<PAGE>
As filed with the Securities and Exchange Commission on September 29, 1999.
Registration No. 333-83041
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
AMENDMENT NO. 2 TO
Form SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------
USABANCSHARES.COM, INC.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Pennsylvania 6022 23-2806495
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1535 Locust Street
Philadelphia, Pennsylvania 19102
(215) 569-4200
(Address and telephone number of principal executive offices
and principal place of business)
Mr. Kenneth L. Tepper,
Chief Executive Officer and President
USABancShares.com, Inc.
1535 Locust Street
Philadelphia, Pennsylvania 19102
(215) 569-4200
(Name, address and telephone number of agent for service)
------------
Copies to:
Ronald J. Frappier, Esq. Norman B. Antin, Esq.
Jenkens & Gilchrist, Jeffrey D. Haas, Esq.
a Professional Corporation Elias, Matz, Tiernan & Herrick L.L.P.
1445 Ross Avenue, 734 15th Street N.W.
Suite 3200 12th Floor
Dallas, Texas 75202 Washington, D.C. 20005
(214) 855-4500 (202) 347-0300
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<PAGE>
------------
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed
Title of Each Maximum
Class of Securities Aggregate Amount of
to be Registered Offering Price(1)(2) Registration Fee(3)
- --------------------------------------------------------------------------------
Common Stock, $1.00 par
value ................ $34,500,000 $9,660
================================================================================
(1) In accordance with rule 457(o) under the Securities Act of 1933, as
amended, the number of shares being registered and the proposed maximum
offering price per share are not included in this table.
(2) Estimated solely for purposes of calculating the registration fee.
(3) Previously paid.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell securities, and we are not solicitating offers to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 1999
PROSPECTUS
1,400,000 Shares
[GRAPHIC OMITTED]
Common Stock
(par value, $1.00 per share)
----------------
This is an Offering of 1,400,000 shares of common stock of
USABancShares.com, Inc.
USABancShares.com's common stock is quoted on the Nasdaq SmallCap Market
under the symbol "USAB." Our common stock has been approved for quotation on the
Nasdaq National Market under the same symbol, effective September 28, 1999. On
September 9, 1999, the last reported sale price of our common stock was $8.25
per share.
See "Risk Factors" beginning on page 9 to read about risks that you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
The shares of common stock offered are not deposits, savings accounts or
other obligations of a bank or savings association and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
================================================================================
Per Share Total
- --------------------------------------------------------------------------------
Initial price to public ...................... $ $
- --------------------------------------------------------------------------------
Underwriting discount ........................ $ $
- --------------------------------------------------------------------------------
Proceeds to USABancShares.com before expenses $ $
================================================================================
The underwriters may, under certain circumstances, purchase up to an
additional 450,000 shares of common stock from USABancShares.com at the initial
price to public less the underwriting discount.
----------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
----------------
Sandler O'Neill & Partners, L.P.
----------------
The date of this Prospectus is , 1999.
<PAGE>
PROSPECTUS SUMMARY
This summary does not contain all the information you should consider
before investing in our common stock. You should read the following summary
together with the more detailed information and financial statements and
related notes contained elsewhere in this prospectus. Unless otherwise
indicated, the information in this prospectus assumes that the underwriters'
over-allotment option will not be exercised.
USABancShares.com, Inc.
USABancShares.com, Inc. was the first "dot com" bank holding company in the
country. The decision to include "dot com" in our new name heralded management's
commitment to its vision of evolving into a fully functional Internet bank
dedicated to becoming a leading provider of financial products and services over
the Internet. We believe the financial services industry has one of the highest
degrees of functionality over the Internet. We will strive to provide the
ultimate application for Internet users through our Website,
www.usabancshares.com. To achieve our objective, we have created a dynamic
Internet banking platform that offers our customers a convenient, secure,
cost-efficient and user-friendly medium for financial products and services,
together with an entertaining on-line experience that we believe no other
financial based site provides. We have established and are continuing to pursue
strategic alliances and marketing programs with leading Internet entities to
attract new USABancShares.com customers. We currently offer on-line
interest-bearing checking accounts, statement savings accounts, certificates of
deposit, electronic bill payment services, overdraft protection, ATM and debit
cards, mortgage loans, and credit cards and on-line trading through our Website.
In addition to offering traditional banking products and services, our site
provides users portal applications such as live news feeds and stock quotes, as
well as links to other sites. Our Website also features news and commentary via
usaTV, a streaming media application, which offers customers and users a unique
opportunity to get to know USABancShares.com live over the Internet.
We are executing our strategy of becoming a leading provider of financial
products and services over the Internet by:
o Pursuing strategic alliances and customer incentive programs. We have
strategic marketing agreements with several leading Internet entities
which provide us access to customers of established Internet companies. We
also have strategic alliances with other Internet entities that provide
hardware and software which give us access to customers at the "point of
sale." Specifically, we have formed strategic alliances with (i) Earthlink
Network, Inc., the seventh largest Internet service provider ("ISP"),
under a two-year agreement by which its subscribers (currently 1.5
million) will have direct access to a co-branded USABancShares.com site
providing both on-line banking and brokerage services; (ii) UltraStar,
Inc. under a one-year agreement by which its brand specific ISP's such as
www.yankees.com, www.orioles.com and www.DavidBowie.com will promote and
offer exclusive online banking and brokerage services by USABancShares.com
and (iii) Webcitizen.com, previously known as Moffett, a regional ISP,
under a one-year agreement by which its current 50,000 customers and any
new customers will have exclusive access to USABancShares.com. We have
also entered into agreements with Systemax, Inc., which gives
USABancShares.com the exclusive right to be on 150,000 desktop interfaces
via a hotlinked icon on computers being shipped during the fourth quarter
of 1999, and Microworkz.com Computer Corporation, which will allow us to
be the exclusive financial service provider via a hotlinked icon on 10,000
units of their latest computer system iToaster, designed exclusively for
Internet users. Under our agreements bounties are generally payable by us
for the first year of point of sale advertising. On September 23, 1999,
EarthLink entered into a merger agreement with MidSpring Enterprises, Inc.
It is anticipated that when, and if, the merger is completed the combined
company will then be the second largest ISP with 3.0 million customers.
These initial costs of our strategic alliances and customer retention
programs will contribute to our anticipated losses from operations in 1999
and 2000. Thereafter, we expect to earn revenues from new customer
accounts, although there can be no
3
<PAGE>
assurances that sufficient revenues will be generated. We intend to
continue to actively pursue additional strategic alliances, implement
several innovative customer acquisition and retention programs designed
for new and existing USABancShares.com customers and co-brand these
programs with select USABancShares.com partners.
o Expanding our national marketing campaign. We intend to continue to
expand our brand awareness through our national marketing campaign. This
campaign includes Internet advertising through portals such as Yahoo! and
Excite, television campaigns on networks such as CNBC and MSNBC,
sponsorship of nationally televised special events on networks such as
VH-1, radio advertising such as our spots on the Howard Stern Show, and
newspaper and magazine advertising in national publications such as the
Wall Street Journal, New York Times and Fast Company. The cost of our
marketing efforts will also contribute to our expected losses in 1999 and
2000. As we increase our market share and become a leading provider of
financial products and services during this early stage of Internet
banking, we expect our revenues to increase and to return to profitability
in 2001, although there can be no assurance that we will return to
profitability within such time frame.
o Establishing the USABancShares.com Website as a leading and comprehensive
source for financial services on the Internet. We have created our
Internet banking platforms to allow our customers to choose between
platforms using either Hypertext Mark-up Language, more commonly known as
"HTML," or Macromedia's innovative "Flash" technology. We were certified
to begin offering our Internet banking and brokerage products and services
through the HTML Website on July 15, 1999, and we expect to begin offering
our products and services through the "Flash" Website in the fourth
quarter of 1999. We believe the "Flash" platform will significantly
enhance our customers' experience on our Website and differentiate us from
other Internet banks. Additionally, because our "Flash" platform was
developed in anticipation of the greater bandwidth that is now widely
available, we will be able to deliver our services at the speed expected
by today's on-line user. We believe www.usabancshares.com's unique
audio/visual interface will attract users who demand not only efficient
and convenient financial services, but entertaining content as well. We
intend to attract customers by:
o Offering a broad selection of financial products and services.
o Offering attractive interest rates and low or no fees.
o Building national brand awareness through strategic alliances and
extensive marketing efforts.
o Offering superior service, convenience and ease of access.
o Offering interesting and entertaining content through a real-time
interactive medium.
o Offering advanced security measures.
o Generating sponsorship and advertising revenues. We intend to establish
advertising relationships by offering advertising opportunities to leading
brand marketers and merchants in traffic intensive areas of the
USABancShares.com network. These merchants will receive exposure through
banner advertising combined with promotional offers in exchange for which
we will collect a fee based on various arrangements, such as cost per
click for each new visit to the third-party Website made through our
network, and/or a share of revenues from each sale to USABancShares.com
users.
4
<PAGE>
o Expanding our Lending Efforts. Since our acquisition of vBank in November
1995, we have pursued an aggressive growth strategy, characterized by
purchases of pools of primarily performing loans at a discount secured by
single-family residential, multi-family residential and commercial
properties. Our net loan portfolio has grown from $7.0 million at December
31, 1995 to $114.7 million at June 30, 1999. On July 31, 1999, we
purchased an $88.3 million loan pool consisting of adjustable-rate
commercial real estate and multi-family residential loans. In addition, on
August 26, 1999, we purchased an $11.0 million loan pool consisting
primarily of adjustable-rate commercial real estate loans. We intend to
increase our originations of commercial real estate and commercial
business loans. We also intend to continue to purchase primarily
performing loan pools. These loans may consist of multi-family residential
loans, commercial property loans and one-to-four family residential
mortgage loans.
International Data Corporation, an independent market research firm,
reports that the number of worldwide Internet users is projected to grow from
approximately 97 million in 1998 to approximately 320 million by 2002.
International Data Corporation forecasts that total worldwide commerce on the
Internet will grow from an estimated $32.4 billion in 1997 to an estimated $1.0
trillion in 2003. We intend to capitalize on the increasing consumer use of the
Internet by aggressively marketing our Internet banking platform on a national
basis. Although our origin is in Philadelphia as a traditional "brick and
mortar" bank, we believe we can provide financial services more efficiently and
economically to customers nationally through electronic delivery channels
rather than through further expansion of traditional "brick and mortar" branch
network delivery facilities. Through our Internet banking operations, our
customers are able to access account data and information about products and
services we offer and conduct banking activities 24-hours-a-day every day of
the year from anyplace.
USABancShares.com is a $230.0 million financial institution with $114.7
million in loans and $170.0 million in deposits at June 30, 1999. Our executive
offices are located at One Lincoln Plaza, Philadelphia, Pennsylvania.
USABancShares.com's toll free telephone number is 877-482-2650 and our Website
address is www.usabancshares.com. The information contained on our Website is
not incorporated by reference into this prospectus.
Except as otherwise indicated, references to "we," "our," and
"USABancShares.com" generally refer to USABancShares.com, Inc. (formerly
USABancShares, Inc. and USABanc.com, Inc.) and its subsidiaries on a
consolidated basis. References to "vBank" refer to USABancShares.com's
wholly-owned bank subsidiary, vBank, a state savings bank (formerly
BankPhiladelphia). References to our "common stock" refer to
USABancShares.com's Class A common stock, unless otherwise indicated.
References to "FHLB" are to the Federal Home Loan Bank of Pittsburgh and
references to "FDIC" are to the Federal Deposit Insurance Corporation. Except
as otherwise indicated, the information in this prospectus (x) has been
adjusted to reflect (1) a 33% stock dividend paid on July 18, 1997 to
shareholders of record as of July 1, 1997, (2) a 33% stock dividend paid on
August 17, 1998 to shareholders of record as of August 3, 1998, and (3) a
two-for-one stock split effected in the form of a dividend paid on June 15,
1999 to shareholders of record as of June 1, 1999; (y) assumes that the
underwriters do not exercise their over-allotment option; and (z) does not give
effect to any change as a result of the Offering in the exercise price of
currently outstanding warrants to purchase shares of our common stock or the
number of shares of common stock which may be acquired upon the exercise of
such warrants. All trademarks or registered trademarks or service marks
appearing herein other than USABancShares.com are trademarks or registered
trademarks or service marks of the respective companies that use them.
5
<PAGE>
The Offering
The following information assumes that the underwriters do not exercise
the option granted by USABancShares.com to purchase additional shares in the
Offering. See "Underwriting." The amount of shares to be outstanding after the
Offering excludes 216,460 shares issuable upon the conversion of our Class B
common stock and 1,508,503 shares issuable upon the exercise of outstanding
options and warrants as of September 28, 1999. See "Description of Capital
Stock."
Common Stock offered..... 1,400,000 shares
Common Stock to be
outstanding after the
Offering................ 5,414,784 shares (1)
Estimated net proceeds... $
Use of proceeds.......... To invest additional capital in vBank to finance
our national marketing campaign and to fund the
infrastructure necessary for the growth of our
Internet banking operations, to maintain our
well-capitalized status and for general corporate
purposes. See "Use of Proceeds."
Risk Factors............. Prior to making an investment decision, you should
carefully consider all of the information in this
prospectus and, in particular, you should evaluate
the risk factors set forth under the caption "Risk
Factors" beginning on page 9.
Nasdaq National Market
symbol.................. USAB
- -------------
(1) Based on 4,014,784 shares outstanding at September 28, 1999.
6
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Set forth below are the selected consolidated financial and other data of
USABancShares.com. This financial data is derived in part from, and it should
be read in conjunction with, USABancShares.com's consolidated financial
statements and related notes included in this prospectus beginning on page F-1.
USABancShares.com was formed on March 14, 1995. All financial information is
derived from our consolidated financial statements. Interim financial results,
in the opinion of our management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of our results
of operations and financial position. The results of operations for an interim
period are not indicative of results that may be expected for a full year or
any other interim period.
<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------------------------
1999 1998
------------------ -------------
(Dollars in Thousands)
<S> <C> <C>
Selected Financial Condition Data:
Total assets ....................................... $ 230,000 $ 134,688
Loans receivable, net .............................. 114,711 79,663
Securities (1) ..................................... 82,004 36,322
Deposits ........................................... 169,955 90,065
Borrowings (2) ..................................... 33,399 30,557
Guaranteed Preferred Beneficial
Interests in Subordinated Debt .................... 10,000 --
Stockholders' equity ............................... 14,032 13,113
Non-performing assets, net of discount (3) ......... 2,083 365
Book value per share (6) ........................... $ 3.32 $ 3.11
Selected Operations Data:
Total interest income .............................. $ 8,549 $ 5,532
Total interest expense ............................. 4,746 2,705
---------- -----------
Net interest income ................................ 3,803 2,827
Provision for loan losses .......................... 250 160
---------- -----------
Net interest income after provision
for loan losses ................................... 3,553 2,667
Total non-interest income .......................... 569 200
Total non-interest expense ......................... 2,903 1,408
---------- -----------
Income before income taxes ......................... 1,219 1,459
Income tax provision ............................... 295 552
---------- -----------
Net income (loss) .................................. $ 924 $ 907
========== ===========
Per Share Data:
Net income (loss) per share (diluted) (6) .......... $ 0.21 $ 0.23
========== ===========
Weighted average number of shares
outstanding (6) ................................... 4,231,244 3,210,540
Weighted average number of shares
(diluted) (6) ..................................... 4,313,040 3,994,972
Performance Ratios (8):
Return (loss) on average total assets .............. 0.99% 1.62%
Return (loss) on average stockholders' equity ...... 14.57 19.63
Net interest margin (9) ............................ 4.28 5.30
Interest rate spread (9) ........................... 4.01 4.66
Efficiency ratio (10) .............................. 68.47(11) 47.28
Non-interest expense to average total assets ....... 3.11(11) 2.51
Average interest-earning assets to average
interest-bearing liabilities ...................... 105.21 112.68
Asset Quality Ratios:
Non-performing loans, net of discount, to total
loans, net of discount (3) ........................ 1.78 0.45
Non-performing assets, net of discount, to total
assets (3) ........................................ 0.91 0.27
Allowance for loan losses to total loans, net of
discount .......................................... 1.13 0.89
Allowance for loan losses and purchase
discount as a percentage of total loans ........... 5.84 6.97
Allowance for loan losses to total
non-performing loans, net of discount (3) ......... 63.61 197.26
Capital Ratios (13):
Stockholders' equity to assets ..................... 6.1 9.7
Tier 1 leverage capital ratio ...................... 9.7 9.8
Tier 1 risk-based capital ratio .................... 10.4 12.6
Total risk-based capital ratio ..................... 13.8 13.3
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995
----------------- ----------------- ------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ....................................... $ 165,106 $ 89,326 $ 38,146 $ 25,786
Loans receivable, net .............................. 102,138 56,002 16,530 6,997
Securities (1) ..................................... 44,144 24,454 16,325 10,068
Deposits ........................................... 114,387 70,474 27,973 20,799
Borrowings (2) ..................................... 35,305 12,638 5,050 --
Guaranteed Preferred Beneficial
Interests in Subordinated Debt .................... -- -- -- --
Stockholders' equity ............................... 13,597 5,366 4,895 4,659
Non-performing assets, net of discount (3) ......... 2,022(4) 287 191 --(5)
Book value per share (6) ........................... $ 3.21 $ 2.48 $ 2.32 $ 2.21
Selected Operations Data:
Total interest income .............................. $ 12,352 $ 4,879 $ 2,942 $ 171
Total interest expense ............................. 6,454 2,530 1,225 96
---------- ---------- ----------- ----------
Net interest income ................................ 5,898 2,349 1,717 75
Provision for loan losses .......................... 510 415 125 50
---------- ---------- ----------- ----------
Net interest income after provision
for loan losses ................................... 5,388 1,934 1,592 25
Total non-interest income .......................... 759 314 103 2
Total non-interest expense ......................... 3,700 2,457(7) 1,501 305
---------- ---------- ----------- ----------
Income before income taxes ......................... 2,447 (209) 194 (278)
Income tax provision ............................... 957 17 68 --
---------- ---------- ----------- ----------
Net income (loss) .................................. $ 1,490 $ (226) $ 126 $ (278)
========== ========== =========== ==========
Per Share Data:
Net income (loss) per share (diluted) (6) .......... $ 0.35 $ (0.10) $ 0.06 $ (0.14)
========== ========== =========== ==========
Weighted average number of shares
outstanding (6) ................................... 3,971,672 2,164,727 2,112,357 1,920,325
Weighted average number of shares
(diluted) (6) ..................................... 4,239,638 2,164,727 2,112,357 1,920,325
Performance Ratios (8):
Return (loss) on average total assets .............. 1.16% (0.09)% 0.36% (1.29)%
Return (loss) on average stockholders' equity ...... 12.81 (1.10) 2.57 (13.00)
Net interest margin (9) ............................ 4.87 4.53 6.11 2.07
Interest rate spread (9) ........................... 4.54 3.68 5.29 1.68
Efficiency ratio (10) .............................. 58.93 79.35 82.76 399.62
Non-interest expense to average total assets ....... 2.88 1.93 2.35 1.43
Average interest-earning assets to average
interest-bearing liabilities ...................... 106.14 117.50 118.83 107.44
Asset Quality Ratios:
Non-performing loans, net of discount, to total
loans, net of discount (3) ........................ 1.89 0.50 1.12 --(5)
Non-performing assets, net of discount, to total
assets (3) ........................................ 1.22 0.32 0.50 --(5)
Allowance for loan losses to total loans, net of
discount .......................................... 1.02 1.01 1.07 0.84
Allowance for loan losses and purchase
discount as a percentage of total loans ........... 5.85 8.88 10.17 5.89
Allowance for loan losses to total
non-performing loans, net of discount (3) ......... 53.72(12) 197.96 95.39 --(5)
Capital Ratios (13):
Stockholders' equity to assets ..................... 8.2 6.0 12.8 18.1
Tier 1 leverage capital ratio ...................... 8.5 5.4 12.9 14.9
Tier 1 risk-based capital ratio .................... 10.3 7.0 24.6 17.1
Total risk-based capital ratio ..................... 11.2 7.9 25.6 40.1
</TABLE>
(Footnotes on next page)
7
<PAGE>
- -------------
(1) Includes securities classified as held-to-maturity and available for sale.
(2) Consists of FHLB advances and collateralized borrowings.
(3) Non-performing loans consist of non-accrual loans and accruing loans 90
days or more overdue. Non-performing assets consist of non-performing
loans and other real estate owned.
(4) The increase in non-performing assets during the year ended December 31,
1998 was due, in large part, to a single commercial real estate loan which
became non-performing during the third quarter of 1998. See Note 11. See
also "Business--Asset Quality--Delinquent Loans and Non-performing
Assets."
(5) vBank had no non-performing loans or assets at December 31, 1995.
(6) 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, and has been calculated based on the weighted average
number of shares outstanding during the period, assuming the conversion of
the shares of Class B common stock into shares of common stock. See
"Certain Relationships and Related Transactions."
(7) Includes a one-time charge of $344,000 during the fourth quarter of 1997
as a result of the recognition of compensation expense due to the
mandatory conversion of our Class B common stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(8) With the exception of end of period ratios, all ratios for periods ending
prior to 1999 are based on average monthly balances and are annualized
where appropriate, and all ratios for periods ending after 1998 are based
on average daily balances.
(9) Net interest margin represents net interest income as a percentage of
average interest-earning assets, and interest rate spread represents the
difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities.
(10) Efficiency ratio represents non-interest expense as a percentage of the
aggregate of net interest income and non-interest income (less
gains/losses on sales of assets and other non-recurring items).
(11) Non-interest expense increased approximately $1.5 million during the six
months ended June 30, 1999 compared to the six months ended June 30, 1998
primarily due to increased costs incurred for advertising and marketing
and compensation expenses associated with the development and launch of
our Internet strategy causing these ratios to increase.
(12) The significant decline in this ratio during the year ended December 31,
1998 was impacted by a single acquired commercial real estate loan.
Management believes that this loan does not present a significant risk of
loss to vBank on the basis of a current appraisal on the real estate
securing the loan, the loan-to-value ratio thereon, the purchase discount
and the specific reserve applied to such loan. As a general rule, in
connection with vBank's purchase of loan pools, a portion of the
discounted purchase price for each loan is not accreted into income but,
rather, is identified as a cash discount and is not amortized into income
until final resolution or collection of principal and interest on the loan
in question. See "Risk Factors--Our Yield on Loans Purchased at a Discount
is Uncertain" and "Business--Asset Quality--Delinquent Loans and
Non-performing Assets."
(13) The ratios are presented on a consolidated basis. For information on
USABancShares.com's and vBank's regulatory capital requirements, see
"Regulation of USABancShares.com and vBank."
8
<PAGE>
RISK FACTORS
You should consider carefully the following risks before making a decision
to buy our common stock. If any of the following risks actually occur, our
business, financial condition and/or results of operations would likely suffer.
In such case, the trading price of our common stock could decline, and you may
lose all or part of the money you paid to buy our common stock. The risk
factors below do not necessarily appear in order of importance. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem
immaterial may also impair our business operations.
We expect to incur substantial losses and we may not achieve or maintain
profitability
Although we are currently profitable, we have recently expended
significant resources on technology, Website development, marketing, hiring of
personnel and other startup costs related to the development and operation of
our Internet banking platform. This resulted in a $877,000 increase in
advertising and marketing expenses and compensation costs for the six months
ended June 30, 1999 compared to the first six months of 1998. We expect to
spend approximately $5.0 million to promote our Internet banking operations
during the second half of 1999, and we expect to spend an additional $10
million over the next two years. We intend to continue to expend significant
financial and management resources in upgrading our internal control systems,
customer service systems and financial reporting systems to accommodate the
growth of USABancShares.com. As a result of these efforts, we expect to incur
substantial losses in 1999 and 2000. If we are successful in executing our
business plan, we expect to be profitable in 2001, although there can be no
assurance that we will return to profitability within such time frame. We
intend to achieve profitability by obtaining on-line banking market penetration
through strategic alliances and brand awareness, thus allowing us to acquire
new customer accounts. To the extent that increases in operating expenses
precede or are not subsequently followed by increased revenues, our business,
financial condition, results of operations, capital levels and cash flows will
be materially adversely affected. There can be no assurance that our revenues
will increase or even continue at their current level or that we will achieve or
maintain profitability or generate positive cash flow from operations in future
periods. Because of these projected operating losses, the market price of our
common stock could decline. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We face strong competition
The financial services industry is highly competitive and is rapidly
evolving, both on-line and through traditional channels. In implementing our
Internet strategy, we face strong competition from more established providers
of direct-marketed savings and investment products, such as PNC Bank, First
Union, E-Trade, Siebert Financial and other Internet-based financial
institutions, such as Net.B@nk, Telebanc and Wingspan Bank. We also face
competition from traditional banks and non-bank financial institutions, many of
which are adopting or have adopted their own Internet strategies. Additionally,
new competitors and competitive factors are likely to emerge, particularly in
light of the rapid development of the Internet and electronic commerce and the
relatively low barriers to entry. As a consequence, other financial services
companies may be able to adopt strategies similar to ours with relative ease.
Most of our competitors have financial and other resources greater than ours
and have other competitive advantages over us. There can be no assurance that
we will be able to successfully compete with our competitors.
Internet banking customers may be more price sensitive and more willing to
try new technologies than customers of traditional financial services firms,
which rely on branches and face-to-face customer service. Consequently, the
following competitive factors are of particular importance to the successful
execution of our Internet banking strategy and our profitability:
o price competition for deposits and borrowings;
o introduction of new products by us and our competitors;
o changes in the mix of products and services we sell; and
o the level of use of the Internet for banking services and electronic
commerce generally.
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We may not succeed in implementing our Internet banking strategy
Our success depends on our ability to execute our Internet banking
strategy. We were certified to begin offering our Internet banking and
brokerage products and services through our Website on July 15, 1999. Due to
our limited operating history, it is difficult to evaluate the effectiveness of
our Internet banking strategy. We may not succeed in implementing our business
strategy and, even if we do succeed, such strategy may not have the favorable
impact on operations that we anticipate. We may not be able to manage
effectively the expansion of our Internet bank operations or achieve the rapid
execution necessary to fully capitalize on the market for our electronic
services or offset the significant expenditures we are incurring to implement
our Internet banking strategy. In addition, the market for financial products
and services through the Internet is new and evolving, and the degree to which
customers will use it for their financial transactions is not yet fully
determined. If we are unable to manage growth effectively, or to otherwise
implement our business strategy, our business, financial condition, results of
operations and cash flows could be materially adversely affected.
Our success depends on the continued growth in use and commercial viability of
the Internet
Our future success depends substantially on continued growth in use of the
Internet in general and for commercial and financial services transactions in
particular. The Internet is a relatively new commercial marketplace and may not
continue to grow. Consequently, Internet banking may not become as widely
accepted as traditional forms of banking. Critical issues concerning the
commercial use of the Internet such as reliability, cost, ease of access,
quality of service and security will impact the growth of Internet use. If
Internet use does not continue to grow, we may not succeed in implementing our
business strategy and our business, financial condition, results of operations
and cash flows could be materially adversely affected.
Additionally, if the number of Internet users and the level of use
continues to grow, the Internet's technical infrastructure may become unable to
support the demands placed upon it. Furthermore, third party vendors might not
be able to timely and adequately develop the necessary technical infrastructure
for significant increases in electronic commerce, such as a reliable network
backbone, or introduce performance improvements, such as high-speed modems. The
Internet could also lose its viability due to delays in the development or
adoption of new standards and protocols required to handle increased levels of
activity or due to increased governmental regulation. Changes in or
insufficient availability of telecommunications services could produce slower
response times and adversely affect use of the Internet. Furthermore, the
general public's security concerns regarding the transmittal of confidential
information, such as credit card numbers, over the Internet might persist or
even worsen. Issues like these could lead to resistance against acceptance of
the Internet as a viable commercial marketplace. To the extent the Internet's
technical infrastructure or security concerns adversely affect its potential
growth, our business, financial condition, results of operations and cash flows
could be materially adversely affected.
Network and computer systems could fail, which could adversely affect our
business
During September 1999, we completed a conversion of our Intrieve
data processing system to EDS-Miser III. Our computer systems and network
infrastructure could be vulnerable to unforeseen problems. Because we intend to
conduct a substantial portion of our business over the Internet and outsource
several critical functions to third parties, our operations depend on our
ability, as well as that of our third-party service providers, to protect our
computer systems and network infrastructure against damage from fire, power
loss, telecommunications failure, physical break-ins or similar catastrophic
events. For example, from September 17, 1999, through September 20, 1999 due to
flooding from Hurricane Floyd in Electronic Data Systems' Rochelle Park, New
Jersey facility housing servers and network computers that support our Internet
access, our customers were unable to access their accounts. Customers may become
dissatisfied by any system failure that interrupts our ability to provide our
services to them. Sustained or repeated system failures would reduce the
attractiveness of the electronic banking services which we provide. Slower
response time or system failures may also result from straining the capacity of
our software or hardware due to an increase in the volume of services delivered
through our servers. To the extent that we do not effectively address any
capacity constraints or system failures, our customers could seek other
providers of banking services. Any damage or failure that causes interruptions
in our operations, such as the interruption caused by Hurricane Floyd, could
materially adversely affect our business, financial condition, results of
operations and cash flows. See "Business--Security."
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Our security could be breached, which could damage our reputation and deter
customers from using our services
We must protect our computer systems and network from physical break-ins,
security breaches and other disruptive problems caused by the Internet or other
users. Computer break-ins could jeopardize the security of information stored
in and transmitted through our computer systems and network, which would likely
adversely affect our ability to retain or attract customers, could damage our
reputation and could subject us to litigation. Although we rely on encryption
and authentication technology to provide the security and authentication
necessary to effect secure transmissions of confidential information, and
although we intend to continue to implement security technology and establish
operational procedures to prevent break-ins, damage and failures, these
security measures may fail. Advances in computer capabilities, new discoveries
in the field of cryptography or other developments could result in a compromise
or breach of the algorithms vBank and its third-party service providers use to
protect customer transaction data. If any compromise of our security were to
occur, it could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
We are part of a rapidly evolving electronic commerce market. Market
acceptance of Internet banking depends substantially on widespread adoption of
the Internet for general commercial and financial services transactions. If
another provider of commercial services through the Internet were to suffer
damage from a physical break-in, security breach or other disruptive problem
caused by the Internet or other users, the growth and public acceptance of the
Internet for commercial transactions could suffer. Such an event could deter
potential customers of vBank or cause customers to leave vBank and thereby
materially adversely affect our business, financial condition, results of
operations and cash flows.
Rapidly changing technologies may cause us to delay introduction of new
products, services and enhancements, which may result in a loss of existing
customers or a failure to attract new customers
Our future success will depend on our ability to adapt to rapidly changing
technologies. We also will have to enhance existing products and services and
develop and introduce a variety of new products and services to address our
customers' changing demands. If we are unable to develop and bring additional
products and services to market in a timely manner, we could lose market share
to competitors who are able to offer these services, which could materially
adversely affect our business, financial condition, results of operations and
cash flows.
We outsource many essential services to third-party providers who may terminate
their agreements with us, resulting in interruptions to our Internet banking
operations
We receive essential technical and customer service support from
third-party providers. We outsource Webhosting, check processing, check
imaging, electronic bill payment, Internet processing, Internet software,
statement rendering services and other additional services to third party
vendors. Specifically, we receive essential Webhosting, electronic bill payment
and core systems processing services on an outsourced basis from Electronic
Data Systems Corporation ("EDS"). Our agreements with each service provider are
generally cancelable without cause by either party upon specified notice
periods. If one of our third-party service providers terminates its agreement
with us and we are unable to replace such provider with another service
provider, our operations may be interrupted. If an interruption were to
continue for a significant period of time, our business, financial condition,
results of operations and cash flows could be materially adversely affected.
If a competitor successfully challenges our ability to use the name
USABancShares.com or vBank, significant financial resources in developing brand
awareness would be lost
Our success in introducing new financial products and services through the
Internet and attracting new customers will depend in part upon our ability to
increase the brand name awareness of USABancShares.com,
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vBank and other names related to us. We are making a substantial investment in
the promotion and marketing of the USABancShares.com and vBank brands. We own a
federal registration for the servicemark USABancShares. We currently do not own
federal registrations for the servicemarks "USABancShares.com" or "vBank,"
although applications for such servicemarks are pending. Infringement claims by
competitors challenging our ability to use such names, even if without merit,
could result in the expenditure of significant financial and managerial
resources. Further, if such claims are successful, we could lose our right to
use such names and the benefits of the brand awareness we are spending
significant resources to develop. In that regard, U.S. Bank National Association
and its holding company, U.S. Bancorp, recently brought a legal proceeding
against us alleging that our use of the name USABanc.com infringed on certain
servicemarks allegedly owned by U.S. Bancorp. We have entered into a settlement
agreement resolving such dispute. As a result, we ceased use of the name
USABanc.com, under which we had been actively marketing our Internet bank, and
changed our name to USABancShares.com. See "Business--Legal Proceedings."
Our competitive position depends on our ability to attract and retain key
employees
Our success depends heavily on the expertise and guidance of our President
and Chief Executive Officer, Kenneth L. Tepper, and certain other senior
executive officers, including Brian M. Hartline, our Chief Financial Officer,
and Craig J. Scher, our Senior Vice President and Director of Lending/Credit of
vBank. We have entered into employment agreements with Messrs. Tepper, Hartline
and Scher. We do not maintain key-man life insurance on Messrs. Tepper,
Hartline or Scher. If we lose the services of Messrs. Tepper, Hartline or
Scher, or if we are unable to attract additional qualified employees, our
business would likely be adversely affected. See "Management."
Our existing shareholders have significant control of our management and
affairs, which they could exercise against your best interests
Upon completion of this Offering, our directors and executive officers as
a group will beneficially own approximately 21.8% of our outstanding common
stock. Kenneth L. Tepper, USABancShares.com's President and Chief Executive
Officer, is the holder of all of the issued and outstanding Class B common
stock of USABancShares.com, which is convertible into 216,460 shares of our
common stock on January 1, 2001. Assuming the conversion of Mr. Tepper's Class
B common stock, our directors and executive officers as a group would
beneficially own approximately 24.5% of our outstanding common stock upon
completion of this Offering. As a result, our directors and executive officers
as a group can exercise significant control over our management and affairs,
including the election of directors, a change in control of USABancShares.com
and the determination of all other matters requiring shareholder approval. This
concentration of ownership may have the effect of delaying or preventing a
change of control of USABancShares.com that may be in your best interests.
Additionally, as the holder of all of our issued and outstanding Class B common
stock, Mr. Tepper has the right to elect one-third of the directors of
USABancShares.com. Mr. Tepper waived such right for our annual meeting held on
July 15, 1999, but there can be no guarantee that Mr. Tepper will waive his
voting rights in the future. See "Management--Security Ownership of Certain
Beneficial Owners and Management" and "Description of Capital Stock--Common
Stock--Voting Rights."
Changes in interest rates could adversely affect us
Like most financial institutions, our results of operations are primarily
dependent on net interest income. Net interest income results from the "margin"
between interest earned on interest-earning assets, such as investments and
loans, and interest paid on interest-bearing liabilities, such as deposits and
borrowings. As of June 30, 1999, based on certain assumptions, vBank's
interest-bearing liabilities that were estimated to mature or reprice within
one year exceeded similar interest-earning assets by $67.1 million, or 31.6% of
total interest-earning assets.
Interest rates are highly sensitive to many factors that are beyond our
control. Some of these factors include: governmental monetary policies;
inflation; recession; unemployment; the money supply; domestic and
international economic and political conditions; and domestic and international
crises. Changes in interest rates could have adverse effects on our operations.
Historically, we have relied on short-term and institutional
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deposits as a source of funds, and we will continue to rely on these types of
deposits pursuant to our Internet strategy. Our ability to retain these
deposits is directly related to the rate of interest paid by us. When
interest-bearing liabilities mature or reprice more quickly than
interest-earning assets, in a particular period of time, a significant increase
in interest rates could adversely impact our net interest income. Changes in
interest rates could adversely affect:
o the volume of loans we originate;
o the value of our purchased loans and other interest-earning assets,
particularly the investment securities and trust preferred securities
portfolio;
o our ability to recognize income on loans purchased at a discount; and
o loan repayments and prepayments.
Our commercial lending activity exposes us to credit risks
At June 30, 1999, a majority of our real estate loan portfolio consisted
of loans secured by multi-family residential real estate and commercial real
estate properties. In addition, as of June 30, 1999, we had an aggregate of
$2.3 million of commercial business loans and we expect to increase our
emphasis on commercial business lending in the future. Furthermore, all of our
commercial business loans which are secured by real estate have in the past
been classified as real estate loans. We make commercial real estate and
commercial business loans following analysis of credit risk, the value of the
underlying collateral and other more intangible factors. This commercial
lending activity exposes us to risks, particularly in the case of loans to
small businesses and individuals. These risks include possible errors in our
credit analysis, the uncertainty of the borrower's ability to repay the loans,
the uncertainty of future economic conditions and the possibility of loan
defaults. Commercial lending generally includes higher interest rates and
shorter terms of repayment than non-commercial lending. Accordingly, we are
subject to greater credit risk with our commercial lending. As of June 30,
1999, we had no non-performing commercial business loans and $941,000 of
non-performing loans secured by commercial real estate and multi-family
residential real estate.
Our loan acquisition strategy involves significant risks
In addition to originating loans, our lending activities include
identifying and purchasing loans which we believe to be undervalued at
discounts. We have historically purchased loans either from institutions which
were seeking to eliminate certain loans or categories of loans from their
portfolios or in connection with the failure or consolidation of other
financial institutions. Our loan acquisition strategy subjects us to risks,
including some risks not experienced by financial institutions engaged in more
traditional lending activities. There can be no assurance that this component
of our operations will continue to provide the same level of profitability we
have experienced in the past. Our loan acquisition strategy is subject to the
following risks:
o the shrinking pool of assets available because the decreasing number of
failed or failing financial institutions that are being resolved by the
FDIC may result in us not meeting our targeted level of loan purchases;
o the competitive nature of the market for loan pools may result in us
having to acquire such loans at less attractive prices than we have in the
past;
o the cost of resolving non-performing loan pools may be greater than that
contemplated at the time of acquisition;
o the accretion of the discount associated with purchased loans is subject
to management's assumptions with respect to the estimated value of the
loans and future cash flows, all of which is uncertain and is subject to
change, resulting in inter-period variations in income; and
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o geographic concentrations of purchased loans, including loans in
geographic areas with which we have little or no familiarity.
We also originate loans by purchasing participations in loans from other
financial institutions. We consider such loan participations to be originations
because we underwrite each participation as an origination and the
participation is closed using our underwriting criteria. Although we have
participated in loans with four other financial institutions, as of June 30,
1999, we had seven loan participations with an aggregate principal balance of
$10.7 million with affiliates of a local specialty finance and real estate
company. In each of these seven loan participations, our interest and rights to
principal recovery are senior to the rights of the junior participant, are
collateralized by assets of an affiliate of the specialty finance company and
are serviced by the specialty finance company. The senior rights created under
the participation agreements were significant considerations in our
qualification of the loan. Although the finance company has agreed, in several
(but not all) transactions, to cause the participated loans owned by its
affiliates which may become non-performing to be substituted for performing
underlying loans, we are subject to risk to the extent the finance company
experiences financial difficulties and is unable to comply with its replacement
obligations. Furthermore, to the extent the finance company experiences
financial difficulties, our ability to receive principal and interest payments
on a timely basis from the finance company, as servicer of the loans, could be
temporarily interrupted.
We could sustain losses if our asset quality deteriorates
Our results of operations are significantly dependent on the quality of
our assets, which is measured by the level of our non-performing assets.
Non-performing assets consist of non-accrual loans, net of discount, loans
which are 90 days or more overdue but still accruing interest and other real
estate owned. At June 30, 1999, our non-performing assets, net of discount,
amounted to $2.1 million or 0.91% of total assets. All of the $2.1 million of
non-performing assets, net of discount, consisted of purchased loans, except
for one consumer loan totaling $25,000. Although we purchase loan pools at a
discount to the face value of such loans, we face the risk that in the event
one or more of such purchased loans becomes non-performing, the underlying
discount may not be sufficient to cover our cost of acquiring, servicing and,
if necessary, taking legal action, with respect to such loans. Although we have
recently enhanced our policies and procedures relating to monitoring asset
quality and we continue to devote a significant amount of time and resources to
the identification, collection and work-out of non-performing assets, the real
estate markets and the overall economy in the markets where we originate and
purchase loans are likely to be significant determinants of the quality of our
assets in future periods and, thus, our financial condition and results of
operations.
Increases in our reserve coverage for loan losses would adversely affect our
business
At June 30, 1999, our allowance for loan losses amounted to 1.13% of total
loans, net of discount, and 63.61% of total non-performing loans, net of
discount. In addition, the applicable purchase discount for an individual
acquired loan may act as an additional reserve against loss for such loan to
the extent that the collectability of such loan becomes questionable. Although
we believe that we have established an adequate allowance for losses on our
loan portfolio, including purchased loans, material future additions to the
allowance for loan losses may be necessary due to changes in economic
conditions, the performance of our loan portfolio and increases in both loan
originations and purchases. In addition, the Pennsylvania Department of Banking
and the FDIC, as an integral part of their examination process, periodically
review our allowance for loan losses and could require increases in such
allowance. Increases in the allowance for loan losses would adversely affect
our results of operations.
Our yield on loans purchased at a discount is uncertain
At the time we purchase a pool of loans, the difference between the note
amount and the purchase price is accounted for as a discount. The purchase
price is based on our estimate of the value of the loan, including an estimate
of future cash flows. In accordance with generally accepted accounting
principles, to the extent we believe a purchased loan will be collected in
full, the discount associated with such purchased loan will be recognized as an
increase in the yield of the loan and will be included as interest income over
the estimated life of the loan. To the extent that we believe full repayment of
principal and interest is not reasonable and
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probable, the discount will be set up as a cash discount and will not be
recognized as an increase in the yield of the loan until all principal and
interest is received or a final resolution is determined. To the extent that
cash flows from the purchased loans may be uncertain, recognition of this
income will also be uncertain. The yield on our portfolio of loans which have
been purchased at a discount is subject to significant inter-period variations
due to the fact that the timing of actual repayments and prepayments of the
loans may differ from the original assumptions. Such inter-period variations
can also result from the reclassification of loans from performing to
non-performing status.
We rely on short-term deposits
We employ a wholesale funding strategy consisting primarily of marketing
retail and non-retail certificates of deposit. We have been able to maintain
sufficient funds to support our lending activities by offering rates of
interest on certificates of deposit marginally higher than rates offered by
other banks on comparable deposits. As of June 30, 1999, $144.6 million, or
85.1%, of our deposits consisted of certificates of deposit. Of this amount,
$108.0 million, or 74.7%, were placed with institutional investors. In
addition, as of June 30, 1999, $67.2 million, or 46.5%, of our total
certificates of deposit were due to mature within one year. In the current
economic environment of low interest rates, we have been focusing on extending
the maturities of our certificates of deposit and borrowings. We have extended
the average maturities on our certificates of deposit to approximately 16
months. Our ability to attract and maintain deposits, as well as our cost of
funds, has been, and will continue to be, significantly affected by money
market rates, general economic conditions and our regulatory capital levels. In
addition, our ability to internally fund any additional growth through lending
will be impacted by our ability to maintain or generate deposits. In the event
we increase interest rates further to retain deposits, earnings may be
negatively affected.
We are vulnerable to unfavorable economic conditions
The performance of financial institutions like vBank is sensitive to
general economic conditions. Unfavorable economic conditions at the local,
national or international level may adversely affect vBank's performance. For
example, much of the United States experienced a significant economic decline
in the late 1980's and early 1990's. This decline adversely affected the real
estate market and the banking industry. As a result of this decline, loan
repayment delinquencies increased and the value of properties underlying
secured loans declined. Numerous bank failures resulted in the placement of
many properties in the hands of a federal banking agency with the primary
objective of prompt liquidation. In addition, recent activity in financial
markets in the United States and the rest of the world has demonstrated an
increasing interdependency among the various world markets and economies and
has raised concerns among those in the banking industry. The implications of
this interdependency are very uncertain and present risks to financial
institutions such as vBank, particularly in light of the current turmoil in
some foreign markets and economies. Economic conditions are unpredictable and
the potential for downturns is always present.
Although we have historically focused on acquiring loans in the
Mid-Atlantic region of the United States, we have acquired loans secured by
real estate located in a number of other states including Texas, Florida and
California and we may acquire loans throughout the nation. In the future, we
may acquire or originate loans throughout the United States through our
Internet banking operations or through other means. To the extent such loans
are secured by real estate outside the Mid-Atlantic region, such loans may
present a greater risk of collectability than loans located in our historical
primary market area. Thus, adverse economic conditions affecting any of these
market areas could have a negative impact on our financial condition and
results of operations.
Problems related to "Year 2000" issues could adversely affect our business
We are aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000" problem
is pervasive and complex. Virtually every computer operation will be affected
in some way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information
when the year changes to 2000. Systems that do not properly recognize this
information could generate incorrect data or cause a system to fail. We have
consulted
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with our outside vendors as well as our third-party computer and software
providers and are preparing our systems to operate without significant
modification as a result of Year 2000 issues (including any new hardware and
software which are integral to the proposed conversion of our computer-based
systems). We have not been advised by any of our primary outside vendors and
service providers that they do not have plans in place to address and correct
any Year 2000 problems. Nevertheless, unanticipated problems could cause our
systems to malfunction or cause us to incur significant costs to remediate such
problems. We anticipate incurring approximately $25,000 in additional costs
during the year ending December 31, 1999 related to the proposed implementation
of our Year 2000 Plan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
We could be adversely affected by government regulation
Bank regulation. We are subject to a complex body of federal and state
banking laws and regulations which are intended primarily for the protection of
depositors. Governmental or regulatory authorities could revise existing
regulations or adopt new regulations at any time. Certain revisions could
subject vBank to more demanding regulatory compliance requirements and could
thereby adversely affect our ability to conduct, or the cost of conducting,
business. Legislation and regulatory initiatives containing wide-ranging
proposals for altering the structure, regulation and competitive relationships
of financial institutions are introduced regularly. We cannot predict whether
or what form of proposed statute or regulation will be adopted or the extent to
which such adoption will affect our business. Furthermore, given the rapid
expansion of the electronic commerce market, many regulatory bodies are
adopting measures to ensure that their regulations are keeping pace. For
example, Congress has held hearings on whether to regulate the electronic
commerce market, while numerous states are considering adopting their own laws
to regulate Internet banking. Furthermore, Congress is considering proposing
new laws relating to customer privacy. Moreover, the FDIC has proposed other
guidelines governing Internet operations. These and any other proposed laws,
rules and regulations could force us to comply with more complex and perhaps
more burdensome regulatory requirements, which could materially adversely
affect our business, financial condition, results of operations and cash flows.
Internet regulation. A number of legislative and regulatory proposals
currently under consideration by federal, state, local and foreign governmental
organizations may lead to laws or regulations concerning various other aspects
of the Internet, including, but not limited to, on-line content, user privacy,
taxation, access charges, information sharing, community development, data
security, liability or third-party activities and jurisdiction. Moreover, it is
uncertain how existing laws relating to these issues will be applied to the
Internet. The adoption of new laws or the application of existing laws could
decrease the growth in the use of the Internet, which could in turn decrease
the demand for our products and services, increase our cost of doing business
or otherwise have a material adverse effect on our business, financial
condition, results of operations and cash flows. Furthermore, government
restrictions on Internet content could slow the growth of Internet use and
decrease acceptance of the Internet as a communications and commercial medium,
and thereby have a material adverse effect on our business, financial condition
and results of operations.
Although certain local telephone carriers have asserted that the growing
popularity and use of the Internet has burdened the existing telecommunications
infrastructure and caused interruptions in telephone service in areas with high
Internet use, the Federal Communications Commission ("FCC") has declined the
request of such carriers to impose access fees on Internet service providers or
commercial on-line service providers. If the FCC or state regulatory agency
were to impose such access fees, the costs of transacting business on the
Internet could increase substantially, potentially slowing the growth in use of
the Internet, which could in turn decrease demand for our Internet bank
services or increase our cost of doing business, and thus have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
Internet privacy. Internet user privacy has become an issue both in the
United States and abroad. Numerous bills have been introduced in the House and
Senate that would force companies to comply with certain specified core
information practices. Such privacy legislation could affect in a materially
adverse manner the way in which USABancShares.com is allowed to conduct its
Internet bank business, especially those aspects that involve the collection or
use of personal information.
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At the international level, the European Union (the "EU") has already
adopted a Directive on Data Protection (the "Directive") that permits EU member
countries to impose restrictions on the collection and use of personal data.
The Directive could, among other things, affect United States companies that
collect information over the Internet from individuals in EU member countries,
and may impose restrictions that are more stringent than current Internet
privacy standards in the United States. In response to the Directive, on
November 4, 1998, the United States Department of Commerce published for
comment a set of "safe harbor" principles designed to help United States
organizations comply with the Directive. The "safe harbor" principles were
subsequently revised and reissued for comment on April 19, 1999. On June 21,
1999, the EU and the United States Department of Commerce presented a joint
report to the EU/United States Summit in Bonn, Germany on the topic of the
EU/United States Data Protection Dialogue. The joint report indicates that the
EU and the United States expect to finalize the "safe harbor" arrangement by
Autumn 1999. It is intended that the "safe harbor" arrangement would provide a
predictable framework for the application of the Directive to the transfer of
personal data from the EU to the United States with adequate protection for
privacy. A number of aspects to the "safe harbor" arrangement remain to be
finalized, and there can be no assurance that such principles will be
implemented.
Future sales of our common stock in the public market could adversely affect
our stock price and our ability to raise funds in new stock offerings
If our shareholders sell substantial amounts of common stock in the public
market following this Offering, including shares issued upon the exercise of
outstanding options and warrants, the market price of our common stock could
fall. These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of the Offering, we will have 5,414,784 shares of
common stock outstanding, assuming no exercise of outstanding options or
warrants.
As of September 1, 1999, holders of 110,764 of our shares of common stock
and holders of warrants exercisable for 445,000 shares of our common stock have
rights to require us to register their shares for sale with the Securities and
Exchange Commission. By exercising their registration rights and causing a
large number of shares to be sold in the public market, these shareholders may
cause the market price of the common stock to fall. In addition, if such
shareholders demand to include their shares in one of our registration
statements, our ability to raise needed capital could be adversely effected.
Our Company, our directors and officers who will beneficially own,
collectively, 1,329,314 shares of common stock after this Offering, have agreed
not to offer or sell any shares of common stock for 180 days following the date
of this prospectus without prior written consent from the underwriters. We may,
however, issue shares of common stock pursuant to employee stock plans, upon
conversion of outstanding securities or in connection with acquisitions,
business combinations or strategic investments.
As of September 1, 1999, there were outstanding options to purchase
1,023,503 shares of our common stock and warrants to acquire 485,000 shares of
our common stock. The common stock underlying these options and warrants will
be eligible for sale in the public market from time to time subject to vesting
and other requirements. The stock options and warrants generally have exercise
prices significantly below the current market price of our common stock. We may
issue additional shares of our common stock or securities convertible or
exercisable into our common stock in connection with strategic alliances or
other transactions. We recently issued warrants for 120,000 shares of our
common stock to EarthLink and warrants to purchase up to 40,000 shares of our
common stock to Systemax in connection with strategic marketing agreements. The
possible sale of a significant number of these shares may cause the market
price of our common stock to decline.
USABancShares.com does not intend to pay cash dividends and the ability of
vBank to pay cash dividends to USABancShares.com is restricted
USABancShares.com has never paid or declared a cash dividend and we do not
anticipate paying cash dividends in the foreseeable future. USABancShares.com
currently intends to retain earnings, if any, to fund
17
<PAGE>
the development and growth of its business. USABancShares.com's ability to pay
dividends to its shareholders is limited by vBank's ability to pay dividends to
USABancShares.com. vBank is subject to substantial regulatory restrictions on
its ability to pay dividends to USABancShares.com. See "Dividend Policy."
We need to maintain adequate capital to support our anticipated growth
We are required by federal and state regulatory authorities to maintain
adequate levels of capital to support our operations. To the extent our
operations expand, we will be required to support such growth by increasing our
capital to acceptable regulatory levels. We expect our operations, including
our asset base, to grow substantially as a result of implementing our Internet
banking strategy. Accordingly, we may need to raise additional capital in the
future to support our operations should they continue to expand. This may be
accomplished through the sale of additional securities of USABancShares.com,
including the issuance of additional shares of our common stock. There is no
assurance that we will be able to raise additional capital when needed. If we
cannot raise additional capital when needed, our business, financial condition,
results of operations, capital levels and cash flows will be materially
adversely affected. If we issue additional common stock, shareholders
of USABancShares.com do not have a right to purchase any new issue of shares of
our common stock in order to maintain their proportionate ownership interests
in USABancShares.com. Should we choose to raise capital through the sale of our
common stock, such action would dilute the ownership and voting power of the
outstanding shares and reduce the portion of any dividend and liquidation
proceeds payable to the holders of the common stock.
Provisions of our Articles of Incorporation and Bylaws have certain
anti-takeover effects
Certain provisions of our amended and restated articles of incorporation
and our bylaws may delay, deter or prevent a change in control of
USABancShares.com that is not approved by our board of directors. These
provisions include our ability to issue shares of preferred stock in one or
more series without further authorization of the shareholders and a
supermajority shareholder approval requirement for certain transactions,
including a merger, consolidation, liquidation or disposition of all or
substantially all of our assets. See "Description of Capital Stock--Change in
Control."
The voting rights of the shares of Class A common stock are identical to
the voting rights of the Class B common stock with one exception: the holders
of the shares of Class A common stock are entitled to elect two-thirds of our
directors and the holder of the Class B common stock is entitled to elect
one-third of our directors. Kenneth L. Tepper, our President and Chief
Executive Officer, is the sole holder of Class B common stock. This
concentration of voting power could have the effect of delaying or preventing a
change of control.
Our articles also give our board of directors broad discretion to evaluate
a takeover attempt. In particular, our articles give our board of directors
broad discretion to prevent a change of control, including the use of a "poison
pill" defense. See "Description of Capital Stock."
The book value of the shares you purchase in this Offering will be diluted
The initial price to public of our common stock is expected to be
substantially higher than the book value per share of our outstanding common
stock immediately after the Offering. If you purchase common stock in this
Offering, you will incur immediate dilution of approximately $ in the
book value per share of the common stock from the price you pay for the common
stock. You will experience further dilution as holders of options and warrants
to purchase our common stock exercise their options and warrants at exercise
prices below the initial price to public in this Offering. You may also
experience dilution as a result of shares of our common stock or securities
convertible or exercisable into shares of our common stock being issued by us
in connection with strategic alliances or other transactions.
18
<PAGE>
USE OF PROCEEDS
We estimate our net proceeds from the sale of the 1,400,000 shares of
common stock we are offering to be $ million, after deducting the
underwriting discount and estimated offering expenses. If the underwriters
exercise their over-allotment option in full, then our net proceeds will be
$ million.
We intend to use approximately $ million of the net proceeds to invest
as additional capital in vBank. vBank intends to use approximately $5.0
million of the additional capital to finance a national marketing campaign for
our Internet banking operations and to enter into strategic marketing
agreements with other Internet entities, and approximately $ 1.0 million to fund
the infrastructure for our Internet banking operations. vBank intends to use
the remaining additional capital, approximately $ million, to maintain its
well-capitalized status under regulatory capital guidelines. We intend to
retain the remaining net proceeds, approximately $ million, in
USABancShares.com for general corporate purposes, including payments on our
guaranteed preferred beneficial interests in subordinated debt. See
"Capitalization" and notes 5 and 20 to the financial statements included in
this prospectus beginning on page F-1. We intend to invest the net proceeds of
this Offering in U.S. government agency securities, mortgage-backed securities
and other investment securities pending their use.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq SmallCap Market under the
symbol "USAB" since the first quarter of 1996 and on the Nasdaq National Market
under the same symbol, since September 16, 1999. The following table sets forth,
for the periods indicated, the range of high and low sales prices per share of
our common stock as reported on the Nasdaq SmallCap Market through September 16,
1999 and on the Nasdaq National Market after that date. All prices have 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.
<TABLE>
<CAPTION>
Sales Price
-------------------------
Period High Low
- ------ ----------- -----------
<S> <C> <C>
1997
- ----
First Quarter ..................................... $ 2 31/32 $ 2 39/64
Second Quarter .................................... 3 7/64 2 15/32
Third Quarter ..................................... 3 49/64 2 3/4
Fourth Quarter .................................... 3 61/64 3
1998
- ----
First Quarter ..................................... 5 41/64 3 19/64
Second Quarter .................................... 5 59/64 4 57/64
Third Quarter ..................................... 6 49/64 3 3/4
Fourth Quarter .................................... 4 1/2 3 3/8
1999
- ----
First Quarter ..................................... 4 1/2 4
Second Quarter .................................... 11 4
Third Quarter (through September 28, 1999) ......... 16 1/2 6 7/8
</TABLE>
On September 28, 1999, the last reported sale price of our common stock on
the Nasdaq National Market was $8.25 per share.
As of September 28, 1999, there were 4,014,784 shares of common stock
outstanding, held by approximately 209 holders of record.
19
<PAGE>
DIVIDEND POLICY
USABancShares.com has never paid or declared a cash dividend and we do not
anticipate paying cash dividends in the foreseeable future. USABancShares.com
currently intends to retain future earnings, if any, to fund the development
and growth of its business. During each of the last two fiscal years,
USABancShares.com paid a 33% stock dividend to the holders of shares of its
common stock. Effective June 15, 1999, USABancShares.com paid a dividend to the
holders of shares of its common stock in the form of a two-for-one stock split.
In the future, our board of directors will determine our dividend policy based
on an analysis of factors that the board of directors deems relevant and
subject to applicable legal restrictions. We expect that those factors will
include our earnings, financial condition, cash requirements, the capital
requirements of vBank and investment opportunities at the time any such payment
is considered.
In addition, USABancShares.com's ability to pay dividends to its
shareholders is limited by vBank's ability to pay dividends to
USABancShares.com. Dividend payments from vBank are subject to:
o regulatory limitations, generally based on current and retained earnings,
imposed by the various regulatory agencies with authority over vBank;
o regulatory restrictions if such dividends would impair the capital of
vBank or cause vBank to be undercapitalized;
o Federal Reserve Board prudent banking standards relating to the amount of
net income available to common shareholders and the prospective rate of
earnings retention; and
o vBank's profitability, financial condition and capital expenditures and
other cash flow requirements.
20
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization at June 30,
1999, (1) on an actual basis, and (2) as adjusted to give effect to the sale of
common stock in this Offering, assuming the underwriters do not exercise their
over-allotment option. See "Use of Proceeds." This table excludes 1,508,503
shares of common stock issuable upon exercise of stock options and warrants.
This table should be read in conjunction with our consolidated financial
statements and notes thereto, which are included in this prospectus beginning
on Page F-1, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
At June 30, 1999
--------------------------
As
Actual Adjusted(1)
----------- ------------
(Dollars in Thousands)
<S> <C> <C>
Liabilities:
Deposits ................................................................. $169,955 $169,955
Borrowings ............................................................... 33,399 33,399
Guaranteed Preferred Beneficial Interests in Subordinated Debt ........... 10,000 10,000
Accrued expenses and other liabilities ................................... 2,614 2,614
-------- --------
Total liabilities ..................................................... 215,968 215,968
-------- --------
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; 5,414,784
shares issued and outstanding and 216,460 shares of converted and
unissued Class B common stock, actual; 7,014,784 shares issued and
outstanding and 216,460 shares of converted and unissued Class B
Common Stock, as adjusted ............................................... 4,231 5.631
Additional paid-in-capital ............................................... 8,568
Accumulated earnings ..................................................... 2,036 2,036
Accumulated other comprehensive (loss) income -- unrealized depreciation
on securities available-for-sale ........................................ (803) (803)
-------- --------
Total stockholders' equity ............................................ 14,032
-------- --------
Total liabilities and stockholders' equity ............................ $230,000
========
</TABLE>
- ------------
(1) Assumes that the net proceeds to USABancShares.com, after deducting the
estimated underwriting discount and estimated offering expenses, are
$ .
21
<PAGE>
REGULATORY CAPITAL
Under regulations adopted by the Board of Governors of the Federal Reserve
System, we are required to maintain Tier 1 capital equal to at least 4.0% and
total capital (Tier 1 plus Tier 2 capital) equal to at least 8.0% of our risk
weighted assets, and Tier 1 capital equal to at least 4.0% of our average total
assets (calculated quarterly). See "Regulation of USABancShares.com and vBank."
The following tables set forth USABancShares.com's actual regulatory
capital and regulatory capital ratios at June 30, 1999 and USABancShares.com's
pro forma regulatory capital and regulatory capital ratios at June 30, 1999, as
adjusted to give effect to the receipt of the net proceeds from the sale of the
common stock in the Offering. See "Use of Proceeds." The amount of average
adjusted total assets used for the Tier 1 leverage ratio was approximately
$202.0 million. Risk-weighted assets used for the risk-based capital ratios
amounted to approximately $189.0 million. The following tables assume the
investment of the proceeds of the Offering in assets with an average
risk-weighting of 20%.
<TABLE>
<CAPTION>
Actual Pro Forma(2)
------------------------------------ -------------------------------
Risk-Based Risk-Based
------------------------ -------------------
Tier 1 Tier 1
Leverage Tier 1 Total Leverage Tier 1 Total
Capital Capital Capital Capital Capital Capital
---------- ----------- ----------- ---------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity ............................ $14,835 $14,835 $ 14,835 $ $ $
Minority interest--Guaranteed Preferred
Beneficial Interests in Subordinated
Debt (1) ....................................... 4,937 4,937 10,000
Unrealized losses on securities available for
sale (with readily determinable market
values) ........................................ (23) (23) (23)
Non-allowable capital:
Direct real estate investments ................. -- -- --
Intangible assets .............................. (73) (73) (73)
Supplemental capital:
Allowance for loan losses ...................... -- -- 1,325
------- ------- -------- ------- ------ ------
Regulatory capital .............................. $19,676 $19,676 $ 26,064 $ $ $
======= ======= ======== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
Actual Pro Forma(2)
---------------------------------- ---------------------------------
Risk-Based Risk-Based
--------------------- --------------------
Tier 1 Tier 1 Total Tier 1 Tier 1 Total
Leverage Capital Capital Leverage Capital Capital
Ratio Ratio Ratio Ratio Ratio Ratio
---------- --------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital .................. 9.7% 10.4% 13.8% % % %
Regulatory requirement .............. 4.0 4.0 8.0
--- ---- ---- ----- ----- ----
Excess above required ratio ......... 5.7% 6.4% 5.8% % % %
=== ==== ==== ===== ===== ====
</TABLE>
(Footnotes on next page)
22
<PAGE>
- ------------
(1) On March 9, 1999, USABancShares.com issued $10.0 million of 9.5% junior
subordinated debentures to USA Capital Trust I, a Delaware business trust,
in which USABancShares.com owns all of the common equity. The trust issued
$10.0 million of trust preferred securities to investors in a private
offering, secured by the junior subordinated debentures and the guarantee
of USABancShares.com. The trust preferred securities are Tier 1 eligible
except that, in accordance with Federal Reserve Board regulations, no more
than 25% of Tier 1 capital may be comprised of trust preferred securities.
At June 30, 1999, 25% of USABancShares.com's Tier 1 capital equaled
approximately $4.5 million. Accordingly, only $4.5 million of the trust
preferred securities were eligible as Tier 1 capital as of such date. Upon
completion of the Offering, USABancShares.com's Tier 1 capital would
increase to a level such that the entire amount of the trust preferred
securities would be eligible for treatment as Tier 1 capital on a pro
forma basis.
(2) Pro forma calculations assume that the net proceeds from the sale of common
stock of USABancShares.com, approximately $ million, are invested in
assets that have a risk-weight equivalent to investment securities
assigned to the 20% category. While a portion of the net proceeds of the
Offering will be used to maintain capital levels above minimum regulatory
levels, USABancShares.com intends to immediately deploy a portion of the
net proceeds of the Offering to enter into strategic marketing agreements
with other Internet entities, to fund a national marketing campaign for
its Internet banking operations and to fund the infrastructure of its
Internet banking operations. See "Use of Proceeds." The pro forma
regulatory levels and ratios set forth in the tables above reflect
anticipated levels and ratios immediately upon completion of the Offering
and are not necessarily indicative of such levels and ratios at any time
following completion of the Offering.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Capital Resources" for
a discussion of vBank's regulatory capital and regulatory capital ratios at
June 30, 1999.
23
<PAGE>
USABANCSHARES.COM STATEMENTS OF OPERATIONS
The following Statements of Operations of USABancShares.com for each of
the years in the two-year period ended December 31, 1998 are derived from
financial statements that have been audited by Grant Thornton LLP, independent
auditors, whose report thereon appears elsewhere in this prospectus. The
information for the six months ended June 30, 1999 and 1998 is derived from
unaudited financial statements, and, in the opinion of management, all
adjustments necessary for a fair presentation of such interim periods have been
included and are only of a normal recurring nature. Results for the six months
ended June 30, 1999 are not indicative of the results that may be expected for
the year ending December 31, 1999. These statements should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the consolidated financial statements and
notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
----------------------------- -----------------------------
1999 1998 1998 1997
------------- ------------- ------------- -------------
(unaudited)
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans .......................................... $ 5,736 $ 4,124 $ 9,028 $ 3,090
Investment securities .......................... 2,709 1,238 3,015 1,637
Interest-bearing deposits and other ............ 104 170 309 152
---------- ---------- ---------- ----------
Total interest income ........................ 8,549 5,532 12,352 4,879
Interest expense:
Deposits ....................................... 3,582 2,322 5,266 2,285
Borrowed funds ................................. 1,164 383 1,188 245
---------- ---------- ---------- ----------
Total interest expense ....................... 4,746 2,705 6,454 2,530
Net interest income ............................ 3,803 2,827 5,898 2,349
Provision for loan losses ...................... 250 160 510 415
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ................................. 3,553 2,667 5,388 1,934
Non-interest income:
Gain on sales of investment securities ......... 30 49 378 127
Brokerage operations ........................... 193 91 141 102
Other .......................................... 346 60 240 85
---------- ---------- ---------- ----------
Total non-interest income .................... 569 200 759 314
Non-interest expense:
Compensation and benefits ...................... 1,346 542 1,539 1,346
Occupancy ...................................... 342 251 523 202
Other .......................................... 1,215 615 1,638 909
---------- ---------- ---------- ----------
Total non-interest expense ................... 2,903 1,408 3,700 2,457
Income (loss) before income taxes ............... 1,219 1,459 2,447 (209)
Income taxes .................................... 295 552 957 17
---------- ---------- ---------- ----------
Net income (loss). .............................. $ 924 $ 907 $ 1,490 $ (226)
========== ========== ========== ==========
Earnings (loss) per share--basic ................ $ 0.22 $ 0.28 $ 0.38 $ (0.10)
========== ========== ========== ==========
Earnings (loss) per share--diluted .............. $ 0.21 $ 0.23 $ 0.35 $ (0.10)
========== ========== ========== ==========
Weighted average number of shares
outstanding-- basic ............................ 4,231,244 3,210,540 3,971,672 2,164,727
Weighted average number of shares
outstanding-- diluted .......................... 4,313,040 3,994,972 4,239,638 2,164,727
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We currently offer a full range of banking services through vBank and a
wide range of investment-related products through USACapital, Inc., a
wholly-owned subsidiary of USABancShares.com. Our goal is to become a leading
provider of financial products and services over the Internet.
In pursuit of this goal, we have recently expended significant resources
on technology, Website development, marketing, hiring of personnel and other
startup costs related to the development and operation of our Internet banking
platform. Given that we intend to continue to expend significant financial and
management resources in connection with our Internet banking operations, we
expect to incur substantial losses. Moreover, to the extent that increases in
operating expenses precede or are not subsequently followed by increased
revenues, our business, financial condition, results of operations and cash
flows will be materially adversely affected.
Our revenue consists of interest income and, to a lesser degree,
non-interest income, which includes income primarily from services and gains on
the sale of loans and securities. Our net interest income is the difference
between the rates of interest earned on our loans and other interest-earning
assets and the rates of interest paid on our deposits and borrowed funds. An
indicator of an institution's profitability is its net interest margin or net
yield on interest-earning assets, which is its annualized net interest income
divided by the average balance of interest-earning assets. Fluctuations in
interest rates as well as volume and composition changes in interest-earning
assets and interest-bearing liabilities may materially affect net interest
income.
Since our acquisition of vBank in November 1995, we have aggressively
grown our loan portfolio through the acquisition of loan pools at a discount
and through loan originations. Our net loan portfolio has grown from $7.0
million at December 31, 1995 to $114.7 million at June 30, 1999. On July 31,
1999, we purchased an $88.3 million loan pool at a purchase price of $88.5
million consisting of adjustable-rate commercial real estate and multi-family
residential loans. In addition, on August 26, 1999, we purchased an $11.0
million loan pool consisting primarily of adjustable-rate commercial real
estate loans. This pool of performing assets was purchased for approximately
$10.0 million. Of the total $99.3 million loans purchased since June 30, 1999,
$35.3 million, or 35.6%, are located in Pennsylvania and New Jersey, 15.4% are
located in California, 12.1% are located in Minnesota and 11.2% are located in
Florida. We intend to continue to expand our small business community banking
presence in the Mid-Atlantic region primarily through increased loan
originations and purchases of pools of loans. We intend to emphasize the
origination and purchase of commercial real estate and commercial business
loans, which generally carry higher yields than traditional single-family
residential loans. Although we intend to continue to originate single-family
residential and consumer loans, such loans will not be emphasized and will be
offered primarily as an accommodation to our customers. Single-family
residential loans originated through our Website will be originated through our
alliance partner, Fidelity Mortgage Trust dba Low Cost Loans ("Low Cost
Loans"). We intend to fund our increased lending activities in part with
deposit growth we expect to achieve from our Internet banking operations.
We actively monitor our net interest rate sensitivity position. Effective
interest rate sensitivity management seeks to ensure that net interest income
and the market value of equity are protected from the impact of changes in
interest rates. To this end, we have established risk measurement guidelines
employing market value of equity and gap methodologies and other measures.
Comparison of Financial Condition at June 30, 1999 and December 31, 1998 and
Results of Operations for the Six Months Ended
June 30, 1999 and June 30, 1998
Financial Condition
USABancShares.com'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 loans receivable, net,
securities and interest-bearing deposits of $12.6 million, $37.9 million, and
$5.3 million,
25
<PAGE>
respectively. The increase in the loan portfolio was a result of vBank
originating $24.0 million in loans, primarily commercial real estate and
multi-family residential real estate loans and acquiring $8.9 million of
performing commercial real estate loans during the six months ended June 30,
1999. The acquired loans were purchased for $7.3 million. The increase in the
volume of loan acquisitions and originations was partially offset by
prepayments and repayments of $17.3 million in the aggregate. 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 fundings of loan closings
scheduled in early July 1999. The growth in total assets was funded by an
increase in deposits of $40.1 million in non-retail certificates of deposit and
an increase of $15.5 million in transaction accounts, and the issuance of $10.0
million of trust preferred securities. Management plans to continue to utilize
FHLB advances in conjunction with deposit expansion to provide the necessary
funding and liquidity for vBank's continued growth. vBank'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. USABancShares.com's stockholders'
equity increased from $13.6 million at December 31, 1998 to $14.0 million at
June 30, 1999.
Results of Operations
Net Income. USABancShares.com reported net income of $924,000, or $0.21
per share (diluted), for the six months ended June 30, 1999, compared to
$907,000, or $0.23 per share (diluted), for the six months ended June 30, 1998,
representing a 1.87% increase in overall net income. Net income increased
primarily because USABancShares.com did not provide for income taxes in the
quarter ended June 30, 1999 as a result of the anticipated operating losses for
1999. Net interest income increased $976,000, and 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,
USABancShares.com also recognized approximately $250,000 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. Income
on loans increased $1.6 million due to the average balance of loans increasing
$39.6 million, reflecting the increases in both our originations and purchases
during the period. The increase in average loans outstanding was partially
offset by the average yield on loans decreasing by 148 basis points, which
reflects USABancShares.com's strategy of increasing its internal loan
originations while at the same time purchasing loans with lower yields but
higher asset quality. It also reflects a higher level of prepayments on higher
yielding acquired seasoned loans. Interest earned on investment securities and
other interest-earning assets increased by $1.4 million during the six months
ended June 30, 1999, due primarily to the average balance of investment
securities and other interest-earning assets increasing by $31.8 million and
the average yield earned thereon increasing by 80 basis points during the
period.
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 trust preferred securities issued
in March 1999. Interest expense on deposits increased $1.3 million, interest
expense on other borrowings increased $781,000 and interest expense incurred on
the trust preferred securities was $300,000. Such expenses increased primarily
due to the average outstanding balances increasing $36.2 million, $20.7 million
and $6.3 million, respectively. The increase in interest expense was also due
to an increase in the average rate paid on borrowings of 18 basis points. The
trust preferred securities carry 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.
Net Interest Income. USABancShares.com'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 and mortgage-backed 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 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.
26
<PAGE>
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 spread and net interest margin
decreased for the period ended June 30, 1999 compared to June 30, 1998, from
4.66% to 4.01% and from 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 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 the six months ended June
30, 1998 to 3.64% from 4.45%, respectively.
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>
Six Months Ended June 30,
--------------------------------------
1999
--------------------------------------
Average Average
Balance(1) Interest Yield/Rate
------------ ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans ............................................. $107,388 $5,736 10.68%
Securities ........................................ 64,133 2,709 8.45
Interest-bearing deposits and other ............... 6,085 104 3.42
-------- ------
Total interest-earning assets .................. $177,606 $8,549 9.63%
======== ======
Interest-bearing liabilities:
Deposits:
Savings and passbook accounts ................... $ 12,037 $ 278 4.61%
NOW accounts .................................... 1,348 14 2.05
Money market accounts ........................... 2,506 58 4.60
Certificates of deposit ......................... 111,984 3,233 5.77
Borrowings ........................................ 40,934 1,163 5.69
-------- ------
Total interest-bearing liabilities ............. $168,809 $4,746 5.62%
======== ======
Excess of interest-earning assets over interest-
bearing liabilities ............................... $ 8,797
========
Net interest income ................................ $3,803
======
Interest rate spread ............................... 4.01%
=====
Net interest margin ................................ 4.28%
=====
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------
1998
-------------------------------------
Average Average
Balance(1) Interest Yield/Rate
------------ ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans ............................................. $ 67,833 $4,124 12.16%
Securities ........................................ 32,360 1,238 7.65
Interest-bearing deposits and other ............... 6,499 170 5.23
-------- ------
Total interest-earning assets .................. $106,692 $5,532 10.37%
======== ======
Interest-bearing liabilities:
Deposits:
Savings and passbook accounts ................... $ 1,790 $ 23 2.60%
NOW accounts .................................... 937 9 2.02
Money market accounts ........................... 2,319 76 6.54
Certificates of deposit ......................... 75,738 2,213 5.84
Borrowings ........................................ 13,902 384 5.51
-------- ------
Total interest-bearing liabilities ............. $ 94,686 $2,705 5.71%
======== ======
Excess of interest-earning assets over interest-
bearing liabilities ............................... $ 12,006
========
Net interest income ................................ $2,827
======
Interest rate spread ............................... 4.66%
=====
Net interest margin ................................ 5.30%
=====
</TABLE>
- ------------
(1) For the six months ended June 30, 1999, average balances are calculated
based on average daily balances, and for the six months ended June 30,
1998, average balances are calculated based on average monthly balances.
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:
(1) changes attributable to changes in volume (changes in volume multiplied by
prior rate); (2) changes attributable to changes in rate (changes in rate
27
<PAGE>
multiplied by prior volume); and (3) 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.
<TABLE>
<CAPTION>
June 30, 1999 compared to June 30, 1998
---------------------------------------
Increase or
(Decrease)
Due to Change in
---------------------
Average Average Total Increase
Volume Rate (Decrease)
--------- --------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
Variance in interest income on:
Interest-earning assets:
Loans ....................................... $2,405 $ (793) $1,612
Securities .................................. 1,216 255 1,471
Interest-bearing deposits and other ......... (11) (55) (66)
------ ------ ------
Total interest-earning assets .............. $3,610 $ (593) $3,017
------ ------ ------
Interest-bearing liabilities:
Deposits:
Savings and passbook accounts ............... $ 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
------ ------ ------
Change in net interest income ................. $1,662 $ (686) $ 976
====== ====== ======
</TABLE>
Provision for Loan Losses. Management records a provision for loan losses
in an amount that it believes will 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 compared to $160,000 during the same period in 1998. The increase in the
provision for loan losses during the six months ended June 30, 1999, as
compared to the same period in the prior year, was due primarily to the
substantial growth in vBank's loan portfolio. The allowance for loan losses as
a percentage of loans outstanding and leases was 1.13% at June 30, 1999,
compared to 1.02% at December 31, 1998 and 0.89% at June 30, 1998. In addition,
the allowance for loan losses as a percentage of total non-performing loans,
net of discount, was 63.61% at June 30, 1999, compared to 197.26% at June 30,
1998. The significant decline in this ratio during the six months ended June
30, 1999 compared to the same period in the prior year was due, in large part,
to a single acquired commercial real estate loan which became non-performing
during the third quarter of 1998. vBank is pursuing an aggressive strategy of
resolution with respect to this loan, and vBank expects to resolve the loan to
its satisfaction within the next six months. 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.
Management believes that the allowance for loan losses is adequate to
cover actual and potential losses in the loan portfolio under current
conditions. Nevertheless, there can be no assurance that additions to such
allowance will not be necessary in future periods, particularly if the growth
in vBank's commercial loan originations and purchases continues.
Non-Interest Income. Non-interest income increased $369,000, or 184.5%, in
the six months ended June 30, 1999 compared to the same six months of 1998.
Gains 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 primarily
due to USACapital's earnings increasing $102,000.
28
<PAGE>
Non-Interest Expense. Non-interest expense increased an aggregate of $1.5
million, or 106.2%, compared to the first six months of 1998. Compensation
expense increased $804,000 due to the hiring of additional personnel to support
the technology development of the Internet bank. 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 Website www.usabancshares.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. We
expect non-interest expense to increase substantially as we continue to
implement our Internet banking strategy.
Income Tax Expense. Income tax expense recorded for the six months ended
June 30, 1999 and 1998 was $295,000 and $552,000, representing effective tax
rates of 24.2% and 37.8%, respectively. USABancShares.com did not provide a tax
provision for the second quarter ended June 30, 1999 as a result of the
anticipated operating losses in 1999. USABancShares.com anticipates spending
significant financial resources on a national marketing program, developing
strategic alliances, technology initiatives and human resources on its Internet
initiative that will result in operating losses for at least the years ending
December 31, 1999 and 2000.
Asset and Liability Management
A principal objective of vBank's asset and liability management is to
minimize vBank's exposure to changes in interest rates. vBank's policy is to
attempt to manage assets and liabilities in such a way as to maximize net
interest income through changing interest rate environments. 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
net 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 June 30, 1999 and
the difference or "gap" between them on an actual and cumulative basis for the
periods indicated. The table was prepared with the following assumptions: (1)
50% of vBank's transaction accounts are considered core deposits and are
assumed to mature in the "Over 5 Years" category; the remaining 50% are not
considered to be core transaction accounts, are sensitive to rate changes, and,
as such, are placed in the "1-90 Days" category; (2) interest-earning assets
are calculated based on contractual adjustments or stated maturities in the
instruments without any adjustments for prepayment; and (3) certificates of
deposit and borrowings are scheduled based on the applicable stated maturities.
29
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1999
----------------------------------------------------------------------------
1-90 Days 91-364 Days 1-5 Years Over 5 Years Balance
----------- ------------- ------------- -------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ............................... $ 7,849 $ 6,995 $ 45,820 $ 56,603 $ 117,267
Investments .................................... 4,904 -- 13,100 64,000 82,004
Interest-bearing deposits and other ............ 12,987 -- -- -- 12,987
-------- -------- -------- ------- ---------
Total interest-earning assets ............... $ 25,740 $ 6,995 $ 58,920 $120,603 $ 212,258
======== ======== ======== ======= =========
Interest-bearing liabilities:
Demand ......................................... $ 925 $ -- $ -- $ 924 $ 1,849
NOW accounts ................................... 761 -- -- 760 1,521
Money market accounts .......................... 593 -- -- 593 1,186
Savings and passbook accounts .................. 10,391 -- -- 10,390 20,781
Certificates of deposit ........................ 8,587 58,617 76,392 1,224 144,820
Borrowings ..................................... -- 20,000 10,000 -- 30,000
Guaranteed Preferred Beneficial Interests in
Subordinated Debt ............................ -- -- -- 10,000 10,000
Collateralized Borrowings ...................... -- -- 3,399 -- 3,399
-------- -------- -------- -------- ---------
Total interest-bearing liabilities .......... $ 21,257 $ 78,617 $ 89,791 $ 23,891 $ 213,556
======== ======== ======== ======== =========
Periodic gap .................................... $ 4,483 $(71,622) $(30,871) $ 96,712 $ (1,298)
======== ======== ======== ======== =========
Cumulative gap .................................. $ 4,483 $(67,139) $(98,010) $ (1,298) --
======== ======== ======== ======== =========
Ratio of gap to interest-earning assets ......... 2.1% (33.7)% (14.6)% 45.6% --
======== ======== ======== ======== =========
Ratio of cumulative gap to interest-earning
assets ......................................... 2.1% (31.6)% (46.2)% (0.6)% --
======== ======== ======== ======== =========
</TABLE>
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 vBank'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. At June 30, 1999, vBank had 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 previous table
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 vBank in the event of a change in interest rates may deviate
significantly from those assumed in calculating the data shown in the table.
In the event vBank should experience a mismatch in its desired gap ranges
or an excessive decline in its market value of equity resulting from changes in
interest rates, it has a number of options which it could utilize to remedy
such mismatch. vBank could restructure its investment portfolio through sales
or purchases 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.
30
<PAGE>
Comparison of Financial Condition and Results of Operations
for the Years Ended December 31, 1998 and December 31, 1997
Financial Condition
USABancShares.com's total assets increased from $89.3 million at December
31, 1997 to $165.1 million at December 31, 1998, an increase of $75.8 million,
or 84.8%. The increase was due primarily to increases in the loan and
securities portfolios of $46.1 million and $22.3 million, respectively. This
growth was funded by increases in certificates of deposit (primarily non-retail
certificates of deposit) and borrowed funds of $41.8 million and $22.7 million,
respectively. The increase in the loan portfolio was primarily due to the
purchase of commercial and single-family residential real estate loans at a
discount. These purchased loans, which had an aggregate unpaid principal
balance of approximately $37.3 million (38% of commercial and 62% of
residential loans) as of the date of acquisition, were acquired for
approximately $35.2 million (reflecting an aggregate discount of $2.1 million,
or 5.6%). The increase in the securities portfolio was primarily due to the
acquisition of trust preferred securities and financial institution bonds.
Total deposits increased $43.9 million to $114.4 million at December 31, 1998.
The increase in deposits was comprised of an increase in certificates of
deposit of $41.8 million and an increase in transaction accounts of $2.1
million during the period which resulted from vBank's marketing efforts to
attract new customers. Borrowed funds consist of fixed-rate callable advances
from the FHLB. Total borrowed funds increased to $35.3 million at December 31,
1998, from $12.6 million at December 31, 1997. The increases in deposits and
borrowed funds were utilized to fund increases in loans and securities as part
of vBank's overall growth strategy. Management plans to continue to utilize
advances from the FHLB in conjunction with deposit expansion to provide the
necessary funding for vBank's continued growth. vBank's borrowing limit at the
FHLB as of December 31, 1998, was approximately $30.0 million, all of which was
drawn upon as of such date. USABancShares.com's stockholders' equity increased
from $5.4 million at December 31, 1997 to $13.6 million at December 31, 1998.
The $8.2 million, or 151.8%, increase in stockholders' equity was primarily due
to USABancShares.com's private placement of $7.5 million of common stock in
February 1998.
Results of Operations
Net Income. USABancShares.com reported net income of $1.5 million, or
$0.35 per share, diluted, for the year ended December 31, 1998, compared to a
net loss of $226,000, or $0.10 per share, diluted, for the year ended December
31, 1997. The increase in net income was primarily the result of an increase in
net interest income of $3.5 million and an increase in non-interest income of
$445,000. These increases were partially offset by an increase in the provision
for loan losses of $95,000, an increase in non-interest expense of $1.2
million, and an increase in income tax expense of $940,000.
Interest Income. Interest income increased 153.2% or $7.5 million to $12.4
million, for the year ended December 31, 1998, compared to the prior year. The
increase in interest income was the result of an increase in interest income on
loans, investment securities, and interest-bearing deposits of $5.9 million,
$1.4 million, and $157,000, respectively. The increase in interest income on
loans was due to an increase in the average balance of the loan portfolio, as
well as accretion income recognized on loan pools purchased by vBank at a
discount since 1995. The discount associated with such loan pools is recognized
as a yield adjustment and is included as interest income using the level yield
method (to the extent that the timing and amount of cash flows can reasonably
be determined). Any changes from original estimates used in the purchase price
could result in either an increase or decrease in accretion income. During the
years ended December 31, 1998 and 1997, vBank recognized $1.3 million and
$691,000 in accretion income, respectively, representing 10.5% and 14.2% of
total interest income, respectively. The significant increase in the average
balance of vBank's loan portfolio reflects the $37.3 million of loan purchases
and the more than $30.0 million of loan originations (including participations
with local financial institutions) which were closed during the year ended
December 31, 1998.
Interest Expense. Interest expense increased 155.1% or $3.9 million to
$6.5 million, for the year ended December 31, 1998, compared to the year ended
December 31, 1997, due to higher volumes of new certificates of deposit and
advances from the FHLB. In order to fund USABancShares.com's substantial
31
<PAGE>
growth during the year ended December 31, 1998, USABancShares.com relied
primarily on non-retail certificates of deposit and, to a lesser extent, long
term callable advances from the FHLB. The increase in interest expense during
the year ended December 31, 1998 was also due to vBank extending the average
maturity of its certificates of deposit from approximately 9 months to
approximately 16 months. The average cost of funds, including borrowings,
decreased 0.08% to 5.65% for the year ended December 31, 1998 when compared to
the prior year.
Net Interest Income. The earnings of USABancShares.com depend primarily on
its level of net interest income, which is the difference between interest
earned on USABancShares.com's interest-earning assets (loans and investment
securities) and the interest paid on interest-bearing liabilities (deposits and
borrowings). Net interest income is a function of USABancShares.com'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 for the year ended December 31, 1998, increased $3.5 million, or 151.1%,
to $5.9 million from $2.3 million for the same period in 1997. Average
interest-earning assets increased by $69.3 million, or 133.6%, to $121.2
million, for the year ended December 31, 1998. Average interest-bearing
liabilities increased $70.0 million or 158.6% over the same period.
USABancShares.com's interest rate spread increased from 3.68% to 4.54% while
USABancShares.com's net interest margin increased from 4.53% to 4.87%. The
increase in USABancShares.com's interest rate spread and margin reflects
USABancShares.com's significant growth in loans and securities which were
funded at a positive spread with deposits and borrowings.
Analysis of Net Interest Income. 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
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>
Year Ended December 31,
-----------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
Average Average Average Average
Balance(1) Interest Yield/Rate Balance(1) Interest Yield/Rate
------------ ---------- ------------ ------------ ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ..................................... $ 78,797 $ 9,028 11.46% $26,421 $3,090 11.70%
Securities ................................ 36,510 3,015 8.26 22,696 1,637 7.21
Interest-bearing deposits and
other ................................... 5,842 309 5.30 2,739 152 5.55
-------- ------- ------- ------
Total interest-earning assets .......... $121,149 $12,352 10.20% $51,856 $4,879 9.41%
-------- ------- ------- ------
Interest-bearing liabilities:
Deposits:
Savings and passbook accounts ........... $ 3,650 $ 70 1.91% $ 1,888 $ 47 2.49%
NOW accounts ............................ 842 21 2.48 705 16 2.27
Money market accounts ................... 3,573 134 3.76 1,684 63 3.74
Certificates of deposit ................. 83,592 5,041 6.03 35,627 2,158 6.06
Borrowings ................................ $ 22,482 $ 1,188 5.29% $ 4,227 $ 246 5.82%
-------- ------- ------- ------
Total interest-bearing
liabilities .......................... $114,139 $ 6,454 5.66% $44,131 $2,530 5.73%
-------- ------- ------- ------
Excess of interest-earning assets
over interest-bearing liabilities ......... $ 7,010 $ 7,725
======== =======
Net interest income ........................ $ 5,898 $2,349
======= ======
Interest rate spread ....................... 4.54% 3.68%
===== =====
Net interest margin ........................ 4.87% 4.53%
===== =====
</TABLE>
- ------------
(1) Average balances are calculated on a monthly basis.
32
<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:
(1) changes attributable to changes in volume (changes in volume multiplied by
prior rate); (2) changes attributable to changes in rate (changes in rate
multiplied by prior volume); and (3) 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.
<TABLE>
<CAPTION>
December 31, 1998
compared to December 31, 1997
---------------------------------------
Increase or Decrease
Due to Change in
----------------------
Average Average Total Increase
Volume Rate (Decrease)
--------- ----------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
Variance in interest income on:
Interest-earning assets:
Loans ....................................... $6,000 $(62) $5,938
Securities .................................. 1,113 265 1,378
Interest-bearing deposits and other ......... 164 (7) 157
------ ---- ------
Total interest-earning assets .............. $7,277 $196 $7,473
------ ---- ------
Interest-bearing liabilities:
Deposits:
Savings and passbook accounts ............... 30 (7) 23
NOW accounts ................................ 3 2 5
Money market accounts ....................... 71 -- 71
Certificates of deposit ..................... 2,892 (9) 2,883
Borrowings .................................... 962 (20) 942
------ ---- ------
Total interest-bearing liabilities ......... $3,958 $(34) $3,924
====== ==== ======
Change in net interest income .................. $3,319 $230 $3,549
====== ==== ======
</TABLE>
Provision for Loan Losses. Management records a provision for loan losses
in an amount that it believes will 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 increased $95,000 during the year ended December
31, 1998, compared to the same period in 1997. The increase in the provision
for loan losses during the year ended December 31, 1998, as compared to the
same period in the prior year was due primarily to the substantial growth in
vBank's loan portfolio and the shift in such loan portfolio from predominantly
residential loans to a mix of residential and commercial real estate loans. The
allowance for loan losses as a percentage of loans outstanding, net of
discount, was 1.02% at December 31, 1998, compared to 1.01% at December 31,
1997. In addition, the allowance for loan losses as a percentage of total
non-performing loans, net of discount, was 53.72% at December 31, 1998,
compared to 197.96% at December 31, 1997. The significant decline in this ratio
during the year ended December 31, 1998 was due, in large part, to a single
acquired commercial real estate loan which became non-performing during the
third quarter of 1998. vBank is pursuing an aggressive strategy of resolution
with respect to this loan, and vBank expects to resolve the loan to its
satisfaction within the next six months. See "Risk Factors--Our Yield on Loans
Purchased at a Discount is Uncertain" and "Business --Asset Quality--Delinquent
Loans and Non-performing Assets."
33
<PAGE>
Management believes that the allowance for loan losses is adequate to
cover actual and potential losses in the loan portfolio under current
conditions. Nevertheless, there can be no assurance that additions to such
allowance will not be necessary in future periods, particularly if the growth
in vBank's commercial loan originations and purchases continues.
Non-Interest Income. Non-interest income increased by $445,000 to
$759,000, for the year ended December 31, 1998. The increase was primarily the
result of an increase in gain on sales of investment securities of $251,000, an
increase in other non-interest income of $155,000 and brokerage operating
income of $39,000 generated by USABancShares.com's brokerage subsidiary,
USACapital.
Non-Interest Expense. Non-interest expense increased 50.6%, or $1.2
million to $3.7 million, for the year ended December 31, 1998. Compensation and
benefits expense increased $194,000 due primarily to the hiring of additional
personnel to assist in vBank's retail operations, including personnel for a new
branch, persons to service vBank's increased number of loans and staff to
assist with USABancShares.com's financial reporting and other compliance
issues. Occupancy expense increased $321,000 due to the costs associated with
the opening of vBank's headquarters and branch in Center City, Philadelphia.
Advertising expense increased $115,000 as a result of opening vBank's Center
City branch and corporate headquarters, a promotional campaign for the branch
opening and an image campaign. Office and supplies expense increased $150,000
due to vBank changing its name in July 1998. Data processing expense increased
$84,000 as a result of the increase in the number of loans and deposit
accounts, as well as the number of transactions processed.
Income Tax Expense. Income tax expense increased $940,000 to $957,000, for
the year ended December 31, 1998, compared to the same period in 1997. The
increase in income tax expense reflected the increase in earnings before income
taxes.
Liquidity and Capital Resources
Liquidity. As vBank is the primary operating subsidiary of
USABancShares.com, liquidity management is generally handled by vBank's
management. Liquidity refers to a company's ability to generate sufficient cash
to meet the funding needs of current loan demand, deposit withdrawals,
principal and interest payments with respect to outstanding borrowings and to
pay operating expenses. It is management's policy to maintain greater liquidity
than required by the applicable regulatory authorities in order to be in a
position to fund loan originations and purchases, to meet withdrawals from
deposit accounts, to make principal and interest payments with respect to
outstanding borrowings and to make investments that take advantage of interest
rate spreads. vBank monitors its liquidity in accordance with guidelines
established by vBank and applicable regulatory requirements. vBank can minimize
the cash required during times of heavy loan demand by modifying its credit
policies or reducing its marketing effort. Liquidity demand caused by net
reductions in deposits are usually caused by factors over which vBank has
limited control. vBank derives its liquidity from both its assets and
liabilities. Liquidity is derived from assets by receipt of interest and
principal payments and prepayments, by the ability to sell assets at market
prices and by utilizing unpledged assets as collateral for borrowings.
Liquidity is derived from liabilities by maintaining a variety of funding
sources, including deposits, advances from the FHLB and other short and
long-term borrowings.
vBank's liquidity management is both a daily and long-term function of
funds management. Liquid assets are generally invested in short-term investment
securities and other short-term investments. If vBank requires funds beyond its
ability to generate them internally, various forms of both short and long-term
borrowings provide an additional source of funds. At June 30, 1999, vBank had
$43.8 million in borrowing capacity under a collateralized line of credit with
the FHLB, of which $30.0 million had been drawn upon as of such date.
At June 30, 1999, vBank had outstanding commitments, including unused
lines of credit, of $3.4 million and letters of credit of $649,000.
Certificates of deposit that are scheduled to mature within one year totaled
$67.2 million at June 30, 1999, and USABancShares.com, on a consolidated basis,
had $5.0 million of borrowings scheduled to mature within one year. vBank
anticipates that it will have sufficient funds available to meet its current
loan commitments.
We intend to continue to expend significant financial and management
resources in connection with our Internet banking operations; consequently we
expect to incur losses. Over the next twenty-four months, we expect to incur
$15.0 million in marketing expenses and $4.0 million in connection with the
development of our Internet banking operations.
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<PAGE>
USABancShares.com believes that the net proceeds of this Offering, short
and long-term borrowings and advances from the FHLB will be sufficient to fund
its operating activities, capital expenditures and other obligations for the
next three months. The execution of our current business plan will require us to
raise additional capital thereafter. There can be no assurance that
USABancShares.com will be successful in raising additional capital when
required in sufficient amounts and on terms acceptable to USABancShares.com.
The failure to raise such capital could have a material adverse affect on
USABancShares.com's business, results of operations and financial condition. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of USABancShares.com's then-current shareholders would be
reduced.
Capital Resources. USABancShares.com and vBank are subject to various
regulatory capital requirements administered by federal and state banking
agencies. Failure to meet minimum capital requirements can result in certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on USABancShares.com's
financial condition and results of operations. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
USABancShares.com and vBank must meet specific capital guidelines that involve
quantitative measures of USABancShares.com's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
USABancShares.com and vBank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. See "Regulation of USABancShares.com and vBank."
Quantitative measures established by regulation to ensure capital adequacy
require USABancShares.com and vBank to maintain minimum amounts and ratios (set
forth in the table below) of Total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets. As of June 30, 1999, USABancShares.com
and vBank exceeded all capital adequacy requirements to which they were
subject.
On March 9, 1999, USABancShares.com issued $10.0 million of 9.5% junior
subordinated debentures to USA Capital Trust I, a Delaware business trust, in
which USABancShares.com owns all of the common equity. The trust issued $10.0
million of trust preferred securities to investors in a private offering,
secured by the junior subordinated debentures and the guarantee of
USABancShares.com. The junior subordinated debentures mature in 2029. The trust
preferred securities are Tier 1 eligible except that, in accordance with
Federal Reserve Board regulations, no more than 25% of Tier 1 capital may be
comprised of trust preferred securities. Due to current capital levels,
USABancShares.com has been limited to recognizing $4.9 million of the trust
preferred securities as Tier 1 capital. Upon completion of the Offering, it is
anticipated that USABancShares.com's Tier 1 capital would increase to a level
such that an additional amount of the trust preferred securities would be
eligible for treatment as Tier 1 capital depending on the amount of proceeds
from the Offering. USABancShares.com invested $6.0 million of the proceeds from
the trust preferred securities offering in vBank.
At June 30, 1999 and December 31, 1998, vBank's actual and required
minimum capital ratios were as follows:
<TABLE>
<CAPTION>
To Be "Well
Capitalized" Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- --------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Total Capital (to Risk Weighted Assets) .......... $21,545 11.6% $14,836 8.0% $18,545 10.0%
Tier 1 Capital (to Risk Weighted Assets) ......... 20,220 10.9 7,418 4.0 11,127 6.0
Leverage ......................................... 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 1 Capital (to Risk Weighted Assets) ......... 12,879 10.3 4,994 4.0 7,490 6.0
Leverage ......................................... 12,879 8.5 6,068 4.0 7,585 5.0
</TABLE>
35
<PAGE>
At June 30, 1999 and December 31, 1998, USABancShares.com's actual and
required minimum capital ratios were as follows:
<TABLE>
<CAPTION>
For Capital Adequacy
Actual Purposes
----------------------- ----------------------
Amount Ratio Amount Ratio
---------- ---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
As of June 30, 1999:
Total Capital (to Risk Weighted Assets) .......... $26,064 13.8% $15,115 8.0%
Tier 1 Capital (to Risk Weighted Assets) ......... 19,676 10.4 7,558 4.0
Leverage ......................................... 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 1 Capital (to Risk Weighted Assets) ......... 13,782 10.7 5,159 4.0
Leverage ......................................... 13,782 8.7 6,319 4.0
</TABLE>
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 our 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. We use computer systems to perform financial calculations,
track deposits and loan payments, transfer funds and make direct deposits. The
primary processing of our loan and deposit transactions was previously performed
by Intrieve Incorporated, a third-party data processing vendor. We converted our
data processing systems to EDS-Miser III during September 1999, a third-party
data processing vendor. We also use computer software and computer chips to run
security systems, communications networks and other essential bank equipment.
Because of our reliance on these systems (including those used by our existing
and anticipated future third-party data processing vendors), we are following a
comprehensive process to ensure that such systems are ready for the Year 2000
date change. To become Year 2000 compliant, we are following guidelines
suggested by federal bank regulatory agencies and the Securities and Exchange
Commission. A description of each of the steps and the status of our efforts in
completing the steps is as set forth below.
<PAGE>
During 1997, we formed a Year 2000 committee that has investigated the
Year 2000 problem and its potential impact on our 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 us in developing
our approach to becoming Year 2000 compliant. The initial phase of achieving
Year 2000 compliance includes educating our employees and customers about Year
2000 issues. We have completed this initial awareness and understanding phase.
We have 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. We have
completed our assessment of which systems and equipment are most prone to
placing USABancShares.com at risk if they are not Year 2000 compliant (i.e.,
mission critical systems).
The Year 2000 committee has developed an inventory of our vendors and
actions to be taken, identified the team members responsible for completion of
each action and prepared a timetable and a project tracking methodology.
Significant vendors have been requested to advise us 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.
Our current third party data processing servicer as well as vendors who
provide significant technology- related services have represented to us that
they have modified their systems to become Year 2000 compliant.
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<PAGE>
We have developed scripts involving typical transactions to test the proper
functioning of the modified systems. Additionally, in contemplation of our
conversion from Intrieve to EDS-Miser III during September 1999, we performed
such Year 2000 compliance checks on the EDS-Miser III system. We have 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 our 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 throughout 1999.
Year 2000 issues also affect certain of our customers, particularly in the
areas of access to funds and additional expenditures to achieve compliance. As
of December 31, 1998, we had contacted our commercial credit customers and
borrowers regarding the customers' awareness of Year 2000 issues. While no
assurance can be given that our customers will be Year 2000 compliant, we
believe, 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 our exposure in the event that such borrowers do experience problems
or delays becoming Year 2000 compliant.
Our efforts to become Year 2000 compliant are being monitored by our
federal banking regulators. Failure to be Year 2000 compliant could subject us
to formal supervisory or enforcement actions. We expensed $20,000 during the
year ended December 31, 1998 relating to costs incurred as a result of our Year
2000 plan. We anticipate incurring approximately $25,000 in additional costs
related to the implementation of our Year 2000 plan. We presently believe Year
2000 issues will not pose significant operating problems for us. However, if
implementation and testing plans are not completed in a satisfactory and timely
manner by third parties on which we depend, or other unforeseen problems arise,
Year 2000 issues could potentially have an adverse effect on our operations.
See "Risk Factors--Problems Related to "Year 2000" Issues Could Adversely
Affect Our Business."
Inflation and Changing Prices
We are 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. We monitor our 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 our
performance.
Inflation can have a more direct impact on categories of non-interest
expenses such as salaries and wages, supplies, and employee benefit costs. We
closely monitor expenses for both the effect of inflation and non-inflationary
increases in such items as staffing levels, usage of supplies and occupancy
costs.
37
<PAGE>
BUSINESS
General
USABancShares.com was the first "dot com" bank holding company in the
country. The decision to include "dot com" in our new name heralded management's
commitment to its vision of evolving into a fully functional Internet bank
dedicated to becoming a leading provider of financial products and services over
the Internet. We believe the financial services industry has one of the highest
degrees of functionality over the Internet. We will strive to provide the
ultimate application for Internet users through our Website,
www.usabancshares.com. To achieve our objective, we have created a dynamic
Internet banking platform that offers our customers a convenient, secure,
cost-efficient and user-friendly medium for financial products and services,
together with an entertaining on-line experience that we believe no other
financial based site provides. We have established and are continuing to pursue
strategic alliances and marketing programs with leading Internet entities to
attract new USABancShares.com customers. We currently offer on-line
interest-bearing checking accounts, statement savings accounts, certificates of
deposit, electronic bill payment services, overdraft protection, ATM and debit
cards, mortgage loans, credit cards and on-line trading through our Website. In
addition to offering traditional banking products and services, our site
provides users portal applications such as live news feeds and stock quotes, as
well as links to other sites. Our Website also features news and commentary via
usaTV, a streaming media application, which offers customers and users a unique
opportunity to get to know USABancShares.com live over the Internet.
We intend to capitalize on the increasing consumer use of the Internet by
aggressively marketing our Internet banking platform on a national basis.
Although our origin is in Philadelphia as a traditional "brick and mortar"
bank, we believe we can provide financial services more efficiently and
economically to customers nationally through electronic delivery channels
rather than through further expansion of traditional "brick and mortar" branch
network delivery facilities. Through our Internet banking operations, our
customers are able to access account data and information about products and
services we offer and conduct banking activities 24-hours-a-day every day of
the year from anyplace.
Internet Industry Background
Overview. The Internet enables millions of people worldwide to access news
and information, communicate with each other and conduct business
electronically. International Data Corporation reports that the number of
worldwide Internet users is projected to grow from approximately 97 million in
1998 to approximately 320 million by 2002.
The Internet has become a significant marketplace for buying and selling
goods and services. International Data Corporation forecasts that total
worldwide commerce on the Internet will grow from an estimated $32.4 billion in
1997 to an estimated $1.0 trillion in 2003. With the emergence of the Internet
as a globally accessible, fully interactive medium, many companies that have
traditionally conducted business in person, through the mail or over the
telephone are increasingly using electronic commerce. Many consumers are
showing strong preferences for transacting certain types of business, such as
paying bills, booking airline tickets, trading securities and purchasing
consumer products, electronically rather than in person or over the telephone.
Individuals can now conduct these transactions virtually anywhere at any time.
Many consumers have accepted and even welcomed self-directed on-line
transactions because such transactions can be faster, less expensive and more
convenient than transactions conducted through a human intermediary.
In addition to its use as a general commercial medium, the Internet has
rapidly emerged as a means of providing financial services. Many companies are
increasingly offering a variety of financial services, including credit cards,
brokerage services, insurance products and banking services, via the Internet,
and finance-related Websites continue to grow in popularity.
Electronic Banking. The increasing level of commerce transacted on the
Internet has prompted the development of electronic banking delivery systems.
These forms of electronic delivery systems provide convenience for customers
and allow financial institutions to lower their overhead costs. The two types
of electronic banking currently available, PC-based home banking and Internet
banking, are very different. The characteristics of each are as follows:
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<PAGE>
o PC-based Home Banking. PC-based home banking requires PC-based financial
services software products such as Intuit's Quicken, Microsoft's Money or
a bank's proprietary software. Each product carries its own set of
instructions that the customer must learn before commencing any banking
transactions. The software resides on the customer's PC along with his or
her account data and requires a dial-up modem and manual downloading.
Consequently, customers must conduct PC-based home banking from the PC
containing the customer's software and account data. Customers generally
must back up their account data at frequent intervals to counteract the
risk of losing data. Because the customer must connect with the financial
institution via modem and download his or her account data, real-time
transactions are not generally possible.
o Internet Banking. Unlike PC-based home banking, Internet banking requires
only a secure Web browser for access to the Internet and the financial
institution. Internet banking requires no particular software and does not
restrict the customer's operations to the location of his or her PC.
Instead, the customer accesses the financial institution through the
Internet and deposits or transfers funds, pays bills or transacts other
business on a real-time basis. Account data remains stored on the bank's
secure server at all times protected by technology designed specifically
to safeguard such information. No downloading or back-up is required, as
the bank's server backs up all data and transactions on a continuous
basis. With Internet banking, the information presented to the customer
remains current at all times. Customers who use personal financial
software retain the option to download transactions for financial or tax
planning purposes.
The use of electronic banking delivery systems, and particularly Internet
banking, is growing as consumers find that electronic banking is both
convenient and cost-effective. According to Cyber Dialogue, the number of
Americans banking on-line will triple from an estimated 6.9 million in 1998 to
an estimated 24.2 million in 2002. Cyber Dialogue further indicates that
web-banking customers are active customers.
Demographic surveys indicate that Internet users represent an ideal target
market for Internet banking. Studies by Jupiter Communications revealed that,
in the United States, approximately 49% of Internet users are college graduates
and that approximately 30% are engaged in professional or managerial
occupations. The survey also indicated that the median age of Internet users is
33, that approximately 61% of Internet users are under the age of 45 and that
the average annual income of an Internet user is over $60,000. The attractive
demographics of Internet users facilitate the growth of Internet banking.
Internet users tend to be young and mobile and thus comfortable with and
receptive to the convenience of on-line commercial transactions. We believe
that as Internet users enter their prime earnings and savings years, there will
be an increased demand for high-yielding savings products. Additionally,
Internet users tend to be professionals with limited amounts of discretionary
time and are attracted to the convenience of "one-stop shopping" for a full
range of financial services.
The USABancShares.com Strategy
We are executing our strategy of becoming a leading provider of financial
products and services over the Internet by:
o Pursuing strategic alliances and customer incentive programs. We have
strategic marketing agreements with several leading Internet entities
which provide us access to customers of established Internet companies. We
also have strategic alliances with other Internet entities that provide
hardware and software, which give us access to customers at the "point of
sale." Specifically, we have formed strategic alliances with (i)
Earthlink, the seventh largest Internet service provider, under a two-year
agreement by which its subscribers (currently 1.5 million) will have
direct access to a co-branded USABancShares.com site providing both
on-line banking and brokerage services; (ii) UltraStar under a one-year
agreement by which its brand specific ISP's such as www.yankees.com,
www.orioles.com and www.DavidBowie.com will promote and offer exclusive
on-line banking and brokerage services by USABancShares.com and (iii)
Webcitizen.com, previously known as Moffett, a regional ISP, under a
one-year agreement by which its current 50,000 customers and any new
customers will have exclusive access to USABancShares.com. We have also
entered into agreements with Systemax, which gives USABancShares.com the
exclusive right to be on 150,000 desktop interfaces via a hotlinked icon
on
39
<PAGE>
computers being shipped during the fourth quarter of 1999, and
Microworkz.com, which will allow us to be the exclusive financial service
provider via a hotlinked icon on 10,000 units of their latest computer
system iToaster, designed exclusively for Internet users. Under our
agreements, bounties are generally payable by us for the first year of
point of sale advertising. On September 23, 1999 EarthLink entered into a
merger agreement with MindSpring Enterprises, Inc. It is anticipated that
when, and if, the merger is completed the combined company will then be the
second largest ISP with 3.0 million customers. These initial costs of our
strategic alliances and customer retention programs will contribute to our
anticipated losses from operations in 1999 and 2000. Thereafter, we expect
to earn revenues from new customer accounts, although there can be no
assurance that sufficient revenues will be generated. We intend to continue
to actively pursue additional strategic alliances, implement several
innovative customer acquisition and retention programs designed for new and
existing USABancShares.com customers and co-brand these programs with
select USABancShares.com partners.
o Expanding our national marketing campaign. We intend to continue to
expand our brand awareness through our national marketing campaign. This
campaign includes Internet advertising through portals such as Yahoo! and
Excite, television campaigns on networks such as CNBC and MSNBC,
sponsorship of nationally televised special events on networks such as
VH-1, radio advertising such as our spots on the Howard Stern Show, and
newspaper and magazine advertising in national publications such as the
Wall Street Journal, New York Times and Fast Company. The cost of our
marketing efforts will also contribute to our expected losses in 1999 and
2000. As we increase our market share and become a leading provider of
financial products and services during this early stage of Internet
banking, we expect our revenues to increase and to return to profitability
in 2001, although there can be no assurance that we will return to
profitability within such time frame.
o Establishing the USABancShares.com Website as a leading and comprehensive
source for financial services on the Internet. We have created our
Internet banking platforms to allow our customers to choose between
platforms using either Hypertext Mark-up Language, more commonly known as
"HTML," or Macromedia's innovative "Flash" technology. We were certified
to begin offering our Internet banking and brokerage products and services
through the HTML Website on July 15, 1999, and we expect to begin offering
products and services through the "Flash" Website in the fourth quarter of
1999. We believe the "Flash" platform will significantly enhance our
customers' experience on our Website and differentiate us from other
Internet banks. Additionally, because our "Flash" platform was developed
in anticipation of the greater bandwidth that is now widely available, we
will be able to deliver our services at the speed expected by today's
on-line user. We believe www.usabancshares.com's unique audio/visual
interface will attract users who demand not only efficient and convenient
financial services, but entertaining content as well. We intend to attract
customers by:
o Offering a broad selection of financial products and services. We
provide the convenience of "one-stop shopping" to consumers. We
currently offer on-line interest-bearing checking accounts, statement
savings accounts, certificates of deposit, electronic bill payment
services, overdraft protection, ATM and debit cards, mortgage loans, and
credit cards. USACapital, Inc., our wholly-owned subsidiary, offers
on-line trading, real-time quotes, low commissions and direct access to
funds held on deposit with vBank. We intend to continue to develop
innovative financial products such as CDEnergy.com, the first live
auction site for FDIC-insured certificates of deposit. Although most of
our products are offered by us directly, some of our products, such as
our credit cards and mortgage loans, are offered through our alliance
partners such as Low Cost Loans. We anticipate expanding our product
offerings in the future through strategic partnerships with other
companies to include various types of consumer loans and insurance
products. See "--Products and Services."
o Offering attractive interest rates and low or no fees. In the future, we
expect our operating costs will be generally lower than those of
traditional "brick and mortar" banks because we will not require a
traditional branch network to generate deposits and conduct operations.
We intend to pass our savings in operating costs on to our customers by
offering attractive interest rates and low or no fees.
o Building national brand awareness through strategic alliances and
extensive marketing efforts. We are forming strategic alliances and
creating a national marketing campaign designed to acquire new
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<PAGE>
customers and promote the USABancShares.com brand as a premier provider
of financial services over the Internet. We are working with a
nationally known marketing company to build national awareness of the
USABancShares.com name through a variety of marketing initiatives. Such
initiatives include Internet advertising, national print, television and
radio advertising, direct mail, strategic alliances with other companies
and customer referral programs. We expect to spend $5.0 million to fund
our marketing efforts during the last six months of 1999 and an
additional $10.0 million over the following two years. While our
strategic alliances and marketing efforts are intended to increase brand
awareness and to enhance our market share and provide us with a
competitive advantage over both our existing and potential competition,
our marketing expenditures are expected to result in our recognizing net
losses during the next two years. See "--Marketing and Strategic
Alliances."
o Offering superior service, convenience and ease of access. As with our
traditional banking operations, we will continually seek ways to enhance
customer satisfaction. For example, unlike many other banks, we offer
services such as electronic bill payment and ATM cards without imposing
service charges. Our Website also offers a higher level of convenience
than can be achieved in a traditional bank branch or through PC-based
home banking. Our customers are able to access account data and
information regarding products and services and conduct banking
activities 24-hours-a-day. Our customers can also reach our customer
service representatives 24-hours-a-day by telephone or e-mail. We have
developed our Website to be a user-friendly Internet banking platform.
o Offering interesting and entertaining content through a real-time
interactive medium. Our Website was designed to be utilized by Internet
users who are attracted to the innovative features contained on our
Website and not just by persons who are solely interested in executing
financial transactions. In addition to a wide array of financial
products and services, we offer live news feeds, news and commentary and
links to other sites on the Internet.
o Offering advanced security measures. Through the use of sophisticated
technology, we are able to provide security measures to our customers
that we believe to be among the most advanced security measures
currently available in the Internet banking industry. See "--Security."
o Generating sponsorship and advertising revenues. We intend to establish
advertising relationships by offering advertising opportunities to leading
brand marketers and merchants in traffic intensive areas of the
USABancShares.com network. These merchants will receive exposure through
banner advertising combined with promotional offers in exchange for which
we will collect a fee based on various arrangements such as cost per click
for each new visit to the third-party website made through our network,
and/or a share of revenues from each sale to USABancShares.com users.
o Expanding our Lending Efforts. Since our acquisition of vBank in November
1995, we have pursued an aggressive growth strategy, characterized by
purchases of pools of primarily performing loans at a discount secured by
single-family residential, multi-family residential and commercial
properties. Our net loan portfolio has grown from $7.0 million at December
31, 1995 to $114.7 million at June 30, 1999. On July 31, 1999, we
purchased an $88.3 million loan pool at a purchase price of $88.5 million
consisting of adjustable-rate commercial real estate and multi-family
residential loans. In addition, on August 26, 1999, we purchased an $11.0
million loan pool consisting primarily of adjustable-rate commercial real
estate loans. We intend to increase our originations of commercial real
estate and commercial business loans. We also intend to continue to
purchase primarily performing loan pools. These loans may consist of
multi-family residential loans, commercial property loans and one-to-four
family residential mortgage loans.
Our Internet banking strategy also involves the streamlining of our
existing branch network. We are currently negotiating the sale of one of our
four "brick and mortar" branch facilities. Additionally, we are in the process
of selling the building which serves as our corporate headquarters. We intend
to lease this building following the sale and to maintain our retail and
lending operations in such facility. We will use any gains on these
dispositions for the execution of our Internet business strategy. See
"--Description of Properties."
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Products and Services
Deposit Products and Services. We offer a variety of deposit products at
attractive interest rates in order to build our customer base. We are able to
offer attractive interest rates as a result of our low operating costs. We also
seek to attract customers by offering convenient services such as free
electronic bill payment, and ATM/debit cards. Our on-line deposit products and
services include:
o Deposit Products. We offer an interest-bearing checking account, a
statement savings account and several fixed term certificates of deposit.
o Bill Payment Service. Through services provided by EDS, customers can pay
their bills on-line through electronic funds transfer or a written draft
prepared and sent to the creditor. We do not charge a fee for this
service.
o Overdraft Protection. If a customer has both an interest checking account
and a statement savings account, we will automatically establish overdraft
protection between those accounts.
o ATM/Debit Cards. Each customer automatically receives an ATM card when he
or she opens an account with vBank. We do not charge our own fee for ATM
usage, but fees are generally imposed by the operator of the ATM. vBank
will reimburse ATM surcharges incurred at facilities charging $2.00 or
less per transaction for up to five ATM transactions per monthly statement
cycle. Debit cards carry the MasterCard logo.
Lending Programs. To generate fee income and provide a convenient service
to our customers, we offer on-line loans and credit cards as described below.
o Mortgage Loans. Our Website enables customers to obtain interest rate
quotes and apply for mortgage loans on-line. We have an agreement with Low
Cost Loans, whereby we act as a loan originator on behalf of Low Cost
Loans.
o Credit Cards. We offer our customers Visa credit cards issued for no
annual fee. We are paid a fee for each cardholder referred through our
Website. Customers can apply for these credit cards on-line.
Non-banking Financial Services. To serve as a single convenient source for
the financial services needs of Internet users and to generate additional
non-interest income, we offer non-banking financial services designed to
attract and retain customers. These services include on-line trading through
USACapital, Inc., our wholly-owned broker-dealer subsidiary. Customers can
purchase securities without writing checks to their brokers, as trading fees
are automatically deducted from their checking or money market accounts with
vBank. Investment proceeds are automatically deposited into the customer's
deposit account with vBank. We provide customers 24-hour on-line access,
real-time quotes, low commissions and a professional brokerage staff.
Future Products and Services. To generate additional interest and fee
income and enhance customer convenience, in the future we plan to introduce a
variety of new products and services. Future products and services may include
insurance products, commercial and consumer lending, cash management accounts,
installment loans, business equipment leasing, timely search and retrieval
services through our Website and various other products and services.
<PAGE>
Marketing and Strategic Alliances
Our marketing strategy is aimed at making USABancShares.com a leading
brand in the Internet financial services market. Our marketing strategy is
designed to increase our customer base and includes on-line and off-line
advertising. We expect to derive marketing benefits from media coverage that we
generate through our public relations campaign. For example, UltraStar, Inc., an
entertainment promotion agency, has agreed to offer us premier sponsorship of
the GQ Man of the Year Award Ceremony to be held at Radio City Music Hall in New
York City and televised on VH-1. This sponsorship includes a customized,
celebrity endoresed multimedia compact disk bundled with 500,000 circulated,
copies of the GQ Man of the Year issue. We will have customized promotional
content in the compact disk and the right to two full page magazine
advertisments in GQ placed at our discretion. We believe such coverage will
increase the general public's awareness of USA BancShares.com and simultaneously
build our customer base. However, our marketing strategies will extend beyond
our on-line advertising and public relations campaigns. New initiatives will
include print advertisements in publications aimed at our target customers and
potential strategic partners, direct mail marketing, co-branded credit cards and
other strategic partnerships with Internet financial services providers. We
realize that our new marketing strategy will require a significant investment of
resources and a commitment to pursue new marketing relationships.
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We recently hired a director of marketing and we plan to hire additional
marketing support staff. We believe that a significant increase in our
investment in marketing initiatives will enable us to increase our name
recognition and grow our customer and deposit base on a national scale.
We are developing strategic alliances and partnerships with several
top-performing and customer-based Internet sites. Additionally, as described
below, we are developing several innovative customer incentive programs. These
strategic relationships and customer incentive programs will be a key factor in
promoting and branding our core products and services.
o Reaching Internet Service Provider ("ISP") Customers. We have entered
into agreements with several ISPs giving us the ability to market
USABancShares.com's services directly to the ISP customers. In July 1999,
we entered into a two-year agreement with EarthLink, the seventh largest
ISP, pursuant to which we will provide EarthLink's subscribers (currently
1.5 million) access to a USABancShares.com/ EarthLink co-branded Website
that promotes and exclusively offers our on-line financial products and
services. Under this agreement, we will pay EarthLink promotion fees and a
set fee for each customer generated under the agreement. The per-customer
fees will be credited against the promotion fees until the promotion fees
are completely offset, at which time we will pay per-customer fees in
cash. In connection with this agreement, we granted EarthLink 120,000
warrants to purchase our common stock at an exercise price of $12.00 per
share which vest over a two-year period. This agreement allows us to
provide interactive, on-line banking services to EarthLink members as the
default on-line financial services provider in select areas, such as the
EarthLink Personal Start Page and the EarthLink Finance Channel Jump Page,
of the EarthLink network. On September 23, 1999, EarthLink entered into a
merger agreement with MindSpring Enterprises, Inc. It is anticipated that
when, and if, the merger is completed the combined company will be the
second largest ISP with 3.0 million customers. In September 1999, we
entered into an annual agreement with UltraStar whereby UltraStar's brand
specific ISP providers will promote and offer exclusive on-line banking
and brokerage services by USABancShares.com. We will pay UltraStar a set
fee for each customer who uses our on-line banking services. These ISPs
will include, among others, www.DavidBowie.com, www.yankees.com and
www.orioles.com. We have also entered into agreements with regional ISPs,
such as Webcitizen.com, to reach other specific, new and existing customer
bases.
o Reaching Customers at the "Point of Sale." We have entered into
agreements with personal computer distributors that allow us to reach
potential on-line banking customers at the point of sale. We have a
short-term agreement with Microworkz.com that makes us the exclusive
financial service provider to customers of the nationally-distributed,
customized, interactive computer system, iToaster. iToaster customers will
be able to access the USABancShares.com banking and brokerage services
through an icon on 10,000 personal computer desktop interfaces containing a
direct link to our Website. We will also include our marketing material in
the packaging for the personal computers. We will pay Microworkz.com a fee
for every time a third party goes to our Website through the desktop icon
on the iToaster service. We also paid a fee to Microworkz.com that
guarantees us a right of first refusal for a long-term agreement for the
"On-line Bank" button on the computer desktop.
In September 1999, we entered into a one-year agreement with Systemax
where we will be the exclusive financial service provider to the
purchasers of 150,000 nationally distributed personal computers through an
icon on the personal computer desktop interface containing a direct link
to our Website. In addition, Systemax will ship our marketing materials to
their purchasers in the packaging with the personal computers. Systemax
will also market USABancShares.com through their Website, globally
distributed direct mail catalog, mass e-mail newsletter promotions,
television advertisements and infomercials on the Home Shopping Network
and co-branded marketing campaigns. Under this agreement, we will pay a
fee for every customer based upon the average deposit or loan. We will
also pay a fee for every computer shipped with our direct linked icon on
the computer desktop. In connection with this agreement, we granted
Systemax warrants to purchase up to 40,000 shares of our common stock.
Systemax may exercise 10,000 of the warrants at any time prior to August
19, 2001 at an exercise price of $10.00 per share. Systemax may exercise
the remaining 30,000 warrants upon certain conditions being met at an
exercise price equal to the closing market bid price on the day prior to
the day the conditions are fulfilled by Systemax.
o Customer Incentive Programs. We are establishing programs that offer
incentives to customers who open an account with USABancShares.com. For
example, we have an agreement with MyPoints.com,
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Inc. that will guarantee traffic to our Website through e-mail and direct
marketing efforts on our behalf by MyPoints.com and premier branding
placement on the MyPoints.com Website. We will pay to MyPoints.com a fee
for every new customer acquired through the MyPoints.com Website. Our
customers will receive points for performing transactions with our Website
that they can redeem at qualified on-line vendors for other products and
services. We have also established other customer incentive programs
through our strategic alliances with certain ISPs. These agreements
include an incentive program offering up to one year of free ISP dial-up
service to customers who open qualified bank accounts with us through
EarthLink, UltraStar, and Webcitizen.com.
Operations
Customers are able to access our Internet bank through any Internet
service provider by means of an acceptable secure Web browser. When customers
access USABancShares.com's service menu, they are able to open a new account,
review the status of an existing account or engage in a transaction. To open a
new account, the customer completes the on-line enrollment form on our Website,
prints the signature card, signs it and mails it to us. Customers are able to
make deposits into an open account via direct deposit programs, by transferring
funds between accounts at vBank, by wire transfer, by mail or in person at our
principal executive offices. Customers also have the ability to make
withdrawals and access their accounts at ATMs that are affiliated with the MAC,
Cirrus, Honor and NYCE networks, which we believe provides added customer
convenience. Customers are able to apply for loans, review account activity,
pay bills electronically, conduct brokerage transactions, receive statements by
mail and print bank statement reports from any PC with a secure Web browser,
regardless of its location.
We have negotiated relationships with a select group of service providers
who not only provide us with significant quality, security, reliability,
performance and marketing capabilities, but also play an integral role in
implementing our Internet banking strategy. Because we outsource our principal
operational functions to experienced third-party service providers that have
the capacity to process a high volume of transactions, we believe we will be
able to respond easily to growth. Moreover, we intend to preserve a degree of
flexibility that will enable us to assess and evaluate our product offerings
and delivery structure on an ongoing basis and to incorporate other alliance
opportunities as they present themselves. Should any of these relationships
terminate however, we believe we will be able to secure the required services
from an alternative source without material interruption of our operations. Our
principal service providers are described below.
o EDS-Miser. We receive core systems processing services, such as deposit
account, loan and year-end processing services, from EDS-Miser. The
EDS-Miser's Miser III system interfaces with EDS' secure Internet servers
and verifies customer passwords and identification. Miser III also
operates our ATM/debit card management systems.
o EDS. EDS licenses its Internet-based Electronic Banking System and
electronic bill paying services, provided through CheckFree, to us. EDS
provides operational support and hosting services for our Internet banking
and bill payment applications. Specifically, EDS provides a secure Website
and software that performs services relating to our infrastructure and
other electronic banking services. EDS provides the interface necessary to
link our servers with those used by EDS-Miser and CheckFree. EDS also
provides software maintenance and consulting services as needed.
Security
Our ability to provide our customers with secure financial services over
the Internet is of paramount importance. We will continually evaluate the
Internet systems, services and software used in our operations to ensure that
they meet the highest standards of security. The following are among the
security measures that we have in place for our Internet banking operations:
o Encrypted Transactions. All banking transactions and Internet
communications are encrypted so that sensitive information is not
transmitted over the Internet in a form that can be read or easily
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deciphered. Encryption of Internet communications is accomplished through
the use of the Secure Sockets Layer ("SSL") technology. SSL is the
standard for encryption on the Internet and is currently used by
Netscape's Navigator (Version 3.03 or higher) and Microsoft's Internet
Explorer (Version 3.02 or higher). Messages between the web application
server and EDS-Newtrends system will use encrypted pins using EDS
encryption, which is described in "--Isolated Bank Server" below.
o Secure Logon. To eliminate the possibility that a third party may
download vBank's or a customer's password file, user identification and
passwords are not stored on the Internet or the Web server. Furthermore,
passwords are strings of six to eight alphanumeric characters, which makes
the chance that a password can be randomly guessed less than one in one
trillion.
o Isolated Bank Server. The computer used to provide our operational
services cannot be accessed directly through the Internet. It is on a
private connection, or intranet, that provides two-way communication
between the isolated bank server and the EDS Internet server.
Consequently, an Internet user cannot directly access the computer that
actually provides our services. All banking services are routed from the
EDS application server through a firewall. The firewall is a combined
software and hardware product that precisely defines, controls and limits
the access to "internal" computers from "outside" computers across a
network. Use of this firewall means that only authenticated bank customers
or administrators may send or receive transactions through it, and the
firewall itself is believed to be immune to penetration from the network.
The firewall is thus a mechanism used to protect the vBank server from the
freely accessible Internet. Furthermore, all messages sent or received
between the EDS application server and the vBank server are carried on a
proprietary internal EDS network and employ DES encryption to increase
security. Finally user passwords are additionally protected using Atalla's
hardware based encryption techniques. DES is a symmetric key algorithm and
is highly secure because it is not susceptible to standard cipher-text
attacks. Thus, even if a perpetrator were able to route a message to the
vBank server through the firewall, the message could not be encrypted in a
way that would be considered valid by the server. As a result, the vBank
server would reject the message.
o Authenticated Session Integrity. An authenticated user is any user who
signs onto our Website with a valid user ID and password. Although we
expect the vast majority of authenticated users to be legitimate bank
customers, vBank server is programmed to limit exposure to an
authenticated user who is attempting to defraud vBank. If the
authenticated user alters the URL (the command or request that is sent
from the browser to the server) in any way in an attempt to gain access to
other users' accounts, the EDS server immediately detects that the session
integrity variables have been violated. The EDS server will immediately
stop the session and record the attempt in a log so that our staff can
investigate.
o Physical Security. All servers and network computers reside in Plano,
Texas and Rochelle Park, New Jersey in secure EDS facilities. Currently,
computer operations supporting our Internet access are based in Plano,
Texas. Only employees with proper photographic identification may enter
the primary building, which is monitored by guards at multiple levels
24-hours-per-day, 7-days-per-week. The computer operations are located in
a secure area, with admission only by key card. Key cards are restricted
to a specific group of employees. Access to the Web server console
requires further password identification, which provides only limited
access to the system based on the role assigned to that password by the
security administrator.
o Secure Modem Access. A private leased line that is not accessible from
the public network connects vBank server and EDS' web application server.
A dial-up maintenance port also permits access to vBank server. The modem
that provides the only access to this port is specially protected and is
only enabled on an as-needed basis to a restricted group of employees.
o Service Continuity. EDS and EDS-Newtrend each provide a fully redundant
network with no single point of failure. vBank server is also "mirrored"
so that hardware failures or software bugs should cause no more than a few
minutes of service outage. "Mirroring" means that the various servers are
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backed up continuously so that all data is stored in two physical
locations. This network and server redundancy ensures that access to vBank
will be reliable. However, if customers are not able to access vBank over
the Internet, customers will retain access to their funds through several
means, including paper checks, ATM cards and customer service.
o Monitoring. All customer transactions on the vBank server in EDS produce
one or more entries into transactional logs. We and EDS recognize that it
is critical to monitor these logs for unusual or fraudulent activity. As
mentioned previously, any attempt by an authenticated user to modify the
command or request that is sent from the browser to the server will be
logged. Additionally, all financial transactions will be logged. Our
personnel will review these logs regularly, and any abnormal or unusual
activity will be noted and we, EDS or both will take either appropriate
action. Ultimately, vigilant monitoring is the best defense against fraud.
o Security Assessment and Detection. EDS uses a service to simulate attacks
on the networks and systems to fortify the security features before the
system is breached. The system also has a feature that detects and stops
any unauthorized activity, whether from an internal or external source.
This feature can record the origin, type, destination, and time of the
attack and make this information immediately available to a monitor.
The preceding security measures are designed to ensure that our Internet
bank is set up in a secure manner. However, over the long term, the security of
our Internet bank depends upon the procedures and standards used for
administration of the Internet site. EDS is required to obtain SAS 70
certification from a national accounting firm. This is a certification by
independent auditors that EDS computer systems are being managed and operated
in a manner consistent with accepted practices. EDS has received this
certification.
We believe the risk of fraud presented by Internet banking is not
materially different from the risk of fraud inherent in any banking
relationship. We believe the three principal reasons for a breach in bank
security are: (1) misappropriation from the user of the user's account number
or password, (2) penetration of the bank's server by an outside "hacker" and
(3) fraud committed by an employee of the bank or one of its service providers.
Both traditional banks and Internet banks are vulnerable to these types of
fraud. By establishing the security measures described above, we believe we
have reduced our vulnerability to the first two types of fraud. To counteract
fraud by employees, associates and consultants, we have established internal
procedures and policies designed to ensure that, as in any bank, proper control
and supervision is exercised over employees, associates and consultants. We
will also counteract all types of fraud through daily examination of our
transactional logs. In addition, we intend to provide, at no cost to the
depositor, $10,000 insurance coverage from Travelers Property Casualty to
protect the customer from any loss due to the unauthorized use of a depositor's
accounts and access to our Internet banking system.
Lending Activities
Since our acquisition of vBank in November 1995, we have aggressively
grown our loan portfolio through the acquisition of loan pools at a discount
and through loan originations. We intend to continue to expand our small
business community banking presence in the Mid-Atlantic region primarily
through increased loan originations and purchases of pools of loans. We intend
to emphasize the origination and purchase of commercial real estate and
commercial business loans, which generally carry higher yields than traditional
single-family residential loans. Although we intend to continue to originate
single-family residential and consumer loans, such loans will not be emphasized
and will be offered primarily as an accommodation to our customers.
Single-family residential loans originated through our Website will be
originated through our alliance partner, Low Cost Loans. We intend to fund our
increased lending activities in part with deposit growth we expect to achieve
from our Internet banking operations.
Loan Portfolio. The principal components of our loan portfolio are first
mortgage loans secured by residential real estate and commercial real estate
and, to a much lesser extent, home equity loans, passbook and other consumer
loans and commercial business loans. At June 30, 1999, our total loans
receivable, net, amounted to $114.7 million, which represented 49.9% of our
total assets at that date.
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The following table sets forth the composition of our loan portfolio in
dollar amounts and as a percentage of the portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
------------------------ --------------------------------------------------
1999 1998 1997
------------------------ ------------------------ -----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate(1)(2) .................. $114,416 97.6% $102,076 98.8% $54,262 95.1%
Commercial business(3) ............. 2,289 1.9 986 1.0 1,091 1.9
Consumer(4) ........................ 562 0.5 243 0.2 1,694 3.0
-------- ----- -------- ----- ------- -----
Total loans receivable ............. $117,267 100.0% $103,305 100.0% $57,047 100.0%
======== ===== ======== ===== ======= =====
Less
Loans in process .................. (1,042) -- 260
Deferred loan fees ................ (189) (116) 217
Allowance for loan losses ......... (1,325) (1,051) 568
-------- -------- -------
Net loans receivable ............... $114,711 $102,138 $56,002
======== ======== =======
</TABLE>
- ------------
(1) Consists of loans secured by single-family residential, multi-family
residential and commercial real estate.
(2) At June 30, 1999, a majority of vBank's real estate loans consisted of
loans secured by multi-family residential and commercial real estate.
(3) Consists primarily of inventory and working capital loans.
(4) Consists primarily of home equity loans and installment loans.
Loan Maturity. The following table sets forth the maturity or period of
repricing of our loan portfolio at June 30, 1999. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due within one year. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in which they contractually mature. Fixed rate loans are included
in the period in which the final contractual repayment is due. The following
table does not include the effect of future principal prepayments.
<TABLE>
<CAPTION>
Within 1 1-3 3-5 5-15 Beyond
Year Years Years Years 15 Years Total
---------- ---------- ---------- ---------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate(1) .................. $14,844 $14,785 $30,392 $25,085 $29,310 $114,416
Commercial business(2) .......... -- -- 81 2,208 -- 2,289
Consumer(3) ..................... -- -- 562 -- -- 562
------- ------- ------- ------- ------- --------
Total loans receivable ......... $14,844 $14,785 $31,035 $27,293 $29,310 $117,267
======= ======= ======= ======= ======= ========
</TABLE>
<PAGE>
- ------------
(1) Consists of loans secured by single-family residential, multi-family
residential and commercial real estate.
(2) Consists primarily of inventory and working capital loans.
(3) Consists primarily of home equity loans and installment loans.
Origination, Purchase and Sale of Loans. Our lending activities are subject
to the underwriting policies and loan origination and purchase procedures
established by the board of directors and management. Loan originations are
derived from a number of sources, such as existing customers, our loan officers,
borrowers, builders, attorneys, walk-in customers and correspondent lenders. We
expect loan originations to also be derived from our Website in the future. As
described in "--Products and Services--Lending Programs--Mortgage Loans," we
have an agreement with Low Cost Loans whereby vBank acts as a loan originator on
behalf of Low Cost Loans with respect to retail loans, including single-family
residential and home equity loans. Upon receiving a loan application, we obtain
a credit report and employment verification to verify specific information
relating to the applicant's employment, income and credit standing. In the case
of a real estate loan, an appraiser approved by us appraises the real estate
intended to collateralize the proposed loan.
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An underwriter checks the loan application file for accuracy and completeness,
and verifies the information provided. If the appraisal and credit information
generally comply with our underwriting guidelines, the loan is approved by the
board of directors. We have not delegated to any of our loan officers approval
authority and all loan originations are required to be approved by the board of
directors. However, to accommodate vBank's future growth, the board of
directors is considering implementing a committee system to approve loans. Such
committee would approve loans based on the board of directors' approved loan
underwriting policies. Loans in excess of $1.0 million would still require
approval by the full board of directors. For multi-family residential and
commercial real estate loans, we require that the borrower provide operating
statements, pro forma cash flow statements and, if applicable, rent rolls. In
addition, we review the borrower's credit standing and expertise in owning and
managing the type of property that will collateralize the loan. Fire and
casualty insurance, and in certain cases, flood insurance, are required on the
property serving as collateral at the time the loan is made and throughout the
term of the loan.
Our internal originations consist primarily of multi-family residential
and commercial real estate loans, which we intend to continue to emphasize. In
addition, although commercial business loans have historically not been a major
line of business for us, we intend to increase our emphasis on small business
commercial loan originations. Although we will and do originate single-family
residential and consumer loans, such originations have historically been made
as an accommodation to our customers and we generally do not emphasize such
loans.
Since December 1995, we have been supplementing our originations with
purchases of loan pools at a discount. Such purchases have been the primary
factor in our substantial growth since 1995. Prior to 1997, we acquired loans
at a discount, generally from the FDIC and the Resolution Trust Corporation,
primarily in auctions of pools of loans acquired by such agencies from the
large number of financial institutions which had failed during the late 1980s
and early 1990s. Although governmental agencies, such as the FDIC, continue to
be a potential source of loans, in recent periods we have obtained discounted
loans primarily from various private sector sellers, such as banks, savings
institutions, mortgage companies and insurance companies which generally were
seeking to eliminate a loan or a category of loans from their portfolio.
At June 30, 1999, our net discounted loan portfolio amounted to $51.6
million or 44.0% of our total assets. These loans had a face value of $57.1
million, reflecting a discount of $5.5 million or 9.6%. Management believes
that, at June 30, 1999, approximately 54% and 46% of the discounted loan
portfolio was secured by residential and commercial properties, respectively.
Substantially all of the loans we purchase at a discount were performing
in accordance with their terms at the time of purchase. We have developed and
maintain a proprietary model to determine what we believe to be the appropriate
purchase price to be paid for a discounted loan pool. The discount is
determined based on objective and subjective criteria. The objective criteria
includes geographic location, loan-to-value ratio, collateral type, past
payment performance, and the term and structure of the loan. The subjective
criteria relies on senior management's substantial experience with respect to
the acquisition and management of discounted real estate loans. On July 31,
1999, we purchased an $88.3 million loan pool at a purchase price of $88.5
million consisting of adjustable-rate commercial real estate and multi-family
residential loans. The loans have a weighted average maturity of 127 months
with $59.7 million repricing within one year. The weighted average yield on
such portfolio is 8.32%. In addition, on August 26, 1999, we purchased an $11.0
million loan pool consisting primarily of adjustable-rate commercial real
estate loans. This pool of performing assets was purchased for approximately
$10.0 million. The loans have a weighted average yield of 8.36%. Of the total
$99.3 million loans purchased since June 30, 1999, $35.3 million, or 35.6%, are
located in Pennsylvania and New Jersey, 15.4% are located in California, 12.1%
are located in Minnesota and 11.2% are located in Florida. We funded these
acquisitions with excess liquidity, FHLB advances and institutional
certificates of deposit.
Real estate loans generally are acquired in pools, although multi-family
residential and commercial real estate loans may be acquired individually.
These pools generally are acquired in auctions or competitive bid circumstances
in which we face substantial competition. Although many of our competitors have
access to greater capital and have other advantages, we believe we have a
competitive advantage relative to many of our competitors as a result of our
experience in acquiring and managing loans purchased at a discount and the
strategic relationships and contacts we have developed in connection with these
activities.
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Prior to making an offer to purchase a portfolio of loans, we conduct an
extensive investigation and evaluation of the loans in the portfolio.
Evaluations of potential loans are conducted primarily by our senior management
who specialize in the analysis of such loans. Our employees may use third
parties to assist them in conducting an evaluation of the value of the
collateral property as well as to assist them in the evaluation and
verification of information and the gathering of other information not
previously made available by the potential seller.
Although we focus on acquiring loans in the Mid-Atlantic region, we have
acquired loans secured by real estate located in a number of other states
including Texas, Florida and California. We believe that the relatively broad
geographic distribution of our discounted loan portfolio reduces the risks
associated with concentrating such loans in limited geographic areas and that
due to our expertise and our policies and procedures, the geographic diversity
of our discounted loan portfolio does not place greater burdens on our ability
to administer and, if applicable, service such loans.
One-to-Four Family Residential Mortgage Lending. We have historically not
been an active originator of single-family residential loans and such loans
have generally been originated as an accommodation to our customers. These
loans are generally made to borrowers who, because of the size of the loan,
prior credit problems, the absence of a credit history or other factors, are
unable to qualify as borrowers for a single-family residential loan under
Federal Home Loan Mortgage Corporation or Federal National Mortgage Association
guidelines ("conforming loans"). As a result, these loans are not eligible for
resale in the secondary mortgage market. Loans to non-conforming borrowers are
perceived by our management as being advantageous to us because they generally
have higher interest rates and origination and servicing fees and generally
lower loan-to-value ratios.
Substantially all of our one-to-four family residential loans have been
acquired through loan purchases. A majority of these loans are located outside
of the greater Delaware Valley. Although our purchased single-family
residential loans carry a variety of terms, we believe the majority of such
loans have loan-to-value ratios of 80% or below and carry fixed rates of
interest. We generally attempt to acquire the servicing rights with respect to
purchased single-family residential loans, which includes collecting and
remitting loan payments, inspecting the properties and making certain insurance
and tax payments on behalf of the borrowers. However, we may on occasion
purchase such loans where the seller retains the servicing rights. At June 30,
1999, we held in our portfolio approximately $20.0 million of loans which were
being serviced by others.
We currently offer fixed rate one-to-four family mortgage loans and,
through an affiliation with Low Cost Loans, we will offer a full array of
adjustable, balloon and fixed rate one-to-four family mortgage loans, in each
case with terms typically ranging from 15 to 30 years. One-to-four family
residential real estate loans often remain outstanding for significantly
shorter periods than their contractual terms because borrowers may refinance or
prepay loans at their option. The average length of time that our one-to-four
family residential mortgage loans remain outstanding varies significantly
depending upon trends in market interest rates and other factors. In recent
years, the average maturity of our mortgage loans has decreased significantly
due to the unprecedented volume of refinancing activity. Accordingly, estimates
of the average length of time that one-to-four family loans may remain
outstanding cannot be made with any degree of accuracy.
We are permitted under applicable law to lend up to 100% of the appraised
value of the real property securing a residential loan. However, if the amount
of a residential loan originated or refinanced exceeds 80% of the appraised
value, we are required by federal regulations to obtain private mortgage
insurance on the portion of the principal amount that exceeds 80% of the
appraised value of the security property. Pursuant to underwriting guidelines
adopted by the board of directors, we will generally only lend up to 80% of the
appraised value of the property securing a single-family residential loan.
From time to time, we will originate loans for the construction of
single-family residential properties. Such loans may be made to individuals or
builders. Although we do not expect to emphasize construction lending in the
near term, at June 30, 1999 we had $2.8 million of gross construction loans
with $1.8 million of construction loans outstanding.
Multi-family Residential Real Estate and Commercial Real Estate
Lending. Our lending activities currently emphasize the origination and
acquisition of loans secured by existing multi-family residential and
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commercial properties. As of June 30, 1999, a majority of our real estate loan
portfolio consisted of loans secured by multi-family residential and commercial
properties. We have generally targeted higher quality, smaller multi-family
residential and commercial real estate loans with principal balances up to
vBank's legal lending limit of $3.2 million.
Our multi-family residential loans are secured by multi-family properties
of five units or more, while our commercial real estate loans are secured
primarily by industrial, warehouse and self-storage properties, office
buildings, office and industrial condominiums, retail space, strip shopping
centers and mixed-used commercial properties. At June 30, 1999, substantially
all of the properties securing our multi-family residential and commercial real
estate loans were located in the greater Delaware Valley. We will presently
originate multi-family residential and commercial real estate loans for terms
of up to 25 years. Some of these loans contain call or repayment option
features within three to seven years after origination. We will originate such
loans on both a fixed-rate or adjustable-rate basis, with the latter based on
an applicable prime rate. Adjustable-rate loans may have an established ceiling
and floor, and the maximum loan-to-value for these loan products is generally
80%. Though historically vBank has originated and acquired loans with lower
debt coverage ratios, as part of the criteria for underwriting multi-family
residential and commercial real estate loans, vBank generally requires a debt
coverage ratio (the ratio of net cash from operations before payment of debt
service to debt service) of at least 1.25 to 1.0 on originated loans and at
least 1.15 to 1.0 on acquired loans. We generally seek additional protection,
such as secondary collateral and personal guarantees from the principals of the
borrowers, to mitigate any weaknesses identified in the underwriting process.
Loans collateralized by multi-family residential and commercial real
estate generally involve a greater degree of credit risk than one-to-four
family residential mortgage loans and carry larger loan balances. This
increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate and
multi-family real estate is typically dependent upon the successful operation
of the related property. If the cash flow from the project is reduced, the
borrower's ability to repay the loan can become impaired. At June 30, 1999,
$941,000 of our commercial real estate loans were classified as non-performing.
As of such date, a significant portion of our non-performing commercial real
estate loans was comprised of one purchased loan.
Commercial Business Loans. We originate commercial business loans
consisting primarily of lines of credit and term loans secured by equipment and
accounts receivable. At June 30, 1999, commercial business loans totaled $2.3
million, or 1.9%, of our total loan portfolio. In addition, all of our
commercial business loans which are secured by real estate have been classified
as commercial real estate loans. Currently, we are placing greater emphasis on
the origination of commercial business loans. We recently hired two loan
officers with extensive commercial lending experience. Commercial business
loans generally have shorter terms and higher interest rates than mortgage
loans because of the type and nature of the collateral. At June 30, 1999, none
of our commercial business loans were classified as non-performing.
Consumer Loans. We originate consumer loans consisting principally of
loans secured by deposit accounts and marketable securities, and home
improvement, personal and automobile loans. At June 30, 1999, consumer loans
totaled $562,000, or 0.5%, of our total loan portfolio. We offer consumer loans
as a service to our customers. Consumer loans are offered primarily on a
fixed-rate basis with maturities generally of less than ten years. Consumer
loans entail greater credit risk than do residential mortgage loans but have
smaller balances and tend to have higher interest rates. At June 30, 1999, one
consumer loan with a principal balance of $25,000 was classified as
non-performing.
Loan Origination Fees and Other Income. In addition to interest earned on
loans, we generally receive fees in connection with loan originations. Such
loan origination fees, net of costs to originate, are deferred and amortized
using the interest method over the contractual life of the loan. Fees deferred
are recognized as income immediately upon prepayment of the related loan. At
June 30, 1999, we had $189,000 of net deferred loan origination fees. Such fees
vary with the volume and type of loans and commitments made and purchased, the
principal repayments on such loans, and competitive conditions in the real
estate market that reflect the demand and availability of money. In addition to
loan origination fees, we also receive loan fees and service charges that
consist primarily of deposit transaction account service charges and late
charges.
50
<PAGE>
Loans to One Borrower. Current regulations restrict loans to one borrower
to an amount equal to 15% of unimpaired capital and unimpaired surplus on an
unsecured basis, and an additional amount equal to 10% of unimpaired capital
and unimpaired surplus if the loan is secured by readily marketable collateral
(generally, financial instruments). At June 30, 1999, our regulatory limit on
loans to one borrower was $3.2 million. Our five largest loans or groups of
loans to one borrower, including related entities, each aggregate approximately
$3.0 million. All five of these loans or loan concentrations were secured by
multi-family residential, commercial real estate or marketable securities and
were performing in accordance with their terms at June 30, 1999. Although two
extensions of credit may have exceeded our regulatory lending limit of $3.0
million at March 31, 1999, management has taken appropriate measures to conform
such loans. A $3.7 million extension of credit is conforming as of June 30,
1999 as a result of permanent principal reductions exceeding $700,000 on the
aggregate loan relationship. A $3.2 million extension is conforming as of June
30, 1999 based on our sale of a $200,000 participation to another financial
institution.
Asset Quality
Collection Procedures. Our collection procedures provide that when a loan
is 16 days past due, a computer generated late charge notice is sent to the
borrower requesting payment of the amount due under the loan, plus a late
charge. If such delinquency continues, on the first day of the next month, a
delinquent notice is mailed advising the borrower of the violation of the terms
of the loan. We attempt to contact borrowers whose loans are more than 30 days
past due. If such attempts are unsuccessful, we will engage counsel to
facilitate the collection process. A delinquent loan report is presented to the
board of directors on a monthly basis for their review. Historically, we have
instituted legal action on loans 90 days past due. It is sometimes necessary
and desirable to arrange special repayment schedules with borrowers to prevent
foreclosure or filing for bankruptcy. In such cases, we prepare a schedule
pursuant to discussions with the borrower and such schedule is reviewed by the
board of directors.
Delinquent Loans and Non-performing Assets. Loans are reviewed on a
monthly basis. Loans are typically placed on nonaccrual status when either
principal or interest is 90 days or more past due. Delinquent loans are charged
off when it appears no longer reasonable or probable that the loan will be
collected. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income.
Real estate acquired by us as a result of foreclosure or by deed in lieu
of foreclosure is deemed other real estate owned ("OREO") until such time as it
is sold. When OREO is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its estimated fair value, less
estimated selling expenses. Valuations are periodically performed, or obtained,
by management and any subsequent decline in fair market value is charged to
operations. We had no OREO as of June 30, 1999, $66,000 as of December 31, 1998
and no OREO as of December 31, 1997.
51
<PAGE>
The following table sets forth information with respect to our delinquent
loans at June 30, 1999.
Balance Number
--------- -------
(Dollars in
Thousands)
Residential real estate(1):
Loans 30 to 89 days delinquent ........... $ 742 17
Loans 90 or more days delinquent ......... 1,117 23
------ --
Total .................................. 1,859 40
------ --
Commercial real estate:
Loans 30 to 89 days delinquent ........... 312 4
Loans 90 or more days delinquent ......... 918 6
------ --
Total .................................. 1,230 10
------ --
Commercial business loans:
Loans 30 to 89 days delinquent ........... 21 1
Loans 90 or more days delinquent ......... -- --
------ --
Total .................................. 21 1
------ --
Consumer loans:
Loans 30 to 89 days delinquent ........... 27 1
Loans 90 or more days delinquent ......... 25 1
------ --
Total .................................. 52 2
Total delinquent loans .................... $3,162 53
====== ==
- ------------
(1) Consists solely of loans secured by single-family residential real estate.
52
<PAGE>
The following table presents information on our non-performing assets at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------------
1999 1998 1997
------------------ -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
Residential real estate(1) ............................ $ 1,117 $ 666 $ 258
Commercial real estate ................................ 941(2)(3) 1,138(3) --
Commercial business ................................... -- -- 29
Consumer .............................................. 25 -- --
------- -------- -------
Total ............................................... 2,083 1,804 287
------- -------- -------
Accruing loans greater than 90 days delinquent ......... -- 152 --
------- -------- -------
Total non-performing loans(4) ....................... 2,083 1,956 287
------- -------- -------
Other real estate owned(5) ............................. -- 66 --
------- -------- -------
Total non-performing assets ............................ $ 2,083 $ 2,022 $ 287
======= ======== =======
Total non-performing loans, net of discount, as a
percentage of total loans, net of discount ............ 1.78% 1.89% 0.50%
======= ======== =======
Total non-performing assets, net of discount, as a
percentage of total assets, net of discount ........... 0.91% 1.22% 0.32%
======= ======== =======
</TABLE>
- ------------
(1) Consists solely of loans secured by single-family residential real estate.
(2) One loan with a balance of $23,000, which is 30 to 89 days delinquent, has
been classified as non-accrual.
(3) The significant increase in non-performing commercial real estate loans
during the year ended December 31, 1998 (which remained non-performing at
June 30, 1999) was due, in large part, to a single acquired loan. We
believe that this loan does not present a significant risk of loss to us
on the basis of a current appraisal on the real estate securing the loan,
the loan-to-value ratio thereon, as well as the purchase discount and
specific reserve applied to such loan.
(4) All of our non-performing loans as of December 31, 1998 consisted of
acquired loans.
(5) Consists of one parcel of commercial real estate.
The interest income that would have been recorded during the quarter ended
June 30, 1999 if our non-accrual loans at the end of such period had been
current in accordance with their terms during such period was $47,000.
Classification of Assets. Federal regulations provide for the
classification of delinquent or non-homogeneous loans and other assets such as
debt and equity securities as "substandard," "doubtful," or "loss" assets. In
analyzing loans for purchase as well as for purposes of our loan
classification, we have placed increased emphasis on the payment history of the
obligor and, to a lesser extent, the purchase discount associated with a
specific loan. Assets that do not expose us to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management.
Loans designated as special mention are generally loans that, while current in
required payment, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future. An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor. "Substandard" assets include those
characterized by the "distinct possibility" that we will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets is
not warranted and are charged against the loan loss reserve. Pursuant to
internal procedures, loans with a history of 30-89 day delinquencies will
generally be classified either special mention or substandard. However, all
loans 90 days or more delinquent are classified either substandard, doubtful or
loss.
53
<PAGE>
The following table sets forth the aggregate amount of our special mention
and classified assets at June 30, 1999:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Special mention ............................................ $ 93
Substandard ................................................ 1,967
Doubtful ................................................... 423
Loss ....................................................... --
------
Total special mention and classified assets ................ 2,483
Other real estate owned .................................... --
------
Total special mention and classified assets, including other
real estate owned ........................................ $2,483
======
</TABLE>
Allowance for Loan Losses. Our policy is to provide for estimated losses
on our loan portfolio based on management's evaluation of the probable losses
that may be incurred. Our method of determining provisions for loan losses is
based partially on the Pennsylvania Department of Banking's and the FDIC's
Allowance for Loan and Lease Loss Guidelines, and partially on an in-house
asset classification policy. The policy provides for the monthly evaluation of
concentrations of credit, past loan experience, current economic conditions,
amount and composition of the loan portfolio, estimated fair value of
collateral, delinquencies and other factors.
The asset classifications are reviewed monthly by senior management with
respect to the loan portfolio and the adequacy of the allowance for loan
losses. Based upon that review, management determines whether any loans require
the establishment of appropriate reserves or allowances for losses. Such
evaluation, which includes a review of all loans for which full collectability
of interest and principal may not be reasonably assured, considers, among other
matters, the estimated fair value of the underlying collateral. Other factors
considered by management include the site and risk exposure of each segment of
the loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in future
periods. Management also prepares a summary classifying all delinquent loans
and non-homogenous loans as special mention, substandard, doubtful or loss.
Management then recommends the general allowance for loan losses in part based
on past experience, and in part based on specified loan balances within each
classification.
Based on the recommendation of management, the board of directors makes
determinations as to any reserves and changes to the provision for loan losses
and allowance for loan losses. Both general and specific loan loss allowances
are charged against earnings; however, general loan loss allowances are added
back to capital in computing total risk-based capital under Pennsylvania
Department of Banking and FDIC regulations, subject to certain limitations.
We will continue to monitor the allowance for loan losses and make future
adjustments to the allowance through the provision for loan losses as
conditions indicate. Although we maintain our allowance for loan losses at a
level that we consider to be adequate to provide for the inherent risk of loss
in the loan portfolio, there can be no assurance that future losses will not
exceed estimated amounts or that additional provisions for loan losses will not
be required in future periods. In addition, our determination as to the amount
of our allowance for loan losses is subject to review by the Pennsylvania
Department of Banking and the FDIC as part of their examination process, which
may result in the establishment of an additional allowance based upon the
judgment of the applicable regulator.
54
<PAGE>
The following table sets forth activity in our allowance for loan losses
at or for the specified periods.
<TABLE>
<CAPTION>
At or for the Six Months At or for the Year Ended
Ended June 30, December 31,
--------------------------- ----------------------------
1999 1998 1998 1997
----------- ------------- ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total loans outstanding. ............................ $117,267 $ 80,611 $ 103,305 $ 57,047
Average loans outstanding. .......................... 107,388 67,833 78,797 26,421
Allowance balance (at beginning of period) .......... 1,051 568 568 182
Provision for loan losses ........................... 250 160 510 415
Charge-offs (recoveries), net of recoveries ......... (24) 8 27 29
-------- --------- --------- ---------
Allowance balance (at end of period) ................ $ 1,325 $ 720 $ 1,051 $ 568
======== ========= ========= =========
Allowance for loan losses as a percent of total
loans, net of discount, at end of period ........... 1.13% 0.89% 1.02% 1.01%
======== ========= ========= =========
Allowance for loan losses as a percent of total
non-performing loans, net of discount, at
end of period ...................................... 63.61% 197.26% 53.72% 197.96%
======== ========= ========= =========
Allowance for loan losses and purchase
discount as a percentage of total loans ............ 5.84% 6.97% 5.85% 8.88%
======== ========= ========= =========
Net loans charged off as a percent of average
loans outstanding. ................................. 0.00% 0.01% 0.03% 0.11%
======== ========= ========= =========
</TABLE>
The following tables set forth our percentage of allowance for loan losses
to total allowance for loan losses and the percentage of loans to total loans
in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
At June 30, 1999 At December 31, 1998
------------------------------------------ ------------------------------------------
Percentage of Percentage of Percentage of Percentage of
Allowance Loans in Each Allowance Loans in Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
-------- --------------- --------------- -------- --------------- ---------------
Balance of allowance (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
for loan losses at end of
period applicable to:
Real estate .............. $1,275 96.2% 97.6% $1,037 98.8% 98.8%
Commercial business ...... 25 1.9 1.9 11 1.0 1.0
Consumer ................. 25 1.9 0.5 3 0.2 0.2
------ ----- ----- ------ ----- -----
Total ................... $1,325 100.0% 100.0 % $1,051 100.0% 100.0%
====== ===== ===== ====== ===== =====
<CAPTION>
At December 31, 1997
-----------------------------------------
Percentage of Percentage of
Allowance Loans in Each
to Total Category to
Amount Allowance Total Loans
-------- --------------- --------------
Balance of allowance
<S> <C> <C> <C>
for loan losses at end of
period applicable to:
Real estate .............. $528 93.0% 95.1%
Commercial
business ................ 30 5.3 1.9
Consumer ................. 10 1.7 3.0
---- ----- -----
Total ................... $568 100.0% 100.0%
==== ===== =====
</TABLE>
Investment Activities
Our securities portfolio is managed by our President and the Chief
Financial Officer (the "Investment Officers") in accordance with a written
investment policy of the board of directors which addresses strategies, types
and levels of allowable investments.
At June 30, 1999, our securities portfolio equaled $82.0 million, or 35.7%
of our total assets. Our investment portfolio is comprised of trust preferred
securities, mortgage-backed securities, U.S. government agency securities,
corporate and municipal obligations and equity securities. At June 30, 1999,
our trust preferred securities amounted to $31.9 million, mortgage-backed
securities amounted to $13.8 million, equity securities (consisting of common
stock of a local financial institution, a self-service photocopy business,
stock in our computer vendor and a financial institution managed fund) equaled
$2.5 million, corporate and municipal obligations amounted to $31.0 million,
and U.S. government agency securities amounted to $2.8 million.
55
<PAGE>
We classify securities as either available for sale or held to maturity
based upon our intent and ability to hold such securities. Securities available
for sale include debt and equity securities that are held for an indefinite
period of time and are not intended to be held to maturity. Securities
available for sale include securities that we intend to use as part of our
overall asset/liability management strategy and that may be sold in response to
changes in interest rates and resultant prepayment risk and other factors
related thereto. Securities available for sale are carried at fair value, and
unrealized gains and losses (net of related tax effects) on such securities are
excluded from earnings but are included in stockholders' equity. Upon
realization, such gains and losses will be included in our earnings. Investment
securities and mortgage-backed securities, other than those designated as
available for sale, are comprised of debt securities that we have the
affirmative intent and ability to hold to maturity. Securities held to maturity
are carried at cost, and are adjusted for amortization of premiums and
accretion of discounts over the estimated terms of the securities.
We are required under federal regulations to maintain a minimum amount of
liquid assets that may be invested in specified short-term securities and
certain other investments. We have maintained a portfolio of liquid assets that
exceeds regulatory requirements. Our Asset Liability Management Committee
generally meets on a monthly basis to decide, based on market levels and
conditions, current economic data, political and regulatory information, and
internal needs, whether any alterations need to be made to our investment
portfolio. Based on the parameters of our Investment Policy, we endeavor to
diversify our holdings through the purchase of medium-term and long-term,
fixed-rate and variable-rate instruments, which provide both an adequate return
and moderate risk. The Investment Officers of USABancShares.com make all
investment decisions in accordance with the Investment Policy and Asset
Liability Management Committee guidelines.
Our securities portfolio composition is designed to provide a liquid
portfolio yet maximize yield on a risk adjusted basis. The process by which we
decide to acquire debt instruments, trust preferred securities and corporate
and municipal obligations is similar to that of underwriting a loan. We
evaluate the potential credit risk associated with these types of investment
instruments by becoming familiar with the institution, its earnings history,
its ability to meet its debt obligation and, if possible, by meeting its
management team. The trust preferred securities are fixed-rate long-term
obligations with a weighted average yield of 9.22% as of June 30, 1999. The
trust preferred securities are obligations of primarily non-rated financial
institutions located throughout the United States, and thus there is a limited
market in which to purchase and sell these securities. As long-term
instruments, this portfolio is also subject to interest rate risk. If interest
rates were to rise, these securities would lose value and require us to reflect
a charge to our stockholders' equity.
Our investments include mortgage-backed securities, which represent an
interest in, or are collateralized by, pools of mortgage loans originated by
private lenders that have been grouped by various governmental,
government-related or private organizations. Mortgage-backed securities
generally enhance the quality of our assets by virtue of the insurance or
guarantees that back such securities, are more liquid than individual mortgage
loans and may be used to collateralize borrowings or other obligations.
Investments in mortgage-backed securities, however, may involve risks not
present with mortgage loans. Specifically, mortgage-backed securities are
subject to the risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such
instruments, thereby reducing the net yield on such securities. Like mortgage
loans, there is also reinvestment risk associated with the cash flows from such
securities in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates. As interest rates decrease, the value of such
securities may decrease as mortgages with higher rates are refinanced. At June
30, 1999 $1.5 million, or 10.9%, of our total mortgage-backed securities
portfolio of $13.8 million had adjustable interest rates. We are seeking to
increase our portfolio of adjustable-rate mortgage-backed securities. Our
mortgage-backed securities are primarily pass-through securities, which provide
us with payments consisting of both principal and interest as mortgage loans in
the underlying mortgage pool are paid off by the borrowers. The average
maturity of pass-through mortgage-backed securities varies with the maturities
of the underlying mortgage instruments and with the occurrence of unscheduled
prepayments of those mortgage instruments.
56
<PAGE>
The following tables present the book values and estimated market values
at June 30, 1999, December 31, 1998 and December 31, 1997, respectively, for
each major category of our investment securities.
<TABLE>
<CAPTION>
June 30, 1999
---------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available-for-Sale:
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
Equity securities ......................... 3,453 112 (202) 3,363
-------- ---- -------- --------
Total available-for-sale ................ $ 33,869 $162 $ (660) $ 33,371
-------- ---- -------- --------
Held-to-Maturity:
U.S. Government agency securities ......... $ 1,927 $ -- $ (73) $ 1,854
Mortgage-backed securities ................ 4,595 197 (42) 4,750
Municipal securities ...................... 3,168 -- (87) 3,081
Trust preferred securities ................ 25,120 191 (418) 24,893
Corporate obligations ..................... 13,823 33 (466) 13,390
-------- ---- -------- --------
Total held-to-maturity .................. $ 48,633 $421 $ (1,086) $ 47,968
======== ==== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
---------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ------------
(Dollars in Thousands)
<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 and other securities(1) ..... 24,944 243 (664) 24,523
------- ----- ------ -------
Total available-for-sale ............................. $28,894 $ 256 $ (761) $28,389
======= ===== ====== =======
Held-to-Maturity:
U.S. Government 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 and other securities(1) ..... 5,738 79 (56) 5,761
------- ----- ------- -------
Total held-to-maturity ............................... $15,755 $ 253 $ (57) $15,951
======= ===== ======= =======
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available-for-Sale:
U.S. Government agency securities ...................... $ 1,243 $ 16 $ -- $ 1,259
Trust preferred securities and other securities(1) ..... 7,637 150 (11) 7,776
------- ---- ----- -------
Total available-for-sale ............................. $ 8,880 $166 $ (11) $ 9,035
======= ==== ===== =======
Held-to-Maturity:
U.S. Government agency securities ...................... $ 3,557 $ -- $ (10) $ 3,547
Mortgage-backed securities ............................. 6,306 50 -- 6,356
Municipal securities ................................... 3,163 101 -- 3,264
Trust preferred securities and other securities(1) ..... 2,393 84 -- 2,477
------- ---- ----- -------
Total held-to-maturity ............................... $15,419 $235 $ (10) $15,644
======= ==== ===== =======
</TABLE>
- ------------
(1) Trust preferred securities and other securities are primarily comprised of
trust preferred securities of financial institutions located throughout
the United States. At December 31, 1998, we held $22.6 million of trust
preferred securities available-for-sale and $2.3 million held-to-maturity.
Also included in the available-for-sale category was approximately $1.9
million of equity securities consisting of equity securities of a local
financial institution and a self-service photocopy business, equity
securities of our computer vendor and a financial institution managed
fund. At December 31, 1997, we had trust preferred securities available
for sale totaling $7.3 million and $325,000 of equity securities of the
FHLB. At December 31, 1997, trust preferred securities held to maturity
totaled $500,000. The remaining $1.9 million of other securities held to
maturity at such date consisted of debt instruments of financial
institutions on the East Coast of the United States. We do not hold more
than $2.0 million of trust preferred securities of any one issuer.
The following table shows the contractual maturity of our investment
securities portfolio at June 30, 1999.
<PAGE>
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
-------------------------------------- -------------------------------------
Weighted Weighted
Amortized Approximate Average Amortized Approximate Average
Cost Fair Value Yield Cost Fair Value Yield
----------- ------------- ---------- ----------- ------------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due within one year ............................ $ 4,781 $ 4,740 8.74% $ -- $ -- --%
Due after one year through five years .......... 6,698 6,640 9.65 2,623 2,444 10.40
Due after five years through ten years ......... 2,899 2,864 7.31 10,925 10,665 11.90
Due after ten years ............................ 7,590 7,532 8.68 30,490 30,109 8.52
Mortgage-backed securities ..................... 9,436 9,185 6.80 4,595 4,750 6.45
Equity securities .............................. 2,465 2,410 -- -- -- --
------- ------- ------- -------
$33,869 $33,371 $48,633 $47,968
======= ======= ======= =======
</TABLE>
Sources of Funds
General. Deposits are the major source of our funds for lending and other
investment purposes. We expect our Internet banking operations to generate
significant deposit growth. In addition to deposits, we derive funds from the
scheduled payments as well as prepayment of loans, the maturity of investment
securities and the sale of assets available for sale. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and market conditions. Borrowings may be used to compensate for
reductions in the availability of funds from other sources or on a longer term
basis for general business purposes.
Deposits. Consumer and commercial deposits have historically been
attracted principally from within our market area through the offering of a
broad selection of deposit instruments, including non interest-bearing
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demand accounts, NOW accounts, passbook savings accounts, money market
accounts, term certificate accounts and individual retirement accounts. We
expect to attract deposits on a national basis through our Internet banking
operations. Deposit account terms vary according to the minimum balance
required, the period of time during which the funds must remain on deposit, and
the interest rate, among other factors. Deposits have increased 717% from $20.8
million at December 31, 1995 to $170.0 million at June 30,1999. The largest
area of increase occurred in certificates of deposit as we continued to rely
primarily on non-retail certificates of deposits. At June 30, 1999, we had
$144.6 million of certificates of deposit, $74.1 million of which were in
excess of $100,000, of which $28.4 million mature within twelve months.
We regularly evaluate our internal cost of funds, survey rates offered by
competing institutions, review our cash flow requirements for lending and
liquidity, and execute rate changes when deemed appropriate. We anticipate that
the mix of deposits will shift towards transaction accounts as we expand our
commercial line of business. We anticipate that the growth in deposits would be
accomplished through aggressive marketing of our Internet banking operations
and our virtual branch network in surrounding communities, competitive pricing
of retail products and the ability to provide loan and deposit products to
consumers and commercial businesses on a national level through our Internet
banking operations and in the Mid-Atlantic region through our community banking
franchise. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
<PAGE>
The following table sets forth the balance of each deposit type and the
weighted average rate paid on each deposit type of vBank for the periods
indicated.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 Years Ended December 31,
------------------------------------- -------------------------------------
1998
-------------------------------------
Percent of Weighted Percent of Weighted
Total Average Total Average
Balance Deposits Yield Balance Deposits Yield
----------- ------------ ---------- ----------- ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand ..................... $ 1,849 1.09% -- $ 1,439 1.26% --
NOW accounts ................ 1,521 0.89 2.05% 846 0.73 2.31%
Savings and passbook
accounts ................... 20,781 12.23 4.61 5,281 4.62 4.40
Money market deposit
accounts ................... 1,186 0.70 4.60 2,345 2.05 3.66
Certificates of deposit ..... 144,618 85.09 5.77 104,476 91.34 5.73
-------- ------ ---- -------- ------ ----
Total deposits ............. $169,955 100.00 5.55% $114,387 100.00% 5.53%
======== ====== ==== ======== ====== ====
</TABLE>
[RESTUBBED]
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997
----------------------------------
Percent of Weighted
Total Average
Balance Deposits Yield
--------- ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-interest-bearing
demand ..................... $ 257 0.37% --
NOW accounts ................ 688 0.98 2.27%
Savings and passbook
accounts ................... 2,019 2.86 2.49
Money market deposit
accounts ................... 4,802 6.81 3.74
Certificates of deposit ..... 62,708 88.98 6.06
------- ------ ----
Total deposits ............. $70,474 100.00% 5.72%
======= ====== ====
</TABLE>
At June 30, 1999, our certificates of deposit had the following stated
maturities.
Maturity Period Amount
- ------------------------------------------------------ ---------------
(In Thousands)
Within one year ............................ $ 67,204
Over one year through two years ............ 39,766
Over two years through three years ......... 13,006
Over three years though five years ......... 23,417
Over five years through ten years .......... 1,225
--------
Total ...................................... $144,618
========
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<PAGE>
The following table presents, by various rate categories, the amount of
certificates of deposit outstanding at June 30, 1999.
Outstanding
Certificate Rates: Amount
- ---------------------------------- ---------------
(In Thousands)
0 to 3.99% ..................... $ 50
4.00% to 5.99% ................. 101,336
6.00% to 7.99% ................. 43,232
--------
Total .......................... $144,618
========
The following table summarizes the maturity composition of certificates of
deposit with balances of $100,000 or more at June 30, 1999.
June 30, 1999
---------------------
Balance %
--------- ---------
(Dollars in Thousands)
Three months or less ..................... $ 1,733 2.3%
Over three months to six months .......... 7,825 10.6
Over six months to twelve months ......... 18,812 25.4
Over twelve months ....................... 45,702 61.7
------- -----
$74,072 100.0%
======= =====
Borrowings. If the need arises, we may rely upon advances from the FHLB
and the Board of Governors of the Federal Reserve System discount window to
supplement our supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB typically are collateralized by our stock
in the FHLB and a portion of our first mortgage loans. At June 30, 1999, we had
approximately $43.8 million in borrowing capacity under a collateralized line
of credit with the FHLB, of which $30.0 million had been drawn upon as of such
date.
The FHLB functions as a central reserve bank providing credit for vBank
and other member savings and financial institutions. As a member, vBank is
required to own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities that are obligations of, or guaranteed
by, the United States) provided certain standards related to creditworthiness
have been met. Advances are made pursuant to several different programs. Each
credit program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness.
<PAGE>
At June 30, 1999, we had five callable fixed-rate advances for $30.0
million from the FHLB. Of these callable advances, $15 million mature within
five years, and $15 million mature between six and ten years with call options
ranging from 6 months to 51 months. The interest rates on the callable advances
range from 4.83% to 5.63%, with a weighted average interest rate of 5.30% at
June 30, 1999.
The following table sets forth certain information regarding our borrowed
funds, which consist solely of the advances from the FHLB, at or for the
periods ended on the dates indicated.
<TABLE>
<CAPTION>
At or for the Six At or for the
Months Ended June 30, Year Ended December 31,
-------------------------- ---------------------------
1999 1998 1998 1997
------------ ----------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
FHLB advances:
Maximum month-end balance .......... $ 30,000 $ 6,000 $ 31,000 $ 12,700
Balance at end of period ........... 30,000 3,000 30,000 9,000
Average balance .................... 30,000 4,833 22,482 7,000
Weighted average interest rate on:
Balance at end of period ........... 5.30% 6.38% 5.30% 5.87%
Average balance for period ......... 5.30% 6.20% 5.29% 5.87%
</TABLE>
60
<PAGE>
USACapital, Inc.
USACapital, Inc., a registered broker-dealer with the National Association
of Securities Dealers, Inc. is a Pennsylvania corporation wholly-owned by
USABancShares.com. A subsidiary of USABancShares.com acquired USACapital in
April 1997 for a purchase price of $75,000, paid in shares of
USABancShares.com's common stock. USACapital trades stocks, bonds, annuities,
and other investment related products to the general public. In connection with
our Internet banking operations, USACapital offers on-line trading, real time
quotes, low commissions and direct access to funds held on deposit with vBank.
During the year ended December 31, 1998, USACapital increased its staff from
two persons to eight persons, which we believe will facilitate the growth of
USACapital's business. The majority of the additional employees at USACapital
are compensated on a commission basis, which will maintain a variable expense
base related to performance. USACapital operates out of our corporate office.
USACapital generated pre-tax earnings of $193,000 for the six months ended June
30, 1999 and $290,000 from the time of our acquisition of USACapital in April
1997 through June 30, 1999. Although we do not expect commission charges and
fees to meet costs, we expect the operations of USACapital to be consistent
with our Internet strategy by attaining market share.
USACredit, Inc.
USACredit, Inc., our wholly-owned subsidiary, is a Pennsylvania
corporation engaged in business equipment leasing services. We have entered
into an agreement with USACredit that allows our customers, many of whom are
independent business owners or managers, to lease small business equipment
through credit. Leases range in amounts from $5,000 to $500,000 and cover
virtually all types of business equipment. USACredit will act as a broker and
provide advice, comparison quotes and immediate equipment lease financing
through a network of financial institutions.
USACredit holds a 20% interest in USACredit Ventures LLC, a Delaware
limited liability company in the business of acquiring, owning, servicing,
selling or otherwise disposing of nonperforming financial assets. USACredit had
two loans outstanding to USACredit Ventures LLC at June 30, 1999 totaling
approximately $89,000. These loans partially fund the purchase judgments and
deficiency claims with respect to nonperforming loans and other delinquent
claims against third-party debtors.
Personnel
As of June 30, 1999, we had a total of 62 full-time and 2 part-time
employees.
Description of Properties
On December 23, 1997, we purchased a building at 1535 Locust Street in
Center City Philadelphia, formerly owned and operated by PNC Bank, which serves
as our corporate offices and flagship retail operation. This location consists
of approximately 10,000 square feet of space, and includes not only a first
floor retail operation, but also houses senior management of USABancShares.com
and USACapital, Inc., in addition to selected members of vBank staff. We are in
the process of selling this facility, but we intend to maintain our retail
operation and lending operations in such facility following such sale pursuant
to a lease to be entered into with the purchaser. We will use any gains on this
disposition to execute our Internet business strategy.
Pursuant to a lease dated July 27, 1998, we lease a building at 18 East
Wynnewood Road, Wynnewood, Pennsylvania. We opened a retail branch at this
location in April 1999. The lease is for an initial period of 10 years with an
option to renew for an additional 10 years. The annual lease payments total
$48,000.
We lease the building located at 803 East Germantown Pike in Norristown,
Pennsylvania, which contains a retail branch as well as administrative offices,
on a month-to-month basis. The monthly lease payment is $3,117. We are
currently negotiating the sale of the Norristown branch. We will use any gains
on this disposition to execute our Internet business strategy.
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<PAGE>
We also lease an additional "mini" branch, known as "eBank" in the office,
restaurant and retail complex known as "the Bellevue" which is located in
Center City Philadelphia. The annual lease payments total $8,200.
Deposits are received at the Locust Street headquarters, the Norristown
branch, the Wynnewood branch and the eBank. At June 30, 1999, our branches had
the following deposits: Locust Street, $103.6 million; Norristown, $54.6
million; and eBank, $6.2 million. The Wynnewood Branch, which opened for
business on April 19, 1999, had $5.6 million of deposits at June 30, 1999.
We are currently engaged in discussions to lease approximately 23,000
square feet of warehouse space in Philadelphia to house our Internet banking
operations and to serve as our corporate offices. We have not yet reached a
definitive agreement and there can be no guarantee that we will be able to
negotiate acceptable lease terms for such space.
Legal Proceedings
On July 28, 1999, U.S. Bancorp, et. al. filed a lawsuit against us and our
subsidiaries alleging various claims relating to U.S. Bancorp's servicemarks.
On August 16, 1999 we ceased use of the name "USABanc.com" and the domain name
www.usabanc.com, and we changed our Website to www.usabancshares.com. On
September 9, 1999, all parties to the litigation entered into a settlement
agreement resolving the dispute. In accordance with the terms of the settlement
agreement, USABancShares.com agreed not to use USABanc.com as a name or a
domain name. USABancShares.com will retain the right to permanently use
"USABancShares.com," "vBank" and "USACapital" as the respective names of its
holding company, FDIC insured banking subsidiary and NASD broker-dealer.
Additionally, USABancShares.com will retain ownership and control of the
Internet domain name www.usabanc.com, which it will hold as an inactive domain
name. The settlement agreement terminated the litigation and provided all
parties to the lawsuit with full releases.
We are not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. We believe that
such routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operation.
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<PAGE>
REGULATION OF USABANCSHARES.COM AND VBANK
USABancShares.com and vBank are extensively regulated under both federal
and state law. From time to time, various new types of federal and state
legislation have been proposed that could result in additional or diminished
regulation of and restrictions on, or altered forms of supervision of, banks or
bank holding companies. We cannot predict whether any such legislation will be
adopted or how such legislation, if adopted, would affect USABancShares.com's
business or vBank's business. As a consequence of the extensive regulation of
commercial banking activities and financial institutions in the United States,
the business and activities of USABancShares.com and vBank are susceptible to
changes in federal and state legislation which may affect the scope, nature and
costs of such business and activities. The following description of statutory
and regulatory provisions, which is not intended to be a complete description
of these provisions or their effects on USABancShares.com or vBank, is
qualified in its entirety by reference to the particular statutory or
regulatory provisions.
USABancShares.com
General. USABancShares.com is a registered bank holding company pursuant
to the Bank Holding Company Act of 1956, as amended, and USABancShares.com is
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System and the Pennsylvania Department of Banking. USABancShares.com is
required to file annually a report of its operations with, and is subject to
examination by, the Board of Governors of the Federal Reserve System and the
Pennsylvania Department of Banking. The Bank Holding Company Act and other
federal laws subject bank holding companies to particular restrictions on the
types of activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for
violations of laws and regulations. Certain of these laws and regulations are
described below.
Bank Holding Company Act of 1956 Activities and Other Limitations. As a
registered bank holding company, USABancShares.com's activities and those of
its banking and nonbanking subsidiaries are limited to the business of banking
and activities closely related or incidental to banking.
With certain limited exceptions, the Bank Holding Company Act requires
every bank holding company to obtain the prior approval of the Board of
Governors of the Federal Reserve System before (i) acquiring substantially all
of the assets of any bank, (ii) acquiring direct or indirect ownership or
control of any voting shares of any bank if after such acquisition it would own
or control more than 5% of the voting shares of such bank (unless it already
owns or controls the majority of such shares), or (iii) merging or
consolidating with another bank holding company.
The Bank Holding Company Act also prohibits a bank holding company, with
certain exceptions discussed below, from acquiring the voting shares or assets
of any company that is not a bank and from engaging in any business other than
banking or managing or controlling banks. Under the Bank Holding Company Act,
the Board of Governors of the Federal Reserve System is authorized to approve
the ownership of shares by a bank holding company in any company, the
activities of which the Board of Governors of the Federal Reserve System has
determined to be so closely related to banking or to managing or controlling
banks as to be a proper incident thereto. In making such determinations, the
Board of Governors of the Federal Reserve System is required to weigh the
expected benefit to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.
The Board of Governors of the Federal Reserve System has by regulation
determined that certain activities are closely related to banking within the
meaning of the Bank Holding Company Act. These activities include operating a
mortgage company, finance company, credit card company, factoring company,
trust company or savings association; performing certain data processing
operations; providing limited securities brokerage services; acting as an
investment or financial advisor; acting as an insurance agent for certain types
of credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing tax planning and preparation services; operating
a collection agency; and providing certain courier services.
63
<PAGE>
In addition, and subject to certain exceptions, the Bank Holding Company
Act and the Change in Control Act, together with regulations thereunder,
require approval of the Board of Governors of the Federal Reserve System (or,
depending on the circumstances, no notice of disapproval) prior to any person
or company acquiring "control" of a bank holding company, such as
USABancShares.com. Control is conclusively presumed to exist if any individual
or company acquires 25% or more of any class of voting securities of the bank
holding company. With respect to corporations with securities registered under
the Securities Exchange Act of 1934, as amended (such as USABancShares.com),
control will be rebuttably presumed to exist if a person acquires at least 10%
of any class of voting securities of the corporation.
A registered bank holding company is generally required to give the Board
of Governors of the Federal Reserve System prior notice of any redemption or
repurchase of its own equity securities if the consideration to be paid,
together with the consideration paid for any repurchases or redemptions in the
preceding year, is equal to 10% or more of its consolidated net worth. The
Federal Reserve Board may oppose the transaction if it believes that the
transaction would constitute an unsafe or unsound practice or would violate any
law or regulation.
Anti-Tying Restriction. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a bank holding company or its affiliates.
Capital Adequacy Requirements. The Board of Governors of the Federal
Reserve System has adopted capital adequacy guidelines pursuant to which it
assesses the adequacy of capital in examining and supervising a bank holding
company and in analyzing applications to it under the Bank Holding Company Act.
The Board of Governors of the Federal Reserve System capital adequacy
guidelines generally require bank holding companies to maintain total capital
equal to 8% of total risk-weighted assets, with at least one-half of that
amount (4%) consisting of Tier 1 or core capital and up to one-half of that
amount consisting of Tier 2 or supplementary capital. Tier 1 capital for bank
holding companies generally consists of the sum of common stockholders' equity
and perpetual preferred stock (subject in the case of the latter to limitations
on the kind and amount of such stocks which may be included as Tier 1 capital),
less goodwill and, with certain exceptions, intangibles. Tier 2 capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as Tier 1 capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Under the risk-based capital guidelines, specific
categories of assets and certain off- balance sheet assets such as letters of
credit are assigned different risk weights to take into account different risk
characteristics of the assets. These risk weights are multiplied by
corresponding asset balances to determine a "risk-weighted" asset base. The
risk weightings range from 0% (requiring no additional capital) for assets such
as cash to 100% for the bulk of assets which are typically held by a bank
holding company, including multi-family residential and commercial real estate
loans, commercial business loans and consumer loans. Single-family residential
first mortgage loans which are not past-due (90 days or more) or non-performing
and which have been made in accordance with prudent underwriting standards are
assigned a 50% level in the risk-weighting system, as are certain
privately-issued mortgage-backed securities representing indirect ownership of
such loans. Off-balance sheet items also are adjusted to take into account
certain risk characteristics.
In addition to the risk-based capital guidelines, the Board of Governors
of the Federal Reserve System uses a leverage ratio as an additional tool to
evaluate the capital adequacy of bank holding companies. The leverage ratio is
a company's Tier 1 capital divided by its average total consolidated assets.
Total assets for this purpose does not include goodwill, certain mortgage and
non-mortgage servicing assets, purchased credit card relationships and any
other intangible assets and investments that the Board of Governors of the
Federal Reserve System determines should be deducted from Tier 1 capital. Bank
holding companies must maintain a minimum leverage ratio of at least 3%,
although most organizations are expected to maintain leverage ratios that are
100 to 200 basis points above this minimum ratio.
The risk-based and leverage ratios are minimum supervisory ratios
generally applicable to banking organizations that meet certain specified
criteria, assuming that they have the highest regulatory rating. Banking
organizations not meeting these criteria are expected to operate with capital
positions well above the minimum ratios. The federal bank regulatory agencies
may set capital requirements for a particular banking
64
<PAGE>
organization that are higher than the minimum ratios when circumstances
warrant. Federal Reserve Board guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets. In
addition, the regulations of the Federal Reserve Board provide that
concentration of credit risk and certain risks arising from nontraditional
activities, as well as an institution's ability to manage these risks, are
important factors to be taken into account by regulatory agencies in assessing
an organization's overall capital adequacy.
As of June 30, 1999, USABancShares.com was in compliance with the minimum
regulatory capital requirements established by the Board of Governors of the
Federal Reserve System.
Financial Support of Affiliated Institutions. In accordance with
established policy of the Board of Governors of the Federal Reserve System,
USABancShares.com will be expected to act as a source of financial strength to
vBank and to commit resources to support vBank in circumstances when it might
not do so absent such policy.
vBank
General. vBank operates as a state-chartered savings bank incorporated
under the Pennsylvania Banking Code and is subject to extensive regulation and
examination by the Pennsylvania Department of Banking and by the FDIC. These
regulatory authorities regulate or monitor all areas of vBank's operations,
including capital requirements, loans, interest rates, investments, borrowings,
deposits, record keeping, security devices, issuances of securities, payment of
dividends, interest rate risk management, acquisitions, mergers, establishment
of branches, and corporate reorganizations. There are periodic examinations by
the Pennsylvania Department of Banking and the FDIC to test vBank's compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether by the
Pennsylvania Department of Banking, the FDIC or the Congress could have a
material adverse impact on USABancShares.com, vBank and their operations.
Federal Deposit Insurance Corporation Assessments. The deposits of vBank
are insured by the Bank Insurance Fund of the FDIC, up to applicable limits,
and are subject to deposit premium assessments by the Bank Insurance Fund.
Under the FDIC's risk-based insurance system, Bank Insurance Fund-assessed
deposits have been subject to premiums which have varied, depending upon the
institution's capital position and other supervisory factors.
The FDIC may terminate the deposit insurance of any insured depository
institution, including vBank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. The FDIC may also suspend deposit insurance temporarily prior to the
hearing process for the permanent termination of insurance, if, among other
things, the institution has no tangible capital. If insurance of accounts is
terminated, the accounts at the institution at the time of the termination,
less subsequent withdrawals, shall continue to be insured for a period of six
months to two years, as determined by the FDIC. USABancShares.com is not aware
of any circumstances which would result in termination of vBank's deposit
insurance.
Capital Requirements. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like vBank, are not members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Board of
Governors of the Federal Reserve System regarding bank holding companies, as
previously described.
The FDIC's capital regulations establish a minimum 3% Tier 1 leverage
capital requirement for the most highly-rated state-chartered, non-member
banks, with an additional cushion of at least 100 to 200 basis points for all
other state-chartered, non-member banks, which effectively will increase the
minimum Tier 1 leverage
65
<PAGE>
ratio for such other banks to 4% to 5% or more. Under the FDIC's regulation,
highest-rated banks are those that the FDIC determines are not anticipating or
experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity,
good earnings and, in general, which are considered a strong banking
organization and are rated composite 1 under the Uniform Financial Institutions
Rating System. Tier 1 or core capital is defined as the sum of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, and minority interests in consolidated
subsidiaries, minus all intangible assets other than certain qualifying
supervisory goodwill and certain purchased mortgage servicing rights.
The FDIC also requires that banks meet a risk-based capital standard.
Risk-based capital standard for banks requires the maintenance of total capital
(which is defined as Tier 1 capital and supplementary (Tier 2) capital) to
risk-weighted assets of 8.0%, of which at least 4.0% shall be Tier 1 capital.
In determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on
risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the
leverage capital standard. The components of supplementary capital include
certain perpetual preferred stock, certain mandatory convertible securities,
certain subordinated debt and intermediate preferred stock and general
allowances for loan and lease losses. Allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. As of June 30, 1999,
vBank met each of its capital requirements.
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate
risk in assessing a bank's capital adequacy. According to the agencies,
applicable considerations include the quality of the bank's interest rate risk
management process, the overall financial condition of the bank and the level
of other risks at the bank for which capital is needed. Institutions with
significant interest rate risk may be required to hold additional capital. The
agencies also have issued a joint policy statement providing guidance on
interest rate risk management, including a discussion of the critical factors
affecting the agencies' evaluation of interest rate risk in connection with
capital adequacy.
A bank may be subject to higher minimum requirements than those described
above if, for example, a bank has previously received special attention or has
a high susceptibility to interest rate risk. Banks with capital ratios below
the required minimum are subject to certain administrative actions, including
prompt corrective action, the termination of deposit insurance upon notice and
hearing, or a temporary suspension of insurance without a hearing.
vBank is also subject to more stringent Pennsylvania Department of Banking
capital guidelines. Although not adopted in regulation form, the Pennsylvania
Department of Banking utilizes capital standards requiring a minimum of 6%
leverage capital and 10% risk-based capital. The components of leverage and
risk-based capital are substantially the same as those defined by the FDIC. As
of June 30, 1999, vBank exceeded the Pennsylvania Department of Banking's
capital guidelines.
Prompt Corrective Action. In addition to the capital adequacy guidelines,
the FDIC is required to take "prompt corrective action" with respect to any
state-chartered bank which does not meet specified minimum capital
requirements. Federal regulations applicable to financial institutions
establish five capital levels: "well capitalized," "adequately capitalized,"
"undercapitalized," "severely undercapitalized" and "critically
undercapitalized."
o An institution is considered "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater, and it is
not subject to an order, written agreement, capital directive, or prompt
corrective action directive to meet and maintain a specific capital level
for any capital measure.
o An institution is considered "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of at least 4% and leverage capital ratio of 4% or greater (or a
leverage ratio of 3% or greater if the institution is rated composite 1 in
its most recent report of examination, subject to appropriate federal
banking agency guidelines), and the institution does not meet the
definition of an undercapitalized institution.
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<PAGE>
o A bank is considered "undercapitalized" if it has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that
is less than 4%, or a leverage ratio that is less than 4% (or a leverage
ratio that is less than 3% if the institution is rated composite 1 in its
most recent report of examination, subject to appropriate federal banking
agency guidelines).
o A "significantly undercapitalized" institution is one which has a total
risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital
ratio that is less than 3%, or a leverage ratio that is less than 3%.
o A "critically undercapitalized" institution is one which has a ratio of
tangible equity to total assets that is equal to or less than 2%.
Under certain circumstances, a "well capitalized," "adequately
capitalized" or "undercapitalized" institution may be treated as if the
institution were in the next lower capital category.
Federal banking regulators are authorized to take "prompt corrective
action" with respect to capital-deficient institutions. In addition to
requiring the submission of a capital restoration plan, federal law contains
broad restrictions on certain activities of undercapitalized institutions
involving asset growth, acquisitions, branch establishment, and expansion into
new lines of business. With certain exceptions, an insured depository
institution is prohibited from making capital distributions, including
dividends, and is prohibited from paying management fees to control persons
(e.g., a holding company) if the institution would be undercapitalized after
any such distribution or payment.
As an institution's capital decreases, the powers of the federal
regulators become greater. A significantly undercapitalized institution is
subject to mandated capital raising activities, restrictions on interest rates
paid and transactions with affiliates, removal of management, and other
restrictions. The regulators have very limited discretion in dealing with a
critically undercapitalized institution and are virtually required to appoint a
receiver or conservator if the capital deficiency is not corrected promptly.
Activities and Investments of Insured State-chartered Banks. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally
may not directly or indirectly acquire or retain any equity investment of a
type, or in an amount, that is not permissible for a national bank unless the
FDIC has determined that such activities would pose no risk to the insurance
fund of which it is a member and the bank is in compliance with applicable
regulatory capital requirements. An insured state bank is not prohibited from,
among other things, (1) acquiring or retaining a majority interest in a
subsidiary, (2) investing as a limited partner in a partnership the sole
purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided
that such limited partnership investments may not exceed 2% of the bank's total
assets, (3) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees' and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (4) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
Pennsylvania Banking Law. The Pennsylvania Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of vBank
and its affairs. The Pennsylvania Banking Code delegates extensive rulemaking
power and administrative discretion to the Pennsylvania Department of Banking
so that the supervision and regulation of state-chartered savings banks may be
flexible and readily responsive to changes in economic conditions and in
savings and lending practices.
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<PAGE>
One of the purposes of the Pennsylvania Banking Code is to provide banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal
and foreign laws. A Pennsylvania bank may locate or change the location of its
principal place of business and establish an office anywhere in the
Commonwealth, with the prior approval of the Pennsylvania Department of
Banking.
The Pennsylvania Department of Banking generally examines each savings
bank not less frequently than once every two years. Although the Pennsylvania
Department of Banking may accept the examinations and reports of the FDIC in
lieu of the Pennsylvania Department of Banking's examination, the present
practice is for the Pennsylvania Department of Banking to conduct individual
examinations. The Pennsylvania Department of Banking may order any savings bank
to discontinue any violation of law or unsafe or unsound business practice and
may direct any trustee, officer, attorney or employee of a savings bank engaged
in an objectionable activity, after the Pennsylvania Department of Banking has
ordered the activity to be terminated, to show cause at a hearing before the
Pennsylvania Department of Banking why such person should not be removed.
Restrictions on Payment of Dividends. Under the Federal Deposit Insurance
Act, insured depository institutions such as vBank are prohibited from making
capital distributions, including the payment of dividends, if, after making any
such distribution, the institution would become "undercapitalized" (as such
term is used in the statute). Under the Federal Deposit Insurance Act, no
dividends may be paid by an insured bank if the bank is in arrears in the
payment of any insurance assessment due to the FDIC. Dividend payments by vBank
are subject to the Pennsylvania Banking Code. Under the Pennsylvania Banking
Code, no dividends may be paid except from "accumulated net earnings"
(generally, undivided profits). As previously discussed, state and federal
regulatory authorities have adopted standards for the maintenance of adequate
levels of capital by banks. Adherence to such standards further limits the
ability of vBank to pay dividends. In addition, vBank's regulators have
authority to prohibit us or vBank from engaging in an unsafe or unsound
practice in conducting their business. The payment of dividends, depending upon
our financial condition or the financial condition of vBank, could be deemed to
constitute such an unsafe or unsound practice.
Regulatory Enforcement Authority. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities.
Limitations on Transactions with Affiliates and Insiders. Transactions
between banks and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a bank is any company or entity which
controls, is controlled by or is under common control with the bank. In a
holding company context, the parent holding company of a bank (such as
USABancShares.com) and any companies which are controlled by such parent
holding company are affiliates of the bank. Generally, Section 23A places
limits on the amount of loans or extensions of credit to, or investments in, or
certain other transactions with, affiliates. In addition, limits are placed on
the amount of advances to third parties collateralized by the securities or
obligations of affiliates. Most of these loans and certain other transactions
must be secured in prescribed amounts. Section 23B of the Federal Reserve Act,
among other things, prohibits an institution from engaging in transactions with
certain affiliates unless the transactions are on terms substantially the same,
or at least as favorable to such institution or its subsidiaries, as those
prevailing at the time for comparable transactions with non-affiliated
companies.
In addition, USABancShares.com is subject to restrictions on extensions of
credit to executive officers, directors, certain principal stockholders, and
their related interests. Such extensions of credit (i) must be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with third parties and (ii)
must not involve more than the normal risk of repayment or present other
unfavorable features.
Community Reinvestment Act. The Community Reinvestment Act requires that,
in connection with examinations of financial institutions, the federal
regulatory authorities evaluate the record of such financial
68
<PAGE>
institutions in meeting the credit needs of their local communities, including
low- and moderate-income neighborhoods, consistent with the safe and sound
operation of those institutions. These factors are also considered in
evaluating mergers, acquisitions and applications to open a branch or facility.
Other Regulations
Lending Activities. Interest and certain other charges collected or
contracted for by vBank are subject to state usury laws and certain federal
laws concerning interest rates. vBank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as (i) the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, (ii) the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials
to determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the community it serves, (iii) the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit, (iv) the Fair Credit Reporting Act of
1978 governing the use and provision of information to credit reporting
agencies, (v) the Fair Debt Collection Act governing the manner in which
consumer debts may be collected by collection agencies, and (vi) the rules and
regulations federal agencies charged with the responsibility of implementing
such federal laws.
Deposit Activities. The deposit operations of vBank also are subject to
(i) the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records, and (ii) the
Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
Board to implement that act, which govern automatic deposits to and withdrawals
from deposit accounts and customers' rights and liabilities arising from the
use of automated teller machines and other electronic banking services.
Internet and Electronic Commerce Activities. A number of legislative and
regulatory proposals currently under consideration by federal, state, local and
foreign governmental organizations may lead to laws or regulations concerning
the electronic commerce market and use of the Internet, including, but not
limited to, on-line content, user privacy, taxation, access charges, liability
or third-party activities and jurisdiction. Congress has held hearings on
whether to regulate the electronic commerce market, while numerous states are
considering adopting their own laws to regulate Internet banking. Moreover, the
FDIC has proposed other guidelines governing Internet operations.
These and any other proposed laws, rules and regulations could force us to
comply with more complex and perhaps more burdensome regulatory requirements,
which could materially adversely affect our business, financial condition,
results of operations and cash flows.
69
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information concerning our current
directors and executive officers. The term of office for each director is one
year or until the next meeting of shareholders, at which time elections are
held for each seat on the board of directors.
<TABLE>
<CAPTION>
Director and/or
Position with USABancShares.com Executive Officer
Name and/or vBank Age Since
- -------------------------------- ------------------------------------------------ ----- ------------------
<S> <C> <C> <C>
George M. Laughlin ............. Chairman 78 1995
Zeev Shenkman .................. Vice-Chairman 47 1998
Kenneth L. Tepper .............. President and Chief Executive Officer/Director 37 1995
Clarence L. Rader .............. Director/Chairman of vBank 68 1995
George C. Fogwell, III ......... Director 52 1995
John A. Gambone ................ Director 60 1995
Carol J. Kauffman .............. Director 52 1997
Wayne O. Leevy ................. Director 55 1996
Brian M. Hartline .............. Chief Financial Officer and Director/Chief 34 1998
Operating Officer of vBank
Craig J. Scher ................. Senior Vice President and Director of 35 1998
Lending/Credit of vBank
</TABLE>
Following is a brief summary of each director's and executive officer's
occupation over the last five years.
George M. ("Dewey") Laughlin is a real estate investor and insurance
broker and the founder/owner of Best Auto Tags and Abat's Auto Tags, one of the
first companies to originate 24-hour licensed messenger service in
Pennsylvania. Mr. Laughlin owns and manages a total of twenty-four branch
locations throughout the Commonwealth of Pennsylvania. He is a veteran of the
United States Navy, having served on the aircraft carrier U.S.S. Independence
in every major South Pacific campaign of World War II.
Zeev Shenkman has been the Chief Executive Officer of Shen Management
Corporation since September 1995. From 1996 through 1997, Mr. Shenkman was
Chief Financial Officer of Global Sports, Inc. Prior thereto, from May 1984
through March 1995, Mr. Shenkman was the Chief Financial Officer of Today's
Man, Inc. In 1996, Today's Man filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code, and emerged under a plan approved in 1998.
Kenneth L. Tepper has been our Director, President and Chief Executive
Officer since 1995. Mr. Tepper has been a Director, President and Chief
Executive Officer of vBank since 1995. Mr. Tepper served as an agent of the
FDIC assigned to the Resolution Trust Corporation from 1990 through 1991.
Thereafter, Mr. Tepper was Director of Merchant Banking at Tucker Federal SLA,
and from 1994 through 1995 was Managing Director of Merchant*BancShares, Inc.,
an investment banking firm specializing in community bank mergers and loan
portfolio acquisitions. He was Finance Chairman of the Pennsylvania Republican
State Committee during the 1994 gubernatorial campaign, and a principal of the
1995 Congressional Medal of Honor Society Convention. He serves on the board of
directors of TRM Corporation, a public company in the self-service photocopy
business in which USABancShares.com maintains a $500,000 investment in debt
securities.
Clarence L. Rader has served as Chairman of vBank since November 1995. Mr.
Rader served as President and Chief Executive Officer of vBank from 1986 to
1995. Mr. Rader was President of the Norristown School Board, and Chairman of
the Central Montgomery Chamber of Commerce from 1991 to 1992. He is a senior
appraiser with the American Society of Appraisers.
George C. Fogwell, III is a senior international Captain for Delta
Airlines. Mr. Fogwell, as a certified flight instructor, is a member of the Air
Line Pilots Association, the Seaplane Pilots Association and the owner of
Clinton Aviation. Mr. Fogwell works for the American Heart Association and has
been a member of the Board of Directors for USABancShares.com, USACapital and
vBank since their inception.
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<PAGE>
John A. Gambone is the Chairman, President and Chief Executive Officer of
Gambone Bros. Organization, Inc., a real estate development concern founded in
1958 and headquartered in Fairview Village, Pennsylvania. He is a member of the
Pennsylvania Horse Breeders Association as well as numerous professional
organizations related to the building industry.
Carol J. Kauffman has served as the Director of Business Development for
Lawyers' Travel Service Division of the World Travel Specialists Group since
1996. Prior to Lawyers' Travel, Ms. Kauffman was Senior Account Executive,
Account Services for Reimel Carter Public Relations firm after successfully
selling the firm she founded over ten years ago, Lawlor Jackson, Inc.
Wayne O. Leevy is the Managing Partner of Mitchell & Titus, LLP, a public
accounting firm. Prior to Mitchell & Titus, Mr. Leevy was Managing Officer of
Leevy, Redcross and Co., which merged with Mitchell & Titus in 1990.
Brian M. Hartline is currently our Director and Chief Financial Officer
and Chief Operating Officer of vBank, where he has been employed since December
1998. Prior to joining USABancShares.com, Mr. Hartline served from 1994 through
1998 in a number of positions, including Executive Vice President and Chief
Financial Officer, at ML Bancorp, Inc. in Villanova, Pennsylvania, and from
1990 to 1994 as Vice President and Controller of PNC Bank (Central Region),
formerly United Federal Bank, in State College, Pennsylvania. Mr. Hartline is a
licensed certified public accountant.
Craig J. Scher is currently Senior Vice President and Director of
Lending/Credit of vBank, where he has been employed since July 1998. Prior to
joining vBank, Mr. Scher served from 1989 to 1998 in a number of positions,
including Senior Vice President, at Equity National Bank, in Marlton, New
Jersey, and from 1985 to 1989 with Midlantic Bank, formerly Continental Bank in
Philadelphia, Pennsylvania.
Compensation of the Board of Directors
Directors of USABancShares.com receive a fee of $400 for each meeting of
the board of directors attended. Directors of USABancShares.com also receive a
fee of $100 for each committee meeting attended. Mr. Laughlin receives $1,000
per month, plus reimbursement of reasonable out-of-pocket expenses not to
exceed $12,000 per year. Mr. Shenkman receives $25,000 per year pursuant to his
election as Vice-Chairman of USABancShares.com. During 1998, an aggregate of
$58,800 was paid to directors for their services. No director received more
than $14,200 in 1998.
During 1998, Ms. Kauffman was awarded options to purchase 2,660 shares of
common stock at an exercise price of $3.76 per share and options to purchase
13,300 shares of common stock at an exercise price of $5.64 per share. Mr.
Shenkman was awarded options to purchase 66,500 shares of common stock at an
exercise price of $5.64 per share. Also, Mark A. Kearney was awarded options to
purchase 13,300 shares of common stock at an exercise price of $5.64 per share.
Such options were subsequently forfeited in connection with Mr. Kearney's
resignation from the board of directors.
71
<PAGE>
Executive Compensation
The following table sets forth compensation paid in the fiscal year ended
December 31, 1998 for services performed in all capacities for
USABancShares.com and vBank with respect to the Chief Executive Officer, the
Chief Financial Officer and vBank's Chief Operating Officer and the Senior Vice
President and Director of Lending/Credit of vBank. USABancShares.com and vBank
had no other executive officer whose salary and bonus exceeded $100,000 in the
fiscal year ended December 31, 1998 or whose current salary exceeds $100,000.
<TABLE>
<CAPTION>
Long Term
Compensation
No. of Securities All Other
Name and Principal Position Fiscal Year Annual Salary Underlying Options Compensation
- ---------------------------------------------- ------------- ----------------- -------------------- -----------------------
<S> <C> <C> <C> <C>
Kenneth L. Tepper, President and CEO ......... 1998 $219,462(1) 106,134 $162,000(2)(3)
1997 $120,000 -- $ 12,000(3)
1996 $120,000 -- $ 12,000(3)
Brian M. Hartline, Chief Financial
Officer/Chief Operating Officer
of vBank .................................... 1998 $ 11,692(4) 40,000 --
Craig J. Scher, Senior Vice President and
Director of Lending/Credit of vBank ......... 1998 $ 42,115(5) 20,000 --
</TABLE>
- ------------
(1) Mr. Tepper's annual base salary was increased to $245,000 effective March
1, 1998.
(2) Mr. Tepper received a payment of $150,000 in connection with his agreement
to cap the anti-dilutive feature of the Class B common stock. See "--
Certain Relationships and Related Transactions."
(3) In addition to his base salary, Mr. Tepper received $12,000 in additional
compensation which was used to purchase a deferred compensation life
insurance policy.
(4) Mr. Hartline was employed by USABancShares.com on December 1, 1998 at an
annual base salary of $160,000.
(5) Mr. Scher was employed by vBank in July 1998 at an annual base salary of
$120,000.
Stock Options
The following table sets forth certain information concerning grants of
stock options to the Chief Executive Officer, Chief Financial Officer and
Director of Lending/Credit in the fiscal year ended December 31, 1998. We had
no other executive officers whose salary and bonus exceeded $100,000 in the
fiscal year ended December 31, 1998 or whose salary currently exceeds $100,000.
Option Grants During 1998
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------------
% of Total Options
Number of Granted to
Securities Underlying Employees Exercise Expiration
Name Options Granted During 1998 Price Date
- --------------------------- ----------------------- ------------------- ---------------- -----------
<S> <C> <C> <C> <C>
Kenneth L. Tepper ......... 70,756(1) 23.3% $ 3.76/share 2/11/03
35,374(2) 11.6% $ 3.76/share 2/11/03
Brian M. Hartline ......... 40,000 13.2% $ 3.75/share 12/01/09
Craig J. Scher ............ 20,000 6.6% $ 3.75/share 12/01/09
</TABLE>
- ------------
(1) These options vest over a three year period beginning February 1999.
(2) These options vest over a three year period beginning February 2002.
72
<PAGE>
The following table sets forth certain information concerning the exercise
of options to purchase common stock of USABancShares.com in the fiscal year
ended December 31, 1998 and the unexercised options to purchase common stock of
USABancShares.com held by the named executive officers at December 31, 1998.
Year-end values are based upon the closing market price of a share of common
stock on December 31, 1998 of $4.50.
Aggregated Option Exercises in Fiscal Year
1998 and December 31, 1998 Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998 at December 31, 1998
------------------------------- ------------------------------
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ------------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth L. Tepper ......... 8,800 $24,595 399,860 42,454 $559,804 $31,416
Brian M. Hartline ......... -- -- -- 40,000 -- $30,000
Craig J. Scher ............ -- -- -- 20,000 -- $15,000
</TABLE>
Employment Agreements
USABancShares.com and vBank have entered into a three-year employment
agreement with Mr. Tepper pursuant to which Mr. Tepper serves as the President
and Chief Executive Officer of USABancShares.com and vBank. Under his employment
agreement, Mr. Tepper receives an annual base salary of $245,000 and has the
ability to receive cash bonuses at the end of each fiscal year, beginning with
the fiscal year ending 1999, based on our attainment of certain performance
objectives. Mr. Tepper will receive a cash bonus of $100,000 when vBank's total
assets reach $500 million. He will also receive a cash bonus of $100,000 upon
the opening of the fifty thousandth (50,000) deposit account and an additional
$100,000 cash bonus upon the opening of deposit accounts in increments of
fifty thousand (50,000) thereafter. Mr. Tepper will receive a cash bonus based
on our earnings per share each year as follows: (i) $50,000 for earnings per
share in excess of $0.50, (ii) $75,000 for earnings per share in excess of
$0.75, and (iii) $100,000 for earnings per share in excess of $1.00.
Additionally, Mr. Tepper will receive a cash bonus of $200,000 for every $100
million increase in our market capitalization, with such increase in market
capitalization being based on the average closing price of our common stock as
reported on the Nasdaq SmallCap or National Market for twenty (20) consecutive
trading days. The employment agreement provides that in the event Mr. Tepper is
discharged other than for cause, as defined in the employment agreement, Mr.
Tepper will receive, until the earlier of the remaining term of the employment
agreement or obtaining employment elsewhere, his current salary, medical
benefits, the use of a company automobile and any earned bonuses and expense
reimbursements due to Mr. Tepper. In the event of a change of control, Mr.
Tepper will receive his current salary, medical benefits and the use of a
company car, for twenty-four months, if he is not offered continued employment
with the same job title, responsibilities, locality and compensation.
USABancShares.com and vBank have entered into a three-year employment
agreement with Mr. Hartline pursuant to which Mr. Hartline serves as
USABancShares.com's Chief Financial Officer and Chief Operating Officer of
vBank. Mr. Hartline receives an annual base salary of $200,000 and may receive
annual cash bonuses, beginning with the fiscal year ending 1999, based on our
attainment of certain performance objectives. Mr. Hartline will receive a cash
bonus of $100,000 when vBank's total assets reach $500 million. He will also
receive a cash bonus of $100,000 upon the opening of the fifty thousandth
(50,000) deposit account and an additional $100,000 cash bonus upon the opening
of deposit accounts in increments of fifty thousand (50,000) thereafter. Mr.
Hartline will receive a cash bonus based on our earnings per share each year as
follows: (i) $50,000 for earnings per share in excess of $0.50, (ii) $75,000 for
earnings per share in excess of $0.75, and (iii) $100,000 for earnings per share
in excess of $1.00. Additionally, Mr. Hartline will receive a cash bonus of
$100,000 for every $100 million increase in our market capitalization, with such
increase in market capitalization being based on the average closing price of
our common stock as reported on the Nasdaq SmallCap or National Market for
twenty (20) consecutive trading days. If Mr. Hartline's employment is terminated
without cause, as defined in the employment agreement, Mr. Hartline will
receive, until the earlier of the remaining term of the employment agreement or
obtaining employment elsewhere, his current salary, medical benefits, use of an
automobile and any earned bonuses and expense reimbursements due to Mr.
Hartline. In the event of a change in control, Mr. Hartline will receive his
current salary, medical benefits and the use of an automobile for twenty-four
months, if he is not offered continued employment with the same job title,
responsibilities, locality and compensation following the change in control.
vBank has entered into a three-year employment agreement with Mr. Scher
pursuant to which Mr. Scher serves as the Senior Vice President and Director of
Lending/Credit. Mr. Scher receives an annual base salary of $120,000 and will
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<PAGE>
receive incentive compensation in the amount of $50,000 if we earn in excess of
$0.50 per share (as adjusted for stock splits, stock dividends, etc.) in any
four consecutive reporting periods. Pursuant to the agreement, Mr. Scher was
granted or will be granted options to purchase 20,000 shares of common stock on
November 30 of each of 1998, 1999 and 2000, for a total of 60,000 options. The
options vest over a three-year period, ratably. The exercise price of the
options will be the last reported sale price on the Nasdaq SmallCap or National
Market of our common stock of the business day preceding the date of grant. If
Mr. Scher's employment is terminated without cause, as defined in the employment
agreement, Mr. Scher will receive, until the earlier of the remaining term of
the employment agreement or obtaining employment elsewhere, his current salary,
medical benefits, use of an automobile and any earned bonuses. In the event of a
change in control, Mr. Scher will receive his current salary, medical benefits
and the use of an automobile for twenty-four months, if he is not offered
continued employment with the same job title, responsibilities and compensation
following the change in control.
Indemnification of Directors and Officers
Our articles and bylaws provide that we will indemnify every person who is
or was our director or executive officer to the fullest extent permitted by
law. This indemnification applies to all expenses and liabilities reasonably
incurred in connection with any proceeding to which the director or executor
officer may become involved by reason of being or having been a director or
executive officer. Pennsylvania law, under which we are incorporated, allows
indemnification of directors and officers if the indemnified person acted in
good faith and in a manner such person reasonably believed to be in, or not
opposed to, our best interest and, with respect to any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful. We maintain a director
and officer liability insurance policy covering each of our directors and
executive officers.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information concerning the beneficial
ownership of our common stock, as of September 1, 1999, by each director, each
named executive officer, all directors and executive officers as a group, and
each person known to us to beneficially own 5% or more of our outstanding
common stock. The information in the table concerning persons known by us to
own beneficially 5% or more of the common stock is derived, without independent
investigation on our part, from the most recent filings made by such persons
with the Securities and Exchange Commission on Schedule 13D and Schedule 13G
pursuant to Rule 13d-3 of the Securities Exchange Act of 1934. Mr. Tepper, our
President and Chief Executive Officer, owns all 10,000 shares of the issued and
outstanding Class B common stock. The address for each listed executive officer
and director is 1535 Locust Street, Philadelphia, Pennsylvania 19102.
<TABLE>
<CAPTION>
Shares of Percentage of Shares of
Common Stock Common Stock
Name of Beneficial Owner Beneficially Owned (1) Beneficially Owned (1)
- ------------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
George M. Laughlin .................................... 124,086(2)(3) 3.1
Zeev Shenkman ......................................... 119,400(4) 2.9
Clarence L. Rader ..................................... 35,378(2) 0.9
Kenneth L. Tepper ..................................... 542,644(5) 12.3
George C. Fogwell, III ................................ 89,506(2)(6) 2.2
John A. Gambone ....................................... 138,592(2)(7) 3.4
Carol J. Kauffman ..................................... 125,334(8)(9) 3.0
Wayne O. Leevy ........................................ 23,690(10) 0.6
Brian M. Hartline ..................................... 80,000 2.0
Craig J. Scher ........................................ 50,684 1.3
--------- ----
Directors and Executive Officers (10 persons) ......... 1,329,314(11) 28.4%
========= ====
</TABLE>
(Footnotes on next page)
74
<PAGE>
- ------------
* Less than one percent (1%)
(1) Based upon 4,014,784 shares of common stock outstanding as of September 1,
1999 (which does not include the shares of Class B common stock which are
convertible into shares of common stock). Calculated in accordance with
Rule 13d-3 promulgated under the Securities Exchange Act of 1934. Also
includes shares owned by (a) a spouse, minor children or by relatives
sharing the same home, (b) entities owned or controlled by the named
person and (c) other persons if the named person has the right to acquire
such shares within 60 days of September 1, 1999 by the exercise of any
right or option. Unless otherwise noted, shares are owned of record and
beneficially by the named person.
(2) Includes options to purchase 17,690 shares of common stock within 60 days
of September 1, 1999.
(3) Includes 35,378 shares held by Mr. Laughlin's wife and 1,764 shares held
by his daughter.
(4) Includes options to purchase 66,500 shares of common stock within 60 days
of September 1, 1999.
(5) Includes 354 shares of common stock held by Mr. Tepper as custodian for
his minor son. Also includes options to purchase 399,860 shares within 60
days of September 1, 1999. Does not include 10,000 shares of Class B
common stock beneficially owned by Mr. Tepper and convertible in 2001 into
216,460 shares of common stock.
(6) Includes 1,062 shares of common stock held by Mr. Fogwell's children.
(7) Mr. Gambone's shares of common stock are held in the name of a trust, of
which Mr. Gambone is trustee (53,066 shares), and in the name of a
corporation (37,888 shares) of which Mr. Gambone is president. Includes
620 shares of common stock owned by family members who reside in Mr.
Gambone's home, as to which Mr. Gambone disclaims beneficial ownership
owned by family members who reside in Mr. Gambone's home.
(8) Includes 3,240 shares of common stock owned by Mrs. Kauffman's husband,
options to purchase 106,134 shares of common stock within 60 days of
September 1, 1999 held by Mrs. Kauffman's husband and options to purchase
2,660 shares of common stock within 60 days of September 1, 1999.
(9) Includes options to purchase 13,300 shares of common stock within 60 days
of September 1, 1999.
(10) Includes options to purchase 11,690 shares of common stock within 60 days
of September 1, 1999.
(11) Includes 670,904 options exercisable within 60 days of September 1, 1999;
does not include 212,450 options that are not exercisable within 60 days
of September 1, 1999.
75
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following summarizes certain material agreements between us and our
officers, directors and certain of our existing shareholders. The summary is
not a complete description of such agreements and therefore this discussion is
qualified in its entirety by reference to the agreements, copies of which will
be made available for inspection upon written request. It is our intention that
in the future, transactions with our directors, officers, employees or
affiliates will be minimal and will be approved in advance by a majority of the
disinterested members of our board of directors.
vBank has engaged in, and expects in the future to engage in, banking
transactions in the ordinary course of business with its directors, executive
officers and principal shareholders, or their affiliate organizations, on
substantially the same terms as those prevailing for comparable transactions
with others. vBank made all loans to such persons (1) in the ordinary course of
business, (2) on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and (3) without involving more than the normal risk of
collectability or other unfavorable features. As of June 30, 1999, certain of
our executive officers and directors and certain executive officers and
directors of vBank had outstanding indebtedness in amounts exceeding $60,000 to
vBank as follows: As of June 30, 1999, four companies in which Mr. Gambone owns
a minority interest had outstanding indebtedness totaling $3.0 million. Of this
amount, $2.7 million is secured by real estate, $133,000 is secured by titles
to motor vehicles and $132,000 is secured by a commercial vehicle, with all
loans personally guaranteed by Mr. Gambone. Mr. Tepper had outstanding loan
commitments totaling $692,000, of which $642,000 is secured by a residential
mortgage and $50,000 is an unsecured line of credit. Mr. Shenkman has a loan
outstanding totaling $1.1 million. The loan is secured by marketable securities
and a second mortgage on residential real estate. Additionally, Mr. Laughlin
had outstanding loan commitments totaling $187,000, of which $137,000 is
secured by commercial real estate and $50,000 is an unsecured line of credit.
The aggregate amount of loans outstanding to executive officers and directors
of vBank as of June 30, 1999 equaled 34.8% of stockholder's equity.
Mr. Tepper, President and Chief Executive Officer, is the sole holder of
the Class B common stock. The terms of the Class B common stock provide that on
January 1, 2001, all of the authorized shares of Class B common stock will
automatically convert into 10% of the then issued shares of Class A common
stock, rounded up to the nearest whole share. In connection with a private
placement of our common stock in February 1998, we entered into an agreement
with Mr. Tepper by which we have an option to pay Mr. Tepper $150,000 per year
for each of the three years beginning in 1998 in exchange for Mr. Tepper
agreeing to cap the non-dilutive feature of the Class B common stock to 10% of
the Class A common stock outstanding prior to the February 1998 private
placement of Class A common stock, or 216,460 shares, and waive any future
exercise of the non-dilutive feature of the Class B common stock. The first
payment was made upon the closing of the February 1998 private placement. The
second payment was made in January 1999. The third optional payment is
anticipated to be made in January 2000.
In March 1999, our USA Capital Trust I subsidiary completed an offering of
$10,000,000 aggregate principal amount of Series A 9.50% trust preferred
securities. Royal BancShares of Pennsylvania, Inc. ("Royal") purchased
$3,000,000 of the Trust Preferred Securities. Daniel M. Tabas, the Chairman of
the Board of Royal, is the father-in-law of Mr. Tepper, our President, Chief
Executive Officer and director.
DESCRIPTION OF CAPITAL STOCK
USABancShares.com's authorized capital stock consists of 10,000,000 shares
of common stock, par value $1.00 per share, 10,000 shares of Class B common
stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par
value $1.00 per share. The following summary does not purport to be complete
and is qualified by reference to our articles and bylaws, which are
incorporated by reference as exhibits to the registration statement of which
this prospectus is a part, and by provisions of applicable law.
As of September 1, 1999, 4,014,784 shares of common stock, 10,000 shares
of Class B common stock and no shares of preferred stock were outstanding.
Kenneth L. Tepper, our President and Chief Executive Officer, presently owns
all of the authorized shares of Class B common stock.
76
<PAGE>
Common Stock
Dividends. Holders of common stock are entitled to receive dividends, if
any, as may be declared by the board of directors out of legally available
funds subject to the payment of any preferential dividend to the holders of
preferred stock, if any. To date, we have not paid any cash dividends with
respect to the common stock.
Voting Rights. The voting rights of the shares of common stock are
identical to the voting rights of the Class B common stock with one exception:
the holders of the shares of common stock are entitled to elect two-thirds of
our directors and the holders of the Class B common stock are entitled to elect
one-third of our directors. Excluding the election of directors, the common
stock and the Class B common stock vote together as a single class on all
matters submitted to a vote of the holders of common stock, unless applicable
law requires that each class vote separately. Mr. Tepper, the holder of all of
the issued and outstanding Class B common stock, waived his right to elect
one-third of the directors for our Annual Meeting on July 15, 1999. Mr.
Tepper's waiver of his voting rights applies only to the meeting of July 15,
1999, and there is no assurance that Mr. Tepper will waive his voting rights in
the future.
Holders of common stock do not have cumulative voting rights. Holders of
common stock are entitled to one vote for each share held, subject to certain
limitations on such voting rights provided by our articles. Our articles
provide that no one person or group may hold or vote more than 10% of the
common stock without the board of directors' consent.
Our articles provide that a director, or the entire board of directors,
may only be removed for "cause" and only with the vote of at least 75% of the
outstanding shares entitled to vote. "Cause" is defined to mean only (1)
conviction of the director of a felony, (2) declaration by order of court that
the director is of unsound mind, or (3) gross abuse of trust. Under this
provision, no director may be removed by shareholders without cause regardless
of the vote in favor of such removal. This provision could make the removal of
directors more difficult to accomplish since the holders of more than 25% of
our capital stock then eligible to vote, which could include directors and
officers, would have a veto power over any attempted removal even if "cause" is
established. As of September 1, 1999, our directors and executive officers as a
group owned 28.4% of our shares of common stock.
Our articles provide that the affirmative vote of at least 80% of the
outstanding shares of capital stock then eligible to vote is required for the
adoption of any shareholder proposal to amend the bylaws which has not been
previously approved by the board of directors. This provision could make
shareholder proposals to amend the bylaws more difficult to adopt since the
holders of more than 20% of stock then eligible to vote, which could include
directors and officers, would have a veto power over any changes to our bylaws.
Our articles also provide that a three-quarters vote of directors and
two-thirds vote of the outstanding shares of common stock is necessary to
approve a merger, consolidation, liquidation or dissolution or any action that
would result in the sale or other disposition of all or substantially all of
our assets. However, these voting requirements are not required if a bylaw
amendment is subsequently adopted by all of the members of the board of
directors to modify or eliminate such requirements. Under such circumstances,
Pennsylvania's Business Corporation Law would require only a majority vote of
both the board of directors and shareholders.
Preemptive Rights. Holders of common stock have no preemptive rights.
Liquidation. In the event of our liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in the assets available
for distribution after payment or provision for payment of our debts and other
liabilities, subject to the rights of any series of preferred stock, if any,
then outstanding.
Conversion of Class B Common Stock. Mr. Tepper, President and Chief
Executive Officer, is the sole holder of Class B common stock. The terms of the
Class B common stock provide that on January 1, 2001, all of the authorized
shares of Class B common stock will automatically convert into 10% of the then
issued shares of Class A common stock, rounded up to the nearest whole share.
In connection with a private placement of our common stock in February 1998, we
entered into an agreement with Mr. Tepper by which we have an option to pay Mr.
Tepper $150,000 per year for each of the three years beginning in 1998 in
exchange for Mr. Tepper agreeing to cap the non-dilutive feature of the Class B
common stock to 10% of the
77
<PAGE>
Class A common stock outstanding prior to the February 1998 private placement
of Class A common stock, or 216,460 shares, and waive any future exercise of
the non-dilutive feature of the Class B common stock. The first payment was
made upon the closing of the February 1998 private placement. The second
payment was made in January 1999. The third optional payment is anticipated to
be made in January 2000. Following the exchange, those shares of the Class B
common stock will no longer be available for issuance.
Preferred Stock
The authorized preferred stock may be issued from time to time in one or
more designated series or classes. The board of directors, without approval of
the shareholders, is authorized to establish the voting, dividend, redemption,
conversion, liquidation and other relative provisions as may be provided in a
particular series or class. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of common stock and, under certain circumstances, make it more
difficult for a third party to acquire, or discourage a third party from
acquiring, a majority of the outstanding voting stock of USABancShares.com. We
have no present intention to issue any series or class of preferred stock.
Warrants
Sandler O'Neill & Partners, L.P. received warrants which are convertible
into 3.25% of our common stock in connection with its service as placement
agent in a $7.5 million private placement of our common stock in February 1998.
The exercise price of the warrants, as adjusted for an August 1998 stock
dividend and a June 1999 two-for-one stock split effected in the form of a
stock dividend, is $3.85 per share. The warrants include anti-dilution
protection provisions whereby the number of warrants will be adjusted for
future stock splits, stock dividends, and the issuance of additional shares of
common stock for a period of three years from the closing of the private
placement and are exercisable for five years from such date.
EarthLink received warrants to purchase 120,000 shares of our common stock
in connection with a strategic alliance we entered into with EarthLink on July
19, 1999. The exercise price of the warrants is $12.00 per share. Of the
120,000 warrants issued, 80,000 are exercisable on or after July 22, 2000, and
40,000 are exercisable on or after July 22, 2001.
Systemax received warrants to purchase up to 40,000 shares of our common
stock in connection with a marketing agreement we entered into with Systemax on
August 18, 1999. Systemax may exercise 10,000 of the warrants at any time prior
to August 19, 2001 at an exercise price of $10.00 per share. Systemax may
exercise the remaining 30,000 warrants upon certain conditions being met at an
exercise price equal to the closing market bid price on the day prior to the
day the conditions are met by Systemax.
Change in Control
Our articles and bylaws contain the following provisions that could delay,
defer or prevent a change in control:
o any merger, consolidation, liquidation or dissolution must be approved by
the affirmative vote of 75% of directors and 66-2/3% of shareholders;
o one person or group may not hold or vote more than 10% of the shares of
common stock without the consent of the board of directors;
o directors may be removed only for cause and only by a vote of 75% of the
outstanding shares of common stock;
o the holders of the Class B common stock, currently only Mr. Tepper, are
entitled to elect one-third of the directors;
o the board of directors has broad discretion in evaluating any takeover
attempt and is authorized to use a "poison pill" defense; and
o the board of directors is authorized to issue "blank check" preferred
stock which provides the board of directors broad discretion to determine
the number of shares, voting rights and preferences of the preferred
stock.
78
<PAGE>
UNDERWRITING
USABancShares.com and Sandler O'Neill & Partners, L.P., as the
representative of the underwriters for the Offering named below, have entered
into an underwriting agreement with respect to the shares being offered.
Subject to certain conditions, each underwriter has severally agreed to
purchase the number of shares indicated in the following table.
Underwriters Number of Shares
- ------------ ----------------
Sandler O'Neill & Partners, L.P. ..........
Total ....................................
=================
Under the terms and conditions of the underwriting agreement, the
underwriters are committed to take and pay for all the common stock offered
hereby, if any are taken.
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial
price to public. After the common stock is released for sale to the public, the
initial price to public and other selling terms may from time to time be varied
by the underwriters.
If the underwriters sell more shares than the total number set forth in
the table above, the underwriters have an option to buy up to an additional
210,000 shares from us to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set
forth in the table above.
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Sandler O'Neill & Partners, L.P. has advised us that the underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.
<PAGE>
In connection with this Offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the Offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the Offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discounted by the
underwriters at any time. These transactions may be effected on the Nasdaq
SmallCap or National Market, in the over-the-counter market or otherwise. In
general, purchases of a security for the purpose of stabilization or to reduce
a short position could cause the price of the security to be higher than it
might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
As permitted by Rule 103 under the Securities Exchange Act of 1934,
underwriters and selling group members, if any, that are market makers in the
common stock may make bids for or purchases of the common stock in the Nasdaq
SmallCap or National Market until such time, if any, when a stabilizing bid for
the
79
<PAGE>
securities has been made. Rule 103 generally provides that (1) a passive market
maker's net daily purchases of the common stock may not exceed 30% of its
average daily trading volume in such securities for the two full consecutive
calendar months, or any 60 consecutive days ending within the 10 days,
immediately preceding the filing date of the registration statement of which
this prospectus forms a part, (2) a passive market maker may not effect
transactions or display bids for the common stock at a price that exceeds the
highest independent bid for the common stock by persons who are not passive
market makers and (3) bids made by passive market makers must be identified as
such.
Neither the Company nor the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
the Company nor the underwriters makes any representation that the underwriters
will engage in such transactions or that such transactions, once commenced,
will not be discontinued without notice.
Sandler O'Neill & Partners, L.P. has provided from time to time, and
expects to provide in the future, investment banking services to the Company
and its affiliates for which Sandler O'Neill & Partners, L.P. has received or
will receive customary fees and commissions.
USABancShares.com, our directors and executive officers have agreed with
the underwriters not to offer, sell, contract to sell or otherwise dispose of
any equity securities of the Company or securities convertible into or
exchangeable for equity securities of the Company during the period from the
date of this prospectus continuing through the date 180 days after the date of
this prospectus, except with the prior written consent of Sandler O'Neill &
Partners, L.P.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the
Securities and Exchange Commission. Our Securities and Exchange Commission
filings are also available over the Internet at the Securities and Exchange
Commission's website at http://www.sec.gov. You may also read and copy any
document we file at the Securities and Exchange Commission's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for more information on
the public reference room and their copy charges.
You may request a copy of any filings referenced above, excluding
exhibits, at no cost, by contacting USABancShares.com's Chief Financial
Officer, Brian M. Hartline, at the following address:
USABancShares.com, Inc.
1535 Locust Street
Philadelphia, Pennsylvania 19102
(215) 569-4200
We have filed a registration statement on Form SB-2 with the Securities
and Exchange Commission covering the Offering. For further information about us
and the Offering, you should refer to our registration statement and its
exhibits. Since the prospectus may not contain all the information that you may
find important, you should review the full text of the documents included in
the registration statement.
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
80
<PAGE>
FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus are forward-looking statements.
These forward-looking statements include statements in the "Business" section
of this prospectus relating to trends in Internet use and electronic commerce.
These forward-looking statements also include statements relating to our
performance in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Use of Proceeds" and "Business" sections of this
prospectus. In addition, we may make forward-looking statements in future
filings with the Securities and Exchange Commission and in written material,
press releases and oral statements issued by us or on our behalf.
Forward-looking statements include statements regarding our intent, belief or
current expectations (including statements preceded by, followed by or
including forward-looking terminology such as "may," "will," "should,"
"believe," "expect," "anticipate," "estimate," "continue" or similar
expressions or comparable terminology) with respect to various matters.
It is important to note that our actual results could differ materially
from those anticipated from the forward-looking statements depending on various
important factors. These important factors include a possible decline in asset
quality, the evolving nature of the market for Internet banking, the possible
adverse effects of unexpected changes in the interest rate environment,
increasing competition and regulatory changes. See "Risk Factors" beginning on
page 9 for more information on these and other risks we face.
All forward-looking statements in this prospectus are based on information
available to us on the date of this prospectus. We do not undertake to update
any forward-looking statements that may be made by us or on our behalf in this
prospectus or otherwise. In addition, please note that matters set forth under
the caption "Risk Factors" constitute cautionary statements identifying
important factors with respect to the forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for USABancShares.com by Jenkens & Gilchrist, a Professional Corporation,
Dallas, Texas. Certain legal matters in connection with the Offering will be
passed upon for the underwriters by Elias, Matz, Tiernan & Herrick L.L.P.,
Washington, D.C. As of the date of this prospectus, certain members of Elias,
Matz, Tiernan & Herrick L.L.P. own approximately 20,460 shares of common stock
of USABancShares.com.
EXPERTS
The consolidated financial statements of USABancShares.com and its
subsidiaries as of December 31, 1998 and 1997, and for the two years ended
December 31, 1998 have been included in this prospectus and in the registration
statement in reliance on the report of Grant Thornton LLP, independent
accountants, on the authority of that firm as experts in accounting and
auditing.
81
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
USABANCSHARES.COM, INC.
(formerly USABancShares, Inc. and USABanc.com, Inc.)
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Certified Public Accountants ....................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 ............................. F-3
Consolidated Statements of Operations for the years ended December 31, 1998 and 1997 ..... F-4
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income (Loss)
for the years ended December 31, 1998 and 1997 ........................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997 ..... F-6
Notes to Consolidated Financial Statements ............................................... F-7
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 ........ F-29
Consolidated Statements of Income for the six months ended June 30, 1999 and 1998 and the
three months ended June 30, 1999 and 1998 (unaudited) ................................... F-30
Consolidated Statements of Comprehensive Income for the six months ended June 30, 1999 and
1998 and the three months ended June 30, 1999 and 1998 (unaudited) ...................... F-31
Consolidated Statement of Changes in Stockholders' Equity for the six months ended June
30, 1999 (unaudited) ..................................................................... F-32
Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998
(unaudited) ............................................................................. F-33
Notes to Consolidated Financial Statements ............................................... F-34
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
USABancShares.com, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
USABancShares.com, Inc. and Subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, changes in stockholders'
equity and comprehensive income (loss) and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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 financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of
USABancShares.com, Inc. and Subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their consolidated cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ GRANT THORNTON LLP
- ----------------------
GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 22, 1999 (except for
Note 21, as to which the
date is June 15, 1999)
F-2
<PAGE>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
(in thousands, except per
share data)
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks .................................................... $ 1,335 $ 833
Interest bearing deposit with banks ........................................ 7,706 3,975
Investment securities available for sale ................................... 28,389 9,035
Investment securities held to maturity (fair market value of $15,951 and
$15,644 in 1998 and 1997, respectively) ................................... 15,755 15,419
FHLB Stock ................................................................. 3,523 900
Loans receivable, net ...................................................... 102,138 56,002
Premises and equipment, net ................................................ 2,023 1,153
Accrued interest receivable ................................................ 1,633 847
Other real estate .......................................................... 66 --
Goodwill, net .............................................................. 69 80
Deferred income taxes ...................................................... 573 163
Other assets ............................................................... 1,896 919
--------- --------
Total assets ............................................................ $ 165,106 $ 89,326
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand .................................................................... $ 1,439 $ 257
NOW ....................................................................... 846 688
Money Market .............................................................. 2,345 4,802
Savings and passbook accounts ............................................. 5,281 2,019
Time ...................................................................... 104,476 62,708
--------- --------
Total deposits .......................................................... 114,387 70,474
Borrowings ................................................................. 35,305 12,638
Accrued interest payable ................................................... 399 75
Accrued expenses and other liabilities ..................................... 1,418 773
--------- --------
Total liabilities ....................................................... $ 151,509 $ 83,960
========= ========
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 in 1998; 1,627,614 shares issued and
outstanding in 1997 and 216,460 shares of converted and unissued Class
B common stock in 1998; 162,762 converted and unissued 1997 ............... 4,232 814
Additional paid-in-capital ................................................. 8,567 4,828
Accumulated (deficit) earnings ............................................. 1,112 (378)
Accumulated other comprehensive income (loss) .............................. (314) 102
--------- --------
Total stockholders' equity .............................................. 13,597 5,366
--------- --------
Total liabilities and stockholders' equity .............................. $ 165,106 $ 89,326
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1998 1997
------------ ------------
(in thousands, except per
share data)
<S> <C> <C>
Interest income:
Loans .............................................................. $ 9,028 $ 3,090
Investment securities .............................................. 3,015 1,637
Interest bearing deposits with banks and other ..................... 309 152
-------- --------
Total interest income ............................................ 12,352 4,879
-------- --------
Interest expense:
Deposits ........................................................... 5,266 2,285
Other borrowings ................................................... 1,188 245
-------- --------
Total interest expense ........................................... 6,454 2,530
-------- --------
Net interest income .............................................. 5,898 2,349
Provision for possible loan losses .................................. 510 415
-------- --------
Net interest income after provision for possible loan losses ..... 5,388 1,934
-------- --------
Other income:
Service charges on deposit accounts ................................ 94 26
Gain on sale of securities ......................................... 378 127
Brokerage operations ............................................... 141 102
Other income ....................................................... 146 59
-------- --------
Total other income ............................................... 759 314
-------- --------
Other expenses:
Salaries and employee benefits ..................................... 1,539 1,345
Net occupancy expense .............................................. 523 202
Professional fees .................................................. 275 175
Office expenses .................................................... 270 120
Data processing fees ............................................... 199 115
Advertising expense ................................................ 177 62
Goodwill amortization .............................................. 10 8
Other operating expenses ........................................... 707 430
-------- --------
Total other expense .............................................. 3,700 2,457
-------- --------
Income (loss) before income tax expense .......................... 2,447 (209)
Income tax expense: ................................................. 957 17
-------- --------
Net income (loss) ................................................... $ 1,490 $ (226)
======== ========
Net income (loss) per share-- basic (1) ............................. $ 0.38 $ (0.10)
======== =========
Net income (loss) per share-- diluted (1) ........................... $ 0.35 $ (0.10)
======== =========
</TABLE>
- ------------
(1) 1998 and 1997 per share amounts have been restated to reflect a 33% stock
dividend paid August 17, 1998 and a two-for-one stock split effected in
the form of a dividend paid on June 15, 1999.
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
USABancShares.com, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
Income (Loss)
<TABLE>
<CAPTION>
Additional Accumulated
Common paid-in (deficit)
stock capital earnings
---------- ------------ -------------
(in thousands)
<S> <C> <C> <C>
Balance, January 1, 1997 ..................... $ 597 $ 4,878 $ (152)
Net loss .................................... -- -- (226)
Other comprehensive income, net of
reclassification adjustments and taxes ..... -- -- --
Total comprehensive loss ....................
Stock issued to acquire Knox Financial ...... 8 67 --
33% common stock dividend ................... 200 (200) --
Conversion of Class B common stock .......... 9 83 --
Amortization of unearned compensation
Class B common stock ....................... -- -- --
------- -------- -------
Balance, December 31, 1997 ................... 814 4,828 (378)
Net income .................................. -- -- 1,490
Other comprehensive loss, net of
reclassification adjustments and taxes ..... -- -- --
Total comprehensive income ..................
Private placement offering .................. 769 6,341 --
Exercise of stock options ................... 9 38 --
33% stock dividend .......................... 524 (524)
100% stock dividend ......................... 2,116 (2,116) --
------- -------- -------
Balance, December 31, 1998 ................... $ 4,232 $ 8,567 $ 1,112
======= ======== =======
<CAPTION>
Unearned Accumulated
compensation other Total
Class B comprehensive stockholders' Comprehensive
Common Stock income (loss) equity income (loss)
-------------- --------------- --------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Balance, January 1, 1997 ..................... $ (425) $ (2) $ 4,896
Net loss .................................... -- -- (226) $ (226)
Other comprehensive income, net of
reclassification adjustments and taxes ..... -- 104 104 104
-------
Total comprehensive loss .................... $ (122)
=======
Stock issued to acquire Knox Financial ...... -- -- 75
33% common stock dividend ................... -- -- --
Conversion of Class B common stock .......... -- -- 92
Amortization of unearned compensation
Class B common stock ....................... 425 -- 425
------- ------ --------
Balance, December 31, 1997 ................... -- 102 5,366
Net income .................................. -- -- 1,490 $ 1,490
Other comprehensive loss, net of
reclassification adjustments and taxes ..... -- (416) (416) (416)
-------
Total comprehensive income .................. $ 1,074
=======
Private placement offering .................. -- -- 7,110
Exercise of stock options ................... -- 47
33% stock dividend ..........................
100% stock dividend ......................... -- -- --
------- ------ --------
Balance, December 31, 1998 ................... $ -- $ (314) $ 13,597
======= ====== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................................... $ 1,490 $ (226)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Provision for possible loan losses ........................................ 510 415
Depreciation and amortization ............................................. 219 60
Decrease in goodwill ...................................................... 11 49
Accretion of discounts on purchased loan portfolio ........................ (1,306) (691)
(Accretion) amortization of securities (discount) premium, net ............ (9) (5)
Amortization of Class B common stock ...................................... -- 425
Class B common stock conversion ........................................... -- 92
Gain on sale of securities ................................................ (378) (127)
Increase in accrued interest receivable ................................... (786) (540)
Decrease (increase) in deferred tax asset ................................. (166) (216)
Increase in other assets .................................................. (977) (621)
Increase in accrued interest payable ...................................... 324 56
Increase in accrued expenses and other liabilities ........................ 645 565
-------- --------
Net cash used in operating activities ................................... (423) (764)
-------- --------
Cash flows from investing activities:
Investment securities available for sale
Purchases ............................................................... (29,512) (11,433)
Sales ................................................................... 9,286 4,524
Maturities and principal repayments ..................................... 1,250 4,218
Investment securities held to maturity
Purchases ............................................................... (8,012) (9,131)
Sales ................................................................... 1,444 2,001
Maturities and principal repayments ..................................... 5,580 1,959
Purchases of FHLB Stock ................................................... (2,622) (650)
(Increase) decrease in interest bearing deposits with banks ............... (3,731) 41
Net increase in loans ..................................................... (45,340) (39,196)
Increase in other real estate, net ........................................ (66) --
Cash of entity acquired ................................................... -- 45
Purchase of premises and equipment ........................................ (1,089) (1,067)
-------- --------
Net cash used in investing activities ................................... (72,812) (48,689)
-------- --------
Cash flows from financing activities:
Net increase in deposits .................................................. 43,913 42,500
Net increase in borrowings ................................................ 22,667 7,588
Private placement proceeds ................................................ 7,110 --
Exercise of stock options ................................................. 47 --
-------- --------
Net cash provided by financing activities ............................... 73,737 50,088
-------- --------
Net increase in cash and cash equivalents ............................... 502 635
Cash and cash equivalents, beginning of year ............................... 833 198
-------- --------
Cash and cash equivalents, end of year ..................................... $ 1,335 $ 833
======== ========
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest ................................................................ $ 6,137 $ 2,231
======== ========
Income taxes ............................................................ $ 975 $ 237
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
Note 1 -- Organization
USABancShares.com, Inc. (the "Corporation"), through its subsidiaries,
vBank (the "Bank"), USACapital, Inc. ("USACapital") and USACredit, Inc.
("USACredit"), provides a full range of banking and non-depository services to
individual and corporate customers located in the greater Delaware Valley
region.
The Corporation was organized in November 1995 in order to facilitate the
acquisition of People's Thrift Savings Bank, which changed its name to "vBank"
in July 1999.
The Bank is a Pennsylvania 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, and credit unions actively compete for savings and time deposits
and for types of loans. Such institutions, as well as consumer finance,
insurance, and brokerage firms, may be considered competitors of the Bank with
respect to one or more of the services it provides.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, is periodically examined by those regulatory authorities. As
a consequence of the extensive regulation of commercial banking activities, the
Bank's business is particularly susceptible to being affected by state and
federal legislation and regulations.
USACapital is a broker dealer registered with the Securities and Exchange
Commission ("SEC") and the National Association of Securities Dealers ("NASD").
USACapital 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 brokers pursuant to clearance agreements.
USACredit is a majority owner of a Delaware limited liability company in
the business of purchasing judgments, deficiencies, and claims, and pursuing
collections on such claims.
Note 2 -- Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The accounting and reporting policies of the Corporation and its
subsidiaries conform with generally accepted accounting principles and
predominant practices within the banking industry. All significant intercompany
balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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 financial
statements. These estimates and assumptions also affect reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
The principal estimates particularly susceptible to significant change in
the near term relates to the allowance for loan losses. The evaluation of the
adequacy of the allowance for loan losses includes an analysis 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, and current loan collateral values. However, actual losses on
specific loans, which also are encompassed in the analysis, may vary from
estimated losses.
F-7
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
In 1998, the Corporation adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about the Corporation and its subsidiaries operating
segments. Management has determined the Corporation operates in one business
segment, namely community banking.
Investment Securities
The Corporation accounts for its investment securities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The Corporation classifies
its securities as held for investment purposes (held to maturity) and available
for sale. Investment securities for which the Corporation has the ability and
intent to hold until maturity are classified as held to maturity. These
investment securities are carried at cost, adjusted for amortization of
premiums and accretion of discounts on a straight-line basis, which is not
materially different from the effective interest method.
Investment securities which are held for indefinite periods of time, which
management intends to use as part of its asset/liability strategy, or which may
be sold in response to changes in interest rates, changes in prepayment risk,
increases in capital requirements or other similar factors, are classified as
available for sale and are carried at fair value. Differences between a
security's amortized cost and fair value is charged/credited directly to
shareholders' equity, net of income taxes. The cost of securities sold is
determined on a specific identification basis. Gains and losses on sales of
securities are recognized in the consolidated statements of income upon sale.
The Corporation had no securities held for trading purposes at December 31,
1998 and 1997.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge. The accounting for changes in the
fair value of a derivative (gains and losses) depends on the intended use of
the derivative and resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Earlier
application is permitted only as of the beginning of any fiscal quarter. The
adoption of SFAS No. 133 is not anticipated to have a material impact on the
Corporation's consolidated financial position or results of operations.
Loans and Allowance for Possible Loan Losses
Loans receivable, which management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at their
outstanding principal, adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. The Corporation's
management maintains the allowance for possible loan losses at a level
considered adequate to provide for potential loan losses. The allowance is
increased by provisions charged to expense and reduced by net charge-offs.
Loans are charged against the allowance for possible loan losses when
management believes that the collectibility of the principal is unlikely. The
level of the allowance is based on management's evaluation of potential losses
in the loan portfolio after consideration of appraised collateral values,
financial condition of the borrowers, and prevailing and anticipated economic
conditions. Credit reviews of the loan portfolio, designed to identify
potential charges to the allowance, are made on a periodic basis during the
year by senior management.
Interest on loans is credited to operations primarily based upon the
principal amount outstanding. When management believes there is sufficient
doubt as to the ultimate collectibility of interest on any loan, the accrual of
applicable interest is discontinued. Interest income is subsequently recognized
only to the extent
F-8
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
cash payments are received. Net loan origination fees and loan discounts on
purchased loan pools are deferred and amortized over the life of the related
loan using the level yield method. 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 net 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 Corporation accounts for its impaired loans in accordance with 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. This standard 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.
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.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
The Corporation accounts for its transfers and servicing financial assets
in accordance with 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 SFAS No. 125. This
standard provides accounting guidance on transfers of financial assets,
servicing of financial assets, and extinguishments of liabilities.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Building and leasehold improvements are amortized over the
term of the lease or estimated useful life, whichever is shorter. Depreciation
and amortization is computed primarily on the straight-line method over the
estimated useful lives of the assets.
Goodwill
Goodwill is stated at cost less accumulated amortization, and is being
amortized on 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 Corporation estimates the value of and the estimated undiscounted
future net income expected to be generated by the related subsidiaries to
determine that no impairment has occurred.
The Corporation accounts for impairment under SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of.
This standard provides accounting 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.
Other Real Estate
Properties acquired by foreclosure are other real estate (ORE) and
recorded at the lower of recorded investment in the related loan or fair value
based on appraised value at the date actually or constructively received. Loan
losses arising from the acquisition of such properties are charged against the
allowance for possible loan losses. Subsequent adjustments to the carrying
values of ORE properties are charged to operating expense. ORE is stated at the
lower of cost or fair value less estimated cost to sell.
F-9
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
Income Taxes
The Corporation recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Bank's financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on their difference between the
financial statement carrying amounts and the tax basis of assets and
liabilities. The Corporation 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.
Per Share Amounts
On January 1, 1997, the Corporation adopted the provisions of SFAS No.
128, Earnings Per Share. SFAS No. 128 eliminated primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings per
share 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. All weighted average actual shares or per share information in the
financial statements have been adjusted retroactively for the effect of a stock
dividend.
Comprehensive Income
On January 1, 1998, the Bank adopted SFAS No. 130, Reporting Comprehensive
Income. This standard establishes new standards for reporting comprehensive
income which includes net income as well as certain other items which result in
a change to equity during the period. These financial statements have been
reclassified to reflect the provisions of SFAS No. 130.
The income tax effects allocated to comprehensive income (loss) is as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------------------- ----------------------------------
Tax Net of Net of
Before tax expense tax Before tax Tax tax
amount (benefit) amount amount expense amount
------------ ----------- ---------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains (losses) on securities
Unrealized holding gains (losses)
arising during period ................ $ (282) $ 100 $ (182) $ 296 $ (113) $ 183
Less reclassification adjustment for
gains realized in net income ......... 378 (144) 234 127 (48) 79
------ ------ ------ ----- ------ -----
Other comprehensive income (loss),
net .................................... $ (660) $ 244 $ (416) $ 169 $ (65) $ 104
====== ====== ====== ===== ====== =====
</TABLE>
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and amounts due from banks.
Advertising Costs
The Corporation expenses advertising costs as incurred.
Restrictions on Cash and Due from Banks Costs
As of December 31, 1998, the Corporation did not maintain reserves (in the
form of deposits with the Federal Home Loan Bank ("FHLB")) to satisfy federal
regulatory requirements. As of December 31, 1998, USACapital has segregated
$130,000 in special reserve bank accounts for the benefit of customers as
required by the clearing organizations.
F-10
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
Reclassifications
Certain reclassifications have been made to the 1997 financial statements
to conform with the 1998 presentation.
Note 3 -- Private Placement
On February 18, 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 $7.1 million, net of offering cost of $390,000.
In connection with the offering, the Company granted warrants convertible
for a period of five years into 3.25% of the Corporation's common stock on the
date of conversion. The number of warrants will be adjusted for stock splits,
stock dividends and the issuance of additional shares so as to maintain the
holder's ownership of the fully diluted common stock at 3.25% for a period of
three years from the close of the offering.
Note 4 -- Acquisition
In 1997, the Corporation acquired Knox Financial Services Group, Inc. The
Corporation distributed 28,000(1) shares of common stock of its parent to
effect the combination. The purchase method of accounting was used to account
for this business combination. Subsequent to the 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.
(1) Adjusted for 33% stock dividends paid by the Corporation on July 18, 1997
and August 17, 1998 and a two-for-one stock split effected in the form of
a dividend paid on June 15, 1999.
Note 5 -- Investment Securities
The amortized cost, gross unrealized gains and losses, and fair market
value of the Bank's investment securities available for sale and held to
maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
(in thousands)
Gross Gross
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 and other securities ......... 24,944 243 (664) 24,523
-------- ----- ------ --------
$ 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 and other securities ......... 5,738 79 (56) 5,761
-------- ----- ------ --------
$ 15,755 $ 253 $ (57) $ 15,951
======== ===== ====== ========
</TABLE>
F-11
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 5 -- Investment Securities -- (Continued)
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------
(in thousands)
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Available for sale
U.S. Government and agency securities ................... $ 1,243 $ 16 $ -- $ 1,259
Trust preferred securities .............................. 7,637 150 (11) 7,776
-------- ----- ------ --------
$ 8,880 $ 166 $ (11) $ 9,035
======== ===== ====== ========
Held to maturity
U.S. Government and agency securities ................... $ 3,557 $ -- $ (10) $ 3,547
Mortgage-backed securities .............................. 6,306 50 -- 6,356
Municipal securities .................................... 3,163 101 -- 3,264
Trust preferred securities and other securities ......... 2,393 84 -- 2,477
-------- ----- ------ --------
$ 15,419 $ 235 $ (10) $ 15,644
======== ===== ====== ========
</TABLE>
The amortized cost and fair market value of investment securities, by
contractual maturity, as of December 31, 1998, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or repayment
penalties.
<TABLE>
<CAPTION>
Available for sale Held to maturity
-------------------------------------- ------------------------------------
Weighted Weighted
Average Amortized Approximate Average Amortized Approximate
Yield Cost Fair Value Yield Cost Fair Value
---------- ----------- ------------- --------- ----------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Due after one year through five years ...... $ 1,246 $ 1,170 11.92% $ 2,001 $ 2,015 7.31%
Due after five years through ten years ..... 816 770 9.88% 2,635 2,581 7.90
Due after ten years ........................ 22,312 21,996 9.61 5,479 5,613 7.06
Mortgage-backed securities ................. 2,628 2,620 7.00 5,640 5,742 6.59
Equity securities .......................... 1,892 1,833 -- -- -- --
-------- ------- ----- ------- -------- ----
$ 28,894 $28,389 $15,755 $ 15,951
======== ======= ======= ========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. In 1998, the Corporation sold securities which were
classified as held-to-maturity due to unforeseen circumstances that could not
have been anticipated.
Proceeds on the sale of investment securities classified as
held-to-maturity were $1.4 million and $2 million in 1998 and 1997,
respectively. Proceeds on the sale of investment securities classified as
available-for-sale were $9.3 million and $4.5 million in 1998 and 1997,
respectively. Gross gains of $393,000 and gross losses of $15,000 were realized
on 1998 sales.
F-12
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 6 -- Loans Receivable
Loans outstanding by classification are as follows:
December 31,
--------------------------
1998 1997
------------ -----------
(in thousands)
Real estate ................................ $ 102,076 $ 54,262
Commercial and industrial loans ............ 986 1,091
Other ...................................... 243 1,694
--------- --------
103,305 57,047
Loans in process ........................... -- (260)
Unearned income ............................ (116) (217)
Allowance for possible loan losses ......... (1,051) (568)
--------- --------
$ 102,138 $ 56,002
========= ========
At December 31, 1998 and 1997, loans outstanding to certain officers and
directors of the Bank and their affiliated interests amounted to $2.5 million
and $233,000, respectively. An analysis of activity in loans to related parties
at December 31, 1998 and 1997, resulted in new loans of $2.7 million and
$122,000, respectively, and reductions of $483,000 and $504,000, respectively,
representing payments.
An analysis of the allowance for possible loan losses is as follows:
December 31,
----------------------
1998 1997
----------- --------
(in thousands)
Balance, beginning of year ............. $ 568 $ 182
Provision charged to expense ........... 510 415
Charge-offs, net of recoveries ......... (27) (29)
------- -----
Balance, end of year ................... $ 1,051 $ 568
======= =====
Included in loans receivable are nonaccrual loans of $1.8 million and
$287,000 at December 31, 1998 and 1997, respectively. Interest income that
would have been recorded in the financial statements had the nonaccrual loans
been performing in accordance with their terms would have been $140,000 in
1998.
Also included in loans receivable are loans past due 90 days or more and
accruing in the amount of $152,000 and $165,000 at December 31, 1998 and 1997,
respectively, which have not been classified as nonaccrual due to management's
belief that the loans are well-secured and in the process of collection.
Note 7 -- Premises And Equipment
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
Estimated -------------------------
useful lives 1998 1997
--------------- ----------- -----------
<S> <C> <C> <C>
Building ............................................... 31.5 years $ 754 $ 754
Premises and improvements .............................. 5 to 20 years 726 135
Furniture and equipment ................................ 5 to 7 years 969 367
------- -------
2,449 1,256
Less accumulated depreciation and amortization ......... (426) (103)
------- -------
$ 2,023 $ 1,153
======= =======
</TABLE>
F-13
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 7 -- Premises And Equipment -- (Continued)
Depreciation and amortization charged to operations was $219,000 and
$60,000 for the years ended December 31, 1998 and 1997, respectively.
Note 8 -- Deposits
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was approximately $34.7 million and $9.3 million at
December 31, 1998 and 1997, respectively.
At December 31, 1998, the schedule of maturities of certificates of
deposit is as follows:
1999 ............... $ 47,067
2000 ............... 28,399
2001 ............... 14,769
2002 ............... 5,663
2003 ............... 7,670
Thereafter ......... 908
--------
$104,476
========
Note 9 -- Borrowings
At December 31, 1998, the Bank had five callable fixed-rate advances
outstanding with the FHLB. The callable advances mature within five to ten
years with call options ranging from 18 months to five years. The interest
rates on the callable advances range from 4.83% to 5.63% with a weighted
average interest rate of 5.31% at December 31, 1998.
The following table sets forth certain information regarding the Bank's
FHLB advances, at or for the period ended December 31:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Balance outstanding, December 31 ...................... $30,000 $ 9,000
Average balance outstanding during year ............... $22,482 $ 7,000
Weighted average interest rate for the period ......... 5.29% 5.87%
Maximum outstanding balance at any month end .......... $31,000 $12,700
</TABLE>
The Bank also has $4.2 million in collateralized borrowings that represent
participations by other banks in certain loans; such amounts are non-interest
bearing.
The Corporation has three line of credit facilities with local financial
institutions totaling $2.0 million. The aggregate outstanding balance on the
lines of credit at December 31, 1998 was $1.1 million. The interest rates paid
on these advances are floating, prime based rates, ranging from prime to prime
plus one percentage point, with the average interest rate at December 31, 1998
equaling 8.21%.
Note 10 -- Shareholders' Equity
In connection with the formation of the Corporation, 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
F-14
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 10 -- Shareholders' Equity -- (Continued)
issued shares of Class A Common Stock on January 1, 2001. Unearned compensation
of $543,000 was recorded at the close of the offering on November 30, 1995,
based on the offering price of $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
Stockholders' equity, was being amortized over five years. In connection with
the offering (Note 2), the President & 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, adjusted for any future stock dividends, or stock splits. In conjunction
with this agreement, the Corporation fully recognized the remaining unearned
compensation as compensation expense in 1997.
On July 18, 1997, the Corporation paid a 33% stock dividend on its common
stock to stockholders of record as of July 1, 1997.
On August 17, 1998, the Corporation paid a 33% stock dividend on its
common stock to stockholders of record as of August 3, 1998.
On June 15, 1999, the Corporation effected a two-for-one stock split in
the form of a stock dividend to stockholders of record as of June 1, 1999.
Note 11 -- Employee Benefit Plans
The Bank had a defined contribution plan, 401(k), covering eligible
employees, as defined under the plan document. Employees could contribute up to
10% of compensation, as defined under the plan document. The Bank could make
discretionary contributions. The Bank did not make any contributions into the
plan during the period ended December 31, 1998 or 1997. The plan was terminated
in 1998, and all funds were distributed to the employees.
Note 12 -- Income Taxes
The components of income taxes (benefit) are as follows:
1998 1997
-------- -----------
(dollars in thousands)
Federal
Current .................................... $ 935 $ 193
Deferred ................................... (165) (216)
Benefit applied to reduce goodwill ......... -- 22
------ -----
770 (1)
State
Current .................................... 187 9
Benefit applied to reduce goodwill ......... -- 9
------ -----
187 18
------ -----
Income taxes ................................ $ 957 $ 17
====== =====
F-15
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 12 -- Income Taxes -- (Continued)
The reconciliation of the tax computed at the statutory federal rate was
as follows:
<TABLE>
<CAPTION>
1998 1997
-------- ----------
(dollars in thousands)
<S> <C> <C>
Tax at statutory rate .................................................. $ 832 $ (71)
Increase (decrease) in taxes resulting from
Tax-exempt income ..................................................... (76) --
Nondeductible compensation ............................................ -- 144
Nondeductible expenses, including goodwill and meals and entertainment 31 16
Increase (decrease) in valuation allowance ............................ -- (103)
State income taxes, net of federal income tax benefit ................. 124 12
Other, net ............................................................ 46 19
----- ------
Income tax expense ..................................................... $ 957 $ 17
===== ======
</TABLE>
Deferred income taxes are provided for the temporary difference between
the financial reporting basis and the tax basis of the Corporation's assets and
liabilities. Cumulative temporary differences are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- -----------
(dollars in thousands)
<S> <C> <C>
Deferred tax assets
Allowance for possible loan losses ......................... $346 $184
Deferred loan fees ......................................... 7 9
Deferred compensation ...................................... 24 23
Fixed asset ................................................ 5 --
Unrealized losses on securities available for sale ......... 191 --
---- ----
573 216
Deferred tax liabilities
Fixed assets ............................................... $ -- (1)
Unrealized gains on securities available-for-sale .......... -- (52)
---- ----
(53)
----
Net deferred tax asset ...................................... $573 $163
==== ====
</TABLE>
During 1997, the Corporation 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 Corporation
believes it is more likely than not to realize the net deferred tax asset, and
accordingly, no valuation allowance has been provided at December 31, 1997.
F-16
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 13 -- Earnings Per Share
The following table illustrates the reconciliation of the basic and
diluted EPS computations (in thousands, except per share data).
<TABLE>
<CAPTION>
For the year ended December 31, 1998(1)
--------------------------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) amount
------------- --------------- ----------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common stockholders ......... $1,490 3,972 $ 0.38
Effect of dilutive securities
Options ............................................. -- 266 --
------ ----- -------
Diluted earnings per share
Net income available to common stockholders plus
assumed conversions ............................... $1,490 4,238 $ 0.35
====== ===== =======
</TABLE>
Options to purchase 124,000 shares of common stock at exercise prices
ranging from $5.64 to $15.00 per share were outstanding during 1998 which 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.
<TABLE>
<CAPTION>
For the year ended December 31, 1997(1)
----------------------------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) amount
------------- --------------- ------------
<S> <C> <C> <C>
Basic earnings per share
Net loss available to common stockholders ......... $ (226) 2,164 $ (0.10)
Effect of dilutive securities
Options ........................................... -- -- --
------ ----- --------
Diluted earnings per share
Net loss available to common stockholders plus
assumed conversions ............................. $ (226) 2,164 $ (0.10)
====== ===== ========
</TABLE>
Options to purchase 645,640 shares of common stock at $2.83 per share were
outstanding during 1997 which were not included in the computation of diluted
EPS because the options were anti-dilutive.
(1) Adjusted for 33% stock dividend paid by the Corporation in August 1998 and
a two-for-one stock split effected in the form of a dividend paid by the
Corporation in June 1999.
Note 14 -- Financial Instruments with Off-Balance-Sheet Risk and Concentrations
of Credit Risk
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and 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-17
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 14 -- Financial Instruments with Off-Balance-Sheet Risk and Concentrations
of Credit Risk -- (Continued)
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of 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 it does for on-balance-sheet
instruments.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk. The approximate
contract amounts are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit ....................................... $ 1,070 $ 1,322
Standby letters of credit and financial guarantees written ......... 1,098 --
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
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. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
The Bank's originated loan portfolio primarily consists of loans secured
by real estate in the greater Delaware Valley region. The Bank's acquired loan
portfolio consists of individual loans and loan pools throughout the domestic
United States purchased at sales conducted by governmental agencies. The Bank,
as with any lending institution, is subject to the risk that residential real
estate values in the primary lending area will deteriorate, thereby potentially
impairing collateral values in the primary lending area. However, management
believes that real estate values are presently stable in its primary lending
area and that loan loss allowances have been provided in amounts commensurate
with its current perception of the foregoing risks of the portfolio.
F-18
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 15 -- Commitments And Contingencies
Leases
The Bank and the Corporation have entered into operating lease arrangement
for branch facilities. Both the Bank and the Corporation are responsible for
pro-rata operating expense escalations.
As of December 31, 1998, future approximate minimum rental payments are as
follows (in thousands):
1999 ........................................... $ 91
2000 ........................................... 96
2001 ........................................... 104
2002 ........................................... 106
2003 ........................................... 108
Thereafter ..................................... 386
----
$891
====
The above amount represents minimum rentals not adjusted for possible
future increases due to escalation provisions and assumes that all option
periods will be exercised by the Bank or the Corporation.
Rent expense for the years ended December 31, 1998 and 1997, amounted to
$147,000 and $125,000, respectively.
Employee Agreements
The Corporation has employment agreements with certain key executives that
provide severance pay benefits if there is a change in control of the
Corporation. The agreements will continue in effect on a year-to-year basis
until terminated or not renewed by the Corporation or key executives. Upon a
change in control, the Corporation 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,
1998 was $1.2 million.
In addition, in connection with the offering (Note 2), the Corporation and
the President & CEO have entered into an agreement by which the Corporation has
the 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 Corporation 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 Corporation exercised
its option for 1998 upon the close of the offering, and has also exercised its
option for 1999.
Other
The Corporation may, in the ordinary course of business, become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business. In management's judgment,
the financial position of the Corporation will not be materially affected by
the final outcome of any present legal proceedings.
Note 16 -- Fair Value of Financial Instruments
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For the
Corporation, as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments. However, many such
instruments lack an available trading market, as characterized by a willing
buyer and seller engaging in an exchange transaction.
F-19
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 16 -- Fair Value of Financial Instruments -- (Continued)
Also, it is the Corporation'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. Therefore, the Corporation had to use significant
estimations 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 Corporation using the
best available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and recorded book balances at December 31, 1998 and 1997, are outlined
below.
For cash and cash equivalents, including cash and due from banks and
interest bearing deposits with banks, the recorded book values of $1.3 million
and $7.7 million, respectively, as of December 31, 1998 and $833,000 and $4.0
million, respectively, at December 31, 1997, approximate fair values. The
estimated fair values of investment securities, including FHLB stock, 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 net loan portfolio at December 31, 1998 and 1997, has been valued
using a present value discounted cash flow 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 of accrued
interest approximates fair value.
The estimated fair values of demand deposits (i.e., interest- and
noninterest-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 fair values of
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered to a schedule of aggregated
expected monthly time deposit maturities. The carrying amount of accrued
interest payable approximates its fair value.
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Investment securities ......... $ 47,667 $ 47,862 $ 24,454 $ 24,678
Loans receivable .............. 103,189 110,242 56,570 57,647
Deposits ...................... 114,387 114,777 70,474 70,645
</TABLE>
The fair values of borrowings totaling $35.3 million and $12.7 million are
estimated to approximate their recorded book balances at December 31, 1998 and
1997, respectively.
There was no material difference between the notional amount and the
estimated fair value of off-balance-sheet items, which totalled approximately
$2.2 million and $1.3 million at December 31, 1998 and 1997, respectively, and
primarily comprise unfunded loan commitments, which are generally priced at
market at the time of funding.
Note 17 -- Stock Option Plan
The FASB issued SFAS No. 123, Accounting for Stock-Based Compensation,
which contains a fair value-based method for valuing stock-based compensation
that entities may use, which measures compensation
F-20
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 17 -- Stock Option Plan -- (Continued)
cost at the grant date based on the fair value of the award. Compensation is
then recognized over the service period, which is usually the vesting period.
Alternatively, the standard permits entities to continue accounting for
employee stock options and similar equity instruments under APB Opinion No. 25,
Accounting for Stock Issued to Employees. Entities that continue to account for
stock options using APB Opinion No. 25 are required to make pro forma
disclosures of net income and earnings per share, as if the fair value-based
method of accounting defined in SFAS No. 123 had been applied. The Corporation
has determined it will follow APB Opinion No. 25.
The Corporation has a Stock Option Plan (the "Plan") for the benefit of
key officers and employees of the Corporation. The Plan was designed to attract
and retain qualified personnel in key positions, provide officers and key
employees with a proprietary interest in the Corporation as an incentive to
contribute to the success of the Corporation, and reward key employees for
outstanding performance and the attainment of targeted goals. The Plan was also
designed to retain qualified directors for the Corporation, and will provide
for the grant of non-qualified stock options and incentive options intended to
comply with the requirements of Section 422 of the Internal Revenue Code of
1986, as amended.
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. The options, which have a term of between 4 and
10 years when issued, vest either immediately or over a period specified by the
Corporation's compensation committee. The exercise price of each option is
equal to or above the market value on the date of grant. Accordingly, no
compensation cost has been recognized for the Plan. Had compensation cost for
the Plan been determined based on the fair value of options at the grant dates
consistent with the method of SFAS No. 123, Accounting for Stock-Based
Compensation, the Corporation's net income and earnings per share would have
been reduced to the pro forma amounts indicated below.
December 31,
--------------------------
1998 1997
------------ -----------
Net income
As reported .................... $1,490 $ (226)
Pro forma ...................... $1,180 $ (226)
Basic earnings (loss) per share
As reported .................... $ 0.38 $(0.10)
Pro forma ...................... $ 0.30 $(0.10)
Diluted earnings (loss) per share
As reported .................... $ 0.35 $(0.10)
Pro forma ...................... $ 0.28 $(0.10)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect the pro forma compensation expense related
to grants before 1995.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1998: no dividend yield for all years;
expected volatility of 20%, risk-free interest rate of 5.55%, and an expected
life of ten years for all options. No options were granted in 1997.
F-21
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 17 -- Stock Option Plan -- (Continued)
A summary of the status of the Corporation's fixed stock option plans as
of December 31, 1998, and changes for each of the years in the two-year period
then ended was as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
Weighted Weighted
average average
Number exercise Number exercise
of price per of price per
shares share shares share
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ......... 646,000 $2.83 666,000 $2.83
Options granted .......................... 304,000 4.89 -- --
Options exercised ........................ (18,000) 2.83 -- --
Options forfeited ........................ (56,000) 2.83 (20,000) 2.83
------- -------
Outstanding at end of year ............... 876,000 $3.60 646,000 $2.83
======= =======
Options exercisable at year-end .......... 686,000 646,000
======= =======
Weighted average fair value of options
granted during year ..................... $1.79 $ --
===== =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
Weighted
Number average Weighted Number Weighted
outstanding at remaining average exercisable at average
Range of exercise December 31, contractual exercise December 31, exercise
prices 1998 life (years) price 1998 price
- -------------------- ---------------- -------------- ---------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
$2.83 to $4.24 730,000 5.92 years $ 3.03 680,000 $ 3.05
$4.33 to $6.50 120,000 9.42 years 5.40 -- --
$7.52 to $11.28 22,000 9.67 years 8.55 6,000 10.00
$12.50 to $15.00 4,000 9.67 years 13.75 -- --
</TABLE>
Note 18 -- Regulatory Capital Requirements
The Corporation and the Bank are 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 Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines that involve
quantitative measures of the Corporation's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Corporation's and 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 Corporation and the Bank to maintain minimum amounts and ratios
(set forth in the following table) 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). Management believes, as of
December 31, 1998, that the Corporation and the Bank meet all capital adequacy
requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Corporation as adequately
capitalized under the regulatory framework for prompt corrective
F-22
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 18 -- Regulatory Capital Requirements -- (Continued)
action. To be categorized as adequately capitalized, the Corporation must
maintain minimum total risk-based, Tier I risk- based and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Corporation's actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
For capital
Actual adequacy purposes
----------------------- ----------------------
Amount Ratio Amount Ratio
---------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
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
As of December 31, 1997:
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
Tier I capital (to Average Assets) ............... 5,184 5.8 3,570 4.0
</TABLE>
The Bank's actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
----------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- --------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
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
As of December 31, 1997:
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
Tier I capital (to Average Assets) ......... 4,747 5.4 3,548 4.0 4,435 5.0
</TABLE>
At December 31, 1997, the Bank's Total capital ratio of 7.90% did not meet
the minimum requirement of 8.0% in order to consider the Bank adequately
capitalized. However, upon completion of the offering (Note 2) the Corporation
raised $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%.
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 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 investment, loans,
extensions of credit and advances that one subsidiary bank can make to the
Corporation at any time to 10% and in the aggregate 20% of the
F-23
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 18 -- Regulatory Capital Requirements -- (Continued)
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 amounts thereof. At December 31, 1998,
loans from the Bank to the Corporation amounted, in aggregate, to $976,000, or
7.50%, of the Bank's capital stock and surplus. There were no investments,
extensions of credits or advances at December 31, 1998. At December 31, 1997,
there were no investments, loans, extensions of credit or advances from the
Bank to the Corporation.
Note 19 -- Condensed Financial Information -- Parent Company Only
Condensed financial information for USABancShares.com, Inc. (parent
company only) follows:
BALANCE SHEET
December 31,
---------------------
1998 1997
---------- --------
(in thousands)
ASSETS
Cash and Due from banks ............................... $ 23 $ 254
Securities available-for-sale ......................... 1,931 328
Investment in subsidiaries ............................ 13,281 5,088
Other assets .......................................... 708 211
------- -------
Total assets ......................................... $15,943 $ 5,881
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Other borrowed money ................................. $ 1,957 $ 340
Other liabilities .................................... 389 175
------- -------
Total liabilities .................................. 2,346 515
Stockholders' equity .................................. 13,597 5,366
------- -------
Total liabilities and stockholders' equity ......... $15,943 $ 5,881
======= =======
F-24
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 19 -- Condensed Financial Information -- Parent Company Only -- (Continued)
STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Income:
Interest income ....................................................... $ 49 $ --
Other income .......................................................... 19 77
------ -----
Total income ........................................................ 68 77
------ -----
Expenses:
Compensation .......................................................... 150 517
Interest .............................................................. 89 14
Other ................................................................. 10 29
------ -----
Total expenses ...................................................... 249 560
------ -----
Income (loss) before undistributed earnings of subsidiaries ......... (181) (483)
Provision (benefit) for income taxes ............................... 1 (16)
------ -----
Income (loss) before undistributed earnings of subsidiaries ......... (182) (467)
Undistributed earnings of subsidiaries ................................. 1,672 241
------ -----
Net Income (loss) ................................................... $1,490 $(226)
====== =====
</TABLE>
F-25
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 19 -- Condensed Financial Information -- Parent Company Only -- (Continued)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---------- -----------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 1,490 $(226)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Undistributed earnings (loss) from subsidiaries .................... (1,672) 241
(Gain) loss on sale of investments ................................. 5 (28)
Net change in assets and liabilities ............................... (146) 99
------- -----
Net cash provided by (used in) operating activities .............. (323) 86
------- -----
Cash flows from investing activities:
Capital distribution (to) from subsidiaries ........................ (7,078) --
Purchase of investment securities available-for-sale ............... (1,603) (135)
------- -----
Net cash used in investing activities ............................ (8,681) (135)
------- -----
Cash flows from financing activities:
Net increase in borrowings ......................................... 1,616 290
Proceeds from issuance of common stock ............................. 7,157 --
------- -----
Net cash provided by financing activities ........................ 8,773 290
------- -----
Net increase (decrease) in cash .................................. (231) 241
Cash at beginning of year ........................................... 254 13
------- -----
Cash at end of year ................................................. $ 23 $ 254
======= =====
Supplemental disclosure of cash flow information Cash paid during the
year for income taxes .............................................. $ 1 $ --
======= =====
</TABLE>
F-26
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 20 -- Guaranteed Subordinated Debt
On March 9, 1999, the Corporation issued $10 million of 9.50% Capital
Securities in conjunction with a trust-preferred offering (the "trust
preferred"). Total cash received was $9.1 million, net of related offering cost
of $900,000. Had this transaction occurred as of December 31, 1998, the
Corporation's condensed balance sheet would have been as follows:
<TABLE>
<CAPTION>
Actual Pro-Forma
------------ ------------
(in thousands
except share data)
<S> <C> <C>
ASSETS
Cash and due from banks (1) ....................................................... $ 1,335 $ 10,435
Interest bearing deposit with banks ............................................... 7,706 7,706
Investment securities ............................................................. 47,667 47,667
Loans receivable, net ............................................................. 102,138 102,138
Premises and equipment, net ....................................................... 2,023 2,023
Other assets (2) .................................................................. 4,237 5,137
-------- ---------
Total assets ..................................................................... $165,106 $175,106
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .......................................................................... $114,387 $114,387
Borrowings ........................................................................ 35,305 35,305
Guaranteed preferred beneficial interest in subordinated debt ..................... -- 10,000
Accrued expenses and other liabilities ............................................ 1,817 1,817
-------- --------
Total liabilities ................................................................ 151,509 161,509
======== ========
STOCKHOLDERS' EQUITY
Preferred stock $1.00 par value, 5,000,000 shares authorized, no shares issued and
outstanding in 1998 and 1997
Common stock $1.00 par value, 10,000,000 shares authorized, 2,007,386 shares
issued and outstanding in 1998; 813,807 shares issued and outstanding in 1997,
and 108,236 shares of converted and unissued Class B common stock in 1998;
81,381 converted and unissued 1997 ............................................... 2,116 2,116
Additional paid-in capital ........................................................ 10,683 10,683
Accumulated (deficit) earnings .................................................... 1,112 1,112
Accumulated other comprehensive income ............................................ (314) (314)
-------- --------
Total stockholders' equity ....................................................... 13,597 13,597
-------- --------
Total liabilities and stockholders' equity ....................................... $165,106 $175,106
======== ========
</TABLE>
- ------------
(1) Total cash received was $9.1 million, net of trust preferred offering cost
of $900,000.
(2) $900,000 of trust preferred offering costs will be amortized over the life
of the related junior subordinated debentures.
F-27
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998 and 1997
Note 20 -- Guaranteed Subordinated Debt -- (Continued)
Although the junior subordinated debentures will be treated as debt of the
Corporation, they currently qualify for Tier I capital investments, subject to
the 25% limitation under risk-based capital guidelines of the Federal Reserve.
The portion of the Trust Preferred Securities that exceeds this limitation
qualifies as Tier II capital of the Corporation. Had the trust preferred
offering occurred as of December 31, 1998, the Corporation's Total Capital,
Tier 1 Capital, and Tier 1 Leverage capital ratios would have been 19.82%,
13.36% and 10.91%, respectively.
Note 21 -- Subsequent Event
On June 15, 1999 the Corporation effected a two-for-one stock split in the
form of a dividend paid to stockholders of record as of June 1, 1999. All
weighted average actual shares or per share information in the financial
statements have been adjusted retroactively for the effect of stock dividends.
F-28
<PAGE>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
------------ -------------
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ...................................... $ 1,210 $ 1,335
Interest bearing deposit 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 accounts ............................... 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 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 2,116
Additional paid-in-capital ................................... 8,568 10,683
Accumulated earnings ......................................... 2,036 1,112
Accumulated other comprehensive (loss) income ................ (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 statements.
F-29
<PAGE>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Three Months
ended June 30, ended 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 expenses:
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
------ ------ ------ ------
Earnings before income taxes ................................ 1,219 1,459 529 779
Taxes on income: ............................................ 295 552 19 284
------ ------ ------ ------
Net earnings ................................................ $ 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>
- ------------
(1) All per share amounts have been adjusted to reflect a 33% stock dividend
paid August 17, 1998 and a two-for-one stock split effected in the form of
a dividend paid on June 15, 1999.
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE 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>
Net earnings ...................................... $ 924 $ 907 $ 510 $ 495
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available-for-sale:
Unrealized holding gains (losses) arising during
the period, net of taxes ...................... (489) (258) (174) (155)
----- ----- ----- -----
Comprehensive income .............................. $ 435 $ 649 $ 336 $ 340
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
USABancShares.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 Accumulated other
Common paid-in earnings comprehensive
Stock capital (1) (deficit) 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>
- ------------
(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.
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
USABancShares.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 provided by (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)
Decrease (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 provided by (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)
Decrease (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) increase 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 seven thousand dollars
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.
F-33
<PAGE>
USABancShares.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 USABancShares.com, Inc. (the "Company"), vBank (the "Bank"), a
Pennsylvania chartered stock savings bank, USACapital, Inc., a Pennsylvania
corporation, USACredit, Inc., a Pennsylvania corporation, USAHoldings, 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 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 issues $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.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
----------- -----------
(Dollars in Thousands),
except per share data
<S> <C> <C>
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
====== ======
</TABLE>
- ------------
(1) All per share data has been adjusted to reflect a 33% stock dividend paid
on August 17, 1998 and a two-for-one stock split effected in the form of a
dividend paid on June 15, 1999.
F-34
<PAGE>
================================================================================
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-----------------------------------
TABLE OF CONTENTS
Page
--------
Prospectus Summary ................................. 3
Selected Consolidated Financial
and Other Data................................... 7
Risk Factors ....................................... 9
Use of Proceeds .................................... 19
Price Range of Common Stock ........................ 19
Dividend Policy .................................... 20
Capitalization ..................................... 21
Regulatory Capital ................................. 22
USABancShares.com Statements
of Operations.................................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ...................................... 25
Business ........................................... 38
Regulation of USABancShares.com
and vBank........................................ 63
Management ......................................... 70
Certain Relationships and Related
Transactions..................................... 76
Description of Capital Stock ....................... 76
Underwriting ....................................... 79
Where You Can Find More Information ................ 80
Forward Looking Statements ......................... 81
Legal Matters ...................................... 81
Experts ............................................ 81
Index to Consolidated Financial Statements ......... F-1
================================================================================
<PAGE>
================================================================================
1,400,000 Shares
[GRAPHIC OMITTED]
Common Stock
----------------
PROSPECTUS
----------------
, 1999
Sandler O'Neill & Partners, L.P.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
USABancShares.com's articles and by-laws provide that USABancShares.com
will indemnify every person who is or was a director or executive officer of
USABancShares.com to the fullest extent permitted by law. This indemnification
applies to all expenses and liabilities reasonably incurred in connection with
any proceeding to which the director or executive officer may become involved
by reason of being or having been a director or executive officer of
USABancShares.com. Pennsylvania law, under which USABancShares.com is
incorporated, allows USABancShares.com to indemnify its directors and officers
if the indemnified person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interest of
USABancShares.com and, with respect to any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful. USABancShares.com
maintains a director and officer liability insurance policy covering each of
USABancShares.com's directors and executive officers.
Item 25. Other Expenses of Issuance and Distribution
The following is an itemized statement of the estimated amounts of all
expenses payable by the registrant in connection with the registration of the
shares of common stock offered hereby, other than underwriting discounts and
commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ................. $9,660
NASD filing fee ..................................................... $3,950
NASDAQ National Market fee for listing of additional shares ......... $ *
Blue Sky fees and expenses .......................................... $ *
Accounting fees and expenses ........................................ $ *
Legal fees and expenses ............................................. $ *
Printing and EDGAR expenses ......................................... $ *
Registrar and Transfer Agent's fees ................................. $ *
Miscellaneous ....................................................... $ *
------
Total ............................................................ $ *
======
</TABLE>
- ------------
*To be provided by amendment.
Item 26. Recent Sales of Unregistered Securities
On August 18, 1999, USABancShares.com issued Systemax warrants to purchase
10,000 shares of its common stock. Such warrants are exercisable as of August
18, 1999 at an exercise price of $10.00 per share. Such warrants expire on
August 19, 2001. In addition, USABancShares.com agreed to grant Systemax, upon
certain conditions, warrants to purchase an additional 30,000 shares of its
common stock at a per share exercise price equal to the closing market bid price
on the day prior to the grant.
On July 19, 1999, USABancShares.com issued EarthLink warrants to purchase
120,000 shares of its common stock. The exercise price of the warrants is $12.00
per share. 80,000 of the warrants can be exercised on or after July 22, 2000,
with the remaining 40,000 exercisable on or after July 22, 2001.
On March 9, 1999, USABancShares.com issued $10,000,000 of 9.50% Junior
Subordinated Debentures of USA Capital Trust I, a newly-formed, special purpose
business trust, which in turn issued $10,000,000 of 9.50% Capital Securities to
a limited number of qualified institutional buyers and institutional accredited
investors pursuant to Rule 144A and Rule 506 of Regulation D promulgated under
the Securities Act. Sandler O'Neill & Partners, L.P. acted as placement agent
in the Offering. The net proceeds to USABancShares.com were $8,734,000. The
expenses of the Offering were $916,000.
II-1
<PAGE>
On February 13, 1998, USABancShares.com issued 2,046,134 shares (as
adjusted to reflect a 33% stock dividend paid August 17, 1998 and a two-for-one
stock split effected in the form of a dividend paid on June 15, 1999) of its
common stock for cash to a limited number of accredited investors in a private
placement pursuant to Section 4(2) of the Securities Act. Sandler O'Neill &
Partners, L.P. acted as placement agent in the offering. The net proceeds to
USABancShares.com were $7,136,420. The offering expenses were $363,580.
On April 11, 1997, USABancShares.com issued 27,930 shares (as adjusted to
reflect 33% stock dividends paid July 18, 1997 and August 17, 1998 and a
two-for-one stock split effected in the form of a dividend paid on June 15,
1999) of common stock to Thomas J. Knox pursuant to Section 4(2) of the
Securities Act in connection with the acquisition of USACapital.
Item 27. Exhibits
The following exhibits are filed as part of this registration statement.
Exhibit numbers correspond to the exhibits required by Item 601 of Regulation
S-B.
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
1.1 Form of Underwriting Agreement among USABancShares.com and Sandler O'Neill &
Partners, L.P.+
3.1 Amended and Restated Articles of Incorporation of USABancShares.com*
3.1.1 Articles of Amendment to the Amended and Restated Articles of Incorporation of
USABancShares.com, dated as of May 13, 1999+
3.1.2 Articles of Amendment to the Amended and Restated Articles of Incorporation of
USABancShares.com, dated as of August 24, 1999+
3.1.3 Articles of Amendment to the Amended and Restated Articles of Incorporation of
USABancShares.com, dated as of September 9, 1999+
3.2 Bylaws of USABancShares.com*
5.1 Opinion and consent of Jenkens & Gilchrist, a Professional Corporation, as to legality of the
common stock to be issued by USABancShares.com+
10.1 Stock Option Plan, as amended and restated+
10.2 Employee Stock Purchase Plan*****
10.3 Employee Savings Plan*****
10.4 Employment agreement between USABancShares.com and Kenneth L. Tepper+
10.5 Employment agreement between USABancShares.com and Brian M. Hartline+
10.6 Employment agreement between USABancShares.com and Craig J. Scher+
10.7 Agreement by and between Kenneth L. Tepper and USABancShares.com dated January 2,
1998**
10.8 Warrant Agreement between USABancShares.com and Sandler O'Neill & Partners, L.P.
dated February 13, 1998**
10.9 Registration Rights Agreement between USABancShares.com and certain shareholders dated
February 13, 1998**
10.10 Indenture of USABancShares.com relating to the Junior Subordinated Debentures****
10.11 Registration Rights Agreement among USABancShares.com, USA Capital Trust I and
Sandler O'Neill & Partners, L.P., as representative of the investors****
10.12 Agreement by and between EarthLink Network, Inc., EarthLink Operations, Inc. and
USABancShares.com effective as of July 21, 1999+ ++
10.13 Agreement by and between USABancShares.com and Systemax, Inc. dated August 18, 1999+ ++
11 Statement regarding computation of per share earnings (included in Financial Statements on
Pages F-10 and F-17)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
21 Subsidiaries of USABancShares.com+
<S> <C>
23.1 Consent of Grant Thornton LLP
23.2 Consent of Jenkens & Gilchrist, a Professional Corporation (included in Exhibit 5.1)+
24 Power of Attorney of certain officers and directors of USABancShares.com (included on
signature page hereto)+
</TABLE>
- ------------
* Incorporated by reference from the Registration Statement on Form SB-2 of
USABancShares.com, as amended, Registration No. 33-92506.
** Incorporated by reference from USABancShares.com's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997.
*** Incorporated by reference from USABancShares.com's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998.
**** Incorporated by reference from the Registration Statement on Form S-4 of
USABancShares.com, Registration No. 333-78348.
***** Incorporated by reference from the Registration Statement on form S-8 of
USABancShares.com, Registration No. 333-84135l.
+ Previously filed.
++ Confidential Materials deleted and filed separately with the Securities
and Exchange Commission.
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the undersigned registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the undersigned registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(2) For determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1), or (4) or 497(h) under
the Securities Act (SectionSection 230.424(b)(1), (4) or 230.497(h)) shall be
deemed to be part of this registration statement as of the time the Commission
declared it effective.
(3) For determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time shall be deemed to
be the initial bona fide offering of those securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
USABancShares.com, Inc. certifies that it has reasonable grounds to believe
that it meets all of the requirements of filing on Form SB-2 and authorized
this amendment no. 2 to the registration statement to be signed on its behalf
by the undersigned, in the City of Philadelphia, Commonwealth of Pennsylvania
on September 29, 1999.
USABancShares.com, Inc.
By: /s/ Kenneth L. Tepper
--------------------------
Kenneth L. Tepper,
President and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment no. 2 to the registration statement was signed below by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Kenneth L. Tepper* President, Chief Executive Officer and September 29, 1999
- ---------------------------- Director (Principal Executive Officer)
Kenneth L. Tepper
/s/ Brian M. Hartline Chief Financial Officer and Director September 29, 1999
- ---------------------------- (Principal Accounting and Financial
Brian M. Hartline Officer)
/s/ George M. Laughlin* Chairman of the Board September 29, 1999
- ----------------------------
George M. Laughlin
/s/ Clarence L. Rader* Director and Chairman of vBank September 29, 1999
- ----------------------------
Clarence L. Rader
/s/ Zeev Shenkman* Vice Chairman of the Board September 29, 1999
- ----------------------------
Zeev Shenkman
/s/ George C. Fogwell, III* Director September 29, 1999
- ----------------------------
George C. Fogwell, III
/s/ John A. Gambone* Director September 29, 1999
- ----------------------------
John A. Gambone
/s/ Carol J. Kauffman* Director September 29, 1999
- ----------------------------
Carol J. Kauffman
/s/ Wayne O. Leevy* Director September 29, 1999
- ----------------------------
Wayne O. Leevy
*By: /s/ Brian M. Hartline
-------------------------
Brian M. Hartline, Agent and
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement among USABancShares.com and Sandler O'Neill &
Partners, L.P.+
3.1 Amended and Restated Articles of Incorporation of USABancShares.com*
3.1.1 Articles of Amendment to the Amended and Restated Articles of Incorporation of
USABancShares.com, dated as of May 13, 1999+
3.1.2 Articles of Amendment to the Amended and Restated Articles of Incorporation of
USABancShares.com, dated as of August 24, 1999+
3.1.3 Articles of Amendment to the Amended and Restated Articles of Incorporation of
USABancShares.com, dated as of September 9, 1999+
3.2 Bylaws of USABancShares.com*
5.1 Opinion and consent of Jenkens & Gilchrist, a Professional Corporation, as to legality of the
common stock to be issued by USABancShares.com+
10.1 Stock Option Plan, as amended and restated+
10.2 Employee Stock Purchase Plan*****
10.3 Employee Savings Plan*****
10.4 Employment agreement between USABancShares.com and Kenneth L. Tepper+
10.5 Employment agreement between USABancShares.com and Brian M. Hartline+
10.6 Employment agreement between USABancShares.com and Craig J. Scher+
10.7 Agreement by and between Kenneth L. Tepper and USABancShares.com dated January 2,
1998**
10.8 Warrant Agreement between USABancShares.com and Sandler O'Neill & Partners, L.P.
dated February 13, 1998**
10.9 Registration Rights Agreement between USABancShares.com and certain shareholders dated
February 13, 1998**
10.10 Indenture of USABancShares.com relating to the Junior Subordinated Debentures****
10.11 Registration Rights Agreement among USABancShares.com, USA Capital Trust I and
Sandler O'Neill & Partners, L.P., as representative of the investors****
10.12 Agreement by and between EarthLink Network, Inc., EarthLink Operations, Inc. and
USABancShares.com effective as of July 21, 1999+ ++
10.13 Agreement by and between USABancShares.com and Systemax, Inc. dated August 18, 1999+ ++
11 Statement regarding computation of per share earnings (included in Financial Statements on
Pages F-10 and F-17)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
21 Subsidiaries of USABancShares.com+
23.1 Consent of Grant Thornton LLP
23.2 Consent of Jenkens & Gilchrist, a Professional Corporation (included in Exhibit 5.1)+
24 Power of Attorney of certain officers and directors of USABancShares.com (included on
signature page hereto)+
</TABLE>
- ------------
* Incorporated by reference from the Registration Statement on Form SB-2 of
USABancShares.com, as amended, Registration No. 33-92506.
** Incorporated by reference from USABancShares.com's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997.
*** Incorporated by reference from USABancShares.com's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998.
**** Incorporated by reference from the Registration Statement on Form S-4 of
USABancShares.com, Registration No. 333-78348.
***** Incorporated by reference from the Registration Statement on form S-8 of
USABancShares.com, Registration No. 333-84135l.
+ Previously filed.
++ Confidential Materials deleted and filed separately with the Securities
and Exchange Commission.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 22, 1999 (except for Note 21, as to which
the date is June 15, 1999) accompanying the consolidated financial statements of
USABancShares.com, Inc. and Subsidiaries included in Form 10-KSB for the year
ended December 31, 1998 which are included in this Registration Statement. We
consent to the inclusion in the Registration Statement of the aforementioned
report, and to the use of our name as it appears under the caption "Experts."
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
September 29, 1999
