<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee required]
For the Fiscal Year Ended December 31, 1997.
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No fee required]
For the transition period from____to____
Commission file number: 000-27244
USABANCSHARES, INC.
(Name of Small Business Issuer In Its Charter)
PA 23-2806495
-- ----------
(State Or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
1535 Locust Street, Philadelphia, PA 19102
- ------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (215) 569-4200
-------------
Securities registered under Section 12(b) of the Act: None.
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
- ------------------------------- ---------------------------------------------
- ------------------------------- ---------------------------------------------
Securities registered under
Section 12(g) of the Act:
Common Stock, $1.00 Par Value Per Share
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter periods 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 __
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $5,193,503.
The aggregate market value of the voting stock held by non-affiliates as of
February 28, 1998, was $13,802,030, based on the average of the bid and asked on
the National Association of Securities Dealers Automated Quotation System on
February 28, 1998.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be utilized in connection with the
registrant's Annual Meeting of Shareholders scheduled to be held in June, 1998
are incorporated by reference into Part III hereof.
Registration Statement on Form SB-2 of the Company, as Amended, Registration
No. 33-92506
Transitional Small Business Disclosure Format (Check one): Yes____ No__X__
<PAGE>
USABancShares, Inc.
Form l0-KSB
This report contains "forward-looking" statements. USABancShares ("The Company")
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Act of 1995 and is including this statement for the
express purpose of availing itself of such safe harbor with respect to such
statements. Forward- looking information is subject to important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, such results may differ from those expressed in any
forward-looking statements made by the Company. These risks and uncertainties
include, but are not limited to, uncertainties affecting banking generally;
risks relating to credit decisions; sensitivity to fluctuations in interest
rates; competition within the primary markets in which the Company operates, and
the ability to make and successfully integrate acquisitions. The Company wishes
to caution each reader of this report to carefully consider the risks and
uncertainties with respect to each such forward-looking statement.
INDEX
PART I Page
Item 1 Description of Business 1
Item 2 Description of Property 4
Item 3 Legal Proceedings 4
Item 4 Submission of Matters to a Vote of Security Holders 5
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 5
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 7 Financial Statements 25
Item 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 25
PART III
Item 9 Directors, Executive Officers, Promoters and
Control Persons Compliance with Section 16(a)
Exchange Act 25
Item 10 Executive Compensation 25
Item 11 Security Ownership of Certain Beneficial Owners
and Management 25
Item 12 Certain Relationships and Related Transactions 25
Item 13 Exhibits and Reports on Form 8-K 25
<PAGE>
PART I
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Item 1: Description of Business
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USABancShares, Inc.
USABancShares, Inc. (the "Company") is a one-bank holding company registered
under the Bank Holding Company Act of 1956, as amended. It was incorporated
under the laws of the Commonwealth of Pennsylvania on March 14, 1995, and
approved by the Federal Reserve System on October 3, 1995. On November 30, 1995
(the "Effective Date"), the Company completed its acquisition of Peoples Thrift
Savings Bank (the "Bank") pursuant to the Agreement and Plan of Merger dated
February 24, 1995, and Related Plan of Merger dated September 27, 1995, pursuant
to which the Bank thereby became a wholly-owned subsidiary of the Company. On
April 11, 1997 the Company completed its acquisition of Knox Financial Services
Group, Inc., a registered broker-dealer with the NASD. Subsequent to the
acquisition, Knox Financial Services Group, Inc. was renamed USACapital, Inc.
("USACapital").
The Company, through its operation of the Bank, derives a substantial portion of
its income from banking and banking-related services. The Company continually
evaluates financial services-related and other activities in addition to owning
and supervising the Bank, particularly those which allow the Company to generate
fee-based income. The Company's Common Stock is traded on the NASDAQ SmallCap
Market under the symbol "USAB" The principal executive offices of the Company
were located at One Penn Square, 30 South 15th Street, Philadelphia, PA. The
principal offices of the Bank were located at 803 East Germantown Pike,
Norristown, PA and are currently located at 1535 Locust Street, Philadelphia,
PA. Their respective telephone numbers are (215) 569-4200 and (610) 272-3690.
The Company, the Bank and USACapital have a total of 18 full-time and one
part-time employees. Management anticipates hiring additional staff during 1998.
The Bank
The Company owns 100% of the Bank, which is a Pennsylvania chartered savings
bank whose deposits are insured by the Bank Insurance Fund ("BIF") of the
Federal Deposit Insurance Corporation ("FDIC"). The Bank has operated as a
community-based financial institution for over 110 years, and was originally
organized in 1887 as mutual building and loan. In December 1990, the Bank
converted to a state chartered stock savings bank insured by the FDIC. The Bank
has its primary retail location in Plymouth Meeting, Pennsylvania, opened a
"mini" branch in the Bellevue Hotel in Philadelphia, and plans to open a new
flagship retail operation at 1535 Locust Street in Center City Philadelphia
during the first quarter of 1998. The Bank is in the business of taking deposits
and making loans in and around the greater Delaware Valley area, and intends to
maintain its loan origination and deposit generation operations within this and
other geographically proximate locations.
1
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The Bank's primary source of funds are deposits and proceeds from principal and
interest payments on loans and securities; the flow of these payments are
generally predictable, but can be greatly influenced by general interest rates,
economic conditions and competition.
The primary investing activity of the Bank is the origination of real estate and
commercial mortgage loans, the purchase of investment securities and the
acquisition of discounted loan portfolios. Loan originations have accounted for
approximately one-half of the Bank's total loan growth over the last several
years, with the balance comprised of loan portfolio acquisitions. The Bank
generally purchases portfolios consisting of performing loans secured by
mortgages on real estate in and around the Delaware Valley. These loans are
purchased at discounts to book value, providing the Bank with an increased yield
above normal market rates. The Bank intends to continue its loan portfolio
acquisitions over the coming years to enhance loan growth and yield as a
complement to its loan originations, and shall evaluate opportunities to acquire
attractive loan portfolios secured by real estate outside of the Bank's primary
area, as well as its historical local concentration. In furtherance of this
strategy, during the quarter ended December 31,1997 the Bank acquired loans
aggregating $18.0 million which were secured by mortgages on commercial and
residential properties located in the Northeast region of the United States.
Lending Activities
The Bank's lending strategy focuses on the origination of commercial real estate
and other commercial loans in its primary market area. The Bank believes that
its adherence to strict loan underwriting criteria has been largely responsible
for its high asset quality. Such underwriting criteria include, among others, a
maximum loan to value ratio of up to 80%, a 10 year maximum maturity on
commercial and commercial real estate loans and a maximum loan amount that is
currently approximately $1.8 million. In certain situations, the Board has and
may continue to approve loans which do not meet such underwriting criteria -
based upon individual circumstances. The Bank's commercial loans are working
capital lines of credit, term loans to purchase equipment, fixtures or
furniture, commercial mortgages to finance investment properties and commercial
mortgages to acquire business-owner occupied properties. The Bank's general
practice is to write loans at variable interest rates for a period of not
greater than five years, with a strong preference for the origination of
adjustable rate loans tied to the Bank's prime lending rate which is generally
above the New York money center prime rate. Generally, the Bank requires
collateral on all commercial loans, which may be in the form of residential or
commercial real estate, cash, marketable securities, accounts receivable,
inventory, equipment and other fixed assets, but the Bank does not make loans
based primarily on accounts receivable or inventory of the business.
Notwithstanding the form or value of collateral provided, the Bank will
generally obtain a personal guarantee from its commercial borrowers.
The Bank seeks to make commercial loans to a wide variety of service, retail,
distribution and manufacturing companies. No individual director, officer or
employee of the Company has lending authority for any amount and all credit
decisions and decisions to lend money are made by the Loan Committee or the
Board of Directors.
2
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Asset Acquisition Activities
The Bank actively reviews opportunities to acquire discounted loan portfolios
and will continue to do so as part of its growth strategy. These portfolios are
primarily offered through government agencies, but are often available through
private sector transactions as well. The Bank has found that the pools which are
offered through governmental agencies, such as the FDIC, are due to the
agencies' efforts to dispose of assets held as a result of the consolidation of
the banking regulatory system and the closing of governmental offices. Loan
pools are generally available from private sellers in connection with asset
securitizations and other restructurings. At December 31, 1997 approximately
$28.4 million , or 49.8% of the Bank's loan portfolio consisted of loans
purchased in seven separate loan pool acquisitions, which included a loan pool
acquired during October, 1997 aggregating $3.4 million secured by properties
located in the greater Delaware Valley area and another loan pool in December,
1997 aggregating $14.6 million secured by properties located in the Northeast
region of the United States. The loans which made up these pools were
predominantly commercial real estate secured loans generally ranging in size
from $100,000 to $300,000. Generally, the properties securing these loans are
held for investment purposes and include personal guarantees for the loan
amount. On average the loan to value ratios were between 75% and 80%.
The Bank performs detailed due-diligence on all potential loan acquisitions,
which includes a review of each loan file to ascertain information regarding
collateral value, payment history, interest rate, and guarantor and borrower
financial statements in order to ensure the loan meets the Bank's underwriting
criteria. Loan pools are priced in accordance with a proprietary computer
pricing model developed by personnel of the Bank which they have successfully
utilized in evaluating and acquiring numerous loan pools over the past five
years on behalf of the Bank and, prior to formation of the Company, on behalf of
private clients. The loan pools are generally purchased with certain
representations and warranties which protect the Bank in the event of document
deficiencies or fraud. In connection with its growth strategy, the Bank intends
to increase its emphasis on the acquisition of loan pools secured by properties
located both within and outside of its primary market area, while continuing to
expand loan originations.
Management believes that there are numerous opportunities in the market place to
acquire loan pools at a discount and that the experience and knowledge of its
senior management team provides the Bank with a unique opportunity to take
advantage of this market to facilitate the growth strategy of the Bank.
USACapital
USACapital, Inc. ("USACapital"), a registered broker-dealer with the NASD, is a
Pennsylvania corporation wholly-owned by the Company. The Company acquired
USACapital in April, 1997 for a purchase price of $75,000. USACapital is engaged
in the business of trading stocks, bonds, annuities, and other investments
related products to the general public. USACapital operates out of the same
offices as the Company and has relocated to offices in the new branch on Locust
Street during the first quarter of 1998.
3
<PAGE>
Competition
The Bank's primary market area is served by several major commercial banks such
as First Union, PNC Bank, Mellon Bank and Commerce Bank, as well as a number of
mid-size savings banks and thrifts, to include Progress Federal and Harleysville
Savings Bank, and other small community banks and thrifts. The Bank actively
competes with all of these institutions for retail and commercial accounts. The
Bank faces competition from financial institutions located out of state which
conduct commercial calling efforts in the area and direct mail promotions to
consumers, as well as from outside the banking industry, such as money market
mutual funds, stock brokers, and the federal government. Larger competitors have
much greater financial and marketing resources than those of the Bank and in
commercial transactions, the Bank's legal lending limit to a single borrower
restricts its ability to compete effectively for the business of large local
companies; smaller commercial borrowers, though, can be effectively served
through the Bank's personalized service and quick response time. In order to
compete, the Bank places a major emphasis on superior service and will rely on
the flexibility that its size and independent status permits. The Company and
the Bank believe that an independent community bank, operated by responsive and
experienced employees who are dedicated to personal service and innovative
thought, offers an attractive alternative to both larger and smaller competing
institutions.
Item 2. Description of Properties
-------------------------
On December 23, 1997, the Bank purchased a building at 1535 Locust Street in
Center City Philadelphia, formerly owned and operated by PNC Bank, which will
serve as its Center City flagship retail operation upon its opening in the first
quarter of 1998. This new building consists of approximately 10,000 square feet
of space, and will include not only a first floor retail operation, but also
house senior management of the Company and USACapital, in addition to selected
members of the Bank staff. Pursuant to a lease dated May 11, 1989, the Bank
leases its building located at 803 East Germantown Pike in Norristown, PA, which
contains a retail banking operation as well as administrative offices. The lease
is for an initial period of 10 years, with an option to renew or extend the
lease for an additional 10 years. The Bank leases an additional branch in the
office, retail and hotel complex known as the "Bellevue" which is located in
Center City Philadelphia. The Bank may acquire or lease other real estate in the
future for purposes of opening new branch locations. In addition, the Bank may
acquire or lease real estate out parcels for purposes of establishing
mini-branch locations, which would likely include state of the art automated
teller facilities that would involve minimal staffing requirements. The Company
also currently leases 5,000 square feet of space at One Penn Square, 30 South
15th Street, Philadelphia, PA. This space is utilized by the Company's executive
and administrative offices and no deposits are taken at this location. The
Company intends to move these offices to its new location during the first
quarter of 1998 and will not renew the lease which expires on August 1, 1998.
Item 3. Legal Proceedings
-----------------
There are no legal actions or proceedings to which the Company or the Bank is a
party.
4
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Item 4. Submission of Matters to a Vote of Security Holders
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None.
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
The Common Stock of the Company is listed for trading on the NASDAQ SmallCap
Market under the symbol "USAB" and began trading during the first quarter of
1996. As of February 28, 1998, there were approximately 272 holders of record of
the Company's Common Stock. The Company has not, since its inception, paid any
cash dividends. On July 18, 1997, the Company paid a 33% stock dividend to its
common stockholders' of record as of July 1, 1997.
State banking statutes restrict the amount of dividends paid on capital stock.
Accordingly, no dividends shall be paid by the Bank on its capital stock unless,
following the payment of such dividends, the capital stock of the Bank will be
unimpaired, and (1) the Bank will have a surplus of not less than 50% of its
capital, or, if not, (2) the payment of such dividend will not reduce the
surplus of the Bank.
|------------------------|----------------|------------------|-----------------|
|Price of Common Stock | | | |
|------------------------|----------------|------------------|-----------------|
|1997 | Low Price | High Price | Dividend |
|------------------------|----------------|------------------|-----------------|
|First Quarter (1) | $ 6.75 | $ 9.00 | $ - |
|Second Quarter (1) | $ 6.00 | $ 7.69 | $ - |
|Third Quarter | $ 6.00 | $ 7.31 | $ - |
|Fourth Quarter | $ 6.38 | $ 7.69 | $ - |
|------------------------|----------------|------------------|-----------------|
|------------------------|----------------|------------------|-----------------|
|Price of Common Stock | | | |
|1996 | Low Price | High Price | Dividend |
|------------------------|----------------|------------------|-----------------|
|First Quarter (1) | $ 6.94 | $ 7.88 | $ - |
|Second Quarter (1) | $ 6.56 | $ 8.06 | $ - |
|Third Quarter (1) | $ 7.41 | $ 9.75 | $ - |
|Fourth Quarter (1) | $ 8.00 | $ 10.50 | $ - |
|------------------------|----------------|------------------|-----------------|
(1) Adjusted for 33% stock dividend effective July 1, 1997.
Market quotations reflect inter-dealer prices, without retail markups, markdown
or commissions and may not necessarily reflect actual transactions.
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following represents summarized selected consolidated financial data of the
Company which, in the opinion of management, reflects all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the Company's financial condition and results of operations.
<TABLE>
<CAPTION>
Selected Financial Condition Data: 12/31/97 12/31/96
- ---------------------------------- ----------------- -----------------
<S> <C> <C>
Total assets $ 89,325,976 $ 38,145,499
Loans receivable, net 56,002,164 16,529,483
Securities 24,453,629 16,324,746
Deposits 70,473,521 27,973,147
Total borrowings 12,637,942 5,050,000
Stockholders' equity 5,365,783 4,894,847
Selected Operations Data:
- -------------------------
Total interest income $ 4,879,045 $ 2,942,144
Total interest expense 2,530,250 1,225,116
------------------ ------------------
Net interest income 2,348,795 1,717,028
Provision for loan losses 415,000 125,000
------------------ ------------------
Net interest income after provision for loan losses 1,933,795 1,592,028
Total noninterest income 314,458 103,232
Total noninterest expense 2,456,970 1,500,996
----------------- ------------------
Income before income taxes (208,717) 194,264
Income tax provision 16,891 67,995
----------------- ------------------
Net income $ (225,608) $ 126,269
================= ==================
Selected Financial Ratios and Other Data:
- -----------------------------------------
Performance Ratios:
Return on assets (ratio of net income to average total assets) -0.09% 0.36%
Return on equity (ratio of net income to average equity) -1.10% 2.57%
Interest Rate Spread Information:
Average during the period 3.68% 5.29%
Net interest margin (net interest income/average earning assets) 4.53% 6.11%
Ratio of operating expense to average total assets 1.93% 2.35%
Ratio of average interest-earning assets to average interest-bearing liabilities 117.50% 118.38%
Asset Quality Ratios:
Non-performing assets to total assets at end of period 0.32% 3.50%
Allowance for loan losses to non-performing loans 197.92% 58.38%
Allowance for loan losses to loans receivable, net 1.01% 1.10%
Capital Ratios:
Stockholders' equity to total assets at end of period 6.01% 12.83%
Other Data:
Number of full-time employees 18 10
Number of full-service offices 2 1
</TABLE>
6
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The following represents summarized quarterly financial data of the Company
which, in the opinion of Management, reflects all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the Company's
results of operations.
<TABLE>
<CAPTION>
Three months ended
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1997 31-Dec 30-Sep 30-Jun 31-Mar
- ---- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Total interest income $1,698,917 $1,226,373 $1,028,729 $925,026
Total interest expense 957,836 605,551 520,162 446,701
---------- ---------- ---------- --------
Net interest income 741,081 620,822 508,567 478,325
Provision for loan losses 340,000 50,000 - 25,000
---------- ---------- ---------- --------
Net interest income after provision for loan losses 401,081 570,822 508,567 453,325
Total noninterest income 33,404 151,063 112,594 17,397
Total noninterest expense 1,134,356 480,328 455,574 386,712
---------- ---------- ---------- --------
Income before income taxes (699,871) 241,557 165,587 84,010
Income tax (benefit) provision (186,410) 113,697 58,558 31,046
---------- ---------- ---------- --------
Net income $ (513,461) $ 127,860 $ 107,029 $ 52,964
========== ========== ========== ========
Per share data
Weighted-average common shares outstanding 813,807 804,618 794,119 794,119
Net income (loss) per common share - basic and diluted $ (0.63) $ 0.15 $ 0.13 $ 0.07
</TABLE>
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------------
1996 31-Dec 30-Sep 30-Jun 31-Mar
- ----- --------- --------- --------- --------
<S> <C> <C> <C> <C>
Total interest income $ 796,679 $ 817,053 831,886 $496,526
Total interest expense 379,352 291,871 276,723 277,170
---------- ---------- ---------- --------
Net interest income 417,327 525,182 555,163 219,356
Provision for loan losses - 50,000 75,000 -
---------- ---------- ---------- --------
Net interest income after provision for loan losses 417,327 475,182 480,163 219,356
Total noninterest income 7,142 28,412 5,377 62,301
Total noninterest expense 413,767 387,291 426,966 272,972
---------- ---------- ---------- --------
Income before income taxes 10,702 116,303 58,574 8,685
Income tax provision 67,995 - - -
---------- ---------- ---------- --------
Net income $ (57,293) $ 116,303 $ 58,574 $ 8,685
========== ========== ========== ========
Per share data
Weighted-average common shares outstanding 794,119 794,119 794,119 794,119
Net income (loss) per common share - basic and diluted $ (0.07) $ 0.15 0.07 $ 0.01
</TABLE>
7
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Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The purpose of this discussion is to focus on significant and encouraging
changes in the financial condition and results of operations of the Company and
its subsidiaries during the past two years. The discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report.
Financial Condition
The Company's total assets increased from $38.1 million at December 31, 1996 to
$89.3 million at December 31, 1997, an increase of $51.2 million, or 134.4%. The
increase was due primarily to increases in the loan and investment portfolios of
$39.5 million and $8.1 million, respectively. This growth was funded by
increases in certificates of deposit and borrowed funds (primarily Federal Home
Loan Bank Advances ("Advances")), during the year of $42.5 million, and $4.3
million, respectively. The increase in the loan portfolio during 1997 was
primarily due to the acquisition of discounted commercial and residential real
estate loan portfolios. These loan portfolios, with unpaid principal balances of
approximately $27.8 million were acquired for approximately $24.0 million.
Total deposits increased $42.5 million to $70.5 million at December 31, 1997.
The increase in deposits was comprised of an increase in Money Market accounts
of $4.8 million and a substantial increase in certificates of deposit during
1997 which resulted directly from the Bank's marketing efforts to attract new
customers.
Borrowed funds consist primarily of advances from the FHLB with both fixed and
variable interest rates and stated maturities occurring during 1997. Total
borrowed funds increased to $9.3 million at December 31, 1997. The Company had
$5.0 million in borrowed funds at December 31, 1996. The increases in deposits,
described above, and in borrowed funds were utilized to fund increases in loans
and other earning assets as part of the Bank's overall growth strategy.
Management plans to continue to utilize FHLB advances in conjunction with
deposit expansion to provide the necessary funding for the Bank's continued
growth. The Bank's borrowing limit at the FHLB as of December 31, 1997, was
approximately $24.1 million.
Results of Operations
Comparison of the Year Ended December 31, 1997 and the Year Ended
December 31,1996
General. As a result of the positive performance of the Company to date,
management elected to take a one-time charge of $343,775, in the fourth quarter
of 1997, related to the conversion provision of the Class B Common Stock (see
Note 12 in the Notes to Consolidated Financial Statements). This charge, while
treated as a current expense, resulted in a corresponding increase in capital,
by the same amount, and will benefit future periods as Class B amortization will
no longer be required. Additionally, management decided to increase the
allowance for loan losses in the fourth quarter of 1997 by $340,000 (in addition
to $75,000 which was added previously in the year), in anticipation of ongoing
loan growth. As a result of these transactions, the Company reported a net loss
of $225,608 for the year ended December 31, 1997, a decrease of $351,877
compared to net income of $126,269 for the year ended December 31, 1996.
8
<PAGE>
Interest expense increased $1.3 million due to expanded use of certificates of
deposit to fund loan portfolio acquisitions, non-interest expense increased
$639,339 primarily due to the addition of key servicing and operations
personnel, and the allowance for loan loss reserves increased $290,000, or
approximately 1.0% of gross loans.
The decrease was partially offset by an increase in interest income of $1.9
million and an increase in non-interest income of $211,226. Further details
regarding changes in the major categories of income and expense are discussed
below.
Interest Income. Interest income increased $1.9 million to $4.9 million for the
year ended December 31,1997, from $2.9 million for the year ended December 31,
1996. The increase in interest income was primarily the result of an increase in
interest income on loans and investment securities of $1.2 million and $830,846.
The increase in interest income on loans is due to an increase in the average
balance of the loan portfolio, as well as accretion income recognized on
discounted real estate loan portfolios purchased during 1997, 1996 and 1995. The
discount associated with such loan portfolios is recognized as a yield
adjustment, included as interest income using the interest method and applied on
a loan-by-loan basis (to the extent that the timing and amount of cash flows can
reasonably be determined).
During 1997, the Bank recognized approximately $691,000 in accretion income
associated with these discounted loan portfolios. As the Bank continues to grow,
the percentage of the total loan portfolio represented by loans purchased at a
discount will decrease and decline in significance.
Interest Expense. Interest expense increased $1.3 million to $2.5 million for
the year ended December 31, 1997, from $1.2 million for the year ended December
31, 1996. The majority of this increase was the result of higher interest
expense of $1.1 million on certificates of deposit resulting from higher
outstanding average balances during 1997.
Net Interest Income. The earnings of the Bank depend primarily on its level of
net interest income, which is the difference between interest earned on the
Bank's interest-earning assets (loans and investment securities) and the
interest paid on interest-bearing liabilities (deposits). Net interest income is
a function of the Bank's interest rate spread, which is the difference between
the yield earned on interest-earning assets and the rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest- earning assets as compared to the average balance of interest-bearing
liabilities. Net interest income increased $631,767, from $1.7 million to $2.3
million for the year ended December 31, 1997. The Bank's interest rate spread
averaged 3.68% during 1997 compared to 5.29% during 1996. The decrease in net
interest spread during 1997 was due to a decrease in the average yield on
earning assets of 1.06% from 10.47% in 1996 compared to 9.41% in 1997 and an
increase the average cost of interest-bearing liabilities of .55% from 5.18% in
1996 to 5.73% in 1997.
9
<PAGE>
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1997 was $415,000 compared to $125,000 in 1996. The provision for
loan losses, less charge-offs for the year of $29,139, increased the allowance
for loan losses to $567,940 at December 31, 1997. Management will continue to
record a provision for loan losses to maintain the allowance for loan losses at
a level deemed adequate by management based on a quarterly analysis.
Non-interest Income. Non-interest income increased to $314,458 for the year
ended December 31, 1997, from $103,232 for the year ended December 31, 1996.
This increase of $211,226, was primarily the result of a $111,395 increase in
net gains on sales of investment securities during 1997 as well as brokerage
fees generated by USACapital totaling $102,107.
Non-interest Expense. Non-interest expense increased to $2.5 million for the
year ended December 31, 1997, from $1.5 million for the year ended December 31,
1996. This increase of $1.0 million was the result of increases in compensation
and benefits, occupancy, and other expenses of $510,205, $82,599, and $363,170,
respectively, during the year ended December 31, 1997.
Income Tax Expense. Income tax expense decreased to $16,891 for the year ended
December 31, 1997. During 1997, the Company realized a tax benefit related to
the net operating loss carryovers from the acquisition of the Bank which was
treated as a reduction to goodwill in accordance with SFAS No. 109.
10
<PAGE>
Average Balance Sheets and Rate/Yield Analysis
Net interest income is affected by changes in both average interest rates and
average volumes of interest-earning assets and interest-bearing liabilities.
The following table presents for the period indicated the total dollar amount of
interest income from average interest-earning assets and the resultant yields,
as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates.
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year-to-Date
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
Average Average Average Average
Assets: Balance (1) Interest Rate Balance (1) Interest Rate
---------- -------- ------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans $ 26,421 $3,090 11.70% $ 11,706 $ 1,923 16.43%
Investment securities 22,696 1,637 7.21% 12,320 807 6.55%
Interest-bearing deposits and other 2,739 152 5.55% 4,084 212 5.19%
-------- ------ ------- ---------- ---------- -------
Total earning assets $ 51,856 $4,879 9.41% $ 28,110 $ 2,942 10.47%
Liabilities:
Deposits:
Passbook $ 1,888 $ 47 2.49% $ 2,354 $ 61 2.59%
NOW accounts 705 16 2.27% 585 12 2.05%
Money Market accounts 1,684 63 3.74% - - 0.00%
Certificates of deposit 35,627 2,158 6.06% 19,967 1,109 5.55%
Other borrowings 4,227 246 5.82% 750 43 5.73%
------- ------ ------- ---------- ----------- -------
Total interest-bearing liabilities $44,131 $2,530 5.73% $ 23,656 $ 1,225 5.18%
Excess of interest earning assets over ------- ----------
interest-bearing liabilities $ 7,725 $ 4,454
======= ------ ========== -----------
Net interest income $2,349 $ 1,717
====== ===========
Effective interest differential (spread) 3.68% 5.29%
------- -------
Net yield on average interest earning assets 4.53% 6.11%
======= =======
</TABLE>
(1) Average balances are calculated on a quarterly basis.
11
<PAGE>
Rate Volume Analysis
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between changes (a) related to
outstanding balances and (b) due to the changes in interest rates. Information
is provided in each category with respect to: (i) changes attributable to
changes in volume (changes in volume multiplied by prior rate); (ii) changes
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) the net change in rate/volume (change in rate multiplied by change in
volume). The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 Versus 1996
--------------------------------------------------
Increase or Decrease
Due to Change in Total
---------------------------
Average Average Increase
Volume Rate (Decrease)
------------- ---------- --------------
<S> <C> <C> <C>
Variance in interest income on:
Interest-earning assets:
Loans $ 1,514 $ (347) $ 1,167
Investment securities 741 89 830
Interest-bearing deposits and other (76) 16 (60)
----------- ---------- ----------
Total interest-eaming assets 2,179 (242) 1,937
Interest-bearing deposits:
Deposits:
Passbook (12) (2) (14)
NOW accounts 3 1 4
Money Market accounts 63 - 63
Certificates of deposit 940 109 1,049
Other borrowings 202 1 203
----------- --------- ----------
Total interest-bearing liabilities 1,197 108 1,305
----------- --------- ----------
Change in net interest income $ 982 $ (350) $ 632
----------- --------- ----------
</TABLE>
12
<PAGE>
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from principal and
interest payments on loans and mortgage-backed securities. While maturities and
scheduled amortization of loans and mortgage-backed securities are a predictable
source of funds, deposit flows and mortgage prepayments are influenced by
general interest rates, economic conditions and competition. The primary
investing activity of the Bank is the origination or purchase of loans and the
purchase of investment securities. These activities are funded primarily by
deposits, principal repayments on loans and securities, and proceeds from FHLB
borrowings. The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. During the period ended December 31, 1997, the Bank used its
sources of funds primarily to fund loan and investment purchases, loan
commitments, and to pay maturing certificates of deposit and other deposit
withdrawals. At December 31, 1997, the Bank had approximately $1.3 million of
unfunded commitments to extend credit.
At December 31, 1997, certificates of deposit amounted to $62.7 million, or
88.9%, of the Bank's total deposits, including $26.5 million which are scheduled
to mature by December 31, 1998. Historically, the Bank has been able to retain a
significant amount of its certificates of deposit as they mature. Management of
the Bank believes it has adequate resources to fund all loan commitments through
deposits and FHLB advances. For regulatory purposes, liquidity is measured as
the ratio of cash and certain investments to withdrawable savings and short-term
borrowings. The Bank has established as an objective a minimum liquidity ratio
of 15%. The Bank is not aware of any adverse conditions which would impact its
short or long-term funding needs.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. 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 and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital 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 classifications 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 and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to average
assets (as defined). 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 on the following page.
13
<PAGE>
Risk-Based Capital Ratios:
At December 31, 1997 and 1996, the Bank's and the Company's actual and required
minimum capital ratios were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) To Be Well
Capitalized Under
For Capital Prompt Corrective
For the Bank: Actual: Adequacy Purposes: Action Provisions:
- ------------- -------------------- ------------------ -------------------
As of December 31, 1997: Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 5,315 7.9% $ 5,400 8.0% 6,750 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 4,747 7.0% $ 2,700 4.0% 4,050 6.0%
Leverage $ 4,747 5.4% $ 3,548 4.0% 4,435 5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $ 4,657 25.6% $ 1,458 8.0% 1,822 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 4,475 24.6% $ 729 4.0% 1,093 6.0%
Tier I Capital
(Average Assets) $ 4,475 12.9% $ 1,387 4.0% 1,734 5.0%
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands) For Capital
For the Company: Actual: Adequacy Purposes:
- ---------------------- -------------------- --------------------
As of December 31, 1997: Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 5,752 8.5% $ 5,431 8.0%
Tier I Capital
(to Risk Weighted Assets) $ 5,184 7.6% $ 2,715 4.0%
Leverage $ 5,184 5.8% $ 3,570 4.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $ 4,951 26.9% $ 1,471 8.0%
Tier I Capital
(to Risk Weighted Assets) $ 4,897 25.9% $ 735 4.0%
Tier I Capital
(Average Assets) $ 4,897 15.3% $ 1,279 4.0%
</TABLE>
14
<PAGE>
At December 31, 1997, The Bank's Total capital ratio of 7.9% did not meet the
minimum requirements of 8.0% in order to consider the Bank adequately
capitalized. However, subsequent to year end, the Company completed an offering
of approximately $7.1 million, of which $7.0 million was contributed to the
Bank. As a result the Bank's Total capital ratio increased to 17.9% at February
13, 1998.
Asset and Liability Management
A principal objective of the Bank's asset and liability management is to
minimize the Bank's exposure to changes in interest rates. The Bank's policy is
to attempt to manage assets and liabilities in such a way as to stabilize net
interest income. An interest rate sensitive asset or liability is one that,
within a defined time period, either matures or experiences an interest rate
change in line with general market rates. Interest rate sensitivity measures the
relative volatility of a bank's interest margin resulting from changes in market
interest rates.
The following table summarizes repricing intervals for interest-earning assets
and interest-bearing liabilities for the period ended December 31, 1997 and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated:
<TABLE>
<CAPTION>
Interest Rate Sensitivity Table 1-90 91-364 1-5 Over 5 12/31/97
(Dollars in thousands) Days Days Years Years Balance
- ------------------------------------- ---------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 14,627 $ 5,337 $ 17,567 $ 19,039 $ 56,570
Investment securities 3,830 3,570 5,572 11,002 23,974
Other interest earning assets 3,975 3,975
---------- ---------- ---------- -------- ----------
Total interest-earning assets $ 22,432 $ 8,907 $ 23,139 $ 30,041 $ 84,519
Interest-bearing liabilities:
NOW accounts $ 688 $ 688
Money Market Accounts 2,401 2,401 4,802
Passbook savings accounts 1,009 1,009 2,018
Certificates of deposit 3,325 23,174 34,533 1,676 62,708
Other borrwings 7,340 2,000 9,340
--------- ---------- ---------- --------- ----------
Total interest-bearing liabilities $ 14,763 $ 23,174 $ 36,533 $ 5,086 $ 79,556
Periodic gap $ 7,669 $ (14,267) $ (13,394) $ 24,955 $ 4,963
========= ========== ========== ========== ==========
Cumulative gap $ 7,669 $ (6,598) $ (19,992) $ 4,963
========= ========== ========== ==========
Gap to asset ratio 9% -16% -15% 28% -
Cumulative gap to asset ratio 9% -7% -22% 6% -
</TABLE>
15
<PAGE>
A gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds interest
rate sensitive assets. During a period of falling interest rates, a positive gap
would tend to adversely affect net interest income, while a negative gap would
tend to result in an increase in net interest income. During a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income while a negative gap would tend to affect net interest income
adversely.
If repricing of the Bank's assets and liabilities were equally flexible and
moved concurrently, the impact of an increase or decrease in interest rates on
net income would be minimal. The Bank currently experiences a negative
cumulative one year gap, which suggests that net interest income may decrease
during periods of rising interest rates.
The method used to analyze interest rate sensitivity in the table above has a
number of limitations. Certain assets and liabilities may react differently to
changes in interest rates even though they reprice or mature in the same or
similar time periods. The interest rates on certain assets and liabilities may
change at different times than changes in market interest rates, with some
changing in advance of changes in market rates and some lagging behind changes
in market rates. Also, certain assets, such as adjustable rate loans, often have
provisions which may limit changes in interest rates each time market interest
rates change and on a cumulative basis over the life of the loan. Additionally,
the actual prepayments and withdrawals experienced by the Bank in the event of a
change in interest rates may deviate significantly from those assumed in
calculating the data shown in the table.
Management also simulates possible economic conditions and interest rate
scenarios in order to quantify the impact on net interest income. The effect
that changing interest rates has on the Bank's net interest income is simulated
by increasing and decreasing interest rates. This simulation is known as rate
shocks. The report below forecasts changes in the Bank's market value of equity
under alternative rate environments. The market value of equity is defined as
the net present value of the Banks' existing assets and liabilities. The results
of the December 31, 1997 rate shock simulations are show in the table below:
A gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds interest
rate sensitive assets. During a period of falling interest rates, a positive
gap would tend to adversely affect net interest income, while a negative gap
would tend to result in an increase in net interest income. During a period of
rising interest rates, a positive gap
16
<PAGE>
In the event the Bank should experience a mismatch in its desired gap ranges or
an excessive decline in its market value of equity resulting from changes in
interest rate, it has a number of options which it could utilize to remedy such
mismatch. The Bank could restructure its investment portfolio through sale or
purchase of securities with more favorable repricing attributes. It could also
emphasize loan products with appropriate maturities or repricing attributes, or
it could attract deposits or obtain borrowings with desired maturities.
17
<PAGE>
Investment Portfolio
The following table presents the book values and estimated market values at
December 31, 1997, and December 31, 1996, respectively, for each major category
of the Bank's investment securities:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Available-for-Sale
U.S. Government agency securities $ 1,243,139 $ 15,824 $ - $ 1,258,963
Equity and other securities 7,636,598 150,461 11,297 7,775,762
----------- ------------- ------------ ------------
Total available-for-sale $ 8,879,737 $ 166,285 $ 11,297 $ 9,034,725
=========== ============= ============ ============
Held-to-Maturity
U.S. Government agency securities $ 3,557,087 $ - $ 10,202 $ 3,546,885
Mortgage-backed securities 6,306,384 50,074 - 6,356,458
Municipal securities 3,162,576 100,831 3,263,407
Equity and other securities 2,392,857 84,023 - 2,476,880
----------- ------------- ------------ ------------
Total held-to-maturity $15,418,904 $ 234,928 $ 10,202 $ 15,643,630
=========== ============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available-for-Sale
U.S. Government agency securities $ 3,614,740 $ 28,850 $ - $ 3,643,590
Mortgage-backed securities 1,863,115 6,037 1,869,152
Corporate securities 461,429 - 3,044 458,385
Equity securities 161,626 - 35,126 126,500
----------- ------------- ------------ ------------
Total available-for-sale $ 6,100,910 $ 34,887 $ 38,170 $ 6,097,627
=========== ============= ============ ============
Held-to-Maturity
U.S. Government agency securities $ 1,498,179 $ - $ 1,884 $ 1,496,295
Mortgage-backed securities 6,820,038 3,602 - 6,823,640
Corporate securities 1,908,902 1,737 - 1,910,639
----------- ------------- ------------ ------------
Total held-to-maturity $10,227,119 $ 5,339 $ 1,884 $ 10,230,574
=========== ============= ============ ============
</TABLE>
18
<PAGE>
The Bank's investment portfolio is composed of interest-earning assets which not
only provide interest income but a source of liquidity and diversity. The
majority of the investment portfolio is held-to-maturity which is stated at par
value, plus any remaining unamortized premium paid or less any remaining
unamortized discount received. Available-for-sale securities are stated at fair
market value, plus any remaining unamortized premium paid or less any remaining
unamortized discount received. The Bank invests in securities for yield income
and not to profit from trading activities.
The following table shows the contractual maturity distribution of the
investment securities portfolio at December 31, 1997:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
---------------------------------------------------------------------
Approximate Approximate
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
Due after one year through five years $ - $ - $ 999,606 $ 995,000
Due after five years through ten years 993,139 1,005,937 1,909,402 1,950,553
Due after ten years 7,561,847 7,652,183 12,509,896 12,698,077
----------- ------------- -------------- -------------
Equity Securities 324,751 376,605 - -
----------- ------------- -------------- -------------
$ 8,879,737 $ 9,034,725 $ 15,418,904 $ 15,643,630
----------- ------------- -------------- -------------
</TABLE>
Loan Portfolio
Historically, the Bank's lending business had been primarily real estate
mortgage loans secured by one-to- four family residences in the Bank's lending
area. Typically, these residences were single family homes that serve as the
primary residence of the owner. The Bank currently originates such loans in
amounts up to 80% of the appraised value of the property . The Bank has recently
expanded the focus of its lending program to include commercial lending,
primarily secured by real estate. In the future, the Bank may increase its loans
collateralized with marketable securities, cash, or potentially equipment. This
expanded focus will allow the Bank to compete more effectively in the community
banking marketplace.
Loans receivable, (net of the allowance for loan losses, unearned fees and
origination costs and loans in process) were $56.0 million at December 31, 1997
compared to $16.5 million at December 31, 1996. Loans receivable represented
62.7% of total assets and 79.5% of total deposits as of December 31, 1997
compared to 43.3% and 58.9%, respectively, at December 31, 1996.
19
<PAGE>
The following table summarizes the loan portfolio of the Bank by loan category
and amount at December 31, 1997, compared to December 31, 1996:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, December 31,
---------------------- -----------------------
1997 % 1996 %
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Real estate $ 54,262 96.9% $ 14,648 88.6%
Commercial and industrial 1,091 2.0% 1,138 6.9%
Other 1,694 3.0% 1,226 7.4%
-------- ------- --------- -------
Total loans 57,047 101.9% 17,012 102.9%
Less:
Loans in process 260 0.5% 215 1.3%
Unearned income 217 0.4% 86 0.5%
Allowance for loan losses 568 1.0% 182 1.1%
--------- ------- ----------- -------
Net loans $ 56,002 100.0% $ 16,529 100.0%
--------- ------- ----------- -------
</TABLE>
The following table summarizes the maturity and or repricing composition of
loans receivable at December 31, 1997, compared to December 31, 1996:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
----------------------------------------------------
1997 % 1996 %
-------- ------- ----------- -------
<S> <C> <C> <C> <C>
Within one year $ 10,634 18.6% $ 7,209 42.4%
Over one year through two years 2,869 5.0% 958 5.6%
Over two years through three years 2,871 5.0% 31 0.2%
Over three years through five years 18,968 33.3% 2,295 13.5%
Over five years through ten years 5,786 10.2% 892 5.2%
Over ten years 15,920 27.9% 5,627 33.1%
--------- ------- --------- -------
Total loans $ 57,047 100.0% $ 17,012 100.0%
========= ======= ========= =======
</TABLE>
On December 31, 1997, the net book value of nonaccrual loans were $286,897 and
loans 90 days or more past due were $165,418. These amounts represented
nonaccrual and past due balances on the discounted commercial and residential
real estate loans purchased during 1997 and not on balances originated directly
by the Bank. There were no troubled debt restructured loans as of or during the
year ended December 31, 1997. There were no impaired loans at December 31, 1997,
and 1996. The Bank will recognize income on nonaccrual loans, under the cash
basis, when the loans are brought current as to outstanding principal and
collateral on the loan is sufficient to cover the outstanding obligation to the
Bank.
20
<PAGE>
Loans to directors, executive officers and their associates, are made in the
ordinary course of business and on substantially the same terms and conditions,
including interest rate and collateral, as those prevailing at the time for
comparable transaction with others. The aggregate amount of loans by the Bank to
its directors and executive officers, including loans to related persons and
entities was $232,900 at December 31, 1997, and $614,421 at December 31, 1996,
and represented .26% and 1.6%, respectively, of total assets. Activity of these
loans is as follows:
December 31,
-------------------------
1997 1996
---------- ----------
Balance at beginning of year $ 614,421 $ 12,391
New loans 121,664 610,000
Repayments (503,185) (7,970)
--------- ---------
Balance at end of year $ 232,900 $ 614,421
--------- ---------
Allowance For Loan Losses
In originating loans, the bank recognizes that some degree of credit losses may
be experienced. The risk of loss will vary according to among other things, the
type of loan, the creditworthiness of the borrower, the type and quality of the
collateral as well as general economic conditions. The Bank determines the level
of its allowance for possible loan losses based upon a number of factors. In
connection with this analysis, the Bank considers both internal and external
factors which may affect the adequacy of the allowance for possible loan losses.
Such factors may include, but are not limited to, present and prospective
industry trends and regional and national economic conditions, past estimates of
possible loan losses as compared to actual losses and potential problems with
sizable loans, large concentrations, known and inherent risk in the portfolio,
prevailing market conditions, and management's judgment as to collectability.
The following table summarizes the changes in the Bank's allowance for loan
losses for the period ended December 31, 1997, compared to December 31, 1996:
December 31,
-------------------------
1997 1996
--------- ----------
Balance at beginning of year $ 182,079 60,000
Provision for loan losses 415,000 125,000
Loan losses $ (29,139) (2,921)
--------- ---------
Balance at end of year $ 567,940 $ 182,079
--------- ---------
The allowance for loan losses represents a reserve against potential but
undetermined future losses. The allowance for loan losses is established through
a provision for loan losses based on Management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation, which
includes a review of all loans on which full collectability may not be
reasonably assured, considers among other matters, the estimated fair value of
the underlying collateral, economic conditions, historical loan loss experience
and other factors that warrant recognition in providing for an adequate loan
loss allowance. Although the Bank believes that its allowance for loan losses is
at a level which it considers to be adequate to provide for losses, there can be
no assurances that such losses will not exceed the estimated amounts.
21
<PAGE>
Deposits
Deposits are the primary source of the Bank's funds for lending and other
investment purposes. Total deposits at December 31, 1997 were $70.5 million
compared to $28.0 million at December 31, 1996, an increase of $42.5 million or
151.9%. The Bank's current deposit products include statement savings accounts,
passbook savings accounts, personal and business checking accounts, NOW
accounts, Money Market accounts and certificates of deposit (ranging in terms
from three months to eight years). The Bank's deposits are obtained primarily
from residents in its primary market area, in and around the Plymouth
Meeting/Norristown area, as well as from an expanded customer base in and around
greater Philadelphia.
The principal methods used by the Bank to attract deposit accounts include
offering a wide variety of services and accounts, competitive interest rates and
convenient office hours. The Bank still relies upon certificates of deposit as
its primary funding source, but it has instituted a program which emphasizes the
acquisition of more stable core deposits, using traditional marketing methods,
to attract new customers and savings deposits.
The following table presents the weighted average rates paid on and composition
of deposit balances at December 31, 1997, compared to December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
Amount Percent Amount Percent
--------------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Demand $ 257,325 0.37% $ 58,659 0.21%
NOW Accounts 688,177 0.98% 891,640 3.19%
Money Market Accounts 4,801,606 6.81% - -
Passbook 2,018,768 2.86% 2,029,694 7.26%
Certificates of deposit 62,707,645 88.98% 24,993,154 89.34%
------------ ---------- ------------- ----------
$ 70,473,521 100.00% $ 27,973,147 100.00%
------------ ---------- ------------- ---------
</TABLE>
The following table summarizes the maturity composition of certificates of
deposit with balances of $100,000 or more at December 31, 1997, compared to
December 31, 1996:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1997 % 1996 %
------------ ----------- ------------- ---------
<S> <C> <C> <C> <C>
Tbree nionths or less $ 652,783 7.23% $ 1,057,638 42.12%
Over three months to six months 103,215 1.14% 200,000 7.96%
Over six months to twelve months 4,246,805 47.03% 237,700 9.47%
Over twelve months 4,027,146 44.60% 1,015,741 40.45%
------------ ---------- ------------- ---------
$ 9,029,949 100.00% $ 2,511,079 100.00%
------------ ---------- ------------- ---------
</TABLE>
22
<PAGE>
Inflation and Changing Prices
Management is aware of the impact of inflation on interest rates and the
corresponding impact on a bank's performance. The ability of a financial
institution to cope with inflation can only be determined by ongoing analysis
and monitoring of its asset and liability structure. The Company monitors its
asset and liability position with particular emphasis on the mix of
interest-sensitive assets and liabilities in order to reduce the effect of
inflation upon its performance.
Inflation can have a more direct impact on categories of Non-interest expenses
such as salaries and wages, supplies, and employee benefit costs. These expenses
are very closely monitored by management for both the effects of inflation and
noninflationary increases in such items as staffing levels, usage of supplies
and occupancy costs.
Year 2000
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Year 2000 issue affects virtually all companies and organizations.
The Company has taken steps to communicate with unrelated third parties who
provide computer services to coordinate Year 2000 compliance. The Company
expects to attain Year 2000 compliance and institute appropriate testing before
the Year 2000 date change. The costs in addressing the Year 2000 issue are not
anticipated to be material, and will be expensed as incurred in compliance with
Generally Accepted Accounting Principles (GAAP).
23
<PAGE>
SUBSEQUENT EVENT
On February 13, 1998, the Company issued 769,231 shares of its Class A common
stock in conjunction with a private placement offering (the "Offering"). Total
cash received was $7,136,420, net of related Offering costs of $363,580. Had
this transaction occurred as of December 31, 1997, stockholders' equity would
have been as follows:
<TABLE>
<CAPTION>
Pro-Forma
Actual Adjustment Pro-Forma
------------- -------------- ---------------
<S> <C> <C> <C>
Stockholders' equity
Preferred stock, $1.00 par value; authorized
5,000,000 shares; no shares issued and
outstanding $ - $ - $ -
Common stock, $1.00 par value; authorized
10,000,000 shares; 732,426 shares issued
and outstanding and 81,381 shares of
converted and unissued Class B common
stock (1) 813,807 769,231 1,583,038
Additional paid-in-capital 4,827,866 6,367,189 11,195,055
Accumulated deficit (378,182) - (378,182)
Unrealized gain (loss) on securities available
for sale 102,292 - 102,292
----------- ----------- ------------
Total stockholders' equity $ 5,365,783 $ 7,136,420 $ 12,502,203
----------- ----------- ------------
</TABLE>
(1) Subsequent to the Offering, authorized 10,000,000 shares; 1,501,657 shares
issued and outstanding and 81,381 shares of converted and unissued Class B
common stock.
In connection with the Offering, the Company granted, to the placement agent,
warrants convertible for a period of five years into 3.25% of the Company's
Common Stock. The number of warrants will be adjusted for stock splits, stock
dividends, and the issuance of additional shares so as to maintain the
underwriter's ownership of the fully diluted Common Stock at 3.25% for a period
of three years from the close of the offering.
24
<PAGE>
Item 7: Financial Statements
The financial statements of the Company are attached herewith and begin on page
F-1.
Item 8: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9: Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Securities and
Exchange Commission (the "Commission") in connection with the Company's annual
meeting of shareholders scheduled for 1998.
Item 10: Executive Compensation
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's annual meeting of shareholders scheduled for 1998.
Item 11: Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's annual meeting of shareholders scheduled for 1998.
Item 12: Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's annual meeting of shareholders scheduled for 1998.
Item 13: Exhibits and Reports on Form 8-K
(A) Exhibits
25
<PAGE>
The following Exhibits are filed as part of this report. (Exhibit numbers
correspond to the exhibits required by Item 601 of Regulation S-B for an annual
report on Form 10-KSB)
Page No. in Sequential
Exhibit No. Numbering System
3(a) Amended and Restated Articles of Incorporation N/A
of the Company, as amended.*
3(b) Bylaws of the Company.* N/A
4(a) Specimen Stock Certificate of the Company.* N/A
10.1 Stock Option Plan (incorporated by reference to Exhibit
10.1 of the Form SB-2)
10.2 Employment agreement by and between the Registrant and Kenneth L.
Tepper (incorporated by reference to Exhibit 10.2 of the Form SB-2)
10.3 Employment agreement by and between the Registrant and Bruce W.
Kauffman (incorporated by reference to Exhibit 10.3 of the Form SB-2)
10.4 Agreement by and between Kenneth L.Tepper and the Registrant dated
January 2, 1998.
10.5 Warrant Agreement between the Registrant and Sandler O'Neill dated
February 13, 1998.
10.6 Registration Rights Agreement between the Registrant and certain
shareholders dated February 13, 1998.
11 Computation of Per Share Earnings (Included in Financial Statements on
Page F-26 and F-27)
21 Subsidiaries of the Company* N/A
27 Financial Data Schedule
27.1 Fiscal year ended 1995
27.2 Period ended March 31, 1996
27.3 Period ended June 30, 1996
27.4 Period ended September 30, 1996
27.5 Fiscal year ended December 31, 1996
27.6 Period ended March 31, 1997
27.7 Period ended June 30, 1997
27.8 Period ended September 30, 1997
27.9 Fiscal year ended December 31, 1997
26
<PAGE>
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K
during the fourth quarter of 1997.
- ----------------------------
*Incorporated by reference from the Registration Statement on Form SB-2 of the
Company, as amended, Registration No. 33-92506.
27
<PAGE>
SIGNATURES
In accordance with 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, in the City of Philadelphia,
Commonwealth of PA.
USABancShares, Inc.
By: /s/ Kenneth L. Tepper
Kenneth L. Tepper,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ David J. Torpey
David J. Torpey, Vice-President,
Chief Financial Officer
(Principal Accounting and Financial Officer)
28
<PAGE>
In accordance with the Securities Exchange Act of 1934, this Report has been
duly signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
March 25, 1998 /s/ George M. Laughlin
----------------------
George M. Laughlin
Chairman of the Board
March 25, 1998 /s/ Carmen J. Cocca, Jr.
------------------------
Carmen J. Cocca, Jr.
Director
March 25, 1998 /s/ Jeffrey A. D'Ambrosio
-------------------------
Jeffrey A. D'Ambrosio
Director
March 25, 1998 /s/ George C. Fogwell, III
--------------------------
George C. Fogwell, III
Director
March 25, 1998 /s/ John A. Gambone
-------------------
John A. Gambone
Director
March 25, 1998 /s/ Carol J. Kauffman
---------------------
Carol J. Kauffman
Director
March 25, 1998 /s/ Wayne O. Leevy
------------------
Wayne O. Leevy
Director
March 25, 1998 /s/ Clarence L. Rader
---------------------
Clarence L. Rader
Director of Company
Chairman of the Bank
29
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
USABancShares, Inc. and Subsidiaries
We have audited the consolidated balance sheets of USABancShares, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated 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 our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
USABancShares, Inc. and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Grant Thornton LLP
Philadelphia, Pennsylvania
March 25, 1998
<PAGE>
USABancShares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 833,176 $ 198,154
Interest-bearing deposits with banks 3,975,261 4,016,032
-------------- -------------
Cash and cash equivalents 4,808,437 4,214,186
Securities available-for-sale 9,034,725 6,097,627
Securities held-to-maturity (fair value: 1997 - $15,643,630;
1996 - $10,230,574) 15,418,904 10,227,119
FHLB Stock 900,000 250,000
Loans receivable, net 56,002,164 16,529,483
Premises and equipment, net 1,152,789 145,421
Goodwill, net 79,648 128,285
Other assets (including accrued interest: 1997 - $847,056;
1996 - $307,407) 1,929,309 553,378
-------------- -------------
Total assets $ 89,325,976 $ 38,145,499
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 70,473,521 $ 27,973,147
Borrowed funds 9,340,000 5,050,000
Collateralized borrowings 3,297,942 -
Accrued expenses and other liabilities 848,730 227,505
-------------- -------------
Total liabilities 83,960,193 33,250,652
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; authorized 5,000,000 shares;
no shares issued and outstanding
Common stock, $1.00 par value; authorized 10,000,000 shares;
732,426 shares issued and outstanding and 81,381 shares of
converted and unissued Class B common stock 813,807 597,082
Additional paid-in capital 4,827,866 4,877,701
Accumulated deficit (378,182) (152,574)
Unearned compensation, Class B common stock - (425,195)
Unrealized gain (loss) on securities available-for-sale 102,292 (2,167)
-------------- -------------
Total stockholders' equity 5,365,783 4,894,847
============== =============
Total liabilities and stockholders' equity $ 89,325,976 $ 38,145,499
============== =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-1
<PAGE>
USABancShares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Interest income:
Loans $ 3,089,857 $ 1,923,831
Investment securities 1,637,461 806,615
Interest-bearing deposits and other 151,727 211,698
--------- ---------
Total interest income 4,879,045 2,942,144
Interest expense:
Deposits 2,284,951 1,182,452
Borrowed funds 245,299 42,664
--------- ---------
Total interest expense 2,530,250 1,225,116
Net interest income 2,348,795 1,717,028
Provision for loan losses 415,000 125,000
--------- ---------
Net interest income after provision for loan losses 1,933,795 1,592,028
Non-interest income:
Gain on sales of investment securities 127,458 16,063
Brokerage operations 102,107 --
Other 84,893 87,169
--------- ---------
Total non-interest income 314,458 103,232
Non-interest expense:
Compensation and benefits 1,345,422 835,217
Occupancy 202,235 119,636
Other 909,313 546,143
--------- ---------
Total non-interest expense 2,456,970 1,500,996
--------- ---------
Income (loss) before income taxes (208,717) 194,264
Income taxes 16,891 67,995
--------- ---------
Net income (loss) $ (225,608) $ 126,269
=========== ===========
Per Share data:
Net income (loss) per common share basic and diluted $ (0.28) $ 0.16
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
USABancShares, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Unearned
Additional compensation
Common paid-in Accumulated Class B
Stock capital deficit Common Stock
----- ------- ------- ------------
<S> <C> <C> <C> <C>
Balances, January 1, 1996 $ 597,082 $ 4,877,701 $ (278,843) $ (533,755)
Net unrealized loss on
securities available-for-sale - - - -
Amortization of unearned
compensation Class B common stock - - - 108,560
Receipt of stock subscription receivable - - - -
Net income - - 126,269 -
--------- ----------- ---------- ----------
Balances, December 31, 1996 $ 597,082 $ 4,877,701 $ (152,574) $ (425,195)
========= =========== ========== ==========
Stock issued to acquire Knox Financial 7,894 67,106 - -
Common stock dividend 199,642 (199,642) - -
Conversion of Class B common stock 9,189 82,701 - -
Net unrealized gain on
securities available-for-sale - - - -
Amortization of unearned
compensation Class B common stock - - - 425,195
Net loss - - (225,608) -
--------- ----------- ---------- ----------
Balances, December 31, 1997 $ 813,807 $ 4,827,866 $ (378,182) $ -
========= =========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net
Stock unrealized
subscription gain (loss) on
receivable AFS securities Total
---------- -------------- -----
<S> <C> <C> <C>
Balances, January 1, 1996 $(20,000) $ 16,657 $ 4,658,842
Net unrealized loss on
securities available-for-sale - (18,824) (18,824)
Amortization of unearned
compensation Class B common stock - - 108,560
Receipt of stock subscription receivable 20,000 - 20,000
Net income - - 126,269
---------- --------- -----------
Balances, December 31, 1996 $ - $ (2,167) $ 4,894,847
========== ========= ===========
Stock issued to acquire Knox Financial - - 75,000
Common stock dividend - - -
Conversion of Class B common stock - - 91,890
Net unrealized gain on
securities available-for-sale - 104,459 104,459
Amortization of unearned
compensation Class B common stock - - 425,195
Net loss - - (225,608)
---------- --------- -----------
Balances, December 31, 1997 $ - $ 102,292 $ 5,365,783
========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
USABancShares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (225,608) $ 126,269
Adjustments to reconcile net income (loss) to cash used in
operating activities:
Depreciation and amortization 59,806 46,555
Net accretion of discounts on purchased loan portfolios (691,483) (674,101)
Provision for loan losses 415,000 125,000
Net accretion of investment securities premiums/discounts (4,986) (44,389)
Amortization of Class B common stock 425,195 108,560
Class B common stock conversion 91,890 -
Net gains on sale of investment securities (127,458) (16,063)
Increase in other assets (1,375,931) (235,858)
Increase (decrease) in other liabilities 621,225 (100,267)
------------ ------------
Net cash used in operating activities (812,350) (664,294)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of investment securities available-for-sale 4,524,271 1,515,938
Proceeds from sale of investment securities held-to-maturity 2,001,250 -
Proceeds from maturity or calls of investment securities available-for-sale 4,125,000 500,000
Proceeds from maturity or calls of investment securities held-to-maturity 1,450,000 -
Purchase of investment securities available-for-sale (11,432,891) (5,709,176)
Purchase of investment securities held-to-maturity (9,130,922) (3,407,529)
Repayments of principal on investment securities held-to-maturity 508,461 676,950
Repayments of principal on investment securities available-for-sale 93,041 114,674
Purchase of FHLB Stock (650,000) (166,200)
Net increase in loans (39,196,198) (8,983,185)
Cash of entity acquired 44,810 -
Decrease in goodwill 48,637 57,207
Purchases of premises and equipment (1,067,174) (58,570)
------------ ------------
Net cash used in investing activities (48,681,715) (15,459,891)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 42,500,374 7,174,238
Net increase in other borrowed funds 4,290,000 5,050,000
Increase in collateralized borrowings 3,297,942 -
Decrease in stock subscription receivable - 20,000
------------ ------------
Net cash provided by financing activities 50,088,316 12,244,238
------------ ------------
Net increase (decrease) in cash and cash equivalents 594,251 (3,879,947)
Cash and cash equivalents, beginning of period 4,214,186 8,094,133
------------ ------------
Cash and cash equivalents, end of period $ 4,808,437 $ 4,214,186
============ ============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 2,230,979 $ 1,181,284
Income Taxes 237,000 43,800
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
USABancShares, Inc. (the Company), through its subsidiaries, Peoples Thrift
Savings Bank (the "Bank") and USACapital, Inc. ("USACapital"), provides a full
range of banking and non-depository services to individual and corporate
customers located in eastern Pennsylvania.
The Bank is a state-chartered stock savings institution which competes with
other banking and financial institutions in its primary market communities,
including financial institutions with resources substantially greater than its
own. Commercial banks, savings banks, savings and loan associations, credit
unions and money market funds actively compete for deposits and for types of
loans. Such institutions, as well as consumer finance and insurance companies,
may be considered competitors of the Bank with respect to one or more of the
services it renders. In addition to being subject to competition from other
financial institutions, the Bank is subject to federal and state laws and to
regulations of certain federal agencies, and accordingly, is periodically
examined by those regulatory authorities.
USACapital (a Pennsylvania corporation) is a broker-dealer registered with the
Securities and Exchange Commission (SEC) and the National Association of
Securities Dealers (NASD). USA Capital conducts business through its clearing
brokers for its proprietary accounts. USACapital also introduces customer
accounts on a fully disclosed basis to the clearing brokers and earns revenues
and incurs expenses from activities on those accounts. The clearing and
depository operations for USACapital's customer accounts and proprietary
accounts are performed by its clearing broker pursuant to a clearance agreement.
Basis of Financial Statement Presentation
The accounting and reporting policies of the Company and its subsidiaries
conform with generally accepted accounting principals and predominant practices
within the banking industry. All significant intercompany balances and
transactions are eliminated in consolidation, and certain reclassifications are
made when necessary to conform the previous years financial statements to the
current year's presentation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the balance sheet and the reported amounts of revenues and expenses during the
reporting periods. Therefore, actual results could differ significantly from
those estimates.
F-5
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
The principal estimates particularly susceptible to significantly change in the
near term relate to the allowance for loan losses and certain intangible assets,
such as goodwill. The evaluation of the adequacy of the allowance for loans
losses includes a review of the individual loans and overall risk
characteristics and size of the different loan portfolios, and takes into
consideration current economic and market conditions, the capability of specific
borrowers to pay specific loan obligations as well as current loan collateral
values. However, actual losses on specific loans, which are also encompassed in
the analysis, may vary from estimated losses. All goodwill resulted from the
acquisitions of the Bank and USACapital.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks and interest bearing
deposits with banks. Interest bearing deposits with banks consist of short-term
investments having maturities of three months or less.
Investments and Mortgage-Backed Securities
The Company accounts for securities under the Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," which requires among other things, that debt and equity securities
classified as available-for-sale be reported at fair value with unrealized gains
and losses excluded from earnings and reported in a separate component of
shareholders' equity, net of income taxes. The net effect of unrealized gains or
losses, caused by marking an available for sale portfolio to market, could cause
fluctuations in the level of shareholders' equity and equity-related financial
ratios as market interest rates cause the fair value of fixed-rate securities to
fluctuate.
Investment securities are classified in one of three categories:
held-to-maturity, trading or available-for-sale. Debt securities that the Bank
has the positive intent and ability to hold to maturity are classified as
held-to-maturity and are reported at amortized cost. As the Bank does not engage
in security trading, the balance of its debt securities and any equity
securities are classified as available-for-sale. Net unrealized gains and losses
for such securities, net of tax, are required to be recognized as a separate
component of stockholders' equity and excluded from the determination of net
income. Gains and losses on sales of investments are determined primarily by use
of the specific identification method.
F-6
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Loans and Allowance for Loan Losses
Loans receivable, that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off, are stated at the amount of
unpaid principal and are reduced by unearned loan fees and an allowance for loan
losses. Interest on loans is accrued and credited to operations based on the
principal amounts outstanding. The allowance for loan losses is established
through a provision for possible loan losses charged to expenses. Loans are
charged against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely.
Loan origination fees and loan discounts on purchased loan pools are deferred
and recognized over the life of the loan as an adjustment to yield. The net loan
origination fees recognized as yield adjustments are reflected in total interest
income in the consolidated statement of operations. The unamortized balance of
loan origination fees is reported in the consolidated balance sheet as part of
unearned income; the unamortized portion of discounts on purchased loans reduces
the carrying value of loans receivable on the consolidated balance sheet.
The allowance is an amount that management believes will be adequate to absorb
possible loan losses on existing loans that may become uncollectible based on
evaluations of the collectibility of the loans and prior loan loss experience.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrower's
ability to pay. While management uses the best information available to make
such evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluation. 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 the judgment of information available to them at the time of
their examination.
Accrual of interest is discontinued on a loan when principal and interest become
90 days or more past due and when management believes, after considering
economic and business conditions and collection efforts, that the borrower's
financial condition is such that collection is doubtful. Once a loan is placed
on non-accrual status, interest previously accrued and uncollected is charged to
operations and interest is included in income thereafter only to the extent
actually received in cash.
The Bank follows the provisions of SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," which requires that
a creditor measure impairment based on the present value of expected future cash
flows discounted at the loan's effective interest rate, except that as a
practical expedient, a creditor may measure impairment based on a loan's
observable market price, or the fair value of the collateral, if the loan is
collateral dependent.
F-7
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Regardless of the measurement method, a creditor must measure impairment based
on the fair value of the collateral when the creditor determines that
foreclosure is probable.
The Company adopted SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB No. 125 - An
Amendment of FASB Statement No. 125" on January 1, 1997. SFAS No. 125 applies a
control-oriented, financial-components approach to financial-asset-transfer
transactions whereby the Corporation (1) recognizes the financial and servicing
assets it controls and the liabilities it has incurred, (2) derecognizes
financial assets when control has been surrendered, and (3) derecognizes
liabilities once they are extinguished. Under SFAS No. 125, control is
considered to have been surrendered only if: (i) the transferred assets have
been isolated from the transferor and its creditors, even in bankruptcy or other
receivership (ii) the transferee has the right to pledge or exchange the
transferred assets, or, is a qualifying special-purpose entity (as defined) and
the holders of beneficial interests in that entity have the right to pledge or
exchange those interests; and (iii) the transferor does not maintain effective
control over the transferred assets through an agreement which both entitles and
obligates it to repurchase or redeem those assets prior to maturity, or through
an agreement which both entitles and obligates it to repurchase or redeem those
assets if they were not readily obtainable elsewhere. If any of these conditions
are not met, the Corporation accounts for the transfer as a secured borrowing.
SFAS No. 125 also requires that the Company derecognize a liability if and when
it is extinguished. A liability is considered extinguished under SFAS No. 125 if
(1) the Company pays the creditor, and thus, is relieved of its obligation for
the liability, or (2) is legally released from being the primary obligor under
the liability, either judicially or by the creditor. The adoption of this
statement did not have a material impact on the Company's consolidated financial
position or results of operations.
Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated
useful life of the assets. Leasehold improvements are amortized over the term of
the lease or estimated useful life, whichever is shorter.
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be disposed of," which
provides guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The adoption of SFAS No. 121 had no impact
on the Company's consolidated financial position or results of operations.
F-8
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Goodwill
Goodwill which arose from the acquisition of the Bank on November 30, 1995, and
USA Capital on April 11, 1997 is being amortized using the straight-line method
over 15 years. On an ongoing basis, management reviews the valuation and
amortization of goodwill. As part of this review, the Company estimates the
value of and the estimated undiscounted future net income expected to be
generated by the related subsidiary to determine that no impairment has
occurred.
Other Information
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards to provide prominent disclosure of
comprehensive income items. Comprehensive income is the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. SFAS No. 130 is effective for all periods
beginning after December 15, 1997. Subsequent to the effective date, all
prior-period amounts are required to be restated to conform to the provisions of
SFAS No. 130. The adoption of SFAS 130 is not expected to have a material impact
on the presentation of the Company's financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. SFAS No. 131
is effective for all periods beginning after December 15, 1997. The adoption of
SFAS 131 will have no impact on the presentation of the Company's financial
position or results of operations.
F-9
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Income Taxes
The Bank accounts for its income taxes under the liability method specified by
SFAS No. 109 "Accounting for Income Taxes". Deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates which will
be in effect when these differences reverse. Deferred tax expense is the result
of changes in deferred tax assets and liabilities. The Company files a
consolidated federal income tax return and the amount of income tax expense or
benefit is computed and allocated on a separate return basis.
Earnings Per Share
On December 15,1997, the Company adopted the provisions of SFAS No. 128,
"Earnings per Share." SFAS No. 128 eliminates primary and fully diluted earnings
per share and requires the presentation of basic and diluted earnings per share
(EPS) in conjunction with the disclosure of the methodology used in computing
such earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the weighted
average common shares outstanding during the period. Diluted earnings per share
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. Prior periods' earnings per share calculations have been restated to
reflect the adoption of SFAS No.128.
All weighted-average actual shares or per share information in the financial
statements have been adjusted retroactively for the effect of a stock dividend.
Advertising Costs
The Company expenses advertising costs as incurred.
Restrictions on Cash and Due from Banks
As of December 31, 1997, the Bank did not need to maintain reserves (in the form
of deposits with the Federal Home Loan Bank) to satisfy federal regulatory
requirements. As of December 31, 1997, USACapital had segregated $126,450 in
special reserve bank accounts for the benefit of customers as required by the
clearing organizations.
F-10
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITIONS
On April 11, 1997, the Company acquired Knox Financial Services Group, Inc. The
Company distributed 7,895 shares of common stock of its parent to effect the
combination. The purchase method of accounting was used to account for the
business combination.
Subsequent to acquisition, Knox Financial Services Group, Inc., was renamed
USACapital, Inc. The results of operations of USACapital are included in the
accompanying financial statements since the date of acquisition.
F-11
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and approximate fair
market value of the Bank's available-for-sale and held-to-maturity securities
are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-Sale
U.S. Government agency securities $ 1,243,139 $ 15,824 $ -- $ 1,258,963
Equity and other securities 7,636,598 150,461 11,297 7,775,762
----------- ----------- ----------- -----------
Total available-for-sale $ 8,879,737 $ 166,285 $ 11,297 $ 9,034,725
=========== =========== =========== ===========
Held-to-Maturity
U.S. Government agency securities $ 3,557,087 $ -- $ 10,202 $ 3,546,885
Mortgage-backed securities 6,306,384 50,074 -- 6,356,458
Municipal securities 3,162,576 100,831 -- 3,263,407
Equity and other securities 2,392,857 84,023 -- 2,476,880
----------- ----------- ----------- -----------
Total held-to-maturity $15,418,904 $ 234,928 $ 10,202 $15,643,630
=========== =========== =========== ===========
December 31, 1996
------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available-for-Sale
U.S. Government agency securities $ 3,614,740 $ 28,850 $ -- $ 3,643,590
Mortgage-backed securities 1,863,115 6,037 -- 1,869,152
Corporate securities 461,429 -- 3,044 458,385
Equity securities 161,626 -- 35,126 126,500
----------- ----------- ----------- -----------
Total available-for-sale $ 6,100,910 $ 34,887 $ 38,170 $ 6,097,627
=========== =========== =========== ===========
Held-to-Maturity
U.S. Government agency securities $ 1,498,179 $ -- $ 1,884 $ 1,496,295
Mortgage-backed securities 6,820,038 3,602 -- 6,823,640
Corporate securities 1,908,902 1,737 -- 1,910,639
----------- ----------- ----------- -----------
Total held-to-maturity $10,227,119 $ 5,339 $ 1,884 $10,230,574
----------- ----------- ----------- -----------
</TABLE>
F-12
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES - (Continued)
The following table lists the maturities of debt and equity securities at
December 31, 1997 classified as available-for-sale and held-to-maturity:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
-----------------------------------------------------------------------------
Approximate Approximate
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due after one year through five years $ -- $ -- $ 999,606 $ 995,000
Due after five years through ten years 993,139 1,005,937 1,909,402 1,950,553
Due after ten years 7,561,847 7,652,183 12,509,896 12,698,077
----------- ----------- ----------- -----------
Equity Securities 324,751 376,605 -- --
----------- ----------- ----------- -----------
$ 8,879,737 $ 9,034,725 $15,418,904 $15,643,630
----------- ----------- ----------- -----------
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. In 1997, the Company sold two securities which were
classified as held-to-maturity due to unforeseen circumstances which could not
have been anticipated.
The Company has the intent and ability to hold the remaining portion of the
held-to-maturity portfolio through maturity. Proceeds on the sales of investment
securities classified as held-to-maturity were $2,001,250 in 1997. There were no
sales of investment securities classified as held-to-maturity during 1996.
Proceeds on the sales of investment securities classified as available-for-sale
were $4,524,271 in 1997. Gross gains of $137,166 and gross losses of $9,708 were
realized on these sales.
Proceeds on the sales of investment securities classified as available-for-sale
during 1996 were $1,515,938. Gross gains of $22,063 and gross losses of $6,000
were realized on these sales.
F-13
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, December 31,
------------------------------------------------------------
1997 % 1996 %
------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate $54,262 96.9% $14,648 88.6%
Commercial and industrial 1,091 2.0% 1,138 6.9%
Other 1,694 3.0% 1,226 7.4%
------- ----- ------- -----
Total loans 57,047 101.9% 17,012 102.9%
Less:
Loans in process 260 0.5% 215 1.3%
Unearned income 217 0.4% 86 0.5%
Allowance for loan losses 568 1.0% 182 1.1%
------- ----- ------- -----
Net loans $56,002 100.0% $16,529 100.0%
------- ----- ------- -----
</TABLE>
Changes in the allowance for loan losses are summarized as follows:
December 31,
-------------------------
1997 1996
---- ----
Balance at beginning of year $ 182,079 $ 60,000
Provision for loan losses 415,000 125,000
Loan losses $ (29,139) $ (2,921)
--------- ---------
Balance at the end of year $ 567,940 $182,079
--------- ---------
F-14
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS - (Continued)
On December 31, 1997, nonaccrual loans were $286,897, and loans 90 days or more
past due were $165,418. There were no troubled debt restructured loans as of
December 31, 1997. On December 31, 1996, nonaccrual loans were $120,985, loans
90 days or more past due were $190,879. There were no troubled debt restructured
loans as of December 31, 1996. There were no impaired loans at December 31, 1997
and December 31, 1996.
The aggregate amount of loans by the Bank to its directors and executive
officers, including loans to related persons and entities, are summarized as
follows:
December 31,
-------------------------------
1997 1996
---- ----
Balance at beginning of year $ 614,421 $ 12,391
New loans 121,664 610,000
Repayments (503,185) (7,970)
--------- ---------
Balance at end of year $ 232,900 $ 614,421
--------- ---------
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
Estimated -------------------------------
useful lives 1997 1996
------------ ---- ----
<S> <C> <C> <C>
Building 31.5 Years $ 753,750 $ -
Furniture and fixtures 5-7 Years 367,493 128,474
Leasehold improvements 5-20 Years 134,898 60,493
----------- ---------
1,256,141 188,967
Accumulated depreciation and amortization (103,352) (43,546)
----------- ---------
$ 1,152,789 $ 145,421
----------- ---------
</TABLE>
Depreciation and amortization charged to operations amounted to $59, 806 during
1997 and $36,185 during 1996.
F-15
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases -The Bank and the Company have entered into non-cancelable operating
lease agreements for their primary facilities. Both the Bank and Company are
responsible for pro-rata operating expense escalations. The minimum annual
rental payments at December 31, 1997, are summarized as follows:
Year Ending December 31,
1998 $ 105,477
1999 29,724
2000 8,882
2001 8,882
2002 8,882
----------
Total $ 161,847
==========
Rent expense for the years ended December 31, 1997, and December 31, 1996,
amounted to $125,022 and $91,000, respectively.
Employment Agreements - The Company has employment agreements with certain key
executives that provide severance pay benefits if there is a change in control
of the Company. The agreements will continue in effect on a year-to-year basis
until terminated or not renewed by the Company or key executives. Upon a change
in control, the Company shall continue to pay the key executives' salaries per
the agreements and certain benefits for the agreed upon time periods. The
maximum contingent liability under the agreements at December 31, 1997 was
$1,567,960.
In addition, in connection with the offering (Note 19), the Company and the
President and CEO have entered into an agreement by which the Company has an
option to pay $150,000 per year for each of the three years beginning in 1998 in
exchange for the President agreeing to waive any future exercise of the
non-dilutive feature of the Class B common stock. If the Company does not make
the optional payment on January 2nd of each year, the President will be entitled
to implement the anti-dilutive feature for 10% of any shares of Class A common
stock issued during the year of non-payment. The Company exercised its option
for 1998 upon the close of the offering.
NOTE 7 - FINANCIAL INSTRUMENTS
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 their customers and to
reduce their own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
Such financial instruments are recorded in the financial statements when they
become payable. Those instruments involve, to varying degrees, elements of
credit and interest rate risks in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.
F-16
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - FINANCIAL INSTRUMENTS - (Continued)
The Bank's exposure to credit loss in the event of non-performance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as they do for on-balance-sheet instruments.
On December 31 1997, the Bank had the following off-balance-sheet financial
instruments whose contract amount represent credit risk:
Commitments to extend credit: $1,321,993
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition set forth in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. During 1997, the Bank did not enter
into any interest rate swaps, caps, floors or collars and is not party to any
forward or futures transactions.
NOTE 8 - DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- ----------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Demand $ 257,325 0.37% $ 58,659 0.21%
NOW Accounts 688,177 0.98% 891,640 3.19%
Money Market Accounts 4,801,606 6.81% -- --
Passbook 2,018,768 2.86% 2,029,694 7.26%
Certificates of deposit 62,707,645 88.98% 24,993,154 89.34%
----------- ------- ----------- -------
$70,473,521 100.00% $27,973,147 100.00%
----------- ------- ----------- -------
</TABLE>
F-17
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEPOSITS - (Continued)
The following table summarizes the maturity composition of certificates of
deposit with balances of $100,000 or more at December 31, 1997, compared to
December 31, 1996:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1997 % 1996 %
------------ ------ ------------ ------
<S> <C> <C> <C> <C>
Three months or less $ 652,783 7.23% $ 1,057,638 42.12%
Over three months to six months 103,215 1.14% 200,000 7.96%
Over six months to twelve months 4,246,805 47.03% 237,700 9.47%
Over twelve months 4,027,146 44.60% 1,015,741 40.45%
------------ ------ ------------ ------
$ 9,029,949 100.00% $ 2,511,079 100.00%
============ ====== ============ ======
</TABLE>
Interest expense on deposits for the years ended December 31 is summarized as
follows:
December 31,
--------------------------------------
1997 1996
----------- -----------
NOW Accounts $ 16,142 $ 11,916
Money Market Accounts 63,020 -
Passbook 47,356 60,533
Certificates of deposit 2,158,433 1,110,003
----------- -----------
$ 2,284,951 $ 1,182,452
=========== ===========
F-18
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - BORROWED FUNDS
FHLB Advances
Borrowings, primarily advances from the Federal Home Loan Bank ("FHLB"), consist
of the following:
December 31,
---------------------------
1997 1996
----------- -----------
Notes payable to FHLB, with fixed rates
payable between 5.80% and 6.71% $ 2,000,000 $ 3,500,000
Notes payable to FHLB, with variable rates 7,000,000 1,500,000
----------- -----------
$ 9,000,000 $ 5,000,000
=========== ===========
Advances are made pursuant to several different credit programs offered from
time to time by the FHLB. Unused lines of credit at the FHLB were $15.1 million
at December 31, 1997. In 1997, the maximum month-end FHLB advances outstanding
were $12.7 million, average outstandings were $7.0 million and the
weighted-average interest rate was 5.87%. Unused lines of credit at the FHLB
were $11.7 million at December 31, 1996. In 1996, the maximum month-end FHLB
advances outstanding were $5.0 million, average outstandings were $1.9 million
and the weighted-average interest rate was 5.61%.
Outstanding borrowings mature as follows:
1998 $ 7,000,000
1999 2,000,000
-----------
$ 9,000,000
===========
Collateralized borrowings
Collateralized borrowings represent participations by other banks in certain
loans; such amounts are non-interest bearing.
Lines of Credit
In October, 1996 the Company entered into a one year renewable $350,000
revolving line of credit with a financial institution. Interest on the revolving
line is charged at prime plus one percent and carried a finance charge of
$3,500. Total interest paid during the year ended December 31, 1997 amounted to
$13,891. The amount outstanding on this facility at December 31, 1997 was
$340,000.
F-19
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are as follows for the years ended
December 31:
1997 1996
---------- ----------
Other noninterest income:
Service charges and fees $ 25,531 $ 2,453
Loan review fees 22,260 42,777
Other 37,102 41,939
---------- ----------
$ 84,893 $ 87,169
========== ==========
Other noninterest expense:
Data processing $ 114,957 $ 80,271
Professional fees 174,742 83,973
Advertising 61,654 21,995
Insurance 48,124 66,971
Office 119,812 66,406
Travel & entertainment 136,218 74,103
Depreciation and amortization 59,806 46,555
Other 194,000 105,869
---------- ----------
$ 909,313 $ 546,143
---------- ----------
F-20
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLAN
The Bank has a Stock Option Plan (the Plan) for the benefit of key officers and
employees of the Bank. The Plan was designed to attract and retain qualified
personnel in key positions, provide officers and key employees with a
proprietary interest in the Company as an incentive to contribute to the success
of the Company, and reward key employees for outstanding performance and the
attainment of targeted goals. The Plan was also designed to retain qualified
directors for the Company, and will provide for the grant of non-qualified stock
options and incentive stock options intended to comply with the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended. Initial options to
acquire shares of Common stock that have been awarded to officers and key
employees of the Company and the Bank and directors of the Company with an
exercise price equal to $10.00 per share. The Plan is administered and
interpreted by a Committee of the Board of Directors, and unless sooner
terminated, will be in effect for a period of ten years from the Effective Date.
A total of 300,000 shares has been reserved for issuance under the Plan.
The options, which have a term of between 4 and 10 years when issued, vest
either immediately or over a period specified by the Company's compensation
committee. The excercise price of each option equals the market price of the
Company's stock on the date of the grant. Accordingly, no compensation cost has
been recognized for the plan.
F-21
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLAN - (Continued)
Had compensation cost for the plans been determined based on the fair value of
the options at the grant dates consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
-------- ----------
<S> <C> <C>
Net income (loss) per common share as reported $ (225,608) $ 126,269
Pro forma net loss per common share (225,608) (208,695)
Net income (loss) per common share - basic and diluted as reported $ (0.28) $ 0.16
Pro forma net loss per common share - basic and diluted (0.28) (0.26)
</TABLE>
<TABLE>
<CAPTION>
1997 1996
----------------------------------- ----------------------------------
Weighted-Average Weighted-Average
Number of Per Share Number of Per Share
Options Excercise Price Options Excercise Price
---------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 250,705 $ 7.52 234,080 $ 7.52
Granted - - 16,625 7.52
Exercised - - - -
Forfeited 7,983 7.52 - -
Expired - - - -
------- ------- -------- -------
Outstanding, end of year 242,722 $ 7.52 250,705 $ 7.52
------- ------- -------- -------
Options exercisable at year-end 242,722 $ 7.52 250,705 $ 7.52
======= ======= ======== =======
Weighted-average fair value of
options granted during the year $ - $ 2.90
======= ========
</TABLE>
The fair value of options granted during 1996 is estimated using the following
weighted-average information: risk-free rate of 6.12%, expected life of 4.7
years, expected volatility of stock price of 18.5% and expected dividends of $0
per year.
At December 31, 1997, options outstanding were as follows:
Options outstanding and exercisable 242,722
Range of exercise prices $ 7.52
Weighted-average remaining option life 6.54 yrs
Weighted-average exercise price $ 7.52
F-22
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY
In connection with the formation of the Company, the President & CEO purchased
10,000 shares, par value $ .01, of Class B Common Stock for $500. These shares
mandatorily convert into ten percent of the then issued shares of Class A Common
Stock on January 1, 2001.Unearned compensation of $542,802 was recorded at the
close of the offering on November 30, 1995, based on the offering price of the
$10.00 per share. As a result of the mandatory conversion provision, the Class B
Common Stock was deemed converted on November 30, 1995 for financial statement
purposes.
Unearned compensation, which is shown as a separate component of Shareholders'
equity, was being amortized over five years. In connection with the offering
(Note 19), the President and CEO agreed to cap the amount of Class A common
stock into which the Class B common stock could be converted, into an amount
equal to 10% of the Class A common stock outstanding at December 31, 1997. In
conjunction with this agreement, the Company fully recognized the remaining
unearned compensation as compensation expense in the fourth quarter of 1997.
On July 18, 1997, the Company paid a 33% stock dividend on its common stock to
stockholders' of record as of July 1, 1997.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Bank has a defined contribution plan 401(k) covering eligible employees, as
defined under the plan document. Employees may contribute up to 10% of
compensation, as defined under the plan document. The Bank can make
discretionary contributions. The Bank did not make any contributions into the
plan during the period ended December 31, 1997 or 1996.
F-23
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. 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 and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital 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 classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
At December 31, 1997 and 1996, the Bank's actual and required minimum capital
ratios were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) To Be Well
Capitalized Under
For Capital Prompt Corrective
For the Bank: Actual: Adequacy Purposes: Action Provisions:
- ------------- ------------------------ ---------------------- ---------------------
As of December 31, 1997: Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 5,315 7.9% $ 5,400 8.0% 6,750 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 4,747 7.0% $ 2,700 4.0% 4,050 6.0%
Leverage $ 4,747 5.4% $ 3,548 4.0% 4,435 5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $ 4,657 25.6% $ 1,458 8.0% 1,822 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 4,475 24.6% $ 729 4.0% 1,093 6.0%
Tier I Capital
(Average Assets) $ 4,475 12.9% $ 1,387 4.0% 1,734 5.0%
</TABLE>
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
above) of total and Tier I capital ( as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to
risk-weighted assets (as defined). At December 31, 1997, The Bank's Total
capital ratio of 7.9% did not meet the minimum requirement of 8.0% in order to
consider the Bank adequately capitalized. However, subsequent to year end, the
Company completed an offering (Note 19) of approximately $7.1 million, of which
$6.9 million was contributed to the Bank. As a result the Bank's Total capital
ratio increased to 17.8% at February 13, 1998.
F-24
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - REGULATORY MATTERS - (Continued)
At December 31, 1997 and 1996, the Company's actual and required minimum capital
ratios were as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
For Capital
For the Company: Actual: Adequacy Purposes:
- ---------------- ----------------------- ---------------------
As of December 31, 1997: Amount Ratio Amount Ratio
------ ----- ------- -------
<S> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 5,752 8.5% $ 5,431 8.0%
Tier I Capital
(to Risk Weighted Assets) $ 5,184 7.6% $ 2,715 4.0%
Leverage $ 5,184 5.8% $ 3,570 4.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $ 4,951 26.9% $ 1,471 8.0%
Tier I Capital
(to Risk Weighted Assets) $ 4,897 25.9% $ 735 4.0%
Tier I Capital
(Average Assets) $ 4,897 15.3% $ 1,279 4.0%
</TABLE>
State banking statutes restrict the amount of dividends paid on capital stock.
Accordingly, no dividends shall be paid by the Bank on its capital stock unless,
following the payment of such dividends, the capital stock of the Bank will be
unimpaired, and (1) the Bank will have a surplus of not less than 50% of its
capital, or, if not, (2) the payment of such dividend will not reduce the
surplus of the Bank.
Additionally, banking regulations limit the amount of investments, loans,
extensions of credit and advances that one subsidiary bank can make to the
Company at any time to 10% and in the aggregate 20% of the Bank's capital stock
and surplus. These regulations also require that any such investment, loan,
extension of credit or advance be secured by securities having a market value in
excess of the amount thereof. At December 31, 1997, there were no investments,
loans, extensions of credit or advances from any of the subsidiary banks to the
Company.
F-25
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - EARNINGS PER SHARE
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted EPS computations.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
--------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net Loss per common share - basic $ (225,608) 813,807 $(0.28)
Effective of dilutive securities $ -- -- $ --
------------ ------- ------
Net Loss per common share diluted $ (225,608) 813,807 $(0.28)
============ ======= ======
</TABLE>
Options to purchase 243,055 shares of common stock at $7.52 a share were
outstanding during the year. They were not included in the computation of
diluted EPS because the options were anti-dilutive.
On February 13, 1998, the Company issued 769,231 shares of Class A common stock
in conjunction with the offering (Note 19). Had the shares been issued as of
December 31, 1997, basic and diluted EPS would have been $(.14). The exercise
price of the warrants issued under the terms of the offering was $10.24 (105% of
the sales price per share sold in the offering). The warrants would have had no
impact on EPS at December 31, 1997 because the warrants' exercise price was
greater than the average market price of the common shares.
F-26
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - EARNINGS PER SHARE - (Continued)
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted EPS computations.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
--------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
<S> <C> <C> <C>
Net Loss per common share - basic $ 126,269 794,119 $ 0.16
Effect of dilutive securities $ -- -- $ --
--------- ------- ------
Net Loss per common share dilutive $ 126,269 794,119 $ 0.16
========= ======= ======
</TABLE>
Options to purchase 250,705 shares of common stock at $7.52 a share were
outstanding during the year. They were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
F-27
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - INCOME TAXES
Income tax expense from current operations is composed of the following:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Federal
Current $ 193,335 $ 23,155
Deferred (215,737) --
Benefit applied to reduce goodwill 21,701 30,042
--------- --------
(701) 53,197
State
Current 8,520 --
Deferred -- --
Benefit applied to reduce goodwill 9,072 14,798
--------- --------
17,592 14,798
--------- --------
Income taxes $ 16,891 $ 67,995
--------- --------
</TABLE>
A reconciliation of income taxes computed at the statutory federal corporation
income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Income taxes at statutory rate $ (70,964) $ 66,050
Adjustments resulting from:
Nondeductible compensation 144,566 --
Nondeductible expenses, including goodwill
and meals and entertainment 15,483 40,251
Net operating loss carryover utilized -- (76,708)
Increase (decrease) in valuation allowance (102,734) 36,418
State taxes, net of Federal tax benefit 11,610 9,767
Other 18,930 (7,783)
--------- --------
Income taxes $ 16,891 $ 67,995
--------- --------
</TABLE>
F-28
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - INCOME TAXES - (Continued)
Deferred taxes are included in the accompanying financial statements at December
31, 1997 and 1996 for the effects of differences between the financial statement
and federal income tax bases of assets and liabilities under the provisions of
enacted tax laws. Deferred tax assets and liabilities at December 31, 1997 and
1996 were comprised as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 183,691 $ 48,657
Deferred loan fees 9,245 11,244
Deferred compensation 23,525 23,525
Charitable contribution -- 1,391
Unrealized loss on securities available-for-sale -- 1,116
Net operating loss carryforwards -- 21,701
--------- --------
216,461 107,634
Valuation Allowance -- (103,850)
--------- --------
216,461 3,784
--------- --------
Deferred tax liabilities:
Fixed assets (724) 3,784
Unrealized gains on securities available-for-sale (52,696) --
--------- --------
(53,420) 3,784
--------- --------
Net deferred tax asset $ 163,041 $ --
--------- --------
</TABLE>
During 1997, the Company realized a tax benefit related to the net operating
loss carryovers from the acquisition of the Bank which was treated as a
reduction to goodwill in accordance with SFAS No. 109.
The Company believes it is more likely than not to realize the net deferred tax
asset and accordingly no valuation, has been provided at December 31, 1997.
F-29
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures about Fair Values of Financial Instruments," requires
disclosure of the estimated fair value of an entity's assets and liabilities
considered to be financial instruments. For the Company, as for most financial
institutions, the majority of its assets and liabilities are considered
financial instruments as defined in SFAS No. 107. However, many such instruments
lack an available trading market, as characterized by a willing buyer and seller
engaging in an exchange transaction. Also, it is the Company's general practice
and intent to hold its financial instruments to maturity and not to engage in
trading or sales activities, except for certain loans and investments.
Therefore, the Company had to use significant estimates and present value
calculations to prepare this disclosure. Changes in the assumptions or
methodologies used to estimate fair values may materially affect the estimated
amounts. Also, management is concerned that there may not be reasonable
comparability between institutions due to the wide range of permitted
assumptions and methodologies in the absence of active markets. This lack of
uniformity gives rise to a high degree of subjectivity in estimating financial
instrument fair values. Estimated fair values have been determined by the
Company using the best available data and an estimation methodology suitable for
each category of financial instruments.
For cash and due from banks, interest-bearing deposits in banks and federal
funds sold, the recorded book values of $ 4,808,437 and $ 4,214,186 at December
31, 1997 and 1996, respectively, approximate fair values. The estimated fair
values of investment securities are based on quoted market prices, if available.
Estimated fair values are based on quoted market prices of comparable
instruments if quoted market prices are not available.
The loan portfolio, net of unearned income and loans in process, at December
31, 1997 and 1996 has been valued using a present value discounted cash flow
analysis where market prices were not available. The discount rate used in these
calculations is the estimated current market rate adjusted for credit risk. The
carrying value approximates its fair value.
<TABLE>
<CAPTION>
1997 1996
---------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Investment
Securities $ 24,453,629 $ 24,678,355 $ 16,324,746 $ 16,328,201
Loans $ 56,570,103 $ 57,647,000 $ 16,711,000 $ 17,138,818
</TABLE>
F-30
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS - (Continued)
The estimated fair values of demand deposits (i.e., interest and
non-interest-bearing checking accounts, savings and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts of
variable rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. The carrying amount of
accrued interest receivable and payable approximates fair value.
<TABLE>
<CAPTION>
1997 1996
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Time deposits $ 62,707,645 $ 62,878,779 $ 24,993,154 $ 25,050,624
Other deposits $ 7,765,876 $ 7,765,876 $ 2,979,993 $ 2,979,993
------------ ------------ ------------ ------------
Total Deposits $ 70,473,521 $ 70,644,655 $ 27,973,147 $ 28,030,617
------------ ------------ ------------ ------------
</TABLE>
The fair values of borrowed funds, and collateralized borrowings of $12,637,942
and $5,050,000 at December 31, 1997 and 1996, respectively, approximate their
recorded book balances.
There was no material difference between the notional amount and the estimated
fair value of off-balance sheet items which totaled approximately $1,321,993 and
$332,070 at December 31, 1997 and 1996, respectively, and primarily comprised
unfunded loan commitments which are generally priced at market at the time of
funding.
F-31
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
---------------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Cash and Due from banks $ 254,341 $ 13,047
Securities available-for-sale 327,774 126,500
Investment in subsidiaries 5,088,398 4,624,230
Other assets 210,425 218,580
----------- -----------
Total assets $ 5,880,938 $ 4,982,357
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other borrowed money 340,000 50,000
Other liabilities 175,155 37,510
Stockholders' Equity
Preferred Stock - -
Common Stock 813,807 597,082
Additional paid-in-capital 4,827,866 4,877,701
Accumulated defecit (378,182) (152,574)
Unearned compensation, Class B stock - (425,195)
Unrealized gain (loss) on securities available-for-sale 102,292 (2,167)
----------- -----------
Total stockholders' equity $ 5,365,783 $ 4,894,847
Total liabilities and stockholders' equity $ 5,880,938 $ 4,982,357
=========== ===========
</TABLE>
F-32
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF OPERATIONS
Years ended December 31,
-------------------------------
1997 1996
-------- --------
Income:
<S> <C> <C>
Other income $ 77,348 $ 30,719
--------- --------
Total income 77,348 30,719
--------- --------
Expenses:
Compensation 517,085 108,560
Occupancy - -
Professional fees - (28,728)
Insurance - -
Office - (4,252)
Travel & Entertainment 350 -
Depreciation and Amortization 9,995 29,208
Interest Expense 13,891 2,658
Loss on sale of investment securities - 6,000
Other 18,602 2,023
-------- --------
Total expenses 559,923 115,469
-------- --------
Loss before equity in undistributed earnings of subsidiaries (482,575) (84,750)
Provision for income taxes (15,261) (75,299)
-------- --------
Loss before equity in undistributed earnings of subsidiaries (467,314) (9,451)
Equity in undistributed earnings of subsidiaries 241,706 135,720
---------- ---------
Net income (loss) $(225,608) $126,269
========== =========
</TABLE>
F-33
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1997 1996
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ (225,608) $ 126,269
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 9,995 29,208
Amortization of Class B common stock 425,195 108,560
Equity in undistributed (income) loss of subsidiary (241,706) (135,720)
(Gain) loss on sale of investments available for sale (27,920) 6,000
Decrease (increase) in other assets 8,155 31,613
Increase (decrease) in capital contributions due bank - (409,251)
Increase (decrease) in other liabilities 137,646 (45,958)
---------- ---------
Net cash provided by (used in) operating activities 85,757 (289,279)
---------- ---------
Cash flows from investing activities:
Net proceeds from purchase and sale of investment securities (134,463) (167,625)
Capital contributions made to bank - (393,056)
---------- ---------
Net cash used in investing activities (134,463) (560,681)
---------- ---------
Cash flows from financing activities:
Net proceeds from common stock issued - 409,251
Net increase (decrease) in other borrowed funds 290,000 (6,087)
---------- ---------
Net cash provided by financing activities 290,000 403,164
---------- ---------
Net increase (decrease) in cash and cash equivalents 241,294 (446,796)
Cash and cash equivalents, beginning of year 13,047 459,843
---------- ---------
Cash and cash equivalents, end of year $ 254,341 $ 13,047
========== =========
</TABLE>
F-34
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SUBSEQUENT EVENT
On February 13, 1998, the Company issued 769,231 shares of its Class A common
stock in conjunction with a private placement offering (the offering). Total
cash received was $7,136,420, net of related offering cost of $363,580. Had this
transaction occurred as of December 31, 1997, stockholders' equity would have
been as follows:
<TABLE>
<CAPTION>
Pro-Forma
Actual Adjustment Pro-Forma
------------- -------------- ---------------
<S> <C> <C> <C>
Stockholders' equity
Preferred stock, $1.00 par value; authorized
5,000,000 shares; no shares issued and
outstanding $ - $ - $ -
Common stock, $1.00 par value; authorized
10,000,000 shares; 732,426 shares issued
and outstanding and 81,381 shares of
converted and unissued Class B common
stock (1) 813,807 769,231 1,583,038
Additional paid-in-capital 4,827,866 6,367,189 11,195,055
Accumulated deficit (378,182) - (378,182)
Unrealized gain (loss) on securities available
for sale 102,292 - 102,292
----------- ----------- ------------
Total stockholders' equity $ 5,365,783 $ 7,136,420 $ 12,502,203
----------- ----------- ------------
</TABLE>
(1) Subsequent to the offering, authorized 10,000,000 shares; 1,501,657 shares
issued and outstanding and 81,381 shares of converted and unissued Class B
common stock.
In connection with the offering, the Company granted warrants convertible for a
period of five years into 3.25% of the Company's common stock. The number of
warrants will be adjusted for stock splits, stock dividends, and the issuance of
additional shares so as to maintain the underwriter's ownership of the fully
diluted common stock at 3.25% for a period of three years from the close of the
offering.
F-35
<PAGE>
Exhibit 10.4
AGREEMENT
AGREEMENT (this "Agreement"), dated as of January 2, 1998, by and
between USABancShares, Inc., a Pennsylvania corporation (the "Company") and
Kenneth L. Tepper, an individual ("Tepper").
WHEREAS:
A. Tepper is the holder of all of the issued and outstanding shares of
Class B Common Stock, $.01 par value per share, of the Company (the "Class B
Stock");
B. Pursuant to Section 5 of the Company's Amended and Restated Articles
of Incorporation (the "Articles of Incorporation"), the shares of Class B Stock
mandatorily convert into 10% of the then issued shares of Class A Common Stock,
$1.00 par value per share, of the Company (the "Class A Stock") on January 1,
2001.
C. The Company intends to issue and sell to accredited investors in a
private placement (the "Private Placement") shares of Class A Stock;
D. The Company may in the future issue and sell shares of Class A Stock
in one or more public offerings;
E. The Company has determined that a modification of the existing
anti-dilutive conversion rights of the Class B Stock will have a favorable
effect on the Private Placement and any future public offerings by the Company;
and
F. To enable the Company to achieve the favorable effect upon the
Private Placement, the Company and Tepper have agreed to limit the effect of the
anti-dilutive conversion feature of the Class B Stock.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Tepper, intending to be legally bound, hereby agree as follows:
1. CONVERSION FREEZE OPTIONS. The Company may pay to Tepper One Hundred
and Fifty Thousand Dollars ($150,000) on January 2 (or such later date as the
Company and Tepper may agree) of each of 1998, 1999 and 2000, each of which
payments shall be deemed to be the Company's exercise of its option (each, a
"Conversion Freeze Option") requiring that the Conversion Waiver (as defined
below) be in effect for the period through and including the next succeeding
January 1.
2. CONVERSION OF CLASS B STOCK . Subject to the Company's exercise of
each of its Conversion Freeze Options, Tepper hereby waives his right to receive
any shares of Class
1
<PAGE>
A Stock in excess of 81,381 shares, which shares shall be deemed to be fully
vested as of the date hereof and shall be subject to equitable adjustment for
stock splits, stock dividends, reclassifications or similar events subsequent to
the date hereof, upon the conversion of the Class B Stock into Class A Stock on
January 1, 2001, or sooner if provided for pursuant to the terms of the Articles
of Incorporation (the "Conversion Waiver"). If the Company fails for any reason
to exercise a Conversion Freeze Option by failing to make the required payment
therefor to Tepper on any given January 2nd (or such later date as the Company
and Tepper may agree), then the Conversion Waiver shall not apply with respect
to any shares of Class A Stock issued on or subsequent to such January 2nd and
on or prior to the next January 1st.
3. VOTING RIGHTS. So long as the Class B Shares are held by Tepper,
Tepper shall retain all voting rights attendant thereto, including but not
limited to, the right to elect one-third of the members of the Board of
Directors of the Company.
4. STOCK OPTIONS. The Company shall grant to Tepper incentive stock
options (the "Stock Options") to purchase up to 30,000 shares of Class A Stock
under the Company's Stock Option Plan. The Stock Options shall be exercisable
for a period of five (5) years from the date on which the Stock Options are
granted under the Company's Stock Option Plan and be on substantially the terms
(including the vesting schedules) contained in the stock option agreements
attached hereto as Exhibit A. The exercise period of the Stock Options shall
survive the expiration or termination of this Agreement for any reason. The
Stock Options shall be exercisable for the following prices:
Number of Options Exercise Price
20,000 110% of the Fair Market Value (as
defined in the Stock Option Plan) of
the Common Stock on the date hereof
10,000 $20.00
5. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law; Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania applicable to contracts made and to be performed in the
Commonwealth of Pennsylvania. The Company and Tepper irrevocably consent to the
jurisdiction of the United States federal courts and the state courts located in
the Commonwealth of Pennsylvania in any suit or proceeding based on or arising
under this Agreement and irrevocably agree that all claims in respect of such
suit or proceeding may be determined in such courts.
b. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other parties.
2
<PAGE>
c. Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
d. Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement contains the
entire understanding of the parties with respect to the matters covered herein.
No provision of this Agreement may be waived other than by an instrument in
writing signed by the party to be charged with enforcement and no provision of
this Agreement may be amended other than by an instrument in writing signed by
each of the parties.
f. Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties and their successors and
assigns.
g. Third Party Beneficiaries.This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
h. Further Assurances. Each party shall do and perform, or
cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
duly executed as of the date first above written.
USABANCSHARES, INC.
By:_________________________ ___________________________
Name: KENNETH L. TEPPER
Title:
4
<PAGE>
Exhibit 10.5
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"). THE HOLDER HEREOF, BY ITS ACCEPTANCE HEREOF, AGREES FOR THE
BENEFIT OF THE COMPANY THAT THIS WARRANT MAY BE OFFERED, SOLD OR OTHERWISE
DISPOSED OF ONLY (1) TO THE COMPANY, (2) SO LONG AS THIS WARRANT IS ELIGIBLE FOR
RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON
WHOM THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER," AS
DEFINED IN RULE 144A, THAT IS PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT
OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE SALE OR
OTHER DISPOSITION IS BEING MADE IN RELIANCE ON RULE 144A, (3) PURSUANT TO AN
EXEMPTION FROM REGISTRATION IN ACCORDANCE WITH RULE 144 UNDER THE SECURITIES ACT
(IF AVAILABLE), (4) TO AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501 UNDER THE
SECURITIES ACT ("ACCREDITED INVESTOR"), THAT IS ACQUIRING THIS WARRANT FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF ANOTHER ACCREDITED INVESTOR FOR INVESTMENT
PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, IF A
SIGNED CERTIFICATION LETTER (A FORM OF WHICH MAY BE OBTAINED FROM THE COMPANY)
IS DELIVERED BY THE TRANSFEREE TO THE COMPANY OR (5) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH
ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND IN EACH
CASE SUBJECT TO THE RIGHT OF THE COMPANY PRIOR TO ANY SUCH OFFER, SALE OR
DISPOSITION PURSUANT TO CLAUSE (2), (3) OR (4) TO REQUIRE THE DELIVERY OF AN
OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION REASONABLY
SATISFACTORY TO THE COMPANY.
Void After 5:00 p.m., Eastern Time,
on February 13, 2003
1
<PAGE>
USABANCSHARES, INC.
Warrant to Purchase 51,449 Shares of Common Stock
(Subject to Adjustment)
THIS CERTIFIES THAT, FOR VALUE RECEIVED, Sandler O'Neill Mortgage Finance
Corp. or its registered assigns (the "Holder"), is entitled to purchase from
USABancShares, Inc. (the "Company"), subject to the terms and conditions set
forth hereinafter, 51,449 fully paid and nonassessable shares of the Common
Stock, $1.00 par value per share, of the Company (the "Common Stock") at an
exercise price of $10.24 per share upon surrender of this Warrant to the Company
at the Company's principal office in Philadelphia, Pennsylvania with the form of
election to purchase attached to this Warrant duly completed and signed,
together with payment of the exercise price by wire transfer or other payment of
immediately available funds. The exercise price and the number of shares of
Common Stock for which this Warrant is exercisable are subject to change or
adjustment upon the occurrence of certain events as set forth below.
Section 1. Duration and Exercise of Warrants.
1.1 (a) This Warrant may be exercised on or after February 13, 1998 and will
expire at 5:00 p.m., Eastern Time, on February 13, 2003 (the "Expiration Date").
On the Expiration Date, all rights evidenced by this Warrant shall cease and
this Warrant shall become void.
(b) Subject to the provisions of this Warrant, the registered Holder
of this Warrant shall have the right to purchase from the Company (and the
Company shall issue and sell to such registered Holder) the number of fully paid
and nonassessable shares of Common Stock set forth on the face of this Warrant
(or such number of shares of Common Stock as may result from adjustments made
from time to time as provided herein), at the price of $10.24 per share in
lawful money of the United States of America (such exercise price per share, as
adjusted from time to time as provided herein, being referred to herein as the
"Exercise Price"), upon (i) surrender of this Warrant to the Company at the
Company's principal office in Philadelphia, Pennsylvania with the exercise form
attached hereto duly completed and signed by the registered Holder or Holders
thereof, and (ii) payment by wire transfer or other payment of immediately
available funds, in lawful money of the United States of America, of the
Exercise Price for the shares of Common Stock in respect of which this Warrant
is then exercised (and any applicable transfer taxes pursuant to Section 2
hereof). Upon surrender of this Warrant, and payment of the Exercise Price as
provided above, the Company shall promptly issue and cause to be delivered to or
upon the written order of the registered Holder of this Warrant and in such name
or names as such registered holder may designate, a certificate or certificates
for the number of shares of Common Stock so purchased upon the exercise of this
Warrant, together with payment in respect of any fraction of a share of Common
Stock issuable upon such surrender pursuant to Section 11 hereof.
2
<PAGE>
(c) The exercise of this Warrant shall be deemed to have been effected
immediately prior to the close of business on the Business Day (as defined in
Section 17 hereof) on which the Holder surrenders this Warrant to the Company
and payment of the Exercise Price (and any applicable transfer taxes pursuant to
Section 2 hereof) is made, and at such time the person in whose name any
certificate for shares of Common Stock shall be issuable upon such exercise
shall be deemed to be the record holder of such shares of Common Stock for all
purposes.
1.2 In the event that less than all of the shares of Common Stock
represented by this Warrant are exercised on or prior to the Expiration Date, a
new Warrant, duly executed by the Company, will be issued for the remaining
number of shares of Common Stock exercisable pursuant to the Warrant so
surrendered, and the Company shall deliver the required new Warrant pursuant to
the provisions of this Section 1.
1.3 The number of shares of Common Stock to be received upon the exercise
of this Warrant and the Exercise Price are subject to adjustment from time to
time as hereinafter set forth.
Section 2. Payment of Taxes.
The Company will pay all stamp transfer and other similar taxes payable in
connection with the original issuance of this Warrant and the shares of Common
Stock issuable upon exercise thereof, provided, however, that the Company shall
not be required to (i) pay any such tax which may be payable in respect of any
transfer involving the transfer and delivery of this Warrant or the issuance or
delivery of certificates for shares of Common Stock issuable upon exercise
thereof in a name other than that of the registered Holder of this Warrant or
(ii) issue or deliver any certificate for shares of Common Stock upon the
exercise of this Warrant until any such tax required to be paid under clause (i)
shall have been paid, all such tax being payable by the holder of this Warrant
at the time of surrender.
Section 3. Mutilated or Missing Warrants.
In case this Warrant shall be mutilated, lost, stolen or destroyed, the
Company will issue and deliver in exchange and substitution for and upon
cancellation of, the mutilated Warrant, or in substitution for the lost, stolen
or destroyed Warrant, a new Warrant of like tenor evidencing the number of
shares of Common Stock purchasable upon exercise of the Warrant so mutilated,
lost, stolen or destroyed, but only upon receipt of evidence satisfactory to the
Company of such loss, theft or destruction of such Warrant and an indemnity, if
requested, reasonably satisfactory to it. Any such new Warrant shall constitute
an original contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by
anyone.
3
<PAGE>
Section 4. Reservation of Warrant Shares.
The Company shall at all times reserve for issuance and delivery upon
exercise of this Warrant such number of shares of Common Stock or other shares
of capital stock of the Company as from time to time shall be issuable upon
exercise of this Warrant. All such shares shall be duly authorized and, when
issued upon such exercise, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances and free and clear of all preemptive rights. After 5:00 p.m.,
Eastern Time, on the Expiration Date, no shares of Common Stock shall be subject
to reservation in respect of this Warrant.
Section 5. Restrictions on Transfer.
Neither this Warrant nor the shares of Common Stock issuable upon exercise
thereof may be sold, transferred or otherwise disposed of, except in accordance
with and subject to the provisions of the Securities Act of 1933, as amended
(the "Securities Act"), and the rules and regulations promulgated thereunder.
This Warrant and the shares of Common Stock issuable upon exercise of this
Warrant shall be subject to the registration rights and other provisions set
forth in the Registration Rights Agreement dated as of February 9, 1998, by and
among the Company and each of the other parties named on the signature pages
thereto.
Section 6. Rights and Liability of Warrant Holder.
The Holder of this Warrant shall not, by virtue thereof, be (i) entitled to
any rights of a stockholder of the Company, either at law or in equity, and the
rights of such holder are limited to those expressed herein, or (ii) subject to
any liability as a stockholder of the Company.
Section 7. Adjustments of Exercise Price and Number of Shares of Common Stock.
Commencing February 13, 1998 through February 13, 2001, the Exercise Price
and the number and kind of shares of Common Stock issuable upon the exercise of
this Warrant will be subject to change or adjustment from time to time as
follows:
In the event of any change in the Common Stock by reason of a stock
dividend, stock split (including a reverse stock split), split-up,
recapitalization, combination, exchange of shares or similar transaction, the
type and number of shares or securities subject to this Warrant and the Exercise
Price thereof shall be adjusted appropriately, and proper provision shall be
made in the agreements governing such transactions so that the Holder of this
Warrant shall receive, upon exercise of this Warrant, the number and class of
shares or other securities or property that the Holder of this Warrant would
have received in respect of the Common Stock if this Warrant had been exercised
immediately prior to such event, or the record date therefor, as applicable. In
addition, if the Company issues any additional shares of Common Stock (whether
by direct or indirect sale or through the exercise or conversion, as the case
may be, of any option, convertible security or
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warrant) after February 13,1998 (other than pursuant to an event described in
the first sentence of this paragraph), the number of shares of Common Stock
subject to this Warrant shall be adjusted so that, after such issuance, it,
together with any shares of Common Stock previously issued pursuant to this
Warrant, equals 3.25% of the number of shares of Common Stock then issued and
outstanding (calculated on a fully diluted basis taking into account any and all
rights to subscribe for or to purchase, or any warrants or options for the
purchase of, Common Stock or any stock or securities convertible into or
exchangeable for Common Stock which are outstanding as of such date), without
giving effect to any shares subject to or issued pursuant to this Warrant.
Section 8. Reorganizations and Asset Sales.
If any capital reorganization or reclassification of the capital stock of
the Company, or consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets to another corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provision shall be made
whereby the Holder of this Warrant shall thereafter have the right to purchase
and receive, upon the basis and upon the terms and conditions specified in this
Warrant and in lieu of the shares of Common Stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented hereby,
such shares of stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of shares of such stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby had such reorganization, reclassification, consolidation,
merger or sale not taken place, and in any such case appropriate provision shall
be made with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof (including without limitation provisions
for adjustments of the Exercise Price and of the number of shares purchasable
upon the exercise of this Warrant) shall thereafter be applicable, as nearly as
may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise hereof. The Company shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof the
successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume,
by written instrument executed and mailed by first class mail, postage prepaid,
to the Holder hereof at the last address of such Holder appearing on the
register maintained by the Company, the obligation to deliver to such Holder
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such Holder may be entitled to purchase.
Section 9. Notice of Adjustment.
Whenever the number of shares of Common Stock or other stock or property
issuable upon the exercise of this Warrant is adjusted, as herein provided, the
Company shall promptly mail by first class mail, postage prepaid, to the Holder
at the last address of such Holder appearing on the register maintained by the
Company, notice of such adjustment or adjustments. In addition, the Company
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at its sole expense shall within 90 calendar days following the end of each
fiscal year of the Company during which this Warrant remains outstanding and an
adjustment has occurred, and promptly upon the request of the Holder of this
Warrant in connection with the exercise thereof, cause to be delivered to the
Holder a certificate of the chief financial officer of the Company setting forth
the number of shares of Common Stock or other stock or property issuable upon
the exercise of this Warrant after such adjustment, setting forth a brief
statement of the facts requiring such adjustment and setting forth the
computation by which such adjustment was made.
Section 10. Statement of Warrants.
This Warrant may continue to express the same number and kind of shares
which may be purchased upon exercise hereof as are stated in the Warrant
initially issued or any substitute Warrant issued therefor, notwithstanding any
adjustment in the Exercise Price and/or in the number or kind of shares issuable
upon exercise of this Warrant. In the event of any such adjustment, the Company
will, at its expense, promptly upon the Holder's surrender of this Warrant to
the Company, execute a new Warrant or Warrants stating the Exercise Price and
the number and kind of shares issuable upon exercise of this Warrant.
Section 11. Fractional Interest.
The Company shall not be required to issue fractional shares of Common Stock
on the exercise of this Warrant. If more than one Warrant shall be presented for
exercise at the same time by the Holder, the number of full shares of Common
Stock which shall be issuable upon such exercise shall be computed on the basis
of the aggregate number of shares of Common Stock acquirable on exercise of the
Warrants so presented. If any fraction of a share of Common Stock would, except
for the provisions of this Section 11, be issuable on the exercise of any
Warrant (or specified portion thereof), the Company shall pay an amount in cash
calculated by it to be equal to the then current market price per share
multiplied by such fraction computed to the nearest whole cent. The Holder by
his acceptance of this Warrant expressly waives any and all rights to receive
any fraction of a share of Common Stock or a stock certificate representing a
fraction of a share of Common Stock.
Section 12. Entire Agreement.
This Warrant constitutes the full and entire understanding and agreement
among the parties with regard to the subject matter hereof and no party shall be
liable or bound to any other party in any manner by any representations,
warranties, covenants or agreements except as specifically set forth herein or
therein.
Section 13. Successors and Assigns.
13.1 All covenants and provisions of this Warrant by or for the benefit of
the Company or the holder of this Warrant shall bind and inure to the benefit of
their respective successors, assigns, heirs and personal representatives.
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13.2 Subject to the requirements of Section 5 of this Warrant, this Warrant
is assignable only to principals and/or affiliates of Sandler O'Neill Mortgage
Finance Corp. (provided that this Warrant may not be assigned to Sandler O'Neill
Asset Management LLC), in whole or in part, without charge to the holder hereof
upon surrender of this Warrant with a properly executed assignment at the
principal office of the Company. Upon any partial assignment, the Company will
at its expense issue and deliver to the holder hereof a new Warrant of like
tenor, in the name of the holder hereof, which shall be exercisable for such
number of shares of Common Stock (or any shares of stock or other securities at
the time issuable upon exercise of this Warrant) which were not so assigned.
Except as provided in this Section 13.2, this Warrant may not be assigned or
transferred.
Section 14. Termination.
This Warrant shall terminate at 5:00 p.m., Eastern Time, on the Expiration
Date or upon such earlier date on which all of this Warrant has been exercised.
Section 15. Headings.
The headings of sections of this Warrant have been inserted for convenience
of reference only, are not to be considered a part hereof and shall in no way
modify or restrict any of the terms or provisions hereof.
Section 16. Amendments.
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the Company and the holder
of this Warrant.
Section 17. Notices.
All notices, demands and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, registered first-class
mail, telex, telecopier, or air courier guaranteeing overnight delivery:
(a) if to the holder of this Warrant, at the address set forth on the
register of the Warrants maintained by the Company (attention: Thomas W.
Killian), or at such other address as the holder of this Warrant shall have
furnished to the Company in writing;
(b) if to the Company, initially at One Penn Square, 30 South 15th
Street, Philadelphia, Pennsylvania 19102, and thereafter at such other address,
notice of which is given in accordance with the provisions of this Section 17.
All such notices and communications shall be deemed to have been duly given:
at the time delivered by hand, if personally delivered; five Business Days after
being sent by certified mail, return receipt requested, if mailed; when answered
back, if telexed; when receipt is acknowledged, if telecopied; and on the next
Business Day if timely delivered to an air courier guaranteeing overnight
delivery. For purposes of this Warrant, a "Business Day" means any day except a
Saturday, Sunday or other day on which commercial banks in the Commonwealth of
Pennsylvania are authorized by law to close.
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Section 18. Benefits of This Warrant.
Nothing in this Warrant shall be construed to give to any person or
corporation, other than the Company and the registered holder of this Warrant,
any legal or equitable right, remedy or claim under this Warrant, it being
intended that this Warrant shall be for the sole and exclusive benefit of the
Company and the registered holder thereof.
Section 19. Governing Law.
This Warrant shall be governed by and construed in accordance with the laws
of the Commonwealth of Pennsylvania.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its duly authorized officers.
Dated: February 13, 1998 USABANCSHARES, INC.
By:______________________________
Name: Kenneth L. Tepper
Title: President and Chief Executive Officer
Attest:
By:_____________________________
Name: Amy B. Smith
Title: Corporate Secretary
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ELECTION TO PURCHASE
Dated:
----------
The undersigned hereby irrevocably exercises this Warrant to purchase
shares of Common Stock and herewith makes payment of $ in payment
- ---- ---------
of the Exercise Price thereof on the terms and conditions specified in this
Warrant, surrenders this Warrant and all right, title and interest herein to the
Company and directs that the shares of Common Stock deliverable upon the
exercise of this Warrant be registered in the name and at the address specified
below and delivered thereto.
Name:
---------------------------------------------------------------------------
(Please Print)
Address:
------------------------------------------------------------------------
City, State and Zip Code:
-------------------------------------------------------
If such number of shares of Common Stock is less than the aggregate number of
shares of Common Stock purchasable hereunder, the undersigned requests that a
new Warrant representing the balance of such shares of Common Stock be
registered in the name and at the address specified below and delivered thereto.
Name:
---------------------------------------------------------------------------
(Please Print)
Address:
------------------------------------------------------------------------
City, State and Zip Code:
-------------------------------------------------------
Taxpayer Identification or Social Security Number:
------------------------------
Signature:
------------------------------------------------------------------
Note: The above signature must correspond with the name as written upon the face
of this Warrant in every particular, without alteration or enlargement or any
change whatsoever.
<PAGE>
EXHIBIT 10.6
REGISTRATION RIGHTS AGREEMENT
Registration Rights Agreement (the "Agreement"), dated as of February
9, 1998, by and among USABancShares, Inc. (the "Company"), a Pennsylvania
corporation, and each of the undersigned Investors (hereinafter referred to
individually as an "Investor" and collectively as the "Investors").
WITNESSETH:
WHEREAS, the Company and each of the Investors have entered into a
Purchase Agreement, dated as of February 9, 1998, providing for the purchase by
the Investors of shares of the Company's common stock, par value $1.00 per share
(the "Common Stock"), subject to the terms and conditions set forth therein; and
WHEREAS, the Company desires to provide the Investors with certain
registration rights with respect to the shares of Common Stock issuable pursuant
to the Purchase Agreement;
NOW, THEREFORE, in consideration of the premises and mutual agreements
~ forth herein and for other good and valuable consideration, the receipt and
the sufficiency of which are hereby acknowledged, the Company and the Investors,
intending to be legally bound, agree as follows:
Section 1. Definitions.
As used in this Agreement, the following terms shall have the following
meanings:
(a) "Affiliate" shall mean, with respect to any Person, any Person that.
directly or indirectly, controls, is controlled by or is under common control
with such Person. For the purposes of this definition, "control" when used with
respect to any specified Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings corresponding to the foregoing.
(b) "Business Day" shall mean any day except a Saturday, Sunday or other day on
which commercial banks in the Commonwealth of Pennsylvania are authorized or
obligated by law to close.
(c) "Commission" shall mean the Securities and Exchange Commission, or any other
federal agency at the time administering the Securities Act.
(d) "Common Stock" shall mean the Class A common stock, par value $1.00 per
share, of the Company.
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(e) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
(f) "Holder" shall mean any holder of outstanding Registrable Securities,
including any Person to whom Registrable Securities have been transferred in
compliance with this Agreement.
(g) "Initiating Holders" shall mean one or more Holders of not less than 25% of
the Registrable Securities then outstanding.
(h) "Issue Date" shall mean February 13, 1998, the date of original issuance
pursuant to the Purchase Agreement of the shares of Common Stock.
(i) "Person" shall mean an individual a corporation, a partnership, an
association a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
(j) "Purchase Agreement" shall mean the Purchase Agreement, dated as of February
9, 1998, among the Company and the Investors, as amended supplemented or
otherwise modified from time to time.
(k) "Registrable Securities" shall mean (i) the shares of Common Stock issued
pursuant to the Purchase Agreement, (ii) the shares of Common Stock issued upon
exercise of the Warrants and (iii) any shares of the capital stock (or rights to
receive capital stock of the Company) issued in respect of the Common Stock
issued pursuant to the Purchase Agreement and/or upon exercise of the Warrants,
by reason of or in connection with any stock dividend, stock distribution, stock
split, purchase in any rights offering or in connection with any combination of
shares, recapitalization, merger or consolidation, or any other equity
securities issued pursuant to any other pro rata distribution with respect to
the Common Stock issued pursuant to the Purchase Agreement and/or upon exercise
of the Warranty Notwithstanding the foregoing, Registrable Securities shall not
include otherwise Registrable Securities (i) sold to or through a broker or
dealer or underwriter or (ii)sold in a transaction exempt from the registration
and prospectus delivery requirements of the Securities Act under Section 4(1)
thereof, if in any such case (iii) transfer restrictions, and restrictive
legends with respect thereto, if any, are removed upon the consummation of such
sale.
(1) "Registration Statement" shall mean any registration statement (including a
"shelf"registration statement) filed with the Commission pursuant to Sections 3
or 4 of this Agreement.
(m) "Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder.
(n) "Shelf Registration" shall have the meaning set forth in Section 4 of this
Agreement.
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(o) "Shelf Registration Statement" shall mean a "shelf" registration statement
of the Company pursuant to the provisions of Section 4 of this Agreement which
covers all of the Registrable Securities required to be registered on an
appropriate form for purposes of an offering on a continuous basis pursuant to
Rule 415 under the Securities Act, or any similar rule that may be adopted by
the Commission.
(p) "Underwritten Offering" shall mean a bona fide underwritten public offering
pursuant to a Registration Statement.
(q) "Warrants" shall mean the Warrants of the Company issued by the Company to
the Placement Agent (as defined in the Purchase Agreement) as compensation, in
part, for its efforts in advising and assisting the Company in the sale of
Common Stock.
Section 2. Restrictions on Transferability.
The Registrable Securities shall not be sold, transferred or otherwise
disposed of, except in accordance with and subject to (i) the provisions of the
Securities Act and the rules and regulations promulgated thereunder and (ii) the
applicable requirements of Section 3.2 of the Purchase Agreement.
Section 3. Piggyback Registration Rights.
(a) If at any time or from time to time following the Issue Date, the Company
shall determine to register any Company securities, for its own account or the
account of any of its stockholders, other than a registration on Form S-4 or
Form S-8 or any successor or similar forms thereto, the Company will: (i) give
to each Holder written notice thereof as soon as practicable prior to filing the
Registration Statement; and (ii) include in such registration and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests from the Holders, made by one or more Holders within
ten (10) days of mailing of such written notice by the Company. The registration
rights provided hereunder shall be subject to paragraph (b) hereof. In addition,
notwithstanding the foregoing, if, at any time after giving such notice the
Company shall determine for any reason or for no reason not to register or to
delay registration of the securities of the Company which were to be included in
the Registration Statement, the Company may, at its election, give written
notice of such determination to each Holder desiring to include Registrable
Securities in such Registration Statement. In the case of a determination not to
register the securities of the Company, the Company shall be relieved of its
obligation to register any of such Holders' Registrable Securities in connection
with such registration (but not from its obligations to pay reasonable expenses
incurred in connection therewith, subject to the limitations set forth in
Section 6). In the case of a delay in registering the securities of the Company,
the Company shall be permitted to delay registering any Holders' Registrable
Securities which otherwise qualify for registration pursuant to this Section
4(a) for the same period as the delay in registering such other securities of
the Company. The Company will pay the reasonable expenses in connection with
each registration pursuant to this Section 3, to the extent provided in Section
6.
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(b) In the case where the Company is registering securities for the purpose of
an Underwritten Offering, if the managing underwriter of the offering advises
the Company and each Holder desiring to include Registrable Securities in such
Registration Statement in writing that, in its opinion, the number of securities
requested to be included in such registration exceeds the number which can be
sold in such offering without materially and adversely affecting the success of
such offering, the Company will include in such registration only such amount of
securities which the Company is so advised can be sold in such offering, which
shall be determined as follows:
First, the securities proposed by the Company to be sold for its own
account; and Second, allocated among the Holders desiring to include Registrable
Securities in such Registration Statement pro rata based on the percentage of
Registrable Securities to be included in such Registration Statement by such
Holders.
Section 4. Shelf Registration Rights.
(a) The Company shall, at the Company's cost, subject to Section 6 hereof,
(i) within 300 days after the Issue Date, file with the Commission, and
thereafter use its best efforts to cause to be declared effective as promptly as
practicable, a Shelf Registration Statement relating to the offer and sale of
the Registrable Securities by the Holders from time to time;
(ii) use its best efforts to keep the Shelf Registration Statement
continuously effective in order to permit the Prospectus forming a part thereof
to be usable by Holders identified as selling security holders in such Shelf
Registration Statement for a period of two years from the date the Shelf
Registration Statement is declared effective by the Commission or until such
earlier date as all Registrable Securities shall have been disposed of or on
which all Registrable Securities shall be saleable without registration pursuant
to Rule 144(k) (or any similar provision then in effect), or as a result of any
changes in the existing registration requirements under the Securities Act which
eliminate the Holders' need for the Shelf Registration Statement, or upon
receipt of an opinion of counsel satisfactory to the Company which provides that
all Registrable Securities may be resold without registration in a transaction
that would result in the Registrable Securities being freely tradeable provided
that the purchaser is not an affiliate of the Company (the Effectiveness
Period"); and (iii) notwithstanding any other provisions hereof, use its best
efforts to ensure that (i) any Shelf Registration Statement and any amendment
thereto and any Prospectus forming a part thereof and any supplement thereto
complies in all material respects with the Securities Act and the rules and
regulations thereunder, (ii) any Shelf Registration Statement and any amendment
thereto does not, when it becomes effective, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) any Prospectus
forming a part of any Shelf Registration Statement, and any supplement to such
Prospectus (as amended or supplemented from time to time), does not include an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that the Company shall be entitled
to rely on the information provided to them by the Holders with respect to such
Holders.
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(b) Any Holder desiring to sell Registrable Securities pursuant to the Shelf
Registration Statement shall provide not less than ten (10) days prior written
notice to the Company. Any such notice shall specify the number of shares of
Common Stock proposed to be sold and the intended method of disposition thereof.
The Company shall use its best efforts to promptly file any required
amendment(s) to the Shelf Registration Statement in order to facilitate any
sales of shares of Common Stock as described above.
(c) If Initiating Holders so elect, the offering of such Registrable Securities
pursuant to such Shelf Registration shall be in the form of an underwritten
offering. If any Shelf Registration is in the form of an underwritten offering,
the Initiating Holders will select and retain the investment banker or
investment bankers and manager or managers that will administer the offering;
provided that such investment bankers and managers must be reasonably
satisfactory to the Company.
Section 5. Underwritten Offerings.
(a) In connection with any public underwriting of Company securities that are
covered by a Registration Statement, the Company agrees, subject to the
requirements of Sections 3 and 4 hereof, to arrange for its underwriters to
include in the securities to be so distributed by it the Registrable Securities
of any Holder who makes such request of the Company. Each such Holder agrees
that any of such Registrable Securities so included shall be distributed and
sold through such underwriters. The Holders of Registrable Securities to be
distributed by such underwriters shall be parties to the underwriting agreement
between the Company and such underwriters and any such underwriting agreement
shall require that the representations and warranties by, and the other
agreements on the part of, the Company to and for the benefit of such
underwriters also shall be made to and for the benefit of such Holders and that
the conditions precedent to the obligations of such underwriters under such
underwriting agreement shall be conditions precedent to the obligations of such
Holders.
(b) No Holder may participate in any Underwritten Offering under Sections 3 and
4 unless such Holder (i) agrees to sell its Registrable Securities on the basis
provided in any underwriting arrangement approved by the Company and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
securities escrow agreements, underwriting agreements and other documents
required under the terms of such underwriting, and furnishes to the Company such
information as the Company may reasonably request in writing for inclusion in
the Registration Statement (and the prospectus included therein); provided,
however, that no Holder shall be required to make any representations or
warranties to or agreements with the Company or the underwriters other than
representations, warranties or agreements regarding such Holder and such
Holder's intended method of distribution and any other representation required
by law.
(c) (i) The managing underwriter of an Underwritten Offering of the Company may
advise the Company to cause Holders of Registrable Securities to delay the
public sale or distribution of such securities. Each Holder agrees, whether or
not such Holder participating in an Underwritten Offering, if so required by the
managing underwriter, not to effect any public sale or distribution of such
Holder's Registrable Securities or sales of such share~ pursuant to Rule 144,
during the fifteen days prior to and the ninety (90) days after any firm
commitment Underwritten Offering pursuant to
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Section 3 or 4 has become effective. If the managing underwriter advises the
Company in writing that, in its opinion, no such public sale or distribution
should be effected for a specified period longer than ninety (90) days after
such Underwritten Offering has become effective in order to complete the sale
and distribution of securities included in such registration and the Company
gives notice to such Holder of such advice, such Holders shall not effect any
public sale or distribution or sales pursuant to Rule 144 for a reasonably
longer period after such Underwritten Offering has become effective, but in no
event longer than one hundred twenty (120) days, except as part of such
Underwritten Offering.
(ii) The Company agrees, if so required by the managing underwriter, (x) not to
effect any public sale or distribution of its equity securities or securities
convertible into exchangeable or exercisable for any of such securities during
the fifteen days prior to and the ninety (90) days after any firm commitment
Underwritten Offering pursuant to Section 3 or 4 has become effective, except as
part of such Underwritten Offering and except pursuant to registrations on Form
S-4 and Form S-8 or any successor or similar forms thereto, and (y) to use its
best efforts to cause each holder of its equity securities or any securities
convertible into or exchangeable or exercisable for any of such securities, in
each case purchased from the Company at any time after the date hereof (other
than in a public offering), to agree not to effect any such public sale or
distribution of such securities during such period or, in either case, if the
managing underwriter advises the Company in writing that in its opinion no such
public sale or distribution should be effected for a specified period longer
than ninety (90) days after such Underwritten Offering has become effective in
order to complete the sale and distribution of securities included in such
registration, during a reasonably longer period after such Underwritten Offering
but in no event longer than one hundred twenty (120) days, except as part of
such Underwritten Offering.
Section 6. Registration Expenses.
The Company will pay all reasonable registration expenses in connection with any
registration pursuant to Section 3 or 4 of this Agreement, including without
limitation all registration and filing fees, fees with respect to filings
required to be made with the National Association of Securities Dealers, fees
and expenses of compliance with securities or blue sky laws, printing expenses,
and fees and expenses of counsel for the Company and of all independent public
accountants of the Company (including the expenses of any "comfort' letters or
update thereof required by or incident to the foregoing) in connection with such
registration, except that the following expenses relating to the Registrable
Securities shall not be borne by the Company:
(a) underwriting discounts and commissions, underwriting expenses and transfer
taxes, if any (other than discounts, commissions, expenses and transfer taxes
relating to securities offered and sold by the Company) and cost of liability
insurance (except to the extent carried by the Company on its own behalf); and
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(b) the cost of any special audit required by the Securities Act or the rules
and regulations of the Commission thereunder as a result of the Company's
obligation to maintain a Registration Statement current for more than 90 days
pursuant to Section 7, which costs shall be prorated among the Holders who have
Registrable Securities covered by such Registration Statement, based on the
percentage of Registrable Securities so included in such Registration Statement.
Section 7. Registration Procedures.
Whenever the Company seeks to effect the registration of any shares of
Registrable Securities under the Securities Act as provided in Sections 3 and 4,
the Company agrees it will as expeditiously as possible, subject to the terms
and conditions of such sections (including without limitation the Company's
right to terminate or delay a registration pursuant to Sections 3 and 4):
(a) prepare and file with the Commission the requisite Registration Statement to
effect such registration, use its best efforts to cause such Registration
Statement to become effective and promptly notify each Holder of securities
covered by such Registration Statement and any managing underwriter of the
effectiveness thereof;
(b) prepare and file with the Commission such amendments and supplements to such
Registration Statement and the prospectus used in connection therewith as may be
necessary to keep such Registration Statement effective, notify each Holder of
securities covered by such Registration Statement and any managing underwriter
as promptly as practicable of any request by the Commission for amendments or
supplements to such Registration Statement or related prospectus or for
additional information and comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such Registration
Statement until the earlier of such time as all of such securities have been
disposed of in accordance with the intended methods of disposition by the seller
or sellers thereof set forth in such Registration Statement, but for no longer
than 90 days subsequent to the effective date of such registration; provided
that if less than all the securities covered by the Registration Statement are
withdrawn from registration after the expiration of such period, the securities
so withdrawn shall be allocated pro rata among the Holders thereof on the basis
of the percentage of Registrable Securities held by them which were included in
such registration;
(c) furnish to each seller of shares covered by such Registration Statement such
number of conformed copies of such Registration Statement and of each such
amendment and supplement thereto (in each case including all exhibits), such
number of copies of the prospectus contained in such Registration Statement
(including each preliminary prospectus and any summary prospectus) and any other
prospectus filed under Rule 424 under the Securities Act, in conformity with the
requirements of the Securities Act, and such other documents as such seller or
such Holder may reasonably request;
(d) use its best efforts to register or qualify all shares covered by such
Registration Statement under such other securities or blue sky laws of such
jurisdictions as each seller thereof shall reasonably request, to keep such
registration or qualification in effect for so long as such Registration
Statement remains in effect. and take any other action which may be reasonably
7
<PAGE>
necessary or advisable to enable such seller to consummate the disposition in
such jurisdictions of the securities owned by such seller, except that the
Company shall not for any such purpose be required to (i) qualify generally to
do business as a foreign corporation in any jurisdiction wherein it would not
but for the requirements of this Section 7(d) be obligated to be so qualified,
(ii) subject itself to taxation in any such jurisdiction or (iii) consent to
general service of process in any such jurisdiction;
(e) use its best efforts to cause all shares covered by such Registration
Statement to be registered with or approved by such other governmental agencies
or authorities as may be necessary to enable the seller or sellers thereof to
consummate the disposition of such shares;
(f) enter into customary agreements (including, in the case of an Underwritten
Offering, an underwriting agreement in customary form) and take all other action
in connection therewith in order to expedite or facilitate the distribution of
the Registrable Securities included in such Registration Statement, and, in the
case of an Underwritten Offering, make representations and warranties to the
Holders of Registrable Securities covered by such Registration Statement and to
the underwriters in such form and scope as are customarily made by issuers to
underwriters in primary underwritten offerings and confirm the same to the
extent customary if and when requested;
(g) make available for inspection during normal business hours by a
representative of the Holders of Registrable Securities covered by such
Registration Statement and any managing underwriter, and any attorney or
accountant retained by such Holders or managing underwriter, all financial and
other records, pertinent corporate documents and properties of the Company, and
cause the officers, directors and employees of the Company to supply all
information reasonably requested by such representative, managing underwriter,
attorney or accountant in connection with such Registration Statement;
(h) in the case of an Underwritten Offering by the Company, use its best efforts
to furnish to each Holder of Registrable Securities covered by such Registration
Statement and the underwriters a signed counterpart, addressed to such Holder
and the underwriters, of
(i) an opinion of counsel for the Company, dated the effective date of such
Registration Statement and dated the date of each closing under the underwriting
agreement, reasonably satisfactory in form and substance to such Holder, and
(ii) a "comfort" letter, dated the effective date of such Registration Statement
and the date of each closing under the underwriting agreement, signed by the
independent public accountants who have certified the Company's financial
statements included in such Registration Statement, covering substantially the
same matters with respect to such Registration Statement (and the prospectus
included therein) and with respect to events subsequent to the date of such
financial statements, as are customarily covered in accountants' letters
delivered to underwriters in underwritten public offerings of securities and
such other financial matters as such Holder and the underwriters may reasonably
request;
8
<PAGE>
(i) immediately notify each Holder of Registrable Securities covered by such
Registration Statement and any managing underwriter, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such Registration Statement, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances under which they were made, and at the request of any such
Holder or any such managing underwriter, promptly prepare and furnish to such
Holder or managing underwriter a reasonable number of copies of a supplement to
or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made;
(j) notify each Holder of Registrable Securities covered by such Registration
Statement and any managing underwriter as promptly as practicable after becoming
aware of the issuance by the commission of any stop order suspending the
effectiveness of such Registration Statement or the initiation of any
proceedings for that purpose or the receipt by the Company of any notification
with respect to the suspension of qualification of any Registrable Securities
for sale in any jurisdiction or the initiation or threatening of any proceeding
for such purpose and make all reasonable efforts to obtain as promptly as
practicable the withdrawal of any order or other action suspending the
qualification of the Registrable Securities for sale in any jurisdiction;
(k) (i) otherwise use its best efforts to comply with all applicable rules and
regulations of the Commission, (ii) make available to its security holders, as
soon as reasonably practicable, an earnings statement covering the period of at
least twelve months, but not more than eighteen months, beginning with the first
full calendar month after the effective date of such Registration Statement,
which earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act, and (iii) not file any Registration Statement or prospectus or
amendment or supplement to such Registration Statement or prospectus to which
any such Holder of Registrable Securities covered by any Registration Statement
shall have reasonably objected on the grounds that such amendment or supplement
does not comply in all material respects with the requirements of the Securities
Act, such Holder having been furnished with a copy thereof at least two Business
Days prior to the filing thereof
(l) provide a transfer agent and registrar for all shares of Common Stock
covered by such Registration Statement not later than the effective date of such
Registration Statement; and
(m) use its best efforts to list all shares of Common Stock covered by such
Registration Statement on any securities exchange or national market system on
which the Common Stock is then listed.
The Company may require each holder of Registrable Securities as to which any
registration is being effected to furnish the Company with such information and
undertakings regarding such Holder and the distribution of such securities as
the Company may from time to time reasonably request in writing.
9
<PAGE>
Each Holder of Registrable Securities covered by any Registration Statement
agrees (i) that upon receipt of any notice from the Company of the happening of
any event of the kind described in paragraph (i) of this Section 7, such Holder
will forthwith discontinue such Holder's disposition of Registrable Securities
pursuant to the Registration Statement relating to such Registrable Securities
until such Holder's receipt of the copies of the supplemented or amended
prospectus contemplated by paragraph (i) of this Section 7 and, if so directed
by the Company, will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies (which shall be conspicuously marked as
such), then in such Holder's possession of the prospectus relating to such
Registrable Securities current at the time of receipt of such notice and (ii)
that it will immediately notify the Company, at any time when a prospectus
relating to the registration of such shares is required to be delivered under
the Securities Act, of the happening of any event as a result of which
information previously furnished by such Holder to the Company in writing for
inclusion in such prospectus contains an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
under which they were made.
If, at any time prior to the expiration of the Termination Date (as defined in
Section 9 hereof) in the good faith reasonable judgment of the Company's Board
of Directors, the disposition of Registrable Securities would require the
premature disclosure of material non-public information which may reasonably be
expected to have an adverse effect on the Company, then the Company shall not be
required to maintain the effectiveness of or amend or supplement the
Registration Statement for a period (a "Disclosure Delay Period expiring upon
the earlier to occur of (i) the date on which such material information
disclosed to the public or ceases to be material or (ii) up to thirty (30)
calendar days atter the date on which the Company provides a notice to the
Investors stating that the failure to disclose such non-public information
causes the prospectus included in the Registration Statement, as then in effect,
to include an untrue statement of a material fact or to omit to state a material
fact required to be stated therein or necessary to make the statement therein
not misleading. For the avoidance of doubt, in no event shall a Disclosure Delay
Period exceed thirty (30) calendar days.
The Company will give prompt written notice to the Holders of each Disclosure
Delay Period. Advance notice of the Disclosure Delay Period shall be given to
the extent practicable. If practicable, such notice shall estimate the duration
of such Disclosure Delay Period. Each Holder, by accepting Registrable
Securities, agrees that, upon receipt of such notice prior to the Holder's
disposition of all such Registrable Securities, such Holder wilt forthwith
discontinue disposition of such Registrable Securities pursuant to the
Registration Statement, and will not deliver any prospectus forming a part
thereof in connection with any sale of such Registrable Securities until the
expiration of such Disclosure Delay Period. Notwithstanding anything herein to
the contrary, there shall not be more than an aggregate of sixty (60) calendar
days in any twelve (12) month period during which the Company is in a Disclosure
Delay Period nor more than an aggregate of thirty (30) calendar days in any
ninety (90) calendar day period during which the Company is in a Disclosure
Delay Period
10
<PAGE>
Section 8. Indemnification.
(a) In the event of any registration of any Holder's Registrable Securities
under the Securities Act pursuant to this Agreement, the Company shall indemnify
and hold harmless each such Holder (a "Selling Holder"), its directors, each
underwriter and each controlling Person of any Selling Holder, if any, against
any losses, claims, damages or liabilities, joint or several (or actions in
respect thereof), including reasonable attorneys' fees and costs, to which such
Selling Holder, underwriter or controlling Person may be subject under the
Securities Act, under any other statute or at common law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (i) any untrue statement (or alleged untrue statement) of
any material fact contained in any Registration Statement under which such
securities were registered under the Securities Act, and any preliminary
prospectus or final prospectus contained therein, any summary prospectus issued
in connection with any securities being registered, any other document used to
sell the securities (including an illegal prospectus) (collectively, the
"Selling Documents"), or any amendment or supplement thereto (an "Amended
Selling Document"), or (ii) any omission (or alleged omission) to state therein
a material fact required to be stated therein or necessary to make the
statements therein (in light of the circumstances in which they were made with
to any prospectus) not misleading, and shall reimburse each such Selling Holder,
its directors, underwriter or controlling Person for any legal or other expenses
reasonably incurred by such Selling Holder, its directors, underwriter or
controlling Person in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company shall
not be liable to any Selling Holder. its directors, underwriter or controlling
Person in any such event to the extent that any 105% claim, damage or liability
arises out of or is based upon any untrue statement or omission made in such
Registration Statement, Selling Document, Amended Selling Document or any other
document, in reliance upon and in conformity with written information furnished
to the Company by such Selling Holder, its directors, underwriter or controlling
Person, respectively, specifically for use therein; and provided further that
the Company shall not be liable under this paragraph (a) with respect to any
rnisstatement or omission or alleged misstatement or omission in any Selling
Document to the extent that any such loss, claim. damage or liability results
from the fact that the Selling Holder, underwriter or controlling Person sold
securities to a Person to whom there was not sent or given, at or prior to the
written confirmation of such sale, a copy of any Amended Selling Document if the
Company had previously furnished copies thereof to such Selling Holder,
underwriter or controlling Person and if the misstatement or omission or alleged
misstatement or omission was corrected in the Amended Selling Document. The
indemnity provided for herein shall remain in full force and effect regardless
of any investigation made by or on behalf of such Selling Holder, its directors,
underwriter or controlling Person.
(b) In the event of any registration of any of the Company's securities or any
Registrable Securities under the Securities Act, each Selling Holder shall
furnish to the Company in writing such information and affidavits as the Company
reasonably requests for use in connection with such Registration Statement and
agrees, severally and not jointly, to indemnify and hold harmless the Company,
its directors, each underwriter and each controlling Person of the Company, if
any, against any losses, claims, damages or liabilities, joint or several (or
actions in respect thereof), to which the Company, its directors, each
underwriter or controlling Person may be subject under the Securities Act or
under any other statute or at common law, insofar as such losses, claims,
damages or
11
<PAGE>
liabilities, joint or several (or actions in respect thereof) arise out of or
are based upon (i) any untrue statement (or alleged untrue statement) of any
material fact contained in any Registration Statement under which such
securities were registered under the Securities Act, any Selling Document or any
Amended Selling Document, or (ii) any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein (in light of the circumstances in which they were made with
respect to any prospectus) not misleading, and shall reimburse the Company, its
directors, such underwriter and controlling Person for any legal or other
expenses reasonably incurred by such Persons in connection with investigating or
defending any such loss, claim, damage, liability or action; in each case, to
the extent, and only to the extent, that each untrue statement or omission (or
alleged untrue statement or omission) is made in reliance upon and in strict
conformity with written information furnished to the Company by such Selling
Holder.
(c) If the indemnification provided for in paragraph (a) or (b) above is
unavailable to an indemnified party in accordance with its terms in respect of
any losses, claims, damages or liabilities referred to therein, then the
obligations of each indemnitor thereunder shall be limited to such amount paid
or payable by such indemnified party as a result of such losses, claims, damages
or liabilities, in such proportion as is appropriate to reflect the relative
fault of such indemnitor on the one hand and of the indemnified parties on the
other hand in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of each indemnitor and of the indemnified
parties shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by such
indemnitor, or by the indemnified parties, and the parties relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 8 were determined by pro rata allocation or by any
other method of allocation which does not take into account the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages and liabilities or actions in respect thereof referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expense reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 8, no Selling
Holder shall be required to contribute any amount in excess of the amount by
which the total price at which the Registrable Securities sold by it exceeds the
amount of any damages which such person has otherwise been required to pay and
has actually paid by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
(d) Promptly after receipt by an indemnified party of notice of the commencement
of any action, such indemnified party shall, if a claim in respect thereof is to
be made against an indemnitor under paragraph (a) or (b) above, as the case may
be, notify the indemnitor in writing of the commencement thereof; but the
omission to so notify the indemnitor shall not relieve it from any liability
which it may have to any indemnified party under such subsection unless the
failure to
12
<PAGE>
provide such notice results in the forfeiture by the indemnitor of substantial
rights or defenses. In case any such action shall be brought against any
indemnified party, and it shall notify the indemnitor of the commencement
thereof, the indemnitor shall be entitled to participate therein and, to the
extent that it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party; provided, however, that if
the defendants in any such action include both the indemnified party and the
indemnitor and the indemnified party shall have reasonably concluded that there
may be legal defenses available to it and/or other indemnified parties which are
in addition to or in conflict with those available to the indemnitor, the
indemnified party or parties shall have the right to select separate counsel to
assert such legal defenses (in which case the indemnitor shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties). Upon the permitted assumption by the indemnitor of the defense of such
action, and approval by the indemnified party of counsel, the indemnitor shall
not be liable to such indemnified party under this Section 8 for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof (other than reasonable costs of investigation) unless
(i) the indemnified party shall have employed separate counsel in connection
with the assertion of legal defenses in accordance with the proviso to the next
preceding sentence, (ii) the indemnitor shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time, (iii) the indemnitor and its counsel do not actively and
vigorously pursue the defense of such action, or (iv) the indemnitor has
authorized the employment of counsel for the indemnified party at the expense of
the indemnitor. The indemnitor shall not be liable for any settlement of any
action or proceeding effected without its written consent, which consent shall
not be unreasonably withheld.
Section 9. Termination of Rights.
All rights of any particular Holder under this Agreement shall terminate at 5:00
p.m.,Eastern Time, on the date two (2) years after the date of this Agreement
("Termination Date"), provided that the provisions of Section 8 hereof shall
survive any termination of this Agreement.
Section 10. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and construed under
the internal substantive laws of the Commonwealth of Pennsylvania, without
regard to its conflicts of laws principles
(b) Successors and Assigns. The provisions hereof shall inure to the benefit of,
and be binding upon, the parties and their respective successors, assigns,
heirs, executors and administrators. The rights and obligations of any Investor
hereunder may be assigned by such Investor to any Person acquiring Registrable
Securities from the Investor contemporaneously with such assignment, provided
that the rights so assumed shall apply only to the Registrable Securities so
acquired. The rights and obligations of the Company hereunder may not be
assigned by it without the prior written consent of the Investors.
13
<PAGE>
(c) Entire Agreement. This Agreement and the Purchase Agreement constitute the
full and entire understanding and agreement among the parties with regard to the
subject matter hereof and thereof and no party shall be liable or bound to any
other party in any manner by any representations, warranties, covenants or
agreements except as specifically set forth herein or therein. Nothing in this
Agreement, express or implied, is intended to confer upon any party, other than
the parties hereto and their respective successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided herein.
(d) Separability. Any invalidity, illegality or limitation of the enforceability
of any one or more of the provisions of this Agreement. or any part thereof,
shall in no way affect or impair the validity, legality or enforceability of the
other provisions of this Agreement. In case any provision of this Agreement
shall be invalid, illegal or unenforceable, it shall, to the extent practicable,
be modified so as to make it valid, legal and enforceable and to retain as
nearly as practicable the intent of the parties, and the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
(e) Amendment and Waiver. Any provision of this Agreement may be amended and the
observance of any provision of this Agreement may be waived (either generally or
in a particular instance, either retroactively or prospectively, and either for
a specified period of time or indefinitely), with the written consent of the
Company and the Holders of riot less than a majority of the Registrable
Securities; provided, however, that no such amendment or waiver shall reduce the
aforesaid percentage of Registrable Securities the Holders of which are required
to consent to any waiver or supplemental agreement without the consent of the
Holders of all outstanding Registrable Securities. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon the Company and
each Holder under this Agreement. Upon the effectuation of each such amendment
or waiver, the Company shall promptly give written notice thereof to the Holders
who have not previously consented thereto in writing.
(f) Delays or Omissions. No delay or omission to exercise any right, power or
remedy accruing to any Holder, any subsequent Holder of any Registrable
Securities or the Company upon any breach, default or noncompliance under this
Agreement shall impair any such right, power or remedy, nor shall it be
construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of any similar breach, default or noncompliance
thereafter occurring. It is further agreed that any waiver, permit, consent or
approval of any kind or character on the Holders' or the Company's part of any
breach, default or noncompliance under this Agreement or any waiver on the
Holders' or the Company's part of any provisions or conditions of this Agreement
must be in writing and shall be effective only to the extent specifically set
forth in such writing, and that all remedies afforded to the Holders and the
Company under this Agreement shall be cumulative and not alternative.
(g) Notices, etc. All notices, demands and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail. telex, telecopier, or air courier guaranteeing overnight
delivery:
14
<PAGE>
(i) if to any Holder, initially at the address set forth below its name on the
Holder's signature page to this Agreement, arid thereafter at such other
address, notice of which is given in accordance with this Section 10(g); and
(ii) if to the Company, initially at One Penn Square, 30 South 15th Street
Philadelphia, Pennsylvania 19102, Attention: President, and thereafter at such
other address notice of which is given in accordance with this Section 10(g).
All such notices and communications shall be deemed to have been duly given: at
the time delivered by hand, if personally delivered, five Business Days after
being sent by certified mail, return receipt requested, if mailed; when answered
back, if telexed; when receipt is acknowledged, if telecopied; and on the next
Business Day if timely delivered to an air courier guaranteeing overnight
delivery.
15
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<CIK> 0000945532
<NAME> USABANCSHARES, INC.
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