<PAGE>
As Filed with the Securities and Exchange Commission on August 2, 1999
Registration No. 333-78349
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------------
USABanc.com, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Pennsylvania 551111 23-2806495
- --------------------------------- ---------------------------------- --------------------
(State or Other Jurisdiction (Primary North American Industrial (I.R.S. Employer
of Incorporation or Organization) Classification System Number) Identification No.)
</TABLE>
USA Capital Trust I
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Trust Agreement)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 525920 23- 6639461
- --------------------------------- ---------------------------------- ------------------
(State or Other Jurisdiction (Primary North American Industrial (I.R.S. Employer
of Incorporation or Organization) Classification System Number) Identification No.)
</TABLE>
1535 Locust Street, Philadelphia, Pennsylvania 19102, (215) 569-4200
- --------------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrants' Principal Executive Offices)
Kenneth L. Tepper
President and Chief Executive Officer
USABanc.com, Inc.
1535 Locust Street
Philadelphia, Pennsylvania 19102
(215) 569-4200
- --------------------------------------------------------------------------------
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
Copies To:
Stephen T. Burdumy, Esquire
Klehr, Harrison, Harvey, Branzburg & Ellers, LLP
260 S. Broad Street
Philadelphia, Pennsylvania 19102
(215) 568-6060
---------------------------------
Approximate Date of Commencement of Proposed Sale to the Public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are being
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Title of Each Class Of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities Registered Offering Price Per Aggregate Offering Registration Fee
To Be Registered Unit (1) Price (1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series B Capital Securities $10,000,000 100% $10,000,000 $2,780.00(1)
of USA Capital Trust I
- --------------------------------------------------------------------------------------------------------------------
Series B Junior $10,000,000 100% $10,000,000 N/A
Subordinated Deferrable
Interest Debentures of
USABanc.com, Inc. (2)
- --------------------------------------------------------------------------------------------------------------------
USABanc.com, Inc. Series N/A N/A N/A N/A
B Guarantee with respect to
Series B Capital Securities (3)
- --------------------------------------------------------------------------------------------------------------------
Total $10,000,000(4) 100% $10,000,000(4) $2,780.00
====================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee.
The registration fee has been previously paid.
(2) No separate consideration will be received for the Series B Junior
Subordinated Deferrable Interest Debentures of USABanc.com, Inc.
distributed upon any liquidation of USA Capital Trust I.
(3) No separate consideration will be received for the USABanc.com, Inc.
Series B Guarantee.
(4) Such amount represents the liquidation amount of the USA Capital Trust
I Series B Capital Securities to be exchanged hereunder and the
principal amount of Junior Subordinated Debentures that may be
distributed to holders of such Capital Securities upon any liquidation
of USA Capital Trust I.
The Registrants hereby amend this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrants
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 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 2, 1999
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 these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
USA CAPITAL TRUST I
Offer to exchange
Series B 9.50% Capital Securities
for any and all of its outstanding
Series A 9.50% Capital Securities
Fully and unconditionally guaranteed as described in this prospectus by
USABanc.com, Inc.
USA Capital Trust I, a Delaware statutory business trust, is offering
to exchange up to $10,000,000 aggregate liquidation amount of its Series B 9.50%
Capital Securities for a similar amount of its outstanding Series A 9.50%
Capital Securities. The Series B Capital Securities are registered under the
Securities Act of 1933. There is currently $10,000,000 aggregate liquidation
amount of the Series A Capital Securities outstanding.
As part of this exchange offer, USABanc.com, Inc. is also offering to
exchange its Guarantee of USA Capital Trust I's obligations under the Series A
Capital Securities for a similar guarantee of USA Capital Trust I's obligations
under the Series B Capital Securities, as described in this prospectus as the
Series B Guarantee. Also as part of this exchange offer, USABanc.com, Inc. is
offering to exchange up to $10,000,000 of its Series B 9.50% Junior Subordinated
Debentures for a similar amount of its Series A 9.50% Junior Subordinated
Debentures. The Series B Guarantee and the Series B Debentures are also
registered under the Securities Act.
The terms of the Series B Capital Securities, the Series B Debentures
and the Series B Guarantee are the same as the terms of the Series A Capital
Securities, the Series A Debentures and the Series A Guarantee except that:
o each of the Series B securities are registered under the
Securities Act and do not have the same restrictions on
transfer as the Series A Capital Securities;
o the distribution rate on the Series B Capital Securities will
not have the potential to increase; and
o the Series B Debentures will not be entitled to any liquidated
damages.
This prospectus and a transmittal letter describing the procedures for
exchanging Series A securities for the Series B securities are first being
mailed to all of the holders of the Series A securities on August [ ], 1999.
You should carefully consider the "Risk Factors" beginning on page 6
before deciding whether to exchange your Series A Capital Securities for Series
B Capital Securities.
These securities are not deposits or other obligations of a bank and
are not insured by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is August 2, 1999.
<PAGE>
SUMMARY
This summary provides an overview of selected information contained
elsewhere in this prospectus and does not contain all the information you should
consider. Therefore, you should also read the more detailed information
appearing elsewhere in this prospectus.
USABanc.com, Inc.
USABanc.com is a financial services and bank holding company dedicated
to becoming a leading provider of financial products and services over the
Internet. Formerly USABancShares, Inc., USABanc.com is a Pennsylvania
corporation headquartered in Philadelphia, Pennsylvania. Its principal
subsidiary is vBank, formerly BankPhiladelphia, which has operated as a
community-based financial institution for over 110 years. Since USABanc.com's
acquisition of vBank, senior management has undertaken a strategy focused on:
o establishing a USABanc.com Website to begin offering our
Internet banking and brokerage products and services in early
August 1999; and
o aggressively growing its loan portfolio through the purchase of
pools of primarily performing loans at a discount and
increasing emphasis on loan originations, including loan
participations.
USABanc.com also owns USACapital, Inc., a registered broker-dealer which is
engaged in the business of trading stocks, bonds, annuities and other
investment-related products to the general public.
USABanc.com's executive offices are located at 1535 Locust Street,
Philadelphia, Pennsylvania 19102. vBank has retail locations in Center City
Philadelphia, Plymouth Meeting and Wynnewood, Pennsylvania, and a "mini" branch
known as "eBank" in the office, restaurant and retail complex known as "The
Bellevue" in Center City Philadelphia. USABanc.com's telephone number is
888-USA-BANC and its Website address is www.usabanc.com.
USA Capital Trust I
USA Capital Trust I is a statutory business trust created under
Delaware law. The Trust's business and affairs are conducted by Wilmington Trust
Company as the property trustee and the Delaware trustee as well as three
individual administrative trustees, who are officers of USABanc.com. USA Capital
Trust I exists only to:
o issue and sell capital securities, which include the Series A
and B Capital Securities, and common securities;
o use the proceeds from the sale of Capital Securities and common
securities to acquire the Debentures issued by USABanc.com; and
o engage in other activities necessary or incidental to such
activities.
The Debentures are the only assets of USA Capital Trust I, and payments
under the Debentures are the sole revenue of USA Capital Trust I. All of the
common securities issued by USA Capital Trust I are owned by USABanc.com.
The Exchange Offer
The Exchange Offer.......................... We are offering to exchange up to
$10,000,000 aggregate liquidation
amount of Series B Capital
Securities for an equal aggregate
liquidation amount of Series A
Capital Securities. You may
exchange all of your Series A
Capital Securities, or less than
all of them provided that they
have a liquidation amount of at
least $100,000 (100 Capital
Securities), or any integral
multiple of $1,000 (one Capital
Security) in excess of
$100,000.
We are making this exchange offer
in order to satisfy our
obligations under a Registration
Rights Agreement relating to your
Series A
1
<PAGE>
Capital Securities. See "The
Exchange Offer" for a description
of the procedures for tendering
your Series A Capital Securities.
Expiration Date............................. The exchange offer will expire at
5:00 p.m., New York City time, on
______ [ ], 1999, unless we
extend it. See "The Exchange
Offer--Expiration Date;
Extension; Amendments."
Conditions to the Exchange Offer............ The exchange offer is subject to
certain conditions, which we have
the discretion to waive. The
exchange offer is not conditioned
upon the tender of any minimum
liquidation amount of Series A
Capital Securities. See "Exchange
Offer--Conditions to the Exchange
Offer."
Terms of the Exchange Offer................. We reserve the right at any time
and from time to time:
o to delay accepting the
Series A Capital Securities
for exchange;
o to end the exchange offer if
specified conditions are not
satisfied;
o to extend the exchange offer
and keep the Series A
Capital Securities tendered
pursuant to the exchange
offer, subject to your right
to withdraw your tendered
Series A Capital Securities;
or
o to waive any condition or
otherwise change the terms
of the exchange offer in any
way.
See "The Exchange Offer--Terms of
the Exchange Offer."
If you wish to exchange your
Series A Capital Securities for
Series B Capital Securities, you
will be required to represent
that:
o you are not an Affiliate of
either USABanc.com or USA
Capital Trust I;
o you are acquiring Series B
Capital Securities in the
ordinary course of your
business;
o you have no arrangement or
understanding with any person
to participate in a
"distribution" within the
meaning of the Securities Act
of such Series B Capital
Securities; and
o you are not engaged in, and
do not intend to engage in, a
"distribution" within the
meaning of the Securities Act
of such Series B Capital
Securities.
See "The Exchange Offer--Resale
of Series B Capital Securities."
<PAGE>
Capital Securities
Withdrawal Rights........................... You may withdraw your tender of
Series A Capital Securities at
any time before the expiration
date by delivering written notice
of such withdrawal to the
exchange agent as described below
under the caption "The Exchange
Offer--Withdrawal Rights."
Procedures for Tendering
Series A Capital Securities................. You must complete and sign a
letter of transmittal and mail,
fax or hand deliver it, together
with any other documents required
by the letter of transmittal, to
the exchange agent, either with
your Series A Capital Securities
or in compliance with the
specified procedures for
guaranteed delivery of Series A
Capital Securities. Certain
brokers, dealers, commercial
banks, trust companies and
2
<PAGE>
other nominees may also effect
tenders by book-entry transfer.
If your Series A Capital
Securities are registered in the
name of a broker, dealer,
commercial bank, trust company or
other nominee, you should contact
such person promptly if you wish
to tender your Series A Capital
Securities pursuant to the
exchange offer. See "The Exchange
Offer--Procedures for Tendering
Series A Capital Securities."
Resales of Series B Capital Securities...... In making the exchange offer, we
are relying on the position of
the staff of the Securities and
Exchange Commission's Division of
Corporation Finance contained in
certain interpretive letters
addressed to third parties in
other transactions. However, we
have not sought our own
interpretive letter. Therefore,
there is no guarantee that the
staff of the Securities and
Exchange Commission's Division of
Corporation Finance would make a
similar determination regarding
the exchange offer as it has in
the interpretive letters to third
parties.
Unless you are a broker-dealer or
an affiliate of either
USABanc.com or USA Capital Trust
I, we believe that you may sell
or otherwise transfer Series B
Capital Securities issued to you
pursuant to this exchange offer
in exchange for your Series A
Capital Securities without
further compliance with the
registration and prospectus
delivery requirements of the
Securities Act.
If you are a broker-dealer or an
affiliate of either USABanc.com
or USA Capital Trust I, then you
shall be subject to further
restrictions described in "The
Exchange Offer--Resale of Series
B Capital Securities."
Subject to limitations described
in "The Exchange Offer--Resale of
Series B Capital Securities," we
have agreed that this prospectus,
as it may be changed or
supplemented from time to time,
may be used by you if you are a
participating broker-dealer in
connection with resales of such
Series B Capital Securities. See
"Plan of Distribution."
Exchange Agent.............................. The exchange agent with respect
to the exchange offer is
Wilmington Trust Company. The
address, telephone and facsimile
numbers of the exchange agent are
listed in "The Exchange
Offer--Exchange Agent" and in the
letter of transmittal.
<PAGE>
Use of Proceeds............................. Neither USABanc.com nor USA
Capital Trust I will receive any
cash proceeds from the issuance
of the Series B Capital
Securities.
Certain United States Federal
Income Tax Consequences;
ERISA Considerations........................ You should review carefully the
information contained under the
caption "Certain Federal Income
Tax Considerations" and "ERISA
Considerations" before tendering
your Series A Capital Securities
in the exchange offer.
The Series B Capital Securities
Securities Offered.......................... We have registered up to
$10,000,000 aggregate liquidation
amount of Series B Capital
Securities under the Securities
Act. The terms of the Series B
Capital Securities are the same
as the terms of the Series A
Capital Securities, except that
the Series B Capital Securities:
o have been registered under
the Securities Act;
3
<PAGE>
o will not be subject to
certain transfer restrictions
applicable to the Series A
Capital Securities; and
o will not provide for any
increase in the distribution
rate.
See "Description of Series B
Securities."
Distribution Dates.......................... March 15 and September 15 of each
year, beginning September 15,
1999.
Deferral Periods............................ If no default has occurred and is
continuing, USABanc.com will have
the right, at any time, to defer
payments of interest on the
Debentures for a period not
exceeding 10 consecutive
semi-annual periods.
Distributions on the Capital
Securities will be deferred
during any such deferral period.
No deferral period will extend
beyond March 15, 2029. See
"Description of Series B
Securities--Description of
Debentures--Option to Extend
Interest Payment Date."
During a deferral period,
interest will continue to accrue
on the Debentures and holders of
Series B Capital Securities would
be required to accrue income for
United States federal income tax
purposes. This means that you
would have income from the
Capital Securities for United
States federal income tax
purposes but that you would not
receive any cash with which to
pay any tax that might be due on
that income. See "Certain Federal
Income Tax Considerations--
Original Issue Discount and
Interest Income."
USABanc.com does not currently
intend to exercise its right to
defer payments of interest on the
Debentures.
Ranking..................................... The Series B Capital Securities
will rank equally with the Series
A Capital Securities and the
common securities of USA Capital
Trust I except as described under
"Description of Series B
Securities--Description of
Capital Securities--Subordination
of Common Securities."
The Series B Debentures will rank
equally with the Series A
Debentures and will be unsecured,
subordinate and junior in right
of payment to all Senior
Indebtedness of USABanc.com. See
"Description of Series B
Securities--Description of
Debentures--Subordination."
The Series B Guarantee will rank
equally with the Series A
Guarantee and all other
guarantees to be issued by
USABanc.com as described in
"Description of Series B
Securities--Description of
Guarantee--General."
<PAGE>
In addition, because USABanc.com
is a holding company, the
Debentures and the Guarantee are
effectively subordinated to all
existing and future liabilities
of USABanc.com's subsidiaries,
including vBank's deposits.
Redemption.................................. You may be required to sell your
Series B Capital Securities to
USA Capital Trust I if the
Debentures are prepaid. In this
case, USA Capital Trust I will
buy your Series B Capital
Securities at a redemption price
equal to the applicable optional
prepayment price as described in
"Description of Series B
Securities--Description of
Debentures--Optional Prepayment."
Reserve Account............................. USABanc.com is required to
maintain a reserve account for
two years from the date of
issuance of the Debentures. It
has deposited $1.9
4
<PAGE>
million in the reserve account ,
all of which is invested in
marketable securities. Funds in
the reserve account will be
applied to make interest payments
on the Debentures until the
reserve account is exhausted.
Holders of the Debentures have a
perfected security interest in
the reserve account. See
"Description of Series B
Securities--Description of
Debentures--Reserve Account."
Transfer Restrictions....................... The Series B Capital Securities
will be issued, and may be
transferred, only in blocks
having a liquidation amount of
not less than $100,000 and
multiples of $1,000 in excess of
$100,000.
ERISA Considerations........................ You should consider carefully the
restrictions on purchase
described under the caption
"ERISA Considerations."
Absence of Market for the Series B
Capital Securities.......................... The Series B Capital Securities
will be a new issue of securities
for which there currently is no
market. Accordingly, we cannot
assure you that any market will
develop for the Series B Capital
Securities. We do not intend to
apply for listing of the Series B
Capital Securities on any
securities exchange or for
quotation through the National
Association of Securities Dealers
Automated Quotation System. See
"Plan of Distribution."
Forward-Looking Statements
Some of the statements contained in this prospectus discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and was
derived using numerous assumptions. Important factors that may cause actual
results to differ from projections include, for example:
o a decline in the quality of our assets;
o the evolving nature of the market for Internet banking;
o unexpected changes in the interest rate environment;
o new services and products offered by competitors; and
o changes in our regulatory environment.
5
<PAGE>
RISK FACTORS
You should carefully read the following risk factors and the other
sections of this prospectus in connection with the exchange offer and the Series
B Capital Securities. You should consider all of these risk factors to be
important. The risk factors below do not necessarily appear in order of
importance. Except where otherwise indicated, the following risk factors apply
to both the Series A Capital Securities and the Series B Capital Securities.
Risks Related to the Capital Securities and the Debentures
You may lose all or part of your investment in the Series A Capital Securities
if USABanc.com defaults on payment of the Series B Debentures
The ability of USA Capital Trust I to make payments with respect to the
Series B Capital Securities is dependent on USABanc.com making payments on the
Series B Debentures as and when required. If USABanc.com defaults on its
obligations to pay principal, premium or interest on the Series B Debentures,
USA Capital Trust I will not have sufficient funds to make distributions or to
pay you the liquidation amount of $1,000 per Series B Capital Security. Although
the property trustee may enforce the rights of USA Capital Trust I under the
Series B Debentures against USABanc.com, the Series B Debentures rank junior and
subordinate in right of payment to USABanc.com's senior indebtedness and the
liabilities, including deposits, of USABanc.com's subsidiaries. Thus, in an
event of default, you should assume that you only would be able to look to the
assets of USABanc.com. There can be no assurance that any enforcement
proceedings will result in the return to you of all or any part of your
investment in the Series A Capital Securities. See "Description of Series B
Securities--Description of Debentures--Subordination."
vBank's failure or inability to pay dividends may impair the ability of
USABanc.com to make payments on the Debentures
USABanc.com relies primarily on dividends from vBank to meet its
corporate expenses and may rely on such dividends to satisfy its obligations for
payment of principal and interest on the Debentures. vBank's ability to pay
dividends will be subject to state and federal regulatory restrictions and on
its financial condition. Under federal guidelines, vBank and USABanc.com are
discouraged from paying cash dividends on common stock unless they meet
appropriate standards of asset quality and overall financial condition. During
1998, vBank paid no dividends to USABanc.com. There can be no assurance that
vBank can pay sufficient dividends so that USABanc.com will be able to pay it
debt obligations in the future. See "Regulation of USABanc.com and vBank."
Your right to receive interest payments on the Series B Capital Securities may
be deferred for as long as five years
So long as there is no event of default under the Debentures ,
USABanc.com has the right, at one or more times, to defer interest payments on
the Debentures for up to 10 consecutive semi-annual periods, but not beyond the
stated maturity date of March 15, 2029. As a consequence, USA Capital Trust I
will defer distributions on the Series B Capital Securities during any such
deferral period. You would still accumulate distributions at the rate of 9.50%
per annum, plus you would accumulate additional distributions at the same rate
of 9.50% per annum compounded semi-annually, on any unpaid distributions, to the
extent permitted by law. To the extent you would rely on the regular payment of
interest on the Series B Capital Securities, however, any such deferral period
may adversely affect you. See "Description of Series B Securities--Description
of Debentures--Option to Extend Interest Payment Date."
You will be liable for taxes on accrued but unpaid distributions during a
deferral period
During a deferral period, you will be required to continue to accrue
interest income for U.S. federal income tax purposes in respect of your pro rata
share of the Debentures held by USA Capital Trust I, even if you are a cash
basis taxpayer. As a result, you must include the accrued interest in your gross
income for U.S. federal income tax purposes prior to your receiving cash. You
will not receive the cash related to any accrued and unpaid interest from USA
Capital Trust I if you sell your capital securities before the termination of
any deferral period. Additionally, during a deferral period, accrued and unpaid
distributions that are included in your gross income will increase your tax
basis in the Capital Securities. If you sell your Capital Securities during a
deferral period, your increased tax basis will decrease the amount of any
capital gain or will create a capital loss or increase the amount of any capital
loss that you realize on the sale. A capital loss, except in certain limited
circumstances, cannot be applied to offset ordinary income. As a result, you may
suffer adverse tax effects from any deferral of interest. See "Certain Federal
Income Tax Considerations--Sales of Capital Securities."
6
<PAGE>
The market value of the Capital Securities may be adversely affected by a
deferral of interest on the Debentures
Although USABanc.com has no current intention of exercising its rights
to defer interest payments on the Debentures, the market price of the Capital
Securities is likely to be adversely affected if it exercises this right in the
future. The Capital Securities may trade at prices that do not fully reflect the
value of accrued and unpaid interest on the underlying Debentures. As a result,
if you sell your Capital Securities during an interest deferral period, you may
receive a smaller return on your investment than someone else who continues to
hold them.
You may receive cash upon the dissolution of USA Capital Trust I which would
increase your tax liability
In the event USABanc.com dissolves USA Capital Trust I, you may receive
a taxable distribution of cash under some circumstances. As a result, your
income tax liability would increase. See "Certain Federal Income Tax
Considerations-- Distribution of Debentures or Cash upon Liquidation of the
Trust."
The Capital Securities provide you with only limited rights to enforce payment
on the Debentures
In the event USABanc.com defaults in paying distributions on the
Debentures when due, holders of Capital Securities shall have the right to
institute an enforcement proceeding against USABanc.com. As a holder of Capital
Securities you will not, however, have the right to exercise other remedies that
may be available to holders of the Debentures unless there is an event of
default under the Trust Agreement. See "Description of Series B
Securities--Description of Debentures--Enforcement of Certain Rights by Holders
of Capital Securities," "--Debenture Events of Default" and "Description of
Series B Securities--Description of Guarantee."
The market price and liquidity of the Series B Capital Securities may be
adversely affected if a public market fails to develop
Although the Series B Capital Securities are registered under federal
securities law, there can be no assurance that a public trading market will
develop for them. Without a public trading market, the market price and
liquidity of the Series B Capital Securities may be adversely affected.
The value of the Series B Capital Securities may fall below the amount of your
investment
The value of the Series B Capital Securities may fluctuate above or
below the price you pay for them. Their value at any time depends on many
factors, including, among other things, prevailing interest rates, USABanc.com's
results of operations and the market for similar securities. As a result, there
is a risk that the value of your Series B Capital Securities will fall below the
amount of your investment.
Risks Related to USABanc.com and vBank
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 $270,000 increase in
advertising and marketing expenses and compensation costs for the three months
ended March 31, 1999 compared to the first three months of 1998. We expect to
spend approximately $7.0 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
USABanc.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. We intend to achieve profitability by obtaining
on-line banking market penetration and brand awareness, thus allowing us to
continually reduce our cost per new customer acquisition. Although management
expects to return to profitability in 2001, there can be no assurance that we
will return to profitability within such time frame. 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. 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
7
<PAGE>
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 Wells Fargo, 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.
We may not succeed in implementing our Internet banking strategy
Our success depends on our ability to execute our Internet banking
strategy. The USABanc.com Website was introduced to the public in April 1999.
The Website currently allows customers to open certificates of deposit and view
the future banking and brokerage services we will offer. We do not expect to
begin offering our Internet banking and brokerage products and services until
early August 1999, which makes it 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, 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
8
<PAGE>
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
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. 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 intend to 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 could materially adversely affect our business,
financial condition, results of operations and cash flows. See
"Business--Security."
During the third quarter of 1999, we expect to complete a conversion of
our Intrieve data processing system to EDS-Miser III. We believe we have
adequately planned for the conversion, but there are inherent risks associated
with converting to a new system. We may not be able to commence use of the new
system within our planned time frame or the system may not function properly
when it is installed. Such delays or malfunctions could lead to the allocation
of unplanned resources and the expenditure of additional funds. In addition,
significant problems with the conversion could adversely affect our ability to
successfully implement portions of our strategy on a timely basis.
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
intend to rely on encryption and authentication technology to provide the
security and authentication necessary to effect secure transmissions of
confidential information and 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.
9
<PAGE>
We intend to outsource many essential services to third-party providers who may
terminate their agreements with us, resulting in interruptions to our internet
banking operations
We intend to receive essential technical and customer service support
from third-party providers. We expect to 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 expect to receive essential Webhosting, electronic
bill payment and core systems processing services on an outsourced basis from
Electronic Data Systems Corporation, commonly known as EDS. We expect that the
agreements we enter into with each service provider will be 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 our application for the servicemark is challenged, we may lose the right to
use the "USABanc.com" brand name
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 awareness of the USABanc.com brand and any other brands we may use.
We currently do not own a federal registration for the servicemark
"USABanc.com," although an application is pending. We are making a substantial
investment in the promotion and marketing of the USABanc.com brand. If a
competitor successfully challenges our ability to use the name "USABanc.com," we
could lose the right to use the "USABanc.com" brand name and the benefits of the
brand awareness we are spending significant resources to develop.
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. We have entered into employment agreements with Mr. Tepper and Mr.
Hartline. We do not maintain key-man life insurance on Mr. Tepper or Mr.
Hartline. If we lose the services of Mr. Tepper or Mr. Hartline, or if we are
unable to attract additional qualified employees, our business would likely be
adversely affected. See "Management."
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 March 31, 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 $48.7 million, or 27.0% 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 in the
following ways:
o Historically, we have relied on short-term and institutional
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.
o 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.
o Changes in interest rates could adversely affect:
o the volume of loans we originate;
10
<PAGE>
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.
See "Business--General," "--Lending Activities," "--Asset Quality,"
"--Investment Activities" and "--Sources of Funds."
Our commercial lending activity exposes us to credit risks
At March 31, 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 March 31, 1999, we had an
aggregate of $1.1 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 March 31, 1999, we had no
non-performing commercial business loans and $832,000 of non-performing loans
secured by commercial real estate. See "Business--Lending Activities."
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 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 are uncertain and subject to change, resulting in
inter-period variations in income, potential losses and
uncertain yields;
o the shrinking pool of assets available because the decreasing
number of failed or failing financial institutions that are
being resolved by the Federal Deposit Insurance Corporation 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
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
11
<PAGE>
four other financial institutions, as of March 31, 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.
See "Business--General," "--Lending Activities" and "--Asset Quality."
USABanc.com's asset quality may be adversely affected by unfavorable economic
conditions
The performance of financial institutions like vBank are 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 management historically has focused on acquiring loans in the
Mid-Atlantic region of the United States, it has acquired loans secured by real
estate located in a number of other states including Texas, Florida and
California and may acquire loans throughout the nation. In the future, vBank may
acquire or originate loans throughout the United States through its 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. Thus, adverse economic conditions affecting any of these
market areas could have a negative impact on vBank's financial condition and
results of operations. Furthermore, increasing loan delinquencies or regulatory
agencies could require vBank to increase its allowance for loan losses, which
would adversely affect its results of operations.
See "Business--Lending Activities," "--Asset Quality" and "Regulation of
USABanc.com and vBank."
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 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 $120,000 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 and Analysis of Financial Condition
and Results of Operations--Year 2000 Compliance."
12
<PAGE>
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 Federal Deposit Insurance
Corporation 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 has
declined the request of such carriers to impose access fees on Internet service
providers or commercial on-line service providers. If the Federal Communications
Commission 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 USABanc.com is allowed to conduct its Internet
bank business, especially those aspects that involve the collection or use of
personal information.
At the international level, the European Union has already adopted a
Directive on Data Protection that permits 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 European Union and the
United States Department of Commerce presented a joint report to the European
Union/United States Summit in Bonn, Germany on the topic of the EU/US Data
Protection Dialogue. The joint report indicates that the European Union 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 European Union 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.
13
<PAGE>
ACCOUNTING TREATMENT
For financial reporting purposes, USA Capital Trust I is treated as a
subsidiary of USABanc.com and, accordingly, the accounts of USA Capital Trust I
will be included in the consolidated financial statements of USABanc.com. The
Capital Securities will be presented as a separate line item in the consolidated
balance sheets of USABanc.com, entitled "Guaranteed Preferred Beneficial
Interests in Subordinated Debt," and appropriate disclosures about the Capital
Securities, the Guarantee and the Debentures will be included in the notes to
the consolidated financial statements for financial reporting purposes. For
financial reporting purposes, USABanc.com will record distributions payable on
the Capital Securities as a non-interest expense in the consolidated statements
of income.
CAPITALIZATION
The following table sets forth the capitalization of USABanc.com, on a
consolidated basis, as of March 31, 1999. This table should be read in
conjunction with USABanc.com's consolidated financial statements and notes
thereto, which are included in this prospectus beginning on Page F-1.
<TABLE>
<CAPTION>
At March 31, 1999
(Dollars in Thousands) (unaudited)
<S> <C>
Liabilities:
Deposits........................................................................ $125,765
=======
Borrowed funds.................................................................. 34,163
Guaranteed Preferred Beneficial Interests in Subordinated Debt(1)............... 10,000
------
Accrued expenses and other liabilities.......................................... 2,606
=======
Total liabilities............................................................... 172,534
Stockholders' Equity:
Preferred stock, $1.00 par value; authorized 5,000,000 shares;
no shares issued and outstanding.............................................. 0
Common stock, $1.00 par value; authorized 10,000,000 shares; 4,014,784
shares issued and outstanding and 216,460 shares of converted and unissued
Class B common stock (2)....................................................... 4,231
Additional paid-in-capital......................................................... 8,568
=====
Accumulated earnings............................................................... 1,526
Accumulated other comprehensive (loss) income - unrealized depreciation
on securities available-for-sale................................................ (629)
------
Total stockholders' equity.............................................. 13,696
------
Total liabilities and stockholders' equity......................................... 186,230
=======
</TABLE>
- -----------------------------
(1) As described herein, the sole assets of the USA Capital Trust I are
$10,310,000 aggregate principal amount of the Series A Debentures, which
will mature on March 15, 2029. USABanc.com owns all of the common securities
issued by the USA Capital Trust I.
(2) Reflects a two-for-one stock split effected in the form of a stock dividend
paid on June 15, 1999.
14
<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 USABanc.com and
vBank."
The following tables set forth USABanc.com's actual regulatory capital
and regulatory capital ratios at March 31, 1999. The amount of average adjusted
total assets used for the Tier 1 leverage ratio was approximately $177.0
million. Risk-weighted assets used for the risk-based capital ratios amounted to
approximately $149.0 million.
<TABLE>
<CAPTION>
Risk-Based
--------------------------------------
Tier 1
Leverage Tier 1 Total
Capital Capital Capital
-------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Stockholders' equity...................................... $14,325 $14,325 $14,325
Minority interest--Guaranteed
Preferred Beneficial Interests in
Subordinated Debt (1).................................. 4,541 4,541 10,000
Unrealized losses on securities
available for sale..................................... (629) (629) (629)
Non-allowable capital:
Direct real estate investments......................... -- -- --
Intangible assets...................................... (74) (74) (74)
Supplemental capital:
Allowance for loan losses.............................. -- -- 1,175
Regulatory capital........................................ $18,163 $18,163 $24,797
Risk-Based
--------------------------------------
Tier 1 Tier 1 Total
Leverage Capital Capital
Ratio Ratio Ratio
-------------------------------------------------------
Regulatory capital....................................... 10.3% 12.2% 16.6%
Regulatory requirement................................... 4.0 4.0 8.0
------ ----- -----
Excess above required ratio.............................. 6.3% 8.2% 8.6%
====== ===== =====
</TABLE>
- --------------
(1) On March 9, 1999, USABanc.com issued the Series A Debentures to USA Capital
Trust I in which USABanc.com owns all of the common equity. USA Capital
Trust I in turn issued the Series A Capital Securities, secured by the
Series A Debentures and the guarantee of USABanc.com. The Series A Capital
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 such securities. At March 31, 1999, 25% of USABanc.com's Tier 1
capital equaled approximately $4.5 million. Accordingly, only $4.5 million
of the Series A Capital Securities were eligible as Tier 1 capital as of
such date.
15
<PAGE>
USE OF PROCEEDS
Neither USABanc.com nor USA Capital Trust I will receive any cash proceeds
from the issuance of the Series B Capital Securities. The Series A Capital
Securities surrendered in exchange for the Series B Capital Securities will be
retired and canceled. The proceeds to USA Capital Trust I from the offering of
the Series A Capital Securities were $10,000,000 before giving effect to
approximately $916,000 of commissions and expenses of the offering payable by
USABanc.com. All of the proceeds from the sale of Series A Capital Securities
were invested by USA Capital Trust I in the Debentures. USABanc.com contributed
$6.0 million of the net proceeds to vBank to increase vBank's capital position.
vBank expects to leverage the proceeds contributed to it by increasing its
origination and purchase of loans. An aggregate of $1.9 million of the net
proceeds was placed in the reserve account to be held for two years and
thereafter applied to payment of interest on the trust preferred securities. The
remaining net proceeds of $1.2 million were retained by USABanc.com for general
corporate purposes, including the repayment of outstanding debt.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion is to focus on significant and ongoing
changes in our financial condition and results of operations , including those
of our subsidiaries, during the periods indicated. The discussion and analysis
is intended to supplement and highlight information contained in the
accompanying consolidated financial statements and the selected financial data
presented elsewhere in this prospectus.
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 USABanc.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 $110.0 million at March 31, 1999. 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
discounted 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, doing business as 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.
On June 15, 1999, we paid a two for one stock split effected in the
form of a dividend to its common stock to holders of record as of June 1, 1999,
which had the effect of increasing the number of issued and outstanding shares
of common stock by a multiple of two. With the exception of information
contained in "Management--Security Ownership of Certain Beneficial Owners and
Management," this increase is not reflected in this prospectus or in the
accompanying consolidated financial statements and the selected financial data
presented elsewhere in this prospectus.
Comparison of Financial Condition and Results of Operations
for the Quarters Ended March 31, 1999 and March 31, 1998
Financial Condition
USABanc.com's total assets increased from $165.1 million at December
31, 1998 to $186.2 million at March 31, 1999, an increase of $ 21.1 million, or
12.8%. The increase was due primarily to increases in the loan and securities
portfolios of $7.9 million and $20.8 million, respectively. This growth was
17
<PAGE>
funded by increases in deposits of $11.3 million (primarily non-retail
certificates of deposit) and the issuance of the Series A Debentures. The
increase in the securities portfolio was primarily due to the acquisition of
corporate trust preferred securities and federal agency bonds. Management plans
to utilize deposit expansion to provide the necessary funding for vBank's
continued growth, although management may also use advances from the Federal
Home Loan Bank of Pittsburgh in conjunction with deposit expansion to fund
vBank's growth as it has done in the past. At March 31, 1999, vBank had $33.8
million in borrowing capacity under a collateralized line of credit with the
Federal Home Loan Bank, of which $30.0 million was drawn upon as of such date.
USABanc.com's stockholders' equity increased from $13.6 million at December 31,
1998 to $13.7 million at March 31, 1999, as the earnings of USABanc.com were
offset by an increase in the unrealized losses on USABanc.com's securities
portfolio, which pursuant to Statement of Financial Accounting Standards No.
115, are treated as a separate component of stockholders' equity. At March 31,
1999, such unrealized losses amounted to $629,000.
Results of Operations
Net Income. USABanc.com reported net income of $414,000, or $0.19 per
share, for the three months ended March 31, 1999, compared to $413,000 or $0.24
per share for the three months ended March 31, 1998, representing a .24%
increase in overall net income. Net income increased slightly primarily due to
the increase in net interest income of $613,000 resulting from the increase in
average earning assets of $70.5 million over the prior period. Non-interest
income for the three months ended March 31, 1999 increased $99,000 to $320,000
from $221,000 for the same period in 1998. This increase was partially offset by
an increase of non-interest expense of $638,000 due to the cost of enhancing
USABanc.com's infrastructure, primarily an increase in salaries, occupancy
expense and professional fees.
Interest Income. Total interest income increased $1.6 million, or
69.7%, for the three months ended March 31, 1999, compared to the three months
ended March 31, 1998, due to the higher volume of net loans receivable and
securities. The increase in interest income on loans of $1.1 million is due to
an increase of $47.8 million in the average balance of the loan portfolio, as
well as accretion income recognized on discounted loan pools purchased by vBank.
The total increase was related to an increase of $45.9 million in the average
balance of real estate loans and an increase of $1.9 million in the average
balance of commercial business loans. This increase in the average balance of
our loans reflects USABanc.com's strategy to continue to grow its commercial
business and commercial real estate loan portfolio. The discount associated with
such discounted loan pools is recognized as a yield adjustment and is included
as interest income. During the three months ended March 31, 1999 vBank
recognized $301,000 in accretion income compared to $258,000 of accretion income
for the three months ended March 31, 1998. The increase in accretion income is
due to an increased volume of loans. The increase in interest income on
securities of $496,000 is due to an increase of $25.2 million in the average
balance of the securities portfolio. The 6.8 % increase was comprised of an
increase of $13.4 million of trust preferred securities with an average yield of
9.22% and an increase of $11.8 million of mortgage-backed obligations with an
average yield of 6.78%.
Interest Expense. Total interest expense increased $981,000, or 83.6%,
for the three months ended March 31, 1999, compared to the three months ended
March 31, 1998, due to the higher volume of certificates of deposit and Federal
Home Loan Bank advances. Interest expense on borrowings increased $394,000 due
to increase in the average outstanding Federal Home Loan Bank advances of $29.0
million. Interest expense incurred on certificates of deposit increased $537,000
due to the average balance of certificates of deposit increasing $41.2 million.
This increase in interest expense reflects USABanc.com's growth strategy of
increasing certificates of deposit to fund the growth of vBank. Increases in
interest expenses due to volume were partially offset by decreases in the
interest rates paid on Federal Home Loan Bank advances and certificates of
deposit by approximately 37 basis points. The average cost of funds, including
other borrowings, was 5.62% for the first three months of 1999 compared to 5.89%
over the same period in 1998.
Net Interest Income. USABanc.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.
Net interest income for the three months ended March 31, 1999 increased
$613,000, or 55.1%, to $1.7 million from $1.1 million for the same period in
1998. Average interest-earning assets increased by $70.5 million, or 77.0%, to
$162.0 million, for the three months ended March 31, 1999 compared to the same
period in 1998. Average interest-bearing liabilities increased $73.6 million, or
92.2%, over the same period. The net interest spread and net interest margin
18
<PAGE>
decreased for the period ended March 31, 1999 compared to March 31, 1998, from
4.11% to 3.96% and from 4.86% to 4.26%, respectively. The major reason for the
spread and margin compression relates to the proportion of the amount of
accretion of the discount on loans acquired to total interest income. For the
three months ended March 31, 1999, $301,000 of discount was accreted into
interest income, or 7.7% of the total interest income. This compares to $259,000
of discount accreted into interest income for the three month period ended March
31, 1998, or 11.3% of total interest income. Excluding the income attributable
to the accretion of discount on loans acquired, the net interest margin would
have declined 20 basis points for the three months ended March 31, 1999 compared
to the three months ended March 31, 1998 to 3.52% from 3.73%, respectively.
Average Balance and Yield/Rate Analysis. Net interest income is
affected by changes in both average interest rates and average volumes of
interest-earning assets and interest-bearing liabilities. The following table
presents for the periods indicated the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates. Average balances are calculated on a monthly basis.
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------------------
1999 1998
----------------------------------- -------------------------------------
(Dollars in Thousands) Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
---------- ---------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans................................ $102,169 $2,756 10.79% $57,674 $1,647 11.43%
Securities........................... 52,976 1,044 7.88 27,746 548 7.89
Interest-earning deposits and other.. 6,818 81 4.75 6,093 92 6.02
-------- ------ ----- ------- ------ -----
Total interest-earning assets...... $161,963 $3,881 9.58% $91,513 $2,287 10.00%
======== ====== ===== ======= ====== =====
Interest-bearing liabilities:
Deposits:
Passbook........................... $7,671 $85 4.43% $1,876 $13 2.65%
NOW accounts....................... 1,001 6 2.40 935 9 3.95
Money market accounts.............. 3,369 40 4.75 5,770 59 4.05
Certificates of deposit............ 106,033 1,536 5.79 64,857 999 6.17
Borrowings.......................... 35,298 488 5.53 6,340 94 5.90
-------- ------ ----- ------- ------ -----
Total interest-bearing liabilities $153,372 $2,155 5.62% $79,778 $1,174 5.89%
======== ====== ===== ======= ====== =====
Excess of interest-earning assets over
interest-bearing liabilities............ $8,591 $11,735
Net interest income..................... $1,726 $1,113
Effective interest differential (spread) 3.96% 4.11%
Net yield on average interest-earning 4.26% 4.86%
assets..................................
Average earnings assets to average
interest bearing liabilities............ 105.60% 114.71%
</TABLE>
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 related to outstanding balances and those due to changes in
interest rates. Information is provided in each category with respect to:
o changes attributable to changes in volume, shown as changes in
volume multiplied by prior rate;
o changes attributable to changes in rate, shown as changes in
rate multiplied by prior volume; and
19
<PAGE>
o the net change in rate/volume, shown as 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>
March 31, 1999 vs. March 31, 1998
----------------------------------------------------------------
Increase or (Decrease)
Due to Change in
-----------------------------------------
Total Increase
Average Volume Average Rate (Decrease)
-------------- ------------ --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Variance in interest income on:
Interest-earning assets:
Loans................................. $1,212 $(103) $1,109
Securities............................ 497 (1) 496
Interest-earning deposits and other... 8 (19) (11)
------ ----- ------
Total interest-earning assets....... $1,717 $(123) $1,594
====== ===== ======
Interest-bearing liabilities:
Deposits:
Savings and Passbook............ $51 $21 $72
NOW accounts.................... 1 (4) (3)
Money market accounts........... (27) 8 (19)
Certificates of deposit......... 596 (59) 537
Borrowings........................... 400 (6) 394
------ ----- ------
Total interest-bearing liabilities... $1,021 $(40) $981
------ ----- ------
Change in net interest income............... $696 $(83) $613
====== ===== ======
</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 $100,000 during the three months ended March 31,
1999 compared to $35,000 during the same period in 1998. The increase in the
provision for loan losses during the three months ended March 31, 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 was 1.05% at March 31, 1999, compared to 1.02%
at December 31, 1998 and 1.00% at March 31, 1998. In addition, the allowance for
loan losses as a percentage of total non-performing loans, net of discount, was
58.75% at March 31, 1999, compared to 294.55% at March 31, 1998. The significant
decline in this ratio during the three months ended March 31, 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 twelve 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 first quarter of 1999 compared to $8,000 of charge-offs for the first
quarter of 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.
20
<PAGE>
Non-Interest Income. Non-interest income increased $99,000, or 44.8%,
in the first three months of 1999 compared to the same three months of 1998.
Gains on sales of securities classified as available-for-sale increased $17,000
and service charges on deposit accounts, other service charges, loan review
fees, letter of credit fees and other miscellaneous income increased $82,000
during the period.
Non-Interest Expense. Other expense increased an aggregate of $638,000,
or 103.2%, compared to the first three months of 1998. Compensation expense
increased $234,000 due to the hiring of additional personnel. Occupancy expense
increased $92,000 due to the addition of two branches. Advertising expense
increased $36,000 due to a new marketing campaign. Other expenses increased
$192,000 primarily as a result of computer expenses related to certain software
and hardware purchases for the www.usabanc.com Website, expenses related to loan
acquisitions and other miscellaneous items. Professional fees increased $84,000
due to an increase in outside consulting and legal services provided during the
quarter.
Income Tax Expense. Income tax expense recorded for the three months
ended March 31, 1999 and 1998 was $276,000 and $268,000, or 40.0% and 39.4%
effective tax rate, respectively.
Comparison of Financial Condition and Results of Operations
for the Years Ended December 31, 1998 and December 31, 1997
Financial Condition
USABanc.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 primarily by increases in 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 du 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, consisting
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
Federal Home Loan Bank of Pittsburgh. 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 in 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 Federal Home Loan Bank of
Pittsburgh in conjunction with deposit expansion to provide the necessary
funding for vBank's continued growth. vBank's borrowing limit at the Federal
Home Loan Bank of Pittsburgh as of December 31, 1998, was approximately $30.0
million, all of which was drawn upon as of such date. USABanc.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 USABanc.com's private placement of
$7.5 million of common stock in February 1998.
Results of Operations
Net Income. USABanc.com reported net income of $1.5 million, or $0.70
per share, for the year ended December 31, 1998, compared to a net loss of
$226,000, or $0.21 per share, 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 $7.5 million, or 153.2%, 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- earning 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.
21
<PAGE>
Interest Expense. Interest expense increased $3.9 million, or 155.1%,
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 Federal Home Loan Bank of Pittsburgh. In order to fund
USABanc.com's substantial growth during the year ended December 31, 1998,
USABanc.com relied primarily on non-retail certificates of deposit and, to a
lesser extent, long term callable advances from the Federal Home Loan Bank of
Pittsburgh. 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 nine months to approximately 18 months. The average
cost of funds, including borrowings, decreased 0.08% to 5.65% for the year ended
December 31, 1998 compared to the prior year.
Net Interest Income. 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. USABanc.com's interest rate spread increased from 3.68% to 4.54%
while USABanc.com's net interest margin increased from 4.53% to 4.87%. The
increase in USABanc.com's interest rate spread and margin reflects USABanc.com'
significant growth in loans and securities which were funded at a positive
spread with deposits and borrowings.
Average Balance and Yield/Rate Analysis. The following table presents
for the periods indicated the total dollar amount of interest income from
average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates. Average balances are calculated on a monthly basis.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
(Dollars in Thousands) Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- ---------- ----------- ----------- ---------- -----------
<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-earning 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:
Passbook........................... $ 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- bearing assets over
interest-bearing liabilities............ $ 7,010 $ 7,725
========== =======
Net interest income..................... $ 5,898 $2,349
======= ======
Effective interest differential (spread) 4.54% 3.68%
===== =====
Net interest margin .................... 4.87% 4.53%
===== =====
</TABLE>
- ------------
22
<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 related to outstanding balances and those due to changes in
interest rates. Information is provided in each category with respect to:
o changes attributable to changes in volume, shown as changes in
volume multiplied by prior rate;
o changes attributable to changes in rate, shown as changes in
rate multiplied by prior volume; and
o the net change in rate/volume, shown as 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 vs. December 31, 1997
--------------------------------------------------------
(Dollars in Thousands) Increase or Decrease
Due to Change in
-------------------------------------
Average Average Rate Total Increase
Volume (Decrease)
------------------- ----------------- ------------------
<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-earning deposits and other... 164 (7) 157
------ ----- -------
Total interest-earning assets....... 7,277 196 7,473
====== ===== =======
Interest-bearing liabilities:
Deposits:
Passbook........................ 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 increased the provision for loan
losses by $95,000 during the year ended December 31, 1998, compared to the same
period in 1997. This increase 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 twelve
months. See "Risk Factors--Risks Related to USABanc.com and vBank--vBank's Loan
Acquisition Strategy Possesses Increased Risk" and "Business --Asset
Quality--Delinquent Loan and Non-performing Assets."
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.
23
<PAGE>
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 USABanc.com's brokerage subsidiary, USACapital.
Non-Interest Expense. Non-interest expense increased $1.2 million, or
50.6%, to $3.7 million, for the year ended December 31, 1998. Compensation and
benefits expense increased $194,000 due primarily to the hiring of 21 additional
persons 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 USABanc.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.
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 March 31, 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:
o 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;
o interest-earning assets are calculated based on contractual
adjustments or stated maturities in the instruments without any
adjustments for prepayment; and
o certificates of deposit and borrowings are scheduled based on
the applicable stated maturities.
<TABLE>
<CAPTION>
3/31/99
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..................... $ 7,810 $ 7,138 $ 40,981 $ 55,406 $111,335
Investments.......................... 2,561 -- 5,113 61,024 68,698
--------- -------- -------- --------- --------
Total interest-earning assets $ 10,371 $ 7,138 $ 46,094 $ 116,430 $180,033
========= ======== ======== ========= ========
Interest-bearing liabilities:
Demand............................... $ 665 $ -- $ -- $ 664 $ 1,329
NOW accounts......................... 454 -- -- 454 908
Money market accounts................ 1,055 -- -- 1,054 2,109
Passbook accounts................... 6,184 -- -- 6,183 12,367
Certificates of deposit.............. 11,217 41,603 56,232 -- 109,052
Borrowings........................... -- 5,000 29,163 -- 34,163
Guaranteed Preferred Beneficial
Interests in Subordinated Debt... -- -- -- 10,000 10,000
--------- -------- -------- --------- --------
Total interest-bearing
liabilities................ $ 19,575 $ 46,603 $ 85,395 $ 18,355 $169,928
========= ======== ======== ========= ========
Periodic gap............................. $ (9,204) $(39,465) $(39,301) $ 98,075 $ 10,105
Cumulative gap........................... $ (9,204) $(48,669) $(87,970) $ 10,105 --
Ratio of gap to interest-earning assets.. (5.1)% (21.9)% (21.8)% 54.5% --
Ratio of cumulative gap to interest- (5.1)% (27.0)% (48.9)% 5.6% --
earning assets.....................
</TABLE>
24
<PAGE>
A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds interest rate sensitive assets. During a period of falling interest
rates, a positive gap would tend to adversely affect net interest income, while
a negative gap would tend to result in an increase in net interest income.
During a period of rising interest rates, a positive gap would tend to result in
an increase in net interest income while a negative gap would tend to affect net
interest income adversely.
If repricing of 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 March 31, 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 table above
has a number of limitations. Certain assets and liabilities may react
differently to changes in interest rates even though they reprice or mature in
the same or similar time periods. The interest rates on certain assets and
liabilities may change at different times than changes in market interest rates,
with some changing in advance of changes in market rates and some lagging behind
changes in market rates. Also, certain assets, such as adjustable-rate loans,
often have provisions which may limit changes in interest rates each time market
interest rates change and on a cumulative basis over the life of the loan.
Additionally, the actual prepayments and withdrawals experienced by 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.
Liquidity and Capital Resources
Liquidity. As vBank is the primary operating subsidiary of USABanc.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 Federal Home Loan Bank of
Pittsburgh 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 March 31, 1999, vBank had
$33.8 million in borrowing capacity under a collateralized line of credit with
the Federal Home Loan Bank , of which $30.0 million had been drawn upon as of
such date.
25
<PAGE>
At March 31, 1999, vBank had outstanding commitments, including unused
lines of credit, of $1.4 million and letters of credit of $649,000. Certificates
of deposit that are scheduled to mature within one year totaled $52.8 million at
March 31, 1999, and USABanc.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.
USABanc.com intends to continue to expend significant financial and
management resources in connection with its Internet banking operations;
consequently it expects to incur losses. Over the next twenty-four months,
USABanc.com expects to incur $15.0 million in marketing expenses and $3.5
million in connection with the development of its Internet banking operations.
USABanc.com believes that the net proceeds generated from a possible
public offering of its common stock, short and long-term borrowings and advances
from the Federal Home Loan Bank will be sufficient to fund its operating
activities, capital expenditures and other obligations for at least the next 12
months. While the execution of
USABanc.com's current business plan does not require raising additional capital
in the near term, it may seek to raise additional capital within such period to
fund additional growth in excess of that contemplated in its current business
plan. There can be no assurance that USABanc.com will be successful in raising
additional capital when required in sufficient amounts and on terms acceptable
to it. The failure to raise such capital could have a material adverse affect on
USABanc.com's business, results of operations and financial condition. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of USABanc.com's then-current shareholders would be
reduced.
Capital Resources. USABanc.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 USABanc.com's financial
condition and results of operations. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, USABanc.com and vBank must
meet specific capital guidelines that involve quantitative measures of
USABanc.com's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts and
classifications of USABanc.com and vBank are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. See "Regulation of USABanc.com and vBank."
Quantitative measures established by regulation to ensure capital
adequacy require USABanc.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 March 31, 1999,
USABanc.com and vBank exceeded all capital adequacy requirements to which they
were subject.
On March 9, 1999, USABanc.com issued $10.0 million of the Series A
Debentures to USA Capital Trust I, which in turn issued $10.0 million of the
Series A Capital Securities to investors. The securities are Tier I eligible
except, in accordance with Federal Reserve Board regulations, USABanc.com is
limited to recognizing $4.5 million as Tier I capital, such that no more than
25% percent of Tier I capital is comprised of the securities. USABanc.com has
invested $6.0 million of the proceeds in vBank.
At March 31, 1999 and December 31, 1998, vBank's actual and required
minimum capital ratios were as follows:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
(Dollars in Thousands) Actual Purposes Action Provisions
----------------------- --------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total Capital
(to Risk Weighted Assets)..... $20,233 13.9% $11,640 8.0% $14,550 10.0%
Tier I Capital
(to Risk Weighted Assets)..... 19,058 13.1 5,820 4.0 8,730 6.0
Leverage...................... 19,058 11.2 6,815 4.0 8,519 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>
26
<PAGE>
At March 31, 1999 and December 31, 1998, USABanc.com's actual and
required minimum capital ratios were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) Actual For Capital Adequacy Purposes
------------------------------------ ------------------------------------------
Amount Ratio Amount Ratio
--------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
As of March 31, 1999
Total Capital
(to Risk Weighted Assets)......... $24,797 16.6% $11,942 8.0%
Tier I Capital
(to Risk Weighted Assets)......... 18,163 12.2 5,971 4.0
Leverage........................... 18,163 10.3 7,027 4.0
(Dollars in Thousands) Actual For Capital Adequacy Purposes
------------------------------------ ------------------------------------------
Amount Ratio Amount Ratio
--------------- ---------------- ----------------- -----------------
<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 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 is currently performed
by Intrieve Incorporated, a third-party data processing vendor. We intend to
convert our data processing systems to EDS-Miser III during the third quarter
of 1999. Upon such conversion, the primary processing of our loan and deposit
transactions will be performed by EDS-Miser, 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 follows.
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 USABanc.com at risk if they are not Year 2000 compliant.
27
<PAGE>
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. Although responses from certain vendors have
not yet been received, this step is substantially complete and we expect it to
be completed by September 1999.
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. We have developed
scripts involving typical transactions to test the proper functioning of the
modified systems. Additionally, in contemplation of our anticipated conversion
from Intrieve to EDS-Miser III in the third quarter of 1999, we have 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 $120,000 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.
28
<PAGE>
BUSINESS
General
USABanc.com is a financial services company dedicated to becoming a
leading provider of financial products and services over the Internet. We
believe the financial services industry has the highest degree of functionality,
next to research, over the Internet. We will strive to provide the ultimate
application for Internet users through our Website, www.usabanc.com. To achieve
our objective, we have created a dynamic Internet banking platform that will
offer our customers a convenient, cost-efficient, secure 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. In
addition to offering traditional banking products and services, our site will
provide users portal applications such as live news feeds, timely search and
retrieval services, message boards, stock quotes, broker/dealer services and
links to other interesting sites on the Internet. Users can currently purchase
certificates of deposit and obtain stock quotes through our Website. We expect
www.usabanc.com to begin offering our Internet banking and brokerage products
and services in early August 1999.
We intend to capitalize on the increasing consumer use of the Internet
by launching and 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 will be 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 2002. 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:
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.
29
<PAGE>
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
Internet banking customers are active customers.
Demographic surveys indicate that Internet users represent an ideal
target market for Internet banking. Recent 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 USABanc.com Strategy
We intend to execute our strategy of becoming a leading provider of
financial products and services over the Internet by:
o Establishing the USABanc.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 expect the HTML Website to begin
offering our Internet banking and brokerage products and services
in early August 1999, and we expect the "Flash" Website to begin
offering products and services in September 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.usabanc.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 providing the
following benefits:
o Offering a broad selection of financial products and
services. We will provide the convenience of "one-stop
shopping" to consumers. We currently offer certificates of
deposit and, beginning in early August 1999, we will begin
to offer our Internet banking and brokerage products and
services, which we expect to include on-line
interest-earning checking accounts, money market accounts,
bill payment services, overdraft protection, ATM and debit
cards, mortgage loans, business equipment leases and
credit cards. USACapital, Inc., our wholly owned
subsidiary, is expected to offer 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 ever live auction site for Federal
Deposit Insurance Corporation- insured certificates of
deposit. Although most of our products will be offered by
us directly, some of our products, such as our credit
cards and mortgage loans, will be offered through our
alliance partners such as Low Cost Loans. We intend to
expand our product offerings further through strategic
partnerships with other companies to include various types
of consumer loans and insurance products. See "--Products
and Services."
30
<PAGE>
o Offering attractive interest rates and low or no fees. 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 extensive
marketing efforts. We are creating a national marketing
campaign designed to acquire new customers and promote the
USABanc.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 USABanc.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, affinity partnerships and customer referral
programs. We expect to spend $7.0 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 marketing efforts are intended 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 expect to 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 will be able to access account data and
information regarding products and services and conduct
banking activities 24-hours-a-day. Our customers can also
currently 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 intend to offer live
news feeds, timely search and retrieval services, message
boards, 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 Pursuing strategic alliances and affinity partnerships. We are
currently negotiating strategic marketing agreements with several
leading Internet entities. We intend to establish an affinity
marketing program which will allow various trade groups and other
organizations to brand and market USABanc.com's savings and
investment products. These programs will allow us to reach
targeted groups of consumers with the support of a virtual
endorsement of each parent community. Additionally, we plan to
implement several innovative customer acquisition and retention
programs designed for new and existing USABanc.com customers. Our
cost per new customer acquisition will initially be higher than
industry averages, but we expect these costs to decline as
awareness of the USABanc.com brand increases. We intend to
co-brand these programs with select USABanc.com partners. We
believe such co-branding will maximize customer conversion
effectiveness and ultimately reduce the cost per new customer
acquisition.
31
<PAGE>
o Intensive national marketing campaign. We intend to use a national
marketing campaign to expand our brand awareness. The campaign
will include Internet advertising through portals such as Yahoo!
and Excite, television campaigns on networks such as CNBC and
MSNBC, 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. We expect our costs of acquiring new customers to
decline as we gain market share and brand recognition. As a result
of our marketing efforts, we expect to incur losses in 1999 and
2000. As we increase our market share and become a leading
provider 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 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 USABanc.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 USABanc.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
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 $110.0 million at March 31, 1999.
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 at a discount. 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 will use
any gains on these dispositions for the execution of our Internet business
strategy. We intend to lease this building following the sale and to maintain
our retail and lending operations in such facility. See "--Description of
Properties."
Products and Services
Deposit Products and Services. We plan to offer a variety of deposit
products at attractive interest rates in order to build our customer base. We
will be able to offer attractive interest rates as a result of our low operating
costs. We also plan to attract customers by offering convenient services such as
free electronic bill payment, and ATM/debit cards. We expect our on-line deposit
products and services to include:
o Deposit Products. We intend to offer a tiered-rate checking
account, a statement savings account and several fixed term
certificates of deposit.
o Bill Payment Service. Through services expected to be provided by
EDS, we intend that customers will be able to pay their bills
on-line through electronic funds transfer or a written draft
prepared and sent to the creditor. We do not intend to charge a
fee for this service initially.
o Overdraft Protection. If a customer has both an interest checking
account and a money market account or a statement savings account,
we will automatically establish overdraft protection between those
accounts.
o ATM/Debit Cards. Each customer will automatically receive 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. Debit features of the card will carry the
Mastercard logo. vBank will reimburse ATM surcharges incurred at
facilities for up to six ATM transactions per monthly statement
cycle.
<PAGE>
Lending Programs. To generate fee income and provide a convenient
service to its customers, we plan to offer on-line loans and credit cards as
described below:
o Mortgage Loans. We intend for the Website to enable customers to
obtain interest rate quotes and apply for mortgage loans on-line.
We have an agreement with Low Cost Loans, whereby we will act as a
loan originator on behalf of Low Cost Loans.
o Credit Cards. We expect to offer our customers Visa and MasterCard
credit cards issued for no annual fee. We will be paid a fee for
each cardholder referred through our Website. Customers will be
able to apply for these credit cards on-line. We plan for the
cards to prominently display the "USABanc.com" logo with the Visa
or MasterCard emblem appearing in the lower right corner of the
card.
32
<PAGE>
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 plan to offer a full range of non-banking financial
services designed to attract and retain customers. These services are expected
to include securities brokerage through USACapital, Inc. and business equipment
leasing services through USACredit, Inc., each as described below:
o Securities Brokerage Services. We intend to provide our customers
with access to on-line brokerage services through USACapital,
Inc., our wholly owned broker-dealer subsidiary. We have a
fee-sharing agreement with USACapital. Customers will be able to
purchase securities without writing checks to their brokers, as
trading fees will be automatically deducted from their checking or
savings accounts with vBank. Investment proceeds will be
automatically deposited into the customer's deposit account with
vBank. We expect to provide customers 24-hour on-line access,
real-time quotes, low commissions and a professional brokerage
staff.
o Business Equipment Leasing. We have entered into an agreement with
USACredit, Inc., a wholly owned subsidiary of USABanc.com, that
allows our customers, many of whom are independent business owners
or managers, to lease small business equipment. 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.
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 and various other products and services.
Marketing and Strategic Alliances
Our marketing strategy is aimed at making USABanc.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 are
developing strategic alliances and partnerships with several top-performing and
customer-based Internet sites. These strategic relationships will be a key
factor in promoting and branding our core products and services. Additionally,
we expect to derive marketing benefits from media coverage that we generate
through our public relations campaign. We believe such coverage will increase
the general public's awareness of USABanc.com and simultaneously build our
customer base.
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.
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.
Operations
Customers will be able to access our Internet bank through any Internet
service provider by means of an acceptable secure Web browser. When customers
access USABanc.com's service menu, they will be 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 will complete the on-line enrollment form on our
Website, print the signature card, sign it and mail it to us. Customers will be
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 will 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 will provide added
customer convenience. Customers will be 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.
33
<PAGE>
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 expect to
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 will 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 will interface with
EDS' secure Internet servers and will verify customer passwords
and identification. Miser III will also operate 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 will provide operational support and hosting services for
our Internet banking and bill payment applications. Specifically,
EDS will provide a secure Website and software that performs
services relating to our infrastructure and other electronic
banking services. EDS will provide the interface necessary to link
our servers with those used by EDS-Miser and CheckFree. EDS will
also provide 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 will be encrypted so that sensitive information is
not transmitted over the Internet in a form that can be read or
easily deciphered. Encryption of Internet communications is
accomplished through the use of the Secure Sockets Layer
technology. This technology 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 will not be 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 will be 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 vBank server from the freely accessible Internet.
Furthermore, all messages sent or received between the EDS
application server and vBank server are carried on a proprietary
internal EDS network and employ EDS encryption to increase
security. Finally user passwords are additionally protected using
Atalla's hardware based encryption techniques. EDS 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 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, vBank server would reject the
message.
34
<PAGE>
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 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 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:
o misappropriation from the user of the user's account number or
password;
o penetration of the bank's server by an outside "hacker;" and
o fraud committed by an employee of the bank or one of its service
providers.
35
<PAGE>
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 discounted 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 March 31, 1999, our total loans
receivable, net amounted to $110.0 million, which represented 59.1% of our
$186.2 million in total assets at that date.
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 March 31, At December 31,
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate (1) (2).................. $110,197 98.9% $102,076 98.8% $54,262 95.1%
Commercial business (3).............. 1,071 1.0 986 1.0 1,091 1.9
-------- ------ -------- ------ ------- ------
Consumer (4)......................... 67 0.1 243 0.2 1,694 3.0
Total loans receivable............... $111,335 100.0% $103,305 100.0% $57,047 100.0%
-------- ------ -------- ------ ------- ------
Less
Loans in process.................. -- -- 260
Deferred loan fees................ (147) (116) 217
Allowance for loan losses......... (1,175) (1,051) 568
Net loans receivable................. $110,013 $102,138 $56,002
-------- ------ -------- ------ ------- ------
</TABLE>
(1) Consists of loans secured by single-family residential, multi-family
residential and commercial real estate.
(2) At March 31, 1999, over 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.
36
<PAGE>
Loan Maturity. The following table sets forth the maturity or period of
repricing of our loan portfolio at March 31, 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>
Beyond
Within 1 1-3 3-5 5-15 15
Year Years Years Years Years Total
---- ----- ----- ----- ===== -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate (1).................. $14,948 $13,524 $27,390 $21,091 $33,244 $110,197
======= ======= ======= ======= ======= ========
Commercial business (2).......... -- -- -- 1,071 -- 1,071
Consumer (3)..................... -- -- 67 -- -- 67
======= ======= ======= ======= ======= ========
Total loans receivable........ $14,948 $13,524 $27,457 $22,162 $33,244 $111,335
======= ======= ======= ======= ======= ========
</TABLE>
(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. 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 Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation, continue to be a potential
source of loans at a discount, 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.
37
<PAGE>
At March 31, 1999, our net discounted loan portfolio amounted to $57.6
million, or 31.7%, of our total assets. These loans had a face value of $62.1
million, reflecting a discount of $4.5 million or 7.3%. Management believes
that, at March 31, 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.
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.
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,
or "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 March 31, 1999, we held
in our portfolio approximately $25.8 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.
38
<PAGE>
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. We do not expect to emphasize construction lending in the near term
and at March 31, 1999, we had no 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 commercial
properties. As of March 31, 1999, over 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 $3.0 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 March 31, 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 March 31, 1999, $832,000 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 March 31, 1999, commercial business loans totaled $1.1
million, or 1.0%, 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 March 31, 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 March 31, 1999, consumer loans
totaled $67,000, or 0.1%, 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 March 31, 1999, none
of our consumer loans were classified as non-performing.
39
<PAGE>
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
March 31, 1999, we had $147,000 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.
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 March 31, 1999, our regulatory
limit on loans to one borrower was $3.0 million and our five largest loans or
groups of loans to one borrower, including related entities, aggregated $3.7
million, $3.2 million, $3.0 million, $2.2 million and $1.9 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 March 31, 1999. Although two of these extensions
of credit may appear to exceed our regulatory lending limit at March 31, 1999,
management has taken appropriate measures to conform such loans. The largest
extension of credit is currently conforming as a result of permanent principal
reductions exceeding $700,000 on the aggregate loan relationship. The $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, or 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 December 31, 1997 and $66,000 as of December
31, 1998. At March 31, 1999, OREO totaled $65,000 and consisted of one parcel of
commercial real estate.
40
<PAGE>
The following table sets forth information with respect to our
delinquent loans at March 31, 1999. At March 31, 1999, we had no delinquent
consumer loans.
<TABLE>
<CAPTION>
Balance Number
---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate(1):
Loans 30 to 89 days delinquent.................................................... $ 1,065 24
Loans 90 or more days delinquent.................................................. 1,156 24
Total.......................................................................... 2,221 48
----- --
Commercial real estate:
Loans 30 to 89 days delinquent.................................................... -- --
Loans 90 or more days delinquent.................................................. 832 3
Total.......................................................................... 832 3
----- --
Commercial business loans:
Loans 30 to 89 days delinquent.................................................... -- --
Loans 90 or more days delinquent.................................................. -- --
Total.......................................................................... -- --
----- --
Total delinquent loans............................................................... $3,053 51
----- --
</TABLE>
- -----------
(1) Consists solely of loans secured by single-family residential real estate.
The following table presents information on our non-performing assets
at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Non-accruing loans:
Residential real estate(1)............................. $1,156 $ 666 $ 258
Commercial real estate................................. 832 1,138(2) --
Commercial business.................................... -- -- 29
Consumer............................................... -- -- --
Total.............................................. 1,988 1,804 287
Accruing loans greater than 90 days delinquent............ -- 152 --
Total non-performing loans(3)...................... 1,988 1,956 287
Other real estate owned (4)............................... 65 66 --
Total non-performing assets............................... $2,053 $2,022 $ 287
====== ====== =======
Total non-performing loans, net of discount, as a
percentage of total loans, net of discount.............. 1.87% 1.89% 0.50%
Total non-performing assets, net of discount, as a 1.10%
percentage of total assets, net of discount............. 1.22% 0.32%
</TABLE>
- --------------
(1) Consists solely of loans secured by single-family residential real estate.
(2) The significant increase in non-performing commercial real estate loans
during the year ended December 31, 1998 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.
(3) All of our non-performing loans as of December 31, 1998 consisted of
acquired loans.
(4) Consists of one parcel of commercial real estate.
41
<PAGE>
The interest income that would have been recorded during the quarter
ended March 31, 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.
The following table sets forth the aggregate amount of our special
mention and classified assets at March 31, 1999:
(Dollars
in Thousands)
Special mention......................................... $ 368
Substandard............................................. 1,664
Doubtful................................................ 393
Loss.................................................... --
Total special mention and classified assets............. 2,425
Other real estate owned................................. 65
Total special mention and classified assets, including
other real estate owned............................ $ 2,490
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
Federal Deposit Insurance Corporation'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 Federal Deposit Insurance Corporation regulations,
subject to certain limitations.
42
<PAGE>
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 Federal Deposit Insurance Corporation as part of
their examination process, which may result in the establishment of an
additional allowance based upon the judgment of the applicable regulator.
The following table sets forth activity in our allowance for loan
losses at or for the specified periods.
<TABLE>
<CAPTION>
At or for the Three Months At or for the Year Ended
Ended March 31, December 31,
----------------------------------------------------------------------
1999 1998 1998 1997
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total loans outstanding................................. $111,335 $ 59,345 $103,305 $57,047
Average loans outstanding............................... 106,076 57,674 78,797 26,421
Allowance balance (at beginning of period).............. 1,051 568 568 182
Provision for loan losses............................... 100 35 510 415
Charge-offs (recoveries), net of recoveries............. (24) (8) 27 29
-------- -------- -------- -------
Allowance balance (at end of period).................... $ 1,175 $ 595 $ 1,051 $ 568
======== ======== ======== =======
Allowance for loan losses as a percent of total loans,
net of discount, at end of period.................... 1.07% 1.00% 1.02% 1.01%
Allowance for loan losses as a percent of total non-
performing loans, net of discount, at end of period.. 58.75% 294.55% 53.72% 197.96%
======== ======== ======== =======
Allowance for loan losses and purchase discount as a
percentage of total loans............................ 5.20% 8.35% 5.85% 8.89%
======== ======== ======== =======
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 March 31, 1999 At December 31, 1998 At December 31, 1997
----------------------------------- -------------------------------- ---------------------------------
Percentage of Percentage of Percentage of Percentage of Percentage of Percentage of
Allowance Loans in Each Allowance Loans in Each Allowance Loans in Each
to Total Category to to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- ----------- ------ --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance of allowance for
loan losses at end of
period applicable to:
Real estate............. $1,158 98.6% 98.9% $1,037 98.8% 98.8% $528 93.0% 95.1%
Commercial business..... 11 0.9 1.0 11 1.0 1.0 30 5.3 1.9
Consumer................ 6 0.5 0.1 3 0.2 0.2 10 1.7 3.0
------ ------ ------- ------ ------ ------ ---- ------ ------
Total ............... $1,175 100.0% 100.0% $1,051 100.0% 100.0% $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 March 31, 1999, our securities portfolio equaled $64.9 million, or
34.9% 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 March
31, 1999, our trust preferred securities amounted to $25.8 million,
mortgage-backed securities amounted to $15.6 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 $5.9 million, financial institution debt obligations
totaled $3.1 million, corporate and municipal obligations amounted to $12.6
million, and U.S. government agency securities amounted to $1.9 million.
43
<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 USABanc.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 March 31, 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 March 31, 1999 $1.3
million, or 11.5%, of our total mortgage-backed securities portfolio of $15.6
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.
44
<PAGE>
The following tables present the book values and estimated market
values at March 31, 1999, December 31, 1998 and December 31, 1997, respectively,
for each major category of our investment securities.
<TABLE>
<CAPTION>
March 31, 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...... $ 10,529 $ -- $ (65) $10,464
Corporate obligations........... 12,829 52 (295) 12,586
Trust preferred securities...... 25,393 72 (737) 24,728
Other securities................ 2,503 58 (133) 2,428
-------- ---- ------- -------
Total available-for-sale..... $ 51,254 $182 $(1,230) $50,206
======== ==== ======= =======
Held-to-Maturity:
U.S. Government agency
securities................... $ 1,964 $ -- $ (27) $ 1,937
Mortgage-backed securities..... 5,045 61 (16) 5,090
Municipal securities........... 3,167 45 -- 3,212
Trust preferred securities..... 1,113 41 (27) 1,127
Other securities............... 3,433 -- (134) 3,299
-------- ---- ------- -------
Total held-to-maturity....... $ 14,722 $147 $ (204) $14,665
======== ==== ======= =======
December 31, 1998
---------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- --------- ----------
(Dollars in Thousands)
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>
45
<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)..................... 6,737 150 (11) 6,876
-------- ----- ----- --------
Total available-for-sale............ $ 7,980 $166 $ (11) $ 8,135
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, trust preferred securities available for sale totaled
$7.3 million with the remaining $325,000 being equity securities of the
Federal Home Loan Bank. At December 31, 1997, trust preferred securities
held to maturity totaled $500,000. The remaining $1.9 million of other
securities in the held to maturity category 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 March 31, 1999.
<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 after one year through five years $ 3,193 $ 3,103 10.78% $ 2,010 $ 1,911 9.45%
Due after five years through ten years 9,636 9,483 11.95 1,423 1,388 8.60
Due after ten years............. 25,393 24,728 8.87 6,244 6,276 6.49
Mortgage-backed securities...... 10,529 10,464 6.78 5,045 5,090 6.45
Equity securities............... 2,503 2,428 -- -- -- --
------- ------- ----- ------- ------- ----
$51,254 $50,206 $14,722 $14,665
======= ======= ===== ======= ======= ====
</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.
46
<PAGE>
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 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 450% from $20.8 million at December 31,
1995 to $125.8 million at March 31,1999. The largest area of increase occurred
in certificates of deposit as we continued to rely primarily on non-retail
certificates of deposits. At March 31, 1999, we had $109.1 million of
certificates of deposit, $38.1 million of which were in excess of $100,000, of
which $13.7 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 and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
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>
Three Months Ended
March 31, Years Ended December 31,
1999 1998 1997
-------------------------------- ---------------------------------- -------------------------------
Percent of Weighted Percent of Weighted Percent of Weighted
Total Average Total Average Total Average
Balance Deposits Yield Balance Deposits Yield Balance Deposits Yield
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand $ 1,329 1.06% -- $ 1,439 1.26% -- $ 257 0.37% --
NOW accounts............... 908 0.72 2.40% 846 0.73 2.31% 688 0.98 2.27%
Passbooks.................. 12,367 9.83 4.43 5,281 4.62 4.40 2,019 2.86 2.49
Money market deposit accounts 2,109 1.68 4.75 2,345 2.05 3.66 4,802 6.81 3.74
Certificates of deposit 109,052 86.71 5.79 104,476 91.34 5.73 62,708 88.98 6.06
-------- ------ ---- -------- ------ ---- ------- ------ ----
Total deposits............. $125,765 100.00 5.55% $114,387 100.00% 5.53 $70,474 100.00% 5.72%
======== ====== ==== ======== ====== ==== ======= ====== ====
</TABLE>
At March 31, 1999, our certificates of deposit had the following stated
maturities.
Amount
Maturity Period (In Thousands)
Within 12 months................. $52,820
Within 13 to 36 months .......... 41,937
Beyond 36 months................. 14,295
Total............................ $109,052
47
<PAGE>
The following table presents, by various rate categories, the amount of
certificates of deposit outstanding at March 31, 1999.
Certificate Rates: Outstanding Amount
(In Thousands)
0 to 3.99%................... $ 1,420
4.00% to 5.99%............... 68,046
========
6.00% to 7.99%............... 39,589
--------
Total........................ $109,052
========
The following table summarizes the maturity composition of certificates
of deposit with balances of $100,000 or more at March 31, 1999.
March 31, 1999
Balance %
------- -------
(Dollars in Thousands)
Three months or less...................... $ 2,489 6.5%
Over three months to six months........... 1,675 4.4
Over six months to twelve months.......... 9,554 25.1
Over twelve months........................ 24,409 64.0
------- -----
$38,127 100.0%
======= =====
Borrowings. If the need arises, we may rely upon advances from the
Federal Home Loan Bank 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 Federal Home Loan Bank typically are
collateralized by our stock in the Federal Home Loan Bank and a portion of our
first mortgage loans. At March 31, 1999, we had $33.8 million in borrowing
capacity under a collateralized line of credit with the Federal Home Loan Bank ,
of which $30.0 million had been drawn upon as of such date.
The Federal Home Loan Bank 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 Federal Home Loan
Bank 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
Federal Home Loan Bank's assessment of the institution's creditworthiness.
At March 31, 1999, we had five callable fixed-rate advances for $30.0
million from the Federal Home Loan Bank . 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 March 31, 1999.
48
<PAGE>
The following table sets forth certain information regarding our
borrowed funds, which consist solely of the advances from the Federal Home Loan
Bank, at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
At or for the Three At or for the
Months Ended March 31, Year Ended December 31,
====================== =======================
1999 1998 1998 1997
------- ------ ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Bank 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>
USACapital, Inc.
USACapital, Inc., a registered broker-dealer with the National
Association of Securities Dealers, is a Pennsylvania corporation wholly owned by
USABanc.com. A subsidiary of USABanc.com acquired USACapital in April 1997 for a
purchase price of $75,000, paid in shares of USABanc.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, we expect USACapital to offer on-line trading, real time quotes, low
commissions and direct access to funds held on deposit with vBank in early
August 1999. During the year ended December 31, 1998, USACapital increased its
staff from two persons to 8 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 $106,000 for the quarter ended March
31, 1999 and $227,133 from the time of our acquisition of USACapital in April
1997 through December 31, 1998. Although we do not expect commission charges and
fees to meet costs, we expect the operations of USACapital to be consistent with
our goal of 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 March 31, 1999 totaling
approximately $98,000. 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 March 31, 1999, we had a total of 47 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 USABanc.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.
49
<PAGE>
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 Plymouth
Meeting, 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.
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 March 31, 1999, our branches had
the following deposits: Locust Street, $62.0 million; Norristown, $56.8 million;
and eBank, $7.0 million. The Wynnewood Branch had no deposits at March 31, 1999,
as the branch opened for business on April 19, 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
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.
50
<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 USABanc.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
Jeffrey A. D'Ambrosio ... Director 44 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 Operating Officer of 34 1998
vBank
Craig J. Scher............. Senior Vice President and Director of Lending/Credit of vBank 35 1998
</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 Federal
Deposit Insurance Corporation 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 USABanc.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.
Jeffrey A. D'Ambrosio has been the owner and is Chief Executive Officer
of D'Ambrosio Dodge in Downingtown, Pennsylvania since 1985. Mr. D'Ambrosio
presently owns and manages 11 auto franchises in Chester County, Pennsylvania.
Mr. D'Ambrosio is a member of the Dodge Dealers National Advertising Council and
serves on the Pennsylvania Board of Vehicle Manufacturers, Dealers and
Salespersons.
George C. Fogwell, III is an active securities investor, who is also a
senior international Captain for Delta
51
<PAGE>
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 USABanc.com, USACapital and vBank
since their inception.
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 USABanc.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 USABanc.com receive a fee of $400 for each meeting of the
board of directors attended. Directors of USABanc.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 USABanc.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.
<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 USABanc.com
and vBank with respect to the Chief Executive Officer, the Chief Financial
Officer and vBank's Chief Operating Officer and Director of Lending/Senior Vice
President. USABanc.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
Fiscal Annual No. of Securities All Other
Name and Principal Position Year Salary Underlying Options Compensation
--------------------------- ---- ------ ------------------ ------------
<S> <C> <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>
52
<PAGE>
- -------------
(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 USABanc.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 and Chief Financial Officer 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.
The following table sets forth certain information concerning the
exercise of options to purchase common stock of USABanc.com in the fiscal year
ended December 31, 1998 and the unexercised options to purchase common stock of
USABanc.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 $4.50.
53
<PAGE>
Aggregated Option Exercises in Fiscal Year
1998 and December 31, 1998 Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Shares December 31, 1998 (#) at December 31, 1998 ($)
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
On November 30, 1995, we entered into a five-year employment agreement
with Mr. Tepper pursuant to which Mr. Tepper received an annual base salary of
$120,000 and may receive an annual cash bonus and grant of stock options as
determined by the board of directors. Mr. Tepper has not received any cash
bonuses. Pursuant to the agreement, Mr. Tepper was granted options to purchase
100,000 shares of common stock at an exercise price of $10.00 per share. All of
the options are exercisable and expire in November 2005. As a result of the
stock dividends declared and issued in July 1997 , August 1998 and June 1999,
Mr. Tepper's options were adjusted to 353,780 and the exercise price was
adjusted to $2.83 per share. The agreement provides that in the event Mr. Tepper
is discharged other than for cause, as defined in the employment agreement,
disability or incapacity, or Mr. Tepper terminates his employment with us upon
the occurrence of certain specified events or occurrences, including a change of
control of USABanc.com, as defined in the employment agreement, Mr. Tepper will
receive a severance payment equal to his accrued but unpaid base compensation
and incentive compensation plus a lump sum equal to no more than 2.99 times the
average of his total annual compensation over the previous five years. On
February 13, 1998, we extended Mr. Tepper's agreement through February 12, 2001,
at an annual base salary of $245,000 and an annual cash bonus and grants of
stock options as may be determined by the board of directors. Pursuant to the
agreement, Mr. Tepper was granted options to purchase 70,756 shares of common
stock at $3.76 per share, and options to purchase 35,374 shares of common stock
at $5.66 per share. Of the 70,756 options, 31,840 vested on August 13, 1998,
31,840 vested on February 13, 1999, and 7,076 will vest on February 13, 2000. Of
the 35,374 options granted, 13,796 will vest on February 13, 2000, 17,688 will
vest on February 13, 2001 and 3,890 will vest on February 13, 2002.
On November 30, 1998, USABanc.com and vBank, entered into a three-year
employment agreement with Mr. Hartline pursuant to which Mr. Hartline serves as
USABanc.com's Chief Financial Officer and Chief Operating Officer of vBank. Mr.
Hartline receives an annual base salary of $160,000 and will receive incentive
compensation in the amount of $40,000 if we earn in excess of $0.50 per share
(as adjusted for stock splits, stock dividends, etc.) in any fiscal year.
Pursuant to the agreement, Mr. Hartline was granted or will be granted options
to purchase 40,000 shares of common stock on November 30 of each of 1998, 1999
and 2000, for a total of 120,000 options. The options vest over a three year
period using the following vesting schedule: 20,000 in year one, 10,000 in year
two and 10,000 in year three. The exercise price of the options will be the last
reported sale price on the Nasdaq SmallCap Market of our common stock for the
business day preceding the date of grant. 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. In the event of a change
in control, Mr. Hartline shall 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.
On November 30, 1998, vBank 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 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 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.
54
<PAGE>
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 June 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) 2.7
Clarence L. Rader .................................. 35,378(2) *
Kenneth L. Tepper .................................. 542,644(5) 12.3
Jeffrey A. D'Ambrosio ............................ 85,734(2) 2.1
George C. Fogwell, III ............................. 89,506(2)(6) 2.2
John A. Gambone .................................... 112,802(2)(7) 2.8
Carol J. Kauffman .................................. 122,674(8)(9) 3.0
Wayne O. Leevy ..................................... 23,690(2) *
Brian M. Hartline................................... 80,000 2.0
Craig J. Scher...................................... 50,684 1.3
Directors and Executive Officers
(11 persons) ................................... 1,386,598(10) 29.4%
========= ====
</TABLE>
- ------------------
* Less than one percent (1%)
(1) Based upon 4,014,784 shares of common stock outstanding as of June 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 June 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
June 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
June 1, 1999.
55
<PAGE>
(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 June 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.
(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 June
1, 1999 held by Mrs. Kauffman's husband and options to purchase 2,660
shares of common stock within 60 days of June 1, 1999.
(9) Includes options to purchase 13,300 shares of common stock within 60 days
of June 1, 1999.
(10) Includes 694,294 options exercisable within 60 days of June 1, 1999; does
not include 316,004 options that are not exercisable within 60 days of June
1, 1999.
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:
o in the ordinary course of business;
o on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other persons; and
o without involving more than the normal risk of collectability
or present other unfavorable features.
As of March 31, 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 March 31, 1999, two
companies in which Mr. Gambone owns a minority interest had outstanding
indebtedness totaling $409,263. Of this amount, $267,791 is secured by real
estate and $141,472 is secured by titles to motor vehicles, with all loans
personally guaranteed by Mr. Gambone. Mr. Tepper had outstanding loan
commitments totaling $693,920, of which $643,920 is secured by a residential
mortgage and $50,000 is an unsecured line of credit. Mr. Shenkman has
outstanding two loan commitments totaling $1.2 million. Both loans are secured
by marketable securities and a second mortgage on residential real estate.
Additionally, Mr. Laughlin had outstanding loan commitments totaling $188,556,
of which $138,556 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 March 31, 1999 equaled 18.1% of
stockholder's equity.
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 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
56
<PAGE>
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, Royal BancShares of Pennsylvania, Inc. purchased
$3,000,000 of the Series A Capital Securities. Daniel M. Tabas, the Chairman of
the Board of Royal BancShares, is the father-in-law of Mr. Tepper, our
President, Chief Executive Officer and director.
REGULATION OF USABANC.COM AND VBANK
USABanc.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 USABanc.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 USABanc.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 USABanc.com or vBank, is qualified in its
entirety by reference to the particular statutory or regulatory provisions.
USABanc.com
General. We are a registered bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended, and we are subject to regulation and
supervision by the Board of Governors of the Federal Reserve System and the
Pennsylvania Department of Banking. We are required to file annually a report of
our operations with, and are 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, USABanc.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:
o acquiring substantially all of the assets of any bank;
o 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
o 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
57
<PAGE>
full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
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 USABanc.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 USABanc.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 USABanc.com's 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-weighing 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 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.
58
<PAGE>
As of March 31, 1999, we were 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 , we
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 Federal Deposit
Insurance Corporation. 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 Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation or the Congress could have a material
adverse impact on us, vBank and their operations.
Federal Deposit Insurance Corporation Assessments. The deposits of
vBank are insured by Bank Insurance Fund of the Federal Deposit Insurance
Corporation, up to applicable limits, and are subject to deposit premium
assessments by vBank Insurance Fund. Under the Federal Deposit Insurance
Corporation'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 Federal Deposit Insurance Corporation 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 Federal Deposit Insurance
Corporation. The Federal Deposit Insurance Corporation 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 Federal
Deposit Insurance Corporation. We are aware of no circumstances which would
result in termination of vBank's deposit insurance.
Capital Requirements. The Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation'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 ratio for such other
banks to 4% to 5% or more. Under the Federal Deposit Insurance Corporation's
regulation, highest-rated banks are those that the Federal Deposit Insurance
Corporation 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 Federal Deposit Insurance Corporation also requires that banks
meet a risk-based capital standard. Risk-based capital standard for banks
requires the maintenance of total capital, 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
59
<PAGE>
assets, all assets, plus certain off balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on risks the Federal Deposit Insurance
Corporation 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 March 31, 1999, vBank met each of its capital
requirements.
In August 1995, the Federal Deposit Insurance Corporation, 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 Federal Deposit Insurance Corporation. As of March 31, 1999, vBank exceeded
the Pennsylvania Department of Banking's capital guidelines.
Prompt Corrective Action. In addition to the capital adequacy
guidelines, the Federal Deposit Insurance Corporation 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.
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%.
60
<PAGE>
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 Federal Deposit Insurance
Corporation-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 Federal Deposit Insurance Corporation
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:
o acquiring or retaining a majority interest in a subsidiary;
o 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;
o 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
o 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 Federal Deposit Insurance Corporation
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.
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 Federal
Deposit Insurance Corporation in lieu of the Pennsylvania Department of
Banking's examination, the present practice is for the Pennsylvania Department
61
<PAGE>
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 Federal Deposit Insurance
Corporation. 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 us) 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, we are subject to restrictions on extensions of credit to
executive officers, directors, certain principal stockholders, and their related
interests. Such extensions of credit:
o 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
o 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 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:
o the federal Truth-In-Lending Act governing disclosures of
credit terms to consumer borrowers;
o 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;
62
<PAGE>
o the Equal Credit Opportunity Act prohibiting discrimination on
the basis of race, creed or other prohibited factors in
extending credit;
o the Fair Credit Reporting Act of 1978 governing the use and
provision of information to credit reporting agencies;
o the Fair Debt Collection Act governing the manner in which
consumer debts may be collected by collection agencies; and
o 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:
o 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
o 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 Federal Deposit Insurance Corporation 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.
USA CAPITAL TRUST I
USA Capital Trust I is a statutory business trust created under
Delaware law. It exists for the exclusive purposes of:
o issuing and selling the Capital Securities and common
securities, which represent undivided beneficial interests in
the assets of USA Capital Trust I;
o investing the gross proceeds from the sale of the Capital
Securities and common securities in the Debentures; and
o engaging in only those other activities necessary, advisable or
incidental to such activities.
Accordingly, the Debentures are the sole assets of USA Capital Trust I and
payments under the Debentures are the sole revenues of USA Capital Trust I. All
of the common securities are owned directly by USABanc.com. The common
securities rank pari passu, and payments will be made thereon pro rata, with the
Capital Securities, except that upon the occurrence and during the continuance
of an event of default, the rights of USABanc.com as holder of the common
securities to payments in respect of distributions and payments upon
liquidation, redemption or otherwise will be subordinated and rank junior to the
rights of the holders of the Capital Securities. See "Description of Series B
Securities--Description of Capital Securities--Subordination of Common
Securities." USABanc.com acquired the common securities in a liquidation amount
equal to 3% of the total capital of USA Capital Trust I. USA Capital Trust I has
63
<PAGE>
a term of 31 years, but may terminate earlier as provided in its Amended and
Restated Declaration of Trust by and among USABanc.com, Wilmington Trust Company
and the individual trustees. USA Capital Trust I's business and affairs are
conducted by the issuer trustees appointed by USABanc.com as the direct holder
of the common securities. The issuer trustees are Wilmington Trust Company as
the property trustee and the Delaware trustee, and the administrative trustees.
Wilmington Trust Company also acts as indenture trustee under the Guarantee and
the Indenture. See "Description of Series B Securities-- Description of
Guarantee" and "--Description of Debentures." The holder of the common
securities or, if an event of default under the Declaration of Trust has
occurred and is continuing, the holders of not less than a majority in
liquidation amount of the Capital Securities, are entitled to appoint, remove or
replace the property trustee and/or the Delaware trustee. In no event will the
holders of the Capital Securities have the right to vote to appoint, remove or
replace the administrative trustees; such voting rights are vested exclusively
in the holder of the common securities. The duties and obligations of each
issuer trustee are governed by the Declaration of Trust. USABanc.com will pay
directly all fees, expenses, debts and obligations, other than the Capital
Securities and common securities, related to the exchange offer, except as
provided herein, and will pay, directly or indirectly, all ongoing costs,
expenses and liabilities of USA Capital Trust I. The principal executive office
of USA Capital Trust I is c/o USABanc.com, Inc., 1535 Locust Street,
Philadelphia, Pennsylvania 19102.
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
In connection with the sale of the Series A Capital Securities,
USABanc.com and USA Capital Trust I entered into the Registration Rights
Agreement with the initial purchasers, pursuant to which USABanc.com and USA
Capital Trust I agreed to file and to use their reasonable best efforts to cause
to be declared effective by the Securities and Exchange Commission a
registration statement with respect to the exchange of the Series A Capital
Securities for capital securities with terms identical in all material respects
to the terms of the Series A Capital Securities. A copy of the Registration
Rights Agreement has been filed as an Exhibit to the Registration Statement of
which this prospectus is a part.
The exchange offer is being made to satisfy the contractual
obligations of USABanc.com and USA Capital Trust I under the Registration Rights
Agreement. The form and terms of the Series B Capital Securities are the same as
the form and terms of the Series A Capital Securities except that the Series B
Capital Securities have been registered under the Securities Act and therefore
will not be subject to certain restrictions on transfer under federal and state
securities laws and will not provide for any increase in the distribution rate
thereon. In that regard, the Series A Capital Securities provide, among
other things, that, if a registration statement relating to the exchange offer
has not been filed by August 6, 1999 and declared effective by September 6,
1999, the distribution rate borne by the Series A Capital Securities will
increase by 0.25% per annum until the exchange offer is consummated. Upon
consummation of the exchange offer, holders of Series A Capital Securities will
not be entitled to any increase in the distribution rate thereon or any further
registration rights under the Registration Rights Agreement. See "Description of
Series A Capital Securities."
The exchange offer is not being made to, nor will USA Capital Trust I
accept tenders for exchange from, holders of Series A Capital Securities in any
jurisdiction in which the exchange offer or the acceptance thereof would not be
in compliance with the securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect
to the exchange offer means any person in whose name the Series A Capital
Securities are registered on the books of USA Capital Trust I or any other
person who has obtained a properly completed bond power from the registered
holder, or any participant in the DTC system whose name appears on a security
position listing as the holder of such Series A Capital Securities and who
desires to deliver such Series A Capital Securities by book-entry transfer at
DTC. In addition, the term "person" shall refer to a natural person or any
legally existing entity.
Pursuant to the exchange offer, USABanc.com will exchange as soon as
practicable after the date hereof, the Series A Guarantee for the Series B
Guarantee and the Series A Debentures, in an amount corresponding to the Series
A Capital Securities accepted for exchange, for a like aggregate principal
amount of the Series B Debentures. The Series B Guarantee and the Series B
Debentures have been registered under the Securities Act.
Terms of the Exchange Offer
USA Capital Trust I hereby offers, upon the terms and subject to the
conditions set forth in this prospectus and in the accompanying letter of
transmittal, to exchange up to $10,000,000 aggregate liquidation amount of
Series B Capital Securities for a like aggregate liquidation amount of Series A
Capital Securities properly tendered on or prior to the expiration date and not
properly withdrawn in accordance with the procedures described below. USA
64
<PAGE>
Capital Trust I will issue, promptly after the expiration date, an aggregate
liquidation amount of up to $10,000,000 of Series B Capital Securities in
exchange for a like aggregate liquidation amount of outstanding Series A Capital
Securities tendered and accepted in connection with the exchange offer. Holders
may tender their Series A Capital Securities in whole or in part in a
liquidation amount of not less than $100,000 or any integral multiple of $1,000
liquidation amount in excess thereof; provided, however, that if any Series A
Capital Securities are tendered in exchange for part, the untendered liquidation
amount must be $100,000 or any integral multiple of $1,000 in excess thereof.
The exchange offer is not conditioned upon any minimum liquidation
amount of Series A Capital Securities being tendered. As of the date of this
prospectus, $10,000,000 aggregate liquidation amount of the Series A Capital
Securities is outstanding.
Holders of Series A Capital Securities do not have any appraisal or
dissenters' rights in connection with the exchange offer. Series A Capital
Securities which are not tendered for or are tendered but not accepted in
connection with the exchange offer will remain outstanding and be entitled to
the benefits of the Declaration of Trust , but will not be entitled to any
further registration rights under the Registration Rights Agreement. See
"Description of Series A Securities."
If any tendered Series A Capital Securities are not accepted for
exchange because of an invalid tender, the occurrence of certain other events
set forth herein or otherwise, certificates for any such unaccepted Series A
Capital Securities will be returned, without expense, to the tendering holder
thereof promptly after the expiration date.
Holders who tender Series A Capital Securities in connection with the
exchange offer will not be required to pay brokerage commissions or fees or,
subject to the instructions in the letter of transmittal, transfer taxes with
respect to the exchange of Series A Capital Securities in connection with the
exchange offer. USABanc.com will pay all charges and expenses, other than
certain applicable taxes described below, in connection with the exchange offer.
See "--Fees and Expenses."
Neither the Board of Directors of USABanc.com nor any Trustee of USA
Capital Trust I makes any recommendation to holders of Series A Capital
Securities as to whether to tender or refrain from tendering all or any portion
of their Series A Capital Securities pursuant to the exchange offer. In
addition, no one has been authorized to make any such recommendation. Holders of
Series A Capital Securities must make their own decision whether to tender
pursuant to the exchange offer and, if so, the aggregate amount of Series A
Capital Securities to tender based on such holders own financial position and
requirements.
Expiration Date; Extensions; Amendments
The expiration date is 5:00 p.m., New York City time, on ________ [ ],
1999, unless the exchange offer is extended by USABanc.com or USA Capital Trust
I, in which case the expiration date shall be the latest date and time to which
the exchange offer is extended.
USABanc.com and USA Capital Trust I expressly reserve the right in
their sole and absolute discretion, subject to applicable law, at any time and
from time to time, to:
o delay the acceptance of the Series A Capital Securities for
exchange;
o terminate the exchange offer, whether or not any Series A
Capital Securities have been accepted for exchange, if
USABanc.com and USA Capital Trust I determine that any of the
events or conditions referred to under "--Conditions to the
Exchange Offer" have occurred or exist;
o extend the expiration date of the exchange offer and retain all
Series A Capital Securities tendered pursuant to the exchange
offer, subject, however, to the right of holders of Series A
Capital Securities to withdraw their tendered Series A Capital
Securities as described under "--Withdrawal Rights;" and
o waive any condition or otherwise amend the terms of the
exchange offer in any respect.
If the exchange offer is amended in a manner determined by USABanc.com and USA
Capital Trust I to constitute a material change, or if USABanc.com and USA
Capital Trust I waive a material condition of the exchange offer, USABanc.com
and USA Capital Trust I will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders of the
Series A Capital Securities, and USABanc.com and USA Capital Trust I will extend
the exchange offer to the extent required by Rule 14e-1 under the Exchange Act.
65
<PAGE>
Any such delay in acceptance, extension, termination or amendment will
be followed promptly by oral or written notice thereof to the exchange agent and
by making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date. Without limiting
the manner in which USABanc.com and USA Capital Trust I may choose to make any
public announcement and subject to applicable law, USABanc.com and USA Capital
Trust I shall have no obligation to publish, advertise or otherwise communicate
any such public announcement other than by issuing a release to an appropriate
news agency.
Acceptance for Exchange and Issuance of Series B Capital Securities
Upon the terms and subject to the conditions of the exchange offer,
USA Capital Trust I will exchange, and will issue to the exchange agent, Series
B Capital Securities for Series A Capital Securities validly tendered and not
withdrawn promptly after the expiration date.
In all cases, delivery of Series B Capital Securities in exchange for
Series A Capital Securities tendered and accepted for exchange pursuant to the
exchange offer will be made only after timely receipt by the exchange agent of:
o Series A Capital Securities or a book-entry confirmation of a
book-entry transfer of Series A Capital Securities into the
exchange agent's account at DTC, including an Agent's Message
if the tendering holder has not delivered a letter of
transmittal;
o the letter of transmittal, or a facsimile , properly completed
and duly executed, with any required signature guarantees, or,
in the case of a book-entry transfer, an Agent's Message, and
o any other documents required by the letter of transmittal.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Series A Capital Securities into the exchange agent's
account at DTC. The term "Agent's Message" means a message, transmitted by DTC
to and received by the exchange agent and forming a part of a book-entry
confirmation, which states that DTC has received an express acknowledgment from
the tendering participant, which acknowledgment states that such participant has
received and agrees to be bound by the letter of transmittal and that USA
Capital Trust I and USABanc.com may enforce such letter of transmittal against
such participant.
Subject to the terms and conditions of the exchange offer, USABanc.com
and USA Capital Trust I will be deemed to have accepted for exchange, and
thereby exchanged, Series A Capital Securities validly tendered and not
withdrawn as, if and when USA Capital Trust I gives oral or written notice to
the exchange agent of USABanc.com's and USA Capital Trust I's acceptance of such
Series A Capital Securities for exchange pursuant to the exchange offer. The
exchange agent will act as agent for USA Capital Trust I for the purpose of
receiving tenders of Series A Capital Securities, letters of transmittal and
related documents, and as agent for tendering holders for the purpose of
receiving Series A Capital Securities, letters of transmittal and related
documents and transmitting Series B Capital Securities to validly tendering
holders. Such exchange will be made promptly after the expiration date. If, for
any reason whatsoever, acceptance for exchange or the exchange of any Series A
Capital Securities tendered pursuant to the exchange offer is delayed, whether
before or after USA Capital Trust I's acceptance for exchange of Series A
Capital Securities, or USABanc.com and USA Capital Trust I extend the exchange
offer or are unable to accept for exchange or exchange Series A Capital
Securities tendered pursuant to the exchange offer, then, without prejudice to
USABanc.com's and USA Capital Trust I's rights set forth herein, the exchange
agent may, nevertheless, on behalf of USABanc.com and USA Capital Trust I and
subject to Rule 14e-1(c) under the Exchange Act, retain tendered Series A
Capital Securities . Such Series A Capital Securities may not be withdrawn
except to the extent tendering holders are entitled to withdrawal rights as
described under "--Withdrawal Rights."
Pursuant to the letter of transmittal or Agent's Message in lieu
thereof, a holder of Series A Capital Securities will warrant and agree in the
letter of transmittal that it has full power and authority to tender, exchange,
sell, assign and transfer Series A Capital Securities, that USA Capital Trust I
will acquire good, marketable and unencumbered title to the tendered Series A
Capital Securities, free and clear of all liens, restrictions, charges and
encumbrances, and the Series A Capital Securities tendered for exchange are not
subject to any adverse claims or proxies. The holder also will warrant and agree
that it will, upon request, execute and deliver any additional documents deemed
by USABanc.com, USA Capital Trust I or the exchange agent to be necessary or
desirable to complete the exchange, sale, assignment and transfer of the Series
A Capital Securities tendered pursuant to the exchange offer.
66
<PAGE>
Procedures for Tendering Series A Capital Securities
Valid Tender. Except as set forth below, in order for Series A Capital
Securities to be validly tendered pursuant to the exchange offer, a properly
completed and duly executed letter of transmittal, or facsimile of such letter,
with any required signature guarantees, or, in the case of a book-entry
transfer, an Agent's Message and any other required documents, must be received
by the exchange agent at one of its addresses set forth under "--Exchange
Agent," and, in addition, one of the following:
o tendered Series A Capital Securities must be received by the
exchange agent;
o such Series A Capital Securities must be tendered pursuant to
the procedures for book-entry transfer set forth below and a
book-entry confirmation, including an Agent's Message if the
tendering holder has not delivered a letter of transmittal,
must be received by the exchange agent, in each case on or
prior to the expiration date; or
o the guaranteed delivery procedures set forth below must be
complied with.
If less than all of the Series A Capital Securities are tendered, a
tendering holder should fill in the amount of Series A Capital Securities being
tendered in the appropriate box on the letter of transmittal, or so indicate in
an Agent's Message in lieu of the letter of transmittal . The untendered
liquidation amount must be $100,000 or any integral multiple of $1,000 in excess
thereof. The entire amount of Series A Capital Securities delivered to the
exchange agent will be deemed to have been tendered unless otherwise indicated.
The method of delivery of certificates, the letter of transmittal and
all other required documents is at the option and sole risk of the tendering
holder, and delivery will be deemed made only when actually received by the
exchange agent. If delivery is by mail, registered mail, return-receipt
requested, properly insured, or an overnight delivery service is recommended. In
all cases, sufficient time should be allowed to ensure a timely delivery.
Book-Entry Transfer. The exchange agent will establish an account with
respect to the Series A Capital Securities at DTC for purposes of the exchange
offer within two Business Days, a defined under "Description of Series B
Securities--Description of Capital Securities--Distributions," after the date of
this prospectus. Any financial institution that is a participant in DTC's
book-entry transfer facility system may make a book-entry delivery of the Series
A Capital Securities by causing DTC to transfer such Series A Capital Securities
into the exchange agent's account at DTC in accordance with DTC's procedures for
transfers. However, although delivery of Series A Capital Securities may be
effected through book-entry transfer into the exchange agent's account at DTC,
the letter of transmittal, or facsimile of such letter, properly completed and
duly executed, with any required signature guarantees, or an Agent's Message in
lieu of the letter of transmittal, and any other required documents, must in any
case be delivered to and received by the exchange agent at its address set forth
under "-Exchange Agent" on or prior to the expiration date, or the guaranteed
delivery procedure set forth below must be complied with.
Delivery of documents to DTC in accordance with DTC's procedures does
not constitute delivery to the Exchange Agent.
Signature Guarantees. If a certificate for the Series A Capital
Securities is registered in a name other than that of the person surrendering
the certificate or such holder completes the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" in the letter of transmittal,
such certificate must be endorsed or accompanied by a properly executed bond
power, with the respective endorsement or signature guaranteed by a firm or
other entity identified in Rule 17Ad-15 under the Exchange Act as an "eligible
guarantor institution," including, as such terms are defined therein:
o a bank;
o a broker, dealer, municipal securities broker or dealer or
government securities broker or dealer; o a credit union;
o a national securities exchange, registered securities
association or clearing agency; or
o an "Eligible Institution," which is a savings association that
is a participant in a Securities Transfer Association, unless
surrendered on behalf of such Eligible Institution. See
Instruction 1 to the letter of transmittal.
67
<PAGE>
Guaranteed Delivery. If a holder desires to tender Series A Capital
Securities pursuant to the exchange offer and the certificates for such Series A
Capital Securities are not immediately available or time will not permit all
required documents to reach the exchange agent on or prior to the expiration
date, or the procedure for book-entry transfer cannot be completed on a timely
basis, such Series A Capital Securities may nevertheless be tendered; provided,
however, that all of the following guaranteed delivery procedures are complied
with:
o such tenders are made by or through an Eligible Institution;
o a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form accompanying the letter of
transmittal, is received by the exchange agent, as provided
below, on or prior to the expiration date; and
o the certificates, or a book-entry confirmation representing all
tendered Series A Capital Securities, in proper form for
transfer, together with a properly completed and duly executed
letter of transmittal, or a facsimile of such letter, or
Agent's Message with any required signature guarantees and any
other documents required by the letter of transmittal, are
received by the exchange agent within three New York Stock
Exchange trading days after the date of execution of such
Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or
transmitted by facsimile or mail to the exchange agent and must include a
guarantee by an Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of Series B
Capital Securities in exchange for Series A Capital Securities tendered and
accepted for exchange pursuant to the exchange offer will in all cases be made
only after timely receipt by the exchange agent of Series A Capital Securities,
or of a book-entry confirmation with respect to such Series A Capital
Securities, and a properly completed and duly executed letter of transmittal, or
facsimile of such letter, or Agent's Message together with any required
signature guarantees and any other documents required by the letter of
transmittal. Accordingly, the delivery of Series B Capital Securities might not
be made to all tendering holders at the same time, and will depend upon when
Series A Capital Securities, book-entry confirmations with respect to Series A
Capital Securities and other required documents are received by the exchange
agent.
USABanc.com's and USA Capital Trust I's acceptance for exchange of
Series A Capital Securities tendered pursuant to any of the procedures described
above will constitute a binding agreement between the tendering holder,
USABanc.com and USA Capital Trust I upon the terms and subject to the conditions
of the exchange offer.
Determination of Validity. All questions as to the form of documents,
validity, eligibility, including time of receipt, and acceptance for exchange of
any tendered Series A Capital Securities will be determined by USABanc.com and
USA Capital Trust I, in their sole discretion, whose determination shall be
final and binding on all parties. USABanc.com and USA Capital Trust I reserve
the absolute right, in their sole and absolute discretion, to reject any and all
tenders determined by them not to be in proper form or the acceptance of which,
or exchange for, may, in the opinion of counsel to USABanc.com and USA Capital
Trust I, be unlawful. USABanc.com and USA Capital Trust I also reserve the
absolute right, subject to applicable law, to waive any of the conditions of the
exchange offer as set forth under "--Conditions to the Exchange Offer" or any
condition or irregularity in any tender of Series A Capital Securities of any
particular holder whether or not similar conditions or irregularities are waived
in the case of other holders.
The interpretation by USABanc.com and USA Capital Trust I of the terms
and conditions of the exchange offer, including the letter of transmittal and
the instructions thereto, will be final and binding. No tender of Series A
Capital Securities will be deemed to have been validly made until all
irregularities with respect to such tender have been cured or waived. None of
USABanc.com, USA Capital Trust I, any affiliates or assigns of USABanc.com or
USA Capital Trust I, the exchange agent or any other person shall be under any
duty to give any notification of any irregularities in tenders or incur any
liability for failure to give any such notification.
If any letter of transmittal, endorsement, bond power, power of
attorney or any other document required by the letter of transmittal is signed
by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by USABanc.com
and USA Capital Trust I, proper evidence satisfactory to USABanc.com and USA
Capital Trust I, in their sole discretion, of such person's authority to so act
must be submitted.
A beneficial owner of Series A Capital Securities that are held by or
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee or custodian is urged to contact such entity promptly if such
beneficial holder wishes to participate in the exchange offer.
68
<PAGE>
Resale of Series B Capital Securities
USA Capital Trust I is making the exchange offer for the Series B
Capital Securities in reliance on the position of the staff of the Division of
Corporation Finance of the Securities and Exchange Commission as set forth in
certain interpretive letters addressed to third parties in other transactions.
However, neither USABanc.com nor USA Capital Trust I sought its own interpretive
letter and there can be no assurance that the staff of the Division of
Corporation Finance of the Securities and Exchange Commission would make a
similar determination with respect to the exchange offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
staff of the Division of Corporation Finance , and subject to the two
immediately following sentences, USABanc.com and USA Capital Trust I believe
that Series B Capital Securities issued pursuant to this exchange offer in
exchange for Series A Capital Securities may be offered for resale, resold and
otherwise transferred by a holder thereof without further compliance with the
registration and prospectus delivery requirements of the Securities Act;
provided, however, that such Series B Capital Securities are acquired in the
ordinary course of such holder's business , that such holder is not
participating, and has no arrangement or understanding with any person to
participate in, a distribution as defined in the Securities Act of such Series B
Capital Securities and that such holder is not a broker-dealer. However, any
holder of Series A Capital Securities who is an affiliate of USABanc.com or USA
Capital Trust I or who intends to participate in the exchange offer for the
purpose of distributing Series B Capital Securities, or any broker-dealer who
purchased Series A Capital Securities from USA Capital Trust I to resell
pursuant to Rule 144A or any other available exemption under the Securities Act:
o will not be able to rely on the interpretations of the staff of
the Division of Corporation Finance of the Securities and
Exchange Commission set forth in the above-mentioned
interpretive letters;
o will not be permitted or entitled to tender such Series A
Capital Securities in the exchange offer; and
o must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale
or other transfer of such Series A Capital Securities, unless
such sale is made pursuant to an exemption from such
requirements.
In addition, as described below, participating broker-dealers must deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resales of Series B Capital Securities.
Each holder of Series A Capital Securities who wishes to exchange
Series A Capital Securities for Series B Capital Securities in the exchange
offer will be required to represent that:
o it is not an affiliate of USABanc.com or USA Capital Trust I;
o any Series B Capital Securities to be received by it are being
acquired in the ordinary course of its business;
o it has no arrangement or understanding with any person to
participate in a distribution, as defined in the Securities
Act, of such Series B Capital Securities; and
o if such holder is not a broker-dealer, such holder is not
engaged in, and does not intend to engage in, a distribution of
such Series B Capital Securities.
The letter of transmittal contains the foregoing representations. In addition,
USABanc.com and USA Capital Trust I may require such holder, as a condition to
such holder's eligibility to participate in the exchange offer, to furnish to
USABanc.com and USA Capital Trust I in writing information as to the number of
"beneficial owners," as defined in Rule 13d-3 under the Exchange Act, on behalf
of whom such holder holds the Capital Securities to be exchanged in the exchange
offer. Each participating broker-dealer will be deemed to have acknowledged by
execution of the letter of transmittal or delivery of an Agent's Message that it
acquired the Series A Capital Securities for its own account as the result of
market-making activities or other trading activities and must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Series B Capital Securities. The letter of
transmittal states that by so acknowledging and by delivering a prospectus, a
participating broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Based on the position
taken by the staff of the Division of Corporation Finance in the interpretive
letters referred to above, USABanc.com and USA Capital Trust I believe that
participating broker-dealers who acquired Series A Capital Securities for their
69
<PAGE>
own accounts as a result of market-making activities or other trading
activities, may fulfill their prospectus delivery requirements with respect to
the Series B Capital Securities received upon exchange of such Series A Capital
Securities, other than Series A Capital Securities which represent an unsold
allotment from the original sale of the Series A Capital Securities, with a
prospectus meeting the requirements of the Securities Act, which may be the
prospectus prepared for an exchange offer so long as it contains a description
of the plan of distribution with respect to the resale of such Series B Capital
Securities. Accordingly, this prospectus, as it may be amended or supplemented
from time to time, may be used by a participating broker-dealer during the
period referred to below in connection with resales of Series B Capital
Securities received in exchange for Series A Capital Securities where such
Series A Capital Securities were acquired by such participating broker-dealer
for its own account as a result of market-making or other trading activities.
Subject to certain provisions set forth in the Registration Rights Agreement,
USABanc.com and USA Capital Trust I have agreed that this prospectus, as it may
be amended or supplemented from time to time, may be used by a participating
broker-dealer in connection with resales of such Series B Capital Securities for
a period ending 90-days after the expiration date, subject to extension under
certain limited circumstances described below, or, if earlier, when all such
Series B Capital Securities have been disposed of by such participating
broker-dealer. See "Plan of Distribution." However, a participating
broker-dealer who intends to use this prospectus in connection with the resale
of Series B Capital Securities received in exchange for Series A Capital
Securities pursuant to the exchange offer must notify USABanc.com or USA Capital
Trust I, or cause USABanc.com or USA Capital Trust I to be notified, on or prior
to the expiration date, that it is a participating broker-dealer. Such notice
may be given in the space provided for that purpose in the letter of transmittal
or may be delivered to the exchange agent at one of the addresses set forth
herein under "--Exchange Agent." Any person, including any participating
broker-dealer, who is an affiliate of USABanc.com or USA Capital Trust I may not
rely on such interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction.
In that regard, each participating broker-dealer who surrenders Series
A Capital Securities pursuant to the exchange offer will be deemed to have
agreed, by execution of the letter of transmittal or delivery of an Agent's
Message that, upon receipt of notice from USABanc.com or USA Capital Trust I of
the occurrence of any event or the discovery of any fact which makes any
statement contained or incorporated by reference in this prospectus untrue in
any material respect or which causes this prospectus to omit to state a material
fact necessary in order to make the statements contained or incorporated by
reference , in light of the circumstances under which they were made, not
misleading or of the occurrence of certain other events specified in the
Registration Rights Agreement, such participating broker-dealer will suspend the
sale of Series B Capital Securities, or the Series B Guarantee or the Series B
Debentures, as applicable, pursuant to this prospectus until USABanc.com or USA
Capital Trust I has amended or supplemented this prospectus to correct such
misstatement or omission and has furnished copies of the amended or supplemented
prospectus to such participating broker-dealer or USABanc.com or USA Capital
Trust I has given notice that the sale of the Series B Capital Securities, or
the Series B Guarantee or the Series B Debentures, as applicable, may be
resumed, as the case may be. If USABanc.com or USA Capital Trust I gives such
notice to suspend the sale of the Series B Capital Securities, or the Series B
Guarantee or the Series B Debentures, as applicable, it shall extend the 90-day
period referred to above during which participating broker-dealers are entitled
to use this prospectus in connection with the resale of Series B Capital
Securities by the number of days during the period from and including the date
of the giving of such notice to and including the date when participating
broker-dealers shall have received copies of the amended or supplemented
prospectus necessary to permit resales of the Series B Capital Securities or to
and including the date on which USABanc.com or USA Capital Trust I has given
notice that the sale of Series B Capital Securities, or the Series B Guarantee
or the Series B Debentures, as applicable, may be resumed, as the case may be.
Withdrawal Rights
Except as otherwise provided herein, tenders of Series A Capital
Securities may be withdrawn at any time on or prior to the expiration date. In
order for a withdrawal to be effective a written or facsimile transmission of
such notice of withdrawal must be timely received by the exchange agent at one
of its addresses set forth under "--Exchange Agent" on or prior to the
expiration date. Any such notice of withdrawal must specify the name of the
person who tendered the Series A Capital Securities to be withdrawn, the
aggregate principal amount of Series A Capital Securities to be withdrawn, and,
if certificates for such Series A Capital Securities have been tendered, the
name of the registered holder of the Series A Capital Securities as set forth on
the Series A Capital Securities, if different from that of the person who
tendered them. If Series A Capital Securities have been delivered or otherwise
identified to the exchange agent, then prior to their physical release , the
tendering holder must submit the certificate numbers shown on the particular
Series A Capital Securities to be withdrawn and the signature on the notice of
withdrawal must be guaranteed by an Eligible Institution, except in the case of
Series A Capital Securities tendered for the account of an Eligible Institution.
If Series A Capital Securities have been tendered pursuant to the procedures for
book-entry transfer set forth in "--Procedures for Tendering Series A Capital
70
<PAGE>
Securities," the notice of withdrawal must specify the name and number of the
account at DTC to be credited with the withdrawal of Series A Capital
Securities, in which case a notice of withdrawal will be effective if delivered
to the exchange agent by written or facsimile transmission. Withdrawals of
tenders of Series A Capital Securities may not be rescinded. Series A Capital
Securities properly withdrawn will not be deemed validly tendered for purposes
of the exchange offer, but may be retendered at any subsequent time on or prior
to the expiration date by following any of the procedures described above under
"--Procedures for Tendering Series A Capital Securities."
All questions as to the validity, form and eligibility, including time
of receipt, of such withdrawal notices will be determined by USABanc.com and USA
Capital Trust I, in their sole discretion, whose determination shall be final
and binding on all parties. None of USABanc.com, USA Capital Trust I, any
affiliates or assigns of USABanc.com or USA Capital Trust I, the exchange agent
or any other person, shall be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure to
give any such notification. Any Series A Capital Securities which have been
tendered but which are withdrawn will be returned to the holder thereof promptly
after withdrawal.
Distributions on Series B Capital Securities
Holders of Series A Capital Securities as of August 31, 1999, the
record date for the initial distribution on September 15, 1999, including those
who tender their Series A Capital Securities pursuant to the exchange offer,
will be entitled to receive such distribution. Distributions on the Series B
Capital Securities are payable semi-annually in arrears on March 15 and
September 15 of each year, commencing September 15, 1999, at the annual rate of
9.50% of the liquidation amount to the holders of the Series B Capital
Securities on the relevant record dates. Distributions on the Series B Capital
Securities will accumulate from September 15, 1999, the date of the initial
distribution on the Series A Capital Securities.
Conditions to the Exchange Offer
Notwithstanding any other provisions of the exchange offer, or any
extension of the exchange offer, USABanc.com and USA Capital Trust I will not be
required to accept for exchange, or to exchange, any Series A Capital Securities
for any Series B Capital Securities, and, as described below, may terminate the
exchange offer, whether or not any Series A Capital Securities have theretofore
been accepted for exchange, or may waive any conditions to or amend the exchange
offer, if any of the following conditions have occurred or exist:
o there shall occur a change in the current interpretation by the
staff of the Securities and Exchange Commission which permits
the Series B Capital Securities issued pursuant to the exchange
offer to be offered for resale, resold and otherwise
transferred by their holders , other than broker-dealers and
any such holder which is an affiliate of USABanc.com or USA
Capital Trust I, without compliance with the registration and
prospectus delivery provisions of the Securities Act; provided,
however, that such Series B Capital Securities are acquired in
the ordinary course of such holders' business and such holders
have no arrangement or understanding with any person to
participate in the distribution of such Series B Capital
Securities; or
o any law, statute, rule or regulation shall have been adopted or
enacted which, in the judgment of USABanc.com or USA Capital
Trust I, would reasonably be expected to impair its ability to
proceed with the exchange offer;
o any action or proceeding shall have been instituted or
threatened in any court or by or before any governmental agency
or body with respect to the exchange offer which, in
USABanc.com's and USA Capital Trust I's judgment, would
reasonably be expected to impair the ability of USA Capital
Trust I or USABanc.com to proceed with the exchange offer;
o a banking moratorium shall have been declared by United States
federal or Pennsylvania or New York state authorities which, in
USABanc.com's and USA Capital Trust I's judgment, would
reasonably be expected to impair the ability of USA Capital
Trust I or USABanc.com to proceed with the exchange offer;
o trading on the New York Stock Exchange or generally in the
United States over-the-counter market shall have been suspended
by order of the Securities and Exchange Commission or any other
governmental authority which, in USABanc.com's and USA Capital
Trust I's judgment, would reasonably be expected to impair the
ability of the issuer or USABanc.com to proceed with the
exchange offer; or
<PAGE>
o a stop order shall have been issued by the Securities and
Exchange Commission or any state securities authority
suspending the effectiveness of the Registration Statement or
proceedings shall have been initiated or, to the knowledge of
USABanc.com or USA Capital Trust I, threatened for that
purpose, or any governmental approval which either USABanc.com
or USA Capital Trust I shall, in its sole discretion, deem
necessary for the consummation of the exchange offer as
contemplated hereby has not been obtained.
71
<PAGE>
If USABanc.com and USA Capital Trust I determine in their sole and
absolute discretion that any of the foregoing events or conditions has occurred
or exists, they may, subject to applicable law, terminate the exchange offer or
waive any such condition or otherwise amend the terms of the exchange offer in
any respect. If such waiver or amendment constitutes a material change to the
exchange offer, USABanc.com and USA Capital Trust I will promptly disclose such
waiver or amendment by means of a prospectus supplement that will be distributed
to the registered holders of the Series A Capital Securities and will extend the
exchange offer to the extent required by Rule 14e-1 under the Exchange Act.
Exchange Agent
Wilmington Trust Company has been appointed as exchange agent for the
exchange offer. Delivery of the letters of transmittal and any other required
documents, questions, requests for assistance, and requests for additional
copies of this prospectus or of the letter of transmittal should be directed to
the exchange agent as follows:
<TABLE>
<CAPTION>
<S> <C>
By Registered or By Hand or
Certified Mail Overnight Delivery
-------------- ------------------
Wilmington Trust Company Wilmington Trust Company
Rodney Square North Rodney Square North
1100 North Market Street 1100 North Market Street
Wilmington, DE 19890-0001 Wilmington, DE 19890-0001
Attn: Kristen Long, Corporate Trust Operations Attn: Kristen Long, Corporate Trust Operations
Confirm by telephone or for
information call:
(302) 651-1562
----------------------------
Facsimile Transmission
(Eligible Institutions Only):
(302) 651-1079
----------------------------
</TABLE>
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
Fees and Expenses
USABanc.com has agreed to pay the exchange agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith. USABanc.com will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this prospectus
and related documents to the beneficial owners of Series A Capital Securities,
and in handling or tendering for their customers.
Holders who tender their Series A Capital Securities for exchange will
not be obligated to pay any transfer taxes in connection therewith. If, however,
Series B Capital Securities are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of the Series A Capital
Securities tendered, or if a transfer tax is imposed for any reason other than
the exchange of Series A Capital Securities in connection with the exchange
offer, then the amount of any such transfer taxes, whether imposed on the
registered holder or any other persons, will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the letter of transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
Neither USABanc.com nor USA Capital Trust I will make any payment to
brokers, dealers or other nominees soliciting acceptances of the exchange offer.
72
<PAGE>
DESCRIPTION OF SERIES B SECURITIES
The terms of the Series B Securities are identical in all material
respects to the terms of the Series A Securities, except that:
o the Series A Securities have not been registered
under the Securities Act, are subject to restrictions
on transfer under federal and state securities laws
and are entitled to certain rights under the
Registration Rights Agreement which will terminate
upon consummation of the exchange offer;
o the Series B Capital Securities will not provide for
any increase in the distribution rate; and
o the Series B Debentures will not provide for any
increase in the interest rate.
Except where otherwise indicated, the following description applies to both the
Series B Securities and the Series A Securities.
Description of Capital Securities
The Capital Securities represent beneficial interests in USA Capital
Trust I, and the holders thereof are entitled to a preference over the common
securities in certain circumstances with respect to distributions and amounts
payable on redemption of the Capital Securities and common securities of or
liquidation of USA Capital Trust I. See "--Subordination of common securities."
Upon consummation of the exchange offer, the Declaration of Trust will be
subject to and governed by the Trust Indenture Act of 1939. This summary of
certain provisions of the Capital Securities, the common securities and the
Declaration of Trust does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Declaration
of Trust, including the definitions therein of certain terms.
General
The Capital Securities are limited to $10.0 million aggregate
liquidation amount at any one time outstanding. The Capital Securities rank pari
passu with the common securities, and payments will be made pro rata thereon,
except as described under "--Subordination of Common Securities." Legal title to
the Debentures is held by the property trustee in trust for the benefit of the
holders of the Capital Securities and common securities. The Guarantee does not
guarantee payment of distributions or amounts payable on redemption of the
Capital Securities or liquidation of USA Capital Trust I when USA Capital Trust
I does not have funds on hand legally available for such payments. See
"Description of Series B Securities--Description of Guarantee."
Distributions
Distributions on the Capital Securities will be cumulative, will
accumulate from March 15, 1999 and will be payable semi-annually in arrears on
March 15 and September 15 of each year, commencing September 15, 1999, at the
annual rate of 9.50% of the liquidation amount to the holders of the Capital
Securities on the relevant record dates. The record dates will be the last
Business Day of the month immediately preceding the month in which the relevant
payment occurs. A "Business Day" is any day other than a Saturday or a Sunday or
a day on which banking institutions in New York, New York, Wilmington, Delaware
or Philadelphia, Pennsylvania are authorized or required by law or executive
order to remain closed. The amount of distributions payable for any period will
be computed on the basis of a 360-day year of twelve 30-day months and, for any
period of less than a full calendar month, the number of days elapsed in such
month. In the event that any date on which distributions are payable on the
Capital Securities is not a Business Day, payment of the Distribution payable on
such date will be made on the next succeeding day that is a Business Day and
without any interest or other payment in respect to any such delay, except that
if such next succeeding Business Day falls in the next succeeding calendar year,
such payment shall be made on the immediately preceding Business Day, in each
case with the same force and effect as if made on such date.
So long as no event of default has occurred and is continuing with
respect to the Debentures and no amounts remain in the reserve account,
USABanc.com has the right under the Indenture to elect to defer the payment of
interest on the Debentures, at any time or from time to time, for a period not
exceeding 10 consecutive semi-annual periods with respect to each deferral
period; provided, however, that none shall end on a date other than March 15 or
September 15 of each year, or extend beyond the stated maturity date of March
15, 2029. Upon
73
<PAGE>
any such election, semi-annual distributions on the Capital Securities will be
deferred by USA Capital Trust I during such deferral period. Distributions to
which holders of the Capital Securities are entitled during any such deferral
period will accumulate additional distributions thereon at the rate per annum of
9.50% thereof, compounded semi-annually from the relevant distribution date, but
not exceeding the interest rate then accruing on the Debentures.
During any such deferral period, USABanc.com may not:
o declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation
payment with respect to, any of USABanc.com's capital
stock;
o make any payment of principal, interest or premium,
if any, on or repay, repurchase or redeem any debt
securities of USABanc.com that rank pari passu with
or junior in right of payment to the Debentures; or
o make any guarantee payments with respect to any
guarantee by USABanc.com of the debt securities of
any subsidiary of USABanc.com, including all other
guarantees to be issued by USABanc.com, if such
guarantee ranks pari passu with or junior in right of
payment to the Debentures.
This does not prohibit, however:
o dividends or distributions in shares of, or options,
warrants or rights to subscribe for or purchase
shares of, common stock of USABanc.com;
o any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the
issuance of stock under any such plan in the future,
or the redemption or repurchase of any such rights
pursuant thereto;
o payments under the Guarantee;
o the exchange or conversion of one class or series of
USABanc.com's capital stock for another class or
series of USABanc.com's capital stock;
o the purchase of fractional interests in shares of
USABanc.com's capital stock pursuant to the
conversion or exchange provisions of such capital
stock or the security being converted or exchanged;
and
o purchases of common stock related to the issuance of
common stock or rights under any of USABanc.com's
benefit plans for its Directors, officers or
employees or any of USABanc.com's dividend
reinvestment plans. USABanc.com has no current
intention to exercise its option to defer payments of
interest on the Debentures.
Upon termination of a deferral period and the payment of all amounts
then due, USABanc.com may elect to begin a new deferral period as described
under "Description of Series B Securities--Description of Debentures--Option to
Extend Interest Payment Date." For a description of the federal income tax
implications to holders as a result of a deferral period, see "Certain Federal
Income Tax Consequences--Series A Issue Discount and Interest Income."
The revenue of USA Capital Trust I available for distribution to
holders of the Capital Securities is limited to payments under the Debentures in
which USA Capital Trust I invested the proceeds from the issuance and sale of
the Capital Securities and common securities. See "Description of Series B
Securities--Description of Debentures--General." If USABanc.com does not make
interest payments on the Debentures, the property trustee will not have funds
available to pay distributions on the Capital Securities. The payment of
distributions, if and to the extent USA Capital Trust I has funds on hand
legally available for the payment of such distributions, is guaranteed by
USABanc.com on a limited basis as set forth herein under "Description of
Guarantee."
USABanc.com has established the reserve account in which USABanc.com
deposited $1.9 million from the net proceeds of the sale of the Debentures, an
amount equal to two years of interest payments on the Debentures. It is required
to maintain the reserve account for two years from the date of issuance of the
Debentures. Thereafter, interest payments on the Debentures will be made from
the reserve account until the reserve account is exhausted.
74
<PAGE>
The holders of Debentures have a perfected security interest in the reserve
account. See "Description of Series B Securities--Description of
Debentures--Reserve Account."
Redemption
Upon the repayment of the Debentures on March 15, 2029, or prepayment,
in whole or in part, prior to that date, other than following the distribution
of the Debentures to the holders of Capital Securities and common securities,
the proceeds from such repayment or prepayment shall be applied by the property
trustee, subject to the property trustee having received written notice no later
than 45 days prior to such repayment, to redeem a Like Amount of the Capital
Securities and common securities, upon not less than 30 nor more than 60 days'
notice of a date of redemption, at the applicable redemption price, which shall
be equal to:
o in the case of the repayment of the Debentures on
March 15, 2029, the principal of, and accrued and
unpaid interest on, the Debentures;
o in the case of the optional prepayment of the
Debentures before March 15, 2009 upon the occurrence
and continuation of a Special Event as defined under
"--Description of Debentures--Special Event
Prepayment," the corresponding Make-Whole Amount as
defined under "--Description of Debentures--Special
Event Prepayment;" and
o in the case of the optional prepayment of the
Debentures on or after March 15, 2009, the
corresponding optional prepayment price as defined
under "Description of Series B
Securities--Description of Debentures--Optional
Prepayment."
See "Description of Series B Securities--Description of Debentures--Optional
Prepayment" and "--Special Event Prepayment." If less than all of the Debentures
are to be prepaid, the Debentures to be prepaid shall be selected by such method
as the debenture trustee shall deem fair and appropriate.
"Like Amount" means, with respect to:
o a redemption of the Capital Securities and common
securities, those securities having a liquidation
amount equal to the principal amount of Debentures to
be paid in accordance with their terms; and
o a distribution of Debentures upon the liquidation of
USA Capital Trust I, Debentures having a principal
amount equal to the liquidation amount of the Capital
Securities and common securities of the holder to
whom such Debentures are distributed.
USABanc.com has the option to prepay the Debentures in whole or in
part, on or after March 15, 2029, at the applicable optional prepayment price
and in whole but not in part, at any time prior to the March 15, 2029, upon the
occurrence of a Special Event, at a price equal to the corresponding Make-Whole
Amount, in each case subject to the receipt of any required regulatory approval.
See "Description of Series B Securities--Description of Debentures--Optional
Prepayment" and "--Special Event Prepayment."
Liquidation of USA Capital Trust I and Distribution of Debentures
USABanc.com has the right at any time to dissolve USA Capital Trust I
and, after satisfaction of liabilities to creditors of USA Capital Trust I as
required by applicable law, to cause the Debentures to be distributed to the
holders of the Capital Securities and common securities in liquidation of USA
Capital Trust I. Such right is subject to USABanc.com having received an opinion
of counsel to the effect that such distribution will not be a taxable event to
holders of Capital Securities and any required regulatory approval.
USA Capital Trust I shall automatically dissolve upon the first to
occur of:
o events of bankruptcy, dissolution or liquidation of
USABanc.com;
o the distribution of a Like Amount of the Debentures
to the holders of the Capital Securities and common
securities, if USABanc.com, as sponsor, has given
written direction to the property trustee to dissolve
USA Capital Trust I;
o redemption of all of the Capital Securities and
common securities as described under "--Redemption;"
75
<PAGE>
o expiration of the term of USA Capital Trust I; and
o the entry of an order for the dissolution of USA
Capital Trust I by a court of competent jurisdiction.
Except for in the case of a redemption as described under
"--Redemption," if a dissolution occurs as described above, USA Capital Trust I
shall be liquidated by the issuer trustees as expeditiously as the issuer
trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of USA Capital Trust I as provided by applicable law,
to the holders of the Capital Securities and common securities a Like Amount of
the Debentures, unless such distribution is determined by the property trustee
not to be practicable, in which event such holders will be entitled to receive
out of the assets of USA Capital Trust I legally available for distribution to
holders, after satisfaction of liabilities to creditors of USA Capital Trust I
as provided by applicable law, an amount equal to the aggregate of the
liquidation amount plus accumulated and unpaid distributions thereon to the date
of payment. If such liquidation distribution can be paid only in part because
USA Capital Trust I has insufficient assets on hand legally available to pay in
full the aggregate liquidation distribution, then the amounts payable directly
by USA Capital Trust I on the Capital Securities and common securities shall be
paid on a pro rata basis, except that if a Debenture Event of Default has
occurred and is continuing, the Capital Securities shall have a priority over
the common securities. See "--Subordination of Common Securities."
If USABanc.com elects not to prepay the Debentures prior to maturity in
accordance with their terms and either elects not to or is unable to liquidate
USA Capital Trust I and distribute the Debentures to holders of the Capital
Securities and common securities, the Capital Securities and common securities
will remain outstanding until the repayment of the Debentures on March 15, 2029.
After the liquidation date is fixed for any distribution of Debentures
to holders of the Capital Securities and common securities:
o the Capital Securities and common securities will no
longer be deemed to be outstanding;
o DTC or its nominee will receive, in respect of each
registered global certificate, if any, representing
the Capital Securities and common securities held by
it, a registered global certificate or certificates
representing the Debentures to be delivered upon such
distribution; and
o any certificates representing the Capital Securities
and common securities not held by DTC or its nominee
will be deemed to represent Debentures having a
principal amount equal to the liquidation amount of
such the Capital Securities and common securities,
and bearing accrued and unpaid interest in an amount
equal to the accumulated and unpaid distributions on
such securities until such certificates are presented
to the administrative trustees or their agent for
cancellation, whereupon USABanc.com will issue to
such holder, and the debenture trustee will
authenticate, a certificate representing such
Debentures.
There can be no assurance as to the market prices for the Capital
Securities, or for the Debentures that may be distributed in exchange for the
Capital Securities, if a dissolution and liquidation of USA Capital Trust I were
to occur. Accordingly, the Capital Securities or the Debentures that the
investor may receive on dissolution and liquidation of USA Capital Trust I may
trade at a discount to the price that the investor paid to purchase the Capital
Securities.
Redemption Procedures
If applicable, the Capital Securities and common securities shall be
redeemed at the applicable redemption price with the proceeds from the
contemporaneous repayment or prepayment of the Debentures. Any redemption of the
Capital Securities and common securities shall be made and the applicable
redemption price shall be payable only to the extent that USA Capital Trust I
has funds legally available for the payment of such applicable redemption price.
See "--Subordination of Common Securities."
If USA Capital Trust I gives a notice of redemption in respect of the
Capital Securities, then, by 12:00 noon, New York City time, on the redemption
date, to the extent funds are legally available, with respect to the Capital
Securities held by DTC or its nominees, the property trustee will deposit or
cause the paying agent to deposit irrevocably with DTC funds sufficient to pay
the applicable redemption price. See "--Form, Denomination, Book-Entry
Procedures and Transfer." With respect to the Capital Securities held in
certificated form, the property
76
<PAGE>
trustee, to the extent funds are legally available, will irrevocably deposit
with the paying agent for the Capital Securities funds sufficient to pay the
applicable redemption price and will give such paying agent irrevocable
instructions and authority to pay the applicable redemption price to the holders
thereof upon surrender of their certificates evidencing the Capital Securities.
See "--Payment and Paying Agency." Notwithstanding the foregoing, distributions
payable on or prior to the redemption date shall be payable to the holders of
such Capital Securities on the relevant record dates for the related
distribution dates. If notice of redemption shall have been given and funds
deposited as required, then upon the date of such deposit, all rights of the
holders of the Capital Securities called for redemption will cease, except the
right of the holders of such Capital Securities to receive the applicable
redemption price, but without interest on such redemption price, and such
Capital Securities will cease to be outstanding. In the event that any
redemption date of Capital Securities is not a Business Day, then the applicable
redemption price payable on such date will be paid on the next succeeding day
that is a Business Day, and without any interest or other payment in respect of
any such delay, except that, if such next succeeding Business Day falls in the
next calendar year, such payment shall be made on the immediately preceding
Business Day. In the event that payment of the applicable redemption price is
improperly withheld or refused and not paid either by USA Capital Trust I or by
USABanc.com pursuant to the Guarantee as described under "Description of Series
B Securities--Description of Guarantee," distributions on Capital Securities
will continue to accumulate at the then applicable rate, from the redemption
date originally established by USA Capital Trust I to the date such applicable
redemption price is actually paid, and the actual payment date will be the
redemption date for purposes of calculating the applicable redemption price.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days prior to the redemption date to each holder of the Capital
Securities and common securities at its registered address. Unless USA Capital
Trust I defaults in payment of the applicable redemption price on the Capital
Securities and common securities, or USABanc.com defaults in the repayment of
the Debentures, on and after the redemption date, distributions will cease to
accrue on the Capital Securities and common securities called for redemption.
Subject to applicable law, USABanc.com or its subsidiaries may at any
time and from time to time purchase outstanding Capital Securities by tender, in
the open market or by private agreement.
Subordination of Common Securities
Payment of distributions on, and the redemption price of, the Capital
Securities and common securities, as applicable, shall be made pro rata based on
the liquidation amount of the Capital Securities and common securities;
provided, however, that if on any distribution date or redemption date an event
of default shall have occurred and be continuing with respect to the Debentures,
no payment of any distribution on, or applicable redemption price of, any of the
common securities, and no other payment on account of the redemption,
liquidation or other acquisition of the common securities, shall be made unless
a cash payment in full of all accumulated and unpaid distributions on all of the
outstanding Capital Securities for all distribution periods terminating on or
prior thereto, or in the case of payment of the applicable redemption price the
full amount of such redemption price, shall have been made or provided for, and
all funds available to the property trustee shall first be applied to the
payment in full in cash of all distributions on, or redemption price of, the
Capital Securities then due and payable.
In the case of any event of default, USABanc.com as holder of the
common securities will be deemed to have waived any right to act with respect to
such event of default until the effect of such event of default shall have been
cured, waived or otherwise eliminated. Until any such event of default has been
so cured, waived or otherwise eliminated, the property trustee shall act solely
on behalf of the holders of the Capital Securities and not on behalf of
USABanc.com as holder of the common securities, and only the holders of the
Capital Securities will have the right to direct the property trustee to act on
their behalf.
Events of Default; Notice
The occurrence of an event of default with respect to the Debentures
constitutes an event of default under the Declaration of Trust. See "Description
of Series B Securities--Description of Debentures--Debenture Events of Default."
Within 10 Business Days after the occurrence of any event of default
actually known to the property trustee, the property trustee shall transmit
notice of such event of default to the holders of the Capital Securities, the
administrative trustees and USABanc.com, as sponsor, unless such event of
default shall have been cured or waived. USABanc.com, as sponsor, and the
administrative trustees, are required to file annually with the property trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Declaration of Trust.
77
<PAGE>
If an event of default has occurred and is continuing with respect to
the Debentures, the Capital Securities shall have a preference over the common
securities as described under "--Liquidation of USA Capital Trust I and
Distribution of Debentures" and "--Subordination of Common Securities."
Removal of Trustees
Unless an event of default shall have occurred and be continuing, any
issuer trustee may be removed at any time by the holder of the common
securities. If an event of default has occurred and is continuing with respect
to the Debentures, the property trustee and the Delaware trustee may be removed
at such time by the holders of a majority in liquidation amount of the
outstanding Capital Securities. In no event will the holders of the Capital
Securities have the right to vote to appoint, remove or replace the
administrative trustees, which voting rights are vested exclusively in
USABanc.com as the holder of the common securities. No resignation or removal of
an issuer trustee and no appointment of a successor trustee shall be effective
until the acceptance of appointment by the successor trustee in accordance with
the provisions of the Declaration of Trust.
Merger or Consolidation of Trustees
Any person into which the property trustee, the Delaware trustee or any
administrative trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any person resulting from any merger,
conversion or consolidation to which such issuer trustee shall be a party, or
any person succeeding to all or substantially all the corporate trust business
of such issuer trustee, shall be the successor of such issuer trustee under the
Declaration of Trust, provided such person shall be otherwise qualified and
eligible.
Mergers, Consolidations, Amalgamations or Replacements of USA Capital Trust I
USA Capital Trust I may not merge with or into, consolidate, amalgamate
or be replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any corporation or other person,
except as described below or as otherwise described under "--Liquidation of USA
Capital Trust I and Distribution of Debentures." USA Capital Trust I may, at the
request of USABanc.com, as sponsor, with the consent of the administrative
trustees, but without the consent of the holders of the Capital Securities,
merge with or into, consolidate, amalgamate or be replaced by or convey,
transfer or lease its properties and assets as an entirety or substantially as
an entirety, to a trust organized as such under the laws of any state; provided,
however, that:
o such successor entity either expressly assumes all of
the obligations of USA Capital Trust I with respect
to the Capital Securities and common securities or
substitutes for the Capital Securities and common
securities "Successor Securities," which shall be
other securities having substantially the same terms
as the Capital Securities and common securities so
long as they rank in priority the same as that of the
Capital Securities and common securities with respect
to distributions and payments upon liquidation,
redemption and otherwise;
o USABanc.com expressly appoints a trustee of such
successor entity possessing the same powers and
duties as the property trustee with respect to the
Debentures;
o the Successor Securities are listed, or any Successor
Securities will be listed upon notification of
issuance, on any national securities exchange or
other organization on which the Capital Securities
and common securities are then listed or quoted, if
any;
o if the Capital Securities, including any Successor
Securities, are rated by any nationally recognized
statistical rating organization prior to such
transaction, such merger, consolidation,
amalgamation, replacement, conveyance, transfer or
lease does not cause the Capital Securities,
including any Successor Securities, or, if the
Debentures are so rated, the Debentures, to be
downgraded by any such nationally recognized
statistical rating organization;
o such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and
privileges of the holders of the Capital Securities
and common securities, including any Successor
Securities, in any material respect;
78
<PAGE>
o such successor entity has a purpose substantially
identical to that of USA Capital Trust I;
o prior to such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease,
USABanc.com has received an opinion from independent
counsel to USA Capital Trust I experienced in such
matters to the effect that such event does not
adversely affect the rights, preferences and
privileges of the holders of the Capital Securities
and common securities, including any Successor
Securities, in any material respect, other than any
dilution of such holders' interests in the new
entity, and following such event, neither USA Capital
Trust I nor such successor entity will be required to
register as an investment company under the
Investment Company Act; and
o USABanc.com or any permitted successor or assignee
owns all of the common securities of such successor
entity and guarantees the obligations of such
successor entity under the Successor Securities at
least to the extent provided by the Guarantee and the
common guarantee.
Notwithstanding the foregoing, USA Capital Trust I shall not, except with the
consent of holders of 100% in liquidation amount of the Capital Securities and
common securities, consolidate, amalgamate, merge with or into, or be replaced
by or convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety, to any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause USA Capital Trust I or the successor entity not to be classified as
a grantor trust for United States federal income tax purposes. In addition, the
property trustee is required pursuant to the Indenture to exchange, as part of
the exchange offer, the Debentures for the Series B Debentures, which will have
terms substantially identical to the Debentures.
Voting Rights; Amendment of the Declaration of Trust
Except as provided below and under "--Mergers, Consolidations,
Amalgamations or Replacements of USA Capital Trust I" and "Description of Series
B Securities--Description of Guarantee--Amendments and Assignment" and as
otherwise required by law and the Declaration of Trust, the holders of the
Capital Securities have no voting rights.
The Declaration of Trust may be amended from time to time by
USABanc.com, the property trustee and the administrative trustees, without the
consent of the holders of the Capital Securities and common securities, to:
o cure any ambiguity, correct or supplement any
provisions in the Declaration of Trust that may be
inconsistent with any other provision, or to make any
other provisions with respect to matters or questions
arising under the Declaration of Trust, which shall
not be inconsistent with the other provisions of the
Declaration of Trust; provided, however, that such
action shall not adversely affect in any material
respect the interests of the holders of the Capital
Securities and common securities;
o modify, eliminate or add to any provisions of the
Declaration of Trust to such extent as shall be
necessary to ensure that USA Capital Trust I will be
classified for United States federal income tax
purposes as a grantor trust at all times that any of
the Capital Securities and common securities are
outstanding or to ensure that USA Capital Trust I
will not be required to register as an "investment
company" under the Investment Company Act; or
o modify, eliminate or add any provisions of the
Declaration of Trust to such extent as shall be
necessary to enable USA Capital Trust I or
USABanc.com to conduct an exchange offer in the
manner contemplated by the Registration Rights
Agreement.
Any amendments of the Declaration of Trust pursuant to the foregoing shall
become effective when notice thereof is given to the holders of the Capital
Securities and common securities. The Declaration of Trust may be amended by the
issuer trustees and USABanc.com with the consent of holders representing a
majority of the outstanding Capital Securities and common securities, based upon
liquidation amount, and upon receipt by the issuer trustees of an opinion of
counsel experienced in such matters to the effect that such amendment or the
exercise of any power granted to the issuer trustees in accordance with such
amendment will not affect USA Capital Trust I's status as a grantor trust for
United States federal income tax purposes or USA Capital Trust I's exemption
from status as an "investment company" under the Investment Company Act.
79
<PAGE>
In no event, however, may the Declaration of Trust be amended without
the consent of each holder of the Capital Securities and common securities to:
o change the amount or timing of any distribution on
the Capital Securities and common securities or
otherwise adversely affect the amount of any
distribution required to be made in respect of the
Capital Securities and common securities as of a
specified date; or
o restrict the right of a holder of the Capital
Securities and common securities to institute suit
for the enforcement of any such payment on or after
such date.
So long as any Debentures are held by the property trustee, the issuer
trustees shall not:
o direct the time, method and place of conducting any
proceeding for any remedy available to the debenture
trustee, or execute any trust or power conferred on
the debenture trustee with respect to the Debentures;
o waive certain past defaults under the Indenture;
o exercise any right to rescind or annul a declaration
of acceleration of the maturity of the principal of
the Debentures; or
o consent to any amendment, modification or termination
of the Indenture or the Debentures, where such
consent shall be required, without, in each case,
obtaining the prior approval of the holders of a
majority in liquidation amount of all outstanding
Capital Securities; provided, however, that where a
consent under the Indenture would require the consent
of each holder of Debentures affected thereby, no
such consent shall be given by the property trustee
without the prior approval of each holder of the
Capital Securities.
The issuer trustees shall not revoke any action previously authorized or
approved by a vote of the holders of the Capital Securities except by subsequent
vote of such holders. The property trustee shall notify each holder of Capital
Securities of any notice of default with respect to the Debentures. In addition
to obtaining the foregoing approvals of such holders of the Capital Securities,
prior to taking any of the foregoing actions, the issuer trustees shall obtain
an opinion of counsel experienced in such matters to the effect that USA Capital
Trust I will not be classified as an association taxable as a corporation for
United States federal income tax purposes on account of such action.
Any required approval of holders of Capital Securities may be given at
a meeting of such holders convened for such purpose or pursuant to written
consent. The property trustee will cause a notice of any meeting at which
holders of Capital Securities are entitled to vote, or of any matter upon which
action by written consent of such holders has been taken, to be given to each
holder of record of Capital Securities in the manner set forth in the
Declaration of Trust.
No vote or consent of the holders of Capital Securities will be
required for USA Capital Trust I to redeem and cancel the Capital Securities in
accordance with the Declaration of Trust.
Notwithstanding that holders of the Capital Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Capital Securities that are owned by USABanc.com, the issuer trustees or any
affiliate of USABanc.com or any issuer trustee, shall, for purposes of such vote
or consent, be treated as if they were not outstanding.
Form, Denomination, Book-Entry Procedures and Transfer
The Series B Capital Securities may be issued in certificated form or
as "Global Capital Securities," which shall consist of one or more Capital
Securities in registered, global form.
In the event that Capital Securities are issued in certificated form,
the Capital Securities will be issued in blocks having a liquidation amount of
not less than $100,000 and may be transferred or exchanged only in such blocks
in the manner and at the offices described below. The Global Capital Securities
will be deposited upon issuance with the property trustee as custodian for DTC,
in New York, New York, and registered in the name of
80
<PAGE>
DTC or its nominee, in each case for credit to an account of a direct or
indirect participant in DTC as described below.
Except as set forth below, the Global Capital Securities may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee and only in amounts that would not cause a
holder to own less than 100 Capital Securities. Beneficial interests in the
Global Capital Securities may not be exchanged for Capital Securities in
certificated form, except in the limited circumstances described below. See
"--Exchange of Book-Entry Capital Securities for Certificated Capital
Securities."
Other Capital Securities may be issued in registered, certificated,
i.e., non-global form. Other Capital Securities may not be exchanged for
beneficial interests in any Global Capital Securities, except in the limited
circumstances described below. See "--Exchange of Certificated Capital
Securities for Book-Entry Capital Securities."
Transfer of beneficial interests in the Global Capital Securities will
be subject to the applicable rules and procedures of DTC and its direct or
indirect participants, which may change from time to time.
Depositary Procedures
DTC has advised USA Capital Trust I and USABanc.com that DTC is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations and to facilitate the
clearance and settlement of transactions in those securities between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to DTC's system is also available to other entities such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or in the case of indirect
participants, indirectly. Persons who are not participants may beneficially own
securities held by or on behalf of DTC only through the participants or the
indirect participants. The ownership interest and transfer of ownership interest
of each actual purchaser of each security held by or on behalf of DTC are
recorded on the records of the participants and indirect participants.
DTC has also advised USA Capital Trust I and USABanc.com that, pursuant
to procedures established by it:
o upon deposit of the Global Capital Securities
representing Series B Capital Securities, DTC will
credit the accounts of participants exchanging Series
A Capital Securities represented by Global Capital
Securities with portions of the liquidation amount of
the Global Capital Securities representing Series B
Capital Securities; and
o ownership of such interests in the Global Capital
Securities will be shown on, and the transfer of
ownership thereof will be effected only through,
records maintained by DTC, with respect to the
participants, or by the participants and the indirect
participants, with respect to other owners of
beneficial interests in the Global Capital
Securities.
Investors in the Global Capital Securities may hold their interests
directly through DTC if they are participants, or indirectly through
organizations that are participants. All interests in a Global Capital Security
will be subject to the procedures and requirements of DTC. The laws of some
states require that some investors take physical delivery in certificated form
of securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Capital Security to such investors will be limited to that
extent. Because DTC can act only on behalf of participants, which in turn act on
behalf of indirect participants and certain banks, the ability of a person
having beneficial interests in a Global Capital Security to pledge such
interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by the lack
of a physical certificate evidencing such interests. For certain other
restrictions on the transferability of the Capital Securities, see "--Exchange
of Book-Entry Capital Securities for Certificated Capital Securities" and
"--Exchange of Certificated Capital Securities for Book-Entry Capital
Securities."
Except as described below, owners of interests in the Global Capital
Securities will not have Capital Securities registered in their name, will not
receive physical delivery of Capital Securities in certificated form and will
not be considered the registered owners or holders thereof under the Declaration
of Trust for any purpose.
81
<PAGE>
Payments in respect of the Global Capital Security registered in the
name of DTC or its nominee will be payable by the property trustee to DTC in its
capacity as the registered holder under the Declaration of Trust. Under the
terms of the Declaration of Trust, the property trustee will treat the persons
or entities in whose names the Capital Securities, including the Global Capital
Securities, are registered as the owners thereof for the purpose of receiving
such payments and for any and all other purposes whatsoever. Consequently,
neither the property trustee nor any agent thereof has or will have any
responsibility or liability for any aspect of DTC's records or any of its
participant's or indirect participant's records relating to or payments made on
account of beneficial ownership interests in the Global Capital Securities, or
for maintaining, supervising or reviewing any of DTC's records or any
participant's or indirect participant's records relating to the beneficial
ownership interests in the Global Capital Securities or any other matter
relating to the actions and practices of DTC or any of its participants or
indirect participants. DTC has advised USA Capital Trust I and USABanc.com that
its current practice, upon receipt of any payment in respect of securities such
as the Capital Securities, is to credit the accounts of the relevant
participants with the payment on the payment date, in amounts proportionate to
their respective holdings in liquidation amount of beneficial interests in the
relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by
participants and indirect participants to the beneficial owners of Capital
Securities will be governed by standing instructions and customary practices and
will be the responsibility of the participants or the indirect participants and
will not be the responsibility of DTC, the property trustee, USA Capital Trust I
or USABanc.com. None of USA Capital Trust I, USABanc.com or the property trustee
will be liable for any delay by DTC or any of its participants in identifying
the beneficial owners of the Capital Securities, and USA Capital Trust I or
USABanc.com and the property trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all purposes.
Secondary market trading activity in interests in the Global Capital
Securities will settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its participants. Transfers between
participants in DTC will be effected in accordance with DTC's procedures, and
will settle in same-day funds.
DTC has advised USA Capital Trust I and USABanc.com that it will take
any action permitted to be taken by a holder of Capital Securities, including,
without limitation, the presentation of Capital Securities for exchange as
described below, only at the direction of one or more participants to whose
account with DTC interests in the Global Capital Securities are credited and
only in respect of such portion of the liquidation amount of the Capital
Securities as to which such participant or participants has or have given such
direction. However, if there is an event of default under the Declaration of
Trust, DTC reserves the right to exchange the Global Capital Securities for
legended Capital Securities in certificated form and to distribute such Capital
Securities to its participants.
The information in this section concerning DTC and its book-entry
system has been obtained from sources that USA Capital Trust I and USABanc.com
believe to be reliable, but neither USA Capital Trust I nor USABanc.com takes
responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interest in the Global Capital Securities among participants in
DTC, it is under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. None of USA
Capital Trust I, USABanc.com or the property trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of its obligations under the rules and procedures governing its
operations.
Exchange of Global Capital Securities for Certificated Capital Securities
A Global Capital Security is exchangeable for Capital Securities in
registered, certificated form if:
o DTC notifies USA Capital Trust I that it is unwilling
or unable to continue as depositary for the Global
Capital Security and USA Capital Trust I thereupon
fails to appoint a successor depositary within 90
days or has ceased to be a clearing agency registered
under the Exchange Act and USA Capital Trust I
thereupon fails to appoint a successor depositary
within 90 days;
o USABanc.com in its sole discretion elects to cause
the issuance of the Capital Securities in
certificated form; or
o there shall have occurred and be continuing an event
of default or any event which after notice or lapse
of time or both would be an event of default under
the Declaration of Trust.
82
<PAGE>
In addition, beneficial interests in a Global Capital Security may be exchanged
by or on behalf of DTC for certificated Capital Securities upon request by DTC,
but only upon at least 20 days prior written notice given to the property
trustee in accordance with DTC's customary procedures. In all cases,
certificated Capital Securities delivered in exchange for any Global Capital
Security or beneficial interests therein will be registered in the names, and
issued in any approved denominations, requested by or on behalf of the
depositary, in accordance with its customary procedures, and will bear the
restrictive legend referred to in "--Notice to Investors," unless the property
trustee determines otherwise in compliance with applicable law.
Exchange of Certificated Capital Securities for Global Capital Securities
Other Capital Securities, which will be issued in certificated form,
may not be exchanged for beneficial interests in any Global Capital Security
unless such exchange occurs in connection with a transfer of such other Capital
Securities and the transferor first delivers to the property trustee a written
certificate, in the form provided in the Declaration of Trust, to the effect
that such transfer will comply with the appropriate transfer restrictions
applicable to such Capital Securities.
Payment and Paying Agency
Payments in respect of the Capital Securities held in global form shall
be made to DTC, which shall credit the relevant accounts on the applicable
distribution dates, or in respect of the Capital Securities that are not held by
DTC, such payments shall be made by check mailed to the address of the holder
entitled thereto as such address shall appear on the register. The paying agent
shall initially be the property trustee and any co-paying agent chosen by the
property trustee and acceptable to the administrative trustees and USABanc.com.
The paying agent shall be permitted to resign as paying agent upon 30 days
notice to the property trustee, the administrative trustees and USABanc.com. In
the event that the property trustee shall no longer be the paying agent, the
administrative trustees shall appoint a successor, which shall be a bank or
trust company acceptable to the administrative trustees and USABanc.com.
Restrictions on Transfer
The Capital Securities may be transferred, only in blocks having a
liquidation amount of not less than $100,000, and multiples of $1,000 in excess
thereof. Any attempted sale, transfer or other disposition of Capital Securities
in a block having a liquidation amount of less than $100,000 shall be deemed to
be void and of no legal effect whatsoever. Any such purported transferee shall
be deemed not to be the holder of such Capital Securities for any purpose,
including but not limited to the receipt of distributions on such Capital
Securities, and such purported transferee shall be deemed to have no interest
whatsoever in such Capital Securities.
Registrar and Transfer Agent
The property trustee acts as registrar, transfer agent and exchange
agent for the Capital Securities.
Registration of transfers of the Capital Securities will be effected
without charge by or on behalf of USA Capital Trust I, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. USA Capital Trust I will not be required to register or
cause to be registered the transfer of the Capital Securities after they have
been called for redemption.
Information Concerning the Property Trustee
The property trustee, other than during the occurrence and continuance
of an event of default, will undertake to perform only such duties as are
specifically set forth in the Declaration of Trust and, during the existence of
an event of default, must exercise the same degree of care and skill as a
prudent person would exercise or use in the conduct of his or her own affairs.
Subject to this provision, the property trustee is under no obligation to
exercise any of the powers vested in it by the Declaration of Trust at the
request of any holder of the Capital Securities and common securities, unless it
is offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby. If no event of default has occurred and is continuing
and the property trustee is required to decide between alternative courses of
action, construe ambiguous provisions in the Declaration of Trust or is unsure
of the application of any provision of the Declaration of Trust, and the matter
is not one on which holders of the Capital Securities or the common securities
are entitled under the Declaration of Trust to vote, then the property trustee
shall take such action as is directed by USABanc.com and, if not so directed,
shall take such action as it deems advisable and in the best interests of the
holders of the Capital Securities and common securities, and will have no
liability, except for its own bad faith, negligence or willful misconduct.
83
<PAGE>
Miscellaneous
The administrative trustees are authorized and directed to conduct the
affairs of and to operate USA Capital Trust I in such a way that:
o USA Capital Trust I will not be deemed to be an
"investment company" required to be registered under
the Investment Company Act;
o USA Capital Trust I will be classified as a grantor
trust for United States federal income tax purposes;
and
o the Debentures will be treated as indebtedness of
USABanc.com for United States federal income tax
purposes.
USABanc.com and the administrative trustees are authorized to take any action,
not inconsistent with applicable law, the certificate of trust of USA Capital
Trust I or the Declaration of Trust, that USABanc.com and the administrative
trustees determine in their discretion to be necessary or desirable for such
purposes, as long as such action does not materially adversely affect the
interests of the holders of the Capital Securities and common securities.
The Declaration of Trust provides that holders of the Capital
Securities and common securities have no preemptive or similar rights to
subscribe for any additional Capital Securities and common securities and the
issuance of the Capital Securities and common securities is not subject to
preemptive rights.
USA Capital Trust I may not borrow money, issue debt, execute mortgages
or pledge any of its assets.
Description of Debentures
The Series A Debentures were, and the Series B Debentures will be,
issued under an Indenture, as supplemented from time to time, between
USABanc.com and the debenture trustee. Upon effectiveness of the exchange offer
Registration Statement, the Indenture will be qualified under the Trust
Indenture Act. This summary of certain terms and provisions of the Debentures
and the Indenture does not purport to be complete, and, where reference is made
to particular provisions of the Indenture, such provisions, including the
definitions of certain terms, some of which are not otherwise defined herein,
are qualified in their entirety by reference to all of the provisions of the
Indenture and those terms made a part of the Indenture by the Trust Indenture
Act.
General
Concurrently with the issuance of the Capital Securities, USA Capital
Trust I invested the proceeds thereof, together with the consideration paid by
USABanc.com for the common securities, in Debentures issued by USABanc.com. The
Debentures bear interest from March 15, 1999 at the annual rate of 9.50% of the
principal amount thereof, payable semi-annually in arrears on the interest
payment dates of March 15 and September 15 of each year, commencing September
15, 1999. The record dates will be the last Business Day of the month
immediately preceding the month in which the relevant payment occurs. It is
anticipated that, until the liquidation, if any, of USA Capital Trust I, the
Debentures will be held in the name of the property trustee in trust for the
benefit of the holders of the Capital Securities and common securities. The
amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30-day months and, for any period of less than a full
calendar month, the number of days elapsed in such month. In the event that any
date on which interest is payable on the Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day, and without any interest or other payment in respect
of any such delay, except that if such next succeeding Business Day falls in the
next succeeding calendar year, then such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date. Accrued interest that is not paid on the applicable
interest payment date will bear additional interest on the amount thereof, to
the extent permitted by law at the rate per annum of 9.50% thereof, compounded
semi-annually. The term "interest," as used herein, shall include semi-annual
interest payments, interest on semi-annual interest payments not paid on the
applicable interest payment date and additional sums, as applicable.
The Debentures will mature on March 15, 2029.
The Debentures rank pari passu with all other junior subordinated
debentures to be issued by USABanc.com and are unsecured and rank subordinate
and junior in right of payment to all Senior Indebtedness, as defined under
"--Subordination," to the extent and in the manner set forth in the Indenture.
See "--Subordination."
84
<PAGE>
USABanc.com is a bank holding company regulated by the Board of
Governors of the Federal Reserve System, and almost all of the operating assets
of USABanc.com are owned by vBank. USABanc.com is a legal entity separate and
distinct from vBank and its other subsidiaries. Holders of Debentures should
look only to USABanc.com for payments on the Debentures. The principal sources
of USABanc.com's income are dividends, interest and fees from vBank and
USACapital, as its operating subsidiaries. USABanc.com relies primarily on
dividends from vBank to meet its obligations for payment of obligations and
corporate expenses. There are regulatory limitations, discussed in more detail
above, on the payment of dividends directly or indirectly to USABanc.com from
vBank. In addition to restrictions on the payment of dividends, vBank is subject
to certain restrictions imposed by federal law on any extensions of credit to,
and certain other transactions with, USABanc.com and certain other affiliates,
and on investments in their stock or other securities . Such restrictions
prevent USABanc.com and such other affiliates from borrowing from vBank unless
the loans are secured by various types of collateral. Furthermore, such secured
loans, other transactions and investments by vBank are generally limited in
amount as to USABanc.com and as to each of such other affiliates to 10% of
vBank's capital and surplus and as to USABanc.com and all of such other
affiliates to an aggregate of 20% of vBank's capital and surplus.
Under Board of Governors of the Federal Reserve System policy,
USABanc.com is expected to act as a source of financial strength to vBank and to
commit resources to support vBank. This support may be required at times when,
absent such policy, USABanc.com might not otherwise provide such support. Any
capital loans by USABanc.com to vBank are subordinate in right of payment to
deposits and to other indebtedness of vBank. In the event of USABanc.com's
bankruptcy, any commitment by USABanc.com to a federal bank regulatory agency to
maintain the capital of vBank will be assumed by the bankruptcy trustee and
entitled to a priority of payment.
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 Federal Deposit Insurance Corporation. 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," which are,
generally, undivided profits. 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, bank regulatory agencies have authority to prohibit
vBank or USABanc.com from engaging in an unsafe or unsound practice in
conducting their business. The payment of dividends, depending upon the
financial condition of vBank or USABanc.com, could be deemed to constitute such
an unsafe or unsound practice.
Because USABanc.com is a holding company, the right of USABanc.com to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise, and thus the ability of
holders of the Capital Securities to benefit indirectly from such distribution,
is subject to the prior claims of creditors of that subsidiary, including
depositors in the case of vBank, except to the extent USABanc.com may itself be
recognized as a creditor of that subsidiary. Accordingly, the Debentures are
effectively subordinated to all existing and future liabilities of USABanc.com's
subsidiaries, including vBank's deposit liabilities, and all liabilities of any
future subsidiaries of USABanc.com. The Indenture does not limit the incurrence
or issuance of other secured or unsecured debt of USABanc.com or any subsidiary,
including Senior Indebtedness. See "--Subordination."
Reserve Account
USABanc.com has established the reserve account in which it deposited
$1.9 million from the net proceeds of the sale of the Debentures, an amount
equal to two years of interest payments on the Debentures. The amounts deposited
there are invested in marketable securities. USABanc.com is required to maintain
the reserve account for two years from the date of issuance of the Debentures.
Thereafter, funds in the reserve account will be applied to make interest
payments on the Debentures until the reserve account is exhausted. USABanc.com
may not defer payments of interest on the Debentures during any period where
funds are maintained or required to be maintained in the reserve account.
Holders of the Debentures have a perfected security interest in the reserve
account.
Form, Registration Transfer
If the Debentures are distributed to the holders of the Capital
Securities and common securities, the Debentures may be represented by one or
more global certificates registered in the name of Cede & Co., as the nominee of
DTC. The depositary arrangements for such Debentures are expected to be
substantially similar to those in effect for the Capital Securities.
85
<PAGE>
Payment and Paying Agents
Payment of all amounts with respect to the Debentures, including
principal, interest and Additional Sums, will be made at the office of the
debenture trustee in Wilmington, Delaware or at the office of such paying agent
or paying agents as USABanc.com may designate from time to time, except that at
the option of USABanc.com payment of any interest may be made, except in the
case of Debentures in global form, by check mailed to the address of the
recipient as such address shall appear in the register for Debentures or by
transfer to an account maintained by the recipient as specified in such
register; provided, however, that proper transfer instructions have been
received by the relevant record date. Payment of any interest on any Debenture
will be made to the person in whose name such Debenture is registered at the
close of business on the record date for such interest, except in the case of
defaulted interest. USABanc.com may at any time designate additional paying
agents or rescind the designation of any paying agent; provided, however, that
USABanc.com will at all times be required to maintain a paying agent in each
place of payment for the Debentures.
Any moneys deposited with the debenture trustee or any paying agent, or
then held by USABanc.com in trust, for the payment of any amount with respect to
any Debenture, including principal, interest and Additional Sums, and remaining
unclaimed for two years after such amount has become due and payable shall, at
the request of USABanc.com, be repaid to USABanc.com, and the holder of such
Debenture shall thereafter look, as a general unsecured creditor, only to
USABanc.com for payment thereof.
Option to Extend Interest Payment Date
So long as no event of default has occurred and is continuing,
USABanc.com will have the right under the Indenture to defer the payment of
interest on the Debentures, at any time and from time to time, for a period not
exceeding 10 consecutive semi-annual periods with respect to each deferral
period; provided, however, that no deferral period shall end on a date other
than March 15 or September 15 or extend beyond March 15, 2029. USABanc.com may
not defer payments of interest on the Debentures during any period where funds
are maintained or required to be maintained in the reserve account. At the end
of such deferral period, USABanc.com must pay all interest then accrued and
unpaid, together with interest thereon at the annual rate of 9.50%, compounded
semi-annually, to the extent permitted by applicable law. During any deferral
period, interest will continue to accrue and, if the Debentures have been
distributed to holders of the Capital Securities and common securities, holders
of Debentures, or holders of the Capital Securities and common securities while
the Capital Securities and common securities are outstanding, will be required
to accrue such deferred interest income for United States federal income tax
purposes prior to the receipt of cash attributable to such income. See "Certain
Federal Income Tax Consequences-- Series A Issue Discount and Interest Income."
Prior to the termination of any such deferral period, USABanc.com may
further extend such deferral period; provided, however, that such extension does
not cause such deferral period to exceed 10 consecutive semi-annual periods, end
on a date other than March 15 or September 15 or extend beyond March 15, 2029.
Upon the termination of any such deferral period and the payment of all amounts
then due, USABanc.com may elect to begin a new deferral period, subject to the
requirements set forth herein. No interest shall be due and payable during a
deferral period, except at the end thereof. USABanc.com must give the property
trustee, the administrative trustees and the debenture trustee notice of its
election of any deferral period or extension at least five Business Days prior
to the earlier of the date the distributions on the Capital Securities and
common securities would have been payable except for the election to begin or
extend such deferral period or the date the administrative trustees are required
to give notice to any securities exchange, automated quotation system or to
holders of Capital Securities of the record date or the date such distributions
are payable, but in any event not less than five Business Days prior to such
record date. The debenture trustee shall give notice of USABanc.com's election
to begin or extend a new deferral period to the holders of the Capital
Securities. There is no limitation on the number of times that USABanc.com may
elect to begin a deferral period.
Although USABanc.com has no current intention to exercise its option to
extend the interest payment date and defer payments of interest on the
Debentures, you should be aware of what declarations and payments USABanc.com
may or may not make during any such deferral period as described under
"Description of Series B Securities--Description of Capital
Securities--Distribution."
86
<PAGE>
Optional Prepayment
The Debentures will be prepayable, in whole or in part, at the option
of USABanc.com on or after March 15, 2009, subject to USABanc.com having
received any required regulatory approval, at a price equal to the percentage of
the outstanding principal amount of the Debentures specified below, plus, in
each case, accrued and unpaid interest thereon to the date of prepayment if
prepaid during the 12-month period beginning March 15 of the years indicated
below:
Year Percentage
- ---- ----------
2009........................................................ 104.750%
2010 ....................................................... 104.275%
2011 ....................................................... 103.800%
2012 ....................................................... 103.325%
2013 ....................................................... 102.850%
2014 ....................................................... 102.375%
2015 ....................................................... 101.900%
2016 ....................................................... 101.425%
2017 ....................................................... 100.950%
2018 ....................................................... 100.475%
2019 and thereafter ........................................ 100.000%
Special Event Prepayment
Prior to March 15, 2009, if a Special Event has occurred and is
continuing, USABanc.com may, at its option and subject to receipt of any
required regulatory approval, prepay the Debentures, in whole but not in part,
at any time within 60 days of the occurrence of such Special Event, at a
prepayment price equal to the Make-Whole Amount. The "Make-Whole Amount" shall
be an amount equal to the greater of 100% of the principal amount of the
Debentures or the sum, as determined by a Quotation Agent, of the present values
of the remaining scheduled payments of principal and interest on the Debentures
from the prepayment date to March 15, 2009, discounted to the prepayment date on
a semi-annual basis at the Adjusted Treasury Rate, as defined below. In
addition, the Make-Whole Amount shall include accrued and unpaid interest , if
any, to the date of prepayment. The above calculation assumes a 360-day year
consisting of twelve 30-day months. If, following the occurrence of a Special
Event, USABanc.com exercises its option to prepay the Debentures, then the
proceeds of that prepayment must be applied to redeem a Like Amount of the
Capital Securities and common securities at the Special Event redemption price.
See "Description of Series B Securities--Description of Capital
Securities--Redemption."
A "Special Event" means an Investment Company Event, a Regulatory
Capital Event or a Tax Event, as the case may be.
An "Investment Company Event" means the receipt by USABanc.com and USA
Capital Trust I of an opinion of independent securities counsel experienced in
such matters to the effect that as a result of any amendment to, or change,
including any announced prospective change, in the laws or any regulation
thereunder of the United States or any rules, guidelines or policies of any
applicable regulatory authority for USABanc.com or any official administrative
or judicial decision interpreting or applying such laws or regulations, which
amendment or change is effective or which pronouncement or decision is announced
on or after the date of original issuance of the Capital Securities and common
securities, USA Capital Trust I is, or within 90 days of the date of such
opinion will be, considered an Investment Company that is required to be
registered under the Investment Company Act.
A "Regulatory Capital Event" means the receipt by USABanc.com and USA
Capital Trust I of an opinion of independent bank regulatory counsel experienced
in such matters to the effect that, as a result of (i) any amendment to, or
change, including any announced prospective change, in the laws or any
regulations thereunder of the United States or any rules, guidelines or policies
of an applicable regulatory agency for USABanc.com or vBank or (ii) any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which
pronouncement or decision is announced on or after the date of original issuance
of the Capital Securities and common securities, the Capital Securities do not
constitute, or within 90 days of such opinion will not constitute, Tier 1
Capital, or its then equivalent, for purposes of the capital adequacy guidelines
of the Board of Governors of the Federal Reserve System, or any successor
regulatory authority with jurisdiction over bank holding companies, or any
capital adequacy guidelines as then in effect and applicable to USABanc.com;
provided, however, that the distribution of the Debentures in connection with
the liquidation of USA Capital Trust I by USABanc.com shall
87
<PAGE>
not in and of itself constitute a Regulatory Capital Event, unless such
liquidation shall have occurred in connection with a Tax Event.
A "Tax Event" means the receipt by USABanc.com and USA Capital Trust I
of an opinion of independent tax counsel experienced in such matters to the
effect that, as a result of any amendment to, or change, including any announced
prospective change, in the laws or any regulations thereunder of the United
States or any political subdivision or taxing authority thereof or therein, or
as a result of any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of original issuance of the Capital Securities and common securities, there is
more than an insubstantial risk that:
o USA Capital Trust I is, or will be within 90 days of
the date of such opinion, subject to United States
federal income tax with respect to income received or
accrued on the Debentures;
o the interest payable by USABanc.com on the Debentures
is not, or within 90 days of the date of such opinion
will not be, deductible by USABanc.com, in whole or
in part, for United States federal income tax
purposes; or
o USA Capital Trust I is, or will be within 90 days of
the date of such opinion, subject to more than a de
minimis amount of other taxes, duties or other
governmental charges.
"Adjusted Treasury Rate" means, with respect to a prepayment date, the
rate per annum equal to the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently published
statistical release designated "H.15 (519)" or any successor publication which
is published weekly by the Board of Governors of the Federal Reserve System and
which establishes yields on actively traded United States Treasury securities
adjusted to constant maturity under the caption "Treasury Constant Maturities,"
for the maturity corresponding to the Remaining Life, as defined below;
provided, however, that if no maturity is within three months before or three
months after the maturity corresponding to the Remaining Life, yields for the
two published maturities most closely corresponding to the Remaining Life shall
be determined, and the Adjusted Treasury Rate shall be interpolated or
extrapolated from such yields on a straight-line basis, rounding to the nearest
month. If such release or any successor release is not published during the week
preceding the calculation date or does not contain such yields, the rate per
annum equal to the semi-annual equivalent yield to maturity to the Comparable
Treasury Issue, calculated using a price for the Comparable Treasury Issue,
expressed as a percentage of its principal amount, equal to the Comparable
Treasury Price for such prepayment date, plus 325 basis points.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the Remaining
Life of the Debentures that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the Remaining Life. If no United
States Treasury security has a maturity which is within a period from three
months before to three months after the Remaining Life, the two most closely
corresponding United States Treasury securities, as selected by the Quotation
Agent, shall be used as the Comparable Treasury Issue, and the Adjusted Treasury
Rate shall be interpolated or extrapolated on a straight-line basis, rounding to
the nearest month, using such securities.
"Comparable Treasury Price" means, with respect to a prepayment date
the average of three Reference Treasury Dealer Quotations for such prepayment
date, after excluding the highest and lowest such Reference Treasury Dealer
Quotations, or, if the debenture trustee obtains fewer than five such Reference
Treasury Dealer Quotations, the average of all such Quotations.
"Quotation Agent" means the Reference Treasury Dealer appointed by
USABanc.com.
"Reference Treasury Dealer" means a nationally recognized U.S.
Government securities dealer in New York, New York selected by USABanc.com.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and the prepayment date, the average, as determined by
the debenture trustee, of the bid and asked prices for the Comparable Treasury
Issue, expressed in each case as a percentage of its principal amount, quoted in
writing to the debenture trustee by such Reference Treasury Dealer at 5:00 p.m.,
New York time, on the third Business Day preceding such prepayment date.
"Remaining Life" means the term of the Debentures from the prepayment
date to the Stated Maturity Date.
88
<PAGE>
Notice of any prepayment will be mailed at least 30 days but not more
than 60 days before the prepayment date to each holder of Debentures to be
prepaid at its registered address. Unless USABanc.com defaults in payment of the
prepayment price, on the prepayment date interest shall cease to accrue on such
Debentures called for prepayment.
If USA Capital Trust I is required to pay any additional taxes, duties
or other governmental charges as a result of a Tax Event, USABanc.com will pay
"Additional Sums," which shall mean any additional amounts on the Debentures as
may be necessary in order that the amount of distributions then due and payable
by USA Capital Trust I on the outstanding the Capital Securities and common
securities shall not be reduced as a result of any additional taxes, duties or
other governmental charges to which USA Capital Trust I has become subject as a
result of a Tax Event.
Covenants of USABanc.com
In the event USABanc.com:
o has actual knowledge that there has occurred any
event which is, or with the giving of notice or the
lapse of time, or both, would be, an event of default
and in respect of which USABanc.com has not taken
reasonable steps to cure;
o is in default with respect to its payment of any
obligations under the Guarantee; or
o has given notice of its election to exercise its
right to commence a deferral period as provided in
the Indenture and such deferral period, or any
extension thereof, shall have commenced and be
continuing;
then USABanc.com has covenanted that it shall not:
o declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation
payment with respect to, any of USABanc.com's capital
stock;
o make any payment of principal, interest or premium,
if any, on or repay, repurchase or redeem any debt
securities of USABanc.com, including any other junior
subordinated debentures to be issued by USABanc.com
that rank pari passu with or junior in right of
payment to the Debentures; or
o make any guarantee payments with respect to any
guarantee by USABanc.com of the debt securities of
any subsidiary of USABanc.com, including any other
guarantees to be issued by USABanc.com, if such
guarantee ranks pari passu with or junior in right of
payment to the Debentures.
The foregoing covenants, however, do not prohibit:
o dividends or distributions in shares of, or options,
warrants or rights to subscribe for or purchase
shares of, common stock of USABanc.com;
o any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the
issuance of stock under any such plan in the future,
or the redemption or repurchase of any such rights
pursuant thereto;
o payments under the Guarantee;
o a reclassification of USABanc.com's capital stock or
the exchange or conversion of one class or series of
USABanc.com's capital stock for another class or
series of USABanc.com's capital stock;
o the purchase of fractional interests in shares of
USABanc.com's capital stock pursuant to the
conversion or exchange provisions of such capital
stock or the security being converted or exchanged;
and
89
<PAGE>
o purchases of common stock of USABanc.com related to
the issuance of common stock or rights under any of
USABanc.com's benefit plans for its Directors,
officers or employees or any of USABanc.com's
dividend reinvestment plans.
In addition, so long as the Capital Securities and common securities
remain outstanding, USABanc.com has covenanted to:
o directly or indirectly maintain 100% direct or
indirect ownership of the common securities;
provided, however, that any permitted successor of
USABanc.com under the Indenture may succeed to
USABanc.com's ownership of such common securities;
o use commercially reasonable efforts to cause USA
Capital Trust I to:
o remain a business trust, except in connection with
the distribution of Debentures to the holders of the
Capital Securities and common securities in
liquidation of USA Capital Trust I, the redemption of
all of the Capital Securities and common securities,
or certain mergers, consolidations or amalgamations,
each as permitted by USA Capital Trust I Agreement;
and
o otherwise continue to be classified as a grantor
trust and not an association taxable as a corporation
for United States federal income tax purposes;
o use commercially reasonable efforts to cause each
holder of the Capital Securities and common
securities to be treated as owning an undivided
beneficial interest in the Debentures; and
o refrain from, as sponsor of USA Capital Trust I, or
prohibit, as holder of the common securities, the
dissolution, winding up or liquidation of USA Capital
Trust I, except as provided in the Declaration of
Trust.
Modification of Indenture
From time to time USABanc.com and the debenture trustee may, without
the consent of the holders of Debentures, amend the Indenture for specified
purposes, including, among other things, curing ambiguities, defects or
inconsistencies; provided, however, that any such action does not materially
adversely affect the interest of the holders of Debentures, and qualifying, or
maintaining the qualification of, the Indenture under the Trust Indenture Act.
The Indenture contains provisions permitting USABanc.com and the debenture
trustee, with the consent of the holders of a majority in aggregate principal
amount of Debentures, to modify the Indenture in a manner affecting the rights
of the holders of Debentures; provided, however, that no such modification may,
without the consent of the holders of each outstanding Debenture so affected:
o change the stated maturity date of March 15, 2029, or
reduce the principal amount of the Debentures or
reduce the amount payable on prepayment or reduce the
rate or extend the time of payment of interest except
pursuant to their right under the Indenture to defer
the payment of interest as described under "--Option
to Extend Interest Payment Date;"
o make the principal of, or interest or premium on, the
Debentures payable in any coin or currency other than
that provided in the Debentures;
o impair or affect the right of any holder of
Debentures to institute suit for the payment thereof,
or
o reduce the percentage of principal amount of
Debentures, the holders of which are required to
consent to any such modification of the Indenture.
Debenture Events of Default
The Indenture provides that any one or more of the following described
events with respect to the Debentures constitutes an "event of default," whether
it shall be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body:
90
<PAGE>
o failure for 30 days to pay any interest, Additional
Sums or Liquidated Damages, if any, on the Debentures
or all other junior subordinated debentures to be
issued by USABanc.com when due, subject to the
deferral of any due date in the case of a deferral
period with respect to the Debentures or all other
junior subordinated debentures to be issued by
USABanc.com as the case may be;
o failure to pay any principal or premium, if any, on
the Debentures or all other junior subordinated
debentures to be issued by USABanc.com when due
whether at maturity, upon prepayment, by declaration
of acceleration of maturity or otherwise;
o failure to observe or perform any other covenant
contained in the Indenture for 90 days after written
notice to USABanc.com from the debenture trustee or
to USABanc.com and the debenture trustee from the
holders of at least 25% in aggregate outstanding
principal amount of Debentures; or
o events related to bankruptcy, insolvency or
reorganization of USABanc.com.
The holders of a majority in aggregate outstanding principal amount of
the Debentures have, subject to certain exceptions, the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the debenture trustee. The debenture trustee or the holders of not less than 25%
in aggregate outstanding principal amount of the Debentures may declare the
principal due and payable immediately upon an event of default. The holders of a
majority in aggregate outstanding principal amount of the Debentures may annul
such declaration and waive the default if the default, other than the
non-payment of the principal of the Debentures which has become due solely by
such acceleration has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the debenture trustee.
The holders of a majority in aggregate outstanding principal amount of
the Debentures affected thereby may, on behalf of the holders of all the
Debentures, waive any past default, except a default in the payment of
principal, or premium, if any or interest, including Additional Sums and
compounded interest, if any, unless such default has been cured and a sum
sufficient to pay all matured installments of interest, and premium, if any, and
principal due otherwise than by acceleration has been deposited with the
debenture trustee or a default in respect of a covenant or provision which under
the Indenture cannot be modified or amended without the consent of the holder of
each outstanding Debenture.
The Indenture requires the annual filing by USABanc.com with the
debenture trustee of a certificate as to the absence of certain defaults under
the Indenture.
The Indenture provides that the debenture trustee may withhold notice
of an event of default from the holders of the Debentures if the debenture
trustee considers it in the interest of such holders to do so.
Enforcement of Certain Rights by Holders of Capital Securities
If an event of default shall have occurred and be continuing and shall
be attributable to the failure of USABanc.com to pay amounts with respect to the
Debentures on the due date, a holder of Capital Securities may, to the extent
permitted by applicable law, institute a direct action. USABanc.com may not
amend the Indenture to remove the foregoing right to bring a direct action
without the prior written consent of the holders of all of the Capital
Securities. Notwithstanding any payments made to a holder of Capital Securities
by USABanc.com in connection with a direct action, USABanc.com shall remain
obligated to pay the principal of, or premium, if any, or interest, including
Additional Sums and compounded interest, if any, or Liquidated Damages, if any,
on the Debentures, and USABanc.com shall be subrogated to the rights of the
holder of such Capital Securities with respect to payments on the Capital
Securities to the extent of any payments made by USABanc.com to such holder in
any direct action.
The holders of the Capital Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Debentures, unless there shall have been an
event of default under the Declaration of Trust . See "Description of Series B
Securities--Description of Capital Securities--Events of Default; Notice."
91
<PAGE>
Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that USABanc.com shall not consolidate with or
merge into any other person or convey, transfer or lease its properties as an
entirety or substantially as an entirety to any person, and no person shall
consolidate with or merge into USABanc.com or convey, transfer or lease its
properties as an entirety or substantially as an entirety to USABanc.com,
unless:
o in case USABanc.com consolidates with or merges into
another person or conveys or transfers its properties
as an entirety or substantially as an entirety to any
person, the successor person is organized under the
laws of the United States or any State or the
District of Columbia, and such successor person
expressly assumes USABanc.com's obligations under the
Indenture with respect to the Debentures;
o immediately after giving effect thereto, no event of
default, and no event which, after notice or lapse of
time or both, would become an event of default, shall
have occurred and be continuing; and
o certain other conditions as prescribed in the
Indenture are met.
The general provisions of the Indenture do not afford holders of the
Debentures protection in the event of a highly leveraged or other transaction
involving USABanc.com that may adversely affect holders of the Debentures.
Satisfaction and Discharge
The Indenture provides that when, among other things, all Debentures
not previously delivered to the debenture trustee for cancellation have become
due and payable or will become due and payable at maturity or called for
prepayment within one year, and USABanc.com deposits or causes to be deposited
with the debenture trustee funds, in trust, for the purpose and in an amount
sufficient to pay and discharge the entire indebtedness on the Debentures not
previously delivered to the debenture trustee for cancellation, for the
principal, and premium, if any, and interest, including Additional Sums and
compounded interest, if any, to the date of the prepayment or to March 15, 2029,
as the case may be, then the Indenture will cease to be of further effect,
except as to USABanc.com's obligations to pay all other sums due pursuant to the
Indenture and to provide the officers' certificates and opinions of counsel
described therein, and USABanc.com will be deemed to have satisfied and
discharged the Indenture.
Subordination
In the Indenture, USABanc.com has covenanted and agreed that any
Debentures issued thereunder will be subordinate and junior in right of payment
to all senior indebtedness to the extent provided in the Indenture. Upon any
payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of USABanc.com, all senior indebtedness must be paid in
full before the holders of Debentures will be entitled to receive or retain any
payment in respect thereof, including any payment from the reserve account.
In the event of the acceleration of the maturity of Debentures, the
holders of all senior indebtedness outstanding at the time of such acceleration
will first be entitled to receive payment in full before the holders of
Debentures will be entitled to receive or retain any payment in respect of the
Debentures.
No payments on account of principal, or premium, if any, or interest,
including Additional Sums and compounded interest, if any, in respect of the
Debentures may be made if there shall have occurred and be continuing a default
in any payment with respect to senior indebtedness, or an event of default with
respect to any senior indebtedness resulting in the acceleration of the maturity
thereof, or if any judicial proceeding shall be pending with respect to any such
default.
"Indebtedness" shall mean:
o every obligation of USABanc.com for money borrowed;
o every obligation of USABanc.com evidenced by bonds,
debentures, notes or other similar instruments,
including obligations incurred in connection with the
acquisition of property, assets or businesses;
92
<PAGE>
o every reimbursement obligation of USABanc.com with
respect to letters of credit, banker's acceptances or
similar facilities issued for the account of
USABanc.com;
o every obligation of USABanc.com issued or assumed as
the deferred purchase price of property or services,
but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of
business;
o every capital lease obligation of USABanc.com;
o all indebtedness of USABanc.com whether incurred on
or prior to the date of the Indenture or thereafter
incurred, for claims in respect of derivative
products, including interest rate, foreign exchange
rate and commodity forward contracts, options and
swaps and similar arrangements; and
o every obligation of the type referred to above of
another Person and all dividends of another Person
the payment of which, in either case, USABanc.com has
guaranteed or is responsible or liable for, directly
or indirectly, as obligor or otherwise.
"Indebtedness Ranking on a Parity with the Debentures" shall mean
o Indebtedness, whether outstanding on the date of
execution of the Indenture or thereafter created,
assumed or incurred, to the extent such Indebtedness
by its terms ranks equally with and not prior to the
Debentures in the right of payment upon the happening
of the dissolution, winding-up, liquidation or
reorganization of USABanc.com; and
o all other debt securities, and guarantees in respect
of those debt securities, issued to any trust other
than USA Capital Trust I, or a trustee of such trust,
partnership or other entity affiliated with
USABanc.com that is a financing vehicle of
USABanc.com, in connection with the issuance by such
financing vehicle of equity securities or other
securities guaranteed by USABanc.com pursuant to an
instrument that ranks pari passu with or junior in
right of payment to the Guarantee. The securing of
any Indebtedness, otherwise constituting Indebtedness
Ranking on a Parity with the Debentures, shall not be
deemed to prevent such Indebtedness from constituting
Indebtedness Ranking on a Parity with the Debentures.
"Indebtedness Ranking Junior to the Debentures" shall mean any
Indebtedness, whether outstanding on the date of execution of the Indenture or
thereafter created, assumed or incurred, to the extent such Indebtedness by its
terms ranks junior to and not equally with or prior to the Debentures, and any
other Indebtedness Ranking on a Parity with the Debentures, in right of payment
upon the happening of the dissolution, winding-up, liquidation or reorganization
of USABanc.com. The securing of any Indebtedness, otherwise constituting
Indebtedness Ranking Junior to the Debentures, shall not be deemed to prevent
such Indebtedness from constituting Indebtedness Ranking Junior to the
Debentures.
"Senior Indebtedness" shall mean all Indebtedness, whether outstanding
on the date of execution of the Indenture or thereafter created, assumed or
incurred, except Indebtedness Ranking on a Parity with the Debentures or
Indebtedness Ranking Junior to the Debentures, and any deferrals, renewals or
extensions of such Senior Indebtedness.
USABanc.com is a bank holding company and almost all of the operating
assets of USABanc.com are owned by vBank and USACapital. USABanc.com relies
primarily on dividends from vBank to meet its obligations for payment of
principal and interest on its outstanding debt obligations and corporate
expenses. USABanc.com is a legal entity separate and distinct from vBank.
Holders of Debentures should look only to USABanc.com for payments on the
Debentures. There are regulatory limitations on the payment of dividends
directly or indirectly to USABanc.com from its subsidiaries. See "--General." In
addition, vBank is subject to certain restrictions imposed by federal law on any
extensions of credit to, and certain other transactions with, USABanc.com and
certain other affiliates, and on investments in stock or other securities
thereof. Such restrictions prevent USABanc.com and such other affiliates from
borrowing from vBank unless the loans are secured by various types of
collateral. Further, such secured loans, other transactions and investments by
vBank are generally limited in amount as to USABanc.com and as to each of such
other affiliates to 10% of vBank's capital and surplus and as to USABanc.com and
all of such other affiliates to an aggregate of 20% of vBank's capital and
surplus. Accordingly, the Debentures will be effectively subordinated to all
existing and future liabilities of USABanc.com's subsidiaries.
<PAGE>
Because USABanc.com is a bank holding company, the right of
USABanc.com to participate in any distribution of assets of any subsidiary upon
such subsidiary's liquidation or reorganization or otherwise, and thus the
ability
93
<PAGE>
of holders of the Capital Securities to benefit indirectly from such
distribution, is subject to the prior claims of creditors of that subsidiary,
including depositors in the case of vBank, except to the extent USABanc.com may
itself be recognized as a creditor of that subsidiary. At December 31, 1998,
vBank had total liabilities of $203,000, excluding liabilities owed to
USABanc.com. Accordingly, the Debentures will be effectively subordinated to all
existing and future liabilities of USABanc.com's subsidiary, including vBank's
deposit liabilities, and all liabilities of any future subsidiaries of
USABanc.com. The Indenture does not limit the incurrence or issuance of other
secured or unsecured debt of USABanc.com or any subsidiary, including Senior
Indebtedness.
Restrictions on Transfer
The Debentures will be issued and may be transferred only in blocks
having an aggregate principal amount of not less than $100,000 and multiples of
$1,000 in excess of that amount. Any attempted transfer of Debentures in a block
having an aggregate principal amount of less than $100,000 shall be deemed to be
void and of no legal effect whatsoever. Any such purported transferee shall be
deemed not to be the holder of such Debentures for any purpose, including but
not limited to the receipt of payments on such Debentures, and such purported
transferee shall be deemed to have no interest whatsoever in such Debentures.
Governing Law
The Indenture and the Debentures are governed by and will be construed
in accordance with the laws of the State of New York.
Information Concerning the Debenture Trustee
Following the exchange offer and the qualification of the Indenture
under the Trust Indenture Act, the debenture trustee shall have and be subject
to all the duties and responsibilities specified with respect to an indenture
trustee under the Trust Indenture Act. Subject to such provisions, the debenture
trustee is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Debentures, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities which might
be incurred thereby. The debenture trustee is not required to expend or risk its
own funds or otherwise incur personal financial liability in the performance of
its duties under the Indenture.
Description of Guarantee
The Guarantee was executed and delivered by USABanc.com concurrently
with the issuance by USA Capital Trust I of the Capital Securities for the
benefit of the holders from time to time of the Capital Securities. Wilmington
Trust Company will act as guarantee trustee under the Guarantee. The Guarantee
will be qualified under the Trust Indenture Act upon effectiveness of the
exchange offer Registration Statement. This summary of certain provisions of the
Guarantee does not purport to be complete and is subject to, and qualified in
its entirety by reference to, all of the provisions of the Guarantee, including
the definitions therein of certain terms, and the Trust Indenture Act. The
guarantee trustee holds the Guarantee for the benefit of the holders of the
Capital Securities.
General
USABanc.com has irrevocably agreed to pay in full on a subordinated
basis, to the extent set forth herein, to the holders of the Capital Securities,
as and when due, regardless of any defense, right of set-off or counterclaim
that USA Capital Trust I may have or assert other than the defense of payment,
the following payments with respect to the Capital Securities, to the extent not
paid by or on behalf of USA Capital Trust I, pursuant to the Guarantee:
o any accumulated and unpaid distributions required to
be paid on the Capital Securities, to the extent that
USA Capital Trust I has funds on hand legally
available at such time;
o the applicable redemption price with respect to the
Capital Securities called for redemption, to the
extent that USA Capital Trust I has funds on hand
legally available at such time; and
o upon a voluntary or involuntary dissolution,
winding-up or liquidation of USA Capital Trust I,
other than in connection with the distribution of the
Debentures to holders of the Capital Securities or
the redemption of all Capital Securities, the lesser
of the liquidation distribution, to the extent USA
Capital Trust I has funds legally available therefor
at the time, and he amount of assets of USA Capital
Trust I remaining available for distribution to
holders
94
<PAGE>
of Capital Securities after satisfaction of
liabilities to creditors of USA Capital Trust I as
required by applicable law.
USABanc.com's obligation to make payment under the Guarantee may be satisfied by
direct payment of the required amounts by USABanc.com to the holders of the
Capital Securities or by causing USA Capital Trust I to pay such amounts to such
holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis
of USA Capital Trust I's obligations under the Capital Securities, but will
apply only to the extent that USA Capital Trust I has funds sufficient to make
such payments. If USABanc.com does not make interest payments on the Debentures
held by USA Capital Trust I, USA Capital Trust I will not be able to pay the
distributions on the Capital Securities and will not have funds legally
available for payment. See "Relationship Among the Capital Securities, the
Debentures and the Guarantee."
The Guarantee ranks subordinate and junior in right of payment to all
Senior Indebtedness to the extent provided therein. See "--Status of the
Guarantee." Because USABanc.com is a holding company, the right of USABanc.com
to participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise is subject to the prior
claims of creditors of that subsidiary, except to the extent USABanc.com may
itself be recognized as a creditor of that subsidiary. Accordingly,
USABanc.com's obligations under the Guarantee effectively are subordinated to
all existing and future liabilities of USABanc.com's subsidiaries, including
vBank's deposit liabilities, and all liabilities of any future subsidiaries of
USABanc.com. Claimants should look only to the assets of USABanc.com for
payments under the Guarantee. See "Description of Series B
Securities--Description of the Debentures--General." The Guarantee does not
limit the incurrence or issuance of other secured or unsecured debt of
USABanc.com, including Senior Indebtedness, whether under the Indenture, any
other indenture that USABanc.com may enter into in the future or otherwise.
USABanc.com has, through the Guarantee, the Declaration of Trust , the
Debentures and the Indenture, taken together, fully, irrevocably and
unconditionally guaranteed all of USA Capital Trust I's obligations under the
Capital Securities. No single document standing alone, or operating in
conjunction with fewer than all of the other documents, constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of USA
Capital Trust I's obligations under the Capital Securities. See "Relationship
Among the Capital Securities, the Debentures and the Guarantee."
Status of the Guarantee
The Guarantee constitutes an unsecured obligation of USABanc.com and
ranks subordinate and junior in right of payment to all Senior Indebtedness in
the same manner as the Debentures. See "Description of Series B
Securities--Description of Debentures--Subordination." In addition, because
USABanc.com is a holding company, the right of USABanc.com to participate in any
distribution of assets of any subsidiary upon such subsidiary's liquidation or
reorganization or otherwise is subject to the prior claims of creditors of such
subsidiary, including depositors of vBank, except to the extent USABanc.com may
itself be recognized as a creditor of such subsidiary. Accordingly,
USABanc.com's obligations under the Guarantee effectively are subordinated to
all existing and future liabilities of USABanc.com's present and future
subsidiaries, including the depositors of vBank. As a result, claimants should
look only to the assets of USABanc.com for payments under the Guarantee. See
"Description of Series B Securities--Description of Debentures--General." The
Guarantee ranks pari passu with all other guarantees issued by USABanc.com with
respect to preferred beneficial interests, if any issued by other trusts to be
established by USABanc.com similar to USA Capital Trust I.
The Guarantee does not limit the amount of secured or unsecured debt,
including Senior Indebtedness, that may be incurred by USABanc.com or any of its
subsidiaries. USABanc.com expects from time to time that it will incur
additional indebtedness and that its subsidiaries will also incur additional
liabilities.
The Guarantee will constitute a guarantee of payment and not of
collection. As a result, the guaranteed party may institute a legal proceeding
directly against USABanc.com to enforce its rights under the Guarantee without
first instituting a legal proceeding against any other person or entity. The
Guarantee is held for the benefit of the holders of the Capital Securities. The
Guarantee will not be discharged, except by full payment under the Guarantee to
the extent not paid by USA Capital Trust I or upon distribution to the holders
of the Capital Securities of the Debentures.
Events of Default
An event of default under the Guarantee will occur upon the failure of
USABanc.com to perform any of its payment or other obligations thereunder;
provided, however, that except with respect to a default in payment
95
<PAGE>
USABanc.com shall have received notice of default and shall not have cured such
default within 60 days after receipt of such notice. The holders of not less
than a majority in liquidation amount of the Capital Securities will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the guarantee trustee in respect of the Guarantee or to
direct the exercise of any trust or power conferred upon the guarantee trustee
under the Guarantee.
Any holder of the Capital Securities may institute a legal proceeding
directly against USABanc.com to enforce its rights to payment of principal and
interest under the Guarantee without first instituting a legal proceeding
against USA Capital Trust I, the guarantee trustee or any other person or
entity.
USABanc.com, as guarantor, will be required to file annually with the
guarantee trustee a certificate as to whether or not USABanc.com is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
Amendments and Assignment
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Capital Securities, in which case no vote
will be required, the Guarantee may not be amended without the prior approval of
the holders of a majority of the liquidation amount of such outstanding Capital
Securities. The manner of obtaining any such approval will be as set forth under
"Description of Series B Securities--Description of Capital Securities--Voting
Rights; Amendment of the Declaration of Trust ." All guarantees and agreements
contained in the Guarantee Agreement shall bind the successors, assigns,
receivers, trustees and representatives of USABanc.com and shall inure to the
benefit of the holders of the Capital Securities then outstanding.
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon
full payment of the applicable Redemption Price of all outstanding Capital
Securities, upon full payment of the liquidation amount payable upon liquidation
of USA Capital Trust I or upon distribution of Debentures to the holders of the
Capital Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Capital
Securities must restore payment of any sums paid under the Capital Securities or
the Guarantee.
Information Concerning the Guarantee Trustee
The guarantee trustee, other than during the occurrence and continuance
of a default by USABanc.com in performance of the Guarantee, will undertake to
perform only such duties as are specifically set forth in the Guarantee and, in
case a default with respect to the Guarantee has occurred, must exercise the
same degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to this provision, the guarantee
trustee will be under no obligation to exercise any of the powers vested in it
by the Guarantee at the request of any holder of the Capital Securities unless
it is offered reasonable indemnity against the costs, expenses and liabilities
that might be incurred thereby.
Governing Law
The Guarantee is governed by and will be construed in accordance with
the laws of the State of New York.
DESCRIPTION OF SERIES A SECURITIES
The terms of the Series A Securities are identical in all material
respects to the terms of the Series B Securities, except that:
o the Series A Securities have not been registered
under the Securities Act, are subject to restrictions
on transfer under federal and state securities laws
and are entitled to certain rights under the
Registration Rights Agreement, which rights will
terminate upon consummation of the exchange offer;
o the Series B Capital Securities will not provide for
any increase in the distribution rate thereon; and
o the Series B Debentures will not provide for any
increase in the interest rate thereon.
The Series A Securities provide that, in the event that a registration statement
relating to the exchange offer has not been filed by August 6, 1999 and declared
effective by September 6, 1999, or, in certain limited circumstances, in the
event a shelf registration statement with respect to the resale of the Series A
Capital Securities is not declared
96
<PAGE>
effective by September 6, 1999, then interest will accrue, in addition to the
stated interest rate on the Series A Debentures at the rate of 0.25% per annum
on the principal amount of the Series A Debentures and distributions will
accrue, in addition to the stated distribution rate on the Series A Capital
Securities, at the rate of 0.25% per annum on the liquidation amount of the
Series A Capital Securities, for the period from the occurrence of such event
until such time as such required exchange offer is consummated or any required
shelf registration statement is effective. The Exchange Securities are not, and
upon consummation of the exchange offer the Series A Securities will not be,
entitled to any such additional interest or distributions. Accordingly, holders
of Series A Capital Securities should review the information set forth under
"Risk Factors--Risks Related to the Capital Securities and the
Debentures--Consequences of a Failure to Exchange Series A Capital Securities"
and "Description of Series B Securities."
RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE
DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of distributions and other amounts due on the Capital
Securities, to the extent USA Capital Trust I has funds on hand legally
available for the payment of such distributions, are irrevocably guaranteed by
USABanc.com as and to the extent set forth under "Description of Series B
Securities--Description of Guarantee." Taken together, USABanc.com's obligations
under the Debentures, the Indenture, the Declaration of Trust and the Guarantee
provide, in the aggregate, a full, irrevocable and unconditional guarantee of
payments of distributions and other amounts due on the Capital Securities. No
single document standing alone or operating in conjunction with fewer than all
of the other documents constitutes such guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of USA Capital Trust I's obligations
under the Capital Securities. If and to the extent that USABanc.com does not
make the required payments on the Debentures, USA Capital Trust I will not have
sufficient funds to make the related payments, including distributions, on the
Capital Securities. The Guarantee does not cover any such payment when USA
Capital Trust I does not have sufficient funds on hand legally available
therefor. In such event, the remedy of a holder of Capital Securities is to
institute a direct action. The obligations of USABanc.com under the Guarantee
are subordinate and junior in right of payment to all Senior Indebtedness.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on
the Debentures, such payments will be sufficient to cover distributions and
other payments due on the Capital Securities, primarily because:
o the aggregate principal amount or prepayment price of
the Debentures is equal to the sum of the liquidation
amount or redemption Price, as applicable, of the
Capital Securities and common securities;
o the interest rate and interest and other payment
dates on the Debentures match the distribution rate
and distribution and other payment dates for the
Capital Securities and common securities;
o USABanc.com, as sponsor, shall pay for all and any
costs, expenses and liabilities of USA Capital Trust
I except USA Capital Trust I's obligations to holders
of the Capital Securities and common securities under
such the Capital Securities and common securities;
and
o the Declaration of Trust provides that USA Capital
Trust I is not authorized to engage in any activity
that is not consistent with the limited purposes
thereof.
Enforcement Rights of Holders of Capital Securities
A holder of any Capital Security may institute a legal proceeding
directly against USABanc.com to enforce its rights under the Guarantee without
first instituting a legal proceeding against the guarantee trustee, USA Capital
Trust I or any other person or entity.
97
<PAGE>
A default or event of default under any Senior Indebtedness would not
constitute a default or an event of default under the Declaration of Trust.
However, in the event of payment defaults under, or acceleration of, Senior
Indebtedness, the subordination provisions of the Indenture provide that no
payments may be made in respect of the Debentures until such Senior Indebtedness
has been paid in full or any payment default thereunder has been cured or
waived. Failure to make required payments on Debentures would constitute an
event of default under the Declaration of Trust.
Limited Purpose of USA Capital Trust I
USA Capital Trust I exists for the sole purpose of issuing and selling
the Capital Securities and common securities, using the proceeds from the sale
of the Capital Securities and common securities to acquire the Debentures and
engaging in only those other activities necessary, advisable or incidental
thereto. The Capital Securities represent beneficial ownership interests in USA
Capital Trust I. A principal difference between the rights of a holder of
Capital Securities and a holder of Debentures is that a holder of Debentures is
entitled to receive from USABanc.com the principal amount of, and premium, if
any, and interest on Debentures held, while a holder of Capital Securities is
entitled to receive distributions from USA Capital Trust I, or in certain
circumstances, from USABanc.com under the Guarantee, if and to the extent USA
Capital Trust I has funds on hand legally available for the payment of such
distributions.
Rights Upon Termination
Unless the Debentures are distributed to holders of the Capital
Securities and common securities, upon any voluntary or involuntary termination,
winding-up or liquidation of USA Capital Trust I, after satisfaction of the
liabilities of creditors of USA Capital Trust I as required by applicable law,
the holders of the Capital Securities and common securities will be entitled to
receive, out of assets held by USA Capital Trust I, the liquidation distribution
in cash. See "Description of Series B Securities--Description of Capital
Securities--Liquidation of USA Capital Trust I and Distribution of Debentures."
Upon any voluntary or involuntary liquidation or bankruptcy of USABanc.com, the
property trustee, as holder of the Debentures, would be a subordinated creditor
of USABanc.com, subordinated in right of payment to all Senior Indebtedness as
set forth in the Indenture, but entitled to receive payment in full of
principal, and premium, if any, and interest, before any stockholders of
USABanc.com receive payments or distributions. Since USABanc.com is the
guarantor under the Guarantee and has agreed to pay for all costs, expenses and
liabilities of USA Capital Trust I, other than USA Capital Trust I's obligations
to the holders of its the Capital Securities and common securities, the
positions of a holder of Capital Securities and a holder of Debentures relative
to other creditors and to stockholders of USABanc.com in the event of
liquidation or bankruptcy of USABanc.com are expected to be substantially the
same.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of certain of the material United States
federal income tax consequences of the purchase, ownership and disposition of
Capital Securities held as capital assets by a holder who purchases such Capital
Securities upon initial issuance. The statements of law and legal conclusions
set forth in the summary regarding the tax consequences to the beneficial owners
of Capital Securities represent the opinion of Klehr, Harrison, Harvey,
Branzburg & Ellers LLP, special federal income tax counsel to USABanc.com and
USA Capital Trust I. This summary and the tax opinion of Klehr, Harrison,
Harvey, Branzburg & Ellers LLP only address the tax consequences to a person
that acquires Capital Securities on their original issue at their original
offering price. The summary does not address all tax consequences that may be
applicable to beneficial owners of the Capital Securities and does address the
tax consequences to special classes of holders such as banks, thrifts, real
estate investment trusts, regulated investment companies, insurance companies,
dealers in securities or currencies, tax-exempt investors, Non-U.S. Holders, as
defined below, engaged in a U.S. trade or business or persons or entities that
hold the Capital Securities as a position in a "straddle," as part of a
"synthetic security" or "hedge," as part of a "conversion transaction" or other
integrated investment, or as other than a capital asset. This summary also does
not address the tax consequences to persons that have a functional currency
other than the U.S. dollar or the tax consequences to shareholders, partners or
beneficiaries of a holder of Capital Securities. Further, it does not include
any description of any alternative minimum tax consequences or the tax laws of
any state or local government or of any foreign government that may be
applicable to the Capital Securities. This summary is based on the Internal
Revenue Code of 1986, the Treasury regulations promulgated under the Internal
Revenue Code and administrative and judicial interpretations , as of the date
hereof, all of which are subject to change, possibly on a retroactive basis. The
authorities on which this summary is based are subject to various
interpretations and the opinions of Klehr, Harrison, Harvey, Branzburg & Ellers
LLP are not binding on the IRS or the courts, either of which could take a
contrary position. Moreover, no rulings are expected to be sought
98
<PAGE>
from the IRS with respect to the transactions described herein. Accordingly,
there can be no assurance that the IRS will not challenge the opinions expressed
herein or that a court would not sustain such a challenge.
Exchange of Capital Securities
The exchange of Series A Capital Securities for Series B Capital
Securities should not be a taxable event to holders for United States federal
income tax purposes. The exchange of Series A Capital Securities for Series B
Capital Securities pursuant to the exchange offer should not be treated as an
"exchange" for United States federal income tax purposes because the Series B
Capital Securities should not be considered to differ materially in kind or
extent from the Series A Capital Securities and because the exchange will occur
by operation of the terms of the Series A Capital Securities. If, however, the
exchange of the Series A Capital Securities for the Series B Capital Securities
were treated as an exchange for United States federal income tax purposes, such
exchange should constitute a recapitalization for federal income tax purposes.
Accordingly, the Series B Capital Securities should have the same issue price as
the Series A Capital Securities, and a holder should have the same adjusted tax
basis and holding period in the Series B Capital Securities as the holder had in
the Series A Capital Securities immediately before the exchange.
Classification of the Debentures
USABanc.com has taken the position that the Debentures should be
classified for United States federal income tax purposes as indebtedness of
USABanc.com. USABanc.com, USA Capital Trust I and the holders of the Capital
Securities, by acceptance of a beneficial interest in a Capital Security, have
agreed to treat the Debentures as indebtedness of USABanc.com for all United
States federal income tax purposes. No assurance can be given, however, that
such position will not be challenged by the IRS or, if challenged, that such a
challenge will not be successful. The remainder of this discussion assumes that
the Debentures will be classified as indebtedness of USABanc.com for United
States federal income tax purposes.
Classification of USA Capital Trust I
In connection with the issuance of the Series A Capital Securities,
Klehr, Harrison, Harvey, Branzburg & Ellers LLP rendered an opinion generally to
the effect that, under then current law and assuming full compliance with the
terms of the Declaration of Trust and the Indenture, and certain other
documents, and based on certain facts and assumptions contained in such opinion,
USA Capital Trust I will be classified for United States federal income tax
purposes as a grantor trust and not as an association taxable as a corporation.
Accordingly, for United States federal income tax purposes, each holder of
Capital Securities generally will be considered the owner of an undivided
beneficial interest in the Debentures, and thus, each holder is required to
include in its gross income its pro rata share of interest income or original
issue discount that is paid or accrued on the Debentures.
Original Issue Discount and Interest Income
Under the Indenture, so long as no event of default exists and no funds
are on deposit in the reserve account, USABanc.com has the right to defer the
payment of interest on the Debentures at any time or from time to time, for a
period not exceeding 10 consecutive semi-annual periods with respect to each
deferral period; provided, however, that no deferral period shall end on a date
other than March 15 or September 15 or extend beyond March 15, 2029. Under
federal income tax regulations, all interest payable on the Debentures will be
treated as "Original Issue Discount," unless the Indenture or Debentures contain
terms or conditions that make the exercise of the deferral option remote.
Although in recent years, USABanc.com has paid stock dividends on its common
stock, it has not paid cash dividends and it does not have a policy of
continuing to pay dividends on its common stock. Accordingly, the covenant in
the Indenture prohibiting USABanc.com from paying cash dividends during a
deferral period does not provide an effective deterrent to USABanc.com's
exercise of the deferral option. In addition, USABanc.com is not prohibited from
exercising its deferral option after the reserve account is exhausted. As a
result, Klehr, Harrison, Harvey, Branzburg & Ellers LLP is unable to conclude
that the Indenture or the Debentures contain terms or conditions that make the
exercise of the deferral option remote. Accordingly, a holder will recognize
income, in the form of OID, on a daily basis under a constant yield method over
the term of the Debentures, including during any deferral period, during which
USABanc.com would not make actual cash payments), regardless of the receipt of
cash with respect to the period to which such income is attributable. Actual
distributions of stated interest would not be includable in income. The amount
of OID that accrues in any semi-annual period, other than a deferral period,
will equal approximately the amount of the interest that accrues on the
Debentures in that semi-annual period at the stated interest rate. One of the
potential consequences of including in income OID on the Debentures is that, if
the interest payment period is extended, holders will include OID in gross
income in advance of the receipt of cash, and any holders who dispose of the
Capital Securities prior to the record date
99
<PAGE>
for the payment of distributions following such deferral period will have
included the OID in gross income, but will not have received any cash related
thereto from USABanc.com and the amount the holder received on such disposition
may or may not appropriately reflect the amount of accrued OID. See "--Sales of
Capital Securities."
Because income on the Capital Securities will constitute OID, corporate
holders of the Capital Securities will not be entitled to a dividends-received
deduction with respect to any income recognized with respect to the Capital
Securities.
Distribution of Debentures or Cash upon Liquidation of USA Capital Trust I
USABanc.com has the right at any time to liquidate USA Capital Trust I
and cause the Debentures to be distributed to the holders of the Capital
Securities and common securities. Under current law, such a distribution, for
United States federal income tax purposes, would be nontaxable and would result
in the holder receiving directly its pro rata share of the Debentures previously
held indirectly through USA Capital Trust I, with a holding period and aggregate
tax basis equal to the holding period and aggregate tax basis such holder had in
its Capital Securities before such distribution. If, however, the liquidation of
USA Capital Trust I were to occur because USA Capital Trust I is subject to
United States federal income tax with respect to income accrued or received on
the Debentures, the distribution of the Debentures to holders by USA Capital
Trust I would be a taxable event to USA Capital Trust I and each holder, and the
holder would recognize gain or loss as if the holder had exchanged its Capital
Securities for the Debentures it received upon liquidation of USA Capital Trust
I. A holder will include interest in income in respect of the Debentures
received from USA Capital Trust I in the manner described above under "--Series
A Issue Discount and Interest Income."
Under certain circumstances described under "Description of Series B
Securities--Description of Capital Securities", the Debentures may be prepaid
for cash and the proceeds of such prepayment distributed to holders in
redemption of their Capital Securities. Under current law, such a redemption
would, for United States federal income tax purposes, constitute a taxable
disposition of the redeemed Capital Securities, and a holder could recognize
gain or loss as if it sold such redeemed Capital Securities for cash. See
"--Sales of Capital Securities."
Sales of Capital Securities
A holder that sells Capital Securities, including a redemption of the
Capital Securities by USABanc.com for cash, will recognize gain or loss equal to
the difference between its adjusted tax basis in the Capital Securities and the
amount realized on the sale of such Capital Securities, other than with respect
to accrued and unpaid interest which has not yet been included in income, which
will be treated as ordinary income. A holder's adjusted tax basis in the Capital
Securities generally will be its initial purchase price increased by OID
previously includable in such holder's gross income to the date of disposition
and decreased by payments, if any, received on the Capital Securities in respect
of OID. Such gain or loss generally will be a capital gain or loss. Capital
Securities constituting a capital asset which are acquired by an individual and
held for more than 12 months are accorded a maximum United States federal
capital gains tax rate of 20%, or rate of 10% if the individual taxpayer is in
the 15% tax bracket. In tax years beginning after December 31, 2000, the 20%
rate drops to 18%, and the 10% drops to 8%, for capital assets acquired after
December 31, 2000 and held more than five years; however, the requirement that
the capital asset be acquired after December 31, 2000 does not apply to the 8%
rate.
The Capital Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the underlying
Debentures. A holder who disposes of his Capital Securities between record dates
for payments of distributions thereon will be required to include accrued but
unpaid OID on the Debentures through the date of disposition in income as
ordinary income, and to add such amount to his adjusted tax basis in his pro
rata share of the underlying Debentures deemed disposed of. To the extent the
selling price is less than the holder's adjusted tax basis, which will include
all accrued but unpaid OID, a holder will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes.
Non-U.S. Holders
For purposes of this discussion, a "Non-U.S. Holder" is any
corporation, individual, partnership, estate or trust that is not a U.S. Holder
for United States federal income tax purposes.
A "U.S. Holder" is a holder of Capital Securities who or which is a
citizen or individual resident, or is treated as a citizen or individual
resident, of the United States for federal income tax purposes, a corporation or
partnership, except in the case of a partnership to the extent provided in
Regulations, created or organized in or under the laws of
100
<PAGE>
the United States or any political subdivision thereof, or an estate the income
of which is includable in its gross income for federal income tax purposes
without regard to its source; or a trust if, and only if, a court within the
United States is able to exercise primary supervision over the administration of
the trust and one or more United States trustees have the authority to control
all substantial decisions of the trust.
Under present United States federal income tax laws payments by USA
Capital Trust I or any of its paying agents to any holder of a Capital Security
who or which is a Non-U.S. Holder will not be subject to United States federal
withholding tax; provided, however, that
o the beneficial owner of the Capital Security does not
actually or constructively own 10 percent or more of
the total combined voting power of all classes of
stock of USABanc.com entitled to vote;
o the beneficial owner of the Capital Security is not a
controlled foreign corporation that is related to
USABanc.com through stock ownership; and
o either the beneficial owner of the Capital Security
certifies to USA Capital Trust I or its agent, under
penalties of perjury, that it is not a U.S. Holder
and provides its name and address or a securities
clearing organization, bank or other financial
institution that holds customers' securities in the
ordinary course of business and holds the Capital
Security in such capacity, certifies to USA Capital
Trust I or its agent, under penalties of perjury,
that such statement has been received from the
beneficial owner by it or by such financial
institution between it and the beneficial owner and
furnishes USA Capital Trust I or its agent with a
copy thereof. Final Treasury Regulations would
provide alternative methods for satisfying these
certification requirements, which are to be effective
for certain payments made to Non-U.S. Holders after
December 31, 1999.
Furthermore, under present federal income tax laws, a Non-U.S. Holder of a
Capital Security will not be subject to United States federal withholding tax on
any gain realized upon the sale or other disposition of a Capital Security.
Information Reporting to Holders
Generally, income on the Capital Securities will be reported to holders
on Forms 1099, which forms should be mailed to holders of Capital Securities by
January 31 following each calendar year.
Backup Withholding
Payments made on, and proceeds from the sale of, the Capital Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification requirements. Any withheld amounts will be allowed
as a credit against the holder's United States federal income tax, provided the
required information is provided to the IRS.
The United States federal income tax discussion set forth above is
included for general information only and may not be applicable depending upon a
holder's particular situation. Holders should consult their tax advisors with
respect to the tax consequences to them of the purchase, ownership and
disposition of the Capital Securities, including the tax consequences under
state, local, foreign and other tax laws and the possible effects of changes in
United States federal or other tax laws.
ERISA CONSIDERATIONS
Each of USABanc.com, as the obligor with respect to the Debentures held
by USA Capital Trust I, its affiliates and the property trustee may be
considered a "party in interest" ERISA or a "disqualified person" under Section
4975 of the Internal Revenue Code with respect to many plans that are subject to
ERISA and certain employee benefit-related provisions of the Code. The purchase
and/or holding of Capital Securities by a plan that is subject to the fiduciary
responsibility provisions of ERISA or the prohibited transaction provisions of
Section 4975 of the Code, including individual retirement arrangements and other
plans described in Section 4975(e)(1) of the Internal Revenue Code and with
respect to which USABanc.com, the property trustee or any affiliate is a service
provider or otherwise is a party in interest or a disqualified person may
constitute or result in a prohibited transaction under ERISA or Section 4975 of
the Internal Revenue Code, unless such Capital Securities are acquired pursuant
to and in accordance with an applicable exemption, such as a Prohibited
Transaction Class Exemption for transactions:
101
<PAGE>
o as determined by an independent qualified
professional asset manager (PTCE 84-14);
o involving banks' collective investment funds
(PTCE 91-38);
o involving insurance company pooled separate accounts
(PTCE 90-1);
o involving types of insurance company general accounts
(PTCE 95-60); or
o as determined by an in-house asset manager
(PTCE 96-23).
Accordingly, each purchaser of Capital Securities, by its acceptance thereof,
shall be deemed to have represented to USABanc.com, USA Capital Trust I and the
initial purchaser either that it is not a plan, a trustee or other person acting
on behalf of a plan or any other person or entity using the assets of any plan
to finance such purchase, or that such purchase will not result in a prohibited
transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue
Code for which there is no applicable statutory or administrative exemption. In
addition, a Plan fiduciary considering the purchase of Capital Securities should
be aware that the assets of USA Capital Trust I may be considered "plan assets"
for ERISA purposes. In such event, any persons exercising discretion with
respect to the Debentures may become fiduciaries parties in interest or
disqualified persons with respect to investing plans. Accordingly, each
investing plan, by purchasing the Capital Securities, will be deemed to have
directed USA Capital Trust I to invest in the Debentures and to have consented
to the appointment of the property trustee. In this regard, it should be noted
that, in an event of default, USABanc.com may not remove the property trustee
without the approval of a majority of the holders of the Capital Securities.
A Plan fiduciary should consider whether the purchase of Capital
Securities could result in a delegation of fiduciary authority to the property
trustee, and, if so, whether such a delegation of authority is consistent with
the terms of the plan's governing instrument or any investment management
agreement with the plan. Further, prior to an event of default with respect to
the Debentures, the property trustee will have only limited custodial and
ministerial authority with respect to Trust assets.
The sale of investments to plans is in no respect a representation by
USA Capital Trust I, USABanc.com, the property trustee, the initial purchaser or
any other person associated with the sale of the Capital Securities that such
securities meet all relevant legal requirements with respect to investments by
plans generally or any particular plan, or that such securities are otherwise
appropriate for plans generally or any particular plan. Any purchaser proposing
to acquire Capital Securities with assets of any plan should consult with its
counsel.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Series B Capital Securities for its
own account in connection with the exchange offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Series B Capital
Securities. This prospectus, as it may be amended or supplemented from time to
time, may be used by participating broker-dealers during the period referred to
below in connection with resales of Series B Capital Securities received in
exchange for Series A Capital Securities if such Series A Capital Securities
were acquired by such participating broker-dealers for their own accounts as a
result of market-making activities or other trading activities. USABanc.com and
USA Capital Trust I have agreed that this prospectus, as it may be amended or
supplemented from time to time, may be used by a participating broker-dealer in
connection with resales of such Series B Capital Securities for a period ending
90 days after the expiration date, subject to extension under certain limited
circumstances described herein or, if earlier, when all such Series B Capital
Securities have been disposed of by such participating broker-dealer. However, a
Participating Broker-Dealer who intends to use this Prospectus in connection
with the resale of Series B Capital Securities received in exchange for Series A
Capital Securities pursuant to the exchange offer must notify USABanc.com or USA
Capital Trust I, or cause USABanc.com or USA Capital Trust I to be notified, on
or prior to the expiration date, that it is a participating broker-dealer. Such
notice may be given in the space provided for that purpose in the letter of
transmittal or may be delivered to the exchange agent at one of the addresses
set forth herein under "The Exchange Offer--Exchange Agent." See "The Exchange
Offer--Resales of Series B Capital Securities."
USABanc.com or USA Capital Trust I will not receive any cash proceeds
from the issuance of the Series B Capital Securities offered hereby. Series B
Capital Securities received by broker-dealers for their own accounts in
connection with the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Series B Capital Securities or a combination of
such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers
102
<PAGE>
who may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchasers of any such Series B Capital
Securities.
Any broker-dealer that resells Series B Capital Securities that were
received by it for its own account in connection with the exchange offer and any
broker or dealer that participates in a distribution of such Series B Capital
Securities may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of Series B Capital Securities
and any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
VALIDITY OF EXCHANGE SECURITIES
Certain matters of Delaware law relating to the validity of the Series
B Capital Securities and the creation of USA Capital Trust I will be passed upon
on behalf of USA Capital Trust I by Richards, Layton & Finger, special Delaware
counsel to USA Capital Trust I and USABanc.com. The validity of the Series B
Guarantee and the Series B Debentures will be passed upon for USABanc.com by
Klehr, Harrison, Harvey, Branzburg & Ellers LLP. Certain matters relating to
United States federal income tax considerations will be passed upon for
USABanc.com by Klehr, Harrison, Harvey, Branzburg & Ellers LLP.
WHERE YOU CAN FIND MORE INFORMATION
USABanc.com files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission in
compliance with the information reporting requirements of the Exchange Act. You
may read and copy any document that USABanc.com files with the Securities and
Exchange Commission at the following locations:
<TABLE>
<CAPTION>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, DC 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 at prescribed rates. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the public reference rooms. USABanc.com's filings are also available to the
public from commercial document retrieval services and from the web site
maintained by the Securities and Exchange Commission at "http://www.sec.gov."
Separate financial statements of USA Capital Trust I are not included
in this prospectus. We do not believe that such financial statements are helpful
because USA Capital Trust I is a newly formed special purpose entity; USA
Capital Trust I has no operating history or independent operations; and USA
Capital Trust I is not engaged in, and does not propose to engage in, any
activity other than holding as trust assets the Debentures, issuing the Capital
Securities and common securities and engaging in incidental activities. See "USA
Capital Trust I." In addition, USABanc.com does not expect that USA Capital
Trust I will file reports and other information under the Exchange Act with the
Securities and Exchange Commission.
This prospectus is part of a registration statement filed by
USABanc.com and USA Capital Trust I with the Securities and Exchange Commission
under the Securities Act. As allowed by Securities and Exchange Commission
rules, this prospectus does not contain all the information you can find in the
registration statement or the exhibits filed with the registration statement.
You should review the registration statement and the exhibits filed with such
registration statement for further information regarding USABanc.com, USA
Capital Trust I and the Series B Capital Securities being offered by this
prospectus. The registration statement and its exhibits may be inspected at the
public reference facilities of the Securities and Exchange Commission at the
addresses listed above.
103
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
USABANC.COM, INC.
(formerly USABancShares, Inc.)
Page
----
Report of Independent Certified Public Accountants........................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.............. F-3
Consolidated Statements of Operations as of December 31, 1998 and 1997... F-4
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income as of December 31, 1998 and 1997.............. F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999 (unaudited) ........................................ F-32
Consolidated Statements of Income for the three months ended
March 31, 1999 and 1998 (unaudited) ................................... F-33
Consolidated Statements of Comprehensive Income for the three months
ended March 31, 1999 and 1998 (unaudited) ............................. F-34
Consolidated Statement of Changes in Stockholders' Equity for the
three months ended March 31, 1999 (unaudited) ............................ F-35
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 (unaudited) ................................... F-36
Notes to Consolidated Financial Statements................................ F-37
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
USABanc.com, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
USABanc.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 USABanc.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
Philadelphia, Pennsylvania
March 22, 1999 (except for
Note 21, as to which the
Date is June 15, 1999)
F-2
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------------
(in thousands, except per share data)
ASSETS 1998 1997
---------------- ----------------
<S> <C> <C>
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 ....................................................... 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 shares authorized, no shares issued
and outstanding in 1998 and 1997
Common stock $1.00 par value, 10,000,000 shares authorized, 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.......................................... (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>
USABanc.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)....................................... $ .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>
USABanc.com, Inc. and Subsidiaries
Consolidated Statement of Changes in
Stockholders' Equity and Comprehensive Income
<TABLE>
<CAPTION>
Unearned Accumulated
Additional Accumulated compensation other
Common paid-in (deficit) Class B comprehensive
stock capital earnings Common Stock income
------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
(in thousands)
Balance, January 1, 1997.................. $ 597 $4,878 $ (152) $(425) $ (2)
Net loss.............................. -- -- (226) -- --
Other comprehensive income,
net of reclassification adjustments
and taxes.......................... -- -- -- -- 104
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............... -- -- -- 425 --
------ ------ ------ ----- -----
Balance, December 31, 1997................ 814 4,828 (378) -- 102
Net income............................ -- -- 1,490 -- --
Other comprehensive loss,
net of reclassification adjustments
and taxes.......................... -- -- -- -- (416)
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 $ -- $(314)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
stockholders' Comprehensive
equity income (loss)
------------- -------------
<S> <C> <C>
Balance, January 1, 1997.................. $ 4,896
Net loss.............................. (226) $ (226)
Other comprehensive income,
net of reclassification adjustments
and taxes.......................... 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
-------
Balance, December 31, 1997................ 5,366
Net income............................ 1,490 $1,490
Other comprehensive loss,
net of reclassification adjustments
and taxes.......................... (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................ $13,597
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................................... $ 1,490 $ (226)
Adjustments to reconcile net income to net cash provided by
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 provided by 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>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
Note 1 -- Organization
USABanc.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 judgements, 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>
USABanc.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.
F-8
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
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 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 originations 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.
F-9
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
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.
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>
F-10
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
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.
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.
F-11
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
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
<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 of...... 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>
F-12
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 5 -- Investment Securities -- (Continued)
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>
(Dollars in Thousands) Available for sale Held to maturity
---------------------- ---------------------------------------- --------------------------------------
Weighted Weighted
Approximate Average Amortized Approximate Average Amortized
Yield Cost Fair Value Yield Cost Fair Value
----------- -------- ---------- ----------- --------- ----------
<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 ,833 -- -- -- --
------- ------- ----- ------- ------ ----
$28,894 $28,389 $15,755 $15,951
</TABLE>
F-13
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 5 -- Investment Securities -- (Continued)
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.
Note 6 -- Loans Receivable
Loans outstanding by classification are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
-------- -------
(in thousands)
<S> <C> <C>
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
</TABLE>
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 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:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
-------- -------
(in thousands)
<S> <C> <C>
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
</TABLE>
F-14
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 6 -- Loans Receivable -- (Continued)
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>
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
F-15
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
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: December 31,
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
(in thousands)
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 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 records as of June 1, 1999.
F-16
<PAGE>
USABanc.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998 and 1997
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-17
<PAGE>
USABanc.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
---- ----
(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
---- ----
(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-18
<PAGE>
USABanc.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 were 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.
F-19
<PAGE>
USABanc.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
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.
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 consist 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-20
<PAGE>
USABanc.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.
F-21
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
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. 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.
F-22
<PAGE>
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.
F-23
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
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 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
lives of ten years for all options.
No options were granted in 1997.
F-24
<PAGE>
USABanc.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>
F-25
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
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 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.
For capital
Actual adequacy purposes
Amount Ratio Amount Ratio
------- ----- ------ -----
(in thousands)
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
F-26
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 18 -- Regulatory Capital Requirements -- (Continued)
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 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.
F-27
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1998 and 1997
Note 19 - Condensed Financial Information - Parent Company Only
Condensed financial information for USABanc.com, Inc. (parent company
only) follows:
BALANCE SHEET
December 31,
1998 1997
ASSETS (in thousands)
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-28
<PAGE>
USABanc.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
December 31,
1998 1997
---- ----
(in thousands)
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)
F-29
<PAGE>
USABanc.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-30
<PAGE>
USABanc.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)
ASSETS
<S> <C> <C>
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.
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.
F-31
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1998 and 1997
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-32
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks......................................................... $ 1,071 $ 1,335
Interest bearing deposit with banks............................................. 247 7,706
Securities available-for-sale................................................... 50,206 28,389
Securities held-to-maturity (fair value: 1999 - $14,665;
1998 - $15,951).............................................................. 14,722 15,755
FHLB Stock...................................................................... 3,523 3,523
Loans receivable, net........................................................... 110,013 102,138
Premises and equipment, net..................................................... 2,175 2,023
Accrued interest receivable..................................................... 1,829 1,633
Other real estate .............................................................. 65 66
Goodwill, net................................................................... 74 69
Deferred income taxes........................................................... 449 573
Other assets.................................................................... 1,856 1,896
-------- --------
Total assets.............................................................. $186,230 $165,106
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand...................................................................... $ 1,329 $ 1,439
NOW......................................................................... 908 846
Money Market................................................................ 2,109 2,345
Savings and passbook ....................................................... 12,367 5,281
Time........................................................................ 109,052 104,476
-------- --------
Total deposits............................................................ 125,765 114,387
======== ========
Borrowed funds
Short-term borrowings....................................................... 5,000 6,106
Long-term borrowings........................................................ 25,000 25,000
Guaranteed subordinated debt................................................ 10,000 --
Collateralized borrowings................................................... 4,163 4,199
Accrued interest payable ....................................................... 517 399
Accrued expenses and other liabilities ......................................... 2,089 1,418
-------- --------
Total liabilities ........................................................ 172,534 151,509
======== ========
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, 4,014,772 shares
issued and outstanding in 1998............................................... 2,116 2,116
Additional paid-in capital...................................................... 10,683 10,683
Accumulated earnings (deficit) ................................................. 1,526 1,112
Accumulated other comprehensive (loss) income................................... (629) (314)
-------- --------
Total stockholders' equity................................................ 13,696 13,597
-------- --------
Total liabilities and stockholders' equity................................ $186,230 $165,106
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-33
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months
ended March 31,
1999 1998
---- ----
<S> <C> <C>
Interest income:
Loans.................................................................... $ 2,756 $ 1,647
Investment securities.................................................... 1,044 548
Interest bearing deposits and other...................................... 81 92
------- -------
Total interest income............................................... 3,881 2,287
------- -------
Interest expense:
Deposits................................................................. 1,667 1,080
Borrowed funds........................................................... 488 94
------- -------
Total interest expense.............................................. 2,155 1,174
------- -------
Net interest income................................................. 1,726 1,113
Provision for loan losses.................................................... 100 35
------- -------
Net interest income after provision for
loan losses.......................................................... 1,626 1,078
------- -------
Non-interest income:
Gain on sales of investment securities................................... 56 39
Brokerage operations..................................................... 126 162
Other.................................................................... 138 20
------- -------
Total non-interest income........................................... 320 221
------- -------
Non-interest expenses:
Salaries and employee benefits........................................... 506 272
Net occupancy expense.................................................... 164 72
Professional fees........................................................ 100 16
Office expenses.......................................................... 52 31
Data processing fees..................................................... 51 28
Advertising expense...................................................... 45 9
Other operating expenses................................................. 338 190
------- -------
Total non-interest expense.......................................... 1,256 618
------- -------
Earnings before income taxes................................................. 690 681
Taxes on income:............................................................. 276 268
------- -------
Net earnings................................................................. $ 414 $ 413
Earnings per share - basic (1)............................................... $ 0.10 $ 0.13
Earnings per share - diluted (1)............................................. $ 0.10 $ 0.12
</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-34
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months
ended March 31,
1999 1998
---- ----
<S> <C> <C>
Net earnings............................................................... $ 414 $ 413
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period,
net of taxes...................................................... (315) (104)
----- -----
Comprehensive income....................................................... $ 99 $ 309
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-35
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended March 31, 1999
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Accumulated other
Common paid-in earnings comprehensive
Stock capital (deficit) income Total
------ ---------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1998............................ $2,116 $10,683 $1,112 $ (314) $13,597
Net unrealized loss on securities available-for-sale... -- -- -- (315) (315)
Net income............................................. -- -- 414 -- 414
------ ------- ------ ------- -------
Balances, March 31, 1999............................... $2,116 $10,683 $1,526 $ (629) $13,696
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-36
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months
ended March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income ................................................................. $ 414 $ 413
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for possible loan losses ........................................ 100 35
Depreciation................................................................ 88 29
(Increase) Decrease in goodwill............................................. (5) 1
Net accretion of discounts on purchased loan portfolios..................... (301) (259)
Net accretion of securities discount........................................ (13) (14)
Net gains on sale of securities ............................................ (56) (39)
Net gains on sale of loan assets............................................ (42) -
Increase in accrued interest receivable ................................... (196) (97)
Increase in deferred tax asset.............................................. (56) (42)
Decrease (increase) in other assets......................................... 40 (64)
Increase in accrued interest payable ....................................... 118 81
Increase in accrued expenses and other liabilities.......................... 671 (320)
-------- --------
Net cash provided by (used in) operating activities 762 (276)
-------- --------
Cash flows from investing activities:
Investment securities available for sale
Purchases ............................................................... (22,921) (8,570)
Sales.................................................................... 1,081 1,840
Maturities and principal repayments...................................... 23 750
Investment securities held to maturity
Purchases................................................................ (1,979) --
Sales.................................................................... 1,200 --
Maturities and principal repayments...................................... 1,812 1,048
Purchases redemptions of FHLB Stock......................................... -- (57)
Decrease (Increase) in interest bearing deposits with banks 7,459 (4,235)
Net increase in loans ...................................................... (7,698) 3,120
Decrease in other real estate, net ......................................... 1 --
Purchases of premises and equipment......................................... (240) (273)
-------- --------
Net cash used in investing activities............................. (21,262) (12,617)
--------- --------
Cash flows from financing activities:
Net increase in deposits.................................................... 11,378 12,007
Net (decrease) in borrowings ............................................... (1,142) (6,004)
Private placement proceeds.................................................. -- 7,136
Trust preferred proceeds.................................................... 10,000 --
-------- --------
Net cash provided by financing activities ........................ 20,236 13,139
-------- --------
Net (decrease) increase in cash and cash equivalents (264) 246
Cash and cash equivalents, beginning of period ................................. 1,335 833
-------- --------
Cash and cash equivalents, end of period ..................................... $ 1,071 $ 1,079
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-37
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of USABanc.com, Inc. (the "Company"), vBank (the "Bank"), a
Pennsylvania chartered stock savings bank, USACapital, Inc., a Pennsylvania
corporation, USACredit, Inc., a Pennsylvania corporation, 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
March 31, 1999 and for the three months ended March 31, 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.
(Dollars in Thousands), except per share data
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Basic EPS Computation:
Numerator - Net earnings.................................................... $ 414 $ 413
Denominator - Weighted average shares outstanding........................... 2,116 1,605
------ ------
Basic EPS ...................................................................... $ 0.20 $ 0.26
Diluted EPS Computation:
Numerator - Net earnings.................................................... $ 414 $ 413
Denominator - Weighted average shares outstanding........................... 2,116 1,605
Effect of dilutive securities............................................... 117 92
------ ------
Diluted EPS..................................................................... $ 0.19 $ 0.24
</TABLE>
F-38
<PAGE>
================================================================================
You should rely only on the information contained in this Prospectus or that we
have referred you to. We have not authorized anyone to provide you with
information that is different. The information in this Prospectus may to be
accurate beyond the date indicated below, regardless of when this Prospectus is
delivered or when the securities described in this Prospectus are sold. This
Prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary...........................................................................................................1
Risk Factors......................................................................................................6
Accounting Treatment.............................................................................................14
Capitalization...................................................................................................14
Regulatory Capital...............................................................................................15
Use of Proceeds..................................................................................................16
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................................. 17
Business.........................................................................................................29
Management ......................................................................................................51
Certain Relationships and Related Transactions...................................................................56
Regulation of USABanc.com and vBank..............................................................................57
USA Capital Trust I..............................................................................................63
The Exchange Offer...............................................................................................64
Description of Series B Securities..............................................................................73
Description of Series A Securities..............................................................................96
Relationship Among the Capital Securities, the
Debentures and the Guarantee..............................................................................96
Certain Federal Income Tax Considerations........................................................................98
ERISA Considerations............................................................................................101
Plan of Distribution............................................................................................101
Validity of Exchange Securities.................................................................................102
Where You Can Find More Information.............................................................................102
Financial Statements............................................................................................F-1
</TABLE>
$10,000,000
USA CAPITAL TRUST I
9.50% Exchange Capital Securities
for any and all of its outstanding
9.50% Series A Capital Securities
fully and unconditionally
guaranteed, as described herein, by
USABanc.com, Inc.
------------------------
PROSPECTUS
------------------------
August 2 , 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
USABanc.com's charter and by-laws provide that USABanc.com will
indemnify every person who is or was a Director or executive officer of
USABanc.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 executor officer may become involved by
reason of being or having been a Director or executive officer of USABanc.com.
Pennsylvania law, under which USABanc.com is incorporated, allows USABanc.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 USABanc.com and, with respect to any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful.
USABanc.com maintains a Director and officer liability insurance policy covering
each of USABanc.com's Directors and executive officers.
Under the Declaration of Trust of USA Capital Trust I, USABanc.com has
agreed to indemnify each of the trustees of USA Capital Trust I, and to hold
each trustee harmless against any loss, damage, claim, liability or expense
incurred without negligence or bad faith on its part, arising out of, or in
connection with, the acceptance or administration of the Declaration of Trust,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties under the Declaration of Trust.
Item 21. 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>
3.1 Amended and Restated Articles of Incorporation of USABanc.com*
3.1.1 Articles of Amendment to the Amended and Restated Articles of Incorporation of
USABanc.com++
3.2 Bylaws of USABanc.com *
4.1 Indenture of USABanc.com relating to the Debentures+
4.2 Form of Certificate of Series B Debenture+
4.3 Form of Certificate of Series A Debenture+
4.4 Certificate of Trust of USA Capital Trust I+
4.5 Amended and Restated Declaration of Trust of USA Capital Trust I+
4.6 Form of Common Security+
4.7 Form of Series B Capital Security Certificate+
4.8 Form of Certificate of Series A Capital Security+
4.9 Form of Series B Guarantee of USABanc.com relating to the Series B Capital
Securities+
4.10 Registration Rights Agreement among USABanc.com, USA Capital Trust I and Sandler
O'Neill & Partners, L.P.+
5.1 Opinion and consent of Klehr, Harrison, Harvey,
Branzburg & Ellers LLP as to legality of the Series B
Debentures and the Series B Guarantee to be issued by
USABanc.com+
5.2 Opinion and consent of Richards, Layton & Finger as to the legality of the Series B Capital
Securities to be issued by USA Capital Trust I+
8 Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers LLP as to certain federal income tax
matters+
10.1 Stock Option Plan*
10.2 Employment agreement between USABanc.com and Kenneth L. Tepper*
10.3 Employment agreement between USABanc.com and Brian M. Hartline***
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.4 Agreement by and between Kenneth L. Tepper and USABanc.com dated January 2, 1998**
10.5 Warrant Agreement between USABanc.com and Sandler O'Neill dated February 13, 1998**
10.6 Registration Rights Agreement between USABanc.com and certain shareholders dated
February 13, 1998**
11 Computation of Per Share Earnings (Included in Financial Statements on Page F-7)
21 Subsidiaries of USABanc.com+
23.1 Consent of Grant Thornton LLP
23.2 Consent of Klehr, Harrison, Harvey, Branzburg & Ellers LLP+
23.3 Consent of Richards, Layton & Finger+
24 Power of Attorney of certain officers and Directors of USABanc.com and the
Administrative trustees of USA Capital Trust I (included on the signature pages hereto)
25.1 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as trustee under the
Indenture+
25.2 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as trustee under the
Declaration of Trust of USA Capital Trust I+
25.3 Form T-1 Statement of Eligibility of Wilmington Trust Company under the Exchange
Guarantee for the benefit of the holders of Exchange Capital Securities of USA Capital Trust I+
99.1 Form of Letter of Transmittal+
99.2 Form of Notice of Guaranteed Delivery+
</TABLE>
- --------------------
* Incorporated by reference from the Registration Statement on Form SB-2 of
USABanc.com, as amended, Registration No. 33-92506.
** Incorporated by reference from USABanc.com's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997.
*** Incorporated by reference from USABanc.com's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998.
+ Previously filed.
++ Incorporated by reference from the Registration Statement on Form SB-2 of
USABanc.com, Inc., Registration No. 333-83041.
Item 22. Undertakings
Each of the undersigned Registrants hereby undertakes:
(1) to file, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
this Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement; and
(iii) include any additional or changed material information
on the plan of distribution;
(2) that, for determining liability under the Securities Act of 1933,
to treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering;
II-2
<PAGE>
(3) to file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering; and
(4) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired or involved therein,
that was not the subject of and included in the Registration Statement when it
became effective.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, officers and controlling persons of the
undersigned Registrants pursuant to the foregoing provisions, or otherwise, the
Registrants have 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 Registrants of expenses incurred or paid by a Director, officer of
controlling person of the Registrants 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 Registrants will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by the Registrants is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, USABanc.com, Inc.
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania on July 28, 1999.
USABanc.com, Inc.
By: /s/ Kenneth L. Tepper*
---------------------------------
Kenneth L. Tepper, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
July 28, 1999 By: /s/ Kenneth L. Tepper*
---------------------------------
Kenneth L. Tepper, President and
Chief Executive Officer
July 28, 1999 /s/ Brian M. Hartline
---------------------------------
Brian M. Hartline, Chief
Financial Officer
(Principal Accounting and
Financial Officer)
July 28, 1999 /s/ George M. Laughlin*
---------------------------------
George M. Laughlin
Chairman of the Board
---------------------------------
Zeev Shenkman
Vice Chairman of the Board
---------------------------------
Jeffrey A. D'Ambrosio
Director
July 28, 1999 /s/ George C. Fogwell, III*
---------------------------------
George C. Fogwell, III
Director
---------------------------------
John A. Gambone
Director
July 28, 1999 /s/ Carol J. Kauffman*
---------------------------------
Carol J. Kauffman
Director
July 28, 1999 /s/ Wayne O. Leevy*
---------------------------------
Wayne O. Leevy
Director
<PAGE>
July 28, 1999 /s/ Clarence L. Radar*
---------------------------------
Clarence L. Rader
Director
*By: /s/ Brian M. Hartline
---------------------------------
Brian M. Hartline
Attorney-in-Fact
Pursuant to the requirements of the Securities Act, USA Capital Trust I
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on July 28, 1999.
USA Capital Trust I
By: /s/ Kenneth L. Tepper*
---------------------------------
Kenneth L. Tepper
Administrative trustee
By: /s/ Brian M. Hartline
---------------------------------
Brian M. Hartline
Administrative trustee
By: /s/ Craig J. Scher*
---------------------------------
Craig J. Scher
Administrative trustee
* By: /s/ Brian M. Hartline
------------------------------------
Brian M. Hartline
Attorney-in-Fact
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated March 22, 1999 (except for Note 21, as
to which the date is June 15, 1999), accompanying the consolidated financial
statements of USABanc.com, Inc. (formerly USABancShares, Inc.) and Subsidiaries
contained in the Registration Statement and Prospectus. We consent to the use of
the aformentioned reports in the Registration Statement and Prospectus.
/s/ Grant Thornton LLP
Philadelphia, PA
July 30, 1999
