<PAGE>
As filed with the Securities and Exchange Commission on January 6, 1999
Registration No. 333-68675
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------------
USABANCSHARES, INC.
(Exact name of registrant as specified in its charter)
--------------------------------
<TABLE>
<CAPTION>
Pennsylvania 6022 23-2806495
-------------------------------------------------------------------------------
<S> <C> <C>
(State or other jurisdiction of (Primary Standard (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
USABancShares, Inc.
1535 Locust Street
Philadelphia, PA 19102
(215) 569-4200
--------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive officer and principal place of business)
Mr. Kenneth L. Tepper
Chief Executive Officer and President
USABancShares, Inc.
1535 Locust Street
Philadelphia, PA 19102
(215) 569-4200
- --------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
with copy to:
Stephen T. Burdumy, Esquire
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
1401 Walnut Street
Philadelphia, PA 19102
(215) 568-6060
-----------------------------------
Approximate date of proposed sale to the public: As soon as
practicable following the date on which this Registration Statement becomes
effective.
-----------------------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Up to 1,287,032 Shares
USABancShares, Inc.
[LOGO]
Certain Shareholders of USABancShares, Inc. are offering and selling up
to 1,287,032 shares of common stock pursuant to this Prospectus. The Company's
common stock is traded on the Nasdaq SmallCap Market under the symbol "USAB." On
January 5, 1999, the closing price of the Company's common stock was $8.125 per
share.
---------------------------------------
See "Risk Factors" beginning on page 3 of this Prospectus for a
discussion of certain factors that you should consider before investing.
---------------------------------------
The information in this Prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
---------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the Prospectus. Any representation to the contrary is a
criminal offense.
---------------------------------------
The shares of common stock are not bank deposits and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
---------------------------------------
This Prospectus is dated January 8, 1999.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY ......................................................................1
RISK FACTORS...................................................................3
USE OF PROCEEDS...............................................................10
MARKET FOR COMMON STOCK.......................................................11
SELECTED FINANCIAL DATA.......................................................13
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................15
BUSINESS .....................................................................44
MANAGEMENT....................................................................49
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................................52
EXECUTIVE COMPENSATION........................................................55
EMPLOYMENT AGREEMENTS.........................................................55
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................57
SELLING SHAREHOLDERS..........................................................59
DESCRIPTION OF SECURITIES.....................................................62
PLAN OF DISTRIBUTION..........................................................64
LEGAL MATTERS.................................................................66
EXPERTS .....................................................................66
WHERE YOU CAN GET MORE INFORMATION............................................66
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS....................................67
<PAGE>
SUMMARY
This summary highlights selected information from this Prospectus and may not
contain all the information that is important to you. To understand the stock
offering fully, you should carefully read this entire Prospectus. References in
this Prospectus to the "Company" refer to USABancShares, Inc. References to the
"Bank" refer to BankPhiladelphia. References to USACapital refer to USACapital,
Inc. References to "we," "us," and "our" refer to USABancShares, Inc.,
BankPhiladelphia and/or USACapital, Inc., either individually or as a group,
depending on the context.
The Companies
USABancShares, Inc.
1535 Locust Street
Philadelphia, PA 19102
(215) 569-4200
USABancShares, Inc. (the "Company") is a one bank holding company registered
under the Bank Holding Company Act of 1956. The Company was incorporated in
Pennsylvania on March 14, 1995. The Company is not an operating company and has
not engaged in any significant business to date.
BankPhiladelphia
1535 Locust Street
Philadelphia, PA 19102
(215) 569-4200
BankPhiladelphia (the "Bank") is a Pennsylvania chartered savings bank. The Bank
is wholly-owned by the Company. The Bank has operated as a community based
financial institution for over 110 years.
USACapital, Inc.
1535 Locust Street
Philadelphia, PA 19102
(215) 569-4200
USACapital, Inc. ("USACapital") is a Pennsylvania corporation wholly-owned by
the Company. USACapital is a broker-dealer registered with the National
Association of Securities Dealers and is engaged in the business of selling
stocks, bonds, annuities, and other investments related products to the general
public. USACapital operates out the Company's Locust Street office.
The Stock Offering
Up to 1,287,032 shares of common stock of the Company are being offered by the
selling shareholders listed at market prices which will vary from time to time.
<PAGE>
Use of the Proceeds
The offering is on behalf of selling shareholders. The Company will not receive
any proceeds from the sale of the common stock. Certain selling shareholders
will pay the exercise price of the warrants to purchase common stock in
connection with an exercise of such warrants. The Company will use the proceeds
from such exercises for working capital and general corporate purposes.
Dividends
Initially, the Company does not intend to pay any cash dividends on the common
stock. See the "Dividend Policy" section on page 12 of this Prospectus.
Market for the Common Stock
There is a limited market for the common stock, which trades on the NASDAQ
SmallCap Market under the symbol "USAB."
Important Risks in Owning the Company's Common Stock
Before you decide to purchase stock in the offering, you should read the "Risk
Factors" section of this Prospectus beginning on page 3.
2
<PAGE>
RISK FACTORS
An investment in the Company's common stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors
before making an investment.
Vulnerability to Interest Rate Risk
Like most financial institutions, our results of operations are dependent on,
among other things, 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.
As of September 30, 1998, based on certain assumptions, our interest-bearing
liabilities that were estimated to mature or reprice within one year exceeded
similar interest-earning assets by $19.1 million, or 12.62% of total
interest-rate sensitive 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. For example:
o Historically we have relied on short-term and institutional
deposits as a source of funds. The Bank's ability to retain
these deposits is directly related to the interest paid by the
Bank.
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
affect our net interest income.
o Changes in interest rates could adversely affect:
o the volume of loans we originate;
o the value of our purchased loans and other
interest-earning assets;
o our ability to recognize income on loans purchased at a
discount; or
o the acceleration in loan prepayment.
Reliance on Short-term Deposits
As of September 30, 1998, $6.5 million or 6.56% of our deposits, consisted of
core deposits, including: passbook, money market deposit accounts, demand
accounts and NOW accounts. The $92.1 million remaining balance of deposits
consisted of certificates of deposit. Of this $92.1 million, $37.8 million, or
41.05% of our total certificates of deposit, were due to mature within one year.
3
<PAGE>
These numbers are a reflection of customer preference for short-term investments
as a result of the current low interest rate environment. We have historically
employed a wholesale funding strategy consisting primarily of marketing
certificates of deposit. We have been able to maintain sufficient funds to
support our lending activities by offering rates of interest on certificates of
deposit marginally higher than rates offered by other banks on comparable
deposits. Our ability to attract and maintain deposits, as well as our cost of
funds, has been, and will continue to be, significantly affected by money market
rates and general economic conditions. In addition, any decrease in these
deposits would negatively affect our ability to internally fund any additional
growth through lending. A decrease in deposits may also negatively affect our
growth strategy and our results of operations. In the event we increase interest
rates paid to retain deposits, earnings may be adversely affected.
Loan Acquisition Strategy
Our loan acquisition strategy includes identifying and purchasing discounted
loans which management believes to be undervalued. We purchase performing loans
at a discount from private sellers, the Federal Deposit Insurance Corporation
and the former Resolution Trust Corporation. The majority of loans are secured
by properties in the Mid-Atlantic region. We have historically acquired these
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. We have developed and maintain a
proprietary model to determine the appropriate price to be paid for these loans.
Our model is based upon a combination of objective and subjective criteria. The
objective criteria includes loan to value ratios, collateral type and geographic
location. The more subjective criteria includes management's past experience
with purchasing and administering loans. The prices we have paid to acquire
discounted loans are based on our estimate of the market value of such loans. As
of September 30, 1998, our net outstanding purchased loan portfolio totaled
$47.8 million, or 31.7% of our total assets.
Our loan acquisition strategy subjects us to risks, including some risks not
experienced by financial institutions engaged in more traditional lending
activities. We can provide no assurance that this component of the Bank's
operations will continue to provide the same level of profitability. Some of the
risks related to our loan acquisition strategy are:
o fluctuations in our business;
o the uncertainty in identifying and purchasing discounted loans at
sufficient volume or level of discount;
o uncertainty with respect to our ability to continue to achieve the
same results experienced in the past;
o the competitive nature of discounted loan acquisitions;
4
<PAGE>
o the decreasing number of failed or failing financial institutions
that are being resolved by the Federal Deposit Insurance
Corporation;
o the general level of asset quality of financial institutions; and
o potential decreasing returns from our purchased loan portfolio.
Purchase Discount
At the time we purchase a portfolio of loans, a portion of the purchase price is
accounted for as a discount. The discount allocated to each loan portfolio and
the individual loans within the portfolio is based on our estimate of the value
of the loan, including an estimate of future cash flows. For accounting
purposes, the discount associated with the purchased loans is recognized as an
increase in the yield of the loan and is included as interest income. To the
extent that cash flows from the purchased loans may be uncertain, recognition of
this income will also be uncertain. As of September 30, 1998, we have a discount
which could be, but has not been recognized as income of $4.5 million, or 5.04%
of gross loans.
Reserve Coverage for Loans
As of September 30, 1998, our allowance for loan losses with respect to our
total loan portfolio was $834,677 or 0.93% of gross loans. We can provide no
assurance that our actual losses with respect to our total loans will not exceed
the amount of the reserves. Any losses we experience which exceed the allowance
for the loan losses or the discount on the purchased loans will negatively
affect our business.
Commercial Lending Risk
We make commercial loans following our 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. We include, among these risks, 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.
Effect of Rapid Growth on Internal Operations
We have undergone tremendous growth in the past two years. We have increased our
total assets from $89.3 million at December 31, 1997 to $151.0 million at
September 30, 1998. During this period, we have maintained a staff of 25 to 30
people. This growth was due in large part to the increase in the volume of
loans. We have experienced a lag in the ability of our operations to accommodate
this growth. We need to enhance our internal systems of accounting and
monitoring to keep up with the pace of growth and sophistication of our
business. One of our goals for fiscal 1999 is to improve our internal operating
systems and experience level of staff at key positions
5
<PAGE>
throughout the Company. The updating of our internal operating systems, controls
and staffing experience levels will be ongoing over the upcoming year and may
limit our ability to continue to grow the Company if we don't succeed in our
efforts.
"Year 2000" Issues
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 third-party computer and software providers and are preparing our systems to
operate without significant modification as a result of this issue. To date, we
have not been advised by any of our primary providers that they do not have
plans in place to address and correct any Year 2000 problems. Nevertheless, we
are not sure that our systems will not malfunction or that we will not incur
significant costs in correcting any unanticipated problem.
Competition
We face strong competition from more established banks and from non-bank
financial institutions which are aggressively expanding into markets
traditionally served by banks. Most of these competitors have facilities and
financial resources greater than ours and have other competitive advantages over
us. Among the advantages of these larger institutions are their ability to: make
larger loans; finance extensive advertising campaigns; conduct retail operations
at a significant number of branches; and to allocate their investment assets to
business lines of highest yield and demand.
Our profits in recent periods have been largely attributable to the
identification and purchase of discounted loans and the origination of
commercial loans. The primary factors in competing for loan pool acquisitions
are knowledge of the availability of such loans, the ability to efficiently and
accurately evaluate such loans and the ability to accurately price such loans.
The primary factors in competing for commercial loans are interest rates, loan
origination fees and the quality and range of lending services offered. We face
strong competition in attracting and retaining deposits and in purchasing and
originating loans. We can provide no assurance that we will maintain our
competitive position in the future or that we will continue to operate
profitably.
Holding Company Structure
The Company is a holding company and does not have material assets other than
its ownership interests in its subsidiaries, including the Bank. As a holding
company, the Company is dependent upon its subsidiaries for cash to meet its
operating expenses. The Company's ability to pay dividends to its stockholders
is also limited by the Bank's ability under Pennsylvania law to pay
6
<PAGE>
dividends to the Company. In addition, the Company may engage in business
combinations with other companies, may acquire interests in other types of
businesses and may dispose of or reduce its current interests in its
subsidiaries.
Voting Control, Ability to Direct Management
Our management effectively exercises voting and operational control of the
Company. Information regarding Management's ownership of the Company's capital
stock is provided in this Prospectus beginning on page 52, under the heading
"Security Ownership of Certain Beneficial Owners and Management."
Impediments to Takeover Attempts and Removal of Directors
There are provisions in our Articles of Incorporation and other restrictions
that would make it difficult and expensive to pursue a change in control or
takeover attempt which we oppose. As a result, stockholders may not have an
opportunity to participate in these types of transactions. These restrictions
may make the removal of the current Board of Directors difficult and could have
the effect of reducing the trading price of the shares of common stock. These
restrictions include:
o Management has effective voting and operational control of the
Company.
o Federal law imposes restrictions on the acquisition of control
of a bank such as the Bank, including regulatory approval
requirements.
o Pennsylvania law, under which the Company is incorporated,
imposes restrictions on certain business combinations and
gives the Board of Directors broad discretion to resist
takeover attempts, even if such a transaction would be in the
best interests of the Company's stockholders.
o Provisions in the Company's charter and by-laws providing that:
o any merger, consolidation, liquidation or dissolution
of the Company must be approved by the affirmative
vote of 75% of the Company's directors and 66 2/3% of
the Company's shareholders;
o one person or group may not hold or vote more than 10% of the
shares of common stock without the consent of the Board of
Directors;
o directors may be removed only for cause and only by a vote of
75% of the outstanding shares of common stock;
o Mr. Tepper, as the only holder of the Class B common stock, is
entitled to elect 1/3 of the directors;
7
<PAGE>
o shareholders do not have cumulative voting rights, so that
those shareholders who hold a majority of the outstanding
shares of common stock can elect the entire Board of
Directors;
o the Board of Directors is authorized to use a "poison pill"
defense to any unwanted takeover attempt and given broad
discretion in evaluating any such attempt; and
o the Board of Directors is authorized to issue "blank check"
preferred stock, which could be issued as part of a takeover
defense.
Dividend Policy
We have never paid a cash dividend. We can provide no assurance that the Company
will pay cash dividends in the future. During each of the last two fiscal years,
we paid a 33% stock dividend to the holders of the Class A common stock. Our
Board of Directors will determine our future dividend policy based on an
analysis of factors that the Board of Directors deems relevant. We expect that
such factors will include our results of operations, financial condition and
capital needs. The Company's ability to pay dividends to its stockholders is
also limited by the Bank's ability under Pennsylvania law to pay dividends to
the Company.
Limited Public Market for Common Stock
The shares of common stock are traded on the NASDAQ SmallCap Market under the
symbol "USAB," but there is a limited public trading market for the shares of
common stock. We can provide no assurance that the shares of common stock will
trade at prices at or about their present level. An inactive or illiquid trading
market may have an adverse impact on the market price of the shares of common
stock. Moreover, price fluctuations and the trading volume in the shares of
common stock may not necessarily reflect our performance.
Dependence on Key Employees
The success of the Company will depend heavily on the expertise and guidance of
its President and Chief Executive Officer, Kenneth L. Tepper and certain other
senior executive officers. The Company has entered into employment agreements
with Mr. Tepper and other key senior executives. Mr. Tepper will receive a
salary of $245,000 per year for the remaining term of his employment agreement.
His employment agreement expires February 2001. The loss of the services of Mr.
Tepper or certain other senior executives would have a material adverse effect
on the Company. We do not maintain key-man life insurance on any of these
individuals.
8
<PAGE>
Economic Conditions
The performance of financial institutions like the Bank is sensitive to general
economic conditions. Unfavorable economic conditions at the local, national or
international level may adversely affect our 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 the Bank, 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.
The majority of the Bank's purchased loans is secured by real property in the
Mid-Atlantic region and substantially all of the Bank's originated loans are
secured by interests in real property located in the greater Delaware Valley.
Thus, adverse economic conditions affecting this primary market area could have
a direct adverse effect on the financial condition and results of operations of
the Bank.
Federal and State Government Regulation and Deregulation of the Financial
Services Industry
We are subject to a complex body of federal and state banking laws and
regulations which are intended primarily for the protection of depositors. In
addition, there are bills relating to the regulation and deregulation of the
financial services industry pending in the U.S. Congress. Any resulting
legislation could significantly effect the operations and oversight of financial
institutions such as the Bank as well as the competitive environment in which we
operate. Further, the laws and regulations which affect us, as well as the
interpretation by the authorities who examine us, may be changed at any time. We
cannot predict the content, timing or effect of regulation by federal, state and
local regulatory bodies. However, compliance with, or any violation of, current
and future laws or regulations could require material expenditures by the
Company or otherwise adversely affect the Company's business or financial
results.
Environmental Liabilities
In the course of our business, we may acquire properties through foreclosure.
There is a risk that hazardous substances could be discovered on such
properties. Various federal, state and local laws subject property owners or
operators to liability for the costs of removal or remediation of certain
hazardous substances released on a property. Such laws often impose liability
without regard to whether the owner or operator knew of, or was responsible for,
the release of hazardous substances.
9
<PAGE>
There is a risk that we may be required to bear the cost of removing hazardous
substances from any affected properties. The cost of such removal could exceed
the value of the affected properties or the loans secured by the properties. In
addition, the Bank may not have adequate remedies against the prior owner or
other responsible parties and may find it difficult or impossible to sell the
affected properties.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares of common
stock offered by the Selling Stockholders pursuant to this Prospectus. Certain
selling shareholders will pay the exercise price of warrants to purchase common
stock in connection with an exercise of such warrants. The Company will use the
proceeds from such exercises for working capital and general corporate purposes.
10
<PAGE>
MARKET FOR COMMON STOCK
The common stock of the Company is listed for trading on the NASDAQ SmallCap
Market under the symbol "USAB" and began trading during the first quarter of
1996. The following table shows trading prices for the common stock from
inception through January 5, 1999:
Price of Common Stock (1)
<TABLE>
<CAPTION>
1999 Low Price High Price Cash Dividend
- ---- --------- ---------- -------------
<S> <C> <C> <C>
First Quarter (2) $ 8.125 $ 8.25 $ --
1998 Low Price High Price Cash Dividend
- ---- --------- ---------- -------------
First Quarter $ 6 9/16 $10 1/2 $ --
Second Quarter $10 1/8 $11 5/8 $ --
Third Quarter $ 7 1/2 $13 5/16 $ --
Fourth Quarter (2) $ $ $ --
1997 Low Price High Price Cash Dividend
- ---- --------- ---------- -------------
First Quarter $ 5 13/64 $ 5 29/32 $ --
Second Quarter $ 4 59/64 $ 6 3/64 $ --
Third Quarter $ 5 9/16 $ 7 5/6 $ --
Fourth Quarter $ 6 $ 7 7/8 $ --
1996 Low Price High Price Cash Dividend
- ---- --------- ---------- -------------
First Quarter $ 5 1/16 $ 6 3/4 $ --
Second Quarter $ 4 1/2 $ 5 5/8 $ --
Third Quarter $ 4 1/2 $ 5 1/16 $ --
Fourth Quarter $ 4 25/32 $ 5 49/64 $ --
</TABLE>
(1) Adjusted for 33% stock dividends effective August 17, 1998 and July 1, 1997.
(2) Through and including January 5, 1999.
11
<PAGE>
Market quotations reflect inter-dealer prices, without retail markups, markdown
or commissions and may not necessarily reflect actual transactions.
As of January 4, 1999, there were approximately 262 holders of record of the
Company's common stock.
DIVIDEND POLICY
We have never paid a cash dividend. We can provide no assurance that the Company
will pay cash dividends in the future. During each of the last two fiscal years,
we paid a 33% stock dividend to the holders of shares of common stock. Our Board
of Directors will determine our future dividend policy based on an analysis of
factors that the Board of Directors deems relevant. We expect that such factors
will include our results of operations, financial condition and capital needs.
Additionally, the Company's ability to pay dividends to its shareholders is
limited by the Bank's ability to pay dividends to the Company. State banking
statutes restrict the amount of dividends paid on capital stock. Under the
Pennsylvania Banking Code, dividends may be declared and paid only out of
accumulated net earnings and may be paid in cash or property other than a bank's
own shares.
12
<PAGE>
SELECTED FINANCIAL DATA
We are providing the following summary of selected financial information and
other data for your benefit. This information is only a summary and does not
purport to be complete. This summary is qualified in its entirety by reference
to the detailed information and financial statements and accompanying notes
beginning on page F-1. Selected financial information at September 30, 1998 has
been derived from unaudited financial statements. In our opinion, such
information reflects all adjustments (which consist only of normal recurring
adjustments) necessary for a fair presentation of the selected financial
information and other data. The results of operations for the nine month period
ended September 30, 1998 are not necessarily indicative of the results which may
be expected for any other period.
<TABLE>
<CAPTION>
9/30/98
Selected Financial Condition Data: (unaudited) 12/31/97 12/31/96
------------ ----------- -----------
<S> <C> <C> <C>
Total Assets $150,991,832 $89,325,976 $38,145,499
Loans receivable, net 88,598,565 56,002,164 16,529,483
Securities 42,109,185 24,453,629 16,324,746
Deposits 98,563,661 70,473,521 27,973,147
Total borrowings 37,053,176 12,637,942 5,050,000
Stockholders' equity 13,351,829 5,365,783 4,894,847
Selected Operations Data:
Total interest income $ 8,870,759 $ 4,879,045 $ 2,942,144
Total interest expense 4,558,814 2,530,250 1,225,116
------------ ----------- -----------
Net interest income 4,311,945 2,348,795 1,717,028
Provision for loan losses 310,000 415,000 125,000
------------ ----------- -----------
Net interest income after provision for loan losses 4,001,945 1,933,795 1,592,000
Total noninterest income 830,427 314,458 103,232
Total noninterest expense 2,908,320 2,456,970 1,500,996
------------ ----------- -----------
Income before income taxes 1,924,052 (208,717) 194,264
Income tax provision 747,256 16,891 67,995
------------ ----------- -----------
Net income $ 1,176,796 $ (225,608) $ 126,269
============ =========== ===========
</TABLE>
13
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets) 1.31% -0.09% 0.36%
Return on equity (ratio of net income to average equity) 16.8% -1.10% 2.57%
Operating Ratios:
Interest Rate Spread 4.82% 3.68% 5.29%
Net interest margin (net interest income / average earning assets) 5.06% 4.53% 6.11%
Ratio of operating expense to average total assets 3.23% 1.93% 2.35%
Ratio of average interest-earning assets to average interest-bearing 104.35% 117.50% 118.38%
liabilities
Asset Quality Ratios:
Non-performing assets to total assets at end of period 1.30% 0.32% 3.50%
Allowance for loan losses to non-performing loans 42.52% 197.92% 58.38%
Allowance for loan losses to loans receivable, net 0.93% 1.01% 1.10%
Capital Ratios:
Stockholders' equity to total assets at end of period 8.84% 6.01% 12.83%
Other Data:
Number of full-time employees 35 18 10
Number of full-service offices 3 2 1
</TABLE>
14
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SPECIAL NOTE REGARDING 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 general economic conditions, including their impact on capital
expenditures;
o business conditions in the financial services industry;
o the regulatory environment;
o rapidly changing technology and evolving banking industry standards;
o competitive factors, including increased competition with community,
regional and national financial institutions;
o new services and products offered by competitors; and
o price pressures.
We do not promise to update forward-looking information to reflect actual
results or changes in assumptions or other factors that could affect those
statements.
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
the financial condition and results of operations of the Company and its
subsidiaries during the past two years. The discussion and analysis is intended
to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this Prospectus.
15
<PAGE>
On July 23, 1998, the Company declared a 33% stock dividend on its common stock,
effective August 17, 1998, to stockholders of record as of August 3, 1998. All
prior period stock, per share, and option information included in this
Prospectus has been adjusted to account for the stock dividend.
Comparison of Financial Condition and Results of Operations
at and for the Fiscal Years Ended December 31, 1997 and 1996
Financial Condition
The Company's total assets increased from $38.1 million at December 31, 1996 to
$89.3 million at December 31, 1997, an increase of $51.2 million, or 134.4%. The
increase was due primarily to increases in the loan and investment portfolios of
$39.5 million and $8.1 million, respectively. This growth was funded by
increases in certificates of deposit and borrowed funds (primarily Federal Home
Loan Bank Advances ("Advances")), during the year of $42.5 million, and $4.3
million, respectively. The increase in the loan portfolio during 1997 was
primarily due to the acquisition of discounted commercial and residential real
estate loan portfolios. These loan portfolios, with unpaid principal balances of
approximately $27.8 million were acquired for approximately $24.0 million. Total
deposits increased $42.5 million to $70.5 million at December 31, 1997. The
increase in deposits was comprised of an increase in Money Market accounts of
$4.8 million and an increase in certificates of deposit during 1997 which
resulted directly from the Bank's marketing efforts to attract new customers.
Borrowed funds consist primarily of advances from the FHLB with both fixed and
variable interest rates and stated maturities occurring during 1997. Total
borrowed funds increased to $9.3 million at December 31, 1997. The Company had
$5.0 million in borrowed funds at December 31, 1996. The increases in deposits,
described above, and in borrowed funds were utilized to fund increases in loans
and other earning assets as part of the Bank's overall growth strategy.
Management plans to continue to utilize FHLB advances in conjunction with
deposit expansion to provide the necessary funding for the Bank's continued
growth. The Bank's borrowing limit at the FHLB as of December 31, 1997, was
approximately $24.1 million.
Results of Operations
As a result of the positive performance of the Company to date, management
elected to take a one-time charge of $343,775, in the fourth quarter of 1997,
related to full and final recognition of compensation expense associated with
the mandatory conversion provision of the Class B common stock (see Note 12 in
the Notes to Consolidated Financial Statements). This charge, while treated as a
current expense, resulted in a corresponding increase in capital, by the same
amount, and will benefit future periods as Class B amortization will no longer
be required. Additionally, management decided to increase the allowance for loan
losses in the fourth quarter of 1997 by $340,000 (in
16
<PAGE>
addition to $75,000 which was added previously in the year), in anticipation of
ongoing loan growth. As a result of these transactions, the Company reported a
net loss of $225,608 for the year ended December 31, 1997, a decrease of
$351,877 compared to net income of $126,269 for the year ended December 31,
1996.
Interest expense increased $1.3 million due to expanded use of certificates of
deposit to fund loan portfolio acquisitions, non-interest expense increased
$639,339 primarily due to the addition of key servicing and operations
personnel, and the allowance for loan loss reserves increased $290,000, or
approximately 1.0% of gross loans. The decrease was partially offset by an
increase in interest income of $1.9 million and an increase in non-interest
income of $211,226. Further details regarding changes in the major categories of
income and expense are discussed below.
Interest Income. Interest income increased $1.9 million to $4.9 million for the
year ended December 31,1997, from $2.9 million for the year ended December 31,
1996. The increase in interest income was primarily the result of an increase in
interest income on loans and investment securities of $1.2 million and $830,846.
The increase in interest income on loans is due to an increase in the average
balance of the loan portfolio, as well as accretion income recognized on
discounted real estate loan portfolios purchased during 1997, 1996 and 1995. The
discount associated with such loan portfolios is recognized as a yield
adjustment, included as interest income using the interest method and applied on
a loan-by-loan basis (to the extent that the timing and amount of cash flows can
reasonably be determined).
During 1997, the Bank recognized approximately $691,000 in accretion income
associated with these discounted loan portfolios. As the Bank continues to grow,
the percentage of the total loan portfolio represented by loans purchased at a
discount will decrease.
Interest Expense. Interest expense increased $1.3 million to $2.5 million for
the year ended December 31, 1997, from $1.2 million for the year ended December
31, 1996. The majority of this increase was the result of higher interest
expense of $1.1 million on certificates of deposit resulting from higher
outstanding average balances during 1997.
Net Interest Income. The earnings of the Bank depend primarily on its level of
net interest income, which is the difference between interest earned on the
Bank's interest-earning assets (loans and investment securities) and the
interest paid on interest-bearing liabilities (deposits and other borrowings).
Net interest income is a function of the Bank's interest rate spread, which is
the difference between the yield earned on interest-earning assets and the rate
paid on interest-bearing liabilities, as well as a function of the average
balance of interest- earning assets as compared to the average balance of
interest-bearing liabilities. Net interest income increased $631,767, from $1.7
million to $2.3 million for the year ended December 31, 1997. The Bank's
interest rate spread
17
<PAGE>
averaged 3.68% during 1997 compared to 5.29% during 1996. The decrease in net
interest spread during 1997 was due to a decrease in the average yield on
interest-earning assets of 1.06% from 10.47% in 1996 compared to 9.41% in 1997
and an increase the average cost of interest-bearing liabilities of .55% from
5.18% in 1996 to 5.73% in 1997.
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1997 was $415,000 compared to $125,000 in 1996. The provision for
loan losses, less charge-offs for the year of $29,139, increased the allowance
for loan losses to $567,940 at December 31, 1997. Management will continue to
record a provision for loan losses to maintain the allowance for loan losses at
a level deemed adequate by management based on a quarterly analysis.
Non-interest Income. Non-interest income increased to $314,458 for the year
ended December 31, 1997, from $103,232 for the year ended December 31, 1996.
This increase of $211,226, was primarily the result of a $111,395 increase in
net gains on sales of investment securities during 1997 as well as brokerage
fees generated by USACapital totaling $102,107.
Non-interest Expense. Non-interest expense increased to $2.5 million for the
year ended December 31, 1997, from $1.5 million for the year ended December 31,
1996. This increase of $1.0 million was the result of increases in compensation
and benefits, occupancy, and other expenses of $510,205, $82,599, and $363,170,
respectively, during the year ended December 31, 1997.
Income Tax Expense. Income tax expense decreased to $16,891 for the year ended
December 31, 1997. During 1997, the Company realized a tax benefit related to
the net operating loss carryovers from the acquisition of the Bank which was
treated as a reduction to goodwill in accordance with SFAS No. 109.
Average Balance Sheets and Rate/Yield Analysis. Net interest income is affected
by changes in both average interest rates and average volumes of
interest-earning assets and interest-bearing liabilities. The following table
presents for the period indicated the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates.
18
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands) Year to Date
1997
Average Average
Assets: Balance (1) Interest Rate
--------------- ------------- -------------
<S> <C> <C> <C>
Interest earning assets:
Loans $26,421 $3,090 11.70%
Investment securities 22,696 1,637 7.21%
Interest-bearing deposits and
other 2,739 152 5.55%
------- ------ ------
Total earning assets $51,856 $4,879 9.41%
Liabilities:
Deposits:
Passbook $ 1,888 $ 47 2.49%
NOW accounts 705 16 2.27%
Money Market accounts 1,684 63 3.74%
Certificates of deposit 35,627 2,158 6.06%
Other borrowings 4,227 246 5.82%
------- ------ ------
Total interest-bearing
liabilities $44,131 $2,530 5.73%
-------
Excess of interest earning assets
over interest-bearing liabilities $ 7,725
======= ------
Net interest income $2,349
======
Effective interest differential
(spread) 3.68%
------
Net yield on average interest
earning assets 4.53%
======
(Dollars in Thousands) Year to Date
1996
Average Average
Assets: Balance (1) Interest Rate
-------------- ------------- -------------
<S> <C> <C> <C>
Interest earning assets:
Loans $11,706 $1,923 16.43%
Investment securities 12,320 807 6.55%
Interest-bearing deposits and
other 4,084 212 5.19%
------- ------ ------
Total earning assets $28,110 $2,942 10.47%
Liabilities:
Deposits:
Passbook $ 2,354 $ 61 2.59%
NOW accounts 585 12 2.05%
Money Market accounts -- -- 0.00%
Certificates of deposit 19,967 1,109 5.55%
Other borrowings 750 43 5.73%
------- ------ ------
Total interest-bearing
liabilities $23,656 $1,225 5.18%
-------
Excess of interest earning assets
over interest-bearing liabilities $ 4,454
======= ------
Net interest income $1,717
======
Effective interest differential
(spread) 5.29%
------
Net yield on average interest
earning assets 6.11%
======
</TABLE>
(1) Average balances are calculated on a quarterly basis.
<PAGE>
Rate Volume Analysis. The following schedule presents the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between changes (a) related to outstanding balances and (b) due to the changes
in interest rates. Information is provided in each category with respect to: (i)
changes attributable to changes in volume (changes in volume multiplied by prior
rate); (ii) changes attributable to changes in rate (changes in rate multiplied
by prior volume); and (iii) the net change in rate/volume (change in rate
multiplied by change in volume). The changes attributable to the combined impact
of volume and rate have been allocated proportionately to the changes due to
volume and the changes due to rate.
19
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 Versus 1996
-------------------------------------------------------------
Increase or Decrease
Due to Change in
----------------------------------------
Average Average Total Increase
Volume Rate (Decrease)
- -------------------------------------------- ------------------- --------------- --------------
<S> <C> <C> <C>
Variance in interest income on:
Interest-earning assets:
Loans $1,514 $(347) $1,167
Investment securities 741 89 830
Interest-bearing deposits and other (76) 16 (60)
------ ----- ------
Total interest-earning assets $2,179 $(242) $1,937
Interest-bearing liabilities:
Deposits:
Passbook $ (12) $ (2) $ (14)
NOW accounts 3 1 4
Money Market accounts 63 -- 63
Certificates of deposit 940 109 1,049
Other borrowings 202 1 203
------ ----- ------
Total interest-bearing liabilities $1,197 $ 108 $1,305
------ ----- ------
Change in net interest income $ 982 $(350) $ 632
------ ----- ------
</TABLE>
Asset and Liability Management
A principal objective of the Bank's asset and liability management is to
minimize the Bank's exposure to changes in interest rates. The Bank's policy is
to attempt to manage assets and liabilities in such a way as to 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
interest margin resulting from changes in market interest rates.
20
<PAGE>
The following table summarizes repricing intervals for interest-earning assets
and interest-bearing liabilities for the period ended December 31, 1997 and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated:
<TABLE>
<CAPTION>
Interest Rate Sensitivity Table 1-90 91-364
(Dollars in Thousands) Days Days
- --------------------------------------- ------------ ---------------
<S> <C> <C>
Interest-earning assets:
Loans receivable $14,627 $ 5,337
Investment securities 3,830 3,570
Other interest earning assets 3,975 --
------- --------
Total interest-earning assets $22,432 $ 8,907
Interest-bearing liabilities:
NOW accounts $ 688 $ --
Money Market accounts 2,401 --
Passbook savings accounts 1,009 --
Certificates of deposit 3,325 23,174
Other borrowings 7,340 --
------- --------
Total interest-bearing liabilities $14,763 $ 23,174
Periodic gap $7,669 $(14,267)
Cumulative gap $7,669 $ (6,598)
Gap to asset ratio 9% -16%
Cumulative gap to asset ratio 9% -7%
Interest Rate Sensitivity Table 1-5 Over 5 12/31/97
(Dollars in Thousands) Years Years Balance
- --------------------------------------- -------------- --------------- -------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 17,567 $19,039 $56,570
Investment securities 5,572 11,002 23,974
Other interest earning assets -- -- 3,975
-------- ------- -------
Total interest-earning assets $ 23,139 $30,041 $84,519
Interest-bearing liabilities:
NOW accounts $ -- $ -- $ 688
Money Market accounts -- 2,401 4,802
Passbook savings accounts -- 1,009 2,018
Certificates of deposit 34,533 1,676 62,708
Other borrowings 2,000 -- 9,340
-------- ------- -------
Total interest-bearing liabilities $ 36,533 $ 5,086 $79,556
Periodic gap $(13,394) $24,955 $ 4,963
Cumulative gap $(19,992) $ 4,963 4,963
Gap to asset ratio -15% 28% --
Cumulative gap to asset ratio -22% 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
21
<PAGE>
sensitive liabilities exceeds interest rate sensitive assets. During a period of
falling interest rates, a positive gap would tend to adversely affect net
interest income, while a negative gap would tend to result in an increase in net
interest income. During a period of rising interest rates, a positive gap would
tend to result in an increase in net interest income while a negative gap would
tend to affect net interest income adversely.
If repricing of the Bank's assets and liabilities were equally flexible and
moved concurrently, the impact of an increase or decrease in interest rates on
net income would be minimal. At December 31, 1997, the Bank experienced a
negative cumulative one year gap, which suggests that net interest income may
decrease during periods of rising interest rates.
The method used to analyze interest rate sensitivity in the table above has a
number of limitations. Certain assets and liabilities may react differently to
changes in interest rates even though they reprice or mature in the same or
similar time periods. The interest rates on certain assets and liabilities may
change at different times than changes in market interest rates, with some
changing in advance of changes in market rates and some lagging behind changes
in market rates. Also, certain assets, such as adjustable rate loans, often have
provisions which may limit changes in interest rates each time market interest
rates change and on a cumulative basis over the life of the loan. Additionally,
the actual prepayments and withdrawals experienced by the Bank in the event of a
change in interest rates may deviate significantly from those assumed in
calculating the data shown in the table.
In the event the Bank should experience a mismatch in its desired gap ranges or
an excessive decline in its market value of equity resulting from changes in
interest rates, it has a number of options which it could utilize to remedy such
mismatch. The Bank could restructure its investment portfolio through sale or
purchase of securities with more favorable repricing attributes. It could also
emphasize loan products with appropriate maturities or repricing attributes, or
it could attract deposits or obtain borrowings with desired maturities.
22
<PAGE>
Investment Portfolio. The following table presents the book values and estimated
market values at December 31, 1997, and December 31, 1996, respectively, for
each major category of the Bank's investment securities:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Available-for-Sale
U.S. Government agency
securities $ 1,243,139 $ 15,824 $ -- $ 1,258,963
Equity and other securities 7,636,598 150,461 11,297 7,775,762
----------- -------- ------- -----------
Total available-for-sale $ 8,879,737 $166,285 $11,297 $ 9,034,725
=========== ======== ======= ===========
Held-to-Maturity
U.S. Government agency
securities $ 3,557,087 $ -- $10,202 $ 3,546,885
Mortgage-backed securities 6,306,384 50,074 -- 6,356,458
Municipal securities 3,162,576 100,831 -- 3,263,407
Equity and other securities 2,392,857 84,023 -- 2,476,880
----------- -------- ------- -----------
Total held-to-maturity $15,418,904 $234,928 $10,202 $15,643,630
=========== ======== ======= ===========
December 31, 1996
---------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- ----------------- -------------------
Available-for-Sale
U.S. Government agency
securities $ 3,614,740 $ 28,850 $ -- $ 3,643,590
Mortgage-backed securities 1,863,115 6,037 -- 1,869,152
Corporate securities 461,429 -- 3,044 458,385
Equity securities 161,626 -- 35,126 126,500
----------- -------- ------- -----------
Total available-for-sale $ 6,100,910 $ 34,887 $38,170 $ 6,097,627
=========== ======== ======= ===========
Held-to-Maturity
U.S. Government agency
securities $ 1,498,179 $ -- $ 1,884 $ 1,496,295
Mortgage-backed securities 6,820,038 3,602 -- 6,823,640
Corporate securities 1,908,902 1,737 -- 1,910,639
----------- -------- ------- -----------
Total held-to-maturity $10,227,119 $ 5,339 $ 1,884 $10,230,574
=========== ======== ======= ===========
</TABLE>
23
<PAGE>
The Bank's investment portfolio is composed of interest-earning assets which not
only provide interest income but a source of liquidity and diversity. The
majority of the investment portfolio is held-to-maturity which is stated at par
value, plus any remaining unamortized premium paid or less any remaining
unamortized discount received. Available-for-sale securities are stated at fair
market value, plus any remaining unamortized premium paid or less any remaining
unamortized discount received. The Bank invests in securities for yield income
and not to profit from trading activities.
The following table shows the contractual maturity distribution of the
investment securities portfolio at December 31, 1997:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
----------------------------------------- -------------------------------------------
Amortized Approximate Amortized Approximate
Cost Fair Value Cost Fair Value
----------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Due after one year through
five years $ -- $ -- $ 999,606 $ 995,000
Due after five years
through ten years $ 993,139 $1,005,937 $ 1,909,402 $ 1,950,553
Due after ten years $7,561,847 $7,652,183 $12,509,896 $12,698,077
---------- ---------- ----------- -----------
Equity Securities $ 324,751 $ 376,605 $ -- $ --
---------- ---------- ----------- -----------
$8,879,737 $9,034,725 $15,418,904 $15,643,630
---------- ---------- ----------- -----------
</TABLE>
24
<PAGE>
Loan Portfolio. Historically, the Bank's lending business had been primarily
real estate mortgage loans secured by one to four family residences in the
Bank's lending area. Typically, these residences were single family homes that
serve as the primary residence of the owner. The Bank currently originates such
loans in amounts up to 80% of the appraised value of the property. The Bank has
recently expanded the focus of its lending program to include commercial
lending, primarily secured by real estate. In the future, the Bank may increase
its loans collateralized with marketable securities, cash, or potentially
equipment. This expanded focus will allow the Bank to compete more effectively
in the community banking marketplace.
Loans receivable, (net of the allowance for loan losses, unearned fees and
origination costs and loans in process) were $56.0 million at December 31, 1997
compared to $16.5 million at December 31, 1996. Loans receivable represented
62.7% of total assets and 79.5% of total deposits as of December 31, 1997
compared to 43.3% and 58.9%, respectively, at December 31, 1996.
The following table summarizes the loan portfolio of the Bank by loan category
and amount at December 31, 1997, compared to December 31, 1996:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, December 31,
------------------------------------- --------------------------------------
1997 % 1996 %
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Real estate $54,262 96.9% $14,648 88.6%
Commercial and industrial 1,091 2.0% 1,138 6.9%
Other 1,694 3.0% 1,226 7.4%
------- ------ ------- ------
Total loans 57,047 101.9% 17,012 102.9%
Less:
Loans in process 260 0.5% 215 1.3%
Unearned income 217 0.4% 86 0.5%
Allowance for loan losses 568 1.0% 182 1.1%
------- ------ ------- ------
Net loans $56,002 100.0% $16,529 100.0%
======= ====== ======= ======
</TABLE>
25
<PAGE>
The following table summarizes the maturity and or repricing composition of
loans receivable at December 31, 1997, compared to December 31, 1996:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31
---------------------------------------------------------------------------------
1997 % 1996 %
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Within one year $10,634 18.6% $7,209 42.4%
Over one year through two years 2,869 5.0% 958 5.6%
Over two years through three years 2,871 5.0% 31 0.2%
Over three years through five years 18,968 33.3% 2,295 13.5%
Over five years through ten years 5,786 10.2% 892 5.2%
Over ten years 15,920 27.9% 5,627 33.1%
------- ------- ------- -------
Total loans $57,047 100.00% $17,012 100.00%
======= ======= ======= =======
</TABLE>
On December 31, 1997, the net book value of non-accrual loans was $286,897 and
loans 90 days or more past due was $165,418. These amounts represented
non-accrual and past due balances on the discounted commercial and residential
real estate loans purchased during 1997 and not on balances originated directly
by the Bank. There were no troubled debt restructured loans as of or during the
year ended December 31, 1997. There were no impaired loans at December 31, 1997,
and 1996. The Bank will recognize income on non-accrual 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.
Loans to directors, executive officers and their associates are made in the
ordinary course of business and on substantially the same terms and conditions,
including interest rate and collateral, as those prevailing at the time for
comparable transactions with others. The aggregate amount of loans by the Bank
to its directors and executive officers, including loans to related persons and
entities was $232,900 at December 31, 1997, and $614,421 at December 31, 1996,
and represented .26% and 1.6%, respectively, of total assets. Activity of these
loans is as follows:
26
<PAGE>
December 31,
-------------------------------------
1997 1996
------------- ------------
Balance at beginning of year $ 614,421 $ 12,391
New loans 121,664 610,000
Repayments $(503,185) $(7,970)
Balance at end of year $232,900 $614,421
Allowance For Loan Losses. In originating loans, the Bank recognizes that some
degree of credit losses may be experienced. The risk of loss will vary according
to, among other things, the type of loan, the creditworthiness of the borrower,
the type and quality of the collateral as well as general economic conditions.
The Bank determines the level of its allowance for possible loan losses based
upon a number of factors. In connection with this analysis, the Bank considers
both internal and external factors which may affect the adequacy of the
allowance for possible loan losses. Such factors may include, but are not
limited to, present and prospective industry trends and regional and national
economic conditions, past estimates of possible loan losses as compared to
actual losses and potential problems with sizable loans, large concentrations,
known and inherent risk in the portfolio, prevailing market conditions, and
management's judgment as to collectability.
The following table summarizes the changes in the Bank's allowance for loan
losses for the period ended December 31, 1997, compared to December 31, 1996:
December 31,
-------------------------------------
1997 1996
------------- ------------
Balance at beginning of year $ 182,079 $ 60,000
Provision for loan losses 415,000 125,000
Loan losses $ (29,139) (2,921)
--------- --------
Balance at end of year $ 567,940 $182,079
========= ========
The allowance for loan losses represents a reserve against potential but
undetermined future losses. The allowance for loan losses is established through
a provision for loan losses based on Management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation, which
includes a review of all loans on which full collectability may not be
reasonably assured, considers among other matters, the estimated fair value of
the underlying collateral, economic conditions, historical loan loss experience
and other factors that warrant recognition in providing for an adequate loan
loss allowance. Although the Bank believes that its allowance for loan losses is
at a level which it considers to be adequate to provide for losses, there can be
no assurances that such losses will not exceed the estimated amounts.
27
<PAGE>
Deposits. Deposits are the primary source of the Bank's funds for lending and
other investment purposes. Total deposits at December 31, 1997 were $70.5
million compared to $28.0 million at December 31, 1996, an increase of $42.5
million or 151.9%. The Bank's current deposit products include statement savings
accounts, passbook savings accounts, personal and business checking accounts,
NOW accounts, Money Market accounts and certificates of deposit (ranging in
terms from three months to eight years). The Bank's deposits are obtained
primarily from residents in its primary market area, in and around the Plymouth
Meeting/Norristown area, as well as from an expanded customer base in and around
greater Philadelphia.
The principal methods used by the Bank to attract deposit accounts include
offering a wide variety of services and accounts, competitive interest rates and
convenient office hours. The Bank still relies upon certificates of deposit as
its primary funding source, but it has instituted a program which emphasizes the
acquisition of more stable core deposits, using traditional marketing methods,
to attract new customers and savings deposits.
The following table presents the weighted average rates paid on and composition
of deposit balances at December 31, 1997, compared to December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- ---------------------------------------
Amount Percent Amount Percent
----------------- -------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Demand $ 257,325 0.37% $ 58,659 0.21%
NOW accounts $ 688,177 0.98% $ 891,640 3.19%
Money Market accounts $ 4,801,606 6.81% $ -- --
Passbook $ 2,018,768 2.86% $ 2,029,694 7.26%
Certificates of deposit $62,707,645 88.98% $24,993,154 89.34%
----------- ------ ----------- ------
$70,473,521 100% $27,973,147 100%
=========== ====== =========== ======
</TABLE>
The following table summarizes the maturity composition of certificates of
deposit with balances of $100,000 or more at December 31, 1997, compared to
December 31, 1996:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1997 % 1996 %
----------------- ------ ---------- -------
<S> <C> <C> <C> <C>
Three months or less $ 652,783 7.23% $1,057,638 42.12%
Over three months to six months $ 103,215 1.14% $ 200,000 7.96%
Over six months to twelve
months $4,246,805 47.03% $ 237,700 9.47%
Over twelve months $4,027,146 44.60% $1,015,741 40.45%
---------- ------ ---------- ------
$9,029,949 100% $2,511,079 100%
========== ====== ========== ======
</TABLE>
28
<PAGE>
Comparison of Financial Condition and Results of Operations
for the Nine Month Periods Ended September 30, 1998 and 1997
Results of Operations
Net Income. The Company reported net earnings of $1.2 million, or $.60 per
share, diluted, for the nine months ended September 30, 1998, compared to
$287,853, or $.27 per share for the nine months ended September 30, 1997. The
increase in net income was primarily the result of an increase in net interest
income of $2.7 million, and an increase in non-interest income of $551,066. This
was partially offset by an increase in the provision for loan losses of
$235,000, an increase in non-interest expense of $1.6 million, and an increase
in income tax expense of $543,955.
The Company reported net earnings of $269,317, or $.12 per share, diluted, for
the three months ended September 30, 1998, compared to $127,860, or $.12 per
share, diluted, for the three months ended September 30, 1997. The increase in
net income was primarily the result of an increase in net interest income of
$863,550, and an increase in non-interest income of $249,491. This was partially
offset by an increase in the provision for loan losses of $100,000, an increase
in non-interest expense of $789,781, and an increase in income tax expense of
$81,803.
Interest Income. Interest income increased 178.8% or $5.7 million to $8.9
million, for the nine months ended September 30, 1998, compared to the same
period in 1997. The increase in interest income was the result of an increase in
interest income on loans, investment securities, and interest-bearing deposits
of $4.6 million, $904,061, and $144,790, respectively. The increase in interest
income on loans is due to an increase in the average balance of the loan
portfolio, as well as accretion income recognized on discounted loan pools
purchased by the Bank since 1995. The discount associated with such discounted
loan pools is recognized as a yield adjustment and is included as interest
income using the interest method and applied on a loan-by-loan basis (to the
extent that the timing and amount of cash flows can reasonably be determined).
Any changes from these estimates could result in either an increase or decrease
in accretion income. During the nine months ended September 30, 1998, the Bank
recognized $871,524 in accretion income associated with these discounted loan
pools.
Interest income increased 172.2% or $2.1 million to $3.3 million, for the three
months ended September 30, 1998, compared to the same period in 1997. The
increase in interest income was the result of an increase in interest income on
loans, investment securities, and interest-bearing deposits of $1.7 million,
$362,295, and $27,310, respectively. The increase in interest income on loans is
due to an increase in the average balance of the loan portfolio, as well as
accretion income recognized on discounted loan pools purchased by the Bank since
1995. The discount associated with such discounted loan pools is recognized as a
yield adjustment and is included as interest
29
<PAGE>
income using the interest method and applied on a loan-by-loan basis (to the
extent that the timing and amount of cash flows can reasonably be determined).
Any changes from these estimates could result in either an increase or decrease
in accretion income. During the three months ended September 30, 1998, the Bank
recognized $416,122 in accretion income associated with these discounted loan
pools.
Interest Expense. Interest expense increased 189.9% or $3.0 million to $4.6
million, for the nine months ended September 30, 1998, compared to the same
period in 1997, due to higher volumes of new certificates of deposit, money
market accounts, and FHLB Advances. The average cost of funds, including other
borrowings, increased 0.10% to 5.58% for the nine months ended September 30,
1998 compared to the same period in 1997. Interest expense increased 206.2% or
$1.2 million to $1.8 million, for the three months ended September 30, 1998,
compared to the same period in 1997, due to higher volumes of new certificates
of deposit, Money market accounts, and FHLB Advances.
Net Interest Income. Net interest income for the nine months ended September 30,
1998, increased $2.7 million, or 167.9%, to $4.3 million from $1.6 million for
the same period in 1997. Average interest-earning assets increased by $71.1
million, or 166.6%, to $113.7 million, for the nine months ended September 30,
1998 compared to the same period in 1997. Average interest-bearing liabilities
increased $70.7 million or 184.6% over the same period. The average net interest
margin increased from 5.03% to 5.06%, during the period, due to the average rate
on interest-earning assets increasing at a faster rate than the average rate on
interest-bearing liabilities. Net interest income for the three months ended
September 30, 1998, increased $863,550, or 139.1%, to $1.5 million from $620,822
for the same period in 1997.
Analysis of Net Interest Income. The following table presents information
regarding yields on interest-earning assets, expense on interest-bearing
liabilities, and net yields on interest-earning assets for the periods
indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
Average Average Average Average
Assets: Balance (1) Interest Rate Balance (1) Interest Rate
----------------- --------------- ------------ --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans $ 72,300,365 $6,520,236 12.02% $19,896,501 $1,880,149 12.60%
Investment securities 35,565,744 2,083,851 7.81% 19,661,783 1,179,790 8.00%
Interest-bearing deposits
and other 5,828,511 266,672 6.10% 3,079,363 121,882 5.28%
------------ ---------- ------ ----------- ---------- ------
Total earning assets $113,694,620 $8,870,759 10.40% $42,637,647 $3,181,821 9.95%
Liabilities:
Deposits:
Passbook $ 1,704,812 $ 33,302 2.60% $ 1,938,644 $ 35,643 2.45%
NOW accounts 1,043,412 17,901 2.29% 2,103,059 37,403 2.37%
Money Market accounts 2,517,020 33,772 1.79% -- -- 0.00%
Certificates of deposit 84,595,494 3,699,221 5.83% 30,475,981 1,315,441 5.76%
Other borrowings 19,097,184 774,618 5.41% 3,770,000 183,928 6.50%
------------ ---------- ------ ----------- ---------- ------
Total interest-bearing
liabilities $108,957,922 $4,558,814 5.58% $38,287,684 $1,572,415 5.48%
Excess of interest earning
assets over interest-bearing
liabilities $ 4,736,697 $ 4,349,963
============ ===========
Net interest income $4,311,945 $1,609,406
========== ==========
Effective interest differential
(spread) 4.82% 4.47%
------ ------
Net yield on average interest
earning assets 5.06% 5.03%
====== ======
</TABLE>
(1) Average balances are calculated on a quarterly basis.
30
<PAGE>
Rate Volume Analysis. The following schedule presents the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between changes (a) related to outstanding balances and (b) due to the changes
in interest rates. Information is provided in each category with respect to: (i)
changes attributable to changes in volume (changes in volume multiplied by prior
rate); (ii) changes attributable to changes in rate (changes in rate multiplied
by prior volume); and (iii) the net change in rate/volume (change in rate
multiplied by change in volume). The changes attributable to the combined impact
of volume and rate have been allocated proportionately to the changes due to
volume and the changes due to rate.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 vs. September 30, 1997
-----------------------------------------------------------------
Increase or Decrease
Due to Change in
----------------------------------------
Average Average Total Increase
Rate/Volume Analysis Volume Rate (Decrease)
- -------------------------------------------- ------------------- --------------- ------------------
<S> <C> <C> <C>
Variance in interest income on:
Interest-earning assets:
Loans $4,721,930 $(81,843) $4,640,087
Investment securities 931,164 (27,103) 904,061
Interest-bearing deposits and other 123,258 21,532 144,790
---------- -------- ----------
Total interest-earning assets $5,776,352 $(87,414) $5,688,938
Interest-bearing liabilities:
Deposits:
Passbook $ (4,856) $ 2,515 $ (2,341)
NOW accounts (18,223) (1,279) (19,502)
Money Market accounts 33,772 -- 33,772
Certificates of deposit 2,366,333 17,447 2,383,780
Other borrowings 616,245 (25,554) 590,691
---------- -------- ----------
Total interest-bearing liabilities $2,993,270 $ (6,871) $2,986,400
---------- -------- ----------
Change in net interest income $2,783,082 $(80,543) $2,702,539
========== ======== ==========
</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 increased $235,000 during the nine
months ended September 30, 1998, compared to the same period last year. The
allowance for loan losses as a percentage of loans and leases outstanding was
0.93% at September 30, 1998, compared to 1.01% at December 31, 1997 and 0.74% at
September 30, 1997. Management believes that the allowance for loan losses,
which is a general reserve, is adequate to cover actual and potential losses in
the loan portfolio under current conditions. Management is not aware of any
significant risks in the current loan portfolio due to concentrations of loans
within any particular industry, nor of any separate types of loans within a
particular category of non-performing loans that are unusually significant with
respect to possible loan losses when compared to the entire loan portfolio.
During the three months ended September 30, 1998 provision for loan losses
increased $100,000 compared to the same period in 1997.
Non-Interest Income. Non-interest income increased $551,066 to $830,427, for the
nine months ended September 30, 1998, compared to the same period in 1997. The
increase was primarily the result of commission income of $610,297 generated by
the Company's brokerage subsidiary, USACapital, and an increase in the gain on
sales of investment securities of $81,356. This was partially offset by a
decrease in other non-interest income of $140,587.
31
<PAGE>
Non-interest income increased $249,491 to $400,554, for the three months ended
September 30, 1998, compared to the same period in 1997. The increase was
primarily the result of commission income of $289,808 generated by the Company's
brokerage subsidiary, USACapital, and an increase in the gain on sales of
investment securities of $68,871. This was partially offset by a decrease in
other non-interest income of $109,188.
Non-Interest Expense. Non-interest expense increased 119.9%, or $1.6 million to
$2.9 million, for the nine months ended September 30, 1998, compared to the same
period in 1997. Compensation and benefits expense increased $609,779 due to the
hiring of additional personnel. Occupancy expense increased $133,714 due to the
costs associated with the opening of the Bank's headquarters branch in Center
City, Philadelphia. Other expenses increased $842,214 as a result of the Bank's
increased promotional efforts to attract new customers.
Non-interest expense increased 164.4%, or $789,781 to $1.3 million, for the
three months ended September 30, 1998, compared to the same period in 1997.
Compensation and benefits expense increased $424,685 due to the hiring of
additional personnel. Occupancy expense increased $31,418 due to costs
associated with the opening of the Bank's headquarters branch in Center City,
Philadelphia. Other expenses increased $333,678 as a result of the Bank's
increased promotional efforts to attract new customers.
Income Tax Expense. Income tax expense increased $543,955 to $747,256, for the
nine months ended September 30, 1998, compared to the same period in 1997.
Income tax expense increased $81,803 to $195,500, for the three months ended
September 30, 1998, compared to the same period in 1997.
Loan Portfolio. Loans receivable, (net of the allowance for loan losses,
unearned fees and origination costs and loans in process) were $88.6 million at
September 30, 1998 compared to $56.0 million at December 31, 1997. Loans
receivable represented 58.7% of total assets and 89.8% of total deposits as of
September 30, 1998 compared to 62.7% and 79.5%, respectively, at December 31,
1997. The following table summarizes the loan portfolio of the Bank by loan
category and amount at September 30, 1998, compared to December 31, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, December 31,
------------------------------------- --------------------------------------
1998 % 1997 %
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Real estate $84,961 95.9% $54,262 96.9%
Commercial and industrial 832 0.9% 1,091 1.9%
Other 3,878 4.4% 1,694 3.0%
------- ------ ------- ------
Total loans 89,671 101.2% 57,047 101.9%
Less:
Loans in process -- 0.0% 260 0.5%
Unearned income 238 0.3% 217 0.4%
Allowance for loan losses 835 0.9% 568 1.0%
------- ------ ------- ------
Net loans $88,598 100.0% $56,002 100.0%
======= ====== ======= ======
</TABLE>
On September 30, 1998, the net book value of nonaccrual loans was approximately
$2.0 million compared to $286,987 at December 31, 1997. These amounts
represented nonaccrual balances on discounted commercial and residential real
estate loans acquired by the Bank and not on balances originated directly by the
Bank. There were no troubled debt restructured loans as of September 30, 1998.
The Bank will recognize income on nonaccrual loans, on a 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.
32
<PAGE>
The following table summarizes the changes in the Bank's allowance for loan
losses for the period ended September 30, 1998, compared to December 31, 1997:
1998 1997
--------- --------
Balance at beginning of year $567,940 $182,079
Provision for loan losses 310,000 415,000
Loan losses $(43,263) $(29,139)
-------- --------
Balance at September 30, 1998 $834,677 $567,940
======== ========
Investment Portfolio. The following table presents the book values and estimated
market values at September 30, 1998, and December 31, 1997, respectively, for
each major category of the Bank's investment securities:
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Available-for-Sale
Equity and other securities $25,769,936 -- $300,861 25,469,075
----------- -------- -------- -----------
Total available-for-sale $25,769,936 -- $300,861 $25,469,075
=========== ======== ======== ===========
Held-to-Maturity
U.S. Government agency
securities $ 1,203,659 $ 3,841 $ -- $ 1,207,500
Mortgage-backed securities 6,052,993 42,795 -- 6,095,788
Municipal securities 3,164,933 91,499 -- 3,256,432
Equity and other securities 6,218,525 78,991 -- 6,297,516
----------- -------- -------- -----------
Total held-to-maturity $16,640,110 $217,126 $ -- $16,857,236
=========== ======== ======== ===========
December 31, 1997
---------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- -------------- ----------------- -------------------
Available-for-Sale
U.S. Government agency
securities $ 1,243,139 $ 15,824 $ -- $ 1,258,963
Equity and other securities 7,636,598 150,461 11,297 7,775,762
----------- -------- -------- -----------
Total available-for-sale $ 8,879,737 $166,285 $ 11,297 $ 9,034,725
=========== ======== ======== ===========
Held-to-Maturity
U.S. Government agency
securities $ 3,557,087 $ -- $ 10,202 $ 3,546,885
Mortgage-backed securities 6,306,384 50,074 -- 6,356,458
Municipal securities 3,162,576 100,831 -- 3,263,407
Equity and other securities 2,392,857 84,023 -- 2,476,880
----------- -------- -------- -----------
Total held-to-maturity $15,418,904 $234,928 $ 10,202 $15,643,630
=========== ======== ======== ===========
</TABLE>
33
<PAGE>
Liquidity
The Company's primary sources of funds are customer deposits, maturities of
investment securities, sales of "Available for Sale" securities, loan
repayments, net income, advances from the FHLB, and the use of Federal Funds
markets. Scheduled loan repayments are relatively stable sources of funds while
deposit inflows and unscheduled loan prepayments may fluctuate. Deposit inflows
and unscheduled loan prepayments are influenced by general interest rate levels,
interest rates available on other investments, competition, economic conditions,
and other factors. Deposits are the Company's primary source of new funds. Total
deposits increased 39.9% to $98.6 million at September 30, 1998, compared to
$70.5 million as of December 31, 1997. The Bank has made a concerted effort to
attract deposits in the market area served by the Bank through competitive
pricing of its retail deposit products. Increases over the period were due to
marketing efforts, and new business development programs initiated by the
Company. Although deposit balances have shown historical growth, such balances
may be influenced by changes in the banking industry in general, interest rates
available on other investments, general economic conditions, competition and
other factors.
The following table summarizes the composition of the Bank's deposit portfolio.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
---------------------------------------- --------------------------------------
Amount Percent Amount Percent
----------------- ----------------- ------------------ --------------
<S> <C> <C> <C> <C>
Demand $ 1,432,987 1.45% $ 257,325 0.37%
NOW accounts 1,126,903 1.14% 688,177 0.98%
Money Market accounts 2,159,421 2.19% 4,801,606 6.81%
Passbook 1,743,975 1.77% 2,018,768 2.86%
Certificates of deposit 92,100,375 93.45% 62,707,645 88.97%
----------- ------- ----------- -------
$98,563,661 100.00% $70,473,521 100.00%
=========== ======= =========== =======
</TABLE>
The following table summarizes the maturity composition of certificates of
deposit at September 30, 1998, compared to December 31, 1997:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------------------- --------------------------------------
1998 % 1997 %
---------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Within one year $37,814,454 41.05% $26,499,563 42.26%
Over one year through two years 20,968,120 22.77% 21,383,648 34.10%
Over two years through three years 18,623,767 20.22% 8,414,801 13.42%
Over three years through five years 13,628,986 14.80% 4,733,566 7.55%
Over five years 1,065,048 1.16% 1,676,067 2.67%
----------- ------- ----------- -------
$92,100,375 100.00% $62,707,645 100.00%
=========== ======= =========== =======
</TABLE>
Borrowed funds increased $23.5 million to $32.8 million at September 30, 1998,
compared to $9.3 million as of December 31, 1997. This increase was primarily
the result of the utilization of FHLB advances to fund interest-earning asset
growth during the period. Borrowings may be used on a short-term basis to
compensate for reductions in other sources of funds. Borrowings may also be used
on a long-term basis to support expanded lending activities and to match
maturities or repricing intervals of assets. The sources of such funds will be
Federal Funds purchased and borrowings from the FHLB.
34
<PAGE>
Capital Resources
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory-and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to average
assets (as defined). As of September 30, 1998, the Bank meets all capital
adequacy requirements to which it is subject.
At September 30, 1998, the Bank's actual and required minimum capital ratios
were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) To Be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
For the Bank: Actual: Purposes: Action Provisions:
--------------------------- ---------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Total Capital
(to Risk Weighted Assets) $13,230 11.5% $9,210 8.0% $11,512 10.0%
Tier I Capital
(to Risk Weighted Assets) $12,395 10.8% $4,605 4.0% $ 6,907 6.0%
Leverage $12,395 8.6% $5,775 4.0% $ 7,219 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%
Leverage $ 4,747 5.4% $3,548 4.0% $ 4,435 5.0%
</TABLE>
At September 30, 1998, the Company's actual and required minimum capital ratios
were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) For Capital Adequacy
For the Company: Actual: Purposes:
------------------------------ ------------------------------------
Amount Ratio Amount Ratio
------------- ------------- -------------- ------------------
<S> <C> <C> <C> <C>
As of September 30, 1998:
Total Capital
(to Risk Weighted Assets) $14,117 11.6% $9,747 8.0%
Tier I Capital
(to Risk Weighted Assets) $13,282 10.9% $4,873 4.0%
Leverage $13,282 8.8% $6,040 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%
Leverage $ 5,184 5.8% $3,570 4.0%
</TABLE>
35
<PAGE>
Year 2000 ("Y2K") 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 Company has conducted a
comprehensive review of its computer systems to identify the systems that could
be affected by the "Year 2000" problem. The Year 2000 problem is the result of
computer programs using two digits rather than four to define the year. Any of
the Company's programs that are time sensitive may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. Management anticipates that the enhancements
necessary to prepare its mission critical systems for the year 2000 will be
completed in early 1999. Regarding the Company, computer systems are used to
perform financial calculations, track deposits and loan payments, transfer funds
and make direct deposits. The primary processing of the Company's loan and
deposit transactions is performed by Intrieve Incorporated, a third-party data
processing vendor. Computer software and computer chips also are used to run
security systems, communications networks and other essential bank equipment.
Because of its reliance on these systems (including those used by its
third-party data processing vendor), the Company is following a comprehensive
process to assure that such systems are ready for the Year 2000 date change. To
become Y2K compliant the Company is following guidelines suggested by federal
bank regulatory agencies. A description of each of the steps and the status of
the Company's efforts in completing the steps is as follows:
The Company has formed a Year 2000 committee that has investigated the problem
and its potential impact on the Company's systems.
An independent consulting firm has been engaged to assist the Company in
development of its approach to becoming Y2K compliant. This phase also includes
education of the Company's employees and customers about Y2K issues. The
awareness and understanding phase of this step has been completed.
The bank has identified all potentially affected systems. This step has included
a review of all-major information technology and non-information technology
systems to determine how Y2K issues affect them. An inventory has been prepared
of all vendors who render services to the Company.
The Company has completed its assessment of which systems and equipment are most
prone to placing the Company at risk if they are not Y2K compliant.
A Y2K project team has developed an inventory of its vendors, an inventory of
actions to be taken identification of the team members responsible for
completion of each action, a completion timetable and a project tracking
methodology. Significant vendors have been requested to advise the Company in
writing of their Y2K 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 Y2K compliant. This step is substantially
complete. Responses from certain vendors have not yet been received.
The Company's third party data processing servicer as well as vendors who
provide significant technology-related services have modified their systems to
become Y2K compliant. The Company has developed scripts involving typical
transactions to test the proper functioning of the modified systems. It has also
arranged for repair or replacement of equipment programs affected by Y2K issues.
Most of the testing and corrections have taken place. This step is expected to
be completed by the end of 1998. The monitoring of certain vendors will continue
into 1999.
The Bank is preparing a bank wide contingency plan for how the Company would
resume business if unanticipated problems arise from non-performance by vendors.
Such plans are expected to be completed in the first quarter of 1999.
The Company's efforts to become Y2K compliant are being monitored by its federal
banking regulators. Failure to be Y2K compliant could subject the Company to
formal supervisory or enforcement actions. The Company has expensed $20,000 for
the year ending December 31, 1998, and expects to incur additional costs through
1999 to become Y2K compliant. It does not expect such costs to be material to
the operating expenses of the Company. Some of the costs are not expected to be
incremental to the Company, but rather represent new equipment and software that
would otherwise be purchased in the normal course of the Company's business. The
Company presently believes the Y2K issue will not pose significant operating
problems for the Company. However, if implementation and testing plans are not
completed in a satisfactory and timely manner by third parties on which the
Company is dependent, or other unforeseen problems arise, the Y2K issue could
potentially have an adverse effect on the operations of the Company.
36
<PAGE>
Inflation and Changing Prices
Management is aware of the impact of inflation on interest rates and the
corresponding impact on a bank's performance. The ability of a financial
institution to cope with inflation can only be determined by ongoing analysis
and monitoring of its asset and liability structure. The Company monitors its
asset and liability position with particular emphasis on the mix of
interest-sensitive assets and liabilities in order to reduce the effect of
inflation upon its performance.
Inflation can have a more direct impact on categories of Non-interest expenses
such as salaries and wages, supplies, and employee benefit costs. These expenses
are very closely monitored by management for both the effects of inflation and
non-inflationary increases in such items as staffing levels, usage of supplies
and occupancy costs.
BUSINESS
USABancShares, Inc.
The Company is a one-bank holding company registered under the Bank Holding
Company Act of 1956. It was incorporated under the laws of the Commonwealth of
Pennsylvania on March 14, 1995, and approved as a bank holding company by the
Federal Reserve System on October 3, 1995. On November 30, 1995, the Company
completed its acquisition of the Bank and the Bank became a wholly-owned
subsidiary of the Company. On April 11, 1997, a subsidiary of the Company
completed its acquisition of Knox Financial Services Group, Inc., a registered
broker-dealer with the National Association of Securities Dealers ("NASD").
Subsequent to the acquisition, Knox Financial Services Group, Inc. was renamed
USACapital, Inc. ("USACapital"). On April 7, 1998, the Bank changed its name to
"BankPhiladelphia."
The Company, through its operation of the Bank, derives a substantial portion of
its income from banking and banking-related services. The Company continually
evaluates financial services and other activities in addition to owning and
supervising the Bank, particularly those which allow the Company to generate
fee-based income. The principal executive offices of the Company are located at
1535 Locust Street, Philadelphia, PA, 19102. The telephone number is (215)
569-4200.
As of January 4, 1999, the Company, the Bank and USACapital have a total of 33
full-time and 4 part-time employees.
The Bank
The Company owns 100% of the Bank, which is a Pennsylvania chartered savings
bank whose deposits are insured by the Bank Insurance Fund ("BIF") of the
Federal Deposit Insurance Corporation ("FDIC"). The Bank has operated as a
community-based financial institution for over 110 years, and was originally
organized in 1887 as a mutual building and loan. In December 1990, the Bank
converted to a state chartered stock savings bank insured by the FDIC. The Bank
has retail locations at 1535 Locust Street in Center City Philadelphia, and
Plymouth Meeting, Pennsylvania and a "mini" branch in the Bellevue Hotel in
Center City Philadelphia.
The Bank is in the business of taking deposits and making loans in and around
the greater Delaware Valley area, and intends to maintain its loan origination
and deposit generation operations within this and other geographically proximate
locations.
The Bank's primary source of funds are deposits and proceeds from principal and
interest payments on loans and securities. The flow of these payments are
generally predictable, but can be greatly influenced by general interest rates,
economic conditions and competition. The primary investing activity of the Bank
is the origination of real estate and commercial mortgage loans, the purchase of
investment securities and the acquisition of discounted loan portfolios. In
1998, loan originations have accounted for a majority of the Bank's total loan
growth, with the balance comprised of loan portfolio acquisitions. The Bank
generally purchases portfolios consisting of performing loans secured by
mortgages on real estate in and around the Delaware Valley. These loans are
purchased at discounts to book value, providing the Bank with an increased yield
above normal market rates. The Bank intends to continue its loan portfolio
acquisitions over the coming years to enhance loan growth and yield as a
37
<PAGE>
complement to its loan originations, and shall evaluate opportunities to acquire
attractive loan portfolios secured by real estate outside of the Bank's primary
area, as well as its historical local concentration. In furtherance of this
strategy, during the nine months ended September 30, 1998, the Bank had acquired
loans with aggregate balances of $30.1 million which were secured by mortgages
on commercial and residential properties.
Lending Activities
The Bank's lending strategy focuses on the origination of commercial real estate
and other commercial loans in its primary market area. The Bank believes that
its adherence to loan underwriting criteria has been largely responsible for its
high asset quality. Such underwriting criteria include, among others, a maximum
loan to value ratio of up to 80%, a 10 year maximum maturity on commercial and
commercial real estate loans and a maximum loan amount that is approximately
$2.0 million as of September 30, 1998. The Bank's commercial loans are working
capital lines of credit, term loans to purchase equipment, fixtures or
furniture, commercial mortgages to finance investment properties and commercial
mortgages to acquire business-owner occupied properties. The Bank's general
practice is to write loans at variable interest rates for a period of not
greater than five years, with a strong preference for the origination of
adjustable rate loans tied to the Bank's prime lending rate which is generally
above the New York money center prime rate. Generally, the Bank requires
collateral on all commercial loans, which may be in the form of residential or
commercial real estate, cash, marketable securities, accounts receivable,
inventory, equipment and other fixed assets, but the Bank does not make loans
based primarily on accounts receivable or inventory of the business.
Notwithstanding the form or value of collateral provided, the Bank will
generally obtain a personal guaranty from the principals of its commercial
borrowers.
The Bank seeks to make commercial loans to a wide variety of service, retail,
distribution and manufacturing companies. No individual director, officer or
employee of the Company has lending authority for any amount and all credit
decisions and decisions to lend money are made by the Loan Committee or the
Board of Directors.
Asset Acquisition Activities
The Bank actively reviews opportunities to acquire discounted loan portfolios
and will continue to do so as part of its growth strategy. These portfolios are
primarily offered through government agencies, but are often available through
private sector transactions as well. The Bank has found that the pools which are
offered through governmental agencies, such as the FDIC, are due to the
agencies' efforts to dispose of assets held as a result of the consolidation of
the banking regulatory system and the closing of governmental offices. Loan
pools are generally available from private sellers in connection with asset
securitizations and other restructurings. At September 30, 1998, approximately
$47.8 million, or 54.0% of the Bank's loan portfolio consisted of purchased
loans. The acquired loans were predominantly residential and commercial real
estate secured loans. Generally, the properties securing these loans are held
for investment purposes by the mortgagee and include personal guarantees.
The Bank performs detailed due-diligence on all potential loan acquisitions,
which includes a review of each loan file to ascertain information regarding
collateral value, payment history, interest rate, and guarantor and borrower
financial statements in order to ensure the loan meets the Bank's underwriting
criteria. Loan acquisitions are priced in accordance with a proprietary computer
pricing model developed by personnel of the Bank which they have successfully
utilized in evaluating and acquiring numerous loans over the past five years on
behalf of the Bank and, prior to formation of the Company, on behalf of private
clients. The loans are generally purchased with certain representations and
warranties which protect the Bank in the event of document deficiencies or
fraud. In connection with its growth strategy, the Bank intends to increase its
emphasis on the acquisition of loans secured by properties located both within
and outside of its primary market area, while continuing to expand loan
originations.
Management believes that there are numerous opportunities in the marketplace to
acquire loans at a discount and that the experience and knowledge of its senior
management team provides the Bank with a unique opportunity to take advantage of
this market to facilitate the growth strategy of the Bank.
38
<PAGE>
Competition
The Bank's primary market area is served by several major commercial banks such
as First Union, PNC Bank, Mellon Bank and Commerce Bank, as well as a number of
mid-size savings banks and thrifts, including Progress Federal and Harleysville
Savings Bank, and other small community banks and thrifts. The Bank actively
competes with all of these institutions for retail and commercial accounts. The
Bank faces competition from financial institutions located out of state which
conduct commercial calling efforts in the area and direct mail promotions to
consumers, as well as from outside the banking industry, such as money market
mutual funds, stock brokers, and the federal government. Larger competitors have
much greater financial and marketing resources than those of the Bank. In order
to compete, the Bank places a major emphasis on superior service and will rely
on the flexibility that its size and independent status permits. The Company and
the Bank believe that an independent community bank, operated by responsive and
experienced employees who are dedicated to personal service and innovative
thought, offers an attractive alternative to both larger and smaller competing
institutions.
Description of Property
On December 23, 1997, the Bank purchased a building at 1535 Locust Street in
Center City Philadelphia, formerly owned and operated by PNC Bank, which serves
as its Center City flagship retail operation. This new building consists of
approximately 10,000 square feet of space, and includes not only a first floor
retail operation, but also houses senior management of the Company and
USACapital, in addition to selected members of the Bank staff.
Pursuant to a lease dated May 11, 1989, the Bank leases its building located at
803 East Germantown Pike in Norristown, Pennsylvania, which contains a retail
banking operation as well as administrative offices. The lease is for an initial
period of 10 years, with an option to renew or extend the lease for an
additional 10 years. The annual lease payments total $37,400.
Pursuant to a lease dated July 27, 1998, the Bank leases a building at 18 East
Wynnewood Road, Wynnewood, Pennsylvania. 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.
The Bank also leases an additional branch in the office, retail and hotel
complex known as the "Bellevue" which is located in Center City Philadelphia.
The annual lease payments total $8,200.
The Bank may acquire or lease other real estate in the future for purposes of
opening new branch locations. In addition, the Bank may acquire or lease real
estate parcels for purposes of establishing mini-branch locations, which would
likely include state of the art automated teller facilities that would involve
minimal staffing requirements.
USACapital
USACapital, a registered broker-dealer with the NASD, is a Pennsylvania
corporation wholly-owned by the Company. A subsidiary of the Company acquired
USACapital in April 1997 for a purchase price of $75,000, paid in shares of the
Company's common stock. USACapital is engaged in the business of trading stocks,
bonds, annuities, and other investment related products to the general public,
and corporate finance activities. USACapital operates out the Company's Locust
Street office.
39
<PAGE>
MANAGEMENT
Certain information concerning the directors and executive officers of the
Company is set forth below.
<TABLE>
<CAPTION>
Name Position with Company Age Director Since
- ---- --------------------- --- --------------
<S> <C> <C> <C>
George M. Laughlin Chairman 78 1995
Zeev Shenkman Vice-Chairman 46 1998
Kenneth L. Tepper President and Chief Executive 36 1995
Officer/Director
Clarence L. Rader Director/Chairman of Bank (1) 67 1995
Carmen J. Cocca, Jr. Director 51 1996
Jeffrey A. D'Ambrosio Director 43 1995
George C. Fogwell, III Director 51 1995
John A. Gambone Director 59 1995
Carol J. Kauffman Director 51 1997
Mark A. Kearney Director 35 1998
Wayne O. Leevy Director 54 1996
Harry S. McElhone Executive Vice President 47 -
Brian M. Hartline Chief Financial Officer 34 -
</TABLE>
(1) BankPhiladelphia, the Company's wholly-owned FDIC banking subsidiary.
Following is a brief summary of each Director's occupation over the last five
years.
George M. ("Dewey") Laughlin is a real estate investor and insurance broker, and
is 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.
Clarence L. Rader has served as Chairman of the Bank since November 1995. Prior
thereto, he served as President and Chief Executive Officer of the Bank from
1986 to 1995. Mr. Rader was President of the Norristown School Board, and
Chairman of the Central Montgomery Chamber of Commerce from 1991-1992. He is a
senior appraiser with the American Society of Appraisers.
Kenneth L. Tepper has been a Director and President and Chief Executive Officer
of the Company and of the Bank, the Company's operating subsidiary since 1995.
Prior thereto, Mr. Tepper served as agent of the FDIC assigned to the RTC from
1990 through 1991. Thereafter, Mr. Tepper was Director of Merchant Banking at
Tucker Federal SLA, and from 1994 through 1995 was Managing Director of
Merchant*BancShares, Inc., an investment banking firm specializing in community
bank mergers and loan portfolio acquisitions. He was Finance Chairman of the
Pennsylvania Republican State Committee during the 1994 gubernatorial campaign,
and a principal of the 1995 Congressional Medal of Honor Society Convention. He
serves on the Board of Directors of TRM Corporation, a public company unrelated
to Mr. Tepper and in which the Company maintains a financial investment.
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.
Carmen J. Cocca, Jr. has served as President of PPCO Insurance Brokerage, Inc.
in Blue Bell, Pennsylvania since 1982. From 1992 to 1996, Mr. Cocca was the
President of Physicians Insurance Company, in Plymouth Meeting, Pennsylvania.
Mr. Cocca is the Chairman of the Cocca Family Foundation, former Director of
Kencrest, and former Director of Bucks County MHMR.
Jeffrey A. D'Ambrosio has been the owner and is Chief Executive Officer of
D'Ambrosio Dodge in Downingtown, Pennsylvania since 1985. Mr. D'Ambrosio
presently owns and manages 11 auto franchises in Chester County, Pennsylvania.
Mr. D'Ambrosio is a member of the Dodge Dealers National Advertising Council and
serves on the Pennsylvania Board of Vehicle Manufacturers, Dealers and
Salespersons.
40
<PAGE>
George C. Fogwell III is an active investor in publicly-traded securities on
behalf of his own account. He is a Senior Captain with Delta Airlines, where he
also serves as a flight instructor.
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.
Mark A. Kearney, Esq. is a Partner at the law firm of Elliott, Reihner,
Siedzikowski & Egan, where he has practiced law since 1990. Mr. Kearney also
teaches Corporation Law at Villanova Law School, in Villanova, Pennsylvania.
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.
The executive officers of the Company are Kenneth L. Tepper, President and Chief
Executive Officer, Harry S. McElhone, Senior Vice President and Brian M.
Hartline, Chief Financial Officer. Except with respect to Mr. Tepper (whose
biographical information is set forth above), the following is a brief summary
of each executive officer's occupation for the last five years.
Harry S. McElhone, age 47, is currently Executive Vice President of the Bank,
where he has been employed since 1996. From 1992 to 1996, Mr. McElhone served as
Senior Vice President of MetroBank of Philadelphia. Mr. McElhone was also at
Chemical Bank in New Jersey from 1987 to 1991 as Assistant Vice President,
Commercial Lending.
Brian M. Hartline, age 34, is currently Chief Financial Officer of the Company
and Chief Operating Officer of the Bank, where he has been employed since
December 1998. Prior to joining the Company, 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.
41
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information concerning the beneficial ownership
of the Company's shares of common stock as of December 1, 1998, by each
Director, the Chief Executive Officer, all Directors and Officers as a group,
and each person known to the Company to beneficially own 5% or more of the
Company's outstanding Class A common stock. Mr. Tepper owns all the issued and
outstanding Class B common stock. Except as otherwise noted, the address for
each such person is 1535 Locust Street, Philadelphia, Pennsylvania 19102. All
share information set forth gives effect to 33% stock dividends which the
Company effected in July 1997 and August 1998.
<TABLE>
<CAPTION>
Shares of Shares of Common Class
Name of Common Stock Class B Stock Stock B Stock
Beneficial Beneficially Beneficially Percentage Percentage
Owner Owned (1) Owned of Class(1) of Class
- ----- --------- ----- ----------- --------
<S> <C> <C> <C> <C>
George M. Laughlin 62,043(2)(3) 3.1%
Zeev Shenkman 53,200(4) 2.6%
Clarence L. Rader 17,689(2) *
Kenneth L. Tepper 259,352(5) 10,000 11.9% 100%
Carmen J. Cocca, Jr. 34,048(2) 1.7%
Jeffrey A. D'Ambrosio 53,067(2) 2.6%
George C. Fogwell, III 44,753(2)(6) 2.2%
John A. Gambone 56,401(2)(7) 2.7%
Carol J. Kauffman 61,337(8)(9) 3.0%
Mark A. Kearney, Esq. 6,650(9) *
Wayne O. Leevy 10,613(2) *
Sandler O'Neill Asset
Management LLC 143,060(10) 7.1%
Investors of America
Limited 115,949 5.8%
Financial Stocks LP 127,525 6.4%
Rainbow Partners LP 136,410 6.8%
------- -----
Directors and
Executive Officers (11
persons) 659,153 10,000 28% 100%
------- ------ --- ----
</TABLE>
- ----------
* less than one percent (1%)
(1) Based upon 2,007,392 shares of common stock outstanding as of November 30,
1998. Calculated in accordance with Rule 13d-3 promulgated under the Securities
Exchange Act of 1934. It also includes shares owned by (i) a spouse, minor
children or by relatives sharing the same home, (ii) entities owned or
controlled by the named person and (iii) other persons if the named person has
the right to acquire such shares within 60 days 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 8,845 shares presently exercisable at $5.65 per
share.
(3) Includes 17,689 shares held by Mr. Laughlin's wife & 884 shares held by his
daughter.
(4) Includes options to purchase 33,250 shares of common stock exercisable at
$11.28 per share.
(5) Includes 177 shares of common stock held by Mr. Tepper as custodian for his
minor son. Also includes options to purchase 168,090 shares of common stock
presently exercisable at $5.65 per share and options to purchase 11,970 shares
of common stock presently exercisable at $7.95.
(6) Includes 531 shares of common stock held by Mr. Fogwell's children.
42
<PAGE>
(7) Mr. Gambone's shares of common stock are held in the name of a trust, of
which Mr. Gambone is trustee (26,533 shares), and in the name of a corporation
(18,944 shares), of which Mr. Gambone is president. Includes 310 shares of
common stock owned by family members who reside in Mr.
Gambone's home, which Mr. Gambone disclaims beneficial ownership.
(8) Includes 1,620 shares of common stock owned by Mrs. Kauffman's husband,
options to purchase 53,067 shares of common stock held by Mrs. Kauffman's
husband, and options to purchase 1,330 shares of common stock presently
exercisable at $7.52.
(9) Includes options to purchase 6,650 shares of common stock presently
exercisable at $11.28.
(10) The address for Sandler O'Neill Asset Management LLC is 712 Fifth Avenue,
22nd Floor, New York, New York 10019.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid in fiscal 1997 for services
performed in all capacities for the Company and the Bank with respect to the
Chief Executive Officer. With the exception of Mr. Tepper, no Executive Officer
of the Company earned over $100,000 in fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Name and Compensation No. of Securities
Principal Position Fiscal Year Salary(1) Underlying Options
- ------------------ ----------- ---------- ------------------
<S> <C> <C> <C>
Kenneth L. Tepper
President and CEO 1997 $132,000
1996 $132,000
1995 $132,000 100,000
</TABLE>
(1) In addition to a base salary of $120,000, Mr. Tepper received $12,000 in
additional compensation which was used to purchase a deferred compensation life
insurance policy. Mr. Tepper's salary was increased to $245,000 effective March
1, 1998.
EMPLOYMENT AGREEMENTS
On November 30, 1995, the Company entered into a five-year employment agreement
with Mr. Tepper pursuant to which Mr. Tepper received an annual base salary of
$120,000 and may receive an annual cash bonus and grant of stock options as
determined by the Board of Directors (Mr. Tepper has not received any such bonus
in either cash or stock options). Pursuant to the agreement, Mr. Tepper was
granted options to purchase 100,000 shares of common stock at an exercise price
of $10.00 per share. All of the options are exercisable and expire in November
2005. Pursuant to the stock dividends declared and issued in July 1997 and
August 1998, Mr. Tepper's options were adjusted to 176,890 and the exercise
price was adjusted to $5.65 per share. The agreement provides that in the event
the Company discharges Mr. Tepper other than for cause, disability or
incapacity, or Mr. Tepper terminates his employment with the Company upon the
occurrence of certain specified events or occurrences, including a change of
control of the company, Mr. Tepper will receive severance payments equal to his
accrued but unpaid base compensation and incentive compensation plus a lump sum
equal to no more than 2.99 times the average of his total annual compensation
over the previous five years. Effective March 1, 1998, the Company extended Mr.
Tepper's agreement through February 12, 2001, at an annual base salary of
$245,000 and an annual cash bonus and grants of stock options as may be
determined by the Board of Directors. Pursuant to the agreement, Mr. Tepper was
granted options to purchase 26,600 shares of common stock at $10.00 per share,
and options to purchase 13,300 shares of common stock at $15.04 per share. Of
the 26,600 options, 11,970 vested on August 13, 1998, 11,970 will vest on
February 13, 1999, and 2,660 will vest on February 13, 2000. Of the 13,300
options granted, 5,187 will vest on February 13, 2000 years, 6,650 will vest on
February 13, 2001 and 1,463 will vest on February 13, 2002.
The following table sets forth the number and value as of November 15, 1998 of
options held by the Chief Executive Officer at November 15, 1998.
43
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
<S> <C> <C>
Number of
Securities
Underlying Value of Unexercised
Unexercised Options In-the-money Options
Name at 12/31/97 at 12/31/97
- -------- -----------------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
Kenneth L. Tepper 176,890 / 0 (1) $329,840/ $0.00
</TABLE>
(1) Reflects adjustment of options granted in fiscal 1995 to reflect 33%
dividends declared by Company in July 1997 and August 1998.
In conjunction with the private placement of $7.5 million of common stock of the
Company consummated on February 13, 1998, options to purchase 4,433 shares of
common stock at an exercise price of $11.28 were granted to each of three
employees of the Company.
Indemnification of Officers and Directors
The Company's charter and By-laws provide that the Company will indemnify every
person who is or was a director or executive officer of the Company to the
fullest extent permitted by law. This indemnification applies to all expenses
and liabilities reasonably incurred in connection with any proceeding to which
the director or executive officer may become involved by reason of being or
having been a director or executive officer of the Company. Pennsylvania law,
under which the Company is incorporated, allows the Company to indemnify its
directors and officers if the indemnified person acted in good faith and in a
manner such person reasonably believed to be in, or not opposed to, the best
interest of the Company and, with respect to any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful. The Company maintains a
director and officer liability insurance policy covering each of the Company's
directors and executive officers.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted, the Company has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank 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. All loans by the Company to such persons (i) were made in the
ordinary course of business, (ii) were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and (iii) did not involve more than
the normal risk of collectability or present other unfavorable features. As of
December 4, 1998, certain executive officers and Directors of the Company or the
Bank had outstanding indebtedness in amounts exceeding $60,000 to the Bank as
follows. As of December 4, 1998, two companies in which Mr. Gambone owns a
minority interest had outstanding indebtedness totaling $434,062. Of this
amount, $280,656 is secured by real estate and $153,406 is secured by titles to
motor vehicles, with all loans personally guaranteed by Mr. Gambone. Mr. Tepper
had outstanding loan commitments totalling $700,000, of which $650,000 is
secured by a residential mortgage and $50,000 is an unsecured line of credit.
Mr. Shenkman had outstanding two loan commitments totalling $1,200,000. Both
loans are secured by marketable securities and a lien on residential real
estate. (Mr. Shenkman's loans were originated by the Bank prior to his election
as Vice-Chairman of the Company). The aggregate amount of loans outstanding to
executive officers and Directors of the Bank as of December 4, 1998 equaled
17.5% of shareholder's equity.
In January 1998, Mr. Tepper and the Company signed an agreement in which the
Company has the option for each of the next three years to cap the anti-dilutive
feature of Mr. Tepper's Class B common stock for that year in exchange for a
payment of $150,000. In 1998, the Company elected to make the payment to Mr.
Tepper. Due to this agreement, Mr. Tepper did not receive any additional shares
of common stock related to the $7.5 million private placement of common stock
which the Company consummated in February 1998 (prior to the agreement, Mr.
Tepper would have had the right to 85,470 additional shares of common stock upon
conversion of his Class B common stock with a value at closing in excess of
44
<PAGE>
$825,000). Warrants convertible for five years into 3.25% of the common stock of
the Company were granted to Sandler O'Neill & Partners LP, an affiliate of
Sandler O'Neill Asset Management LLC, as compensation for acting as placement
agent in the $7.5 million private placement. The exercise price of the warrants
is $7.70 per share (after giving effect to the 33% stock dividend which took
place in August 1998). The number of warrants will be adjusted for stock splits,
stock dividends, and the issuance of additional shares so as to maintain Sandler
O'Neill's ownership of the fully diluted common stock at 3.25% for a period of
three years from the closing of the $7.5 million private placement.
SELLING SHAREHOLDERS
The following table sets forth the names of the Selling Shareholders, the number
of shares of common stock beneficially owned by the Selling Shareholders and the
number of shares of common stock which may be offered for sale pursuant to this
Prospectus by such Selling Shareholder. The offered shares of common stock may
be offered from time to time by each of the Selling Shareholders named below.
See "Plan of Distribution." However, the Selling Shareholders are under no
obligation to sell all or any portion of the shares of common stock offered
hereby, nor are the Selling Shareholders obligated to sell such shares of common
stock immediately under this Prospectus. Because the Selling Shareholders may
sell all or part of the shares of common stock offered hereby, no estimate can
be given as to the number of shares of common stock that will be held by the
Selling Shareholders upon termination of any offering made hereby.
Pursuant to Rule 416(a) under the Securities Act, the shares of common stock
issuable upon exercise of warrants are subject to adjustment by reason of stock
splits, stock dividends, and other similar transactions in the common stock.
<TABLE>
<CAPTION>
Common Shares Beneficially
Owned After Offering (1)
----------------------------------------------------------
Number of Common
Shares Beneficially Common Shares Percent of
Name of Selling Shareholder Owned Prior to Offering Offered Hereby Number Outstanding
- ----------------------------------------- --------------------------- --------------------- ------------ ----------------
<S> <C> <C> <C> <C>
Everest Partners LP 40,922 40,922 -0- -0-
Howard Amster 13,640 13,640 -0- -0-
Antin & Haas Partnership 10,230 10,230 -0- -0-
Bay Pond Partners LP (2) 85,939 85,939 -0- -0-
Bay Pond Investors (Bermuda) LP (2) 46,378 46,378 -0- -0-
Barlow Partners, Inc. (2) 4,091 4,091 -0- -0-
BP Overseas Partners Ltd. 2,800 2,800 -0- -0-
BP Institutional Partners LP 3,300 3,300 -0- -0-
Boston Provident Partners LP 15,283 15,283 -0- -0-
Endeavor Capital Partners 27,282 27,282 -0- -0-
Financial Stocks LP 127,525 127,525 -0- -0-
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Common Shares Beneficially
Owned After Offering (1)
----------------------------------------------------------
Number of Common
Shares Beneficially Common Shares Percent of
Name of Selling Shareholder Owned Prior to Offering Offered Hereby Number Outstanding
- ----------------------------------------- --------------------------- --------------------- ------------ ----------------
<S> <C> <C> <C> <C>
First Western Investment Services Co. 6,820 6,820 -0- -0-
Investors of America 115,949 115,949 -0- -0-
King Street Capital, L.P. 40,266 40,266 -0- -0-
King Street Capital, Ltd. 14,298 14,298 -0- -0-
Lawrence Partners 26,600 26,600 -0- -0-
Value Realization Fund 10,640 10,640 -0- -0-
Lawrence Offshore Partners 17,324 17,324 -0- -0-
Malta Hedge Fund LP (3) 36,841 36,841 -0- -0-
Malta Hedge Fund II LP (3) 28,680 28,680 -0- -0-
Malta Partners LP (3) 47,747 47,747 -0- -0-
Malta Partners II LP (3) 23,142 23,142 -0- -0-
Anthony Maltese 1,705 1,705 -0- -0-
Terry Maltese (4) 1,705 1,705 -0- -0-
Radio Partnership LP 13,640 13,640 -0- -0-
Rainbow Partners LP 136,410 136,410 -0- -0-
Rising Stars Offshore Fund LP (5) 8,884 8,884 -0- -0-
Thistle Group Holdings Inc. 54,564 54,565 -0- -0-
J. David Rosenberg 20,462 20,462 -0- -0-
SOP Holdings LLC (6) 68,427(7) 250,000(8) -0- -0-
Thomas J. Knox 13,965 13,965 -0- -0-
Kenneth L. Tepper 40,000 40,000 -0- -0-
--------- --------- --- ---
TOTAL 1,105,459 1,287,032 -0- -0-
========= ========= === ===
</TABLE>
- ----------
(1) Assumes the sale of all offered shares of common stock.
(2) Voting and investment power shared with Wellington Management Company, LLP.
(3) Voting and investment power shared with Sandler O'Neill Asset Management
LLC.
(4) Mr. Maltese is President of Sandler O'Neill Asset Management LLC.
(5) Investment discretion shared by Financial Stocks, Inc. and Ivy Asset
Management.
(6) May be deemed to be an affiliate of Sandler O'Neill & Partners, LP, which
acted as placement agent in a private placement of $7.5 million of the Company's
Common Stock on February 13, 1998.
(7) Consists of shares of Common Stock which may be issued upon exercise of a
warrant granted in connection with a private placement of $7.5 million of the
Company's Common Stock on February 13, 1998.
(8) Includes additional shares of common stock which the Company may be
obligated to issue to such selling shareholder pursuant to certain anti-dilution
provisions contained in the warrant described in footnote 7 to this table.
46
<PAGE>
DESCRIPTION OF SECURITIES
The Company's charter authorizes the issuance of 10,000,000 shares of common
stock, par value $1.00 per share, 10,000 shares of Class B common stock, par
value $1.00 per share, and 5,000,000 shares of preferred stock, par value $1.00
per share. This Prospectus relates to shares of the Class A common stock.
As of November 30, 1998, the Company had outstanding 2,007,392 shares of common
stock, 10,000 shares of Class B common stock and no shares of preferred stock.
Kenneth L. Tepper, the President and Chief Executive Officer of the Company,
presently owns (jointly with his wife) all of the authorized shares of Class B
common stock.
The Company's charter authorizes the Board of Directors to provide for the
issuance of preferred stock in one or more series without further shareholder
action. The Board of Directors may determine the number of shares as well as the
applicable voting rights and preferences. It is not possible to state the actual
effect of the authorization of the preferred stock upon the rights of holders of
the common stock until the Board of Directors determines the specific rights of
the holders of any series of preferred stock. However, the issuance of shares of
preferred stock could adversely affect the rights of the holders of common
stock. To date, the Company has issued no shares of preferred stock and has no
present plans to issue any shares of preferred stock.
Conversion of Class B Common Stock
Pursuant to the Company's charter, on January 1, 2001, all of the authorized
shares of the Class B common stock will automatically convert into 10% of the
then issued shares of common stock, rounded up to the nearest whole share,
subject to certain limitations as described in "Certain Relationships and
Related Transactions." Shares of the Class B common stock received by the
Company in exchange for shares of common stock will be retired and canceled and
will no longer be available for issuance.
Dividends
Holders of common stock are entitled to receive such dividends, when, as and if
declared by the Board of Directors out of legally available funds subject to the
payment of any preferential dividend to the holders of the preferred stock, if
any.
Voting Rights
The voting rights of the shares of common stock are identical to the voting
rights of the Class B common stock with one exception: the holders of the shares
of common stock are entitled to elect two-thirds of the Company's Directors and
the holder of the Class B common stock is entitled to elect one-third of the
Company's Directors. Excluding the election of Directors, the common stock and
the Class B common stock vote together as a single class on all matters on which
shareholders are entitled to vote, unless applicable law requires that each
class vote separately. Holders of the common stock do not have cumulative voting
rights. Holders of the common stock are entitled to one vote for each share
held, subject to certain limitations on such voting rights provided by the
Company's charter. The Company's charter provides that no one person or group
may hold or vote more than 10% of the common stock without the Board of
Directors' consent.
The Company's charter provides that individual Directors or the entire Board of
Directors may be removed from office only for "cause" and only with the vote of
the holders of at least 75% of the outstanding shares of capital stock of the
Company then eligible to vote. "Cause" is defined to mean only (1) conviction of
the director of a felony, (2) declaration by order of court that the director is
of unsound mind, or (3) gross abuse of trust. Under this provision, no Director
may be removed by shareholders without cause regardless of the vote in favor of
such removal. One effect of this provision may be to make the removal of
Directors more difficult to accomplish since the holders of more than 25% of the
stock of the Company then eligible to vote (which could include the directors
and officers of the Company) would have a veto power over any attempted removal.
The Company's charter provides that the affirmative vote of at least 80% of the
outstanding shares of capital stock of the Company then eligible to vote is
required for the adoption of any shareholder proposal to amend the Company's
Bylaws which has not been previously approved by the Board of Directors. One
effect of this provision may be to make such proposals to amend the Company's
Bylaws more difficult to accomplish since the holders of more than 20% of the
stock of the Company then eligible to vote (which could include members of the
Board of Directors and/or officers) would have a veto power over any changes to
the Company's Bylaws.
47
<PAGE>
The Company's charter also provides that a three-quarters vote of directors and
a two-thirds vote of the outstanding shares of common stock is necessary to
approve a merger, consolidation, liquidation or dissolution of the Company or
any action that would result in the sale or other disposition of all or
substantially all of the Company's assets. However, these voting requirements
are not required if a Bylaw amendment is subsequently adopted by all of the
members of the Board of Directors to modify or eliminate such requirements in
certain circumstances. Under such circumstances, Pennsylvania's Business
Corporation Law would require only a majority vote of both the Board of
Directors and shareholders.
Preemptive Rights
Holders of the Company's common stock have no preemptive rights.
Liquidation
In the event of liquidation, dissolution or winding up of the Company, holders
of common stock would share pro rata in any distributable assets only after
payment or provision for payment of the debts and other liabilities of the
Company and subject to the rights of any series of preferred stock which may be
outstanding.
The Company's charter and by-laws contain the following provisions that could
delay, defer or prevent a change in control of the Company:
o any merger, consolidation, liquidation or dissolution of the Company must
be approved by the affirmative vote of 75% of the Company's directors and
66 2/3% of the Company's shareholders;
o one person or group may not hold or vote more than 10% of the shares of
common stock without the consent of the Board of Directors;
o directors may be removed only for cause and only by a vote of 75% of the
outstanding shares of common stock;
o the holders of the Class B common stock (currently only Mr. Tepper), are
entitled to elect one-third of the directors;
o the Board of Directors is given broad discretion in evaluating any takeover
attempt and is authorized to use a "poison pill" defense; and
o the Board of Directors is authorized to issue "blank check" preferred
stock.
PLAN OF DISTRIBUTION
The shares of common stock are being offered on behalf of the Selling
Shareholders and the Company will not receive any proceeds from the sale. The
shares of common stock may be sold or distributed from time to time by the
Selling Shareholders, or by pledgees, donees or transferees of, or other
successors in interest to, the Selling Shareholders, directly to one or more
purchasers (including pledgees) or through brokers, dealers or underwriters who
may act solely as agent or may acquire such shares as principals, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at negotiated prices, or at fixed prices, which may be changed.
The sale of the shares of common stock may be effected in one or more of the
following methods: (i) ordinary brokers' transactions, which may include long or
short sales; (ii) transactions involving cross or block trades or otherwise on
the Nasdaq SmallCap Market or any other exchange or inter-dealer quotation
system on which the shares of common stock may trade; (iii) purchases by
brokers, dealers or underwriters as principal and resale by such purchasers for
their own accounts pursuant to this Prospectus; (iv) "at the market" to or
through market makers or into established trading markets, including direct
sales to purchasers or sales effected through agents; (vi) any combination of
the foregoing, or by any other legally available means. In addition, the Selling
Shareholders or their successors in interest may enter into hedging transactions
with broker-dealers who may engage in short sales of shares of common stock in
the course of hedging the position they assume with the Selling Shareholders.
The Selling Shareholders or their successors in interest may also enter into
option or other transactions with broker-dealers that require the delivery by
such broker-dealers of the shares of common stock, which shares of common stock
may be resold thereafter pursuant to this Prospectus. There can be no assurance
that all or any of the shares of common stock will be issued to, or sold by, the
Selling Shareholders.
48
<PAGE>
Brokers, dealers, underwriters or agents participating in the sale of the shares
of common stock as agents may receive compensation in the form of commissions,
discounts or concessions from the Selling Shareholders and/or purchasers of the
shares of common stock for whom such broker-dealers may act as agent, or to whom
they may sell as principal, or both (which compensation to a particular
broker-dealer may be less than or in excess of customary commissions). The
Selling Shareholders and any broker-dealers or other persons who act in
connection with the sale of the shares of common stock hereunder may be deemed
to be "underwriters" within the meaning of the Securities Act, and any
commission they receive and proceeds of any sale of such shares may be deemed to
be underwriting discounts and commissions under the Securities Act. Neither the
Company nor the Selling Shareholders can presently estimate the amount of such
compensation. The Company knows of no existing arrangements between the Selling
Shareholders and any other stockholders, broker, dealer, underwriter or agent
relating to the sale or distribution of the shares of common stock.
The Selling Shareholders and any other persons participating in the sale or
distribution of the shares of common stock will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder, which
provisions may limit the timing of purchases and sales of any of the shares of
common stock by the Selling Shareholders or any other such persons. The
foregoing may affect the marketability of the shares of common stock.
The Company will pay substantially all of the expenses incident to the
registration, offering and sale of the shares of common stock to the public
other than commissions or discounts of underwriters, broker-dealers or agents.
LEGAL MATTERS
The validity of the shares of common stock offered hereby has been passed upon
for the Company by Klehr, Harrison, Harvey, Branzburg & Ellers LLP,
Philadelphia, Pennsylvania.
EXPERTS
The financial statements for the fiscal years ended December 31, 1997 and
December 31, 1996 included in this Prospectus have been so included in reliance
on the report of Grant Thornton LLP independent accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN GET MORE INFORMATION
At your request, we will provide you, without charge, a copy of any exhibits to
the Company's Registration Statement. If you would like more information, write
or call us at:
USA BancShares, Inc.
1535 Locust Street
Philadelphia, PA 19102
(215) 569-4200
Attn: Chief Financial Officer
Our fiscal year ends on December 31. We intend to provide to our stockholders
annual reports containing audited financial statements and other appropriate
reports. In addition, we file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public reference
room in Washington, D.C. You can request copies of these documents, upon payment
of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings are also available to the public free of charge on the
SEC Internet site at http\\www.sec.gov.
49
<PAGE>
USABANCSHARES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Audited Page
- ------- ----
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the years ended December 31, 1997 and 1996 F-3
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
Unaudited
Consolidated Balance Sheets as of September 30, 1998 (Unaudited) and
December 31, 1997 F-37
Consolidated Statements of Income (Unaudited) for the nine month and
three month periods ended September 30, 1998 and September 30, 1997 F-38
Consolidated Statements of Comprehensive Income (Unaudited) for the
nine month periods ended September 30, 1998 and September 30, 1997 F-39
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
for the nine month period ended September 30, 1998 F-40
Consolidated Statements of Cash Flows (Unaudited) for the nine month periods
ended September 30, 1998 and September 30, 1998 F-41
Notes to Consolidated Financial Statements (Unaudited) F-42
</TABLE>
50
<PAGE>
================================================================================
-----------------------
Up to 1,287,032 Shares
of Common Stock
-----------------------
USABANCSHARES, INC.
-----------------------
-----------------------
PROSPECTUS
-----------------------
January 8, 1999
-----------------------
Until February 2, 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
-----------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus. If
any such information or representation is given or made, it must not be relied
upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the securities offered hereby. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
hereby to any person in any jurisdiction in which it is unlawful to make such an
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date of
this Prospectus.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Company's charter and by-laws provide that the Company will indemnify every
person who is or was a director or executive officer of the Company to the
fullest extent permitted by law. This indemnification applies to all expenses
and liabilities reasonably incurred in connection with any proceeding to which
the director or executor officer may become involved by reason of being or
having been a director or executive officer of the Company. Pennsylvania law,
under which the Company is incorporated, allows the Company to indemnify its
directors and officers if the indemnified person acted in good faith and in a
manner such person reasonably believed to be in, or not opposed to, the best
interest of the corporation and, with respect to any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful. The Company maintains a
director and officer liability insurance policy covering each of the Company's
directors and executive officers.
Item 25. Other Expenses of Issuance and Distribution
The following is an itemized statement of the estimated amounts of all expenses
payable by the Registrant in connection with the registration of the shares of
common stock offered hereby, other than underwriting discounts and commissions:
Registration Fee--Securities and Exchange Commission..... $ 2,818.00
*Blue Sky fees and expenses............................... $ 1,000.00
*Accountants' fees and expenses .......................... $15,000.00
*Legal fees and expenses ................................. $15,000.00
*Printing and EDGAR expenses ............................. $ 2,500.00
*Miscellaneous ........................................... $ 1,000.00
----------
Total ........................................... $37,318.00
==========
- ------------------
* Estimate
Item 26. Recent Sales of Unregistered Securities
On February 13, 1998, the Company issued 769,231 shares of its common stock for
cash to a limited number of accredited investors in a private placement pursuant
to Section 4(2) of the Securities Act. The net proceeds to the Company were
$7,136,420. The offering expenses were $363,580.
Item 27. Exhibits
II-1
<PAGE>
The following Exhibits are filed as part of this registration statement:
Exhibit No. Description of Exhibit
- ------------ ---------------------------
3(a) Amended and Restated Articles of Incorporation of the
Company, as amended (1)
3(b) Bylaws of the Company (1)
4(a) Specimen Stock Certificate of the Company (1)
5 Legal Opinion of Klehr, Harrison, Harvey, Branzburg &
Ellers LLP (2)
10.1 Stock Option Plan (incorporated by reference to Exhibit 10.1
of the Form SB-2)
10.2 Employment agreement by and between the Registrant and
Kenneth L. Tepper (incorporated by reference to Exhibit 10.2
of the Form SB-2)
10.3 Employment agreement by and between the Registrant and
Bruce W. Kauffman (incorporated by reference to Exhibit
10.3 of the Form SB-2)
10.4 Agreement by and between Kenneth L. Tepper and the
Registrant dated January 2, 1998 (3)
10.5 Warrant Agreement between the Registrant and Sandler
O'Neill dated February 13, 1998 (3)
10.6 Registration Rights Agreement between the Registrant and
certain shareholders dated February 13, 1998 (3)
11 Computation of Per Share Earnings (Included in Financial
Statements on Page F-27 and F-42)
21 Subsidiaries of the Company (3)
23.1 Consent of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP
(included in Opinion Letter)
23.2 Consent of Grant Thornton, LLP (5)
24 Power of Attorney (included in signature page to this
Registration Statement)
27 Financial Data Schedule (4)
- ---------------
(1) Incorporated by reference from the Registration Statement on Form SB-2 of
the Company, as amended, Registration No. 33-92506.
(2) Filed herewith.
(3) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997, as amended.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1998.
(5) Filed previously.
II-2
<PAGE>
Item 28. Undertakings
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to: (i) include any
prospectus required by Section 10 (a) (3) of the Securities Act; (ii) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information set forth in the Registration Statement,
and (iii) include any additional or changed material information with respect to
the plan of distribution.
2. That for the purpose of determining any liability under the Securities Act,
each post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
4. That for the purpose of determining any liability under the Securities Act,
to treat the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant under Rule 424(b)(1) or (4), or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in a successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issuer.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing Pre-Effective Amendment No. 1 to Form
SB-2 and authorized this registration statement to be signed on its behalf by
the undersigned, in the City of Philadelphia, Commonwealth of Pennsylvania, on
January 6, 1999.
USABANCSHARES, INC.
By: /s/ Kenneth L. Tepper
-----------------------------
Kenneth L. Tepper, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on January 6, 1999.
Signature Title
- --------- -----
/s/ George M. Laughlin* Chairman of the Board of Directors
- ---------------------------
George M. Laughlin
<PAGE>
/s/ Zeev Shenkman* Vice Chairman of the Board of Directors
- ---------------------------
Zeev Shenkman
/s/ Kenneth L. Tepper* President, Chief Executive Officer and Director
- ------------------------- (Principal Executive Officer)
Kenneth L. Tepper
/s/ Clarence L. Rader* Director
- ---------------------------
Clarence L. Rader
/s/ Carmen J. Cocca, Jr.* Director
- ---------------------------
Carmen J. Cocca, Jr.
/s/ Jeffrey A. D'Ambrosio* Director
- ---------------------------
Jeffrey A. D'Ambrosio
/s/ George C. Fogwell, III * Director
- ---------------------------
George C. Fogwell, III
/s/ John A. Gambone * Director
- ---------------------------
John A. Gambone
/s/ Carol J. Kauffman * Director
- ---------------------------
Carol J. Kauffman
Director
- ---------------------------
Mark A. Kearney
/s/ Wayne O. Leevy * Director
- ---------------------------
Wayne O. Leevy
/s/ Brian M. Hartline Chief Financial Officer
- ---------------------------
Brian M. Hartline (Principal Financial and Accounting Officer)
- ----------
*Denotes signature pursuant to a Power of Attorney granted to Kenneth L. Tepper.
/s/ Kenneth L. Tepper
- -------------------------
By: Kenneth L. Tepper
Attorney-in-Fact
<PAGE>
INDEX TO EXHIBITS
5 Legal Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP
<PAGE>
EXHIBIT 5
[LETTERHEAD OF KLEHR, HARRISON, HARVEY, BRANZBURG & ELLERS, LLP]
January 6, 1999
USABancShares, Inc.
1535 Locust Street
Philadelphia, PA 19102
RE: Registration Statement on Form SB-2
Ladies and Gentlemen:
We have acted as counsel to USABancShares, Inc., a Pennsylvania corporation
(the "Company"), in connection with the preparation of the Company's
Registration Statement on Form SB-2 (the "Registration Statement") originally
filed with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"), on December 10, 1998. The
Registration Statement relates to the resale of up to 1,287,042 shares of the
Company's common stock, par value $1.00 per share (the "Shares"), consisting of
the following (numbers are adjusted for stock dividends): (i) 1,023,077 Shares
issued in a private placement (the "Private Placement") pursuant to Section 4(2)
of the Act on February 13, 1998; (ii) 250,000 Shares issuable upon exercise of a
warrant (the "Warrant") issued to the placement agent in the Private Placement;
and (iii) 13,965 Shares issued in connection with the acquisition by a
subsidiary of the Company of Knox Financial Services Group, Inc. (the "Knox
Acquisition").
In connection with this opinion, we have examined and relied upon the
original or copies of (i) the Certificate of Incorporation and the By-laws of
the Company, (ii) minutes and records of the corporate proceedings with respect
to the issuance of the Shares, and (iii) such other documents as we have deemed
necessary as a basis for the opinion hereinafter set forth.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. As to any facts material
to the opinions expressed herein that were not independently established or
verified, we have relied upon oral or written statements and representations of
officers and other representatives of the Company and others.
<PAGE>
January 6, 1999
Page 2
Members of our firm are admitted to the Bar in the Commonwealth of
Pennsylvania and we express no opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that the
Shares issued in the Private Placement and the Knox Acquisition are, and the
Shares issuable upon exercise of the Warrant, when issued upon exercise of the
Warrant, will be, validly issued, fully paid and non-assessable.
This opinion is being furnished to you solely for your benefit in connection
with the Registration Statement and is not to be used, circulated, quoted or
referred to or relied upon for any other purpose without our express written
permission.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Act, or the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
/s/ Klehr, Harrison, Harvey,
Branzburg & Ellers, LLP
