld - -------------------------- Irwin Horowitz 7 EX-10 6 exh10d.txt EX 10.D LEASE FOR BRANCH OFFICE - 1015 N BROAD ST Exhibit 10(d) LEASE FOR BRANCH OFFICE LOCATED AT 1015 NORTH BROAD STREET COPY LEASE AGREEMENT By and Between PROGRESS INVESTMENT ASSOCIATES, INC. TRADING AS PROGRESS PLAZA SHOPPING CENTER LANDLORD AND THE FIRST PENNSYLVANIA BANK N.A. TENANT DATED: OCTOBER 15, 1988 TABLE OF CONTENTS SUBJECT SECTION PAGE - ------- ------- ---- Access by Landlord 8 11 Right of Entry 8.1 11 Excavation 8.2 11 Advertising, Merchant's Association 10 12 Name in Advertising 10.1 12 Merchants Association 10.2 12 Assignment and Subletting 15 16 Consent Required 15.1 16 Corporate Ownership (Deleted) 15.2 16 Conduct of Business by Tenant 6 8 Purpose of Use 6.1 8 Operation of Business 6.2 8 Competition (Deleted) 6.3 9 Storage, Office Space 6.4 9 Operation of Concessions 6.5 9 Default by Tenant 18 19 Right to Re-enter 18.1 19 Notice 3 Opportunity to Cure 21 Right to Re-let 18.2 21 Legal Expenses 18.3 21 Waiver of Jury Trial and Counterclaim 18.4 22 Waiver of Right of Redemption 18.5 22 Destruction of Leased Premises 13 15 Total or Partial Destruction 13.1 15 Partial Destruction of Shopping Center 13.2 15 Eminent Domain 17 17 Total Condemnation 17.1 17 Partial Condemnation 17.2 17 Total Condemnation of Parking Area 17.3 17 Partial Condemnation of Parking Area 17.4 18 Landlord's Damages 17.5 18 Tenant's Damages 17.6 18 Condemnation of Less than a Fee 17.7 18 Holding Over, Successors 19 22 Holding Over 19.1 22 Successors 19.2 22 Insurance and Indemnity 11 13 Liability Insurance 11.1 13 Increase in Fire Insurance Premium 11.2 14 Indemnification of Landlord 11.3 14 Boiler Insurance (Deleted) 11.4 14 Maintenance of Leased Premises 7 9 Maintenance by Tenant 7.1 9 Maintenance by Landlord 7.2 9 Surrender of Premises 7.3 10 Rules and Regulations 7.4 10 Notice by Tenant 7.5 10 Cost of Maintenance of Common Areas 7.6 10 i Table of Contents (continued) SUBJECT SECTION PAGE - ------- ------- ---- Notice by Tenant 7.5 10 Costs of Maintenance of Common Areas 7.6 10 Miscellaneous 21 23 Waiver 21.1 23 Accord and Satisfaction 21.2 23 Entire Agreement 21.3 23 No Partnership 21.4 23 Force Majeure 21.5 23 Notices 21.6 24 Captions and Section Numbers 21.7 24 Tenant Defined and Use of Pronoun 21.8 24 Brokers Commission 21.9 24 Partial Invalidity 21.10 24 No Option 21.11 24 Recording 21.12 25 Rider (Deleted) 21.13 25 Offset Statement, Attornment, Subordination 14 15 Offset Statement 14.1 15 Attornment 14.2 16 Subordination 14.3 16 Attorney-in-Fact 14.4 16 Quiet Enjoyment 20 22 Records and Books of Account 3 5 Tenant's Records 3.1 5 Reports by Tenant 3.2 5 Right to Examine Books 3.3 5 Audit 3.4 5 Rent 2 2 Minimum Rent 2.1 2 Percentage Rent 2.2 3 Gross Receipts Defined 2.3 3 Taxes 2.4 4 Additional Rent 2.5 4 Past Due Rent 2.6 4 Term 1 1 Leased Premises 1.1 1 Use of Additional Areas 1.2 1 Commencement and Ending Date 1.3 1 Lease Year Defined 1.4 1 Failure of Tenant to Open (Deleted) Joint Opening (Deleted) Renovations by Tenant 1.7 1 Delivery of Premises by Landlord 1.8 2 Acceptance of Premises by Tenant 1.9 2 Option to Renew 1.10 2 Security Deposit 4 6 Amount of Deposit (Deleted) 4.1 6 Use and Return of Deposit (Deleted) 4.2 6 Transfer of Deposit (Deleted) 4.3 6 11 Table of Contents - (Continued) SUBJECT SECTION PAGE - ------- ------- ---- Signs, Awnings, Canopies, Fixtures, Alterations 5 6 Installation 5.1 6 Changes and Additions to Building 5.2 7 Removal and Restoration by Tenant 5.3 7 Discharge of Liens 5.4 7 Signs, Awnings and Canopies 5.5 7 Parking and Common Use Areas 5.6 7 License 5.7 8 Tenant's Property 9 12 Loss and Damage 9.1 12 Utilities 12 14 Utility Charges 12.1 14 Waste, Governmental Regulations 16 16 Waste or Nuisance 16.1 16 Governmental Regulations 16.2 16 iii Tenant agrees as( follows: (1) All loading and unloading of goods shall be done only at such times, in the areas, and through the entrances, designated for such purposes by Landlord. (2) The delivery or shipping of merchandise, supplies and fixtures to and from the leased premises shall be subject to such rules and regulations as in the judgment of Landlord are necessary for the proper operation of the leased premises or Shopping Center. (3) All garbage and refuse shall be kept in the kind of container specified by Landlord, and shall be placed outside of the premises prepared for collection in the manner and at the times and places specified by Landlord. If Landlord shall provide or designate a service for picking up refuse and garbage, Tenant shall use same at Tenant's cost. Tenant shall pay the cost of removal of any of Tenant's refuse or rubbish. (4) No television or other similar devise shall be installed without first obtaining in each instance Landlord's consent in writing. No aerial shall be erected on the roof or exterior walls of the premises, or on the grounds, without in each instance, the written consent of Landlord. Any aerial so installed without such written consent shall be subject to removal without notice at any time. (5) No loud speakers, televisions, phonographs, radios or other devices shall be used in a manner so as to be heard or seen outside of the premises without the prior written consent of Landlord. (6) If the leased premises are equipped with heating facilities separate from those in the remainder of the Shopping Center, Tenant shall keep the leased premises at a temperature sufficiently high to prevent freezing of water in pipes and fixtures. (7) The outside areas immediately adjoining the premises shall be kept clean and free from rubbish by Tenant to the satisfaction of Landlord, and Tenant shall not place or permit any obstructions or merchandise in such areas. (8) Tenant and Tenant's employees shall park their cars only in those portions of the parking area designated for that purpose by Landlord. Tenant shall furnish Landlord with State automobile license numbers assigned to Tenant's car or cars, and cars of Tenant's employees, within five (5) days after request of Landlord and shall thereafter notify Landlord of any changes within five (5) days after such changes occur. In the event that Tenant or its employees fail to park their cars in designated parking areas as aforesaid, then Landlord, at its option, shall charge Tenant Ten Dollars ($10.00) per day per car parked in any area other than those designated, as and for liquidated damage. (9) The plumbing facilities shall not be used for any other purpose than that for which they are constructed, and no foreign substance of any kind shall be thrown therein, and the expense of any breakage, stoppage, or damage resulting from a violation of this provision shall be borne by Tenant, who shall, or whose employees, agents or invitees shall have caused it. EXHIBIT "A" (10) Tenant shall use at Tenant's cost such pest extermination contractor as Landlord may direct and at such intervals as Landlord may require. (11) Tenant shall not burn any trash or garbage of any kind in or about the leased premises, the Shopping Center, or within one mile of the outside property lines of the Shopping Center. (12) Tenant shall sponsor no kiddie rides or any other type of. promotion without the prior written consent of the Landlord except as the same may be sponsored by the Merchants Association. THIS LEASE AGREEMENT, made on the 1st day of November, 1988 by PROGRESS INVESTMENT ASSOCIATES, a Pennsylvania Corporation, herein called "Landlord" and THE FIRST PENNSYLVANIA BANK, N.A., herein called "Tenant." W I T N E S S T H SECTION 1. TERM 1.1 LEASED PREMISES In consideration of the rents, covenants and agreements hereinafter reserved and contained on the part of Tenant to be observed and performed, Landlord demises and leases to the Tenant, and Tenant rents from Landlord, those certain premises, now or hereinafter to be erected in the Progress Plaza Shopping Center, (herein called the "Shopping Center") at 1501 North Broad Street, Philadelphia, Pennsylvania, having a frontage of approximately 40 feet, said measurements being from center of partition to center of partition, except that in the event the demised premises is in an end position, measurements shall include full width of end wall, and a depth of 70 feet outside dimensions creating a first floor area of approximately 2,800 square feet, (herein collectively called the "leased premises") as shown on a floor plan attached hereto. 1.2 USE OF ADDITIONAL AREAS The use and occupancy by the Tenant of the leased premises shall include the use in common with others entitled thereto of the common areas, employees' parking areas, service roads, loading facilities, sidewalks and may be designated from time to time by the Landlord, subject however, to the terms and conditions of this agreement and to reasonable rules and regulations for the use thereof as prescribed from time to time by the Landlord. 1.3 COMMENCEMENT AND ENDING DATE OF TERM The term of this lease shall begin on November 1, 1988. Tenant's obligation to pay rent hereunder shall commence on said date. The term of this lease shall end at midnight on the last day of the 10th consecutive full lease year as said term "Lease year" is hereinafter defined, unless sooner terminated as hereinafter provided. See Section 1.10 re Option. Tenant waives any notice requiring to remove from the premises at the end of the term (see Section 1.10 re Option) and covenants to surrender at the end of the term. 1.4 LEASE YEAR DEFINED The term "lease year" as herein shall mean the twelve (12) calendar months commencing with the first day the rent obligation commences and midnight of the day immediately prior to the succeeding anniversaries thereof. 1.5 1.6 DELETED 1.7 DELETED 1 1.8 DELIVERY OF PREMISES BY LANDLORD Landlord agrees that upon the date of delivery of possession to the Tenant, the demised premises shall be free of all violations, orders, or notices of violations of all public authorities; vacant and broom clean. Landlord warrants the heat and air conditioning apparatus, systems are in good working order and condition, and the demised premises includes bathroom facilities in good working order and in accordance with City Zoning Code. Tenant shall maintain the heating and air conditioning systems, as well as the bathroom, and be responsible for there replacements when necessary. 1.9 OPTION TO RENEW The Tenant shall have the option to renew this Lease for one (1) five (5) year period(s) under the same terms and conditions as herein contained, except that the minimum rental shall be increased by six (6) percent every two (2) years. Notice of acceptance of the renewal option must be given to the Landlord in writing at least ninety (90) days before the expiration of the initial term or preceding option period. Nothing herein construed shall require Tenant to exercise said extension option. SECTION 2 RENT 2.1 MINIMUM RENT Tenant agrees to pay to Land lord at the office of Landlord, or at such other place designated by Landlord, without any prior demand therefor. and without any deduction or set-off whatsoever, and as fixed minimum rent; on the first day of each calendar month: 2.1a Commencing on the beginning date and continuing thereafter for each Lease Year during the term and the renewal term of the Lease. Tenant covenants to pay unto Landlord, as rental for the Leased Premises, of each calendar month: (a) A Fixed Annual Guarantee Minimum Rental for the particular Lease Years and in the amounts as follows; payable monthly in equal monthly installments in advance upon the first day of each calendar month. (1) From the Rent Commencement Date through the second (2) anniversary thereof (calendar year 1990) in the amount of Thirty One Thousand Eighty ($31,080.00) per year; (2) From such anniversary date in 1990 through the fourth (4th) anniversary of the Rent Commencement Date (Calendar year 1992) in the amount of Thirty Three Thousand Eight Hundred Eighty ($33,880.00) per year; (3) From such anniversary date in (1992) thru the sixth (6th) anniversary of the Rent Commencement Date (calendar year 1994) in the amount of Thirty Six Thousand Nine Hundred Thirty Two ($36,932.00) per year; 2 (4) From such anniversary date in (199_) thru the eighth (8th) anniversary of the Rent Commencement Date (calendar year 1996) in the amount of Forty Thousand Two Hundred Sixty Four ($40,265.00) per year; (5) From such anniversary date in (1996) thru the tenth (10th) anniversary of the Rent Commencement Date (Calendar year 1998) in the amount of Forty Three Thousand Eight Hundred Seventy Six ($43,876.00) per year. 2.1b If the term shall commence upon a day other than the first day of a calendar month, then Tenant shall pay, upon the commencement date of the term, a pro-rata portion of the fixed monthly rent described in the fractional calendar month preceeding the commencement of the first lease year thereof. 2.2 DELETED 2.3 DELETED 3 2.4 TAXES Owner will pay in the first instance all real property taxes which may be levied or assessed by any lawful authority against the land and improvements in the Shopping Center. If the amount of the real property taxes levied or assessed against the land and building of which the leased premises form a part at the time of commencement of the term hereof shall exceed in any subsequent lease year the amount of such taxes for the first full lease year, Tenant shall pay that portion of such excess equal to the product obtained by multiplying said excess by a fraction, the numerator of which shall be the square-foot area of the leased premises, and the denomimator of which shall be the square-foot area of the Shopping Center exclusive of common areas. For the purpose of this section and of the computation aforesaid, each two (2) square feet of basement or second floor space shall be counted as noe (1) square-foot. The term "first full tax year" shall mean the year 1988. The tax year of any lawful authority commencing during any lease year shall be deemed to correspond to such lease year. The additional rent provided for in this Section 2.4 shall be paid within twenty (20) days after demand therefor by Landlord. A copy of the Jurisdictions taxing authority's tax bill submitted and certified true by Landlord to Tenant shall be sufficient evidence of the amount of taxes assessed or levied against the parcel or real property to which such bill relates. Should the taxing authorities include in such real estate taxes the value of any improvements made by Tenant or include machinery, equipment, fixtures, inventory or other personal property or assets of Tenant, then Tenant shall pay the entire real estate taxes for such items. Tenant, at all times, shall be responsible for and shall pay before delinquency, all municipal, county, state, or federal taxes assessed against any leasehold interest or any personal property of any kind owned, installed or used by Tenant, except if Landlord is required to collect such tax by law, Tenant shall pay the amount of such tax to Landlord as additional rent in the manner as aforesaid. 2.5 ADDITIONAL RENT The Tenant shall pay as additional rent any money require to be paid pursuant to paragraphs 2.4, 7.1, 7.2, 7.6, 11.2, and 12.1 and all other sums of money or charges required to be paid by Tenant under this lease, whether or not the same be designated "additional rent." If such amounts or charges are not paid at the time provided in this lease, they shall nevertheless, if not paid when due, be collectable as additional rent with the next installment of rent thereafter falling due hereunder, but nothing herein contained shall be deemed to suspend or delay the payment of any amount of money or charge at the time the same becomes due and payable hereunder, or limit any other remedy of the Landlord. 2.6 PAST DUE RENT AND ADDITIONAL RENT If Tenant shall fail to pay, when the same is due and payable, any rent or any additional rent, or amounts or charges of the character described in Section 2.5 hereof, such unpaid amount shall bear interest from the due date thereof to the date of payment at the rate of two percent (2x) per month. 4 SECTION 3. RECORDS AND BOOKS OF ACCOUNT -- DELETED 3.1 DELETED 3.2 DELETED 3.3 DELETED 3.4 DELETED 5 SECTION 4. DELETED 4.1 DELETED 4.2 DELETED 4.3 DELETED SECTION 5. SIGNS, AWNINGS, CANOPIES, FIXTURES, ALTERATIONS, CONSTRUCTION 5.1 INSTALLATION BY TENANT All fixtures installed by Tenant shall be new or completely reconditioned. Tenant shall not make or cause to be made any alterations, additions or improvements or install or cause to be installed any trade fixture, exterior signs, floor covering, interior or exterior lighting, or plumbing fixtures, shades or awnings or make any changes to the store front without first obtaining Landlord's written approval and consent. Tenant shall present to the Landlord plans and specifications for such work at the time approval is sought. 6 5.2 CHANGES AND ADDITIONS TO BUILD Landlord hereby reserves the right, at any time, to make alterations or additions to and to build additional stories on the building in which the premises are contained and to build adjoining the same. Landlord also reserves the right to construct other buildings of improvements in the Shopping Center from time to time, and to make alterations thereof or additions thereto and to build additional stories on any such building or buildings and to build adjoining same and to construct doubledeck or elevated parking facilities, to close any skylights or windows and run necessary pipes, conduits and ducts through the herein leased premises and carry on any work, repair, alterations or improvements in, about, or in the vicinity thereof, the demised premises. Tenant hereby waives any claim for damages or inconvenience caused thereby. 5.3 REMOVAL AND RESTORATION BY TENANT All lighting fixtures and air conditioning equipment, any and all alterations, decorations, additions or trade fixtures, other than attached movable trade fixtures improvements and decorations installed or paid for by the Tenant or made by the Landlord on the Tenant's behalf by agreement under this lease shall, upon the expiration or earlier termination of this lease, become the sole property of the Landlord, Such alterations, decorations, additions, improvement and trade fixtures, shall not be removed from the premises prior to the end of the term hereof without the prior consent in writing from the Landlord. 5.4 DISCHARGE OF LIENS Tenant shall promptly pay all contractors and materialmen, so as to minimize the possibility of a lien attaching to the leased premises, and should any such lien be made or filed, Tenant shall bond against or discharge the same within ten (10) days after written request by Landlord. 5.5 SIGNS, AWNINGS AND CANOPIES Tenant will not place or suffer to be placed or maintained on any exterior door, wall or window of the leased premises any sign, awning or canopy, or advertising matter or other things of any kind, and will not place or maintain any decorations, lettering or advertising matter on the glass of any window or door of leased premises without first obtaining Landlord's written approval and consent. Tenant further agrees to maintain such sign, awning, canopy, decoration, lettering, advertising matter or other thing as may be approved in good condition and repair at all times. For the benefit of Tenant, Landlord approves the signage plan as set forth. 5.6 PARKING AND COMMONS USE AREAS AND FACILITIES All automobile parking areas, driveways, entrances and exits thereto, and other facilities furnished by Landlord in or near the Shopping Center, including employee parking areas, the truck way or ways, loading docks, package pick-up stations, pedestrian sidewalks and ramps, landscaped areas, exterior stairs, first aid stations, comfort stations and other areas and improvements provided by Landlord for the general use, in common, of Tenants, their officers, agents, employees and customers, shall at all times be subject to the exclusive control and management of Landlord, and Landlord shall have the right, from time to time, to establish, modify and enforce reasonable rules and regulations with respect to all facilities and areas mentioned in this Article. Landlord shall have the right to construct, to police the same, from time to time, to change the area, level, location and arrangement of parking areas and other facilities hereinabove referred to; to restrict parking by Tenants, their officers, agents and employees, to employee parking areas; to enforce parking charges (by operation of meters or otherwise) with appropriate provision for free parking ticket validation by Tenants; to close all or any portion of said areas or facilities to such extent as may, in the opinion of Landlords. 7 counsel, be legally sufficient to prevent a dedication thereof or the accrual of any rights to any person or the public therein; to close temporarily all or any portion of the parking areas or facilities; to discourage noncustomer parking; and to do and perform such other acts in and to said areas and improvements as, in the use of good business judgement, the Landlord shall determine from time to time. Without limiting the scope of such discretion, Landlord shall have the full right and authority to employ all personnel and to make all rules and regulations pertaining to and necessary for the proper operation and maintenance of the common areas and facilities. Tenant and its employees shall park their cars only in those portions of the parking area designated for that purpose by Landlord. Tenant shall furnish Landlord with State automobile license numbers assigned to Tenant's care or cars and cars of its employees within five (5) days after request from Landlord, and shall thereafter notify Landlord of any changes within five (5) days after changes occur. If Tenant or its employees fail to park their cars in the designated parking areas, after giving notice to Tenant, Landlord shall have the right to charge Tenant ten dollars ($10.00) per day per car parked in any parking area other than those designated. 5.7 LICENSE All common areas and facilities not within the leased premises which Tenant may be permitted to use and occupy, are to be used and occupied under a revocable license, and if the amount of such areas be diminished, Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such diminution of such areas be deemed constructive or actual eviction. SECTION 6. CONDUCT OF BUSINESS BY TENANT 6.1 PURPOSE OF USE Tenant shall use the leased premises solely for the purpose of conducting the business of: Banking and related business. Tenant will not use or permit, or suffer the use of, the leased premises for any other business or purpose. Tenant shall not conduct catalogue sales in or from the leased premises except of merchandise which Tenant is permitted to sell "over the counter" in or at the leased premises pursuant to the provisions of this Section 6.1. 6.2 OPERATION OF BUSINESS -- DELETE 8 6.3. STORAGE, OFFICE SPACE -- DELETE 6.5 OPERATIONS OF CONCESSIONS -- DELETE SECTION 7. MAINTENANCE OF LEASED PREMISES 7.1 MAINTENANCE BY TENANT Tenant shall, at all times, keep the leased premises )including maintenance of exterior entrances, all glass and show window mouldings) and all partitions, doors, fixtures, equipment and appurtenances thereof (including lighting, heating and plumbing fixtures, escalators, elevators, and any air conditioning system) in good order, condition and repair, (including reasonably periodic painting as reasonably determined as to frequency thereof by Landlord), except for structural portions of the premises, which shall be maintained by Landlord, but if Landlord is required to make all repairs to structural portions by reason of Tenant's negligent acts of omission to act, Landlord may add the cost of such repairs to rent which shall thereafter become due. The Roof is structural and therefore part of Landlord responsibility 7.2 MAINTENANCE BY LANDLORD If Tenant refuses or neglects to repair property as required hereunder and to the reasonable satisfaction of Landlord as soon as reasonably possible after written demand, or if Landlord is required to make repairs otherwise required of tenant under this Lease, Landlord may make such repairs without liability to Tenant for any loss or damage that may accrue to Tenant's business by reason thereof, and upon completion thereof, Tenant shall pay Landlord's costs for making such repairs, plus twenty percent (20%) of overhead, upon presentation of bill therefore, as additional rent. 9 7.3 SURRENDER OF PREMISE At the expiration of the tenancy hereby created, Tenant shall surrender the leased premises in the same condition as the leased premises were in upon delivery of possession thereto under this lease, reasonable wear and tear excepted, and shall surrender all keys for the leased premises to Landlord of all combinations on locks and safes, if any, in the leased premises. Tenant shall remove all its personal property, and trade fixtures before surrendering the premises as aforesaid, and shall repair any damage to the leased premises caused thereby. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of the term of this lease. If the Tenant fails to remove such alterations, decorations, additions and improvements and restore the leased premises, then upon the expiration of this lease, or any renewal thereof, and upon the Tenant's removal from the premises, all such alterations, decorations, additions and improvements shall become the property of the Landlord. 7.4 RULES AND REGULATIONS The rules and regulations appended to this lease, as Exhibit A, are hereby made a part of this lease, and Tenant agrees to comply with the observe the same. Tenant's failure to keep and observe said rules and regulations shall constitute a breach of the terms of this lease in the manner as if the same were contained herein as covenants, Landlord reserves the right, from time to time, to reasonably amend or supplement said rules and regulations and to adopt and promulgate additional reasonable rules and regulations applicable to leased premises and Shopping Center. Notice of such additional rules and regulations, and amendments and supplements, if any, shall be given to. Tenant, and Tenant agrees thereupon to comply with and observe all such rules and regulations, and amendments thereto and supplements thereof, provided the same shall apply uniformly to all Tenants of the Shopping Center. 7.5 NOTICE BY TENANT Tenant shall give immediate notice to Landlord in case of fire, damage, repairs needed to, or accidents in the leased premises or in the building of which the premises are a part, of defects therein, or in any fixtures of equipment. 7.6 COST OF MAINTENANCE OF COMMON AREAS (a) In each lease year, Tenant will pay to Landlord, in addition to the rentals specified in Section 2 hereof, as further additional rent, subject to the limitation hereinafter set forth, a proportion of the Shopping Center's operating costs, hereinafter defined, based upon the ratio of the square feet of the leased premises to the total square feet of all the building space leasable in the Shopping Center, except that for the purpose of this computation each two (2) square feet of basement or second floor space shall be counted as one square foot. (b) For the purpose of this Paragraph 7.6, the Shopping Center's Operating cost means the total cost and expense incurred in operating and maintaining the common facilities, herein defined actually used or available for use by Tenant and the employees, agents, servants, customers and other invitees of Tenant, excluding only items of expense commonly known and designated as carrying charges, but specifically including, without limitation, gardening and landscaping, the cost of all Landlord's insurance including but not limited to bodily injury, public liability, property damage liability, automobile insurance, sign insurance any other insurance carried by Landlord for the common areas in limits selected by Landlord, hearing ventilating and air conditioning of the enclosed mall, if any, rental of signs, and equipment, real estate taxes and assessments, repairs, line painting, lighting, sanitary control, removal of snow, trash, rubbish, garbage and other refuse, depreciation on machinery and equipment used in such maintenance, the cost of personnel to implement such services, to direct parking, and to police the 10 common facilities and 10% off all the foregoing costs (excluding real estate taxes and assessments) to cover the Landlord's administrative and overhead costs. "Common facilities" means all areas, space, equipment and special services provided by Landlord for the common or joint use and benefit of the occupants of the Shopping Center, their employees, agents, servants, customers and other invitees, including without limitation, parking areas, access roads, driveways, retailing walls, landscaped areas, truck serviceways or tunnels, loading docks, pedestrian mall, courts, stairs, ramps and sidewalks, comfort and first aid stations, washrooms and parcel pick up stations, and community hall or auditorium, if any, and including any such area as may be added to the Shopping Center by its expansion. Tenant reserves the right to audit books of landlord to verify costs. (c) The additional rent provided to be paid in this Paragraph shall be. computed monthly during the calendar year on such dates as may be designated by the Landlord and shall be payable during each lease year. The total monthly cost shall be divided by the total square feet of the Shopping Center and the square foot rate multiplied by the total square feet of the leased premises. (d) Changes in any particular floor area occurring during any quarterly period shall be effective on the first day of the next succeeding quarterly period, and the amount of any floor area in effect for the whole of any quarterly period shall be the average of the total amounts in effect on the first day of each calendar month in such quarterly period. SECTION 8. ACCESS BY LANDLORD 8.1 RIGHT OF ENTRY Landlord or Landlord's agents shall have the right to enter the leased premises at all times to examine the same, and to show them prospective purchasers or lessees of the building, and to make such repairs, alterations, improvements or additions as Landlord may deem necessary or desirable, and Landlord shall be allowed to take all material into and upon said premises that may be required therefor without the same constituting and eviction of Tenant in whole or in part and the rent reserved shall in no wise abate while said repairs, alterations, improvements, or additions are being made, by reason of loss or interruption of business of Tenant, or otherwise. [ text deleted ] Landlord may exhibit the premises to prospective tenants or purchasers. [ text deleted ] Nothing herein contained, however, shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever, for the care, maintenance or repair of the building, or any part thereof, except as otherwise herein specifically provided. Landlord shall have the right to place, maintain and repair all utility equipment of any kind in, upon and under the demised premises as may be necessary for the servicing of the demised premises and other portions of the Shopping Center. Landlord shall not enforce its rights under this section in any manner as to reasonably interferes with the tenants use and enjoyment of the leased premises. 8.2 EXCAVATION If an excavation shall be made upon land adjacent to the leased premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause excavation, license to enter upon 11 The leased premises for the purpose of doing such work as Landlord shall reasonably deem necessary to preserve the wall or the building of which the leased premises form a part from injury or damage and to support the same by proper foundation, without any claim for damages or indemnification against Landlord or diminution or abatement of rent. Provided that if Tenant should determine in its reasonable business judgement that such entrance upon or into the leased premises makes it impracticable for Tenant to operate the store, then the rent shall abate, for that period of such intrusion. SECTION 9. TENANT'S PROPERTY 9.1 LOSS AND DAMAGE Landlord shall not be liable for any damage to property of Tenant or of others located on the leased premises, not the loss of or damage to any property of Tenant or of others by theft or otherwise. Tenant hereby waives any and all claims against Landlord or Landlord's agents or employees for any loss of, or damage to, personal property, or for any injury sustained in, or about, or in connection with, the use or condition of the leased premises. Landlord shall not be liable for any latent defect in the leased premises or in the building of which they form a part, except for a period of one (1) year from the date Tenant takes possession of the leased premises. All property of Tenant kept or stored on the leased premises shall be so kept or stored at the risk of Tenant only, and Tenant shall hold Landlord harmless from any claims arising out of damage to the same, including subrogation claims by Tenant's insurance carrier. SECTION 10. ADVERTISING, MERCHANTS ASSOCIATION 10.1 NAME IN ADVERTISING Tenant and Tenant's employees and agents shall not solicit business in the parking or other common areas, nor shall Tenant distribute any handbills or other advertising matter in automobiles parked in the parking area or in other common areas. 10.2 MERCHANTS' ASSOCIATION Tenant shall promptly become a member of and during the entire term of this lease, participate fully in, and remain in good standing in the Merchants' Association limited to tenants occupying premises in the Shopping Center and adjoining stores and abide by the regulations of such association. Each member tenant shall have one vote and the Landlord shall also have one vote in the operation of said association. The objects of such association shall be to encourage its members to deal fairly and courteously with their customers, to sell their merchandise or services at fair prices, to follow ethical business practices, to assist the business of the tenants by sales promotions and center-wide advertising, and in particular, to help the interests of members of the said association, The tenant agrees to pay dues to the Merchants' Association in the amount of 11 cents per square foot per year of the total area of the leased premises. Said amounts shall be collectible by the Merchants' Association or by Landlord as additional rent hereunder and shall be payable in each year of the term in twelve (12) equal monthly installments at the times and places and in the same manner as fixed minimum rent is payable hereunder. In any event, the continuing monthly contributions to the Association will be adjusted annually by a percentage equal to the percentage increase from the base period of the United States Department of Labor, Bureau 12 of Labor Statistics Cost of Living Index, provided that J Index has increased by at least ten percent (10%) or more from the base period. The term "Base period" shall refer to the date of which said Index is published, which. is closest to the date of the formation of the Merchant's Association. (1) The Tenant agrees to advertise in special Merchants' Association newspaper sections or advertisements and agrees to cooperate in the Merchants' Association special sales and promotions; subject to tenant's approval of the cost thereof at Tenant's sole discretion. SECTION 11. INSURANCE INDEMNIFY 11.1 LIABILITY INSURANCE Tenant shall procure and keep in force, at all times, during the term of the lease and during such other time as lessee occupies the leased premises, at its expense, insurance as follows: (1) Public liability insurance which shall include the Landlord and its respective agents and employees among the named insured parties, in amounts of not less than five Hundred Thousand Dollars ($500,000) for personal injury to any one person; One Million Dollars ($1,000,000) for personal injuries arising out of any one accident; and Fifty Thousand Dollars ($50,000) property damage. (2) Plate glass insurance covering all plate glass at the leased premises, naming Landlord as a named insured party. Tenant will carry said insurance or be self insured. (3) Fire and extended coverage insurance on Tenant's approval property, including inventory, trade fixtures, floor covering, furniture and other property removable by Tenant. (4) Fire and Public Liability Insurance. Tenant shall furnish Landlord with certificate, or certificates issued by the insurance carrier evidencing the above-mentioned insurance. Such insurance shall be procured from a reputable insurance company or companies, and in form satisfactory to Landlord. If the nature of Tenant's operation is such as to place any or all of its employees under the coverage of local Workmen's Compensation or similar statutes, Tenant shall also keep in force, at its expense, so long as this Lease remains in effect and during such other times as Tenant occupies the leased premises or any part thereof, workmen's compensation or similar insurance affording statutory coverage and containing statutory limits. If Tenant shall not comply with its covenants made in this paragraph, Landlord may cause insurance as aforesaid to be issued, and in such event Tenant agrees to pay, as additional rent, the premium for such insurance upon Landlord's demand. Tenant shall, at its own expense exclude from its liability insurance policy the "Care, Custody and Control Exclusion." The Landlord agrees to carry insurance against fire and such other risks as are, from time to time, included in standard extended coverage endorsements, insurable value of the improvements and betterments installed by the Tenant in the demised premises, whether the same has been paid for entirely or partially by the Tenant. All of the Tenant's insurance policies shall name Landlord as an Additional insurer. 13 It is expressly agreed that Tenant is solely responsible for the maintenance and replacement of the plate glass display or other windows on its premises. It is also agreed that Tenant is solely responsible for maintaining and replacing its personal property located on the premises including inventory, trade fixtures, floor covering, furniture and other property removable by Tenant. Tenant shall indemnify and hold harmless Landlord for any damage to persons or to its plate glass or personal property on the leased premises caused by fire, vandalism or other casualty of whatever nature and kind. 11.2 INCREASE IN FIRE INSURANCE PREMIUM Tenant agrees that it will not keep, use, sell or offer for sale in or upon the leased premises any article which may be prohibited by the standard form of fire insurance policy. Tenant agrees to pay any increase in premiums for fire and extended coverage insurance that may be charged during the term of this lease on the amount of such insurance which may be carried by Landlord on said premises or the building of which they are a part, resulting from the type of merchandise sold by Tenant in the leased premises, whether or not Landlord has consented to the same. In determining whether increased premiums are the result of Tenant's use of the leased premises, a schedule, issued by the organization making the insurance rate, shall be conclusive evidence of the several items and charges which make up the fire insurance rate of the lease premises. In the event Tenant's occupancy causes any increase of premium for the fire, boiler and/or casualty rates on the leased premises or any part thereof above the rate of the least hazardous type of occupancy legally permitted in the leased premises, the Tenant shall pay the additional premium on the fire, boiler and/or casualty insurance policies by reason thereof. The Tenant also shall pay in such event, any additional premium on the rent insurance policy that may be carried by the Landlord for its protection against rent loss through fire. Bills for such additional premiums shall be rendered by Landlord to Tenant when rendered, and the amount thereof shall be deemed to be, and be paid as additional rent. 11.3 INDEMNIFICATION OF LANDLORD Tenant will hold and save Landlord harmless of and from any and all claims, or liabilities in connection with any loss of or damage to property, loss of life or personal injury arising from or out of the occupancy or use of the leased premises or any part thereof or any other part of the Landlord's property by Tenant or any licensee, visitor, customer, employees, servants, agents, or contractor of Tenant occasioned wholly or in part by any act or omission of Tenant or any of the Tenant's agents or employees, and shall indemnify Landlord for any loss, damage or expense which may be sustained or incurred by Landlord except for Landlords negligence, as a result of any of the foregoing, including legal expenses and reasonable attorney's fees in defending against any such claim or liability. 11.4 DELETED SECTION 12. UTILITIES. 12.1 UTILITIES CHARGES Tenant shall be solely responsible for and promptly pay all charges for heat, water, gas electricity or any other utility used or consumed in the leased premises. Should Landlord elect to supply the water, gas, heat, electricity or any other utility used or consumed in the leased premises, Tenant agrees to purchase and pay for the same as additional rent at the applicable rages filed by the Landlord with the proper regulatory authority. In no event shall Landlord be liable for an interruption or failure in the supply of any such utilities to the leased premises. 14 Should the Landlord elect to install a central heating and/or air conditioning system and offer to supply either chilled air or water or warm air or water, Tenant agrees to adopt Landlord's heating and cooling equipment and at Tenant's expense to connect said equipment to facilities provided by Landlord, and to pay for such chilled air or water and/or warm air, as metered through meters installed by the Landlord.. All charges for services provided by Landlord under this paragraph shall be paid by Tenant within ten (10) days after receipt of the bill from Landlord SECTION 13. DESTRUCTION OF LEASED PREMISES 13.1 TOTAL OR PARTIAL DESTRUCTION If the leased premises shall be damaged by any casualty insurable under the Landlord's insurance policy, but are not thereby rendered untenantable in whole or in part, Landlord shall. upon receipt of the insurance proceeds, REPAIR THE same and the minimum rent shall not be abated. If by reason of such occurrence, the premises shall be rendered untenantable only in part, Landlord shall, out of the insurance proceeds cause the damage to be repaired, and the fixed minimum rent, meanwhile, shall be abated proportionately as to the portion of the premises rendered untenantable. If the premises shall be rendered wholly untenantable, If determined by municipal authority, Landlord may, at its election, terminate this lease and the tenancy hereby created, by giving to Tenant within the ninety (90) days following the date of said occurrence, written notice of Landlord's election to do so and in event of such termination, rent shall be adjusted as of such date. Nothing in this Section shall be construed to permit the abatement in whole or in part of the percentage rent, but for the purpose of Paragraph 2.2 hereof, the computation of percentage rent shall be based upon the revised minimum rent as the same may be abated pursuant to this Paragraph 13.1. 13.2 PARTIAL DESTRUCTION OF SHOPPING CENTER In the event that fifty (50) percent or more of the rentable area of the Shopping Center shall be damaged or destroyed by fire or other cause, notwithstanding that the leased premises may be unaffected by such fire or, other cause, Landlord or Tenant may terminate this lease and the tenancy hereby created by giving to Tenant or Landlord five (5) days prior written notice of Landlord's election to do so, which notice shall be given, if at all, within the 90 days following the date of said occurrence, rent shall be adjusted as of the date of said termination. In the event Landlord elects to repair the damage insurable under Landlord's policies, any abatement of rent shall end five (5) days after notice by Landlord to Tenant that the demised premises have been repaired. Unless this lease is terminated by Landlord, Tenant shall, at its cost, repair and re-fixture the interior of the demised premises in a manner and to at lease condition equal to that existing prior to its destruction or casualty, and the proceed of all insurance carried by Tenant on its property and improvements shall be held in trust by Tenant for the purpose of said repair and replacement. In no event shall Landlord be liable for interruption to business of Tenant or for damage to or replacement or repair of Tenant's personal property, including inventory, trade fixtures, floor coverings, furniture and other property removable by Tenant under the provisions of this lease. SECTION 14. OFFSET STATEMENT, ATTORNMENT SUBORDINATION 14.1 OFFSET STATEMENT Within ten (10) days after request therefore by Landlord, or in the event that upon any sale, assignment or hypothecation of the leased premises and/or the land thereunder by Landlord, an offset statement shall be required from Tenant; Tenant agrees to delivery in recordable form, a certificate to any 15 proposed mortgages or purchaser, or to Landlord, certifying if such be the case) that this lease is in full force and effect and that there are no defenses or offsets thereto, or stating those claimed by Tenant. 14.2 ATTORNMENT Tenant shall, in the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under any mortgage made by the Landlord covering the leased premises, attorn to the purchaser, upon any such foreclosure or sale, and recognize such purchaser as the Landlord under this lease. 14.3 SUBORDINATION Tenant does subordiante its rights hereunder to the lien of any mortgage or mortgages, or the lien resulting from any other method of financing or refinancing, now or hereafter in force against the land and/or buildings of which the leased premises are a part or against any buildings hereafter placed upon the land of which the leased premises are a part, and to all advances made or hereafter to be made upon the security thereof. Landlord agrees to provide tenant with non-disturbance agreements where required by tenant to protect tenants continuing operation in the center. 14.4 ATTORNEY-IN-FACT The Tenant, upon request of any party in interest, shall execute promptly such instruments or certificates to carry out the intent of Sections 14.2 and 14.3 above as shall be requested by the Landlord. If fifteen (15) days after the date of a written request by Landlord to execute such instruments, the Tenant shall not have executed the same, the Landlord may at its option, execute the same as attorney-in-fact for tenant or cancel this lease without incurring any liability on account thereof, and the term hereby granted is expressly limited accordingly. SECTION 15. ASSIGNMENT AND SUBLETTING 15.1 CONSENT REQUIRED Tenant will not, except to a parent or subsidiary corporation or to Marine-Midland, assign mortgage or encumber this lease in whole or in part, nor sublet all or any part of the leased premises, without the prior written consent of Landlord in each instance. The consent by Landlord to any assignment or subletting shall not constitute a waiver of the necessity for such consent to any subsequent assignment or subletting. This prohibition against any assigning or subletting shall be construed to include a prohibition against any assignment or subletting by operation of law. If this lease be assigned, or if the leased premises or any part thereof be underlet or occupied by any body other than the Tenant, Landlord may collect from assignee, under tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant shall remain fully liable on this lease and shall not be released from performing any of the term covenants. and conditions of this lease. Any attempt of assignment or sublease without, Landlord's written approval, which consent shall not unreasonable be withheld, as defined in this paragraph shall constitute a breach of this lease by Tenant and Lessor shall have at its option the right to terminate this lease immediately. SECTION 16. WASTE, GOVERNMENT REGULATIONS 16.1 WASTE OR NUISANCE Tenant shall not commit or suffer to be committed any waste upon the leased premises or any nuisance or other act or thing which may disturb the quiet enjoyment of any other tenant in the building in which the leased 16 premises may be located, in the Shopping Center, or who may disturb the quiet enjoyment of any person within five hundred feet of the boundaries of the Shopping Center. 16.2 GOVERNMENTAL REGULATIONS Tenant shall, at Tenant's sole cost and expense, comply with all of the requirement of all county, municipal, state, federal or other applicable governmental authorities, now in force, or which may hereafter be in force, pertaining to the Tenant's use of the said premises, and shall faithfully observe in the use of the premises all municipal and county ordinance and state and federal statutes now in force, or which may hereafter be in force. SECTION 17. EMINENT DOMAIN 17.1 TOTAL CONDEMNATION OF LEASED PREMISES If the whole of the leased premises shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, then the term of this lease shall cease and terminate as of the date of title vesting in such proceeding and all rental shall be paid up to that date and Tenant shall have no claim against Landlord for the value of any unexpired term of this lease. 17.2 PARTIAL CONDEMNATION OF LEASED PREMISES If a taking of any part of the leased premises shall render the leased premises unsuitable for the business of the Tenant, then the term of this lease shall cease and terminat as of the date of title vesting in such proceeding. Tenant shall have no claim against Landlord for the value of any unexpired term of this lease and rent shall be adjusted to the dat of such termination. In the event of a partial taking or condemnation which is no extensive enough to render the premises unsuitable for the business of Tenant, then, as of the date of title vesting, this lease shall continue in effect, except that the minimum rent shall be reduced in the same proportion that the floor area of the demised premises (including basement, if any) taken bears to the original floor area leased, and Landlord shall, upon receipt of the award in condemnation, make all necessary repairs or alterations to the building in which the leased premises are located so as to constitute the portion of the building not taken a complete architectural unit, without any abatement of rent. But such work shall not exceed the scope of the work to be done by Landlord in originally constructing said building, nor shall Landlord, in any event, be required to spend for such work an amount in excess of the amount received by Landlord as damages for the part of the demised premises so taken. "Amount received by Landlord" shall mean that part of the award in condemnation which is free and clear to Landlord of any collection by mortgagees, for the value of the diminished fee. If more that thirty percent (25%) of the floor area of the Leased Premises in which the demised premises are located shall be taken as aforesaid, Landlord or Tenant may, be written notice to the other, terminate this lease, such termination to be effective as aforesaid. 17.3 TOTAL CONDEMNATION OF PARKING AREA If 75% of the common parking areas in the Shopping Center shall be acquired or condemned as aforesaid, then the term of this lease shall cease and terminate as of the date of title vesting such proceeding unless Landlord shall take immediate steps to provide other parking Facilities substantially equal to the previously existing ratio between the common parking areas and the leased premises, and such substantially equal parking facilities shall be provided by Landlord at its own expense within ninety (90) days from the date of acquisition. -In the event that Landlord shall provide such other substantially equal parking facilities, then this lease shall continue in full force and effect without any reduction or abatement of rent. 17 17.4 PARTIAL CONDEMNATION OF PARKING AREA If any of the parking area in the Shopping Center shall be acquired or condemned as aforesaid, and if, as the result thereof the ratio of square feet of parking area to square feet of the sales area of the entire Shopping Center buildings is reduced to a ratio below two and one-tenth to one, then the term of this lease shall cease and terminate upon the vesting of title in such proceeding, unless the Landlord shall take immediate steps toward increasing the parking ratio to a ratio in excess of two to one, in which event this lease shall be unaffected and remain in full force and effect without any reduction or abatement of rent. In the event of termination of this lease as aforesaid, Tenant shall have no claim against Landlord, not the condemning authority for the value of any unexpired term of this lease and rent shall be adjusted to the date of said termination. 17.5 LANDLORD'S DAMAGES In the event of any condemnation of taking as aforesaid, whether whole or partial, the Tenant shall not be entitled to any part of the award paid for such condemnation and Landlord is to receive the full amount of such award, the Tenant hereby expressly waiving any right or claim to any part thereof. 17.6 TENANT'S DAMAGES Although all damages in the event of any condemnation are to belong to the Landlord whether such damages are awarded as compensation for diminution in value of the leasedhold or to the fee of the leased premises, Tenant shall have the right to claim and recover from the condemning authority, but not from Landlord, such compensation as may be separately awarded or recoverable by Tenant in Tenant's own right on account of any and all damage to Tenant's business by reason of the condemnation and for or on account of any cost or loss to which Tenant might be put in removing Tenant's merchandise, furniture, fixtures, leasedhold improvements, and equipment. 17.7 CONDEMNATION OF LESS THAN A FEE In the event of a condemnation of a leasehold interest in all or a portion of the leased premises without the condemnation of the fee simple title also, this lease shall not terminate and such condemnation shall not excuse Tenant in such event shall be entitled to present or pursue against the condemning authority its claim for and to receive all compensation or damages sustained by it by reason of such condemnation, and Landlord's right to recover compensation or damages shall be limited to compensation for damages, if any, to its reversionary interest, it being understood, however, that during such time as Tenant shall be out of possession of the leased premises by reason of such condemnation, the lease shall not be subject to forfeiture for failure to observe and perform those covenants not calling for the payment of money. In the event the condemning authority shall fail to keep the premises in the state of repair required hereunder, or to perform any other covenant not calling for the payment of money. Tenant shall have ninety (90) days after the restoration of possession to it within which to carry out its obligations under such covenant or covenants. During such time as Tenant shall be out of possession of the leased premises by reason of such leasehold condemnation, Tenant shall pay to Landlord, in lieu of the minimum and percentage rents provided for hereunder, and in addition to any other payment required of Tenant hereunder, an annual rent equal to the average annual minimum and percentage rents paid by Tenant for the period from the commencement of the term until the condemning authority shall take possession, or during the preceding three full calendar years, whichever period is shorter. At any time after such condemnation proceedings are commenced Landlord shall have the right, at its option, to require Tenant to assign to Landlord all compensation and damages payable by the condemnor to Tenant, to be held without liability for interest thereon as security for the full performance of Tenant's covenants hereunder, such compensation and damages received pursuant to said assignment to be applied first the payment of rents, and all other sums from tune to time payable by Tenant pursuant to the terms of this lease as such sums, fall due, and the remainder, if any, to be payable to Tenant, which ever shall first occur, it 18 being understood and agreed that such assignment shall not relieve Tenant of any of its obligation under this lease with respect to such rents, and other sums except as the same shall be actually received by Landlord. SECTION 18. DEFAULT OF THE TENANT 18.1 RIGHT TO RE-ENTER In the event of any failure of Tenant to pay any rental due hereunder within ten (10) days after same shall be due, or any failure to perform any other of the terms, conditions or covenants of this lease to be observed or performed by Tenant for more than thirty (30) days after written notice of such default shall have been given to Tenant, or if Tenant or any guarantor of this lease shall become bankrupt of insolvent, or file any debtor proceedings or take or have taken against Tenant or any guarantor makes an assignment for the benefit of creditors, or petitions for or enters into an arrangement, or if Tenant shall abandon said premises, or suffer this lease to be taken under any writ or execution, them Landlord, besides other rights or remedies it may have, shall have the immediate right or re-entry any may remove all persons and property from the leased premises and such property may be removed and stored in a public warehouse or elsewhere at the cost of, and for the account of, Tenant, all without service of notice or resort to legal process all of which Tenant expressly waives, and without being deemed guilty. of trespass, or becoming liable for any loss or damage which may be occasioned thereby. The Lessor shall be entitled to hold lessee liable for the difference between the monthly minimum rent which would have been payable during the residue of the original term of this lease continued in force and the net monthly minimum rent for the residue of the term realized by the Lessor by means of reletting the leased premises to other parties. The Lessee agrees that in determining such net monthly minimum rent; there shall be deducted from the gross rent received by reason of such reletting, a reasonable expense incurred by the Lessor in recovering possession of the premises. The Lessee agrees that said reletting may be for the whole of said residue of the leased term or for portions thereof from time to time, and may be of the whole of said premises or of portion thereof form time to time as opportunity may offer and as the Lessor may deem expedient, and in such case the Lessee shall for each period for which monthly minimum rent shall be payable under such reletting, be liable for the difference from time to time, between the proportionate part of the monthly minimum rent as fixed by this lease and the net monthly minimum rent received for such period of letting. The Lessor agrees to use Lessors best endeavors to rent the leased premises for the highest rent that can be obtained therefor. 19 When this lease shall be determined by condition broken, either during the original term of this lease or any renewal or extension thereof, and also when and as soon as the term hereby created or any extension thereof shall have expired, it shall be lawful for any attorney as attorney for Tenant to file an agreement for entering in any competent court an amicable action and judgement in ejection against tenant and all persons claiming under Tenant for recovery by Landlord of possession of the herein demised premised, for which this lease shall be his sufficient warrant, whereupon, if Landlord so desires, a Writ of Execution or 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 determined and the possession the premises hereby demised remain in or be restored to Tenant, Landlord shall have the right, upon any subsequent default or defaults, or upon the termination of this lease as hereinbefore set forth, to bring one more amicable action or actions hereinbefore set forth in recover possession of the said premises. The right to enter judgment against Tenant and to enforce all of the other provisions of this lease hereinabove provided for may, at the option of any assignee of this lease, be exercised by any assignee of the Landlord's right, title and interest in this lease in his, her or their own name, notwithstanding the fact that any or all assignments of the said right, title and interest may not be executed and/or witnessed in accordance with the Act of Assembly of May 28, 1715, 1 Sm L 99, and all supplements and amendments thereto that have been or may hereafter be passed and Tenant hereby expressly waives the requirement of said Act of Assembly and any and all laws regulating the manner and/or form in which said assignments shall be executed and witnessed. All of the remedies hereinbefore given to Landlord and all rights and remedies given to it by law equity shall be cumulative and concurrent. No determination of this lease or the taking or recovering of the premises shall deprive Landlord of any of its remedies or actions against the Tenants for rent due at the time or which, under the terms hereof, would in the future become due as if there has been no determination, or for the sum due at the time, or which, under the terms hereof, would in the future become due as if there had been no determination, nor shall the bringing of any action for rent or breach of covenant, or the resort to any other remedy herein provided for the recovery of rent be construed as a waiver of the right to obtain possession of the premises. 20 NOTICE & OPPORTUNITY Anything to the contrary herein notwithstanding, Landlord may not exercise any default rights unless it shall first have given tenant written notice of default and tenant shall have failed to cure same within ten (10) days after receipt of such notice in the case of non-payment of rent, and within thirty (30) days after receipt of notice in case of other defaults. 18.2 RIGHT TO RELET Should Landlord elect to re-enter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this lease or it may, from time to time without terminating this lease, make such alteration and repairs as may be necessary in order to relet the premises, and relet said premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this lease) and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable; upon each such reletting all rentals received by Landlord for such reletting shall be applied first to the payment of rent due and unpaid hereunder from Tenant to Landlord; second, the payment of any costs and expenses of such reletting, including brokerage fees and attorney's fees and of costs of such alterations and repairs; third, to the payment or rent due and unpaid hereunder, and the residue, if any, shall be held by Land lord and applied in payment of future rent as the same may become due and payable hereunder. If such rentals received from such reletting during any month be LESS than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such Deficiency shall be calculated and paid monthly. No such re-entry or taking possession of said premises by Landlord shall be construed as an election on its part to terminate this lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may, at any time thereafter, elect to terminate this lease for such previous breach. Should Landlord, at any time terminate this lease for any breach, in addition to any other remedies at may have, it may recover from Tenant all damages it may incur by reason of such breach, including the cost of recovering the leased premises,* - -reasonable attorney's fees, and including the worth at the time of such termination of the amount of rent and charges equivalent to rent reserved in this lease for the remainder of the stated term, all of which amounts shall be immediately due and payable from Tenant to Landlord. In determining the rent which would be payable by Tenant hereunder, subsequent to default, the annual rent for each year of the unexpired term shall be equal to the average annual minimum percentage and additional rents paid by Tenant from the commencement of the term to the time of default, or during the preceding three full calendar years, whichever period is shorter. 18.3 LEGAL EXPENSES In case suit shall be brought for recovery of possession of the leased premises, for the recovery of rent or any other amount due under the provisions of this lease, or because of the breach of any other covenant herein contained on the part of Tenant to be kept or performed, and a breach shall be established, Tenant shall pay to Landlord all expenses incurred therefore, including a reasonable attorney's fee. 18.4 WAIVER OF JURY TRIAL COUNTERCLAIMS The parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the leased premises, and/or any claim of injury or damage. In the event Landlord commences any proceedings for non-payment of rent, minimum rent, percentage rent or additional rent, Tenant will not interpose any counterclaim of whatever nature or description in any such proceedings. This 21 shall not, however, be construed as a waiver of the Tenant right to assert such claims in any separate action or actions brought by the Tenant. The rights and remedies given to Landlord in this lease are distinct, separate and cumulative remedies, and the exercise of any of them shall not be deemed to exclude Landlord's right to exercise any or all of the others. Tenant expressly waives any right of defense which it may have to claim a merger and neither the commencement of any action or proceeding not the settlement thereof or entering of judgement therein shall bar Landlord from bringing subsequent actions or proceedings from time to time. This paragraph shall apply to any renewal or extension of this lease; and if Tenant shall default hereunder prior to the date fixed as the commencement renewal or extension of this lease, Landlord may cancel such renewal or extension agreement by five (5) days written notice to Tenant. 18.5 WAIVER OF RIGHTS TO REDEMPTION Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the leased premises by reason of the violation by Tenant of any of the covenants or conditions of this lease, or otherwise. SECTION 19 HOLDING OVER, SUCCESSORS 19.1 HOLDING OVER Any holding over after the expiration of the term hereof, with the consent of the Landlord, shall be construed to be a tenancy from month to month at the rents herein specified (pro-rated on a monthly basis) and shall otherwise be on the terms and conditions herein specified, so far as applicable. 19.2 SUCCESSORS All rights and liabilities herein given to, or imposed upon, the respective parties hereto shall extend to and bind the several respective heirs, executors, administrators, successors, and assigns of the said parties; and if there shall be more than one tenant, they shall all be bound jointly and severally by the terms, covenants and agreements herein. No rights, however, shall inure to be benefit of any assignee of the Tenant unless the assignment to such assignee has been approved by Landlord in writing as provided in Section 15 hereof. SECTION 20. QUIET ENJOYMENT 20.1 QUIET ENJOYMENT Upon payment by the tenant of the rents herein provided, and upon the observance and performance of all the covenants, terms and conditions on Tenant's part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the leased premises for the term hereby demised with out hinderance or interruption by Landlord or any other person or persons lawfully or equitable claiming by, through or under the Landlord, subject nevertheless, to the terms and conditions of this lease to any mortgage, ground lease or agreements to which this lease is subordinated. SECTION 21. MISCELLANEOUS 21.1 WAIVER The waiver by Landlord of any breach of any provision rule or regulation, or the failure to exercise any option herein contained shall not be deemed to be a waiver of such provision, rule or regulation or option or any subsequent breach of the same or any other provision, rule or regulation or option herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any proceeding breach by Tenant of any provision, rule or regulation or option of this lease, other than the failure of Tenant to pay the particular rental so accepted regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such 22 rent. No provision, ruled regulation or option of this j e shall be deemed to have been waived by Landlord, unless such waiver be in writing by Landlord. 21.2 ACCORD AND SATISFACTION No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest rent then unpaid, nor shall any endorsement or statement or any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy herein provided. 21.3 ENTIRE AGREEMENT This lease and the Exhibits, and Rider, if any attached hereto and forming a part hereof, set forth all the covenants, promises, agreements, conditions and understanding between Landlord and Tenant concerning the leased premises and there are no covenants promises, agreements, conditions or understandings, either oral or written between them other than are herein set forth. Any prior conversations or writings are merged herein and extinguished. Except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this lease shall be binding upon Landlord or Tenant unless reduced to a writing and signed by them. If any provision contained in a rider or addenda is inconsistent with the printed provision of this lease, the provision contained in said rider addenda shall supersede said printed provision. It is herewith agreed that this lease contains no restrictive covenants or exclusives in favor of Tenant. Should the Tenant at any time during the term of this lease claim rights under a restrictive covenant, exclusive failure of continued occupancy or inducement, whether implied or otherwise, the Tenant herewith specifically waives any such claim with respect to department stores regional or national chains, kiosks in the mall, in addition to other merchants with whom leases had been signed prior to the date of the signing of this lease by both Tenant and Landlord. 21.4 NO PARTNERSHIP Landlord does not, in any way or for any purpose, become a partner of Tenant in the conduct of its business, or otherwise, or joint adventurer or a member of a joint enterprise with Tenant. The provisions of this lease relating to the percentage rent payable hereunder are included solely for the purpose of providing a method whereby the rent is to be measured and ascertained. 21.5 FORCE MAJEURE In the event that Landlord shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lock-outs, labor troubles, inability to procure materials, failure of power restrictive governmental laws or regulations, riots, insurrection, war or other reasons of a like nature not the fault of the Landlord, then performance of such act shall be excused for the period of the delay. The provisions of this Section 21.5 shall not operate to excuse Tenant from prompt payment of rent, percentage rent, additional rent or any other payments required by the terms of this lease. 21.6 NOTICES Any notice demand, request or other instrument which may be or are required to be given under this lease shall be delivered in person or sent by United States Certified Mail, postage prepaid and shall be addressed (a) if to Landlord, at the address first hereinabove given or at such other address as Landlord may designate by written notice and (b) if to Tenant, at Real Estate Dept., 1500 Market Street, Phila., PA 19101 or to such other address as Tenant shall designate by written notice. 23 21.7 CAPTIONS AND SECTION NUMBERS The captions, section number, sub-section numbers and index appearing in this lease are inserted only as a matter of convenience and in no way define, limit, construe, or describe the scope or intent of such sections or articles of this lease nor in any way affect this lease. 21.8 TENANT DEFINED The word "Tenant" shall be deemed and taken to mean each and EVERY person or party mentioned as a Tenant herein, be the same one or more; and if there shall be more than one Tenant, any notice required or permitted by the terms of this lease may be given by or to anyone thereof and shall have the same force and effect as if given by or to all thereof. The use of the neuter, singular pronoun to refer to Landlord or Tenant shall be deemed a proper reference even though Landlord or Tenant may be an individual, a partnership, a corporation, or a group of two or more individuals or corporations. The necessary grammatical changes required to make the provisions of this lease apply in the plural sense where there is more than one Landlord or Tenant and to either corporations, associations, partnerships, or individuals, males or females, shall, in all instances be assumed as through in each case fully expressed. 21.9 DELETED 21.10 PARTIALLY INVALIDITY In any term, covenant or condition 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, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this lease shall be valid and be enforced to the fullest extent permitted by law. 21.11 NO OPTION The submission of this lease for examination does not constitute reservation of or option for the leased premises and this leases becomes effective as a lease only upon execution and delivery thereof by Landlord or Tenant. 21.12 RECORDING Tenant shall not record this lease without the written consent of Landlord, however, upon the request of either party thereto, the other party shall join in the execution of a memorandum or so-called "short form" of this lease for the purposes of recordation. Said memorandum or short form of this lease shall describe the parties, the leased premises and the term of this lease and shall in corporate this lease by reference. 24 IN WITNESS WHEREOF, Landlord and Tenant have signed and sealed this lease as of the day and year first above written. PROGRESS INVESTMENT ASSOCIATES, INC. /s/ By /s/ (SEAL) - -------------------------------- ------------------------------- Attest: Landlord THE FIRST PENNSYLVANIA BANK, N.A. /s/ By /s/ (SEAL) - -------------------------------- ------------------------------- Attest: Tenant 25 EX-10 7 exh10e.txt EX 10.E EMPLOYMENT AGREEMENT - E. SMALLS EXHIBIT 10(e) EVELYN F. SMALLS EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT made as of this 13th day of June, 2000 between United Bank of Philadelphia, a bank organized and incorporated under the laws of the Commonwealth of Pennsylvania, with offices at 300 North Third Street, Philadelphia, Pennsylvania 19106 (the "Bank") and Evelyn Smalls (the "Employee"). WITNESSETH: WHEREAS, the Bank is a Pennsylvania bank, incorporated on September 17, 1990 as a Pennsylvania-chartered commercial bank; and WHEREAS, the Bank would like to employ the Employee as President of the Bank; and WHEREAS, the parties desire to provide for such employment of the Employee in accordance with the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 1 of 8 1. Duties and Term. a. The Bank hereby employs the Employee to serve in the capacity of President of the Bank and, in such capacity, to be responsible for the day-to-day operations and overall management of the Bank, promote the Bank in the minority community and with the public in general and such additional activities as will promote the profitability and growth of the Bank or as shall be assigned by the Board of Directors. The Employee will perform such other duties of a managerial or executive nature consistent with her title as are from time to time determined by the Board. The Employee agrees to be so employed by Bank and shall devote her best efforts and all of her business time to the performance of her duties hereunder. b. The term of the Employee's employment hereunder shall commence upon the date of the execution of this Agreement and shall continue until the second anniversary of this date (the "Original Term"); provided, however, that employment may be terminated earlier in the event that: (i) any governmental or other approvals necessary for the Employee to fill this role cannot be obtained or (ii) the Bank terminates the Employee pursuant to Paragraph 4 of this Agreement. c. This Agreement shall be subject to renewal upon agreement of the parties at any time during the Original Term (any period of employment after the Original Term shall be referred to as a "Renewal Term." EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 2 of 8 2. Compensation. a. Salary. During the first year of the Original Term, the Bank shall pay the Employee an annual salary of $135,000 payable in equal bi-weekly installments or as the parties otherwise agree. Thereafter the Employee's annual salary shall be such as is mutually determined by the Employee and the Board of Directors of the Bank, but in no event shall be less than the Employee's salary during the previous year of the Original Term. The Employee's annual salary during any Renewal Term shall be the subject of mutual agreement between the Employee and the Bank but shall not be less than the Employee's salary during the previous year of the Employment Term. b. Additional Compensation. The Employee shall have the opportunity to receive an annual cash bonus (the "Annual Bonus"), which shall be divided into two tiers: the initial cash bonus (the "Initial Cash Bonus"), equal up to 12% of the Employee's Base Salary, and the additional cash bonus (the "Additional Cash Bonus"), which shall be equal to 12(degree)/a of the Employee's Base Salary. Both the Initial Cash Bonus and the Additional Cash Bonus shall be based upon separate financial performance targets for each fiscal year, or, in the case of the 2000 fiscal year, the last six months of operation (the "Performance Targets"). The Performance Targets shall be determined as follows: EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 3 of 8 (i) The target financial performance on which the Employee's Initial Cash Bonus will be based (the "Initial Cash Bonus Target") shall be equal to the annual EBITDA target for the Bank for that fiscal year as set forth in the Bank's budget. However, for the 2000 fiscal year, the Initial Cash Bonus Target shall be break-even for the last six months of the fiscal year. (ii) The target financial performance on which the Employee's Additional Cash Bonus will be based (the "Additional Cash Bonus Target") shall be equal to the sum of (x) the Initial Cash Bonus Target and (y) the product of the Initial Cash Bonus Target multiplied by 8 percent. However, the Additional Cash Bonus Target for 2000 shall be the target EBITDA of the Bank as set forth in the Bank's budget. c. Fringe benefits. During the Employment Term, the Bank, at its expense, shall provide to the Employee health, disability, life and other insurance benefits. During the Employment Term, the Employee shall be entitled to receive benefits under employee benefit, retirement, pension profit-sharing, deferred compensation, long-term incentive, stock option, restricted stock, phantom stock or other similar plans that may be established at the sole discretion of the Board of Directors of the Bank. EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 4 of 8 d. Insurance. The Employee shall be a beneficiary of the Bank's group health and disability insurance. During the period of employment, the Bank, at its sole expense, will provide the Employee with term life insurance coverage in the amount of two times the salary identified in Section 2(a) hereof. The policy shall be owned by the Employee who shall have all incidents of ownership of the policy, including, without limitation, the right to name the beneficiary thereof. e. Vacation. During each calendar year during the Employment Term, the Employee shall be entitled to take four weeks vacation at such times as the Employee and the Bank mutually agree. Such agreement shall not be unreasonably with-held. Employees vacation shall vest according to vesting schedule contained in the Bank's Employee manual. f. Reimbursement of Expenses. The Employee shall be reimbursed for all items of travel, entertainment and other expense reasonably incurred by her on behalf of the Bank upon presentation to the Bank of vouchers representing such items of expense. Such expenses shall include the cost of leasing an automobile for the Employee and the cost of insurance on such automobile up to a maximum amount of $500 per month. g. Entire Compensation. The compensation provided for herein, and any additional compensation made available to the Employee in the discretion of the Board of Directors of the Bank, is in full payment of the services to be rendered by the Employee to the Bank. EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 5 of 8 3. Death or Total Disability of the Employ i. Death. In the event of the death of the Employee during the Employment Term, this Agreement shall terminate effective as of the date of the Employee's death, and the Bank shall not have any further obligations or liability hereunder, except as set forth in Section 5 hereof. b. Total Disability. In the event of the Total Disability, as that term is defined in this Section 3(b), of the Employee for a period of 90 consecutive days during the Employment Term, the Bank shall have the right to terminate the Employee's employment hereunder after such 90 consecutive days of Total Disability by giving the Employee 30 days' written notice thereof and, upon expiration of such 30-day period, this Agreement shall terminate and the Bank shall not have any further obligations or liability hereunder, except as set forth in Section 5 hereof. The Term "Total Disability", as used in this Section 3(b), shall mean a mental, emotional or physical injury, illness or incapacity which, in the reasonable opinion of the Bank, renders the Employee unable to perform the principal duties, functions and responsibilities required of him hereunder. 4. Discharge for Cause. The Bank may immediately discharge the Employee and terminate her employment hereunder for the following reasons: (i) habitual intoxication; (ii) drug addiction; (iii) conviction of a felony during the Employment Term; (iv) adjudication as an incompetent or (v) the Employee's willful breach or habitual neglect of her duties or obligations as set forth herein. Upon receipt of such notice by the Employee, in the case of clauses (i), (ii), (iii), and (iv) and in the EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 6 of 8 case of clause (v) upon the expiration of a 30-day cure period, this Agreement shall terminate and the Bank shall not have any further obligations or liability hereunder, other than as set forth in Section 5 hereof. 5. Obligations of the Bank Upon Termination. Upon Termination of this Agreement, the Bank shall not have any further obligations or liability hereunder, other than reimbursement of expenses pursuant to Section 2(d) hereof, except to pay to the Employee the unpaid portion, if any, of the Employee's salary accrued for the period up to the date of termination and payable to the Employee pursuant to Section 2(a) hereof. 6. Amendments. Any amendment to this Agreement shall be made only by written agreement signed by the parties hereto. 7. Construction. This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. 8. Assignment. The rights and obligations of the Bank under this Agreement may not be assigned by the Bank without the prior written consent of the Employee. 9. Notices. All notices, consents and other communications to be given hereunder shall be in writing and shall be delivered personally or sent by certified mail, return receipt requested, postage prepaid, and addressed to the parties at their respective addresses set forth in the first paragraph of this Agreement. Any party may from time to time change its address for purposes of notices to that party by notice specifying a new address, but no change shall be deemed to have been given until it is actually received by the party to whom the notice is being given. EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 7 of 8 IN WITNESS WHEREOF, this Agreement has been executed by the Bank and by the Employee as of the day and year first above written. UNITED BANK OF PHILADELPHIA BY: /s/ James F. Bodine -------------------------------- Co-Chairman of the Board /s/ Evelyn Smalls - ------------------------------------- Evelyn Smalls EMPLOYMENT AGREEMENT WITH EVELYN SMALLS Page 8 of 8 EX-10 8 exh10f.txt EX 10.F EMPLOYMENT AGREEMENT - HUDSON-NELSON EXHIBIT 10(f) BRENDA HUDSON-NELSON'S EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT made as of this 13th day of June, 2000 between United Bank of Philadelphia, a bank organized and incorporated under the laws of the Commonwealth of Pennsylvania, with offices at 300 North Third Street, Philadelphia, Pennsylvania 19106 (the "Bank") and Brenda Hudson-Nelson (the "Employee"). WITNESSETH: WHEREAS, the Bank is a Pennsylvania bank, incorporated on September 17, 1990 as a Pennsylvania-chartered commercial bank; and WHEREAS, the Bank would like to employ the Employee as Senior Vice President and Chief Financial Officer of the Bank; and WHEREAS, the parties desire to provide for such employment of the Employee in accordance with the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 1 of 8 1. Duties and Term. a. The Bank hereby employs the Employee to serve in the capacity of Senior Vice President and Chief Financial Officer of the Bank and, in such capacity, to be responsible for the financial and operational matters of the Bank as are consistent with her title. Employee will be responsible for conducting such additional activities as will promote the profitability and growth of the Bank or as shall be assigned by the President of the Board of Directors. The Employee agrees to be so employed by Bank and shall devote her best efforts and all of her business time to the performance of her duties hereunder. b. The term of the Employee's employment hereunder shall commence upon the date of the execution of this Agreement and shall continue until the second anniversary of this date (the "Original Term"); provided, however, that employment may be terminated earlier in the event that: (i) any governmental or other approvals necessary for the Employee to fill this role cannot be obtained or (ii) the Bank terminates the Employee pursuant to Paragraph 4 of this Agreement. c. This Agreement shall be subject to renewal upon agreement of the parties at any time during the Original Term (any period of employment after the Original Term shall be referred to as a "Renewal Term." EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 2 of 8 2. Compensation. a. Salary. During the first year of the Original Term, the Bank shall pay the Employee an annual salary of $95,000 payable in equal bi-weekly installments or as the parties otherwise agree. Thereafter the Employee's annual salary shall be such as is mutually determined by the Employee and the Board of Directors of the Bank, but in no event shall be less than the Employee's salary during the previous year of the Original Term. The Employee's annual salary during any Renewal Term shall be the subject of mutual agreement between the Employee and the Bank but shall not be less than the Employee's salary during the previous year of the Employment Term. b. Additional Compensation. The Employee shall have the opportunity to receive an annual cash bonus (the "Annual Bonus"), which shall be divided into two tiers: the initial cash bonus (the "Initial Cash Bonus"), equal up to 12% of the Employee's Base Salary, and the additional cash bonus (the "Additional Cash Bonus"), which shall be equal to 12% of the Employee's Base Salary. Both the Initial Cash Bonus and the Additional Cash Bonus shall be based upon separate financial performance targets for each fiscal year, or, in the case of the 2000 fiscal year, the last six months of operation (the "Performance Targets"). The Performance Targets shall be determined as follows: EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 3 of 8 (i) The target financial performance on which the Employee's Initial Cash Bonus will be based (the "Initial Cash Bonus Target") shall be equal to the annual EBITDA target for the Bank for that fiscal year as set forth in the Bank's budget. However, for the 2000 fiscal year, the Initial Cash Bonus Target shall be break-even for the last six months of the fiscal year. (ii) The target financial performance on which the Employee's Additional Cash Bonus will be based (the "Additional Cash Bonus Target") shall be equal to the sum of (x) the Initial Cash Bonus Target and (y) the product of the Initial Cash Bonus Target multiplied by 8 percent. However, the Additional Cash Bonus Target for 2000 shall be the target EBITDA of the Bank as set forth in the Bank's budget. c. Fringe benefits. During the Employment Term, the Bank, at its expense, shall provide to the Employee health, disability, life and other insurance benefits. During the Employment Term, the Employee shall be entitled to receive benefits under employee benefit, retirement, pension profit-sharing, deferred compensation, long-term incentive, stock option, restricted stock, phantom stock or other similar plans that may be established at the sole discretion of the Board of Directors of the Bank. EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 4 of 8 d. Insurance. The Employee shall be a beneficiary of the Bank's group health and disability insurance. During the period of employment, the Bank, at its sole expense, will provide the Employee with term life insurance coverage in the amount of two times the salary identified in Section 2(a) hereof. The policy shall be owned by the Employee who shall have all incidents of ownership of the policy, including, without limitation, the right to name the beneficiary thereof. e. Vacation. During each calendar year during the Employment Term, the Employee shall be entitled to take four weeks vacation at such times as the Employee and the Bank mutually agree. Such agreement shall not be unreasonably with-held. Employees vacation shall vest according to vesting schedule contained in the Bank's Employee manual. f. Reimbursement of Expenses. The Employee shall be reimbursed for all items of travel, entertainment and other expense reasonably incurred by her on behalf of the Bank upon presentation to the Bank of vouchers representing such items of expense. Such expenses shall include the cost of leasing an automobile for the Employee and the cost of insurance on such automobile up to a maximum amount of $500 per month. g. Entire Compensation. The compensation provided fo.r herein, and any additional compensation made available to the Employee in the discretion of the Board of Directors of the Bank, is in full payment of the services to be rendered by the Employee to the Bank. EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 5 of 8 3. Death or Total Disability of the Employee. a. Death. In the event of the death of the Employee during the Employment Term, this Agreement shall terminate effective as of the date of the Employee's death, and the Bank shall not have any further obligations or liability hereunder, except as set forth in Section 5 hereof. b. Total Disability. In the event of the Total Disability, as that term is defined in this Section 3(b), of the Employee for a period of 90 consecutive days during the Employment Term, the Bank shall have the right to terminate the Employee's employment hereunder after such 90 consecutive days of Total Disability by giving the Employee 30 days' written notice thereof and, upon expiration of such 30-day period, this Agreement shall terminate and the Bank shall not have any further obligations or liability hereunder, except as set forth in Section 5 hereof. The Term "Total Disability", as used in this Section 3(b), shall mean a mental, emotional or physical injury, illness or incapacity which, in the reasonable opinion of the Bank, renders the Employee unable to perform the principal duties, functions and responsibilities required of him hereunder. 4. Discharge for Cause. The Bank may immediately discharge the Employee and terminate her employment hereunder for the following reasons: (i) habitual intoxication; (ii) drug addiction; (iii) conviction of a felony during Employment Term; (iv) adjudication as an incompetent or (v) the Employee's willful breach or habitual neglect of her duties or obligations as set forth herein. Upon receipt of such notice by the Employee, in the case of clauses (i), (ii), (iii), and (iv) and in the EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 6 of 8 case of clause (v) upon the expiration of a 30-day cure period, this Agreement shall terminate and the Bank shall not have any further obligations or liability hereunder, other than as set forth in Section 5 hereof. 5. Obligations of the Bank Upon Termination. Upon Termination of this Agreement, the Bank shall not have any further obligations or liability hereunder, other than reimbursement of expenses pursuant to Section 2(d) hereof, except to pay to the Employee the unpaid portion, if any, of the Employee's salary accrued for the period up to the date of termination and payable to the Employee pursuant to Section 2(a) hereof. 6. Amendments. Any amendment to this Agreement shall be made only by written agreement signed by the parties hereto. 7. Construction. This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. 8. Assignment. The rights and obligations of the Bank under this Agreement may not be assigned by the Bank without the prior written consent of the Employee. 9. Notices. All notices, consents and other communications to be given hereunder shall be in writing and shall be delivered personally or sent by certified mail, return receipt requested, postage prepaid, and addressed to the parties at their respective addresses set forth in the first paragraph of this Agreement. Any party may from time to time change its address for purposes of notices to that party by notice specifying a new address, but no change shall be deemed to have been given until it is actually received by the party to whom the notice is being given. EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 7 of 8 IN WITNESS WHEREOF, this Agreement has been executed by the Bank and by the Employee as of the day and year first above written. UNITED BANK OF PHILADELPHIA By /s/ James F. Bodine ------------------------------ Co-Chairman of the Board /s/ Brenda Hudson-Nelson ------------------------------ Brenda Hudson-Nelson EMPLOYMENT AGREEMENT WITH BRENDA HUDSON-NELSON Page 8 of 8 EX-10 9 exh10g.txt EX 10.G BROKERAGE SERVICE AGREEMENT Exhibit 10(g) BROKERAGE SERVICES AGREEMENT (Dual Employee Program) THIS AGREEMENT, dated as of JULY 17, 2002, is by and between UVEST FINANCIAL SERVICES GROUP, INC., a North Carolina corporation doing business as UVEST ("UVEST"), and UNITED BANK OF PHILADELPHIA located in PHILADELPHIA, PA ("Subscriber"). THE PARTIES AGREE AS FOLLOWS: 1. Effective Date. This Agreement shall bind UVEST and Subscriber when executed by an authorized representative of each party. The date of this Agreement is referred to as the "Effective Date." 2. UVEST Centers. UVEST is a broker-dealer registered with the Securities and Exchange Commission, (the "SEC") is a member of the National Association of Securities Dealers, Inc., (the "NASD") and provides certain securities brokerage, investment advisory services and insurance services under its UVEST trademark to the general public, including depositors and other customers of participating financial institutions, through the operation of UVEST service centers ("UVEST Centers") located within the branches of such participating financial institutions. 3. Determination of UVEST Center Locations. As soon as practicable following the Effective Date, and from time to time during the term of this Agreement, UVEST and Subscriber shall consult with each other and shall use all reasonable efforts to determine the number and identity of Subscriber's locations or locations of its affiliate depository institutions at which UVEST shall open and operate UVEST Centers. All references to "Subscriber locations" shall be deemed to include the location of Subscriber and such affiliate depository institutions as applicable. UVEST shall use all reasonable efforts expeditiously to open and operate such number of UVEST Centers at such locations as may from time to time be designated by Subscriber and approved by UVEST. At Subscriber's request and with UVEST's approval, UVEST shall transfer any UVEST Center then being operated at any of Subscriber's locations which is being closed or relocated to a different, location. 4. Subscriber's Obligations. Subscriber shall use all reasonable efforts to provide the facilities and personnel and to cooperate with UVEST and to do all other acts and things required by this Agreement to be provided or done by Subscriber, to permit UVEST to open and operate the UVEST Centers in accordance with the terms of this Agreement. Subscriber further agrees that it shall not permit any other broker-dealer to offer brokerage Securities services at any of Subscriber's locations during the term of this Agreement. 5. UVEST Program. The "UVEST Program" consists of the following services which UVEST shall provide: (a) Brokerage Services. Registered representatives of UVEST at the UVEST Centers operated at Subscriber's locations and at the national UVEST offices will, subject to all applicable laws, rules, regulations and procedures, including those of the SEC and the NASD, and subject to the terms and conditions hereof, execute purchases and sales of Securities and Insurance (as hereinafter defined) for UVEST customers, including depositors and other customers of Subscriber and the general public. As used herein, the term "Security" or "Securities" shall have the meaning set forth in the Securities Exchange Act of 1934, as amended and shall also include all other financial instruments or products included in the UVEST Program from time to time, including without limitation, debt and equity instruments, mutual funds and other financial instruments and products approved by appropriate regulatory authorities from time to time for sale (directly or indirectly) by financial institutions. As used herein, the term "Insurance" shall include products in the UVEST Program from time to time, including fixed and variable annuities, term, variable life, universal life, long-term care, disability, whole life and other insurance products approved by appropriate regulatory authorities from time to time for sale (directly or indirectly) by financial institutions. WEST may retain one or more clearing brokers to perform order execution, billing, collection, account surveillance and other services for UVEST, which are customarily performed by clearing brokers. UVEST shall give notice to Subscriber of any change in the clearing brokers it uses to perform such services and will endeavor to give such notice prior to such change. In order to execute such purchase and sale orders, WEST shall establish and maintain cash and/or margin accounts for customers, such accounts to be maintained as accounts of UVEST or its clearing broker. UVEST reserves the right, in its sole discretion, to refuse to open any account or to execute any order by any customer for the purchase or sale of a Security, which right shall not be unreasonably exercised. Subscriber agrees that such right shall not have been unreasonably exercised if UVEST believes in good faith that such an account or such Security or transaction is not appropriate or suitable for such customer. (b) Investment Advisory Services. Registered representatives of UVEST at the UVEST Centers operated at Subscriber's locations and at the national UVEST offices, subject to compliance with and registration under all applicable laws, rules and regulations and subject to the terms and conditions hereof, will provide investment advice and recommendations to UVEST customers (in accordance with each UVEST customer's suitability profile and investment goals) based upon research conducted by, and recommendations obtained from, investment advisory services and UVEST's internal research group. UVEST shall determine the number of registered representatives, which shall staff each WEST Center, located at one of Subscriber's locations, which number shall be subject to approval by Subscriber. Such determination shall in all events be subject to Subscriber's approval of the registered representatives as provided in Section 8(b) hereof. (c) Marketing, Education, Research and Technical Services. UVEST will provide Subscriber with marketing, education, research and technical services, which will include: 1. advice and assistance regarding the selection of Subscriber's locations at which UVEST shall open and operate UVEST Centers; 2. advice and assistance regarding the placement and set-up of the UVEST Center at Subscriber's locations; 3. advice and assistance regarding the identification, recruiting, obtaining licenses, and registration of qualified personnel who will act as Dual Employees (as defined below) and regarding the training of such persons to qualify as registered representatives; 2 18. monitoring of relevant laws, rules and regulations affecting the UVEST Program and the operation of the UVEST Centers; 19. disbursement of Revenue Sharing Payments (as defined below); and 20. such other services as may from time to time be outlined in the UVEST compliance manual. 6. Modification of UVEST Program. The UVEST Program is a uniform program owned and operated by UVEST. Subject to the provisions of Section 27 hereof, UVEST may modify the UVEST Program from time to time for the intended purpose of meeting applicable regulatory requirements, making the UVEST Program more effective, efficient, economical or competitive, adapting to new technology or conditions or enhancing the reputation or public acceptance of the UVEST Program. 7. Revenue Sharing Payments. (a) UVEST shall make payments to Subscriber with respect to all Securities and Insurance transactions, which occur at, or are attributable to, the UVEST Centers operated at Subscriber's locations ("Revenue Sharing Payments"), in accordance with UVEST's schedule of Revenue Sharing Payments in effect from time to time. UVEST's current schedule of Revenue Sharing Payments is set forth on Schedule 1 attached to this Agreement. Revenue Sharing Payments represent reimbursement for compensation of the Dual Employees and payment for the use of the facilities and equipment of Subscriber or its affiliate depository institutions, as applicable, required for the operation of the UVEST Centers. The Board of Directors of UVEST may, after careful consideration, amend the Revenue Sharing Payments schedule from time to time during the term of this Agreement. WEST shall notify Subscriber not less than 30 days in advance of any reduction in the percentage of Revenue Sharing Payments, which reduction shall take effect on the date specified in such notice; provided, no decrease in the percentage of Revenue Sharing Payments shall be permitted within 12 months after the Effective Date; and provided, further, Subscriber may terminate this Agreement by giving notice to UVEST within 30 days following UVEST's notice of any such reduction in the percentage of Revenue Sharing Payments. If Subscriber gives a notice of termination to UVEST pursuant to this Section 7(a), this Agreement will terminate 60 days following such notice and the reduction in the percentage of Revenue Sharing Payments shall not apply to Revenue Sharing Payments payable to Subscriber prior to such termination. (b) UVEST reserves the right to deduct from Revenue Sharing Payments (i) all undisputed costs, expenses, charges and fees, if any, payable by Subscriber to UVEST pursuant to this Agreement. UVEST shall make Revenue Sharing Payments to Subscriber by the 15th of every month all Securities and Insurance transactions for which it has received commissions through the end of the immediately preceding calendar month. Each Revenue Sharing Payment shall be accompanied by a complete record of transactions and, if applicable, of any costs, expenses, charges or fees incurred by Subscriber and deducted from such Revenue Sharing Payment. 4 8. Dual Employees. At the UVEST Centers operated at Subscriber's locations, Securities and Insurance transactions shall be effected, and investment advice and recommendations shall be disseminated, only by registered representatives of UVEST, who shall at all times be registered and qualified with the SEC, the NASD, and all other applicable federal and state securities and insurance laws (including without limitation investment advisor laws); and who shall undertake such employment by UVEST in addition to their employment by Subscriber. Such persons are referred to in this Agreement as "Dual Employees" or "registered representatives." Each Dual Employee shall enter into an employment agreement with UVEST, in a form to be provided by UVEST and agreed to by Subscriber, setting forth the terms of the Dual Employee's employment as a registered representative. Neither Subscriber nor any of its affiliate depository institutions shall have any responsibility for supervision of the Securities brokerage and investment advisory services performed by the Dual Employees or for compliance by the Dual Employees with UVEST's standards of conduct or procedures established for such persons and, except as set forth in Sections 8(d) and 8(e) hereof, shall not be obligated to notify UVEST regarding any Dual Employee's acts. (a) Compensation. Subscriber shall pay the compensation of the Dual Employees in amounts to be determined by Subscriber and UVEST. UVEST shall reimburse Subscriber for such compensation payments by means of Revenue Sharing Payments. Subscriber shall compensate Dual Employee as permitted by federal and state securities and banking laws, rules and regulations. Subscriber agrees to maintain payroll and bonus records for each Dual Employee, to withhold payroll taxes from the compensation of each Dual Employee, and to remit payroll taxes for each Dual Employee (including the employer's portion of any such taxes) to the appropriate government agencies in compliance with applicable law. (b) Number; Identification and Acceptability. Subscriber and UVEST shall determine the individuals, which shall receive offers of employment as registered representatives of UVEST. If UVEST decides to make an offer of employment to one of Subscriber's employees, to which Subscriber agrees, such person shall become a Dual Employee and Subscriber shall make available to UVEST upon UVEST's request all records in Subscriber's possession which UVEST reasonably considers necessary, or which are required by law, rule or regulation, in connection with such person's employment, qualification and registration as a UVEST representative. A Dual Employee may be assigned to more than one UVEST Center; provided in no event shall any Dual Employee be assigned to any UVEST Center other than any Subscriber locations. (c) Training. The Dual Employees shall be required to pass one or more examinations prescribed by law in order to qualify to act as registered representatives and Insurance representatives. Prior to taking such examination(s), each Dual Employee must successfully complete certain training, including a prescribed pre-examination course. Either UVEST or third-party vendors shall provide such pre-examination training, at Subscriber's expense. UVEST shall notify Subscriber of the availability of such training. UVEST shall provide additional training of the Dual Employees with respect to the UVEST Program subsequent to their qualification as registered representatives. Subscriber shall not prevent the Dual Employees from being available to fully participate in such pre- and post-qualification training and in such further training, if any, as UVEST may provide. 5 (d) Control by UVEST. UVEST shall exercise exclusive control of the Dual Employees with respect to their conduct of Securities brokerage, Insurance sales and investment advisory activities at the UVEST Centers and UVEST shall cause their conduct in such capacity to be governed in all respects: (i) by UVEST's compliance and procedures manuals and all other manuals, procedures, rules and instructions of UVEST, current copies of which UVEST has provided or will provide to Subscriber and such Dual Employees, and (ii) by applicable laws, rules, and regulations and policies of applicable regulatory agencies, all as in effect from time to time. Subscriber shall strictly honor such control relationship and, subject to Section 25 hereof, neither it nor any of its affiliates, nor any person related to any of them shall have any involvement whatsoever in any of the Securities brokerage, Insurance sales and investment advisory services performed by the Dual Employees. UVEST alone shall exercise all rights and remedies of the "Employer" set forth in the employment agreement with each Dual Employee except as otherwise specified herein. Notwithstanding the above, it is understood and agreed to between UVEST and Subscriber that, to the extent that the loss is not attributable to the negligence or other fault of either party, if any Dual Employee embezzles or otherwise steals from UVEST, UVEST shall bear such loss, and if any Dual Employee embezzles or otherwise steals from Subscriber or any of its affiliates, Subscriber or such affiliate shall bear such loss. It is further understood and agreed that any loss due to a mysterious disappearance of funds from either UVEST or Subscriber shall be borne by the party suffering such disappearance. (e) Discipline. Each Dual Employee shall be subject to discipline by UVEST and by various federal and state regulatory authorities, Securities exchanges, clearing corporations or associations, associations of Securities brokers and dealers and certain other entities having jurisdiction over the operation of the UVEST Centers and the conduct of the Dual Employees. Subscriber shall cooperate with UVEST in all respects in connection with the enforcement of any sanctions imposed by UVEST or by any such entities against any Dual Employee. Such disciplinary measures may include suspension or dismissal of any Dual Employee as a registered representative of UVEST. In the event of any such suspension or dismissal, Subscriber shall impose, upon UVEST's request, the same sanction with respect to the Dual Employee's employment by Subscriber as it relates to securities activities, and shall use its best efforts to cause any of its affiliates who employ such Dual Employee in any capacity to impose the same sanction with respect to the Dual Employee's employment by such affiliate as it relates to securities activities. Unless a Dual Employee has been suspended or barred by such a regulatory authority, UVEST will not terminate or suspend a Dual Employee except in the event of material non-compliance with UVEST's standards of conduct. UVEST and Subscriber agree to advise each other promptly upon receipt of any consumer complaint received with respect to Securities services and further agree to report to each other any violation of any law, rule or regulation or any of UVEST's standards of conduct or procedures for registered representatives of which they have knowledge, it being understood that Subscriber shall not have any obligation to monitor the activities of the Dual Employees with regard to such laws, rules or regulations or UVEST's' standards of conduct or procedures established for such persons. 6 9. Indemnification. (a) UVEST shall, provided Subscriber satisfies its obligations hereunder, defend, indemnify and hold harmless Subscriber (and each person or entity which controls Subscriber within the meaning of Section 20(a) of the Securities Exchange Act of 1934, as amended or Section 15 of the Securities Act of 1933, as amended), its affiliate depository institutions and their respective directors, officers, agents and employees (other than Dual Employees to the extent provided in Section 9(b) below), against any and all losses, claims, damages, liabilities, actions, costs or expenses to which such indemnified party may become subject to the extent such losses, claims, damages, liabilities, actions, costs or expenses arise out of or are based upon: (i) the failure of UVEST to remain a member of the NASD or to remain a duly licensed broker-dealer under federal and state securities laws; (ii) any violation of federal or state securities or insurance laws (including, without limitation, laws relating to the registration or qualification as a broker-dealer, investment advisor or insurance agent) by UVEST, its officers, its agents or its employees (including Dual Employees, but only when such Dual Employees are acting in their capacity as registered representatives of UVEST) arising out of the purchase, sale, offer to purchase or offer to sell, or the furnishing of investment advice with respect to, any Security at a UVEST Center; (iii) any breach, default or violation of, under or with respect to any of UVEST's duties, obligations, representations, warranties or covenants contained in this Agreement; or (iv) any negligence, gross negligence, recklessness or willful or intentional misconduct of, or violation of any law by, UVEST or any UVEST employee or agent (including any Dual Employee in his/her capacity as a representative of UVEST). UVEST agrees to maintain, in full force and effect, insurance in amounts sufficient to meet its indemnification obligations under this Section 9(a); in such form as shall be established by the UVEST Board of Directors from time to time. (b) In no event, however, shall such indemnification inure exclusively to the personal benefit of any Dual Employee whose action or failure to act was the cause of or resulted in the violation of federal or state securities or insurance laws and in no event shall such indemnification result in the payment of moneys to any such Dual Employee. In addition, there shall be no indemnification under this Section 9(b) to the extent the violation of federal or state securities or insurance laws was the result of action or failure 7 to act by a Dual Employee where such Dual Employee was told to perform such action or to refrain from so acting by an officer of Subscriber. (c) Subscriber shall, provided UVEST satisfies its obligations hereunder, defend, indemnify and hold harmless UVEST (and each person or entity which controls UVEST within the meaning of Section 20(a) of the Securities Exchange Act of 1934, as amended or Section 15 of the Securities Act of 1933, as amended), its directors, officers, agents and employees against any and all losses, claims, damages, liabilities, actions, costs or expenses to which such indemnified party may become subject to the extent such losses, claims, damages, liabilities, actions, costs or expenses arise out of or are based upon: (i) the failure of Subscriber to comply with applicable federal and state laws relating to Subscriber or its subsidiaries other than federal or state securities or insurance laws relating to the offer or sale of Securities, investment advisory services or broker-dealer activities relating thereto except as contemplated by (ii) and (iii) below; (ii) the failure of Subscriber to obtain the approval of UVEST for any advertising, promotional materials or marketing efforts for the UVEST Program; (iii) except as contemplated pursuant to Section 25 hereof, interference by Subscriber or by any of its directors, officers, agents or employees (including any Dual Employee acting in a capacity other than as a provider of brokerage services) with UVEST's supervision and control of Dual Employees with respect to their conduct of securities brokerage and investment advisory activity at the UVEST Centers; (iv) the failure of Subscriber to maintain payroll and bonus records for each Dual Employee, to withhold payroll taxes from the compensation of each Dual Employee, and to remit payroll taxes for each Dual Employee (including the employer's portion of any such taxes) to the appropriate government agencies in compliance with applicable law, which functions Subscriber has agreed to perform on behalf of UVEST; (v) the acts or omissions of Subscriber's Non-Dual Employees (as defined below), except to the extent of acts or omissions where such non-Dual Employee was told to perform such action or to refrain from so acting by any employee of UVEST, including a Dual Employee; (vi) any breach, default or violation of, under or with respect to any of Subscriber's duties, obligations, representations, warranties or covenants contained in this Agreement; or (vii) any negligence, gross negligence, recklessness or willful or intentional misconduct of Subscriber or any Subscriber employee or agent (excluding any Dual Employee acting in his/her capacity as a representative of UVEST). 8 (d) Promptly after receipt by an indemnified party under this Section 9 of notice of any claim or the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the party to this Agreement from which it is seeking indemnification under this Section 9, notify such other party in writing of such claim or the commencement of such action, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability it may have to any indemnified party, except to the extent that the indemnifying party demonstrates that its liability for such action is prejudiced by the indemnifying party's failure to give notice. In case any such action is brought against any indemnified party, and such indemnified party notifies UVEST or Subscriber, as appropriate, of the commencement thereof, as provided herein, UVEST or Subscriber, as appropriate, shall be entitled to participate therein and, at its option, assume the defense thereof. Upon assumption by UVEST or Subscriber, as appropriate, of the defense of such action, UVEST or Subscriber, as appropriate, will cease to be liable to such indemnified party under this Section 9 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof. (e) An indemnified party hereunder shall settle a claim for which it has requested or intends to request indemnification only with the consent of the indemnifying party. 10. Non-Dual Employees. (a) Limited activities. Employees of Subscriber or its affiliate depository institutions who are not also registered representatives ("Non-Dual Employees") may distribute promotional literature regarding the UVEST Program, direct persons to registered representatives of UVEST, provide ordinary banking services such as crediting or debiting accounts, even though such services are incidental to transactions with UVEST, and perform other clerical and ministerial tasks to the extent that employees would perform such tasks in any other situation. Non-Dual Employees may not recommend Securities or Insurance products, provide investment advice, hold themselves out as agents of UVEST, or engage in any Securities brokerage or Securities investment advisory activities to the extent that engaging in such activities would require the Non-Dual Employees to register and qualify with the NASD, as such requirements may be amended from time to time, or would require the Subscriber or its affiliate depository institutions to register as a broker-dealer under federal or state securities laws, as such laws may be amended from time to time. Subscriber shall comply in all respects with UVEST's Compliance Manual for UVEST participants ("Participants' Compliance Manual"), as it may be modified from time to time, shall monitor the activities of, and cause compliance by, Non-Dual Employees with UVEST's standards of conduct established for such persons and shall report to UVEST, in the manner set forth in Section 8(e) hereof, any violations of such standards of conduct of which Subscriber has knowledge. Neither UVEST nor Subscriber shall furnish incentive compensation to any Non-Dual Employee or otherwise compensate any Non-Dual Employee, directly or indirectly, based upon the volume or occurrence of Securities transactions, commissions or compensation generated by UVEST or any UVEST Center; provided that, when permitted by regulators and applicable law, Subscriber may pay referral fees to Non-Dual Employees. Such referral fees shall be a one-time, per-customer fee of a nominal, fixed-dollar amount, wholly unrelated to the execution of Securities transactions or the volume of Securities traded by the customer. 9 (b) Training. UVEST shall make materials available to assist Subscriber in training Non-Dual Employees regarding standards of conduct and permissible activities in connection with the UVEST Program. Subscriber or its affiliate depository institutions shall make Non-Dual Employees available from time to time to participate in such training. 11. Hours of Operation. Registered representatives of UVEST located at the national UVEST offices will be available by telephone to provide Securities brokerage and investment advisory services to UVEST customers during all New York Stock Exchange trading hours and any Securities transactions thus effected will be attributed to the appropriate UVEST Center. 12. Separation of Businesses. UVEST and Subscriber, including Subscriber's affiliate depository institutions, shall each maintain strict and total separation of their businesses from the business conducted at each UVEST Center, including separation of records and of physical facilities. All Dual Employees shall conduct business at all times in accordance with UVEST's corporate identity policies, as expressed in Participant's Compliance Manual and herein, so as not to lead to confusion between the business conducted by Subscriber and the business conducted by UVEST through the operation of the UVEST Centers at Subscriber's locations. Subscriber agrees to be bound by, and to comply in all material respects with, the Participants' Compliance Manual, a current copy of which UVEST has provided or will provide to Subscriber and which, as it may be modified from time to time in accordance with the purposes set forth in Section 6 hereof, is incorporated in and made a part of this Agreement. 13. Access. (a) UVEST supervisory personnel and representatives of state and federal regulatory authorities and of any other entity having jurisdiction over the operation of the UVEST Centers and the conduct of the Dual Employees shall have unimpeded access during Subscriber's business hours to the UVEST Centers, to all records maintained in connection with the operation of the UVEST Centers and to Dual Employees and their personnel records. At the time UVEST desires to exercise such access, UVEST shall notify the manager of the branch in which the UVEST Center being accessed is located and the Investment Program Manager of Subscriber and inform the manager and such Investment Program Manager of the purpose of the visit. (b) In addition to any rights of Subscriber and its affiliate depository institutions pursuant to Section 25 hereof, the supervisory personnel of Subscriber or its affiliate depository institutions and representatives of their respective state and federal regulatory, authorities and any other entity having jurisdiction over any of them or the transactions contemplated under this Agreement shall have unimpeded access during UVEST's business hours to all records of UVEST relating to transactions effected hereunder. 10 14. Subscriber Costs and Expenses. (a) Direct Costs and Expenses. Subscriber shall be directly responsible for the costs and expenses associated with the following items in connection with the operation of the UVEST Centers at Subscriber's locations: 1. the furnishings, accessories and equipment necessary to establish the UVEST Center, including a UVEST technology platform 2. the service and maintenance for the UVEST technology platform; 3. investment research material employed in the UVEST Center; 4. telephones and other operating equipment; 5. Dual Employee compensation (which will be reimbursed to Subscriber through Revenue Sharing Payments as provided herein) and Dual Employee costs, including, without limitation, recruitment costs, salary and benefits, travel (including but not limited to any travel associated with pre-qualification or post-qualification training), cost of pre-qualification training and prescribed pre-examination course, examination fees and filing fees and UVEST's corporate stationery and business cards; 6. Dual Employee post-qualification sales training materials; 7. recruitment costs, salary and benefits for any support personnel; 8. Subscriber-sponsored advertising and promotion; and 9. all other costs associated with the operation of the UVEST Centers at Subscriber's locations and not specified in Section 15 hereof. Subscriber shall pay all costs and expenses set forth in this Section 14 directly to third-party vendors or to UVEST or the Dual Employees, in accordance with UVEST's applicable standard procedures and fee schedules, each as in effect from time to time. In the UVEST Centers at Subscriber's locations, Subscriber and UVEST shall mutually approve the furnishings, furniture, fixtures and materials to be used by UVEST in the operation of the UVEST Center. UVEST may from time to time, following notice to Subscriber, eliminate one or more of Subscriber's direct costs or expenses. (b) Indirect Costs and Expenses. With approval from Subscriber, UVEST shall from time to time furnish to each UVEST Center promotional literature in reasonable quantities determined by UVEST. Subscriber shall pay for such items furnished in excess of such reasonable quantities and/or requiring customization at a charge to Subscriber equal to UVEST's cost for such items, which shall be based upon the cost of development, production or purchase, shipping, handling, billing and any applicable taxes. 15. UVEST Costs and Expenses. UVEST shall be directly responsible for the following costs and expenses in connection with the operation of the UVEST Program: 1. all costs associated with the operation of UVEST's offices other than at Subscriber's locations, including centralized investment research, national and regional inquiry/help desks for use by UVEST registered representatives and phone-in service for use by WEST customers during non-regular business hours as set forth in Section 11 hereof; 2. all costs associated with the recruitment, training, qualification and employment by UVEST of all UVEST employees who are not also employees of Subscriber; 3. post-qualification training of Subscriber's Dual Employees and materials for the orientation of Non-Dual Employees regarding the UVEST Program; 4. reasonable quantities of promotional literature furnished from time to time to each UVEST Center; 5. UVEST-sponsored advertising and promotion of the UVEST Program; 6. technical assistance program; 7. compliance and supervision; and 8. field sales support and related travel expenses. 16. Advertising and Promotion. Each party shall secure the other party's prior written approval of all advertising and promotional materials, if any prepared by or on behalf of such party which mention the other party or the UVEST Program. All such advertising and promotional materials shall make it clear that the UVEST Program is provided by UVEST and not by Subscriber, that UVEST and Subscriber are separate, distinct and unaffiliated entities, and that the investment products sold through UVEST Centers by UVEST are not deposits insured by the FDIC. Subject to the provisions of Section 25 hereof, UVEST may use Subscriber's name and may identify Subscriber's locations at which the UVEST Centers are operated. UVEST and Subscriber shall also meet prior to or as soon as possible after the opening of the first UVEST Center at one of Subscriber's locations to develop a comprehensive six-month business plan to promote and develop the UVEST Program for the Subscriber. Thereafter, UVEST and Subscriber shall meet approximately every six months to review the performance of the business plan for the prior six months and to develop a new business plan for the succeeding six months. 17. Vendor Relationships. In addition to being solely responsible for the investment research regarding Securities, UVEST shall be solely. responsible for all contracts and discussions with all vendors of Securities regarding the quality or investment characteristics of such Securities, their availability and all other matters related to such Securities, and UVEST shall be solely responsible for all other aspects of the relationship between such vendors and the UVEST Program. 12 18. Bankruptcy, Changes in Control, Etc. Any party hereto (the "defaulting party") shall give the other party hereto prompt written notice in the event that such defaulting party (i) liquidates or dissolves; (ii) makes an assignment for the benefit of creditors, becomes insolvent or is unable to pay its debts as they mature, files a voluntary petition in bankruptcy or a petition, answer or consent seeking reorganization or readjustment of its indebtedness under applicable bankruptcy or insolvency laws, consents to the appointment of a receiver or trustee for all or a substantial part of its property or takes corporate or other action for the purpose of effecting any of the foregoing; (iii) has filed against it a petition for proceedings in bankruptcy or for its reorganization or for the readjustment of its indebtedness under applicable bankruptcy or insolvency laws or has a receiver or trustee appointed for it or for all or a substantial part of its property; or (iv) experiences a change in control through merger, consolidation or reorganization in a transaction in which such party is not the surviving entity, a sale of substantially all of its assets or, to the extent known by such defaulting party, the acquisition by any person or related group of 25% or more of its outstanding equity interest. The non-defaulting party shall have the right to terminate this Agreement upon the happening of any such event. 19. Term. This Agreement shall have an initial term of two (2) years and shall automatically renew for subsequent terms of one (1) year, subject to termination as provided in Section 20 hereof. 20. Arbitration; Termination; Suspension. (a) UVEST and Subscriber shall work together in good faith to resolve any dispute arising between them. If UVEST and Subscriber cannot resolve such dispute after a good faith attempt to do so, either party may submit such dispute to arbitration in Charlotte, North Carolina, such arbitration to be conducted in accordance with the Commercial Arbitration Rules of the National Association of Securities Dealers. The arbitration award shall be final and binding. Judgment upon the award rendered may be entered in any court having jurisdiction over the party against which the award is rendered. Nothing in this Section 20(a) shall prevent UVEST or Subscriber from exercising any other rights which they have pursuant to this Section 20 or otherwise pursuant to this Agreement in connection with such a dispute; provided, however, that once a dispute has been submitted to arbitration, neither party shall pursue a remedy with respect to such dispute unless such remedy is specifically delineated herein. (b) Either party may terminate this Agreement as of the end of the initial term or subsequent terms by giving notice to the other party at least 90 days prior to the end of the initial term or subsequent terms. (c) UVEST may immediately suspend performance under this Agreement, and may thereafter terminate this Agreement pursuant to the procedures set forth in this Section 20(c), in the event of a material breach by Subscriber in the performance of any material agreement made by Subscriber under this Agreement, including, without limitation, any failure of Subscriber to comply in any material respect with any of the manuals identified in Section 12 hereof. UVEST shall promptly notify Subscriber of the grounds for any such suspension. Subscriber shall have 30 days following such notice to resolve the matter(s) specified therein to UVEST's satisfaction prior to any termination of the Agreement. If 13 Subscriber fails to resolve any such matters) within the prescribed time and UVEST does not agree in writing to extend the period for resolution of any such matter(s), UVEST may terminate this Agreement upon the expiration of such 30-day period. In addition, UVEST may terminate this Agreement upon notice to Subscriber if Subscriber directly or indirectly offers or makes available Securities brokerage or broker-dealer services or Securities investment advisory products or services. (d) Subscriber may terminate this Agreement pursuant to the procedures set forth in this Section 20(d), in the event of a material breach by UVEST in the performance of any material agreement made by UVEST under this Agreement. Subscriber shall promptly notify UVEST of the grounds for any such termination. UVEST shall have 30 days following such notice to cure the breach specified herein. If UVEST fails to cure any such breach within such 30-day period and Subscriber does not agree in writing to extend the period for cure of such breach or UVEST does cure such breach but the same breach occurs within 90 days from the original breach, Subscriber may terminate this Agreement upon the expiration of such 30-day period or upon the occurrence of such second breach. Subscriber shall have the additional rights to terminate this Agreement provided in Section 7(a) hereof. (e) Certain federal and state regulatory authorities may require the termination of this Agreement on behalf of UVEST or Subscriber. In the event of such a termination, whether made on behalf of UVEST or Subscriber, (i) neither party hereto shall have any liability to the other for such termination except to the extent such termination results from the failure of one party to satisfy its obligations hereunder, in which case such failing party shall be liable to the other party to the extent it otherwise would have been liable for such failure, and (ii) certain provisions of this Agreement, as specified in Section 25 hereof, shall survive such termination as provided herein. (f) In the event that UVEST or Subscriber terminates this Agreement or a governmental authority requires the termination of this Agreement, (i) Subscriber shall immediately cease representing itself as a participant in the UVEST Program, discontinue use of all UVEST materials and all materials bearing the UVEST logo, service mark or trademark; and (ii) Subscriber shall return to UVEST all records relating to UVEST's brokerage accounts, all UVEST procedures and compliance manuals and all UVEST forms and documents and shall so certify in writing to UVEST within ten days of the date of termination. (g) Upon the termination of this Agreement by either UVEST, Subscriber or any governmental authority, neither UVEST nor Subscriber shall interfere with the decision of any customer or Dual Employee regarding his brokerage accounts or employment, respectively. Subscriber acknowledges that UVEST shall not be deemed to be interfering with any customer as a result of UVEST performing its obligations or sending customary notices with respect to any customer or any such customer's accounts. Nothing in this Section 20(g) shall prohibit Subscriber or UVEST from engaging in their customary marketing activities or resolving existing disputes with customers. (h) Nothing in this Agreement shall be deemed or construed to create a partnership or joint venture between the Subscriber and UVEST. The relationship between such parties is only contractual in nature. 14 (i) Upon Subscribers request, UVEST shall provide the Subscriber a current list of the Subscriber's customers who have become customers of UVEST under the UVEST program. Upon termination of this Agreement, except for Section 20(c), UVEST agrees to cooperate in the transfer of records relating to customer accounts to the Subscriber or a broker/dealer designated by the Subscriber. After termination of this Agreement, UVEST shall not provide information with respect to such accounts to any other broker dealer or financial institution nor shall information with respect to such accounts be used by UVEST after such transfer 21. UVEST Trademark; No License or Right to Use. Subscriber recognizes and acknowledges that UVEST is a registered service mark and a registered trademark of UVEST. Subscriber is not granted a license or right to use UVEST's UVEST service mark or trademark. Subscriber shall not use the UVEST service mark or trademark in any manner whatsoever without the prior written consent of UVEST and any use of the UVEST service mark or trademark by Subscriber pursuant to such written consent shall comply in all respects with the terms thereof. 22. Additional Representations and Warranties of Subscriber. Subscriber represents and warrants to UVEST that (i) Subscriber has full legal right, power and authority to enter into and perform this Agreement; (ii) this Agreement has been duly authorized, executed and delivered by Subscriber and constitutes the legal, valid and binding agreement of Subscriber; and (iii) no consent, approval, authorization or order of any governmental agency or authority, except (A) those previously obtained by Subscriber, disclosed to UVEST and in full force and effect, and (B) those which have been disclosed to UVEST in writing and are to be obtained by Subscriber, is required in connection with the transactions contemplated by this Agreement on the part of Subscriber. Subscriber agrees to use its best efforts to obtain all consents, approvals, authorizations and orders necessary in connection with its performance under this Agreement which have not been obtained as of the date hereof. Subscriber agrees that once all of such consents, approvals, authorizations and orders have been obtained, it will certify such fact to UVEST in writing. Subscriber further acknowledges that UVEST shall not perform its obligations pursuant hereto until it receives such certification. Subscriber further represents and warrants that, to the extent permitted by law, it shall use its best efforts, upon request by UVEST, to verify any information or representations in the possession of Subscriber made by one of its depositors or customers, or any other potential customer of UVEST, contained or set forth in an Application for Account or any other questionnaire submitted by such potential customer to UVEST in conjunction with the opening or attempted opening of an account with UVEST. Subscriber further represents that, except as may otherwise be required by law, it shall keep confidential all information not generally available to the public which it may acquire as a result of this Agreement regarding the business or affairs of UVEST, or any of its affiliates, and further acknowledges that this covenant shall survive the termination of this Agreement until such information shall become generally available to the public. 23. Representations and Warranties of UVEST. UVEST represents and warrants to Subscriber that (i) UVEST has full legal right, power and authority to enter into and perform this Agreement; (ii) this Agreement has been duly authorized, executed and delivered by UVEST and constitutes the legal, valid and binding agreement of UVEST; (iii) UVEST has obtained all consents, approvals, authorizations and orders of governmental agencies or authorities required in connection with the transactions contemplated by this Agreement 15 on the part of UVEST; including, without limitation, receipt from the Securities and Exchange Commission of a "no-action letter," dated November 24, 1992, which ("no-action letter") has not been modified or rescinded as of the date hereof; (iv) UVEST is registered as a broker-dealer and an investment advisor under federal and state securities laws and is a member of the NASD and, during the term of this Agreement, UVEST will maintain such registrations and membership as required by applicable law. UVEST further represents that, except as may otherwise be required by law, it shall keep confidential all information not generally available to the public which it may acquire as a result of this Agreement regarding the business or affairs of Subscriber, or any of its affiliates, and further acknowledges that this covenant shall survive the termination of this Agreement until such information shall become generally available to the public. 24. Notices. All notices, requests, approvals, consents or other communications required or permitted to be delivered hereunder shall be in writing, delivered personally or forwarded by certified mail, postage prepaid, to the address set forth on the signature page hereof and shall be deemed duly given when so personally delivered or three business days after the date of deposit in a mail box or other U.S. Postal Service depository outside the control of the sender. Either party may from time to time designate in writing any other address to which such notices, requests and other communications shall be sent. Until any such change, such notices, requests and other communications shall be sent to the address of the appropriate party as set forth on the final page of this Agreement. 25. Compliance with Securities Regulations. Notwithstanding any provision contained in this Agreement to the contrary, UVEST shall cause all aspects of the UVEST Program (including, without limitation, designation of the UVEST Centers in Subscriber's locations, training and compensation of Dual Employees and Non-Dual Employee, manner and content of disclosures to customers and advertising and promotional activities) to be conducted in accordance and conformity with the Interagency Statement on Retail Sales of Non-deposit Investment Products, dated February 15, 1994, published by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervisions, as such statement has been and hereafter may be amended from time to time (the "Interagency Statement"). In addition to the Interagency Statement, UVEST adheres to the 1999 Gramm Leach Bliley Act, Title II, Section 201, and all applicable securities laws (NASD, SEC, Etc.). In accordance with their responsibilities under Interagency Statement and various other laws, rules, regulations and policies of their respective regulatory agencies as in effect from time to time, Subscriber and its affiliate depository institutions on whose premises the activities contemplated by this Agreement are conducted may from time to time review the sales and other activities of the Dual Employees and the other operations of the WEST Centers to confirm that such activities and operations are being conducted in a manner consistent with-such Interagency Statement and any such laws, rules, regulations and policies, and in connection therewith to review such records of UVEST as the Subscriber or such affiliate deems necessary or appropriate to evaluate such compliance. Any such review or investigation shall not relieve UVEST from its obligations hereunder to operate all aspects of the UVEST Program in accordance with such Interagency Statement and any such additional laws, rules, regulations and policies. 16 26. Privacy Policy. As a policy, UVEST does not sell, share or otherwise provide account holder's personal information to any nonaffiliated third party entity, with the exception of our clearing firm. Unless otherwise instructed in writing by a customer, UVEST's Privacy Policy does allow sharing of referred account information with Subscriber. 27. Miscellaneous. (a) This Agreement and the materials incorporated herein by reference constitute the entire understanding of the parties with respect to its subject matter. Neither party may assign this Agreement (either voluntarily or by operation of law) without the prior written consent of the other party, except that UVEST, or Subscriber to the extent permitted by applicable law, may assign its rights under this Agreement to a subsidiary or affiliate. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against, the successors and permitted assigns of each of the parties, subject only to the rights of federal and state regulatory authorities to terminate this Agreement under certain circumstances. This agreement and all provisions hereof are for the sole and exclusive benefit of the parties hereto and, in the case of Subscriber, any subsidiary or affiliate depository institutions on whose premises the activities contemplated hereby may be conducted. Nothing expressed or referred to in this Agreement will be construed to give any other person any legal or equitable right, remedy or claim under or with respect to this Agreement or any provision hereof. (b) Subscriber recognizes and acknowledges that failure by Subscriber to comply with the provisions of this Agreement regarding permitted use by Subscriber of the UVEST logo, service mark and trademark, UVEST equipment, signs, materials, furnishings and supplies and items bearing the UVEST logo, service mark or trademark may result in damage to UVEST for which monetary compensation would be inadequate. Subscriber therefore agrees that UVEST shall be entitled to specific performance of Subscriber's obligations pursuant to such provisions. (c) Neither party shall be liable to the other for special, indirect or consequential damages (including lost revenues or lost profits) arising out of any breach of its obligations under this Agreement other than the parties' respective obligations to indemnify each other pursuant to Section 9 hereof. (d) Except to the extent specified in Section 20(a) hereof, the enumeration herein of specific remedies shall not be exclusive of any other remedies and no single, partial or other exercise of any such right, power, remedy or privilege shall preclude the further exercise thereof or the exercise of any other right, power, remedy or privilege. Any delay or failure by any party to this Agreement to exercise any right, power, remedy or privilege herein contained, or now or hereafter existing under any applicable statute or law, shall not be construed to be a waiver of such right, power, remedy or privilege or to limit the exercise of such right, power, remedy or privilege. (e) Neither Subscriber nor UVEST shall hold itself out as an agent of the other or any of the subsidiaries or the companies controlled directly or indirectly by or affiliated with the other. 17 (f) This Agreement may be modified only by a writing signed by both parties to this Agreement. Such modification shall not be deemed a cancellation of this Agreement. (g) In the event that any court of competent jurisdiction declares invalid any provision of this Agreement, such invalidity shall have no effect on the other provisions hereof, which shall remain valid and binding and in full force and effect, and to that end the provisions of this Agreement shall be considered severable; provided, however, that should any court of competent jurisdiction declare invalid any material provision of this Agreement, severance of which would frustrate the purpose of this Agreement, such provision shall not be severable, and this Agreement shall be voidable by either party hereto. (h) UVEST shall have each customer acknowledge in writing the receipt of notice that (i) UVEST, and not Subscriber, is providing and is responsible for the brokerage services being offered and (ii) UVEST is not affiliated with Subscriber. Such notice and acknowledgment may be a part of the customer's application for an account with UVEST. (i) Subscriber, at a time mutually acceptable to Subscriber and UVEST, may inspect those records of UVEST pertaining to commissions and other revenue generated by the UVEST Centers in locations of Subscriber or its affiliates. (j) All such signs bearing the UVEST logo, service mark or trademark shall remain the property of UVEST and shall be used by Subscriber's locations only in connection with the UVEST Program and the business conducted at the UVEST Centers. (k) This Agreement has been accepted by UVEST in, and shall be construed in accordance with the statutory and common laws of, the State of North Carolina, except to the extent such laws may be preempted by federal laws, rules or regulations. (l) The headings preceding the text, articles and sections hereof have been inserted for convenience and reference only and shall not be construed to affect the meaning, constriction or effect of this Agreement. (m) The provisions of Sections 9, 15 (to the extent such costs are incurred prior to termination), 22 and 23 (to the extent such Sections relate to confidentiality concerning UVEST's or Subscriber's business), and 20(g), 27(b) and (c) hereof shall survive the termination of this Agreement. (n) This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. It shall not be necessary to make proof of but one such counterpart in any court of law having jurisdiction with regard to this Agreement or any dispute arising pursuant hereto. 18 IN WITNESS WHEREOF, UVEST and Subscriber have executed this Agreement as of the date set forth above. UVEST FINANCIAL SERVICES GROUP, INC. By /s/ Dan Arnold ----------------------------------- Dan Arnold President & COO Address of UVEST for notices hereunder: UVEST Financial Services Group, Inc. 128 S. Tryon Street, Suite 1340 Charlotte, NC 28202 Attention: Craig Karnis UNITED BANK OF PHILADELPHIA By /s/ Evelyn F. Smalls ----------------------------------- Evelyn F. Smalls President CEO Address of Subscriber for notices hereunder: United Bank of Philadelphia 300 North Third Street Philadelphia, PA 19106-1101. Attention: Evelyn F. Smalls UVEST FINANCIAL SERVICES GROUP, INC. Brokerage Services Agreement SCHEDULE 1 Revenue Sharing Payments Subscriber shall be entitled to the following percentages) of gross commissions generated by the purchase or sale of insurance, mutual funds, annuities, stocks and bonds through registered representatives located in UVEST Centers in Subscriber's branches: Percentage of gross commissions For monthly gross commissions of payable to Subscriber -------------------------------- --------------------- $20,000 or less 77.5% $20,001 and above 80% Clearing Charges of $20 per transaction will be deducted from Subscriber's revenue sharing payment for mutual funds, equities, insurance and variable annuities on a monthly basis in accordance with the terms in Section 7(b) of this Agreement. Clearing Charges of $30 per transaction will be deducted from Subscriber's revenue sharing payment on a monthly basis for bonds in accordance with the terms in Section 7(b) of this Agreement. UVEST's Discount and Internet Brokerage Service Payout to Subscriber: --------------------- For the purchase or sale of Securities 20% of gross commissions utilizing the discount brokerage service, discount commission schedule via the telephone For the purchase or sale of Securities $1.00 per trade utilizing the internet brokerage service There are no clearing charges deducted from Subscriber's revenue sharing payment on a monthly basis in accordance with the terms in Section 7(b) of this Agreement. 20 EX-99 10 exh99_1.txt EX 99.1 SARBANES-OXLEY FOR CEO EXHIBIT (B) 99.1 Exhibit 99.1 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 the Form 10-K for the period ending December 31, 2002 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 results of operation of the Company. /s/ Evelyn F. Smalls - ----------------------- Evelyn F. Smalls Chief Executive Officer March 31, 2003 EX-99 11 exh99_2.txt EX 99.2 SARBANES-OXLEY FOR CFO Exhibit 99.2 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 the Form 10-K for the period ending, December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brenda 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 results of operation of the Company. /s/ Brenda Hudson-Nelson - -------------------------- Brenda Hudson-Nelson, Chief Financial Officer, March 31, 2003 -----END PRIVACY-ENHANCED MESSAGE-----