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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended June 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-27244
USABanc.com, Inc.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2806495
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(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)
(215) 569-4200
---------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Transitional Small Business Format: YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, $1.00 par value, outstanding on August 11, 1999: 4,014,784 shares
Class B Common Stock, $.01 par value, outstanding on August 11, 1999: 216,460
shares
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page #
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Comprehensive Income 5
Statements of Changes in Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Change in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
2
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USABanc.com, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,210 $ 1,335
Interest-bearing deposits with banks 12,987 7,706
Securities available-for-sale 33,371 28,389
Securities held-to-maturity (fair value: 1999 - $47,968;
1998 - $15,951) 48,633 15,755
FHLB Stock 4,011 3,523
Loans receivable, net 114,711 102,138
Premises and equipment, net 2,668 2,023
Accrued interest receivable 2,406 1,633
Other real estate - 66
Goodwill, net 73 69
Deferred income taxes 535 573
Other assets 9,395 1,896
--------- ---------
Total assets $ 230,000 $ 165,106
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 1,849 $ 1,439
NOW 1,521 846
Money Market 1,186 2,345
Savings and Passbook 20,781 5,281
Time 144,618 104,476
--------- ---------
Total deposits 169,955 114,387
Borrowed funds:
Short term borrowings - 6,106
Long term borrowings 30,000 25,000
Guaranteed Preferred Beneficial Interests in Subordinated Debt 10,000 -
Collateralized borrowings 3,399 4,199
Accrued interest payable 983 399
Accrued expenses and other liabilities 1,631 1,418
--------- ---------
Total liabilities 215,968 151,509
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 5,000,000 authorized shares;
no shares issued and outstanding - -
Common stock, $1.00 par value; 10,000,000 authorized shares;
4,014,784 shares issued and outstanding and 216,460 shares
of converted and unissued Class B common stock, actual
4,231,244 shares issued and outstanding, as adjusted 4,231 4,231
Additional paid-in capital 8,568 8,568
Accumulated earnings 2,036 1,112
Accumulated other comprehensive (loss) - unrealized
depreciation on securities available-for-sale (803) (314)
--------- ---------
Total stockholders' equity 14,032 13,597
--------- ---------
Total liabilities and stockholders' equity $ 230,000 $ 165,106
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $ 5,736 $ 4,124 $ 2,980 $ 2,476
Investment securities 2,709 1,238 1,665 691
Interest-bearing deposits and other 104 170 23 78
------- ------- ------- -------
Total interest income 8,549 5,532 4,668 3,245
Interest expense:
Deposits 3,582 2,322 1,915 1,241
Borrowed funds 1,164 383 676 289
------- ------- ------- -------
Total interest expense 4,746 2,705 2,591 1,530
------- ------- ------- -------
Net interest income 3,803 2,827 2,077 1,715
Provision for loan losses 250 160 150 125
------- ------- ------- -------
Net interest income after provision for loan losses 3,553 2,667 1,927 1,590
Non-interest income:
Gain on sales of investment securities 30 49 35 9
Gain on sales of loans receivable 42 - - -
Gain on sale of real estate owned 60 - 60 -
Brokerage operations 193 91 67 12
Other 244 60 87 41
------- ------- ------- -------
Total non-interest income 569 200 249 62
Non-interest expense:
Salaries and employee benefits 1,346 542 840 298
Net occupancy expense 342 251 178 153
Professional fees 198 70 99 65
Office expenses 102 101 50 58
Data processing fees 120 75 70 47
Advertising expense 132 59 87 50
Other operating expenses 663 310 323 202
------- ------- ------- -------
Total non-interest expense 2,903 1,408 1,647 873
------- ------- ------- -------
Income before income taxes 1,219 1,459 529 779
Income taxes 295 552 19 284
------- ------- ------- -------
Net income $ 924 $ 907 $ 510 $ 495
======= ======= ======= =======
Earnings per share - basic (1) $ 0.22 $ 0.28 $ 0.12 $ 0.15
======= ======= ======= =======
Earnings per share - diluted (1) $ 0.21 $ 0.23 $ 0.12 $ 0.11
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(1) All per share data has been adjusted to reflect
(a) a 33% stock dividend paid on July 18, 1997,
(b) a 33% stock dividend paid on August 17, 1998 and
(c) a two-for-one stock split effected in the form of a dividend paid on
June 15, 1999.
4
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USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in Thousands)
Six Months Ended
June 30,
----------------
1999 1998
---- ----
Net income $ 924 $ 907
Other comprehensive loss:
Unrealized losses on securities available-for-sale:
Unrealized holding losses arising during the period,
net of taxes (489) (258)
----- -----
Comprehensive income $ 435 $ 649
===== =====
Three Months Ended
June 30,
----------------
1999 1998
---- ----
Net income $ 510 $ 495
Other comprehensive loss:
Unrealized losses on securities available-for-sale:
Unrealized holding losses arising during the period,
net of taxes (174) (155)
----- -----
Comprehensive income $ 336 $ 340
===== =====
The accompanying notes are an integral part of these consolidated financial
statements.
5
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USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the six months ended June 30, 1999
(unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional other
Common paid-in Accumulated comprehensive
Stock (1) capital (1) earnings income Total
--------- ----------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1998 $4,231 $8,568 $1,112 ($314) $13,597
Net unrealized loss on
securities available-for-sale - - - (315) (315)
Net income - - 414 - 414
------- ------- ------- ------ --------
Balances, March 31, 1999 $ 4,231 $ 8,568 $ 1,526 $ (629) $ 13,696
======= ======= ======= ====== ========
Net unrealized loss on
securities available-for-sale - - - (174) (174)
Net income - - 510 - 510
------- ------- ------- ------ --------
Balances, June 30, 1999 $ 4,231 $ 8,568 $ 2,036 $ (803) $ 14,032
======= ======= ======= ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(1) Data has been adjusted to reflect (a) a 33% stock dividend paid on July 18,
1997, (b) a 33% stock dividend paid on August 17, 1998 and (c) a
two-for-one stock split effected in the form of a dividend paid on June 15,
1999.
6
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USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 924 $ 907
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for possible loan losses 250 160
Depreciation 192 104
(Increase) Decrease in goodwill (4) 3
Net accretion of discounts on purchased loan portfolios (568) (455)
Net (accretion) amortization of securities discount/premiums (39) 39
Net gains on sale of securities (30) (49)
Net gains on sale of loan assets (42) --
Net gains on sale of real estate owned (60) --
Increase in accrued interest receivable (773) (426)
Decrease (Increase) in deferred tax asset 38 (121)
(Increase) in other assets (7,499) (1,771)
Increase in accrued interest payable 584 35
Increase in accrued expenses and other liabilities 213 69
-------- --------
Net cash used in operating activities (6,814) (1,505)
-------- --------
Cash flows from investing activities:
Investment securities available for sale
Purchases (41,560) (13,544)
Sales 1,620 2,409
Maturities and principal repayments 155 1,000
Investment securities held to maturity
Purchases (1,979) (3,140)
Sales 1,200 --
Maturities and principal repayments 2,704 1,157
Purchases of FHLB Stock (488) (2,055)
Increase in interest bearing deposits with banks (5,281) (5,049)
Net increase in loans (12,573) (23,366)
Decrease in other real estate, net 66 --
Purchases of premises and equipment (837) (675)
-------- --------
Net cash used in investing activities (56,973) (43,263)
-------- --------
Cash flows from financing activities:
Net increase in deposits 55,568 19,592
Net (decrease) increase in borrowings (1,906) 17,923
Private placement proceeds -- 7,098
Trust preferred proceeds 10,000 --
-------- --------
Net cash provided by financing activities 63,662 44,613
-------- --------
Net decrease in cash and cash equivalents (125) (155)
Cash and cash equivalents, beginning of period 1,335 833
-------- --------
Cash and cash equivalents, end of period $ 1,210 $ 678
======== ========
</TABLE>
Supplemental disclosure of cash flow information
On April 1, 1999 the Bank reclassed $33.4 million from available for sale to
held to maturity. Due to that reclass the Bank accreted $7.0 thousand into
equity during the quarter ended June 30, 1999 to restore the securities back to
their carrying value.
The accompanying notes are an integral part of these consolidated financial
statements.
7
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USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of USABanc.com, Inc. (the "Company") vBank, (the "Bank") a Pennsylvania
chartered stock savings bank, USACapital, Inc., a Pennsylvania corporation,
USACredit, Inc., a Pennsylvania corporation, and USA Capital Trust I, a Delaware
business trust. All significant intercompany accounts and transactions have been
eliminated. The interim financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments including normal recurring
accruals necessary for fair presentation of results of operations for the
interim periods included herein have been made. The unaudited consolidated
financial statements as of June 30, 1999 and for the three and six months ended
June 30, 1999 and 1998, are not necessarily indicative of results to be
anticipated for the full year.
2. Trust Preferred Securities
On March 9, 1999, the Company issued $10.0 million of 9.5% junior subordinated
debentures to USA Capital Trust I, a Delaware business trust, in which the
Company owns all of the common equity. The trust issued $10.0 million of trust
preferred securities to investors, secured by the junior subordinated debentures
and the guarantee of the Company. The junior subordinated debentures mature in
2029.
3. Computation of Per Share Earnings
Basic earnings per share ("EPS") amounts are computed by dividing net earnings
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share amounts are computed by dividing net earnings by the
weighted average number of shares and all dilutive potential shares outstanding
during the period.
8
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The following information was used in the computation of earnings per share on
both a basic and diluted basis for the six and three month periods ended June
30, 1999 and 1998.
(Dollars in Thousands), except per share data
Six Months Ended
June 30,
----------------
1999 1998
---- ----
Basic EPS Computation:
Numerator - Net earnings $ 924 $ 907
Denominator - Weighted average shares outstanding 4,231 3,211
------ ------
Basic EPS (1) $ 0.22 $ 0.28
====== ======
Diluted EPS Computation:
Numerator - Net earnings $ 924 $ 907
Denominator - Weighted average shares outstanding 4,231 3,211
Effect of dilutive securities 82 784
------ ------
Diluted EPS (1) $ 0.21 $ 0.23
====== ======
Three Months Ended
June 30,
------------------
1999 1998
---- ----
Basic EPS Computation:
Numerator - Net earnings $ 510 $ 495
Denominator - Weighted average shares outstanding 4,231 3,211
------ ------
Basic EPS (1) $ 0.12 $ 0.15
====== ======
Diluted EPS Computation:
Numerator - Net earnings $ 510 $ 495
Denominator - Weighted average shares outstanding 4,231 3,211
Effect of dilutive securities 163 1,094
------ ------
Diluted EPS (1) $ 0.12 $ 0.11
====== ======
(1) All per share data has been adjusted to reflect (a) a 33% stock dividend
paid on July 18, 1997,
(b) a 33% stock dividend paid on August 17, 1998 and
(c) a two-for-one stock split effected in the form of a dividend paid on
June 15, 1999.
9
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USABanc.com, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1999
Forward-looking Statements
When used in this Form 10-QSB, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project", or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as to the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Year 2000 Compliance
Changing from the year 1999 to 2000 has the potential to cause problems in data
processing and other date-sensitive systems. The year 2000 date change can
affect any system that uses computer software programs or computer chips,
including automated equipment and machinery. The Year 2000 problem is the result
of computer programs using two digits rather than four to define the year. Any
of the Company's programs that are time sensitive may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a major
system failure or miscalculations. Regarding the Company, computer systems are
used to perform financial calculations, track deposits and loan payments,
transfer funds and make direct deposits. The primary processing of the Company's
loan and deposit transactions is performed by Intrieve Incorporated, a
third-party data processing vendor. Computer software and computer chips also
are used to run security systems, communications networks and other essential
bank equipment. Because of its reliance on these systems (including those used
by its existing third-party data processing vendor), the Company is following a
comprehensive process to assure that such systems are ready for the Year 2000
date change. To become Year 2000 compliant, the Company is following guidelines
suggested by federal bank regulatory agencies and the Securities and Exchange
Commission (the "Commission"). A description of each of the steps and the status
of the Company's efforts in completing the steps is as follows.
During 1997, the Company formed a Year 2000 committee that has investigated the
Year 2000 problem and its potential impact on the Company's systems. The Year
2000 Committee reports to the Year 2000 Committee of the Board of Directors
which in turn reports to the full Board of Directors.
An independent consulting firm has been engaged to assist the Company in
developing its approach to becoming Year 2000 compliant. The initial phase of
achieving Year 2000 compliance includes educating the Company's employees and
customers abount Year 2000 issues. The Company has completed this initial
awareness and understanding phase.
The Bank has identified all potentially affected systems. This step has included
a review of all major information technology and non-information technology
systems to determine how Year 2000 issues affect them. In connection with the
foregoing, the Company has completed its assessment of which systems and
equipment are most prone to placing the Company at risk if they are not Year
2000 compliant (i.e., mission critical systems).
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The Year 2000 Committee has developed an inventory of its vendors, an inventory
of actions to be taken, identificiation of the team members responsible for
completion of each action, a completion timetable and a project tracking
methodology. Significant vendors have been requested to advise the Company in
writing of their Year 2000 readiness, including actions to become compliant if
they are not already compliant. A plan has been developed to repair or replace
systems and equipment not currently Year 2000 compliant. Although responses from
certain vendors have not yet been received, this step is substantially complete
and is expected to be completed by September 1999.
The Company's third party data processing servicer as well as vendors who
provide significant technology-related services have modified their systems to
become Year 2000 compliant. The Company has developed scripts involving typical
transactions to test the proper functioning of the modified systems. It has also
arranged for repair or replacement of equipment programs affected by Year 2000
issues. Most of the testing and corrections have taken place and all of the
Company's mission critical applications have been deemed compliant through
testing or vendor certification, or a plan has been developed for the software
upgrades required. This step was completed by June 30, 1999. The monitoring of
certain vendors will continue into 1999.
The Bank is preparing a contingency plan for how the Company would resume
business if unanticipated problems arise from non-performance by vendors. Such
plans are expected to be completed in the third quarter of 1999.
The Year 2000 issues also affect certain of the Company's customers,
particularly in the areas of access to funds and additional expenditures to
achieve compliance. As of December 31, 1998, the Company had contacted its
commercial credit customers and borrowers regarding the customers' awareness of
the Year 2000 Issue. While no assurance can be given that its customers will be
Year 2000 compliant, management believes, based on representations of such
customers and a review of their operations (including assessments of the
borrowers' level of sophistication and data and record keeping requirements),
that the customers are either addressing the appropriate issues to insure
compliance or that they are not faced with material Year 2000 issues. In
addition, in substantially all cases the credit extended to such borrowers is
collateralized by real estate which inherently minimizes the Company's exposure
in the event that such borrowers do experience problems or delays becoming Year
2000 compliant.
The Company's efforts to become Year 2000 compliant are being monitored by its
federal banking regulators. Failure to be Year 2000 compliant could subject the
Company to formal supervisory or enforcement actions. The Company has expensed
$20,000 during the year ended December 31, 1998 relating to costs incurred as a
result of the Company's Year 2000 Plan. The Company anticipates incurring
approximately $100,000 in additional costs related to the implementation of the
Company's Year 2000 plan. The Company presently believes the Year 2000 issue
will not pose significant operating problems for the Company. However, if
implementation and testing plans are not complted in a satisfactory and timely
manner by third parties on which the Company is dependent, or other unforseen
problems arise, the Year 2000 issue could potentially have an adverse effect on
the operations of the Company.
Business Summary:
In April 1999 the Company announced its intention to change it's strategic
business plan of being a premier community Bank in the Philadelphia area, using
traditional banking deposit gathering methods to converting to an Internet
financial institution which would provide financial services, both banking and
brokerage services via the Internet. As part of this initiative, the company
changed its name on May 13, 1999 to USABanc.com Inc, the first federally
regulated ".com" Company and on July 2, 1999, the Bank changed its name from
BankPhiladelphia to vBank. In July 1999 the company began a national marketing
campaign to promote the USABanc.com brand, via CNBC cable network commercials
and live reads on the Howard Stern Show. This initiative will lead to the actual
11
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launch of our fully functional internet site scheduled to be presented to the
public on August 16, 1999. The company fully anticipates to launch a second site
to be written in the latest multi media "flash" technology in October 1999. As a
result of the traditional marketing efforts to brand USABanc.com and build the
infrastructure for the Internet site the company anticipates to recognize
financial losses in 1999 and 2000. If we are successful in executing our plan
the company will return to profitability in 2001, no assurances can be made that
the company will return to profitability in 2001.
When the Company announced its Internet initiative, we launched the first ever
FDIC insured CD auction site, as well as its initial Internet vision site that
allowed Internet users to view the sites future functionality as well as open
certificate of deposit accounts. To date the Bank has opened in excess of $1.2
million and over 100 accounts through this site.
In an effort to maintain the Company and the Bank as a well capitalized
financial institution and to fund the Internet strategy, the Company has filed
an SB-2 public offering statement with the Securities and Exchange Commission on
July 16, 1999.
On July 21, 1999, USABanc.com entered into a two year agreement with Earthlink
(NASDAQ-"ELNK") under which Earthlink customers will have direct access to a
co-branded USABanc.com site providing both online banking and brokerage
services. USABanc.com will also serve as the default online banking selection
for customers who use Earthlink's "personal start" page customized option. Under
terms of the agreement, Earthlink has been granted warrants to purchase up to
120,000 shares of USABanc.com common stock, or approximately 3.0% of the current
outstanding shares, and will be paid certain variable fees which will be based
upon the number of accounts opened during the duration of the contract. The
strike price of the warrants is $12.00 per share. In connection with opening a
USABanc.com bank account, new and existing Earthlink customers will be able to
participate in an incentive program which will provide them one year of free ISP
dial-up service. Earthlink is one of the world's leading Internet service
providers, with over 1.3 million subscribers.
The Company on July 30, 1999 closed a loan pool acquisition of $88.3 million of
commercial real estate and multifamily adjustable rate loans. The loans have a
weighted average maturity of 127 months with $59.7 million repricing with in one
year. The weighted average yield on this portfolio is 8.32%. These loans are
located throughout the United States, with approximately 27% located in
Pennsylvania and New Jersey. The company funded these loans with excess
liquidity, FHLB advances and institutional certificates of deposit.
FINANCIAL CONDITION
The Company's total assets increased from $165.1 million at December 31, 1998 to
$230.0 million at June 30, 1999, an increase of $64.9 million, or 39.3%. The
increase was due primarily to increases in the loans receivable, net, securities
portfolio and interest bearing deposits of $12.6 million, $37.9 million, and
$5.3 million, respectively. The increase in the loan portfolio was a result of
originating $24.0 million in loans primarily commercial real estate and
multi-family and acquiring $8.9 million of performing commercial real estate
loans. The acquired loans were purchased for $7.3 million. The acquisitions and
orignation volume was offset by prepayments of $17.3 million. The increase in
the securities portfolio was primarily due to the acquisition of corporate trust
preferred securities and federal agency bonds. The increase in interest bearing
deposits relates to required funding of loan closings scheduled in early July
1999. The growth in total assets was funded by increases in deposits of $40.1
million in non-retail certficiates of deposit and $15.5 million in transaction
accounts, and the issuance of $10.0 million guaranteed subordinated debentures.
Management plans to continue to utilize FHLB advances in conjunction with
deposit expansion to provide the necessary funding and liquidity for the Bank's
continued growth. The Bank's borrowing limit at the FHLB as of June 30, 1999 was
approximately $43.8 million, of which $30.0 million was drawn upon as of such
date. The Companys stockholders' equity increased from $13.6 million at December
31, 1998 to $14.0 million at June 30, 1999.
12
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NET INCOME
The Company reported net income of $924,000 or $0.21 per diluted share, for the
six months ended June 30, 1999, compared to $907,000 or $0.23 per diluted share
for the six months ended June 30, 1998, representing a 1.9% increase in overall
net income. Net income increased primarily because the company did not provide
for income taxes in the quarter ended June 30, 1999, causing a positive variance
of $257,000. Net interest income increased $976,000, noninterest income
increased $369,000 these increases in earnings were offset by an increase in
noninterest expenses of $1.5 million. During the six months ended June 30, 1998,
the Company also recognized approximately $250,000 of non-recurring interest
income related to loan acquisitions.
The Company reported net income of $510,000 or $0.12 per share, for the three
months ended June 30, 1999, compared to $495,000 or $0.11 per share for the
three months ended June 30, 1998, representing a 3.0% increase in overall net
income. Net income increased primarily because the Company did not provide for
income taxes during the quarter ended June 30, 1999, causing a positive variance
of $265,000. Net interest income increased $362,000, noninterest income
increased $187,000 these increases in earnings were offset by an increase in
noninterest expenses of $774,000. During the three months ended June 30, 1998,
the Company also recognized approximately $150,000 of non-recurring interest
income related to loan acquisitions.
INTEREST INCOME
Total interest income increased $3.0 million or 54.5% for the six months ended
June 30, 1999 compared to the six months ended June 30, 1998, due to an increase
in average earning assets of $70.9 million during the same time periods. Income
on loans increased $1.6 million due to the average earning loan balances
increasing $39.6 million. The increase in average loans outstanding was
partially offset by the yield on the loan portfolio decreasing by 148 basis
points. The investment portfolio average earnings balances increased $31.8
million between the noted periods and the yield on the portfolio also increased
by 80 basis points.
Total interest income increased $1.4 million or 43.9% for the three months ended
June 30, 1999 compared to the three months ended June 30, 1998, due to an
increase in average earning assets of $69.8 million during the same time period.
Income on loans increased $504,000 due to the average earning loan balances
increasing $34.6 million. The increase in average loans outstanding was
partially offset by the yield on the loan portfolio decreasing by 211 basis
points. The investment portfolio average balances increased $39.2 million
between the noted periods and the yield on the portfolio also increased by 128
basis points.
INTEREST EXPENSE
Total interest expense increased $2.0 million or 75.4% for the six months ended
June 30, 1999, compared to the six months ended June 30, 1998, due to a higher
volume of new certificates of deposit, an increased outstanding balance of FHLB
advances and the guaranteed subordinated debt, issued in March of 1999. Interest
expense on deposits increased $1.3 million, interest expense on other borrowings
increased $781,000 and interest expense incurred on the guaranteed debt was
$300,000. These interest expenses increased due to the increase average
outstanding balances increasing $36.2 million, $20.7 million and $6.3 million,
respectively. Increases in interest expenses were also associated with an
increase in the cost of funds on borrowings by 18 basis points. The guaranteed
subordinated debt carries an interest rate of 9.50%. The average cost of funds,
including other borrowings, was 5.62% for the first six months of 1999 compared
to 5.71% over the same period in 1998.
Total interest expense increased $1.1 million or 69.3% for the three months
ended June 30, 1999, compared to the three months ended June 30, 1998, due to a
higher volume of new certificates of deposit, an increased outstanding balance
of FHLB advances and the guaranteed subordinated debt, issued in March of 1999.
Interest expense increased on deposits $674,000, interest expense on borrowings
increased $387,000 and interest expense incurred of the guaranteed debt was
$238,000. These interest expenses increased due to the increase average
outstanding balances increasing $32.2 million, $14.0 million and $10.0 million,
respectively. The guaranteed subordinated debt carries an interest rate of
9.50%. The average cost of funds, including other borrowings, was 5.63% for the
three months ended June 1999 compared to 5.58% over the same period in 1998.
13
<PAGE>
NET INTEREST INCOME
The Company's profitability, like that of many financial institutions, is
dependent to a large extent upon net interest income. Net interest income is the
difference between interest income (principally from loans and investment
securities) and interest expense (principally on customer deposits and
borrowings). Changes in net interest income result from changes in the mix of
rates and volumes of interest-earning assets and interest-bearing liabilities
that occur over time. Volume refers to the average dollar level of
interest-earning assets and interest bearing liabilities. Net interest rate
spread refers to the differences between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities. Net interest margin
refers to net interest income divided by average interest-earning assets.
Net interest income for the six months ended June 30, 1999, increased $1.0
million, or 34.5%, to $3.8 million from $2.8 million for the same period in
1998. Average interest-earning assets increased by $70.9 million, or 66.5%, to
$177.6 million, for the six months ended June 30, 1999 compared to the same
period in 1998. Average interest-bearing liabilities increased $74.1 million or
78.3% over the same period. The net interest rate spread and net interest margin
decreased for the period ended June 30, 1999 vs. June 30, 1998, from 4.66% to
4.01% and 5.30% to 4.28%, respectively. For the six months ended June 30, 1999,
$568,000 of discount was accreted into interest income or 6.7% of the total
interest income. This compares to $455,000 of discount accreted into interest
income for the six month period ended June 30, 1998 or 8.2% of total interest
income. Excluding the income attributable to the accretion of discount on loans
acquired, the net interest margin would have declined 81 basis points for the
six months ended June 30, 1999 compared to June 30, 1998 to 3.64% from 4.45%.
Over the past twelve months the Company's strategic initiative has been to
improve the quality of the loan assets and for the Company to originate more
loans than we acquire. Secondarily to this initiative, the loan assets to be
acquired will be of better quality relative to the Bank's underwriting criteria
then past acquisitions. These efforts coupled with the level of loan pay-offs,
$17.3 million in the first half of 1999, have lead to the decline of the yields
on the loan portfolio and the decline in net interest margin.
Net interest income for the three months ended June 30, 1999, increased
$362,000, or 21.1%, to $2.1 million from $1.7 million for the same period in
1998. Average interest-earning assets increased by $69.8 million, or 57.3%, to
$191.7 million, for the three months ended June 30, 1999 compared to the same
period in 1998. Average interest-bearing liabilities increased $74.7 million or
68.2% over the same period. The net interest spread and net interest margin
decreased for the period ended June 30, 1999 compared to June 30, 1998, from
5.07% to 4.12% and 5.63% to 4.33%, respectively. For the three months ended June
30, 1999, $267,000 of discount was accreted into interest income or 5.7% of the
total interest income. This compares to $196,000 of discount accreted into
interest income for the three month period ended June 30, 1998 or 6.0% of total
interest income. Excluding the income attributable to the accretion of discount
on loans acquired, the net interest margin would have declined 121 basis points
for the three months ended June 30, 1999 compared to June 30, 1998 to 3.78% from
4.99%, respectively. Over the past twelve months the Company's strategic
initiative has been to improve the quality of the loan assets and for the
Company to originate more loans than we acquire. Secondarily to this
initiative, the loan assets to be acquired will be of better quality relative to
the Bank's underwriting criteria then past acquisitions. These efforts coupled
with the level of loan pay-offs, $11.1 million for the three months ended June
30, 1999, have lead to the decline of the yields on the loan portfolio and the
decline in net interest margin.
14
<PAGE>
ANALYSIS OF NET INTEREST INCOME
The following table presents information regarding yields on interest-earning
assets, expense on interest-bearing liabilities, and net yields on
interest-earning assets for the periods indicated:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Six Months Ended June 30,
------------------------------------------------------------------------------------
1999 1998
---------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans $107,388 $ 5,736 10.68% $ 67,833 $ 4,124 12.16%
Investment securities 64,133 2,709 8.45 32,360 1,238 7.65
Interest-bearing deposits and other 6,085 104 3.42 6,499 170 5.23
-------- -------- ----- -------- -------- -----
Total interest-aarning assets $177,606 $ 8,549 9.63% $106,692 $ 5,532 10.37%
Interest-bearing liabilities:
Deposits:
NOW accounts $ 1,348 $ 14 2.05% $ 937 $ 9 2.02%
Money Market accounts 2,506 58 4.60 2,319 76 6.54
Savings & Passbook 12,037 278 4.61 1,790 23 2.60
Certificates of Deposit 111,984 3,233 5.77 75,738 2,213 5.84
Borrowings 40,934 1,163 5.69 13,902 384 5.51
-------- -------- ----- -------- -------- -----
Total interest-bearing liabilities $168,809 $ 4,746 5.62% $ 94,686 $ 2,705 5.71%
-------- -------- ----- -------- -------- -----
Excess of interest-earning assets over
interest-bearing liabilities $ 8,797 $ 12,006
======== ========
Net interest income $ 3,803 $ 2,827
======== ========
Net interest rate spread 4.01% 4.66%
====== ======
Net interest margin 4.28% 5.30%
====== ======
Average earning assets to average
interest bearing liabilities 105.21% 112.68%
====== ======
</TABLE>
15
<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 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)
June 30, 1999 vs June 30, 1998
Increase or Decrease
Due to Changes in
-----------------
Total
Average Average Increase
Volume Rate (Decrease)
------ ---- ----------
Variance in interest income on:
Interest-earning assets:
Loans $ 2,405 $ (793) $ 1,612
Securities 1,216 255 1,471
Interest-earning deposits and other (11) (55) (66)
------- ------- -------
Total interest-earning assets $ 3,610 $ (593) $ 3,017
------- ------- -------
Interest-bearing liabilities:
Deposits:
Savings & Passbook $ 5 $ -- $ 5
NOW Accounts 6 (24) (18)
Money Market accounts 134 121 255
Certificates of Deposit 1,059 (39) 1,020
Borrowings 744 35 779
------- ------- -------
Total interest-bearing liabilities $ 1,948 $ 93 $ 2,041
------- ------- -------
Changes in net interest income $ 1,662 $ (686) $ 976
======= ======= =======
16
<PAGE>
PROVISION FOR LOAN LOSSES
Management records the provision for loan losses in amounts that result in an
allowance for loan losses sufficient to cover all potential net charge-offs and
risks believed to be inherent in the loan portfolio. Management's evaluation
includes such factors as past loan loss experience as related to current loan
portfolio mix, evaluation of actual and potential losses in the loan portfolio,
prevailing regional and national economic conditions that might have an impact
on the portfolio, regular reviews and examinations of the loan portfolio
conducted by bank regulatory authorities, and other factors that management
believes deserve current recognition. As a result of management's evaluation of
these factors the provision for loan losses was $250,000 during the six months
ended June 30, 1999. The allowance for loan losses as a percentage of loans
outstanding was 1.14% at June 30, 1999, compared to 1.02% at December 31, 1998
and .89% at June 30, 1998. Management will continue to record a provision for
loan losses to maintain the allowance for loan losses at a level deemed adequate
by management on a quarterly basis. No charge-offs on loans were recorded during
the six months ended June 30, 1999 compared to $8,000 of charge-offs for the six
months ended June 30, 1998.
NONINTEREST INCOME
Noninterest income increased $369,000 or 184.5% in the six months ended June 30,
1999 compared to the same six months of 1998. Gain on sales of securities
classified as available-for-sale decreased $19,000, gain on sale of loans
receivable increased $42,000 and gain on sale of real estate owned increased
$60,000, other income increased $184,000 which was comprised of service charges
increasing $20,000, loan late charges increasing $20,000, loan fees increasing
$50,000, income on bank owned life insurance increasing $22,000 and other
miscellaneous income increasing $72,000 during the period and the brokerage
operations' earnings increased $102,000.
Noninterest income increased $187,000 or 301.6% in the three months ended June
30, 1999 compared to the same three months of 1998. Gain on sales of securities
classified as available-for-sale increased $26,000 and gain on sale of real
estate owned increased $60,000, other income increased $46,000 which was
comprised of service charges increasing $7,000, loan fees increasing $10,000,
income on bank owned life insurance increasing $22,000 and other miscellaneous
income increasing $7,000 during the period and the brokerage operations'
earnings increased $55,000.
NONINTEREST EXPENSE
Other expense increased an aggregate of $1.5 million or 106.2% to $2.9 million,
compared to the six months ended June 30, 1998. Compensation expense increased
$804,000 due to the hiring of 29 additional personnel. Occupancy expense
increased $91,000 due to the addition of one branch. Advertising expense
increased $73,000 due to a new marketing campaign for the Internet site
www.usabanc.com. Office expense, travel and entertainment, and other
miscellaneous expenses increased $399,000 as a result of the increased efforts
to attract additional customers and travel expenses related to Internet
strategic planning. Professional fees increased $128,000 due to an increase in
outside consulting and legal services provided during the six months ended June
30, 1999.
Other expense increased an aggregate of $774,000 or 88.7% to $1.7 million,
compared to the three months ended June 30, 1998. Compensation expense increased
$542,000 due to the hiring of additional personnel. Occupancy expense increased
$25,000 due to the addition of one branch. Advertising expense increased $37,000
due to a new marketing campaign for the Internet site, www.usabanc.com. Office
expense, travel and entertainment, and other miscellaneous expenses increased
$136,000 as a result of the increased efforts to attract additional customers
and travel expenses related to Internet strategic planning. Professional fees
increased $34,000 due to an increase in outside consulting and legal services
provided during the three months ended June 30, 1999.
INCOME TAX EXPENSE
Income tax expense recorded for the six months ended June 30, 1999 and 1998 was
$295,000 and $552,000 or 24.2% and 37.8%, effective tax rate, respectively. The
Company did not provide a tax provision for the second quarter ended June 30,
1999. The Company anticipates to spend significant financial resources on a
national marketing program, technology initiatives and human resources on its
Internet initiative that will result in an operating loss for calendar 1999 and
2000.
17
<PAGE>
LOAN PORTFOLIO
Loans receivable, (net of the allowance for loan losses, unearned fees and
origination costs and loans in process) were $114.7 million at June 30, 1999
compared to $102.1 million at December 31, 1998. Loans receivable represented
49.9% of total assets as of June 30, 1999 compared to 61.8% at December 31,
1998. The following table summarizes the loan portfolio of the Bank by loan
category and amount at June 30, 1999, compared to December 31, 1998:
<TABLE>
<CAPTION>
(Dollars in Thousands)
June 30, December 31,
------------------------- -------------------------
1999 % 1998 %
---------- ------ --------- -----
<S> <C> <C> <C> <C>
Real estate $ 114,416 97.6% $ 102,076 98.8%
Commercial and industrial 2,289 1.9 986 1.0
Consumer 562 0.5 243 0.2
--------- ----- --------- -----
Total loans, net of discount $ 117,267 100.0% $ 103,305 100.0%
========= ===== ========= =====
Loans in process (1,042) -
Deferred loan fees (189) (116)
Allowance for loan losses (1,325) (1,051)
--------- ---------
Net loans $ 114,711 $ 102,138
========= =========
</TABLE>
At June 30, 1999 the Bank's net discounted loan portfolio amounted to $51.6
million or 44.0% of total loans net of discount. These loans have a face value
of $57.1 million, reflecting a discount of $5.5 million or 9.6%. At December 31,
1998 the Bank's net discounted loan portfolio amounted to $51.7 million or 50.0%
of the total loans net of discount. These loans had a face value of $57.0
million, reflecting a discount of $5.3 million or 9.3% as of December 31, 1998.
The Bank has identified $1.5 million and $538,000 of discount as a cash discount
that will not be amortized into income as a yield adjustment until a final
resolution has been determined for the identified loans, at June 30, 1999 and
December 31, 1998, respectively.
On June 30, 1999, the net book value of nonaccrual loans was approximately $2.1
million compared to $1.8 million at December 31, 1998. At June 30, 1999 the
allowance for loan losses to non-performing loans, net of discount was 63.1%
compared to 53.7% at December 31, 1998. The Banks allowance for loan losses and
purchased discount to total loans was 5.57% and 5.85% at June 30, 1999 and
December 31, 1998, respectively.
The amount of troubled debt restructured loans totaled $1.5 million as of June
30, 1999 compared to zero at December 31, 1998. 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.
The following table summarizes the changes in the Bank's allowance for loan
losses for the period ended June 30, 1999, compared to December 31, 1998:
(Dollars in Thousands)
Six months Twelve months
ended June 30, ended December 31,
1999 1998
---------------- ------------------
Balance at beginning of period $1,051 $ 568
Provision for loan losses 250 510
Charge-offs - (43)
Recoveries 24 16
------ ------
Balance at end of period $1,325 $1,051
====== ======
18
<PAGE>
INVESTMENT PORTFOLIO
The following table presents the book values and estimated market values at June
30, 1999, and December 31, 1998, respectively, for each major category of the
Bank's investment securities:
(Dollars in Thousands)
June 30, 1999
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available-for-Sale
U.S. Government and agency
securities $ 899 $ -- $ (35) $ 864
Mortgage-backed securities 9,436 -- (251) 9,185
Corporate obligations 14,181 13 (171) 14,023
Trust preferred securities 6,799 37 (36) 6,800
Other Securities 2,554 112 (167) 2,499
------- ------- ------- -------
Total Available-for-Sale $33,869 $ 162 $ (660) $33,371
======= ======= ======= =======
Held to Maturity
U.S. Government and agency
securities $ 1,927 $ -- $ (73) $ 1,854
Mortgage-backed securities 4,595 197 (42) 4,750
Corporate obligations 13,823 33 (466) 13,390
Trust preferred securities 25,120 191 (418) 24,893
Municipal securities 3,168 -- (87) 3,081
------- ------- ------- -------
Total held-to-maturity $48,633 $ 421 $(1,086) $47,968
======= ======= ======= =======
19
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
December 31, 1998
---------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-Sale
Mortgage-backed securities $2,628 $ - $ (8) $2,620
Corporate obligations 1,322 13 (89) 1,246
Trust preferred securities 22,987 243 (605) 22,625
Other securities 1,957 - (59) 1,898
------- ---- ----- -------
Total available-for-sale $28,894 $256 $(761) $28,389
======= ==== ===== =======
Held-to-Maturity
U.S. Government and agency
securities $1,201 $ 1 $ - $1,202
Mortgage-backed securities 5,650 104 (1) 5,753
Municipal securities 3,166 69 - 3,235
Trust preferred securities 2,313 65 - 2,378
Other securities 3,425 14 (56) 3,383
------- ---- ----- -------
Total held-to-maturity $15,755 $253 $(57) $15,951
======= ==== ==== =======
</TABLE>
LIQUIDITY
The Company's primary sources of funds are customer deposits, non-retail
certificates of deposits, maturities of investment securities, sales of
"Available for Sale" securities, loan sales, loan repayments, net income,
advances from the FHLB, and the use of Federal Funds markets. Scheduled loan
repayments are relatively stable sources of funds while deposit inflows and
unscheduled loan prepayments may fluctuate. Deposit inflows and unscheduled loan
prepayments are influenced by general interest rate levels, interest rates
available on other investments, competition, economic conditions, and other
factors. Deposits are the Company's primary source of new funds. Total deposits
increased 48.6% to $170.0 million at June 30, 1999, compared to $114.4 million
as of December 31, 1998. The Bank has made a concerted effort to attract
deposits in the market area served by the Bank through competitive pricing of
its retail deposit products. Increases over the period were due to marketing
efforts, and new business development programs initiated by the Company.
Management anticipates that the Company will continue relying on customer
deposits, maturity of investment securities, sales of "Available for Sale"
securities, loan sales, loan repayments, net income, Federal Funds markets, and
FHLB borrowings to provide liquidity. Although deposit balances have shown
historical growth, such balances may be influenced by changes in the banking
industry in general, interest rates available on other investments, general
economic conditions, competition and other factors.
20
<PAGE>
The following table summarizes the composition of the Bank's deposit portfolio.
(Dollars in Thousands)
June 30, 1999 December 31, 1998
----------------------- -----------------------
Amount Percent Amount Percent
------ ------- ------ -------
Demand $ 1,849 1.09% $ 1,439 1.26%
NOW 1,521 0.89 846 0.74
Money Market 1,186 0.70 2,345 2.05
Savings and Passbook 20,781 12.23 5,281 4.62
Time 144,618 85.09 104,476 91.33
-------- ------ -------- ------
$169,955 100.00% $114,387 100.00%
======== ====== ======== ======
The following table summarizes the maturity composition of certificates of
deposit at June 30, 1999, compared to December 31, 1998:
<TABLE>
<CAPTION>
(Dollars in Thousands)
June 30, 1999 December 31, 1998
---------------------- ----------------------
<S> <C> <C> <C> <C>
Within one year $ 67,204 46.47% $ 47,067 45.05%
Over one year through two years 39,766 27.50 28,399 27.18
Over two years through three years 13,006 8.99 14,769 14.14
Over three years through five years 23,417 16.19 13,333 12.76
Over five years through ten years 1,225 0.85 908 0.87
-------- ------ -------- ------
$144,618 100.00% $104,476 100.00%
======== ====== ======== ======
</TABLE>
Borrowings remained constant at $30.0 million for June 30, 1999 and December 31,
1998. The Bank has five outstanding credit facilities with fixed rates and a
conversion feature to an adjustable rate in the amounts of $5.0 million, $5.0
million, $5.0 million, $5.0 million, and $10.0 million, respectively. These five
credit facilities have interest rates of 5.47%, 5.63%, 5.14%, 4.84%, and 5.37%,
and conversion dates of June 15, 2000, June 15, 2003, December 15, 1999,
September 30, 2003, and April 7, 2000, respectively. The Bank has available to
borrow from the FHLB an additional $13.8 million, if so desired. Borrowings may
be used on a short-term basis to compensate for reductions in other sources of
funds. Borrowings may also be used on a long-term basis to support expanded
lending activities and to match maturities or repricing intervals of assets. The
sources of such funds will be Federal Funds purchased and borrowings from the
FHLB.
CAPITAL RESOURCES
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 sanctions by
regulators that, if undertaken, could have a material effect on the financial
statements of the Bank. 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 are calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about component, 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). At June 30, 1999, the Company and the Bank meet all capital
adequacy requirements to which they are subject.
21
<PAGE>
At June 30, 1999, the Bank's actual and required minimum capital ratios were as
follows:
<TABLE>
<CAPTION>
To be well
For the Bank: Capitalized Under
- ------------- For Capital Prompt Corrective
(Dollars in Thousands) Adequacy Purposes Action Provisions
As of June 30, 1999 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 21,545 11.6% $ 14,836 8.0% $ 18,545 10.0%
Tier I Capital
(to Risk Weighted Assets) 20,220 10.9 7,418 4.0 11,127 6.0
Tier I Capital
(to Average Assets) 20,220 9.9 8,143 4.0 10,179 5.0
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $ 13,930 11.2% $ 9,987 8.0% $ 12,483 10.0%
Tier I Capital
(to Risk Weighted Assets) 12,879 10.3 4,994 4.0 7,490 6.0
Tier I Capital
(to Average Assets) 12,879 8.5 6,068 4.0 7,585 5.0
</TABLE>
On March 9, 1999, the Company issued $10.0 million of 9.5% junior subordinated
debentures to USA Capital Trust I, a Delaware business trust, in which the
Company owns all of the common equity. The trust issued $10.0 million of trust
preferred securities to investors, secured by the junior subordinated debentures
and the guarantee of the Company. The junior subordinated debentures mature in
2029. The trust preferred securities are Tier I eligible except, in accordance
with Federal Reserve Board regulations, the Company is limited to recognizing
$4.5 million as Tier I capital, such that no more than 25% percent of Tier I
capital is comprised of trust preferred securities. The Company has invested
$6.0 million of the proceeds in BankPhiladelphia.
At June 30, 1999, the Company's actual and required minimum capital ratios were
as follows:
For the Company:
- ---------------- For Capital
(Dollars in Thousands) Adequacy Purposes
As of June 30, 1999 Amount Ratio Amount Ratio
------ ----- ------ -----
Total Capital
(to Risk Weighted Assets) $26,064 13.8% $15,115 8.0%
Tier I Capital
(to Risk Weighted Assets) 19,676 10.4 7,558 4.0
Tier I Capital
(to Average Assets) 19,676 9.7 8,087 4.0
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $15,566 12.1% $10,317 8.0%
Tier I Capital
(to Risk Weighted Assets) 13,782 10.7 5,159 4.0
Tier I Capital
(to Average Assets) 13,782 8.7 6,319 4.0
22
<PAGE>
PART II
Item 1. Legal Proceedings
U.S. Bank National Association, et al. Has filed an action against the Company
alleging, inter alia, servicemark infringement. The Company has independent
counsel to investigate the claim and such investigation has concluded that the
claim has no merit. The Company therefore intends to vigorously defend any
further action which may be pursued by U.S. Bank National Association.
Item 2. Changes in Securities
On March 9, 1999, USA Capital Trust I, a Delaware business trust established by
the Company (the "Trust"), sold $10,000,000 in liquidation amount of 9.50%
Capital Securities, representing preferred beneficial interests in the assets of
the Trust, to a limited number of qualified institutional buyers and
institutional accredited investors in a private placement pursuant to Rule 144
and Rule 506 of Regulation D promulgated under the Securities Act of 1933.
Sandler O'Neill & Partners, L.P. received a fee of $350,000 for its services as
placement agent in the transaction. The Trust contemporaneously sold $300,000 in
liquidation amount of Common Securities of the Trust to the Company. The Trust
used the proceeds of the offering of the Capital Securities and the Common
Securities to purchase 9.50% junior subordinated deferrable interest debentures
issued by the Company in the principal amount of $10,300,000 (the "Junior
Subordinated Debentures"). The Trust will pay semi-annual distributions to the
holders of Capital Securities in amounts equal to the interest payments made by
the Company with respect to the Junior Subordinated Debentures. The obligations
of the Trust to pay distributions on the Capital Securities and the Common
Securities have been fully and unconditionally guaranteed by the Company, to the
extent that the Trust has funds available for distribution. The first
distribution will be payable by the Trust on September 15, 1999.
On July 21, 1999, the Company has granted Earthlink Network, Inc., ("Earthlink")
120,000 warrants to purchase Class A common shares of USABanc.com, Inc. These
warrants carry a strike price of $12.00. Eighty thousand of these warrants can
be exercised on or after July 22, 2000, with the remaining forty thousand being
exercisable on or after July 22, 2001.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
The following exhibits are filed as part of this report. Exhibit
numbers correspond to the exhibits required by Item 601 of Regulation S-B.
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Articles of Incorporation of USABanc.com, Inc. as
amended*
3.2 Bylaws of USABanc.com, Inc.*
4.1 Indenture of USABanc.com , Inc. relating to the Junior Subordinated
Debentures**
4.2 Form of Certificate of Exchange Junior Subordinated Debenture**
4.3 Form of Certificate of Original Junior Subordinated Debenture**
4.4 Certificate of Trust of USA Capital Trust I**
4.5 Amended and Restated Declaration of Trust of USA Capital Trust I**
4.6 Form of Common Security**
4.7 Form of Exchange Capital Security Certificate**
4.8 Form of Certificate of Original Capital Security**
4.9 Form of Exchange Guarantee of USABanc.com, Inc. relating to the Exchange
Capital Securities**
10 Registration Rights Agreement among USABanc.com, Inc., USA Capital Trust I
and Sandler O'Neill & Partners, L.P.**
11 Computation of Per Share Earnings (Included in Financial Statements on Page
8 of this report)
27 Financial Data Schedule
- -------------------------
* Incorporated by reference from the Registration Statement on Form SB-2 of
USABanc.com, as amended, Registration No. 33-92506.
** Incorporated by reference from the Registration Statement on Form S-4 of
USABanc.com filed on May 12, 1999.
(B) Reports on Form 8-K
On March 16, 1999, the Company filed a current report on Form 8-K to
report the event described in Item 2 of this report.
24
<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 Pennsylvania.
USABanc.com, Inc.
Date: August 11, 1999 By: /s/ Kenneth L. Tepper
-------------------------------
Kenneth L. Tepper,
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 1999 By: /s/ Brian M. Hartline
------------------------------------
Brian M. Hartline,
Chief Financial Officer
(Principal Accounting and Financial Officer)
25
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE REPORT TO WHICH THIS SCHEDULE RELATES AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
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