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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
USABancShares.com
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, USABancShares.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,
USABancShares.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.
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 September 14, 1999.
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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.
USABancShares.com, Inc.
USABancShares.com is a financial services and bank holding company
dedicated to becoming a leading provider of financial products and services over
the Internet. USABancShares.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 USABancShares.com's acquisition of vBank, senior
management has undertaken a strategy focused on:
o pursuing strategic alliances and marketing programs with other
Internet entities;
o conducting an intensive national marketing campaign;
o establishing the USABancShares.com Website, www.usabancshares.com,
as a leading and comprehensive source for financial services on the
Internet;
o generating sponsorship and advertising revenues; and
o expanding our lending efforts.
USABancShares.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, as
USAForce.
USABancShares.com's executive offices are located at 1535 Locust
Street, Philadelphia, Pennsylvania 19102. vBank has retail locations in Center
City Philadelphia, Plymouth Meeting, Norristown 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. USABancShares.com's
telephone number is 877-482-2650 and its Website address is
www.usabancshares.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 USABancShares.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 USABancShares.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 USABancShares.com.
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The Exchange Offer
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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
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$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 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
October 15, 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 USABancShares.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."
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."
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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 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 USABancShares.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 USABancShares.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.
Use of Proceeds............................. Neither USABancShares.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.
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The Series B Capital Securities
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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;
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, USABancShares.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."
USABancShares.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 USABancShares.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 USABancShares.com as described in
"Description of Series B Securities--Description of
Guarantee--General."
In addition, because USABancShares.com is a holding company, the Debentures
and the Guarantee are effectively subordinated to all existing and
future liabilities of USABancShares.com's subsidiaries, including vBank's
deposits.
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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............................. USABancShares.com is required to maintain a reserve account for two years
from the date of issuance of the Debentures. It has deposited $1.9
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."
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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.
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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. If any of the following risks actually occur, our
business, financial condition or results of operations likely would suffer. You
should consider all of these risk factors to be important. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations. 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 USABancShares.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 USABancShares.com making payments on
the Series B Debentures as and when required. If USABancShares.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 USABancShares.com, the
Series B Debentures rank junior and subordinate in right of payment to
USABancShares.com's senior indebtedness and the liabilities, including deposits,
of USABancShares.com's subsidiaries. Thus, in an event of default, you should
assume that you only would be able to look to the assets of USABancShares.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
USABancShares.com to make payments on the Debentures
USABancShares.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 USABancShares.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 USABancShares.com. There can be no assurance
that vBank can pay sufficient dividends so that USABancShares.com will be able
to pay it debt obligations in the future. See "Regulation of USABancShares.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,
USABancShares.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
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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."
The market value of the Capital Securities may be adversely affected by a
deferral of interest on the Debentures
Although USABancShares.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 USABancShares.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 USABancShares.com defaults in paying distributions on the
Debentures when due, holders of Capital Securities shall have the right to
institute an enforcement proceeding against USABancShares.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,
USABancShares' 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 USABancShares.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 $877,000 increase in
advertising and marketing expenses and compensation costs for the six months
ended June 30, 1999 compared to the first six months of 1998. We expect to spend
approximately $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
USABancShares. 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
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their current level or that we will achieve or maintain profitability or
generate positive cash flow from operations in future periods. Because of these
projected operating losses, the market price of our common stock could decline.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We face strong competition
The financial services industry is highly competitive and is rapidly
evolving, both on-line and through traditional channels. In implementing our
Internet strategy, we face strong competition from more established providers of
direct-marketed savings and investment products, such as 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. We were certified to begin offering our Internet banking and brokerage
services through our website on July 15, 1999. Due to our limited operating
history it is diffucult 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 to increased governmental regulation. Changes in or insufficient
availability of telecommunications services could produce slower response times
and
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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 causing interruptions
in our operations could materially adversely affect our business, financial
condition, results of operations and cash flows. See "Business--Security."
During September 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 would be
materially adversely affected.
If a competitor successfully challenges our ability to use the names
USABancShares, vBank or www.usabancshares.com, significant financial resources
in developing brand awareness would be lost
Our success in introducing new financial products and services through
the Internet and attracting new customers will depend in part upon our ability
to increase the brand name awareness of USABancShares.com, vBank,
www.usabancshares.com and other names related to us. We are making a substantial
investment in the promotion and marketing of the USABancShares.com and vBank
brands. We own a federal registration for the service mark USABancShares.com. We
do not own federal registrations for the service marks "USABancShares.com" or
"vBank," although applications for such service marks are pending. Infringement
claims by competitors challenging our ability to use such names, even if without
merit, could result in the expenditure of significant financial and managerial
resources. Further, if such claims are successful, we could lose our right to
use such names and the benefits of the brand awareness we are spending
significant resources to develop. In that regard, U.S. Bank National Association
and its holding company, U.S. Bancorp, recently brought a legal proceeding
against us alleging that our use of the name USABanc.com infringed on certain
service marks allegedly owned by U.S.Bancorp. As a result of such proceeding, we
ceased use of the name USABanc.com under which we had been actively marketing
our Internet bank and changed our name to USABancShares.com. See
"Business--Legal Proceedings."
Our competitive position depends on our ability to attract and retain key
employees
Our success depends heavily on the expertise and guidance of our
President and Chief Executive Officer, Kenneth L. Tepper, and certain other
senior executive officers, including Brian M. Hartline, our Chief Financial
Officer and Craig J. Scher, our Senior Vice President and Director of
Lending/Credit of vBank. We have entered into employment agreements with Messrs.
Tepper, Hartline and Scher. We do not maintain key-man life insurance on Messrs.
Tepper, Hartline or Scher. If we lose the services of Messrs. Tepper, Hartline
or Scher, or if we are unable to attract additional qualified employees, our
business would likely be adversely affected. See "Management."
Changes in interest rates could adversely affect us
Like most financial institutions, our results of operations are
primarily dependent on net interest income. Net interest income results from the
"margin" between interest earned on interest-earning assets, such as investments
and loans, and interest paid on interest-bearing liabilities, such as deposits
and borrowings. As of June 30, 1999, based on certain assumptions, vBank's
interest-bearing liabilities that were estimated to mature or reprice within one
year exceeded similar interest-earning assets by $67.1 million, or 31.6% of
total interest-earning assets.
Interest rates are highly sensitive to many factors that are beyond our
control. Some of these factors include: governmental monetary policies;
inflation; recession; unemployment; the money supply; domestic and international
economic and political conditions; and domestic and international crises.
Changes in interest rates could have adverse effects on our operations 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 June 30, 1999, a majority of our real estate loan portfolio
consisted of loans secured by multi-family residential real estate and
commercial real estate properties. In addition, as of June 30, 1999, we had an
aggregate of $2.3 million of commercial business loans and we expect to increase
our emphasis on commercial business lending in the future. Furthermore, all of
our commercial business loans which are secured by real estate have in the past
been classified as real estate loans. We make commercial real estate and
commercial business loans following analysis of credit risk, the value of the
underlying collateral and other more intangible factors. This commercial lending
activity exposes us to risks, particularly in the case of loans to small
businesses and individuals. These risks include possible errors in our credit
analysis, the uncertainty of the borrower's ability to repay the loans, the
uncertainty of future economic conditions and the possibility of loan defaults.
Commercial lending generally includes higher interest rates and shorter terms of
repayment than non-commercial lending. Accordingly, we are subject to greater
credit risk with our commercial lending. As of June 30, 1999, we had no
non-performing commercial business loans and $941,000 of non-performing loans
secured by commercial real estate and multi-family residential real estate. 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 four other financial institutions, as of June 30,
1999, we had seven loan participations with an aggregate principal balance of
11
<PAGE>
$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."
We are vulnerable to unfavorable economic conditions
The performance of financial institutions like vBank is sensitive to
general economic conditions. Unfavorable economic conditions at the local,
national or international level may adversely affect vBank's performance. For
example, much of the United States experienced a significant economic decline in
the late 1980's and early 1990's. This decline adversely affected the real
estate market and the banking industry. As a result of this decline, loan
repayment delinquencies increased and the value of properties underlying secured
loans declined. Numerous bank failures resulted in the placement of many
properties in the hands of a federal banking agency with the primary objective
of prompt liquidation. In addition, recent activity in financial markets in the
United States and the rest of the world has demonstrated an increasing
interdependency among the various world markets and economies and has raised
concerns among those in the banking industry. The implications of this
interdependency are very uncertain and present risks to financial institutions
such as vBank, particularly in light of the current turmoil in some foreign
markets and economies. Economic conditions are unpredictable and the potential
for downturns is always present.
Although we have historically focused on acquiring loans in the
Mid-Atlantic region of the United States, we have acquired loans secured by real
estate located in a number of other states including Texas, Florida and
California and we may acquire loans throughout the nation. In the future, we may
acquire or originate loans throughout the United States through our Internet
banking operations or through other means. To the extent such loans are secured
by real estate outside the Mid-Atlantic region, such loans may present a greater
risk of collectability than loans located in our historical primary market area.
Thus, adverse economic conditions affecting any of these market areas could have
a negative impact on our financial condition and results of operations.
Furthermore, an increase in loan delinquencies 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
USABancShares 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 $25,000 in additional costs during the year ending
December 31, 1999 related to the proposed implementation of our Year 2000 Plan.
See "Management's Discussion and Analysis and Analysis of Financial Condition
and Results of Operations--Year 2000 Compliance."
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<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 USABancShares.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 U.S. companies that collect information over the
Internet from individuals in E.U. 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 U.S. Department
of Commerce published for comment a set of "safe harbor" principles designed to
help U.S. 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 U.S. Department of Commerce presented a
joint report to the European Union/United States Summit in Bonn, Germany on the
topic of the E.U./U.S. 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
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ACCOUNTING TREATMENT
For financial reporting purposes, USA Capital Trust I is treated as a
subsidiary of USABancShares.com and, accordingly, the accounts of USA Capital
Trust I will be included in the consolidated financial statements of
USABancShares.com. The Capital Securities will be presented as a separate line
item in the consolidated balance sheets of USABancShares.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,
USABancShares.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 USABancShares.com,
on a consolidated basis, as of June 30, 1999. This table should be read in
conjunction with USABancShares.com's consolidated financial statements and notes
thereto, which are included in this prospectus beginning on Page F-1.
<TABLE>
<CAPTION>
At June 30, 1999
----------------
(Dollars in Thousands) (unaudited)
Liabilities:
<S> <C>
Deposits........................................................................ $169,955
Borrowed funds.................................................................. 33,399
Guaranteed Preferred Beneficial Interests in Subordinated Debt(1)............... 10,000
--------
Accrued expenses and other liabilities.......................................... 2,614
--------
Total liabilities............................................................... 215,968
========
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............................................................... 2,036
Accumulated other comprehensive (loss) income - unrealized depreciation
on securities available-for-sale................................................ (803)
--------
Total stockholders' equity.............................................. 14,032
========
Total liabilities and stockholders' equity......................................... 230,000
========
</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. USABancShares.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.
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<PAGE>
REGULATORY CAPITAL
Under regulations adopted by the Board of Governors of the Federal
Reserve System, we are required to maintain Tier 1 capital equal to at least
4.0% and total capital (Tier 1 plus Tier 2 capital) equal to at least 8.0% of
our risk weighted assets, and Tier 1 capital equal to at least 4.0% of our
average total assets (calculated quarterly). See "Regulation of
USABancShares.com and vBank."
The following tables set forth USABancShares.com's actual regulatory
capital and regulatory capital ratios at June 30, 1999. 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...................................... $14,835 $14,835 $14,835
Minority interest--Guaranteed
Preferred Beneficial Interests in
Subordinated Debt (1).................................. 4,937 4,937 10,000
Unrealized losses on securities
available for sale (with readily
determinable market values).......................... (23) (23) (23)
Non-allowable capital:
Direct real estate investments......................... -- -- --
Intangible assets...................................... (73) (73) (73)
Supplemental capital:
Allowance for loan losses.............................. -- -- 1,325
-------- ------- -------
Regulatory capital........................................ $19,676 $19,676 $26,064
======== ======= =======
Risk-Based
----------------------
Tier 1 Tier 1 Total
Leverage Capital Capital
Ratio Ratio Ratio
-------- ------- -------
Regulatory capital....................................... 9.7% 10.4% 13.8%
Regulatory requirement.................................. 4.0 4.0 8.0
----- ----- -----
Excess above required ratio............................... 5.7% 6.4% 5.8%
===== ===== =====
</TABLE>
- ----------
(1) On March 9, 1999, USABancShares.com issued the Series A Debentures to USA
Capital Trust I in which USABancShares.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 USABancShares.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 June 30, 1999, 25% of
USABancShares.com's Tier 1 capital equaled approximately $4.9 million.
Accordingly, only $4.9 million of the Series A Capital Securities were
eligible as Tier 1 capital as of such date.
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<PAGE>
USE OF PROCEEDS
Neither USABancShares.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 USABancShares.com. All of the proceeds from the sale of Series A
Capital Securities were invested by USA Capital Trust I in the Debentures.
USABancShares.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 USABancShares.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 USABancShares.com. Our goal is to become a leading provider
of financial products and services over the Internet.
In pursuit of this goal, we have recently expended significant
resources on technology, Website development, marketing, hiring of personnel and
other startup costs related to the development and operation of our Internet
banking platform. Given that we intend to continue to expend significant
financial and management resources in connection with our Internet banking
operations, we expect to incur substantial losses. Moreover, to the extent that
increases in operating expenses precede or are not subsequently followed by
increased revenues, our business, financial condition, results of operations and
cash flows will be materially adversely affected.
Our revenue consists of interest income and, to a lesser degree,
non-interest income, which includes income primarily from services and gains on
the sale of loans and securities. Our net interest income is the difference
between the rates of interest earned on our loans and other interest-earning
assets and the rates of interest paid on our deposits and borrowed funds. An
indicator of an institution's profitability is its net interest margin or net
yield on interest-earning assets, which is its annualized net interest income
divided by the average balance of interest-earning assets. Fluctuations in
interest rates as well as volume and composition changes in interest-earning
assets and interest-bearing liabilities may materially affect net interest
income.
Since our acquisition of vBank in November 1995, we have aggressively
grown our loan portfolio through the acquisition of loan pools at a discount and
through loan originations. Our net loan portfolio has grown from $7.0 million at
December 31, 1995 to $114.7 million at June 30, 1999. 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 our 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.
In an effort to maintain its well capitalized status and to fund the
Internet strategy, USABancShares.com filed an SB-2 public offering statement
with the Securities and Exchange Commission on July 16, 1999.
On July 21, 1999, USABancShares.com entered into a two-year agreement
with Earthlink (NASDAQ-"ELNK") under which Earthlink customers will have direct
access to a co-branded USABancShares.com site providing both online banking and
brokerage services. USABancShares.com will also serve as the default online
banking selection for customers who use Earthlink's "personal start" page
customized option. Under terms of the agreement, Earthlink has been granted
warrants to purchase up to 120,000 shares of USABancShares.com common stock, or
approximately 3.0% of the current outstanding shares, and will be paid certain
variable fees which will be based upon the number of accounts opened during the
duration of the contract. The strike price of the warrants is $12.00 per share.
In connection with opening a USABancShares.com bank account, new and existing
Earthlink customers will be able to participate in a incentive program which
will provide them one
17
<PAGE>
year of free ISP dial-up service. Earthlink is one of the world's leading
Internet service providers, with over 1.3 million subscribers.
USABancShares.com on July 30, 1999 closed a loan pool acquisition of
$88.3 million of commercial real estate and multifamily adjustable rate loans.
The loans have a weighted average maturity of 127 months with $59.7 million
repricing with in one year. The weighted average yield on this portfolio is
8.32%. These loans are located throughout the United States, with approximately
27% located in Pennsylvania and New Jersey. The company funded these loans with
excess liquidity, Federal Home Loan Bank advances and institutional certificates
of deposit.
Comparison of Financial Condition and Results of Operations
for the Six Months Ended June 30, 1999 and June 30, 1998
Financial Condition
USABancShares.com's total assets increased from $165.1 million at
December 31, 1998 to $230.0 million at June 30, 1999, an increase of $64.9
million, or 39.3%. The increase was due primarily to increases in the loans
receivable, net, securities portfolio and interest bearing deposits of $12.6
million, $37.9 million, and $5.3 million, respectively. The increase in the loan
portfolio was a result of originating $24.0 million in loans, primarily
commercial real estate and multi-family, and acquiring $8.9 million of
performing commercial real estate loans. The acquired loans were purchased for
$7.3 million. The acquisitions and origination volume was offset by prepayments
of $17.3 million. The increase in the securities portfolio was primarily due to
the acquisition of corporate trust preferred securities and federal agency
bonds. The increase in interest bearing deposits relates to required funding of
loan closings scheduled in early July 1999. The growth in total assets was
funded by increases in deposits of $40.1 million in non-retail certificates of
deposit and $15.5 million in transaction accounts, and the issuance of $10.0
million guaranteed subordinated debentures. Management plans to continue to
utilize Federal Home Loan Bank advances in conjunction with deposit expansion to
provide the necessary funding and liquidity for vBank's continued growth.
vBank's borrowing limit at the Federal Home Loan Bank as of June 30, 1999 was
approximately $43.8 million, of which $30.0 million was drawn upon as of such
date. USABancShares.com's stockholders' equity increased from $13.6 million at
December 31, 1998 to $14.0 million at June 30, 1999.
Results of Operations
Net Income. USABancShares.com reported net income of $924,000 or $0.21
per diluted share, for the six months ended June 30, 1999, compared to $907,000
or $0.23 per diluted share for the six months ended June 30, 1998, representing
a 1.9% increase in overall net income. Net income increased primarily because
USABancShares did not provide for income taxes in the quarter ended June 30,
1999, causing a positive variance of $257,000. Net interest income increased
$976,000 and non-interest income increased $369,000. These increases in earnings
were offset by an increase in non-interest expenses of $1.5 million. During the
six months ended June 30, 1998, USABancShares.com also recognized approximately
$250,000 of non-recurring interest income related to loan acquisitions.
Interest Income. Total interest income increased $3.0 million, or
54.5%, for the six months ended June 30, 1999, compared to the six months ended
June 30, 1998, due to an increase in average earning assets of $70.9 million.
Income on loans increased $1.6 million due to the average earning loan balances
increasing $39.6 million. The increase in average loans outstanding was
partially offset by the yield on the loan portfolio decreasing by 148 basis
points. The investment portfolio average earnings balances increased $31.8
million between the noted periods and the yield on the portfolio also increased
by 80 basis points.
Interest Expense. Total interest expense increased $2.0 million, or
75.4%, for the six months ended June 30, 1999, compared to the six months ended
June 30, 1998, due to a higher volume of new certificates of deposit , an
increased outstanding balance of Federal Home Loan Bank advances and the
issuance of the Series A Debentures. Interest expense on deposits increased $1.3
million, interest expense on other borrowings increased $781,000 and interest
expense incurred on the guaranteed debt was $300,000. These interest expenses
increased due to the increase average outstanding balances increasing $36.2
million, $20.7 million and $6.3 million, respectively. Increases in interest
expenses were also associated with an increase in the cost of funds on
borrowings by 18 basis points. The guaranteed subordinated debt carries an
interest rate of 9.50%. The average cost of funds, including other borrowings,
was 5.62% for the first six months of 1999 compared to 5.71% over the same
period in 1998.
Net Interest Income. USABancShares.com's profitability, like that of
many financial institutions, is dependent to a large extent upon net interest
income. Net interest income is the difference between interest income,
principally from loans and investment securities, and interest expense,
principally on customer deposits and borrowings.
18
<PAGE>
Changes in net interest income result from changes in the mix of rates and
volumes of interest-earning assets and interest-bearing liabilities that occur
over time. Volume refers to the average dollar level of interest-earning assets
and interest bearing liabilities. Net interest rate spread refers to the
differences between the average yield on interest-earning assets and the average
cost of interest-bearing liabilities. Net interest margin refers to net interest
income divided by average interest-earning assets.
Net interest income for the six months ended June 30, 1999, increased
$1.0 million, or 34.5%, to $3.8 million from $2.8 million, for the same period
in 1998. Average interest-earning assets increased by $70.9 million, or 66.5%,
to $177.6 million, for the six months ended June 30, 1999 compared to the same
period in 1998. Average interest-bearing liabilities increased $74.1 million, or
78.3%, over the same period. The net interest rate spread and net interest
margin decreased for the period ended June 30, 1999 versus June 30, 1998, from
4.66% to 4.01% and 5.30% to 4.28%, respectively. For the six months ended June
30, 1999, $568,000 of discount was accredit into interest income, or 6.7%, of
the total interest income. This compares to $455,000 of discount accredit into
interest income for the six month period ended June 30, 1998, or 8.2%, of total
interest income. Excluding the income attributable to the accretion of discount
on loans acquired, the net interest margin would have declined 81 basis points
for the six months ended June 30, 1999 compared to June 30, 1998 to 3.64% from
4.45%. Over the past twelve months our strategic initiative has been to improve
the quality of the loan assets and to originate more loans than we acquire.
Management believes the loan assets to be acquired will be of better quality
relative to vBank's underwriting criteria than past acquisitions. These efforts
coupled with the level of loan pay-offs, which equaled $17.3 million in the
first half of 1999, have led to the decline of the yields on the loan portfolio
and the decline in net interest margin.
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 for the
six months ended June 30, 1998 and a daily basis for the six months ended June
30, 1999.
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------------------
1999 1998
-------------------------------------- -------------------------------------
(Dollars in Thousands) Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans ................................ $107,388 $ 5,736 10.68% $ 67,833 $ 4,124 12.16%
Securities ........................... 64,133 2,709 8.45 32,360 1,238 7.65
Interest-earning deposits and other .. 6,085 104 3.42 6,499 170 5.23
Total interest-earning assets ...... $177,606 $ 8,549 9.63% $106,692 $ 5,532 10.37%
Interest-bearing liabilities:
Deposits:
Savings and Passbook ............... $ 12,037 $ 278 4.61% $ 1,790 $ 23 2.60%
NOW accounts ....................... 1,348 14 2.05 937 9 2.02
Money market accounts .............. 2,506 58 4.60 2,319 76 6.54
Certificates of deposit ............ 111,984 3,233 5.77 75,738 2,213 5.84
Borrowings .......................... 40,934 1,163 5.69 13,902 384 5.51
Total interest-bearing liabilities $168,809 $ 4,746 5.62% $ 94,686 $ 2,705 5.71%
Excess of interest-earning assets over
interest-bearing liabilities........... $ 8,797 $ 12,006
Net interest income...................... $ 3,803 $ 2,827
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------------------------------------
1999 1998
-------------------------------------- ------------------------------------
(Dollars in Thousands) Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C>
Net interest spread.................... 4.01% 4.66%
Net interest margin................... 4.28% 5.30%
Average earnings assets to average
interest bearing liabilities............ 105.21% 112.68%
</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
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>
June 30, 1999 versus June 30, 1998
-------------------------------------------------------
Increase or (Decrease) Due to Change in
---------------------------------------
Average Volume Average Rate Total Increase
(Decrease)
-------------------------------------------------------
(Dollars in Thousands)
Variance in interest income on:
Interest-earning assets:
<S> <C> <C> <C>
Loans ............................. $ 2,405 $ (793) $ 1,612
Securities ........................ 1,216 255 1,471
Interest-earning deposits and other (11) (55) (66)
------- ------- -------
Total interest-earning assets ... $ 3,610 $ (593) $ 3,017
======= ======= =======
Interest-bearing liabilities:
Deposits:
Savings and Passbook ........ $ 5 $ -- $ 5
NOW accounts ................ 6 (24) (18)
Money market accounts ....... 134 121 255
Certificates of deposit ..... 1,059 (39) 1,020
Borrowings ....................... 744 35 779
------- ------- -------
Total interest-bearing liabilities $ 1,948 $ 93 $ 2,041
======= ======= =======
Change in net interest income ........... $ 1,662 $ (686) $ 976
======= ======= =======
</TABLE>
Provision for Loan Losses. Management records the provision for loan
losses in amounts that result in an allowance for loan losses sufficient to
cover all potential net charge-offs and risks believed to be inherent in the
loan portfolio. Management's evaluation includes such factors as past loan loss
experience as related to current loan portfolio mix, evaluation of actual and
potential losses in the loan portfolio, prevailing regional and national
economic conditions that might have an impact on the portfolio, regular reviews
and examinations of the loan portfolio conducted by bank regulatory authorities,
and other factors that management believes deserve current recognition. As a
result of management's evaluation of these factors the provision for loan losses
was $250,000 during the six months ended June 30, 1999. The allowance for loan
losses as a percentage of loans outstanding, net of discount, was 1.13% at June
30, 1999, compared to 1.02% at December 31, 1998 and 0.89% at June
20
<PAGE>
30, 1998. Management will continue to record a provision for loan losses to
maintain the allowance for loan losses at a level deemed adequate by management
on a quarterly basis. No charge-offs on loans were recorded during the six
months ended June 30, 1999 compared to $8,000 of charge-offs for the six months
ended June 30, 1998.
Management believes that the allowance for loan losses is adequate to
cover actual and potential losses in the loan portfolio under current
conditions. Nevertheless, there can be no assurance that additions to such
allowance will not be necessary in future periods, particularly if the growth in
vBank's commercial loan originations and purchases continues.
Non-Interest Income. Non-interest income increased $369,000, or 184.5%,
in the six months ended June 30, 1999 compared to the same six months of 1998.
Gain on sales of securities classified as available-for-sale decreased $19,000,
gain on sale of loans receivable increased $42,000 and gain on sale of real
estate owned increased $60,000. Other income increased $184,000, which was
comprised of service charges increasing $20,000, loan late charges increasing
$20,000, loan fees increasing $50,000, income on bank owned life insurance
increasing $22,000 and other miscellaneous income increasing $72,000 during the
period. In addition, USA Capital's earnings increased $102,000.
Non-Interest Expense. Other expense increased by an aggregate of $1.5
million, or 106.2%, to $2.9 million, compared to the six months ended June 30,
1998. Compensation expense increased $804,000 due to the hiring of 29 additional
personnel. Occupancy expense increased $91,000 due to the addition of one
branch. Advertising expense increased $73,000 due to a new marketing campaign
for the Internet site, www.usabancshares.com. Office expense, travel and
entertainment, and other miscellaneous expenses increased $399,000 as a result
of the increased efforts to attract additional customers and travel expenses
related to Internet strategic planning. Professional fees increased $128,000 due
to an increase in outside consulting and legal services provided during the six
months ended June 30, 1999.
Income Tax Expense. Income tax expense recorded for the six months
ended June 30, 1999 and 1998 was $295,000 and $552,000, or 24.2% and 37.8%
effective tax rate, respectively.
Comparison of Financial Condition and Results of Operations
for the Three Months Ended June 30, 1999 and June 30, 1998
Results of Operations
Net Income. USABancShares.com reported net income of $510,000 or $0.12
per share, for the three months ended June 30, 1999, compared to $495,000 or
$0.11 per share for the three months ended June 30, 1998, representing a 3.0%
increase in overall net income. Net income increased primarily because
USABancShares.com did not provide for income taxes during the quarter ended June
30, 1999, causing a positive variance of $265,000. Net interest income increased
$362,000 and non-interest income increased $187,000. These increases in earnings
were offset by an increase in non-interest expenses of $774,000. During the
three months ended June 30, 1998, the Company also recognized approximately
$150,000 of non-recurring interest income related to loan acquisitions.
Interest Income. Total interest income increased $1.4 million, or
43.9%, for the three months ended June 30, 1999, compared to the three months
ended June 30, 1998, due to an increase in average earning assets of $69.8
million. Income on loans increased $504,000 due to the average earning loan
balances increasing $34.6 million. The increase in average loans outstanding was
partially offset by the yield on the loan portfolio decreasing by 211 basis
points. The investment portfolio average balances increased $39.2 million
between the noted periods and the yield on the portfolio also increased by 128
basis points.
Interest Expense. Total interest expense increased $1.1 million, or
69.3%, for the three months ended June 30, 1999, compared to the three months
ended June 30, 1998, due to a higher volume of new certificates of deposit, an
increased outstanding balance of Federal Home Loan Bank advances and the
issuance of the Series A Debentures. Interest expense increased on deposits
$674,000, interest expense on borrowings increased $387,000 and interest expense
incurred of the guaranteed debt was $238,000. These interest expenses increased
due to the increase average outstanding balances increasing $32.2 million, $14.0
million and $10.0 million, respectively. The guaranteed subordinated debt
carries an interest rate of 9.50%. The average cost of funds, including other
borrowings, was 5.63% for the three months ended June 1999 compared to 5.58%
over the same period in 1998.
21
<PAGE>
Net Interest Income. Net interest income for the three months ended
June 30, 1999, increased $362,000, or 21.1%, to $2.1 million from $1.7 million
for the same period in 1998. Average interest-earning assets increased by $69.8
million, or 57.3%, to $191.7 million, for the three months ended June 30, 1999
compared to the same period in 1998. Average interest-bearing liabilities
increased $74.7 million, or 68.2%, over the same period. The net interest spread
and net interest margin decreased for the period ended June 30, 1999 compared to
June 30, 1998, from 5.07% to 4.12% and 5.63% to 4.33%, respectively. For the
three months ended June 30, 1999, $267,000 of discount was accredit into
interest income or 5.7% of the total interest income. This compares to $196,000
of discount accredit into interest income for the three month period ended June
30, 1998 or 6.0% of total interest income. Excluding the income attributable to
the accretion of discount on loans acquired, the net interest margin would have
declined 121 basis points for the three months ended June 30, 1999 compared to
June 30, 1998 to 3.78% from 4.99%, respectively.
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 June 30,
-----------------------------------------------------------------------------------
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 ................................ $ 112,560 $ 2,980 10.59% $ 77,992 $ 2,477 12.70%
Securities ........................... 76,224 1,665 8.74 36,974 690 7.46
Interest-earning deposits and other .. 2,873 23 3.20 6,905 78 4.52
--------- --------- ------- --------- --------- ------
Total interest-earning assets ...... $ 191,657 $ 4,668 9.74% $ 121,871 $ 3,245 10.65%
========= ========= ======= ========= ========= ======
Interest-bearing liabilities:
Deposits:
Savings and Passbook ............... $ 1,520 $ 8 2.11 $ 941 $ -- 0.00%
NOW accounts ....................... 1,671 18 4.31 (1,132) 17 -6.01
Money market accounts .............. 16,770 193 4.60 1,704 10 2.35
Certificates of deposit ............ 118,867 1,697 5.71 86,619 1,214 5.61
Borrowings .......................... 45,486 676 5.94 21,463 289 5.39%
--------- --------- ------- --------- --------- ------
Total interest-bearing liabilities $ 184,314 $ 2,592 5.63% $ 109,595 $ 1,530 5.58%
========= ========= ======= ========= ========= ======
Excess of interest-earning assets over
interest-bearing liabilities............ $ 7,343 $ 12,276
Net interest income..................... $ 2,076 $ 1,715
Net interest spread..................... 4.12% 5.07%
Net interest margin..................... 4.33% 5.63%
Average earnings assets to average
interest bearing liabilities............ $103.98% 111.20%
</TABLE>
Provision for Loan Losses. The provision for loan losses was $150,000
during the three months ended June 30, 1999. The allowance for loan losses as a
percentage of loans outstanding was 1.13 at June 30, 1999, compared to 0.89% at
June 30, 1998. Management will continue to record a provision for loan losses to
maintain the allowance for loan losses at a level deemed adequate by management
on a quarterly basis. No charge-offs on loans were recorded during the three
months ended June 30, 1999 or June 30, 1998.
22
<PAGE>
Non-Interest Income. Non-interest income increased $187,000, or 301.6%,
in the three months ended June 30, 1999 compared to the same three months of
1998. Gain on sales of securities classified as available-for-sale increased
$26,000 and gain on sale of real estate owned increased $60,000. Other income
increased $46,000 which was comprised of service charges increasing $7,000, loan
fees increasing $10,000, income on bank owned life insurance increasing $22,000
and other miscellaneous income increasing $7,000 during the period. In addition,
USA Capital's earnings increased $55,000.
Non-Interest Expense. Non-interest expense increased an aggregate of
$774,000, or 88.7%, to $1.7 million, compared to the three months ended June 30,
1998. Compensation expense increased $542,000 due to the hiring of additional
personnel. Occupancy expense increased $25,000 due to the addition of one
branch. Advertising expense increased $37,000 due to a new marketing campaign
for our Website. Office expense, travel and entertainment, and other
miscellaneous expenses increased $136,000 as a result of the increased efforts
to attract additional customers and travel expenses related to Internet
strategic planning. Professional fees increased $34,000 due to an increase in
outside consulting and legal services provided during the three months ended
June 30, 1999.
Income Tax Expense. USABancShares.com did not provide a tax provision
for the second quarter ended June 30, 1999. The Company anticipates spending
significant financial resources on a national marketing program, technology
initiatives and human resources on its Internet initiative that will result in
an operating loss for calendar 1999 and 2000.
Comparison of Financial Condition and Results of Operations
for the Years Ended December 31, 1998 and December 31, 1997
Financial Condition
USABancShares.com's total assets increased from $89.3 million at
December 31, 1997 to $165.1 million at December 31, 1998, an increase of $75.8
million, or 84.8%. The increase was due primarily to increases in the loan and
securities portfolios of $46.1 million and $22.3 million, respectively. This
growth was funded 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 due to the purchase of commercial
and single-family residential real estate loans at a discount. These purchased
loans, which had an aggregate unpaid principal balance of approximately $37.3
million, 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.
USABancShares.com's stockholders' equity increased from $5.4 million at December
31, 1997 to $13.6 million at December 31, 1998. The $8.2 million, or 151.8%,
increase in stockholders' equity was primarily due to USABancShares.com's
private placement of $7.5 million of common stock in February 1998.
Results of Operations
Net Income. USABancShares.com reported net income of $1.5 million, or
$0.70 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
23
<PAGE>
the loan portfolio, as well as accretion income recognized on loan pools
purchased by vBank at a discount since 1995. The discount associated with such
loan pools is recognized as a yield adjustment and is included as interest
income using the level yield method to the extent that the timing and amount of
cash flows can reasonably be determined. Any changes from original estimates
used in the purchase price could result in either an increase or decrease in
accretion income. During the years ended December 31, 1998 and 1997, vBank
recognized $1.3 million and $691,000 in accretion income, respectively,
representing 10.5% and 14.2% of total interest income, respectively. The
significant increase in the average balance of vBank's loan portfolio reflects
the $37.3 million of loan purchases and the more than $30.0 million of loan
originations, including participations with local financial institutions, which
were closed during the year ended December 31, 1998.
Interest Expense. Interest expense increased $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
USABancShares' substantial growth during the year ended December 31, 1998,
USABancShares 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. USABancShares.com's interest rate spread increased from 3.68% to
4.54% while USABancShares.com's net interest margin increased from 4.53% to
4.87%. The increase in USABancShares.com's interest rate spread and margin
reflects USABancShares' 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
----------- ---------- ----------- ----------- ---------- -----------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
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
--------- -------- ------ -------- ------- ------
</TABLE>
24
<PAGE>
<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-bearing liabilities:
Deposits:
Savings and 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
======= ========
Net interest spread..................... 4.54% 3.68%
===== ====
Net interest margin .................... 4.87% 4.53%
===== ====
</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
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.
25
<PAGE>
<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:
Savings and 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 USABancShares.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.
Non-Interest Income. Non-interest income increased by $445,000 to
$759,000, for the year ended December 31, 1998. The increase was primarily the
result of an increase in gain on sales of investment securities of $251,000, an
increase in other non-interest income of $155,000 and brokerage operating income
of $39,000 generated by USABancShares.com's brokerage subsidiary, USACapital.
Non-Interest Expense. Non-interest expense increased $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 USABancShares.com's financial reporting and other compliance issues.
Occupancy expense increased $321,000 due to the costs associated with the
opening of vBank's headquarters and branch in Center City, Philadelphia.
Advertising expense increased $115,000 as a result of opening vBank's Center
City branch and corporate headquarters, a promotional campaign for the branch
opening and an image campaign. Office and supplies expense increased $150,000
due to vBank changing its name in July 1998. Data processing expense increased
$84,000 as a result of the increase in the number of loans and deposit accounts,
as well as the number of transactions processed.
26
<PAGE>
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 June 30, 1999 and
the difference or "gap" between them on an actual and cumulative basis for the
periods indicated. The table was prepared with the following assumptions:
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>
6/30/99
1-90 Days 91-364 Days 1-5 Years Over 5 Years Balance
--------- ----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans receivable................... $ 7,849 $ 6,995 $ 45,820 $ 56,603 $117,267
Investments........................ 4,904 -- 13,100 64,000 82,004
Interest-bearing deposits and other 12,987 0 0 0 12,987
------- --------- --------- -------- --------
Total interest-earning assets.. $25,740 $ 6,995 $ 58,920 $120,603 $212,258
======= ========= ========= ======== ========
Interest-bearing liabilities:
Demand............................. $ 925 $ -- $ -- $ 924 $ 1,849
NOW accounts....................... 761 -- -- 760 1,521
Money market accounts.............. 593 -- -- 593 1,186
Savings and Passbook accounts...... 10,391 -- -- 10,390 20,781
Certificates of deposit............ 8,587 58,617 76,392 1,224 144,820
Borrowings......................... -- 20,000 10,000 -- 30,000
Guaranteed Preferred Beneficial
Interests in Subordinated Debt. -- -- -- 10,000 10,000
Collateralized borrowings................ -- -- 3,399 -- 3,399
------- --------- --------- -------- --------
Total interest-bearing
liabilities................ $21,257 $ 78,617 $ 89,791 $ 23,891 $213,556
======= ========= ========= ======== ========
Periodic gap............................. $(4,483) $(71,622) $ (30,871) $ 96,712 $(14,285)
Cumulative gap........................... $(4,483) $(67,139) $ (98,010) $ (1,298) --
Ratio of gap to interest-earning
assets............................. (2.1)% (33.7)% (14.5)% 45.6% --
Ratio of cumulative gap to interest-
earning assets..................... (2.1)% (31.6)% (46.2)% (0.6)% --
</TABLE>
A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds interest rate sensitive assets. During a period of falling interest
rates, a positive gap would tend to adversely affect net interest income, while
a negative gap would tend to result in an increase in net interest income.
During a
27
<PAGE>
period of rising interest rates, a positive gap would tend to result in an
increase in net interest income while a negative gap would tend to affect net
interest income adversely.
If repricing of vBank's assets and liabilities were equally flexible
and moved concurrently, the impact of an increase or decrease in interest rates
on net income would be minimal. At June 30, 1999, vBank had a negative
cumulative one year gap, which suggests that net interest income may decrease
during periods of rising interest rates.
The method used to analyze interest rate sensitivity in the 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
USABancShares, 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 June 30, 1999, vBank had
$43.8 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.
At June 30, 1999, vBank had outstanding commitments, including unused
lines of credit, of $3.4 million and letters of credit of $649,000. Certificates
of deposit that are scheduled to mature within one year totaled $67.0 million at
June 30, 1999, and USABancShares.com, on a consolidated basis, had $5.0 million
of borrowings scheduled to mature within one year. vBank anticipates that it
will have sufficient funds available to meet its current loan commitments.
USABancShares.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,
USABancShares expects to incur $15.0 million in marketing expenses and $3.5
million in connection with the development of its Internet banking operations.
USABancShares.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 the next 6
months. The execution
28
<PAGE>
of USABancShares.com's current business plan will require raising additional
capital thereafter. There can be no assurance that USABancShares.com will be
successful in raising additional capital when required in sufficient amounts and
on terms acceptable to it. The failure to raise such capital could have a
material adverse affect on USABancShares.com's business, results of operations
and financial condition. If additional funds are raised through the issuance of
equity securities, the percentage ownership of USABancShares.com's then-current
shareholders would be reduced.
Capital Resources. USABancShares.com and vBank are subject to various
regulatory capital requirements administered by federal and state banking
agencies. Failure to meet minimum capital requirements can result in certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on USABancShares.com's financial
condition and results of operations. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, USABancShares.com and vBank
must meet specific capital guidelines that involve quantitative measures of
USABancShares' assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts and
classifications of USABancShares.com and vBank are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. See "Regulation of USABancShares.com and vBank."
Quantitative measures established by regulation to ensure capital
adequacy require USABancShares.com and vBank to maintain minimum amounts and
ratios (set forth in the table below) of Total and Tier 1 capital to
risk-weighted assets and of Tier 1 capital to average assets. As of June 30,
1999, USABancShares and vBank exceeded all capital adequacy requirements to
which they were subject.
On March 9, 1999, USABancShares.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, USABancShares.com
is limited to recognizing $4.9 million as Tier I capital, such that no more than
25% percent of Tier I capital is comprised of the securities. USABancShares.com
has invested $6.0 million of the proceeds in vBank.
At June 30, 1999 and December 31, 1998, vBank's actual and required
minimum capital ratios were as follows:
<TABLE>
<CAPTION>
To Be Well Capitalized
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 June 30, 1999:
Total Capital
(to Risk Weighted Assets)..... $14,836 8.0% $18,545 10.0%
$21,545 11.6%
Tier I Capital
(to Risk Weighted Assets)..... 20,220 10.9 7,418 4.0 11,127 6.0
Leverage...................... 20,220 9.9 8,143 4.0 10,179 5.0
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets).... 13,930 11.2 9,987 8.0 12,483 10.0
Tier 1 Capital
(to Risk Weighted Assets).... 12,879 10.3 4,994 4.0 7,490 6.0
Leverage...................... 12,879 8.5 6,068 4.0 7,585 5.0
</TABLE>
29
<PAGE>
At June 30, 1999 and December 31, 1998, USABancShares.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 June 30, 1999
Total Capital
(to Risk Weighted Assets)......... $26,064 13.8% $15,115 8.0%
Tier I Capital
(to Risk Weighted Assets)......... 19,676 10.4 7,558 4.0
Leverage........................... 19,676 9.7 8,087 4.0
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets).......... 15,566 12.1 10,317 8.0
Tier 1 Capital
(to Risk Weighted Assets).......... 13,782 10.7 5,159 4.0
Leverage........................... 13,782 8.7 6,319 4.0
</TABLE>
Year 2000 Compliance
Changing from the year 1999 to 2000 has the potential to cause problems
in data processing and other date-sensitive systems. The Year 2000 date change
can affect any system that uses computer software programs or computer chips,
including automated equipment and machinery. The Year 2000 problem is the result
of computer programs using two digits rather than four to define the year. Any
of our programs that are time sensitive may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a major system failure
or miscalculations. We use computer systems to perform financial calculations,
track deposits and loan payments, transfer funds and make direct deposits. The
primary processing of our loan and deposit transactions is currently performed
by Intrieve Incorporated, 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.
<PAGE>
We have identified all potentially affected systems. This step has
included a review of all major information technology and non-information
technology systems to determine how Year 2000 issues affect them. We have
completed our assessment of which systems and equipment are most prone to
placing USABancShares.com at risk if they are not Year 2000 compliant.
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 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. We have
30
<PAGE>
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.
We are preparing a contingency plan for how we would resume business if
unanticipated problems arise form non-performance by vendors. Such plans are
expected to be completed in the third quarter of 1999.
Year 2000 issues also affect certain of our customers, particularly in
the areas of access to funds and additional expenditures to achieve compliance.
As of December 31, 1998, we had contacted our commercial credit customers and
borrowers regarding the customers' awareness of Year 2000 issues. While no
assurance can be given that our customers will be Year 2000 compliant, we
believe, based on representations of such customers and a review of their
operations (including assessments of the borrowers' level of sophistication and
data and record keeping requirements), that the customers are either addressing
the appropriate issues to insure compliance or that they are not faced with
material Year 2000 issues. In addition, in substantially all cases the credit
extended to such borrowers is collateralized by real estate which inherently
minimizes our exposure in the event that such borrowers do experience problems
or delays becoming Year 2000 compliant.
Our efforts to become Year 2000 compliant are being monitored by our
federal banking regulators. Failure to be Year 2000 compliant could subject us
to formal supervisory or enforcement actions. We expensed $20,000 during the
year ended December 31, 1998 relating to costs incurred as a result of our Year
2000 plan. We anticipate incurring approximately $25,000 in additional costs
related to the implementation of our Year 2000 plan. We presently believe Year
2000 issues will not pose significant operating problems for us. However, if
implementation and testing plans are not completed in a satisfactory and timely
manner by third parties on which we depend, or other unforeseen problems arise,
Year 2000 issues could potentially have an adverse effect on our operations. See
"Risk Factors--Problems Related to "Year 2000" Issues Could Adversely Affect Our
Business."
Inflation and Changing Prices
We are aware of the impact of inflation on interest rates and the
corresponding impact on a bank's performance. The ability of a financial
institution to cope with inflation can only be determined by ongoing analysis
and monitoring of its asset and liability structure. We monitor our asset and
liability position with particular emphasis on the mix of interest-sensitive
assets and liabilities in order to reduce the effect of inflation upon our
performance.
Inflation can have a more direct impact on categories of non-interest
expenses such as salaries and wages, supplies, and employee benefit costs. We
closely monitor expenses for both the effect of inflation and non- inflationary
increases in such items as staffing levels, usage of supplies and occupancy
costs.
31
<PAGE>
BUSINESS
General
USABancShares.com, the first "dot com" bank holding company in the
country, is 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.usabancshares.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 Website provides users portal applications such as
live news feeds, stock quotes, broker/dealer services and links to other
interesting sites on the Internet.
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.
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<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 USABancShares.com Strategy
We intend to execute our strategy of becoming a leading provider of
financial products and services over the Internet by:
o Pursuing strategic alliances and customer incentive programs. We
have strategic marketing agreements with several leading Internet
entities. We intend to establish an affinity marketing program
which will allow various trade groups and other organizations
to brand and market USABancShares.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 USABancShares.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 USABancShares.com brand increases. We intend to co-brand
these programs with select USABancShares.com partners. We believe
such co-branding will maximize customer conversion effectiveness
and ultimately reduce the cost per new customer acquisition.
<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 Establishing the USABancShares.com Website as a leading and
comprehensive source for financial services on the Internet. We
have created our Internet banking platforms to allow our customers
to choose between platforms using either Hypertext Mark-up
Language, more commonly known as "HTML," or Macromedia's
innovative "Flash" technology. We were certified to begin offering
our Internet banking and brokerage products and services through
the HTML Website on July 15, 1999, and we expect the "Flash"
Website to begin offering products and services in the fourth
quarter of 1999. We
33
<PAGE>
believe the "Flash" platform will significantly enhance our
customers' experience on our Website and differentiate us from
other Internet banks. Additionally, because our "Flash" platform
was developed in anticipation of the greater bandwidth that is now
widely available, we will be able to deliver our services at the
speed expected by today's on-line user. We believe
www.usabancshares.com's unique audio/visual interface will attract
users who demand not only efficient and convenient financial
services, but entertaining content as well. We intend to attract
customers by providing the following benefits:
o Offering a broad selection of financial products and services. We
provide the convenience of "one-stop shopping" to consumers. We
currently offer interest-earning checking accounts, statement
savings accounts, certificates of deposit, bill payment services,
overdraft protection, ATM and debit cards, mortgage loans and
credit cards. USACapital, Inc., our wholly owned subsidiary,
offers on-line trading, real-time quotes, low commissions and
direct access to funds held on deposit with vBank. We intend to
continue to develop innovative financial products such as
CDEnergy.com, the first 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."
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 USABancShares.com brand as a
premier provider of financial services over the Internet. We are
working with a nationally known marketing company to build
national awareness of the USABancShares.com name through a variety
of marketing initiatives. Such initiatives include Internet
advertising, national print, television and radio advertising,
direct mail, strategic alliances with other companies, 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
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advanced security measures currently available in the Internet
banking industry. See "--Security."
o Generating sponsorship and advertising revenues. We intend to
establish advertising relationships by offering advertising
opportunities to leading brand marketers and merchants in traffic
intensive areas of the USABancShares.com network. These merchants
will receive exposure through banner advertising combined with
promotional offers in exchange for which we will collect a fee
based on various arrangements such as cost per click for each new
visit to the third-party Website made through our network, and/or
a share of revenues from each sale to USABancShares.com users.
o Expanding our Lending Efforts. Since our acquisition of vBank in
November 1995, we have pursued an aggressive growth strategy,
characterized by purchases of pools of primarily performing loans
secured by single-family residential, multi-family residential and
commercial properties. Our net loan portfolio has grown from $7.0
million at December 31, 1995 to $114.7 million at June 30, 1999.
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. Our current and planned
on-line deposit products and services include:
o Deposit Products. We offer an interest-earning checking account, a
statement savings account and several fixed term certificates of
deposit.
o Bill Payment Service. Through services provided by EDS, customers
are able to pay their bills on-line through electronic funds
transfer or a written draft prepared and sent to the creditor. We
currently do not charge a fee for this service .
o Overdraft Protection. If a customer has both a checking account
and a statement savings account, we 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 five ATM transactions or $10.00 per monthly
statement cycle.
Lending Programs. To generate fee income and provide a convenient
service to its customers, we offer on-line loans and plan to offer credit cards
as described below:
o Mortgage Loans. We intend for the Website to enable customers to
obtain interest rate quotes and apply for one-to-four family
residential mortgage loans, home equity loans and commercial 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 for the
residential mortgages and home equity loans.
o Credit Cards. We expect to offer our customers Visa 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 "USABancShares" logo with the Visa emblem
appearing in the lower right corner of the card.
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<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 currently
include securities brokerage through USACapital, Inc. and in the near future
will include business equipment leasing services through USACredit, Inc., each
as described below:
o Securities Brokerage Services. We 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 are 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 or their brokerage money market account.
Investment proceeds are automatically deposited into the
customer's checking account with vBank or their brokerage money
market account. We provide customers 24-hour on-line access,
real-time quotes, low commissions and a professional brokerage
staff.
o Business Equipment Leasing. Through our relationship with
USACredit, Inc., a wholly owned subsidiary of USABancShares.com,
we plan to allow our customers, many of whom are independent
business owners or managers, to lease small business equipment in
the future. Leases are planned to 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 real estate and installment lending, cash
management accounts, installment loans and various other products and services.
Marketing and Strategic Alliances
Our marketing strategy is aimed at making USABancShares.com a leading
brand in the Internet financial services market. Our marketing strategy is
designed to increase our customer base and includes on-line and off-line
advertising. We 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 USABancShares.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.
Operations
Customers are able to access our Internet bank through any Internet
service provider by means of an acceptable secure Web browser. When customers
access USABancShares.com's service menu, they are able to open a new account,
review the status of an existing account or engage in a transaction. To open a
new account, the customer completes the on-line enrollment form on our Website,
prints the signature card, signs it and mails it to us. Customers are able to
make deposits into an open account via direct deposit programs, by transferring
funds between accounts at vBank, by wire transfer, by mail or in person at our
principal executive offices. Customers also have the ability to make withdrawals
and access their accounts at ATMs that are affiliated with the MAC, Cirrus,
Honor and NYCE networks, which we believe provide added customer convenience.
Customers are able to apply for loans, review account activity, pay bills
electronically, conduct brokerage transactions, receive statements by mail and
print bank statement reports from any PC with a secure Web browser, regardless
of its location.
We have negotiated relationships with a select group of service
providers who not only provide us with significant quality, security,
reliability, performance and marketing capabilities, but also play an integral
role in implementing our Internet banking strategy. Because we 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
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<PAGE>
we will be able to respond easily to growth. Moreover, we intend to preserve a
degree of flexibility that will enable us to assess and evaluate our product
offerings and delivery structure on an ongoing basis and to incorporate other
alliance opportunities as they present themselves. Should any of these
relationships terminate however, we believe we will be able to secure the
required services from an alternative source without material interruption of
our operations. Our principal service providers are described below:
o EDS-Miser. We receive core systems processing services, such as
deposit account, loan and year-end processing services, from
EDS-Miser. The EDS-Miser's Miser III system interfaces with EDS'
secure Internet servers and 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 and brokerage transactions and
Internet communications are encrypted so that sensitive
information is not transmitted over the Internet in a form that
can be read or easily 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 use encrypted pins
using EDS encryption, which is described in "--Isolated Bank
Server" below.
o Secure Logon. To eliminate the possibility that a third party may
download vBank's or a customer's password file, user
identification and passwords are not stored on the Internet or the
Web server. Furthermore, passwords are strings of six to eight
alphanumeric characters, which makes the chance that a password
can be randomly guessed less than one in one trillion.
o Isolated Bank Server. The computer used to provide our operational
services cannot be accessed directly through the Internet. It is
on a private connection, or intranet, that provides two-way
communication between the isolated bank server and the EDS
Internet Server. Consequently, an Internet user cannot directly
access the computer that actually provides our services. All
banking services are routed from the EDS application server
through a firewall. The firewall is a combined software and
hardware product that precisely defines, controls and limits the
access to "internal" computers from "outside" computers across a
network. Use of this firewall means that only authenticated bank
customers or administrators may send or receive transactions
through it, and the firewall itself is believed to be immune to
penetration from the network. The firewall is thus a mechanism
used to protect 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.
<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
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<PAGE>
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 are logged. Our personnel review these
logs regularly, and any abnormal or unusual activity is noted
and we, EDS or both will take 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.
<PAGE>
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.
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.
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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 June 30, 1999, our total loans
receivable, net, amounted to $114.7 million, which represented 49.9% of our
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>
(Dollars in Thousands)
June 30, 1999 December 31, 1998
-------------------------- --------------------------
Amount % Amount %
<S> <C> <C> <C> <C>
----------- ------- ----------- -------
Real estate(1)(2) $ 114,416 97.6% $ 102,076 98.8%
Commercial and industrial(3) 2,289 1.9 986 1.0
Consumer(4) 562 0.5 243 0.2
---------- ----- ---------- -----
Total loans, net of discount $ 117,267 100.0% $ 103,305 100.0%
========== ===== ========== =====
Loans in process (1,042) --
Deferred loan fees (189) (116)
Allowance for loan losses (1,325) (1,051)
---------- ----------
Net loans $ 114,711 $ 102,138
========== ==========
</TABLE>
- ----------
(1) Consists of loans secured by single-family residential, multi-family
residential and commercial real estate.
(2) At June 30, 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.
On June 30, 1999, the net book value of nonaccrual loans was
approximately $2.1 million compared to $1.8 million at December 31, 1998. At
June 30, 1999 the allowance for loan losses to non-performing loans, net of
discount was 63.1% compared to 53.7% at December 31, 1998. The Banks allowance
for loan losses and purchased discount to total loans was 5.57% and 5.85% at
June 30, 1999 and December 31, 1998, respectively.
The amount of troubled debt restructured loans totaled $1.5 million as
of June 30, 1999 compared to zero at December 31, 1998. The Bank will recognize
income on nonaccrual loans, under the cash basis, when the loans are brought
current as to outstanding principal and collateral on the loan is sufficient to
cover the outstanding obligation to the Bank.
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<PAGE>
Loan Maturity. The following table sets forth the maturity or period of
repricing of our loan portfolio at June 30, 1999. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due within one year. Adjustable and floating rate loans are included
in the period in which interest rates are next scheduled to adjust rather than
in which they contractually mature. Fixed rate loans are included in the period
in which the final contractual repayment is due. The following table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
Within 1 1-3 3-5 5-15 Beyond
Year Years Years Years 15 Years Total
---- ----- ----- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate (1).................. 14,844 14,785 30,392 25,085 29,310 114,469
Commercial business (2).......... -- -- 81 2,208 -- 2,289
Consumer (3)..................... -- -- 562 -- -- 562
------ ------ ------ ------ ------ -------
Total loans receivable........ 14,844 14,785 31,035 27,293 29,310 117,267
====== ====== ====== ====== ====== =======
</TABLE>
- ----------------------
(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.
<PAGE>
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.
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<PAGE>
At June 30, 1999 the Bank's net discounted loan portfolio amounted to
$51.6 million or 44.0% of total loans net of discount. These loans have a face
value of $57.1 million, reflecting a discount of $5.5 million or 9.6%. At
December 31, 1998 the Bank's net discounted loan portfolio amounted to $51.7
million or 50.0% of the total loans net of discount. These loans had a face
value of $57.0 million, reflecting a discount of $5.3 million or 9.3% as of June
30 1999. The Bank has identified $1.5 million and $1.3 million of discount as a
cash discount that will not be amortized into income as a yield adjustment until
a final resolution has been determined for the identified loans at June 30, 1999
and December 31, 1998, respectively.
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 June 30, 1999, we held
in our portfolio approximately $20.0 million of loans which were being serviced
by others.
We currently offer fixed rate one-to-four family mortgage loans and,
through an affiliation with Low Cost Loans, we will offer a full array of
adjustable, balloon and fixed rate one-to-four family mortgage loans, in each
case with terms typically ranging from 15 to 30 years. One-to-four family
residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The average length of time that our one-to-four family
residential mortgage loans remain outstanding varies significantly depending
upon trends in market interest rates and other factors. In recent years, the
average maturity of our mortgage loans has decreased significantly due to the
unprecedented volume of refinancing
41
<PAGE>
activity. Accordingly, estimates of the average length of time that one-to-four
family loans may remain outstanding cannot be made with any degree of accuracy.
We are permitted under applicable law to lend up to 100% of the
appraised value of the real property securing a residential loan. However, if
the amount of a residential loan originated or refinanced exceeds 80% of the
appraised value, we are required by federal regulations to obtain private
mortgage insurance on the portion of the principal amount that exceeds 80% of
the appraised value of the security property. Pursuant to underwriting
guidelines adopted by the Board of Directors, we will generally only lend up to
80% of the appraised value of the property securing a single-family residential
loan.
From time to time, we will originate loans for the construction of
single-family residential properties. Such loans may be made to individuals or
builders. We do not expect to emphasize construction lending in the near term
and at June 30, 1999, we had $2.8 million of gross construction loans with $1.8
million of construction loans outstanding.
Multi-family Residential Real Estate and Commercial Real Estate
Lending. Our lending activities currently emphasize the origination and
acquisition of loans secured by existing multi-family residential and commercial
properties. As of June 30, 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 June 30, 1999, substantially
all of the properties securing our multi-family residential and commercial real
estate loans were located in the greater Delaware Valley. We will presently
originate multi-family residential and commercial real estate loans for terms of
up to 25 years. Some of these loans contain call or repayment option features
within three to seven years after origination. We will originate such loans on
both a fixed-rate or adjustable-rate basis, with the latter based on an
applicable prime rate. Adjustable-rate loans may have an established ceiling and
floor, and the maximum loan-to-value for these loan products is generally 80%.
Though historically vBank has originated and acquired loans with lower debt
coverage ratios, as part of the criteria for underwriting multi-family
residential and commercial real estate loans, vBank generally requires a debt
coverage ratio (the ratio of net cash from operations before payment of debt
service to debt service) of at least 1.25 to 1.0 on originated loans and at
least 1.15 to 1.0 on acquired loans. We generally seek additional protection,
such as secondary collateral and personal guarantees from the principals of the
borrowers, to mitigate any weaknesses identified in the underwriting process.
Loans collateralized by multi-family residential and commercial real
estate generally involve a greater degree of credit risk than one-to-four family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate and multi-family real estate is
typically dependent upon the successful operation of the related property. If
the cash flow from the project is reduced, the borrower's ability to repay the
loan can become impaired. At June 30, 1999, $941,000 of our commercial real
estate loans were classified as non-performing. As of such date, a significant
portion of our non-performing commercial real estate loans was comprised of one
purchased loan.
Commercial Business Loans. We originate commercial business loans
consisting primarily of lines of credit and term loans secured by equipment and
accounts receivable. At June 30, 1999, commercial business loans totaled $2.3
million, or 1.9%, of our total loan portfolio. In addition, all of our
commercial business loans which are secured by real estate have been classified
as commercial real estate loans. Currently, we are placing greater emphasis on
the origination of commercial business loans. We recently hired two loan
officers with extensive commercial lending experience. Commercial business loans
generally have shorter terms and higher interest rates than mortgage loans
because of the type and nature of the collateral. At June 30, 1999, none of our
commercial business loans were classified as non-performing.
Consumer Loans. We originate consumer loans consisting principally of
loans secured by deposit accounts and marketable securities, and home
improvement, personal and automobile loans. At June 30, 1999, consumer loans
totaled $562,000, or 0.5%, of our total loan portfolio. We offer consumer loans
as a service to our customers. Consumer loans are offered primarily on a
fixed-rate basis with maturities generally of less than ten
42
<PAGE>
years. Consumer loans entail greater credit risk than do residential mortgage
loans but have smaller balances and tend to have higher interest rates. At June
30, 1999, one consumer loan was classified as non-performing.
Loan Origination Fees and Other Income. In addition to interest earned
on loans, we generally receive fees in connection with loan originations. Such
loan origination fees, net of costs to originate, are deferred and amortized
using the interest method over the contractual life of the loan. Fees deferred
are recognized as income immediately upon prepayment of the related loan. At
June 30, 1999, we had $189,000 of net deferred loan origination fees. Such fees
vary with the volume and type of loans and commitments made and purchased, the
principal repayments on such loans, and competitive conditions in the real
estate market that reflect the demand and availability of money. In addition to
loan origination fees, we also receive loan fees and service charges that
consist primarily of deposit transaction account service charges and late
charges.
Loans to One Borrower. Current regulations restrict loans to one
borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus
on an unsecured basis, and an additional amount equal to 10% of unimpaired
capital and unimpaired surplus if the loan is secured by readily marketable
collateral (generally, financial instruments). At June 30, 1999, our regulatory
limit on loans to one borrower was $3.2 million and our five largest loans or
groups of loans to one borrower, including related entities, aggregated $3.0
million, $3.0 million, $3.0 million, $3.0 million and $2.9 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 June 30, 1999.
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 and no OREO on June 30, 1999.
43
<PAGE>
The following table sets forth information with respect to our
delinquent loans at June 30, 1999.
Balance Number
-------- -------
(Dollars in Thousands)
Residential real estate(1):
Loans 30 to 89 days delinquent................... 742 17
Loans 90 or more days delinquent................. 1,117 23
----- --
Total......................................... 1,859 40
===== ==
Commercial real estate:
Loans 30 to 89 days delinquent................... 312 4
Loans 90 or more days delinquent................. 918 6
----- --
Total......................................... 1,230 10
===== ==
Consumer loans:
Loans 30 to 89 days delinquent................... 27 1
Loans 90 or more days delinquent................. 25 1
52 2
Commercial business loans:
Loans 30 to 89 days delinquent................... 21 1
Loans 90 or more days delinquent................. - -
----- --
Total......................................... 21 1
----- --
Total delinquent loans.............................. 3,162 53
===== ==
- ----------------------
(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.
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
------------ --------------------------
1999 1998 1997
------------ ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
Residential real estate (1)........................... $1,117 $ 666 $ 258
Commercial real estate (2)(3)......................... 941 1,138 --
Commercial business.................................... -- -- 29
Consumer............................................... 25 -- --
------ ------- -----
Total.............................................. 2,083 1,804 287
====== ======= =====
Accruing loans greater than 90 days delinquent............ -- 152 --
------ ------- -----
Total non-performing loans (4).................... 2,083 1,956 287
====== ======= =====
Other real estate owned (5).............................. -- 66 --
------ ------- -----
Total non-performing assets............................... $2,083 $2,022 $ 287
====== ======= =====
Total non-performing loans, net of discount, as a
percentage of total loans, net of discount.............. 1.78% 1.89% 0.50%
====== ======= =====
Total non-performing assets, net of discount, as a
percentage of total assets, net of discount............. 0.91% 1.22% 0.32%
====== ======= =====
</TABLE>
- ----------
(1) Consists solely of loans secured by single-family residential real estate.
(2) One loan for $23,000 30 to 89 days delinquent has been classified as
nonaccrual.
(3) 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.
(4) All of our non-performing loans as of December 31, 1998 consisted of
acquired loans.
(5) Consists of one parcel of commercial real estate.
44
<PAGE>
The interest income that would have been recorded during the quarter
ended June 30, 1999 if our non-accrual loans at the end of such period had been
current in accordance with their terms during such period was $47,000.
Classification of Assets. Federal regulations provide for the
classification of delinquent or non-homogeneous loans and other assets such as
debt and equity securities as "substandard," "doubtful," or "loss" assets. In
analyzing loans for purchase as well as for purposes of our loan classification,
we have placed increased emphasis on the payment history of the obligor and, to
a lesser extent, the purchase discount associated with a specific loan. Assets
that do not expose us to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess some weaknesses, are required to be
designated "special mention" by management. Loans designated as special mention
are generally loans that, while current in required payment, have exhibited some
potential weaknesses that, if not corrected, could increase the level of risk in
the future. An asset is considered "substandard" if it is inadequately protected
by the current net worth and paying capacity of the obligor. "Substandard"
assets include those characterized by the "distinct possibility" that we will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets is not warranted and are charged against the loan
loss reserve. Pursuant to internal procedures, loans with a history of 30-89 day
delinquencies will generally be classified either special mention or
substandard. However, all loans 90 days or more delinquent are classified either
substandard, doubtful or loss.
The following table sets forth the aggregate amount of our special
mention and classified assets at June 30, 1999:
(Dollars in Thousands)
Special mention......................................... $ 93
Substandard............................................. 1,967
Doubtful................................................ 423
Loss.................................................... --
-------
Total special mention and classified assets............. 2,483
=======
Other real estate owned................................. --
-------
Total special mention and classified assets, including
other real estate owned............................ $ 2,483
=======
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
45
<PAGE>
computing total risk-based capital under Pennsylvania Department of Banking and
Federal Deposit Insurance Corporation regulations, subject to certain
limitations.
We will continue to monitor the allowance for loan losses and make
future adjustments to the allowance through the provision for loan losses as
conditions indicate. Although we maintain our allowance for loan losses at a
level that we consider to be adequate to provide for the inherent risk of loss
in the loan portfolio, there can be no assurance that future losses will not
exceed estimated amounts or that additional provisions for loan losses will not
be required in future periods. In addition, our determination as to the amount
of our allowance for loan losses is subject to review by the Pennsylvania
Department of Banking and the 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 Six Months At or for the Year Ended
Ended June 30, December 31,
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 1998 1998 1997
--------- -------- -------- --------
(Dollars in Thousands)
Total loans outstanding................................... $117,267 80,611 $103,305 $57,047
Average loans outstanding................................. 107,388 67,833 78,797 26,421
Allowance balance (at beginning of period)................ 1,051 568 568 182
Provision for loan losses................................. 250 160 510 415
Charge-offs (recoveries), net of recoveries............... (24) 8 27 29
-------- ------- -------- -------
Allowance balance (at end of period)...................... 1,325 $ 720 $ 1,051 $ 568
Allowance for loan losses as a percent of total loans,
net of discount, at end of period...................... 1.13% 0.89% 1.02% 1.01%
Allowance for loan losses as a percent of total non-
performing loans, net of discount, at end of period 63.61% 197.26% 53.72% 197.96%
Allowance for loan losses and purchase discount as a
percentage of total loans.............................. 5.84% 6.97% 5.85% 8.88%
Net loans charged off as a percent of average loans
outstanding............................................ 0.00% 0.01% 0.03% 0.11%
</TABLE>
<PAGE>
The following tables set forth our percentage of allowance for loan
losses to total allowance for loan losses and the percentage of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
At June 30, 1999 At December 31, 1998
---------------------------------------- ----------------------------------------
Percentage of Percentage of Percentage of Percentage of
Allowance Loans in Each Allowance Loans in Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Balance of allowance for loan
losses at end of period
applicable to:
Real estate............. 1,275 96.2% 97.6% $1,037 98.8% 98.8%
Commercial business..... 25 1.9 1.9 11 1.0 1.0
Consumer................ 25 1.9 0.5 3 0.2 0.2
----- ----- ----- ------ ----- -----
Total ............... 1,325 100.0% 100.0% $1,051 100.0% 100.0%
===== ===== ===== ====== ===== =====
At December 31, 1997
-----------------------------------------
Percentage of Percentage of
Allowance Loans in Each
to Total Category to
Amount Allowance Total Loans
------ --------- -----------
<S> <C> <C> <C>
(Dollars in Thousands)
Balance of allowance for loan
losses at end of period
applicable to:
Real estate............. $528 93.0% 95.1%
Commercial business..... 30 5.3 1.9
Consumer................ 10 1.7 3.0
---- ----- -----
Total ............... $568 100.0% 100.0%
==== ===== =====
</TABLE>
Investment Activities
Our securities portfolio is managed by our President and the Chief
Financial Officer (the "Investment Officers") in accordance with a written
investment policy of the Board of Directors which addresses strategies, types
and levels of allowable investments.
At June 30, 1999, our securities portfolio equaled $82.0 million, or
35.7% of our total assets. Our investment portfolio is comprised of trust
preferred securities, mortgage-backed securities, U.S. government agency
securities, corporate and municipal obligations and equity securities. At June
30, 1999, our trust preferred securities amounted to $31.9 million,
mortgage-backed securities amounted to $13.8 million, equity securities
46
<PAGE>
(consisting of common stock of a local financial institution, a self-service
photocopy business, stock in our computer vendor and a financial institution
managed fund) equaled $2.5 million, corporate and municipal obligations amounted
to $31.0 million, and U.S. government agency securities amounted to $2.8
million.
We classify securities as either available for sale or held to maturity
based upon our intent and ability to hold such securities. Securities available
for sale include debt and equity securities that are held for an indefinite
period of time and are not intended to be held to maturity. Securities available
for sale include securities that we intend to use as part of our overall
asset/liability management strategy and that may be sold in response to changes
in interest rates and resultant prepayment risk and other factors related
thereto. Securities available for sale are carried at fair value, and unrealized
gains and losses (net of related tax effects) on such securities are excluded
from earnings but are included in stockholders' equity. Upon realization, such
gains and losses will be included in our earnings. Investment securities and
mortgage-backed securities, other than those designated as available for sale,
are comprised of debt securities that we have the affirmative intent and ability
to hold to maturity. Securities held to maturity are carried at cost, and are
adjusted for amortization of premiums and accretion of discounts over the
estimated terms of the securities.
We are required under federal regulations to maintain a minimum amount
of liquid assets that may be invested in specified short-term securities and
certain other investments. We have maintained a portfolio of liquid assets that
exceeds regulatory requirements. Our Asset Liability Management Committee
generally meets on a monthly basis to decide, based on market levels and
conditions, current economic data, political and regulatory information, and
internal needs, whether any alterations need to be made to our investment
portfolio. Based on the parameters of our Investment Policy, we endeavor to
diversify our holdings through the purchase of medium-term and long-term,
fixed-rate and variable-rate instruments, which provide both an adequate return
and moderate risk. The Investment Officers of USABancShares.com make all
investment decisions in accordance with the Investment Policy and Asset
Liability Management Committee guidelines.
Our securities portfolio composition is designed to provide a liquid
portfolio yet maximize yield on a risk adjusted basis. The process by which we
decide to acquire debt instruments, trust preferred securities and corporate and
municipal obligations is similar to that of underwriting a loan. We evaluate the
potential credit risk associated with these types of investment instruments by
becoming familiar with the institution, its earnings history, its ability to
meet its debt obligation and, if possible, by meeting its management team. The
trust preferred securities are fixed-rate long-term obligations with a weighted
average yield of 8.45% as of June 30, 1999. The trust preferred securities are
obligations of primarily non-rated financial institutions located throughout the
United States, and thus there is a limited market in which to purchase and sell
these securities. As long-term instruments, this portfolio is also subject to
interest rate risk. If interest rates were to rise, these securities would lose
value and require us to reflect a charge to our stockholders' equity.
Our investments include mortgage-backed securities, which represent an
interest in, or are collateralized by, pools of mortgage loans originated by
private lenders that have been grouped by various governmental,
government-related or private organizations. Mortgage-backed securities
generally enhance the quality of our assets by virtue of the insurance or
guarantees that back such securities, are more liquid than individual mortgage
loans and may be used to collateralize borrowings or other obligations.
Investments in mortgage-backed securities, however, may involve risks not
present with mortgage loans. Specifically, mortgage-backed securities are
subject to the risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such
instruments, thereby reducing the net yield on such securities. Like mortgage
loans, there is also reinvestment risk associated with the cash flows from such
securities in the event such securities are redeemed by the issuer. In addition,
the market value of such securities may be adversely affected by changes in
interest rates. As interest rates decrease, the value of such securities may
decrease as mortgages with higher rates are refinanced. At June 30, 1999 $1.5
million, or 10.9% of our total mortgage-backed securities portfolio of $13.8
million had adjustable interest rates. We are seeking to increase our portfolio
of adjustable-rate mortgage-backed securities. Our mortgage-backed securities
are primarily pass-through securities, which provide us with payments consisting
of both principal and interest as mortgage loans in the underlying mortgage pool
are paid off by the borrowers. The average maturity of pass-through
mortgage-backed securities varies with the maturities of the underlying mortgage
instruments and with the occurrence of unscheduled prepayments of those mortgage
instruments.
47
<PAGE>
The following tables present the book values and estimated market
values at June 30, 1999, December 31, 1998 and December 31, 1997, respectively,
for each major category of our investment securities.
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Available-for-Sale:
U.S. Government agency
securities................ $ 899 $ -- (35) $ 864
Mortgage-backed securities...... 9,436 -- (251) 9,185
Corporate obligations........... 14,181 13 (171) 14,023
Trust preferred securities..... 6,799 37 (36) 6,800
Other securities............... 2,544 112 (167) 2,499
------- ---- ------- -------
Total available-for-sale..... $33,859 $162 $ (660) $33,371
======= ==== ======= =======
Held-to-Maturity:
U.S. Government agency
securities................... $ 1,927 $ -- $ (73) $1,854
Mortgage-backed securities..... 4,595 197 (42) 4,750
Municipal securities........... 3,168 -- (87) 3,081
Trust preferred securities..... 25,120 191 (418) 24,893
Corporate obligations.......... 13,823 33 (466) 13,390
------- ---- ------- -------
Total held-to-maturity....... $48,633 $421 $(1,086) $47,968
======= ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
(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>
48
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Available-for-Sale:
U.S. Government agency
securities................... $ 1,243 $ 16 $ -- $ 1,259
Trust preferred securities and
other securities(1).......... 7,637 150 (11) 7,776
------- ---- ------- -------
Total available-for-sale....... $ 8,880 $166 $ (11) $ 9,035
======= ==== ======= =======
Held-to-Maturity:
U.S. Government agency
securities................... $ 3,557 $ -- $ (10) $ 3,547
Mortgage-backed securities..... 6,306 50 -- 6,356
Municipal securities........... 3,163 101 -- 3,264
Trust preferred securities
and other securities (1)..... 2,393 84 -- 2,477
------- ---- ------- -------
Total held-to-maturity......... $15,419 $235 $ (10) $15,644
======= ==== ======= =======
</TABLE>
- --------------------------
(1) Trust preferred securities and other securities are primarily comprised of
trust preferred securities of financial institutions located throughout the
United States. At December 31, 1998, we held $22.6 million of trust
preferred securities available-for-sale and $2.3 million held-to-maturity.
Also included in the available-for-sale category was approximately $1.9
million of equity securities consisting of equity securities of a local
financial institution and a self-service photocopy business, equity
securities of our computer vendor and a financial institution managed fund.
At December 31, 1997, 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.
<PAGE>
The following table shows the contractual maturity of our investment
securities portfolio at June 30, 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
--------- ----------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Due within one year...................... 4,781 4,740 8.74 -- -- --
Due after one year through five years.... 6,698 6,640 9.65 2,623 2,444 10.40
Due after five years through ten years... 2,899 2,864 7.31 10,925 10,665 11.90
Due after ten years...................... 7,590 7,532 8.68 30,490 30,109 8.52
Mortgage-backed securities............... 9,436 9,185 6.80 4,595 4,750 6.45
Equity securities........................ 2,465 2,410 -- -- --
------ ------ ------ ------
33,869 33,371 48,633 47,960
====== ====== ====== ======
</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
49
<PAGE>
conditions. Borrowings may be used to compensate for reductions in the
availability of funds from other sources or on a longer term basis for general
business purposes.
Deposits. Consumer and commercial deposits have historically been
attracted principally from within our market area through the offering of a
broad selection of deposit instruments, including non interest-bearing demand
accounts, NOW accounts, passbook savings accounts, money market accounts, term
certificate accounts and individual retirement accounts. We expect to attract
deposits on a national basis through our Internet banking operations. Deposit
account terms vary according to the minimum balance required, the period of time
during which the funds must remain on deposit, and the interest rate, among
other factors. Deposits have increased 717% from $20.8 million at December 31,
1995 to $170.0 million at June 30,1999. The largest area of increase occurred in
certificates of deposit as we continued to rely primarily on non-retail
certificates of deposits. At June 30, 1999, we had $144.6 million of
certificates of deposit, $74.1 million of which were in excess of $100,000, of
which $28.4 million mature within twelve months.
We regularly evaluate our internal cost of funds, survey rates offered
by competing institutions, review our cash flow requirements for lending and
liquidity, and execute rate changes when deemed appropriate. We anticipate that
the mix of deposits will shift towards transaction accounts as we expand our
commercial line of business. We anticipate that the growth in deposits would be
accomplished through aggressive marketing of our Internet banking operations and
our virtual branch network in surrounding communities, competitive pricing of
retail products and the ability to provide loan and deposit products to
consumers and commercial businesses on a national level through our Internet
banking operations and in the Mid-Atlantic region through our community banking
franchise. See "Management's Discussion and Analysis and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
<PAGE>
The following table sets forth the balance of each deposit type and the
weighted average rate paid on each deposit type of vBank for the periods
indicated.
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
------------------------------------ -------------------------------------
1999 1998
------------------------------------ -------------------------------------
Percent Weighted Percent of Weighted
of Total Average Total Average
Balance Deposits Yield Balance Deposits Yield
---------- ---------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Non-interest-bearing demand.. $ 1,849 1.09% -- $ 1,439 1.26% --
NOW accounts................. 1,521 0.89 2.05 846 0.73 2.31%
Savings and Passbook......... 20,781 12.23 4.61 5,281 4.62 4.40
Money market deposit......... 1,186 0.70 4.60 2,345 2.05 3.66
Certificates of deposit...... 144,618 85.09 5.77 $104,476 91.34 5.73
-------- ------ ---- -------- ------ ----
Total deposits............... $169,995 100.00 5.55 $114,387 100.00% 5.53%
====== ==== ======== ====== ====
Years Ended December 31,
--------------------------------------
1997
--------------------------------------
Percent of Weighted
Total Average
Balance Deposits Yield
--------- ---------- ----------
<S> <C> <C> <C>
Non-interest-bearing demand.. $ 257 0.37% --
NOW accounts................. 688 0.98 2.27%
Savings and Passbook......... 2,019 2.86 2.49
Money market deposit......... 4,802 6.81 3.74
Certificates of deposit...... 62,708 88.98 6.06
------- ------ ----
Total deposits............... $70,474 100.00% 5.72%
======= ====== ====
</TABLE>
At June 30, 1999 and December 31, 1998, our certificates of deposit had
the following stated maturities.
<TABLE>
<CAPTION>
(Dollars in Thousands)
June 30, 1999 December 31, 1998
----------------------- -----------------------
<S> <C> <C> <C> <C>
Within one year........................ $ 67,204 46.47% $ 47,067 45.05%
Over one year through two years.......... 39,766 27.50 28,399 27.18
Over two years through three years....... 13,006 8.99 14,769 14.14
Over three years through five years...... 23,417 16.19 13,333 12.76
Over five years through ten years........ 1,225 0.85 908 0.87
-------- ------ -------- ------
$144,618 100.00% $104,476 100.00%
</TABLE>
50
<PAGE>
The following table presents, by various rate categories, the amount of
certificates of deposit outstanding at June 30, 1999.
Outstanding
Certificate Rates Amounts
- ----------------- ----------------------
(Dollars in Thousands)
0 to 3.99%.......................... $ 50
4.00% to 5.99%...................... 101,336
6.00% to 7.99%...................... 43,232
--------
Total $144,618
========
The following table summarizes the maturity composition of certificates
of deposit with balances of $100,000 or more at June 30, 1999.
June 30, 1999
-----------------------------
Balance %
-----------------------------
(Dollars in Thousands)
Three months or less...................... $ 1,733 2.3%
Over three months to six months........... 7,825 10.6%
Over six months to twelve months.......... 18,812 25.4%
Over twelve months........................ 45,702 61.7%
------- -----
$74,072 100.0%
======= =====
Borrowings. If the need arises, we may rely upon advances from the
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 June 30, 1999, we had $43.8 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 June 30, 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 5.30% at June 30, 1999.
51
<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 Six At or for the
Months Ended June 30, Year Ended December 31,
---------------------------- ----------------------------
1999 1998 1998 1997
------------- ---------- --------------- --------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
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 USABancShares.com. USABancShares.com acquired USACapital in April 1997 for a
purchase price of $75,000, paid in shares of USABancShares.com's common stock.
USACapital trades stocks, bonds, annuities, and other investment related
products to the general public. On August 16, 1999, USACapital began to offer
on-line trading, real time quotes, low commissions and direct access to funds
held on deposit with vBank . During the year ended December 31, 1998, USACapital
increased its staff from two persons to 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 $193,000 for
the six months ended June 30, 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. Through our
relationship with USACredit we plan to allow our customers, many of whom are
independent business owners or managers, to lease small business equipment in
the future. Leases are planned to range in amounts from $5,000 to $500,000 and
cover virtually all types of business equipment. USACredit will act as a broker
and provide advice, comparison quotes and immediate equipment lease financing
through a network of financial institutions.
USACredit holds a 20% interest in USACredit Ventures LLC, a Delaware
limited liability company in the business of acquiring, owning, servicing,
selling or otherwise disposing of nonperforming financial assets. USACredit had
two loans outstanding to USACredit Ventures LLC at June 30, 1999 totaling
approximately $89,000. These loans partially fund the purchase judgments and
deficiency claims with respect to nonperforming loans and other delinquent
claims against third-party debtors.
Personnel
As of June 30, 1999, we had a total of 62 full-time and 2 part-time
employees.
Description of Properties
On December 23, 1997, we purchased a building at 1535 Locust Street in
Center City Philadelphia, formerly owned and operated by PNC Bank, which serves
as our corporate offices and flagship retail operation. This location consists
of approximately 10,000 square feet of space, and includes not only a first
floor retail
52
<PAGE>
operation, but also houses senior management of USABancShares.com and
USACapital, Inc., in addition to selected members of vBank staff. We are in the
process of selling this facility, but we intend to maintain our retail operation
and lending operations in such facility following such sale pursuant to a lease
to be entered into with the purchaser. We will use any gains on this disposition
to execute our Internet business strategy.
Pursuant to a lease dated July 27, 1998, we lease a building at 18 East
Wynnewood Road, Wynnewood, Pennsylvania. We opened a retail branch at this
location in April 1999. The lease is for an initial period of 10 years with an
option to renew for an additional 10 years. The annual lease payments total
$48,000.
We lease the building located at 803 East Germantown Pike in 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 June 30, 1999, our branches had
the following deposits: Locust Street, $103.6 million; Norristown, $54.6
million; Wynnewood, $5.6 million; and eBank, $ 6.2 million.
We are currently engaged in discussions to lease approximately 23,000
square feet of warehouse space in Philadelphia to house our Internet banking
operations and to serve as our corporate offices. We have not yet reached a
definitive agreement and there can be no guarantee that we will be able to
negotiate acceptable lease terms for such space.
Legal Proceedings
On July 28, 1999, U.S. Bancorp, et al. filed a lawsuit against us and
our subsidiaries alleging various claims relating to U.S. Bancorp's service
marks. On August 16, 1999, we ceased use of the name "USABanc.com" and the
domain name www.usabanc.com, and we changed our Website to
www.usabancshares.com. On September 9, 1999, all parties to the litigation
entered into a settlement agreement resolving the dispute. In accordance with
the terms of the settlement agreement, USABancShares.com agreed not to use
USABanc.com as a name or domain name. USABancShares.com will retain the right to
permanently use "USABancShares.com," "vBank," and "USACapital" as the respective
names of its holding company, FDIC insured banking subsidiary and NASD
broker-dealer. Additionally, USABancShares.com will retain ownership and control
of the Internet domain name www.usabanc.com, which it will hold as an inactive
domain name. The settlement agreement terminated the litigation and provided all
parties to the lawsuit with full releases.
We are not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. We believe that
such routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operation.
53
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information concerning our
current Directors and executive officers. The term of office for each Director
is one year or until the next meeting of shareholders, at which time elections
are held for each seat on the Board of Directors.
<TABLE>
<CAPTION>
Director and/or
Position with USABancShares.com Executive Officer
Name and/or vBank Age Since
- ---- ---------------------------- --- -----------------
<S> <C> <C>
George M. Laughlin ........ Chairman 78 1995
Zeev Shenkman ............. Vice-Chairman 47 1998
Kenneth L. Tepper ......... President and Chief Executive Officer/Director 37 1995
Clarence L. Rader.......... Director/Chairman of vBank 68 1995
George C. Fogwell, III ... Director 52 1995
John A. Gambone ........... Director 60 1995
Carol J. Kauffman ......... Director 52 1997
Wayne O'Leevy ............. Director 55 1996
Brian M. Hartline ......... Chief Financial Officer and Director/Chief 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 President , Chief Executive Officer and
a Director 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 MerchantBancShares, Inc., an investment banking firm specializing in
community bank mergers and loan portfolio acquisitions. He was Finance Chairman
of the Pennsylvania Republican State Committee during the 1994 gubernatorial
campaign, and a principal of the 1995 Congressional Medal of Honor Society
Convention. He serves on the Board of Directors of TRM Corporation, a public
company in the self-service photocopy business in which USABancShares.com
maintains a $500,000 investment in debt securities.
Clarence L. Rader has served as Chairman of vBank since November 1995.
Mr. Rader served as President and Chief Executive Officer of vBank from 1986 to
1995. Mr. Rader was President of the Norristown School Board, and Chairman of
the Central Montgomery Chamber of Commerce from 1991 to 1992. He is a senior
appraiser with the American Society of Appraisers.
George C. Fogwell, III is an active securities investor, who is also a
senior international Captain for Delta Airlines. Mr. Fogwell, as a certified
flight instructor, is a member of the Air Line Pilots Association, the Seaplane
Pilots Association and the owner of Clinton Aviation. Mr. Fogwell works for the
American Heart Association and has been a member of the Board of Directors for
USABancShares, USACapital and vBank since their inception.
54
<PAGE>
John A. Gambone is the Chairman, President and Chief Executive Officer
of Gambone Bros. Organization, Inc., a real estate development concern founded
in 1958 and headquartered in Fairview Village, Pennsylvania. He is a member of
the Pennsylvania Horse Breeders Association as well as numerous professional
organizations related to the building industry.
Carol J. Kauffman has served as the Director of Business Development
for Lawyers' Travel Service Division of the World Travel Specialists Group since
1996. Prior to Lawyers' Travel, Ms. Kauffman was Senior Account Executive,
Account Services for Reimel Carter Public Relations firm after successfully
selling the firm she founded over ten years ago, Lawlor Jackson, Inc.
Wayne O. Leevy is the Managing Partner of Mitchell & Titus, LLP, a
public accounting firm. Prior to Mitchell & Titus, Mr. Leevy was Managing
Officer of Leevy, Redcross and Co., which merged with Mitchell & Titus in 1990.
Brian M. Hartline is currently our Director and Chief Financial Officer
and Chief Operating Officer of vBank, where he has been employed since December
1998. Prior to joining USABancShares.com, Mr. Hartline served from 1994 through
1998 in a number of positions, including Executive Vice President and Chief
Financial Officer, at ML Bancorp, Inc. in Villanova, Pennsylvania, and from 1990
to 1994 as Vice President and Controller of PNC Bank (Central Region), formerly
United Federal Bank, in State College, Pennsylvania. Mr. Hartline is a licensed
certified public accountant.
Craig J. Scher is currently Senior Vice President and Director of
Lending/Credit of vBank, where he has been employed since July 1998. Prior to
joining vBank, Mr. Scher served from 1989 to 1998 in a number of positions,
including Senior Vice President, at Equity National Bank, in Marlton, New
Jersey, and from 1985 to 1989 with Midlantic Bank, formerly Continental Bank in
Philadelphia, Pennsylvania.
Compensation of the Board of Directors
Directors of USABancShares.com receive a fee of $400 for each meeting
of the Board of Directors attended. Directors of USABancShares.com also receive
a fee of $100 for each committee meeting attended. Mr. Laughlin receives $1,000
per month, plus reimbursement of reasonable out-of-pocket expenses not to exceed
$12,000 per year. Mr. Shenkman receives $25,000 per year pursuant to his
election as Vice-Chairman of USABancShares.com. During 1998, an aggregate of
$58,800 was paid to Directors for their services. No Director received more than
$14,200 in 1998.
During 1998, Ms. Kauffman was awarded options to purchase 2,660 shares
of common stock at an exercise price of $3.76 per share and options to purchase
13,300 shares of common stock at an exercise price of $5.64 per share. Mr.
Shenkman was awarded options to purchase 66,500 shares of common stock at an
exercise price of $5.64 per share. Also, Mark A. Kearney was awarded options to
purchase 13,300 shares of common stock at an exercise price of $5.64 per share.
Such options were subsequently forfeited in connection with Mr. Kearney's
resignation from the Board of Directors.
55
<PAGE>
Executive Compensation
The following table sets forth compensation paid in the fiscal year
ended December 31, 1998 for services performed in all capacities for
USABancShares 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. USABancShares.com and vBank had no other
executive officer whose salary and bonus exceeded $100,000 in the fiscal year
ended December 31, 1998 or whose current salary exceeds $100,000.
<TABLE>
<CAPTION>
Long Term Compensation
Fiscal Annual No. of Securities All Other
Name and Principal Position Year Salary Underlying Options Compensation
--------------------------- ---- ------ ------------------ ------------
<S> <C> <C> <C> <C>
Kenneth L. Tepper, President and CEO ...... 1998 $219,462(1) 106,134 $162,000(2)(3)
1997 $120,000 -- $ 12,000(3)
1996 $120,000 -- $ 12,000(3)
Brian M. Hartline, Chief Financial Officer/
Chief Operating Officer of vBank....... 1998 $ 11,692(4) 40,000 --
Craig J. Scher, Senior Vice President and
Director of Lending/Credit of vBank.... 1998 $ 42,115(5) 20,000 --
</TABLE>
- -------------
(1) Mr. Tepper's annual base salary was increased to $245,000 effective March 1,
1998.
(2) Mr. Tepper received a payment of $150,000 in connection with his agreement
to cap the anti-dilutive feature of the Class B common stock. See "--Certain
Relationships and Related Transactions."
(3) In addition to his base salary, Mr. Tepper received $12,000 in additional
compensation which was used to purchase a deferred compensation life
insurance policy.
(4) Mr. Hartline was employed by USABancShares.com on December 1, 1998 at an
annual base salary of $160,000.
(5) Mr. Scher was employed by vBank in July 1998 at an annual base salary of
$120,000.
Stock Options
The following table sets forth certain information concerning grants of
stock options to the Chief Executive Officer 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
35,378(2) 11.6% $3.76/share 2/11/03
Brian M. Hartline.......... 40,000(3) 13.2% $3.75/share 12/01/09
Craig J. Scher............. 20,000(3) 6.6% $3.75/share 12/01/09
</TABLE>
- ------------
(1) These options vest over a three year period beginning August 1998.
(2) These options vest over a three year period beginning February 2000.
(3) These options vest over a three year period beginning December 1999.
56
<PAGE>
The following table sets forth certain information concerning the
exercise of options to purchase common stock of USABancShares.com in the fiscal
year ended December 31, 1998 and the unexercised options to purchase common
stock of USABancShares held by the named executive officers at December 31,
1998. Year-end values are based upon the closing market price of a share of
common stock on December 31, 1998 of $4.50.
Aggregated Option Exercises in Fiscal Year
1998 and December 31, 1998 Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998 (#) at December 31, 1998 ($)
------------------------------- ------------------------------
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth L. Tepper........ 8,800 $24,595 399,860 42,454 $559,804 $31,416
Brian M. Hartline........ -- -- -- 40,000 -- $30,000
Craig J. Scher .......... -- -- -- 20,000 -- $15,000
</TABLE>
Employment Agreements
USABancShares.com and vBank have entered into a three-year employment
agreement with Mr. Tepper pursuant to which Mr. Tepper serves as the President
and Chief Executive Officer of USABancShares.com and vBank. Under his employment
agreement, Mr. Tepper receives an annual base salary of $245,000 and has the
ability to receive cash bonuses at the end of each fiscal year beginning with
the fiscal year ending 1999 based on our attainment of certain performance
objectives. Mr. Tepper will receive a cash bonus of $100,000 when vBank's total
assets reach $500 million. He will also receive a cash bonus of $100,000 upon
the opening of the fifty thousandth (50,000th) deposit account and an additional
$100,000 cash bonus upon the opening of deposit accounts in increments of fifty
thousand (50,000) thereafter. Mr. Tepper will receive a cash bonus based on
earnings per share each year as follows: (i) $50,000 for earnings per share in
excess of $0.50, (ii) $75,000 for earnings per share in excess of $0.75 and
(iii) $100,000 for earnings per share in excess of $1.00. Additionally, Mr.
Tepper will receive a cash bonus of $200,000 for every $100 million increase in
our market capitalization, with such increase in market capitalization being
based on the average closing price of our common stock as reported on the Nasdaq
SmallCap or National Market for twenty (20) consecutive trading days. The
employment agreement provides that in the event Mr. Tepper is discharged other
than for cause, as defined in the employment agreement, Mr. Tepper will receive,
until the earlier of the remaining term of the employment agreement or obtaining
employment elsewhere, his current salary, medical benefits, the use of a company
automobile and any earned bonuses and expense reimbursements due to Mr. Tepper.
In the event of a change of control, Mr. Tepper will receive his current salary,
medical benefits and the use of a company automobile for twenty-four months if
he is not offered continued employment with the same job title,
responsibilities, locality and compensation.
USABancShares.com and vBank have entered into a three-year employment
agreement with Mr. Hartline pursuant to which Mr. Hartline serves as
USABancShares.com's Chief Financial Officer and Chief Operating Officer of
vBank. Mr. Hartline receives an annual base salary of $200,000 and may receive
annual cash bonuses beginning with the fiscal year ending 1999 based on our
attainment of certain performance objectives. Mr. Hartline will receive a cash
bonus of $100,000 when vBank's total assets reach $500 million. He will also
receive a cash bonus of $100,000 upon the opening of fifty thousandth (50,000th)
deposit account and an additional $100,000 cash bonus upon the opening of
deposit accounts in increments of fifty thousand (50,000) thereafter. Mr.
Hartline will receive a cash bonus based on earnings per share each year as
follows: (i) $50,000 for earnings per share in excess of $0.50, (ii) $75,000 for
earnings per share in excess of $0.75 and (iii) $100,000 for earnings per share
in excess of $1.00. Additionally, Mr. Hartline will receive a cash bonus of
$100,000 for every $100 million increase in our market capitalization, with such
increase in market capitalization being based on the average closing price of
our common stock as reported on the Nasdaq SmallCap or National Market for
twenty (20) consecutive trading days. If Mr. Hartline's employment is terminated
without cause, as defined in the employment agreement, Mr. Hartline will
receive, until the earlier of the remaining term of his employment agreement or
obtaining employment elsewhere, his current salary, medical benefits, use of an
automobile and any earned bonuses and expense reimbursements due to Mr.
Hartline. In the event of a change of control, Mr. Hartline will receive his
current salary, medical benefits and the use of a company automobile for
twenty-four months, if he is not offered continued employment with the same job
title, responsibilities, locality and compensation following the change of
control.
vBank has entered into a three-year employment agreement with Mr. Scher
pursuant to which Mr. Scher serves as the Senior Vice President and Director of
Lending/Credit. Mr. Scher receives an annual base salary of $120,000 and will
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
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November 30 of each of 1998, 1999 and 2000, for a total of 60,000 options. The
options vest over a three-year period, ratably. The exercise price of the
options will be the last reported sale price on the Nasdaq SmallCap or National
Market of our common stock of the business day preceding the date of grant. If
Mr. Scher's employment is terminated without cause, as defined in the employment
agreement, Mr. Scher will receive, until the earlier of the remaining term of
the employment agreement or obtaining employment elsewhere, his current salary,
medical benefits, use of an automobile and any earned bonuses. In the event of a
change of 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 of control.
Indemnification of Directors and Officers
Our articles and bylaws provide that we will indemnify every person who
is or was our Director or executive officer to the fullest extent permitted by
law. This indemnification applies to all expenses and liabilities reasonably
incurred in connection with any proceeding to which the Director or executor
officer may become involved by reason of being or having been a Director or
executive officer. Pennsylvania law, under which we are incorporated, allows
indemnification of Directors and officers if the indemnified person acted in
good faith and in a manner such person reasonably believed to be in, or not
opposed to, our best interest and, with respect to any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful. We maintain a Director
and officer liability insurance policy covering each of our Directors and
executive officers.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information concerning the beneficial
ownership of our common stock, as of August 31, 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) 3.0
Clarence L. Rader .................................. 35,378(2) *
Kenneth L. Tepper .................................. 542,644(5) 13.5
George C. Fogwell, III ............................. 89,506(2)(6) 2.2
John A. Gambone .................................... 120,902(2)(7) 3.0
Carol J. Kauffman .................................. 125,334(8)(9) 3.1
Wayne O. Leevy ..................................... 23,690(10) *
Brian M. Hartline................................... 80,000 2.0
Craig J. Scher...................................... 50,684 1.3
Directors and Executive Officers
(10 persons) ................................... 1,311,624(11) 32.6%
</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
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August 31, 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 August 31, 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 August 31, 1999.
(5) Includes 354 shares of common stock held by Mr. Tepper as custodian for his
minor son. Also includes options to purchase 399,860 shares within 60 days
of August 31, 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 (69,026 shares), and in the name of two
corporations (45,868 shares) of which Mr. Gambone is president. Includes
688 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 August
31, 1999 held by Mrs. Kauffman's husband and options to purchase 2,660
shares of common stock within 60 days of August 31, 1999.
(9) Includes options to purchase 13,300 shares of common stock within 60 days
of August 31, 1999.
(10) Includes options to purchase 11,690 shares of common stock within 60 days
of August 31, 1999.
(11) Includes 670,904 options exercisable within 60 days of August 31, 1999;
does not include 212,450 options that are not exercisable within 60 days of
August 31, 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 July 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: Two companies in which Mr.
Gambone owns a minority interest had outstanding indebtedness totaling $3.0. Of
this amount, $2.7 is secured by real estate and $133,000 is secured by titles to
motor vehicles and $132,000 is secured by a commercial vehicle, with all loans
personally guaranteed by Mr. Gambone. Mr. Tepper had
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outstanding loan commitments totaling $692,000 of which $642,000 is secured by a
residential mortgage and $50,000 is an unsecured line of credit. Mr. Shenkman
has loan commitments totaling $1.1 million. Both loans are secured by marketable
securities and a second mortgage on residential real estate. Additionally, Mr.
Laughlin had outstanding loan commitments totaling $187,000, of which $137,000
is secured by commercial real estate and $50,000 is an unsecured line of credit.
The aggregate amount of loans outstanding to executive officers and Directors of
vBank as of June 30, 1999 equaled 34.8% of stockholder's equity.
Mr. Tepper, President and Chief Executive Officer, is the sole holder
of Class B common stock. The terms of the Class B common stock provide that on
January 1, 2001, all of the authorized shares of Class B common stock will
automatically convert into 10% of the then issued shares of Class A common
stock, rounded up to the nearest whole share. In connection with a private
placement of our common stock in February 1998, we entered into an agreement
with Mr. Tepper by which we have an option to pay Mr. Tepper $150,000 per year
for each of the three years beginning in 1998 in exchange for Mr. Tepper
agreeing to cap the non-dilutive feature of the Class B common stock to 10% of
the Class A common stock outstanding prior to the February 1998 private
placement of Class A common stock, or 216,460 shares, and waive any future
exercise of the non-dilutive feature of the Class B common stock. The first
payment was made upon the closing of the February 1998 private placement. The
second payment was made in January 1999. The third optional payment is
anticipated to be made in January 2000.
In March 1999, 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 USABANCSHARES AND VBANK
USABancShares.com and vBank are extensively regulated under both
federal and state law. From time to time, various new types of federal and state
legislation have been proposed that could result in additional or diminished
regulation of and restrictions on, or altered forms of supervision of, banks or
bank holding companies. We cannot predict whether any such legislation will be
adopted or how such legislation, if adopted, would affect USABancShares.com's
business or vBank's business. As a consequence of the extensive regulation of
commercial banking activities and financial institutions in the United States,
the business and activities of USABancShares.com and vBank are susceptible to
changes in federal and state legislation which may affect the scope, nature and
costs of such business and activities. The following description of statutory
and regulatory provisions, which is not intended to be a complete description of
these provisions or their effects on USABancShares.com or vBank, is qualified in
its entirety by reference to the particular statutory or regulatory provisions.
USABancShares
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, USABancShares.com's activities and those of its
banking and nonbanking subsidiaries are limited to the business of banking and
activities closely related or incidental to banking.
With certain limited exceptions, the Bank Holding Company Act requires
every bank holding company to obtain the prior approval of the Board of
Governors of the Federal Reserve System before:
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.
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The Bank Holding Company Act also prohibits a bank holding company,
with certain exceptions discussed below, from acquiring the voting shares or
assets of any company that is not a bank and from engaging in any business other
than banking or managing or controlling banks. Under the Bank Holding Company
Act, the Board of Governors of the Federal Reserve System is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Board of Governors of the Federal Reserve System has
determined to be so closely related to banking or to managing or controlling
banks as to be a proper incident thereto. In making such determinations, the
Board of Governors of the Federal Reserve System is required to weigh the
expected benefit to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.
The Board of Governors of the Federal Reserve System has by regulation
determined that certain activities are closely related to banking within the
meaning of the Bank Holding Company Act. These activities include operating a
mortgage company, finance company, credit card company, factoring company, trust
company or savings association; performing certain data processing operations;
providing limited securities brokerage services; acting as an investment or
financial advisor; acting as an insurance agent for certain types of
credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing tax planning and preparation services; operating
a collection agency; and providing certain courier services.
In addition, and subject to certain exceptions, the Bank Holding
Company Act and the Change in Control Act, together with regulations thereunder,
require approval of the Board of Governors of the Federal Reserve System or,
depending on the circumstances, no notice of disapproval, prior to any person or
company acquiring "control" of a bank holding company, such as
USABancShares.com. Control is conclusively presumed to exist if any individual
or company acquires 25% or more of any class of voting securities of the bank
holding company. With respect to corporations with securities registered under
the Securities Exchange Act of 1934, as amended (such as USABancShares.com),
control will be rebuttably presumed to exist if a person acquires at least 10%
of any class of voting securities of the corporation.
A registered bank holding company is generally required to give the
Board of Governors of the Federal Reserve System prior notice of any redemption
or repurchase of its own equity securities if the consideration to be paid,
together with the consideration paid for any repurchases or redemptions in the
preceding year, is equal to 10% or more of USABancShares.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.
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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.
As of June 30, 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.
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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
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 June 30, 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 June 30, 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.
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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%.
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.
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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
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.
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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;
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.
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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 USABancShares.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 USABancShares.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." USABancShares.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 a term of 31 years, but may terminate earlier as provided in its
Amended and Restated Declaration of Trust by and among USABancShares.com,
Wilmington Trust Company and the individual trustees. USA Capital Trust I's
business and affairs are conducted by the issuer trustees appointed by
USABancShares.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.
USABancShares.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 USABancShares, 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,
USABancShares and USA Capital Trust I entered into the Registration Rights
Agreement with the initial purchasers, pursuant to which USABancShares.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 USABancShares.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
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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, USABancShares.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
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. USABancShares.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 USABancShares.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.
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Expiration Date; Extensions; Amendments
The expiration date is 5:00 p.m., New York City time, on October 15,
1999, unless the exchange offer is extended by USABancShares.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.
USABancShares.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 USABancShares.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 USABancShares.com and
USA Capital Trust I to constitute a material change, or if USABancShares.com and
USA Capital Trust I waive a material condition of the exchange offer,
USABancShares.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 USABancShares.com and USA
Capital Trust I will extend the exchange offer to the extent required by Rule
14e-1 under the Exchange Act.
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 USABancShares.com and USA Capital Trust I may choose to make
any public announcement and subject to applicable law, USABancShares.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 USABancShares.com may enforce such letter of transmittal
against such participant.
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Subject to the terms and conditions of the exchange offer,
USABancShares 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 USABancShares.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 USABancShares.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 USABancShares.com's and USA Capital Trust I's rights set
forth herein, the exchange agent may, nevertheless, on behalf of
USABancShares.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 USABancShares.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.
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
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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.
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.
USABancShares.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
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tendering holder, USABancShares.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 USABancShares.com
and USA Capital Trust I, in their sole discretion, whose determination shall be
final and binding on all parties. USABancShares.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 USABancShares.com and
USA Capital Trust I, be unlawful. USABancShares.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 USABancShares.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
USABancShares, USA Capital Trust I, any affiliates or assigns of
USABancShares.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
USABancShares.com and USA Capital Trust I, proper evidence satisfactory to
USABancShares.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.
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 USABancShares.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, USABancShares.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 USABancShares.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.
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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 USABancShares.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, USABancShares 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 USABancShares 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, USABancShares.com and USA Capital
Trust I believe that participating broker-dealers who acquired Series A Capital
Securities for their 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, USABancShares 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 USABancShares.com
or USA Capital Trust I, or cause USABancShares.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 USABancShares.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 USABancShares.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
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Series B Debentures, as applicable, pursuant to this prospectus until
USABancShares 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
USABancShares.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
USABancShares.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
USABancShares.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
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 USABancShares.com
and USA Capital Trust I, in their sole discretion, whose determination shall be
final and binding on all parties. None of USABancShares.com, USA Capital Trust
I, any affiliates or assigns of USABancShares.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, USABancShares.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:
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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 USABancShares.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 USABancShares.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 USABancShares.com's and USA
Capital Trust I's judgment, would reasonably be expected to impair
the ability of USA Capital Trust I or USABancShares.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
USABancShares.com's and USA Capital Trust I's judgment, would
reasonably be expected to impair the ability of USA Capital Trust I
or USABancShares.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 USABancShares.com's and USA Capital Trust I's
judgment, would reasonably be expected to impair the ability of the
issuer or USABancShares.com to proceed with the exchange offer; or
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 USABancShares.com or USA
Capital Trust I, threatened for that purpose, or any governmental
approval which either USABancShares.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.
If USABancShares.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, USABancShares.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.
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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: Kristin Long, Corporate Trust Operations Attn: Kristin 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
USABancShares.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. USABancShares.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 USABancShares.com nor USA Capital Trust I will make any
payment to brokers, dealers or other nominees soliciting acceptances of the
exchange offer.
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.
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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,
USABancShares 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 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, USABancShares.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 USABancShares.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 USABancShares.com
that rank pari passu with or junior in right of payment to the
Debentures; or
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o make any guarantee payments with respect to any guarantee by
USABancShares.com of the debt securities of any subsidiary of
USABancShares.com, including all other guarantees to be issued by
USABancShares.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
USABancShares.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
USABancShares.com's capital stock for another class or series of
USABancShares.com's capital stock;
o the purchase of fractional interests in shares of
USABancShares.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 USABancShares.com's benefit plans for its
Directors, officers or employees or any of USABancShares.com's
dividend reinvestment plans. USABancShares.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, USABancShares.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 USABancShares.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
USABancShares on a limited basis as set forth herein under "Description of
Guarantee."
USABancShares.com has established the reserve account in which
USABancShares 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. 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;
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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.
USABancShares.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
USABancShares.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 USABancShares.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
USABancShares.com;
o the distribution of a Like Amount of the Debentures to the holders
of the Capital Securities and common securities, if
USABancShares.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;"
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
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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 USABancShares.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 USABancShares.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 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 USABancShares.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
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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 USABancShares.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, USABancShares.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, USABancShares.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 USABancShares 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 USABancShares.com, as sponsor, unless such event of
default shall have been cured or waived. USABancShares.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.
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
USABancShares 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.
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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 USABancShares.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 USABancShares.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;
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, USABancShares.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 USABancShares.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
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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
USABancShares, 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 USABancShares.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 USABancShares.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.
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
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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 USABancShares.com, the issuer trustees or
any affiliate of USABancShares.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 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 USABancShares.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
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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 USABancShares.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.
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 USABancShares.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 USABancShares.com. None of USA Capital Trust I, USABancShares.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 USABancShares.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.
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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 USABancShares.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
USABancShares.com believe to be reliable, but neither USA Capital Trust I nor
USABancShares.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, USABancShares.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 USABancShares.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.
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
USABancShares. The paying agent shall be permitted to resign as paying agent
upon 30 days notice to the property trustee, the administrative trustees and
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USABancShares. 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
USABancShares.
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 USABancShares.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.
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 USABancShares.com
for United States federal income tax purposes.
USABancShares 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 USABancShares.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.
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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
USABancShares 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
USABancShares for the common securities, in Debentures issued by
USABancShares.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 USABancShares.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."
USABancShares.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 USABancShares.com are owned by vBank. USABancShares.com is a legal entity
separate and distinct from vBank and its other subsidiaries. Holders of
Debentures should look only to USABancShares.com for payments on the Debentures.
The principal sources of USABancShares.com's income are dividends, interest and
fees from vBank and USACapital, as its operating subsidiaries. USABancShares.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
USABancShares.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,
USABancShares.com and certain other affiliates, and on investments in their
stock or other securities. Such restrictions prevent USABancShares 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 USABancShares.com
and as to each of such other affiliates to 10% of vBank's capital and surplus
and as to USABancShares.com and all of such other affiliates to an aggregate of
20% of vBank's capital and surplus.
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Under Board of Governors of the Federal Reserve System policy,
USABancShares 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, USABancShares.com might not otherwise provide such
support. Any capital loans by USABancShares.com to vBank are subordinate in
right of payment to deposits and to other indebtedness of vBank. In the event of
USABancShares' bankruptcy, any commitment by USABancShares.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 USABancShares.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 USABancShares.com, could be deemed to constitute
such an unsafe or unsound practice.
Because USABancShares.com is a holding company, the right of
USABancShares.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
USABancShares.com may itself be recognized as a creditor of that subsidiary.
Accordingly, the Debentures are effectively subordinated to all existing and
future liabilities of USABancShares' subsidiaries, including vBank's deposit
liabilities, and all liabilities of any future subsidiaries of
USABancShares.com. The Indenture does not limit the incurrence or issuance of
other secured or unsecured debt of USABancShares or any subsidiary, including
Senior Indebtedness. See "--Subordination."
Reserve Account
USABancShares.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. USABancShares.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.
USABancShares 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.
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 USABancShares.com may designate from time to time, except
that at the option of USABancShares.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. USABancShares.com may at any time designate additional
paying agents or rescind the
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designation of any paying agent; provided, however, that USABancShares.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 USABancShares.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 USABancShares.com, be repaid to USABancShares.com, and
the holder of such Debenture shall thereafter look, as a general unsecured
creditor, only to USABancShares.com for payment thereof.
Option to Extend Interest Payment Date
So long as no event of default has occurred and is continuing,
USABancShares 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. USABancShares.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, USABancShares.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,
USABancShares.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, USABancShares.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.
USABancShares.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 USABancShares' 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 USABancShares may elect to begin a deferral period.
Although USABancShares.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
USABancShares.com may or may not make during any such deferral period as
described under "Description of Series B Securities--Description of Capital
Securities--Distribution."
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Optional Prepayment
The Debentures will be prepayable, in whole or in part, at the option
of USABancShares.com on or after March 15, 2009, subject to USABancShares.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, USABancShares.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, USABancShares.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 USABancShares.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 USABancShares.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 USABancShares.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 USABancShares.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
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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 USABancShares.com; provided, however, that the distribution of the Debentures
in connection with the liquidation of USA Capital Trust I by USABancShares.com
shall 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 USABancShares.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 USABancShares.com on the Debentures is not,
or within 90 days of the date of such opinion will not be,
deductible by USABancShares.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
USABancShares.
"Reference Treasury Dealer" means a nationally recognized U.S.
Government securities dealer in New York, New York selected by
USABancShares.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
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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.
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 USABancShares.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, USABancShares.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 USABancShares.com
In the event USABancShares.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 USABancShares.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 USABancShares.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 USABancShares.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
USABancShares.com, including any other junior subordinated
debentures to be issued by USABancShares.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
USABancShares.com of the debt securities of any subsidiary of
USABancShares.com, including any other guarantees to be issued by
USABancShares.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
USABancShares.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 USABancShares.com's capital stock or the
exchange or conversion of one class or series of USABancShares.com's
capital stock for another class or series of USABancShares.com's
capital stock;
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o the purchase of fractional interests in shares of
USABancShares.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 of USABancShares.com related to the
issuance of common stock or rights under any of USABancShares.com's
benefit plans for its Directors, officers or employees or any of
USABancShares.com's dividend reinvestment plans.
In addition, so long as the Capital Securities and common securities
remain outstanding, USABancShares.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 USABancShares.com under the Indenture may succeed to
USABancShares.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 USABancShares.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 USABancShares.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.
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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:
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 USABancShares.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 USABancShares.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
USABancShares.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 USABancShares.com from
the debenture trustee or to USABancShares.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
USABancShares.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 USABancShares.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 USABancShares.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. USABancShares.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 USABancShares.com in connection with a direct action, USABancShares.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 USABancShares.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 USABancShares.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
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default under the Declaration of Trust. See "Description of Series B Securities
- --Description of Capital Securities--Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that USABancShares.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 USABancShares.com or convey, transfer or
lease its properties as an entirety or substantially as an entirety to
USABancShares.com, unless:
o in case USABancShares.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
USABancShares.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 USABancShares.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 USABancShares.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 USABancShares.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 USABancShares.com will be deemed to have
satisfied and discharged the Indenture.
Subordination
In the Indenture, USABancShares.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 USABancShares.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 USABancShares.com for money borrowed;
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o every obligation of USABancShares.com evidenced by bonds,
debentures, notes or other similar instruments, including
obligations incurred in connection with the acquisition of property,
assets or businesses;
o every reimbursement obligation of USABancShares.com with respect to
letters of credit, banker's acceptances or similar facilities issued
for the account of USABancShares.com;
o every obligation of USABancShares.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 USABancShares.com;
o all indebtedness of USABancShares.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, USABancShares.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
USABancShares.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
USABancShares.com that is a financing vehicle of USABancShares.com,
in connection with the issuance by such financing vehicle of equity
securities or other securities guaranteed by USABancShares.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 USABancShares.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.
USABancShares.com is a bank holding company and almost all of the
operating assets of USABancShares.com are owned by vBank and USACapital.
USABancShares relies primarily on dividends from vBank to meet its obligations
for payment of principal and interest on its outstanding debt obligations and
corporate expenses. USABancShares.com is a legal entity separate and distinct
from vBank. Holders of Debentures should look only to USABancShares.com for
payments on the Debentures. There are regulatory limitations on the payment of
dividends directly or indirectly to USABancShares.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,
USABancShares.com and certain other affiliates, and on investments in stock or
other securities thereof. Such restrictions prevent USABancShares.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 USABancShares.com and
as to each of such other affiliates to 10% of vBank's capital and
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surplus and as to USABancShares.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
USABancShares' subsidiaries.
Because USABancShares.com is a bank holding company, the right of
USABancShares 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
USABancShares.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 USABancShares. Accordingly, the Debentures will be
effectively subordinated to all existing and future liabilities of
USABancShares.com's subsidiary, including vBank's deposit liabilities, and all
liabilities of any future subsidiaries of USABancShares. The Indenture does not
limit the incurrence or issuance of other secured or unsecured debt of
USABancShares.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 USABancShares.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
USABancShares.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;
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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 of Capital Securities after satisfaction of liabilities
to creditors of USA Capital Trust I as required by applicable law.
USABancShares' obligation to make payment under the Guarantee may be satisfied
by direct payment of the required amounts by USABancShares.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 USABancShares.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 USABancShares.com is a holding company, the right of
USABancShares 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
USABancShares may itself be recognized as a creditor of that subsidiary.
Accordingly, USABancShares.com's obligations under the Guarantee effectively are
subordinated to all existing and future liabilities of USABancShares.com's
subsidiaries, including vBank's deposit liabilities, and all liabilities of any
future subsidiaries of USABancShares.com. Claimants should look only to the
assets of USABancShares.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
USABancShares, including Senior Indebtedness, whether under the Indenture, any
other indenture that USABancShares.com may enter into in the future or
otherwise.
USABancShares.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 USABancShares.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
USABancShares is a holding company, the right of USABancShares.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 USABancShares may itself be recognized as a creditor of such
subsidiary. Accordingly, USABancShares.com's obligations under the Guarantee
effectively are subordinated to all existing and future liabilities of
USABancShares.com's present and future subsidiaries, including the depositors of
vBank. As a result, claimants should look only to the assets of
USABancShares.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 USABancShares.com with respect to preferred
beneficial interests, if any issued by other trusts to be established by
USABancShares.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 USABancShares.com or any
of its subsidiaries. USABancShares.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 USABancShares.com to enforce its rights under the Guarantee
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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
USABancShares to perform any of its payment or other obligations thereunder;
provided, however, that except with respect to a default in payment
USABancShares 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 USABancShares.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.
USABancShares.com, as guarantor, will be required to file annually
with the guarantee trustee a certificate as to whether or not USABancShares.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 USABancShares.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 USABancShares.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.
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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 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
USABancShares as and to the extent set forth under "Description of Series B
Securities--Description of Guarantee." Taken together, USABancShares.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 USABancShares.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 USABancShares.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;
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o USABancShares.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 USABancShares.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.
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 USABancShares.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 USABancShares.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
USABancShares.com, the property trustee, as holder of the Debentures, would be a
subordinated creditor of USABancShares.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 USABancShares receive payments or distributions. Since
USABancShares.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
USABancShares.com in the event of liquidation or bankruptcy of USABancShares.com
are expected to be substantially the same.
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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 USABancShares.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 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
USABancShares.com has taken the position that the Debentures should be
classified for United States federal income tax purposes as indebtedness of
USABancShares. USABancShares.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
USABancShares.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 USABancShares.com for United States federal income tax purposes.
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<PAGE>
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, USABancShares.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, USABancShares.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 USABancShares.com from paying cash dividends during a
deferral period does not provide an effective deterrent to USABancShares.com's
exercise of the deferral option. In addition, USABancShares.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 USABancShares 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 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
USABancShares.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
USABancShares.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
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<PAGE>
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 USABancShares.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 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 USABancShares.com entitled to vote;
o the beneficial owner of the Capital Security is not a controlled
foreign corporation that is related to USABancShares.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.
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<PAGE>
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 USABancShares.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 USABancShares.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:
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 USABancShares.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, USABancShares.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
106
<PAGE>
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, USABancShares.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.
USABancShares.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 USABancShares or USA Capital Trust I, or cause
USABancShares.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."
USABancShares.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 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 USABancShares.com. The validity of the Series
B Guarantee and the Series B Debentures will be passed upon for
USABancShares.com by Klehr, Harrison, Harvey, Branzburg & Ellers LLP. Certain
matters relating to United States federal income tax considerations will be
passed upon for USABancShares by Klehr, Harrison, Harvey, Branzburg & Ellers
LLP.
107
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WHERE YOU CAN FIND MORE INFORMATION
USABancShares.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 USABancShares.com files with the Securities
and Exchange Commission at the following locations:
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
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. USABancShares.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, USABancShares.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
USABancShares 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
USABancShares, 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.
108
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
USABANCSHARES.COM INC.
(formerly USABanc.com, 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 for the Years Ended
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 for the Years Ended
December 31, 1998 and 1997.............................................. F-6
Notes to Consolidated Financial Statements................................. F-7
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998....................................................... F-33
Consolidated Statements of Income for the Six Months Ended June 30, 1999
and 1998 and the Three Months Ended June 30, 1999 and 1998 (unaudited).. F-34
Consolidated Statements of Comprehensive Income for the Six Months Ended
June 30, 1999 and 1998 and the Three Months Ended June 30, 1999
and 1998 (unaudited).................................................... F-35
Consolidated Statements of Changes in Stockholders' Equity for the Six Months
Ended June 30, 1999 (unaudited)......................................... F-36
Consolidated Statements of Cash Flows for the Six Months Ended June
30, 1999 and 1998 (unaudited)........................................... F-37
Notes to Consolidated Financial Statements................................. F-38
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
USABancShares.com, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
USABancShares.com, Inc. (formerly 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
USABancShares.com, Inc. and Subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their consolidated cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
March 22, 1999 (except for
Note 21, as to which the
Date is June 15, 1999)
F-2
<PAGE>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------------
(in thousands, except per share data)
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>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1998 1997
--------------- ---------------
(in thousands, except per share data)
<S> <C> <C>
Interest income:
Loans....................................................................... $ 9,028 $3,090
Investment securities....................................................... 3,015 1,637
Interest bearing deposits with banks and other............................. 309 152
Total interest income.................................................. 12,352 4,879
Interest expense:
Deposits.................................................................... 5,266 2,285
Other borrowings........................................................... 1,188 245
Total interest expense................................................. 6,454 2,530
Net interest income.................................................... 5,898 2,349
Provision for possible loan losses.............................................. 510 415
Net interest income after provision for
possible loan losses............................................. 5,388 1,934
Other income:
Service charges on deposit accounts........................................ 94 26
Gain on sale of securities.................................................. 378 127
Brokerage operations........................................................ 141 102
Other income................................................................ 146 59
Total other income..................................................... 759 314
------- ------
Other expenses:
Salaries and employee benefits.............................................. 1,539 1,345
Net occupancy expense....................................................... 523 202
Professional fees........................................................... 275 175
Office expenses............................................................. 270 120
Data processing fees........................................................ 199 115
Advertising expense......................................................... 177 62
Goodwill amortization....................................................... 10 8
Other operating expenses.................................................... 707 430
------- ------
Total other expense.................................................... 3,700 2,457
------- ------
Income (loss) before income tax expense............................... 2,447 (209)
Income tax expense:............................................................. 957 17
Net income (loss)............................................................... $ 1,490 $ (226)
Net income (loss) per share - basic (1)......................................... $ 0.38 $(0.10)
Net income (loss) per share - diluted (1)....................................... $ 0.35 $(0.10)
</TABLE>
(1) 1998 and 1997 per share amounts have been restated to reflect a 33% stock
dividend paid August 17, 1998 and a two-for-one stock split effected in the
form of a dividend paid on June 15, 1999.
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
USABancShares.com, Inc. and Subsidiaries
Consolidated Statement of Changes in
Stockholders' Equity and Comprehensive Income
<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>
USABancShares.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>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
Note 1 -- Organization
USABancShares.com, Inc. (the "Corporation"), through its subsidiaries,
vBank (the "Bank"), USACapital, Inc. ("USACapital") and USACredit, Inc.
("USACredit"), provides a full range of banking and non-depository services to
individual and corporate customers located in the greater Delaware Valley
region.
The Corporation was organized in November 1995 in order to facilitate the
acquisition of People's Thrift Savings Bank, which changed its name to "vBank"
in July 1999.
The Bank is a Pennsylvania chartered stock savings institution which
competes with other banking and financial institutions in its primary market
communities, including financial institutions with resources substantially
greater than its own. Commercial banks, savings banks, savings and loan
associations, and credit unions actively compete for savings and time deposits
and for types of loans. Such institutions, as well as consumer finance ,
insurance , and brokerage firms, may be considered competitors of the Bank with
respect to one or more of the services it provides.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, is periodically examined by those regulatory authorities. As a
consequence of the extensive regulation of commercial banking activities, the
Bank's business is particularly susceptible to being affected by state and
federal legislation and regulations.
USACapital is a broker dealer registered with the Securities and Exchange
Commission ("SEC") and the National Association of Securities Dealers ("NASD").
USACapital conducts business through its clearing brokers for its proprietary
accounts. USACapital also introduces customer accounts on a fully disclosed
basis to the clearing brokers and earns revenues and incurs expenses from
activities on those accounts. The clearing and depository operations for
USACapital's customer accounts and proprietary accounts are performed by its
clearing brokers pursuant to clearance agreements.
USACredit is a majority owner of a Delaware limited liability company in
the business of purchasing 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>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
In 1998, the Corporation adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about the Corporation and its subsidiaries operating
segments. Management has determined the Corporation operates in one business
segment, namely community banking.
Investment Securities
The Corporation accounts for its investment securities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The Corporation classifies
its securities as held for investment purposes (held to maturity) and available
for sale. Investment securities for which the Corporation has the ability and
intent to hold until maturity are classified as held to maturity. These
investment securities are carried at cost, adjusted for amortization of premiums
and accretion of discounts on a straight-line basis, which is not materially
different from the effective interest method.
Investment securities which are held for indefinite periods of time, which
management intends to use as part of its asset/liability strategy, or which may
be sold in response to changes in interest rates, changes in prepayment risk,
increases in capital requirements or other similar factors, are classified as
available for sale and are carried at fair value. Differences between a
security's amortized cost and fair value is charged/credited directly to
shareholders' equity, net of income taxes. The cost of securities sold is
determined on a specific identification basis . Gains and losses on sales of
securities are recognized in the consolidated statements of income upon sale.
The Corporation had no securities held for trading purposes at December 31, 1998
and 1997.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge. The accounting for changes in the fair
value of a derivative (gains and losses) depends on the intended use of the
derivative and resulting designation. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Earlier application is
permitted only as of the beginning of any fiscal quarter. The adoption of SFAS
No. 133 is not anticipated to have a material impact on the Corporation's
consolidated financial position or results of operations.
Loans and Allowance for Possible Loan Losses
Loans receivable, which management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at their
outstanding principal, adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. The Corporation's
management maintains the allowance for possible loan losses at a level
considered adequate to provide for potential loan losses. The allowance is
increased by provisions charged to expense and reduced by net charge-offs. Loans
are charged against the allowance for possible loan losses when management
believes that the collectibility of the principal is unlikely. The level of the
allowance is based on management's evaluation of potential losses in the loan
portfolio after consideration of appraised collateral values, financial
condition of the borrowers, and prevailing and anticipated economic conditions.
Credit reviews of the loan portfolio, designed to identify potential charges to
the allowance, are made on a periodic basis during the year by senior
management.
F-8
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
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>
USABancShares.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>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
Cash 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>
USABancShares.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>
USABancShares.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>
USABancShares.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>
USABancShares.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>
USABancShares.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>
USABancShares.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>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 12 -- Income Taxes -- (Continued)
The reconciliation of the tax computed at the statutory federal rate was as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(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>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 13 -- Earnings Per Share
The following table illustrates the reconciliation of the basic and diluted
EPS computations (in thousands, except per share data).
<TABLE>
<CAPTION>
For the year ended December 31, 1998(1)
--------------------------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common stockholders......... $1,490 3,972 $0.38
Effect of dilutive securities
Options............................................. -- 266 --
------ ----- -----
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions........................ $1,490 4,238 $0.35
</TABLE>
Options to purchase 124,000 shares of common stock at exercise prices
ranging from $5.64 to $15.00 per share were outstanding during 1998 which were
not included in the computation of diluted EPS because the options exercise
price 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>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 14 -- Financial Instruments with Off-Balance-Sheet Risk and Concentrations
of Credit Risk
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>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 15 -- Commitments And Contingencies
Leases
The Bank and the Corporation have entered into operating lease arrangement
for branch facilities. Both the Bank and the Corporation are responsible for
pro-rata operating expense escalations.
As of December 31, 1998, future approximate minimum rental payments are as
follows (in thousands):
1999............................................................... $ 91
2000............................................................... 96
2001............................................................... 104
2002............................................................... 106
2003............................................................... 108
Thereafter......................................................... 386
----
$891
The above amount represents minimum rentals not adjusted for possible
future increases due to escalation provisions and assumes that all option
periods will be exercised by the Bank or the Corporation.
Rent expense for the years ended December 31, 1998 and 1997, amounted to
$147,000 and $125,000, respectively.
Employee Agreements
The Corporation has employment agreements with certain key executives that
provide severance pay benefits if there is a change in control of the
Corporation. The agreements will continue in effect on a year-to-year basis
until terminated or not renewed by the Corporation or key executives. Upon a
change in control, the Corporation shall continue to pay the key executives'
salaries per the agreements and certain benefits for the agreed upon time
periods. The maximum contingent liability under the agreements at December 31,
1998 was $1.2 million.
In addition, in connection with the offering (Note 2), the Corporation and
the President & CEO have entered into an agreement by which the Corporation has
the option to pay $150,000 per year for each of the three years beginning in
1998 in exchange for the President agreeing to waive any future exercise of the
non-dilutive feature of the Class B common stock. If the Corporation does not
make the optional payment on January 2nd of each year, the President will be
entitled to implement the anti-dilutive feature for 10% of any shares of Class A
common stock issued during the year of non-payment. The Corporation exercised
its option for 1998 upon the close of the offering, and has also exercised its
option for 1999.
Other
The Corporation may, in the ordinary course of business, become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business. In management's judgment,
the financial position of the Corporation will not be materially affected by the
final outcome of any present legal proceedings.
F-21
<PAGE>
USABancShares.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>
USABancShares.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>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 17 -- Stock Option Plan -- (Continued)
A summary of the status of the Corporation's fixed stock option plans
as of December 31, 1998, and changes for each of the years in the two-year
period then ended was as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ -----------------------
Weighted Weighted
average average
Number exercise Number exercise
of price per of price per
shares share shares share
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.......... 646,000 $ 2.83 666,000 $ 2.83
Options granted........................... 304,000 4.89 -- --
Options exercised......................... (18,000) 2.83 -- --
Options forfeited......................... (56,000) 2.83 (20,000) 2.83
-------- --------
Outstanding at end of year................ 876,000 $ 3.60 646,000 $ 2.83
Options exercisable at year-end........... 686,000 646,000
Weighted average fair value of
options granted during year............. $ 1.79 $ --
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------ -----------------------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average exercisable at average
Range of exercise December 31, contractual exercise December 31, exercise
prices 1998 life (years) price 1998 price
- --------------------- -------------- ------------ -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$ 2.83 to $ 4.24 730,000 5.92 years $ 3.03 680,000 $ 3.05
$ 4.33 to $ 6.50 120,000 9.42 years 5.40 -- --
$ 7.52 to $11.28 22,000 9.67 years 8.55 6,000 10.00
$12.50 to $15.00 4,000 9.67 years 13.75 -- --
</TABLE>
F-25
<PAGE>
USABancShares.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>
USABancShares.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>
USABancShares.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>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1998 and 1997
Note 19 - Condensed Financial Information - Parent Company Only - (Continued)
STATEMENT OF EARNINGS
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>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1998 and 1997
Note 19 - Condensed Financial Information - Parent Company Only - (Continued)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 1,490 $ (226)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Undistributed earnings (loss) from subsidiaries................. (1,672) 241
(Gain) loss on sale of investments................................. 5 (28)
------- ------
Net change in assets and liabilities................................ (146) 99
Net cash provided by (used in) operating activities................. (323) 86
------- ------
Cash flows from investing activities:
Capital distribution (to) from subsidiaries......................... (7,078) --
Purchase of investment securities available-for-sale................ (1,603) (135)
------- ------
Net cash used in investing activities............................ (8,681) (135)
======= ======
Cash flows from financing activities:
Net increase in borrowings.......................................... 1,616 290
Proceeds from issuance of common stock.............................. 7,157 --
------- ------
Net cash provided by financing activities........................ 8,773 290
======= ======
Net increase (decrease) in cash.................................. (231) 241
Cash at beginning of year.............................................. 254 13
------- ------
Cash at end of year.................................................... $ 23 $ 254
======= ======
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes......................... $ 1 $ --
</TABLE>
F-30
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1998 and 1997
Note 20 - Guaranteed Subordinated Debt
On March 9, 1999, the Corporation issued $10 million of 9.50% Capital
Securities in conjunction with a trust-preferred offering (the "trust
preferred"). Total cash received was $9.1 million, net of related offering cost
of $900,000. Had this transaction occurred as of December 31, 1998, the
Corporation's condensed balance sheet would have been as follows:
<TABLE>
<CAPTION>
Actual Pro-Forma
(in thousands
except share data)
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>
USABancShares.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>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,210 $ 1,335
Interest-bearing deposits with banks 12,987 7,706
Securities available-for-sale 33,371 28,389
Securities held-to-maturity (fair value: 1999 - $47,968;
1998 - $15,951) 48,633 15,755
FHLB Stock 4,011 3,523
Loans receivable, net 114,711 102,138
Premises and equipment, net 2,668 2,023
Accrued interest receivable 2,406 1,633
Other real estate - 66
Goodwill, net 73 69
Deferred income taxes 535 573
Other assets 9,395 1,896
--------- ---------
Total assets $ 230,000 $ 165,106
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 1,849 $ 1,439
NOW 1,521 846
Money Market 1,186 2,345
Savings and Passbook 20,781 5,281
Time 144,618 104,476
--------- ---------
Total deposits 169,955 114,387
Borrowed funds:
Short term borrowings - 6,106
Long term borrowings 30,000 25,000
Guaranteed Preferred Beneficial Interests in Subordinated Debt 10,000 -
Collateralized borrowings 3,399 4,199
Accrued interest payable 983 399
Accrued expenses and other liabilities 1,631 1,418
--------- ---------
Total liabilities 215,968 151,509
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 5,000,000 authorized shares;
no shares issued and outstanding - -
Common stock, $1.00 par value; 10,000,000 authorized shares;
4,014,784 shares issued and outstanding and 216,460 shares
of converted and unissued Class B common stock, actual
4,231,244 shares issued and outstanding, as adjusted 4,231 4,231
Additional paid-in capital 8,568 8,568
Accumulated earnings 2,036 1,112
Accumulated other comprehensive (loss) - unrealized
depreciation on securities available-for-sale (803) (314)
--------- ---------
Total stockholders' equity 14,032 13,597
--------- ---------
Total liabilities and stockholders' equity $ 230,000 $ 165,106
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $ 5,736 $ 4,124 $ 2,980 $ 2,476
Investment securities 2,709 1,238 1,665 691
Interest-bearing deposits and other 104 170 23 78
------- ------- ------- -------
Total interest income 8,549 5,532 4,668 3,245
Interest expense:
Deposits 3,582 2,322 1,915 1,241
Borrowed funds 1,164 383 676 289
------- ------- ------- -------
Total interest expense 4,746 2,705 2,591 1,530
------- ------- ------- -------
Net interest income 3,803 2,827 2,077 1,715
Provision for loan losses 250 160 150 125
------- ------- ------- -------
Net interest income after provision for loan losses 3,553 2,667 1,927 1,590
Non-interest income:
Gain on sales of investment securities 30 49 35 9
Gain on sales of loans receivable 42 - - -
Gain on sale of real estate owned 60 - 60 -
Brokerage operations 193 91 67 12
Other 244 60 87 41
------- ------- ------- -------
Total non-interest income 569 200 249 62
Non-interest expense:
Salaries and employee benefits 1,346 542 840 298
Net occupancy expense 342 251 178 153
Professional fees 198 70 99 65
Office expenses 102 101 50 58
Data processing fees 120 75 70 47
Advertising expense 132 59 87 50
Other operating expenses 663 310 323 202
------- ------- ------- -------
Total non-interest expense 2,903 1,408 1,647 873
------- ------- ------- -------
Income before income taxes 1,219 1,459 529 779
Income taxes 295 552 19 284
------- ------- ------- -------
Net income $ 924 $ 907 $ 510 $ 495
======= ======= ======= =======
Earnings per share - basic (1) $ 0.22 $ 0.28 $ 0.12 $ 0.15
======= ======= ======= =======
Earnings per share - diluted (1) $ 0.21 $ 0.23 $ 0.12 $ 0.11
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(1) All per share data has been adjusted to reflect
(a) a 33% stock dividend paid on July 18, 1997,
(b) a 33% stock dividend paid on August 17, 1998 and
(c) a two-for-one stock split effected in the form of a dividend paid on
June 15, 1999.
F-34
<PAGE>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in Thousands)
Six Months Ended
June 30,
----------------
1999 1998
---- ----
Net income $ 924 $ 907
Other comprehensive loss:
Unrealized losses on securities available-for-sale:
Unrealized holding losses arising during the period,
net of taxes (489) (258)
----- -----
Comprehensive income $ 435 $ 649
===== =====
Three Months Ended
June 30,
----------------
1999 1998
---- ----
Net income $ 510 $ 495
Other comprehensive loss:
Unrealized losses on securities available-for-sale:
Unrealized holding losses arising during the period,
net of taxes (174) (155)
----- -----
Comprehensive income $ 336 $ 340
===== =====
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the six months ended June 30, 1999
(unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional other
Common paid-in Accumulated comprehensive
Stock (1) capital (1) earnings income Total
--------- ----------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1998 $4,231 $8,568 $1,112 ($314) $13,597
Net unrealized loss on
securities available-for-sale - - - (315) (315)
Net income - - 414 - 414
------- ------- ------- ------ --------
Balances, March 31, 1999 $ 4,231 $ 8,568 $ 1,526 $ (629) $ 13,696
======= ======= ======= ====== ========
Net unrealized loss on
securities available-for-sale - - - (174) (174)
Net income - - 510 - 510
------- ------- ------- ------ --------
Balances, June 30, 1999 $ 4,231 $ 8,568 $ 2,036 $ (803) $ 14,032
======= ======= ======= ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(1) Data has been adjusted to reflect (a) a 33% stock dividend paid on July 18,
1997, (b) a 33% stock dividend paid on August 17, 1998 and (c) a
two-for-one stock split effected in the form of a dividend paid on June 15,
1999.
F-36
<PAGE>
USABancShares.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 924 $ 907
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for possible loan losses 250 160
Depreciation 192 104
(Increase) Decrease in goodwill (4) 3
Net accretion of discounts on purchased loan portfolios (568) (455)
Net (accretion) amortization of securities discount/premiums (39) 39
Net gains on sale of securities (30) (49)
Net gains on sale of loan assets (42) --
Net gains on sale of real estate owned (60) --
Increase in accrued interest receivable (773) (426)
Decrease (Increase) in deferred tax asset 38 (121)
(Increase) in other assets (7,499) (1,771)
Increase in accrued interest payable 584 35
Increase in accrued expenses and other liabilities 213 69
-------- --------
Net cash used in operating activities (6,814) (1,505)
-------- --------
Cash flows from investing activities:
Investment securities available for sale
Purchases (41,560) (13,544)
Sales 1,620 2,409
Maturities and principal repayments 155 1,000
Investment securities held to maturity
Purchases (1,979) (3,140)
Sales 1,200 --
Maturities and principal repayments 2,704 1,157
Purchases of FHLB Stock (488) (2,055)
Increase in interest bearing deposits with banks (5,281) (5,049)
Net increase in loans (12,573) (23,366)
Decrease in other real estate, net 66 --
Purchases of premises and equipment (837) (675)
-------- --------
Net cash used in investing activities (56,973) (43,263)
-------- --------
Cash flows from financing activities:
Net increase in deposits 55,568 19,592
Net (decrease) increase in borrowings (1,906) 17,923
Private placement proceeds -- 7,098
Trust preferred proceeds 10,000 --
-------- --------
Net cash provided by financing activities 63,662 44,613
-------- --------
Net decrease in cash and cash equivalents (125) (155)
Cash and cash equivalents, beginning of period 1,335 833
-------- --------
Cash and cash equivalents, end of period $ 1,210 $ 678
======== ========
</TABLE>
Supplemental disclosure of cash flow information
On April 1, 1999 the Bank reclassed $33.4 million from available for sale to
held to maturity. Due to that reclass the Bank accreted $7.0 thousand into
equity during the quarter ended June 30, 1999 to restore the securities back to
their carrying value.
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
USABancShares.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of USABancShares, Inc. (the "Company") vBank, (the "Bank") a
Pennsylvania chartered stock savings bank, USACapital, Inc., a Pennsylvania
corporation, USACredit, Inc., a Pennsylvania corporation, and USA Capital
Trust I, a Delaware business trust. All significant intercompany accounts and
transactions have been eliminated. The interim financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments including normal recurring accruals necessary for fair presentation
of results of operations for the interim periods included herein have been
made. The unaudited consolidated financial statements as of June 30, 1999 and
for the three and six months ended June 30, 1999 and 1998, are not necessarily
indicative of results to be anticipated for the full year.
2. Trust Preferred Securities
On March 9, 1999, the Company issued $10.0 million of 9.5% junior subordinated
debentures to USA Capital Trust I, a Delaware business trust, in which the
Company owns all of the common equity. The trust issued $10.0 million of trust
preferred securities to investors, secured by the junior subordinated debentures
and the guarantee of the Company. The junior subordinated debentures mature in
2029.
3. Computation of Per Share Earnings
Basic earnings per share ("EPS") amounts are computed by dividing net earnings
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share amounts are computed by dividing net earnings by the
weighted average number of shares and all dilutive potential shares outstanding
during the period.
F-38
<PAGE>
The following information was used in the computation of earnings per share on
both a basic and diluted basis for the six and three month periods ended June
30, 1999 and 1998.
(Dollars in Thousands), except per share data
Six Months Ended
June 30,
----------------
1999 1998
---- ----
Basic EPS Computation:
Numerator - Net earnings $ 924 $ 907
Denominator - Weighted average shares outstanding 4,231 3,211
------ ------
Basic EPS (1) $ 0.22 $ 0.28
====== ======
Diluted EPS Computation:
Numerator - Net earnings $ 924 $ 907
Denominator - Weighted average shares outstanding 4,231 3,211
Effect of dilutive securities 82 784
------ ------
Diluted EPS (1) $ 0.21 $ 0.23
====== ======
Three Months Ended
June 30,
------------------
1999 1998
---- ----
Basic EPS Computation:
Numerator - Net earnings $ 510 $ 495
Denominator - Weighted average shares outstanding 4,231 3,211
------ ------
Basic EPS (1) $ 0.12 $ 0.15
====== ======
Diluted EPS Computation:
Numerator - Net earnings $ 510 $ 495
Denominator - Weighted average shares outstanding 4,231 3,211
Effect of dilutive securities 163 1,094
------ ------
Diluted EPS (1) $ 0.12 $ 0.11
====== ======
(1) All per share data has been adjusted to reflect (a) a 33% stock dividend
paid on July 18, 1997,
(b) a 33% stock dividend paid on August 17, 1998 and
(c) a two-for-one stock split effected in the form of a dividend paid on
June 15, 1999.
F-39
<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 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
Page
----
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.................................................................. 32
Management ............................................................... 54
Certain Relationships and Related Transactions ........................... 59
Regulation of USABancShares.com and vBank................................ 60
USA Capital Trust I....................................................... 67
The Exchange Offer........................................................ 67
Description of Series B Securities........................................ 76
Description of Series A Securities........................................ 101
Relationship Among the Capital Securities, the
Debentures and the Guarantee......................................... 101
Certain Federal Income Tax Considerations................................. 103
ERISA Considerations...................................................... 106
Plan of Distribution...................................................... 107
Validity of Exchange Securities........................................... 107
Where You Can Find More Information....................................... 108
Financial Statements...................................................... F-1
================================================================================
<PAGE>
================================================================================
$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
USABancShares.com, Inc.
------------------------
PROSPECTUS
------------------------
September 14, 1999
================================================================================
