<PAGE>
As filed with the Securities and Exchange Commission on July 16, 1999.
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Form SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
USABANC.COM, INC.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Pennsylvania 6022 23-2806495
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1535 Locust Street
Philadelphia, Pennsylvania 19102
(215) 569-4200
(Address and telephone number of principal executive offices and
principal place of business)
Mr. Kenneth L. Tepper,
Chief Executive Officer and President
USABanc.com, Inc.
1535 Locust Street
Philadelphia, Pennsylvania 19102
(215) 569-4200
(Name, address and telephone number of agent for service)
---------------
Copies to:
Ronald J. Frappier, Esq. Norman B. Antin, Esq.
Jenkens & Gilchrist, Jeffrey D. Haas, Esq.
a Professional Corporation Elias, Matz, Tiernan & Herrick L.L.P.
1445 Ross Avenue, 734 15th Street N.W.
Suite 3200 12th Floor
Dallas, Texas 75202 Washington, D.C. 20005
(214) 855-4500 (202) 347-0300
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| _____
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| _____
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ____
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|____
----------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Proposed
Title of Each Maximum
Class of Securities Aggregate Amount of
to be Registered Offering Price(1)(2) Registration Fee(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $1.00 par value $34,500,000 $ 9,660
====================================================================================================================
</TABLE>
(1) In accordance with rule 457(o) under the Securities Act of 1933, as
amended, the number of shares being registered and the proposed maximum
offering price per share are not included in this table.
(2) Estimated solely for purposes of calculating the registration fee.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell securities, and we are not soliciting offers to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 16, 1999
PROSPECTUS
_________________ Shares
[USABANC.COM LOGO]
Common Stock
--------------------
This is an Offering of ________________ shares of common stock of
USABanc.com, Inc.
USABanc.com's common stock is quoted on the Nasdaq SmallCap Market
under the symbol "USAB." We have made application for quotation of our common
stock on the Nasdaq National Market under the same symbol. On July 15, 1999,
the last reported sale price of our common stock was $13.25 per share.
See "Risk Factors" beginning on page 7 to read about risks that you
should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The shares of common stock offered are not deposits, savings accounts
or other obligations of a bank or savings association and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
-------------
Per Share Total
--------- -----
Initial price to public........................... $ $
Underwriting discount............................. $ $
Proceeds, before expenses, to USABanc.com......... $ $
The underwriters may, under certain circumstances, purchase up to an
additional ____________ shares of common stock from USABanc.com at the initial
price to public less the underwriting discount.
---------------
The underwriters expect to deliver the shares against payment in New
York, New York on _______________, 1999.
---------------
Sandler O'Neill & Partners, L.P.
---------------
The date of this prospectus is _______________, 1999.
<PAGE>
PROSPECTUS SUMMARY
This summary does not contain all the information you should consider
before investing in our common stock. You should read the following summary
together with the more detailed information and financial statements contained
elsewhere in this prospectus.
USABanc.com, Inc.
USABanc.com is a financial services company dedicated to becoming a
leading provider of financial products and services over the Internet. We
believe the financial services industry has the highest degree of functionality,
next to research, over the Internet. We will strive to provide the ultimate
application for Internet users through our Website, www.usabanc.com. To achieve
our objective, we have created a dynamic Internet banking platform that will
offer our customers a convenient, cost-efficient, secure and user-friendly
medium for financial products and services, together with an entertaining
on-line experience that we believe no other financial based site provides. In
addition to offering traditional banking products and services, our site will
provide users portal applications such as live news feeds, timely search and
retrieval services, message boards, stock quotes, broker/dealer services and
links to other interesting sites on the Internet. Users can currently purchase
certificates of deposit and obtain stock quotes through our Website. We expect
www.usabanc.com to begin offering our Internet banking and brokerage products
and services in early August 1999.
International Data Corporation, an independent market research firm,
reports that the number of worldwide Internet users is projected to grow from
approximately 97 million in 1998 to approximately 320 million by 2002.
International Data Corporation forecasts that total worldwide commerce on the
Internet will grow from an estimated $32.4 billion in 1997 to an estimated $1.0
trillion in 2003. We intend to capitalize on the increasing consumer use of the
Internet by launching and aggressively marketing our Internet banking platform
on a national basis. Although our origin is in Philadelphia as a traditional
"brick and mortar" bank, we believe we can provide financial services more
efficiently and economically to customers nationally through electronic delivery
channels rather than through further expansion of traditional "brick and mortar"
branch network delivery facilities. Through our Internet banking operations, our
customers will be able to access account data and information about products and
services we offer and conduct banking activities 24-hours-a-day every day of the
year from anyplace.
We intend to execute our strategy of becoming a leading provider of
financial products and services over the Internet by:
o Establishing the USABanc.com Website as a leading and comprehensive
source for financial services on the Internet. We have created our
Internet banking platforms to allow our customers to choose between
platforms using either a Hypertext Mark-up Language, more commonly
known as "HTML," or Macromedia's innovative "Flash" technology. We
expect the HTML Website to begin offering our Internet banking and
brokerage products and services in early August 1999, and we expect
the "Flash" Website to begin offering products and services in
September 1999. We believe the "Flash" platform will significantly
enhance our customers' experience on our Website and differentiate us
from other Internet banks. Additionally, because our "Flash" platform
was developed in anticipation of the greater bandwidth that is now
widely available, we will be able to deliver our services at the
speed expected by today's on-line user. We believe www.usabanc.com's
unique audio/visual interface will attract users who demand not only
efficient and convenient financial services, but entertaining content
as well. We intend to attract customers by providing the following
benefits:
o Offering a broad selection of financial products and services.
o Offering attractive interest rates and low or no fees.
o Building national brand awareness through extensive marketing
efforts.
o Offering superior service, convenience and ease of access.
2
<PAGE>
o Offering interesting and entertaining content through a real-time
interactive medium.
o Offering advanced security measures.
o Pursuing strategic alliances and affinity partnerships. We are
currently negotiating strategic marketing agreements with several
leading Internet entities. We intend to establish an affinity
marketing program which will allow various trade groups and other
organizations to brand and market USABanc.com's savings and
investment products. These programs will allow us to reach targeted
groups of consumers with the support of a virtual endorsement of each
parent community. Additionally, we plan to implement several
innovative customer acquisition and retention programs designed for
new and existing USABanc.com customers. Our cost per new customer
acquisition will initially be higher than industry averages, but we
expect these costs to decline as awareness of the USABanc.com brand
increases. We intend to co-brand these programs with select
USABanc.com partners. We believe such co-branding will maximize
customer conversion effectiveness and ultimately reduce the cost per
new customer acquisition.
o Intensive national marketing campaign. We intend to use a
national marketing campaign to expand our brand awareness. The
campaign will include Internet advertising through portals such
as Yahoo! and Excite, television campaigns on networks such as
CNBC and MSNBC, radio advertising such as our spots on the Howard
Stern Show, and newspaper and magazine advertising in national
publications such as the Wall Street Journal, New York Times and
Fast Company. We expect our costs of acquiring new customers to
decline as we gain market share and brand recognition. As a
result of our marketing efforts, we expect to incur losses in
1999 and 2000. As we increase our market share and become a
leading provider in this early stage of Internet banking, we
expect our revenues to increase and to return to profitability in
2001, although there can be no assurance that we will return to
profitability within such time frame.
o Generating sponsorship and advertising revenues. We intend to
establish advertising relationships by offering advertising
opportunities to leading brand marketers and merchants in traffic
intensive areas of the USABanc.com network. These merchants
will receive exposure through banner advertising combined
with promotional offers in exchange for which we will collect a fee
based on various arrangements, such as cost per click for each new
visit to the third-party Website made through our network, and/or a
share of revenues from each sale to USABanc.com users.
o Expanding our Lending Efforts. Since our acquisition of vBank in
November 1995, we have pursued an aggressive growth strategy,
characterized by purchases of pools of primarily performing loans in
the Mid-Atlantic region secured by single-family residential,
multi-family residential and commercial properties. Our net loan
portfolio has grown from $7.0 million at December 31, 1995 to $110.0
million at March 31, 1999. We intend to increase our originations of
commercial real estate and commercial business loans. We also intend
to continue to purchase primarily performing loan pools at a
discount. These loans may consist of multi-family residential loans,
commercial property loans and one-to-four family residential mortgage
loans.
USABanc.com is a $186.2 million financial institution with $110.0
million in loans and $125.8 million in deposits at March 31, 1999. Our executive
offices are located at 1535 Locust Street, Philadelphia, Pennsylvania.
USABanc.com's telephone number is 888.USA.BANC and our Website address is
www.usabanc.com. The information contained on our Website is not incorporated by
reference into this prospectus.
Except as otherwise indicated, references to "we," "our," and
"USABanc.com" generally refer to USABanc.com, Inc. (formerly USABancShares,
Inc.) and its subsidiaries on a consolidated basis. References to "vBank" refer
to USABanc.com's wholly owned bank subsidiary, vBank, a state savings bank
(formerly BankPhiladelphia). References to our "common stock" refer to
USABanc.com's Class A common stock, unless otherwise indicated. References to
"FHLB" are to the Federal Home Loan Bank of Pittsburgh and references to "FDIC"
are to the Federal Deposit Insurance Corporation. Except as otherwise indicated,
the information in this prospectus (x) has been adjusted to reflect (1) a 33%
stock dividend paid on July 18, 1997 to shareholders of record as of July 1,
1997, (2) a 33% stock dividend paid on August 17, 1998 to shareholders of record
as of August 3, 1998, and (3) a two-for-one stock split effected in the form of
a dividend paid on June 15, 1999 to shareholders of record as of June 1, 1999;
(y) assumes that the underwriters do not exercise their over-allotment option;
and (z) does not give
3
<PAGE>
effect to any change as a result of the Offering in the exercise price of
currently outstanding warrants to purchase shares of our common stock or the
number of shares of common stock which may be acquired upon the exercise of such
warrants. All trademarks or registered trademarks or service marks appearing
herein other than USABanc.com are trademarks or registered trademarks or
service marks of the respective companies that use them.
The Offering
The following information assumes that the underwriters do not exercise
the option granted by USABanc.com to purchase additional shares in the Offering.
See "Underwriting." The amount of shares to be outstanding after the Offering
excludes 216,460 shares issuable upon the conversion of our Class B common stock
and __________ shares issuable upon the exercise of outstanding options and
warrants as of __________, 1999. See "Description of Capital Stock."
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered................................... _________________ shares
Common Stock to be outstanding after the
Offering............................................ _________________ shares (1)
Use of proceeds........................................ To invest additional capital in vBank to launch our national
marketing campaign and to fund the infrastructure necessary
for the growth of our Internet banking operations, to
maintain our well-capitalized status and for general
corporate purposes. See "Use of Proceeds."
Nasdaq SmallCap and proposed National Market
symbol.............................................. USAB
</TABLE>
- ------------------------------
(1) Based on shares outstanding at ____________________, 1999.
4
<PAGE>
Selected Consolidated Financial and Other Data
Set forth below are the selected consolidated financial and other data
of USABanc.com. This financial data is derived in part from, and it should be
read in conjunction with, USABanc.com's consolidated financial statements and
related notes included in this prospectus beginning on page F-1. USABanc.com was
formed on March 14, 1995. All financial information is derived from our
consolidated financial statements. Interim financial results, in the opinion of
our management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of our results of operations and
financial position. The results of operations for an interim period are not
indicative of results that may be expected for a full year or any other interim
period.
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
--------------------- ---------------------------------------------------
1999 1998 1998 1997 1996 1995
-------- -------- -------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets............................ $186,230 $102,535 $165,106 $89,326 $38,146 $25,786
Loans receivable, net................... 110,013 59,345 102,138 56,002 16,530 6,997
Securities(1)........................... 64,928 29,334 44,144 24,454 16,325 10,068
Deposits................................ 125,765 82,480 114,387 70,474 27,973 20,799
Borrowings(2)........................... 34,163 6,634 35,305 12,638 5,050 --
Guaranteed Preferred Beneficial
Interests in Subordinated Debt ..... 10,000 -- -- -- -- --
Stockholders' equity.................... 13,696 12,811 13,597 5,366 4,895 4,659
Non-performing assets, net of
discount(3)......................... 2,000 202 2,022(4) 287 191 --(5)
Book value per share(6)................. $ 6.47 $ 8.53 $ 6.43 $ 4.95 $ 4.63 $ 4.41
Selected Operations Data:
Total interest income................... $ 3,881 $ 2,287 $ 12,352 $ 4,879 $ 2,942 $ 171
Total interest expense.................. 2,155 1,174 6,454 2,530 1,225 96
-------- -------- -------- ------- ------- -------
Net interest income..................... 1,726 1,113 5,898 2,349 1,717 75
Provision for loan losses............... 100 35 510 415 125 50
-------- -------- -------- ------- ------- -------
Net interest income after provision
for loan losses..................... 1,626 1,078 5,388 1,934 1,592 25
Total non-interest income............... 320 221 759 314 103 2
Total non-interest expense.............. 1,256 618 3,700 2,457(7) 1,501 305
-------- -------- -------- ------- ------- -------
Income before income taxes.............. 690 681 2,447 (209) 194 (278)
Income tax provision.................... 276 268 957 17 68 --
-------- -------- -------- ------- ------- -------
Net income (loss)....................... $ 414 $ 413 $ 1,490 $ (226) $ 126 $ (278)
======== ======== ======== ======= ======= =======
Net income (loss) per share
(diluted)(6)........................ $ 0.09 $ 0.12 $ 0.35 $ (0.10) $ 0.06 $ (0.14)
======== ======== ======== ======= ======= =======
Weighted average number of shares
outstanding(6)...................... 4,231,244 3,210,540 3,971,672 2,164,727 2,112,357 1,920,325
Weighted average number of shares
(diluted)(6)........................ 4,465,770 3,393,776 4,239,638 2,164,727 2,112,357 1,920,325
Performance Ratios(8):
Return (loss) on average total assets 0.94% 1.20% 1.16% (0.09)% 0.36% (1.29)%
Return (loss) on average stockholders'
equity.............................. 12.13 18.18 12.81 (1.10) 2.57 (13.00)
Net interest margin(9).................. 4.26 4.86 4.87 4.53 6.11 2.07
Interest rate spread(9)................. 3.96 4.11 4.54 3.68 5.29 1.68
Efficiency ratio(10).................... 63.12 47.72 58.93 79.35 82.76 399.62
Non-interest expense to average
total asset......................... 0.71 0.45 2.88 1.93 2.35 1.43
Average interest-earning assets to
average interest-bearing
liabilities......................... 105.60 114.71 106.14 117.50 118.83 107.44
(Continued on next page)
5
<PAGE>
Asset Quality Ratios:
Non-performing loans, net of discount,
to total loans, net of discount(3).. 1.87 0.49 1.89 0.50 1.12 --(5)
Non-performing assets, net of discount,
to total assets(3).................. 1.10 0.28 1.22 0.32 0.50 --(5)
Allowance for loan losses to total
loans, net of discount............... 1.05 1.00 1.02 1.01 1.07 0.84
Allowance for loan losses and purchase
discount as a percentage of total
loans............................... 5.20 8.35 5.85 8.88 10.17 5.89
Allowance for loan losses to total non-
performing loans, net of discount(3) 58.75 294.55 53.72(11) 197.96 95.39 --(5)
Capital Ratios(12):
Stockholders' equity to assets.......... 13.6 8.0 8.2 6.0 12.8 18.1
Tier 1 leverage capital ratio........... 10.3 12.4 8.5 5.4 12.9 14.9
Tier 1 risk-based capital ratio......... 12.2 16.5 10.3 7.0 24.6 17.1
Total risk-based capital ratio.......... 16.6 17.2 11.2 7.9 25.6 40.1
</TABLE>
- -------------------------
(1) Includes securities classified as held-to-maturity and available for sale.
(2) Consists of FHLB advances and collateralized borrowings.
(3) Non-performing loans consist of non-accrual loans and accruing loans 90
days or more overdue. Non-performing assets consist of non-performing
loans and other real estate owned.
(4) The increase in non-performing assets during the year ended December 31,
1998 was due, in large part, to a single commercial real estate loan which
became non-performing during the third quarter of 1998. See Note 11. See
also "Business--Asset Quality--Delinquent Loans and Non-performing
Assets."
(5) vBank had no non-performing loans or assets at December 31, 1995.
(6) All per share data has been adjusted to reflect (a) a 33% stock dividend
paid on July 18, 1997, (b) a 33% stock dividend paid on August 17, 1998
and (c) a two-for-one stock split effected in the form of a dividend paid
on June 15, 1999, and has been calculated based on the weighted average
number of shares outstanding during the period, assuming the conversion of
the shares of Class B common stock into shares of common stock. See
"Certain Relationships and Related Transactions."
(7) Includes a one-time charge of $344,000 during the fourth quarter of 1997
as a result of the recognition of compensation expense due to the
mandatory conversion of our Class B common stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(8) With the exception of end of period ratios, all ratios are based on
average monthly balances and are annualized where appropriate.
(9) Net interest margin represents net interest income as a percentage of
average interest-earning assets, and interest rate spread represents the
difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities.
(10) Efficiency ratio represents non-interest expense as a percentage of the
aggregate of net interest income and non-interest income (less
gains/losses on sales of assets and other non-recurring items).
(11) The significant decline in this ratio during the year ended December 31,
1998 was impacted by a single acquired commercial real estate loan.
Management believes that this loan does not present a significant risk of
loss to vBank on the basis of a current appraisal on the real estate
securing the loan, the loan-to-value ratio thereon, the purchase discount
and the specific reserve applied to such loan. As a general rule, in
connection with vBank's purchase of loan pools, a portion of the
discounted purchase price for each loan is not accreted into income but,
rather, is identified as a cash discount and is not amortized into income
until final resolution or collection of principal and interest on the loan
in question. See "Risk Factors--Our Yield on Loans Purchased at a Discount
is Uncertain" and "Business--Asset Quality--Delinquent Loans and
Non-performing Assets."
(12) The ratios are presented on a consolidated basis. For information on
USABanc.com's and vBank's regulatory capital requirements, see "Regulation
of USABanc.com and vBank."
6
<PAGE>
RISK FACTORS
You should consider carefully the following risks before making a
decision to buy our common stock. If any of the following risks actually occur,
our business, financial condition or results of operations would likely suffer.
In such case, the trading price of our common stock could decline, and you may
lose all or part of the money you paid to buy our common stock. The risk factors
below do not necessarily appear in order of importance. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial
may also impair our business operations.
We expect to incur substantial losses and we may not achieve or maintain
profitability
Although we are currently profitable, we have recently expended
significant resources on technology, Website development, marketing, hiring of
personnel and other startup costs related to the development and operation of
our Internet banking platform. This resulted in a $270,000 increase in
advertising and marketing expenses and compensation costs for the three months
ended March 31, 1999 compared to the first three months of 1998. We expect to
spend approximately $7.0 million to promote our Internet banking operations
during the second half of 1999, and we expect to spend an additional $10 million
over the next two years. We intend to continue to expend significant financial
and management resources in upgrading our internal control systems, customer
service systems and financial reporting systems to accommodate the growth of
USABanc.com. As a result of these efforts, we expect to incur substantial losses
in 1999 and 2000. If we are successful in executing our business plan, we expect
to be profitable in 2001. We intend to achieve profitability by obtaining
on-line banking market penetration and brand awareness, thus allowing us to
continually reduce our cost per new customer acquisition. Although management
expects to return to profitability in 2001, there can be no assurance that we
will return to profitability within such time frame. To the extent that
increases in operating expenses precede or are not subsequently followed by
increased revenues, our business, financial condition, results of operations and
cash flows will be materially adversely affected. There can be no assurance that
our revenues will increase or even continue at their current level or that we
will achieve or maintain profitability or generate positive cash flow from
operations in future periods. Because of these projected operating losses, the
market price of our common stock could decline. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
We face strong competition
The financial services industry is highly competitive and is rapidly
evolving, both on-line and through traditional channels. In implementing our
Internet strategy, we face strong competition from more established providers of
direct-marketed savings and investment products, such as Wells Fargo, First
Union, E-Trade, Siebert Financial and other Internet-based financial
institutions, such as Net.B@nk, Telebanc and Wingspan Bank. We also face
competition from traditional banks and non-bank financial institutions, many of
which are adopting or have adopted their own Internet strategies. Additionally,
new competitors and competitive factors are likely to emerge, particularly in
light of the rapid development of the Internet and electronic commerce and the
relatively low barriers to entry. As a consequence, other financial services
companies may be able to adopt strategies similar to ours with relative ease.
Most of our competitors have financial and other resources greater than ours and
have other competitive advantages over us. There can be no assurance that we
will be able to successfully compete with our competitors.
Internet banking customers may be more price sensitive and more willing
to try new technologies than customers of traditional financial services firms,
which rely on branches and face-to-face customer service. Consequently, the
following competitive factors are of particular importance to the successful
execution of our Internet banking strategy and our profitability:
o price competition for deposits and borrowings;
o introduction of new products by us and our competitors;
o changes in the mix of products and services we sell; and
o the level of use of the Internet for banking services and electronic
commerce generally.
7
<PAGE>
We may not succeed in implementing our Internet banking strategy
Our success depends on our ability to execute our Internet banking
strategy. The USABanc.com Website was introduced to the public in April 1999.
The Website currently allows customers to open certificates of deposit and
view the future banking and brokerage services we will offer. We do not expect
to begin offering our Internet banking and brokerage products and services until
early August 1999, which makes it difficult to evaluate the effectiveness of our
Internet banking strategy. We may not succeed in implementing our business
strategy and, even if we do succeed, such strategy may not have the favorable
impact on operations that we anticipate. We may not be able to manage
effectively the expansion of our Internet bank operations or achieve the rapid
execution necessary to fully capitalize on the market for our electronic
services or offset the significant expenditures we are incurring to implement
our Internet banking strategy. In addition, the market for financial products
and services through the Internet is new and evolving, and the degree to which
customers will use it for their financial transactions is not yet fully
determined. If we are unable to manage growth effectively, or to otherwise
implement our business strategy, our business, financial condition, results of
operations and cash flows could be materially adversely affected.
Our success depends on the continued growth in use and commercial viability of
the Internet
Our future success depends substantially on continued growth in use of
the Internet in general and for commercial and financial services transactions
in particular. The Internet is a relatively new commercial marketplace and may
not continue to grow. Consequently, Internet banking may not become as widely
accepted as traditional forms of banking. Critical issues concerning the
commercial use of the Internet such as reliability, cost, ease of access,
quality of service and security will impact the growth of Internet use. If
Internet use does not continue to grow, our business, financial condition,
results of operations and cash flows could be materially adversely affected.
Additionally, if the number of Internet users and the level of use
continues to grow, the Internet's technical infrastructure may become unable to
support the demands placed upon it. Furthermore, third party vendors might not
be able to timely and adequately develop the necessary technical infrastructure
for significant increases in electronic commerce, such as a reliable network
backbone, or introduce performance improvements, such as high-speed modems. The
Internet could also lose its viability due to delays in the development or
adoption of new standards and protocols required to handle increased levels of
activity or due to increased governmental regulation. Changes in or insufficient
availability of telecommunications services could produce slower response times
and adversely affect use of the Internet. Furthermore, the general public's
security concerns regarding the transmittal of confidential information, such as
credit card numbers, over the Internet might persist or even worsen. Issues like
these could lead to resistance against acceptance of the Internet as a viable
commercial marketplace. To the extent the Internet's technical infrastructure or
security concerns adversely affect its potential growth, our business, financial
condition, results of operations and cash flows could be materially adversely
affected.
Network and computer systems could fail, which could adversely affect our
business
Our computer systems and network infrastructure could be vulnerable to
unforeseen problems. Because we intend to conduct a substantial portion of our
business over the Internet and outsource several critical functions to third
parties, our operations depend on our ability, as well as that of our
third-party service providers, to protect our computer systems and network
infrastructure against damage from fire, power loss, telecommunications failure,
physical break-ins or similar catastrophic events. Customers may become
dissatisfied by any system failure that interrupts our ability to provide our
services to them. Sustained or repeated system failures would reduce the
attractiveness of the electronic banking services which we intend to provide.
Slower response time or system failures may also result from straining the
capacity of our software or hardware due to an increase in the volume of
services delivered through our servers. To the extent that we do not effectively
address any capacity constraints or system failures, our customers could seek
other providers of banking services. Any damage or failure that causes
interruptions in our operations could materially adversely affect our business,
financial condition, results of operations and cash flows. See
"Business--Security."
During the third quarter of 1999, we expect to complete a conversion of
our Intrieve data processing system to EDS-Miser III. We believe we have
adequately planned for the conversion, but there are inherent risks associated
with converting to a new system. We may not be able to commence use of the new
system within our planned time frame or the system may not function properly
when it is installed. Such delays or malfunctions could lead to the allocation
of
8
<PAGE>
unplanned resources and the expenditure of additional funds. In addition,
significant problems with the conversion could adversely affect our ability to
successfully implement portions of our strategy on a timely basis.
Our security could be breached, which could damage our reputation and deter
customers from using our services
We must protect our computer systems and network from physical
break-ins, security breaches and other disruptive problems caused by the
Internet or other users. Computer break-ins could jeopardize the security of
information stored in and transmitted through our computer systems and network,
which would likely adversely affect our ability to retain or attract customers,
could damage our reputation and could subject us to litigation. Although we
intend to rely on encryption and authentication technology to provide the
security and authentication necessary to effect secure transmissions of
confidential information and to continue to implement security technology and
establish operational procedures to prevent break-ins, damage and failures,
these security measures may fail. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments could result in a
compromise or breach of the algorithms vBank and its third-party service
providers use to protect customer transaction data. If any compromise of our
security were to occur, it could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
We are part of a rapidly evolving electronic commerce market. Market
acceptance of Internet banking depends substantially on widespread adoption of
the Internet for general commercial and financial services transactions. If
another provider of commercial services through the Internet were to suffer
damage from a physical break-in, security breach or other disruptive problem
caused by the Internet or other users, the growth and public acceptance of the
Internet for commercial transactions could suffer. Such an event could deter
potential customers of vBank or cause customers to leave vBank and thereby
materially adversely affect our business, financial condition, results of
operations and cash flows.
Rapidly changing technologies may cause us to delay introduction of new
products, services and enhancements, which may result in a loss of existing
customers or a failure to attract new customers
Our future success will depend on our ability to adapt to rapidly
changing technologies. We also will have to enhance existing products and
services and develop and introduce a variety of new products and services to
address our customers' changing demands. If we are unable to develop and bring
additional products and services to market in a timely manner, we could lose
market share to competitors who are able to offer these services, which could
materially adversely affect our business, financial condition, results of
operations and cash flows.
We intend to outsource many essential services to third-party providers who may
terminate their agreements with us, resulting in interruptions to our Internet
banking operations
We intend to receive essential technical and customer service support
from third-party providers. We expect to outsource Webhosting, check processing,
check imaging, electronic bill payment, Internet processing, Internet software,
statement rendering services and other additional services to third party
vendors. Specifically, we expect to receive essential Webhosting, electronic
bill payment and core systems processing services on an outsourced basis from
Electronic Data Systems Corporation ("EDS"). We expect that the agreements we
enter into with each service provider will be cancelable without cause by either
party upon specified notice periods. If one of our third-party service providers
terminates its agreement with us and we are unable to replace such provider with
another service provider, our operations may be interrupted. If an interruption
were to continue for a significant period of time, our business, financial
condition, results of operations and cash flows could be materially adversely
affected.
If our application for the servicemark is challenged, we may lose the right to
use the "USABanc.com" brand name
Our success in introducing new financial products and services through
the Internet and attracting new customers will depend in part upon our ability
to increase awareness of the USABanc.com brand and any other brands we may use.
We currently do not own a federal registration for the servicemark
"USABanc.com," although an application is pending. We are making a substantial
investment in the promotion and marketing of the USABanc.com brand. If a
competitor successfully challenges our ability to use the name "USABanc.com," we
could lose the right to
9
<PAGE>
use the "USABanc.com" brand name and the benefits of the brand awareness we are
spending significant resources to develop.
Our competitive position depends on our ability to attract and retain key
employees
Our success depends heavily on the expertise and guidance of our
President and Chief Executive Officer, Kenneth L. Tepper, and certain other
senior executive officers, including Brian M. Hartline, our Chief Financial
Officer. We have entered into employment agreements with Mr. Tepper and Mr.
Hartline. We do not maintain key-man life insurance on Mr. Tepper or Mr.
Hartline. If we lose the services of Mr. Tepper or Mr. Hartline, or if we are
unable to attract additional qualified employees, our business would likely be
adversely affected. See "Management."
Our existing shareholders have significant control of our management and
affairs, which they could exercise against your best interests
Upon completion of this Offering, our directors and executive officers
as a group will beneficially own approximately ___% of our outstanding common
stock (_ % assuming the exercise of all outstanding options). Kenneth L. Tepper,
USABanc.com's President and Chief Executive Officer, is the holder of all of the
issued and outstanding Class B common stock of USABanc.com, which is convertible
into 216,460 shares of our common stock on January 1, 2001. Assuming the
conversion of Mr. Tepper's Class B common stock, our directors and executive
officers as a group would beneficially own approximately ___% of our outstanding
common stock ( _____% assuming the exercise of all outstanding options) upon
completion of this Offering. As a result, our directors and executive officers
as a group can exercise significant control over our management and affairs,
including the election of directors, a change in control of USABanc.com and the
determination of all other matters requiring shareholder approval. This
concentration of ownership may have the effect of delaying or preventing a
change of control of USABanc.com that may be in your best interests.
Additionally, as the holder of all of our issued and outstanding Class B common
stock, Mr. Tepper has the right to elect one-third of the directors of
USABanc.com. Mr. Tepper waived such right for our annual meeting held on
July 15, 1999, but there can be no guarantee that Mr. Tepper will waive his
voting rights in the future. See "Management--Security Ownership of Certain
Beneficial Owners and Management" and "Description of Capital Stock--Common
Stock--Voting Rights."
Changes in interest rates could adversely affect us
Like most financial institutions, our results of operations are
primarily dependent on net interest income. Net interest income results from the
"margin" between interest earned on interest-earning assets, such as investments
and loans, and interest paid on interest-bearing liabilities, such as deposits
and borrowings. As of March 31, 1999, based on certain assumptions, vBank's
interest-bearing liabilities that were estimated to mature or reprice within one
year exceeded similar interest-earning assets by $48.7 million, or 27.0% of
total interest-earning assets.
Interest rates are highly sensitive to many factors that are beyond our
control. Some of these factors include: governmental monetary policies;
inflation; recession; unemployment; the money supply; domestic and international
economic and political conditions; and domestic and international crises.
Changes in interest rates could have adverse effects on our operations.
Specifically,
o Historically, we have relied on short-term and institutional deposits
as a source of funds, and we will continue to rely on these types of
deposits pursuant to our Internet strategy. Our ability to retain
these deposits is directly related to the rate of interest paid by
us.
o When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets, in a particular period of time, a
significant increase in interest rates could adversely impact our net
interest income.
o Changes in interest rates could adversely affect:
o the volume of loans we originate;
10
<PAGE>
o the value of our purchased loans and other
interest-earning assets, particularly the investment
securities and trust preferred securities portfolio;
o our ability to recognize income on loans purchased at a
discount; and
o loan repayments and prepayments.
Our commercial lending activity exposes us to credit risks
At March 31, 1999, a majority of our real estate loan portfolio
consisted of loans secured by multi-family residential real estate and
commercial real estate properties. In addition, as of March 31, 1999, we had an
aggregate of $1.1 million of commercial business loans and we expect to increase
our emphasis on commercial business lending in the future. Furthermore, all of
our commercial business loans which are secured by real estate have in the past
been classified as real estate loans. We make commercial real estate and
commercial business loans following analysis of credit risk, the value of the
underlying collateral and other more intangible factors. This commercial lending
activity exposes us to risks, particularly in the case of loans to small
businesses and individuals. These risks include possible errors in our credit
analysis, the uncertainty of the borrower's ability to repay the loans, the
uncertainty of future economic conditions and the possibility of loan defaults.
Commercial lending generally includes higher interest rates and shorter terms of
repayment than non-commercial lending. Accordingly, we are subject to greater
credit risk with our commercial lending. As of March 31, 1999, we had no
non-performing commercial business loans and $832,000 of non-performing loans
secured by commercial real estate.
Our loan acquisition strategy involves significant risks
In addition to originating loans, our lending activities include
identifying and purchasing loans which we believe to be undervalued at
discounts. We have historically purchased loans either from institutions which
were seeking to eliminate certain loans or categories of loans from their
portfolios or in connection with the failure or consolidation of other financial
institutions. Our loan acquisition strategy subjects us to risks, including some
risks not experienced by financial institutions engaged in more traditional
lending activities. There can be no assurance that this component of our
operations will continue to provide the same level of profitability we have
experienced in the past. Our loan acquisition strategy is subject to the
following risks:
o the shrinking pool of assets available because the decreasing
number of failed or failing financial institutions that are being
resolved by the FDIC may result in us not meeting our targeted
level of loan purchases;
o the competitive nature of the market for loan pools may result in
us having to acquire such loans at less attractive prices than we
have in the past;
o the cost of resolving non-performing loan pools may be greater
than that contemplated at the time of acquisition;
o the accretion of the discount associated with purchased loans is
subject to management's assumptions with respect to the estimated
value of the loans and future cash flows, all of which is
uncertain and is subject to change, resulting in inter-period
variations in income; and
o geographic concentrations of purchased loans, including loans in
geographic areas with which we have little or no familiarity.
We also originate loans by purchasing participations in loans from
other financial institutions. We consider such loan participations to be
originations because we underwrite each participation as an origination and the
participation is closed using our underwriting criteria. Although we have
participated in loans with four other financial institutions, as of March 31,
1999, we had seven loan participations with an aggregate principal balance of
$10.7 million with affiliates of a local specialty finance and real estate
company. In each of these seven loan participations, our interest and rights to
principal recovery are senior to the rights of the junior participant, are
collateralized by assets of an affiliate of the specialty finance company and
are serviced by the specialty finance company. The senior rights created under
the
11
<PAGE>
participation agreements were significant considerations in our qualification of
the loan. Although the finance company has agreed, in several (but not all)
transactions, to cause the participated loans owned by its affiliates which may
become non-performing to be substituted for performing underlying loans, we are
subject to risk to the extent the finance company experiences financial
difficulties and is unable to comply with its replacement obligations.
Furthermore, to the extent the finance company experiences financial
difficulties, our ability to receive principal and interest payments on a timely
basis from the finance company, as servicer of the loans, could be temporarily
interrupted.
We could sustain losses if our asset quality deteriorates
Our results of operations are significantly dependent on the quality
of our assets, which is measured by the level of our non-performing assets.
Non-performing assets consist of non-accrual loans, net of discount, loans which
are 90 days or more overdue but still accruing interest and other real estate
owned. At March 31, 1999, our non-performing assets, net of discount, amounted
to $2.1 million or 1.10% of total assets. All of the $2.1 million of
non-performing assets, net of discount, consisted of purchased loans. Although
we purchase loan pools at a discount to the face value of such loans, we face
the risk that in the event one or more of such purchased loans becomes
non-performing, the underlying discount may not be sufficient to cover our cost
of acquiring, servicing and, if necessary, taking legal action, with respect to
such loans. Although we have recently enhanced our policies and procedures
relating to monitoring asset quality and we continue to devote a significant
amount of time and resources to the identification, collection and work-out of
non-performing assets, the real estate markets and the overall economy in the
markets where we originate and purchase loans are likely to be significant
determinants of the quality of our assets in future periods and, thus, our
financial condition and results of operations.
Increases in our reserve coverage for loan losses would adversely affect our
business
At March 31, 1999, our allowance for loan losses amounted to 1.05% of
total loans, net of discount, and 58.75% of total non-performing loans, net of
discount. In addition, the applicable purchase discount for an individual
acquired loan may act as an additional reserve against loss for such loan to the
extent that the collectability of such loan becomes questionable. Although we
believe that we have established an adequate allowance for losses on our loan
portfolio, including purchased loans, material future additions to the allowance
for loan losses may be necessary due to changes in economic conditions, the
performance of our loan portfolio and increases in both loan originations and
purchases. In addition, the Pennsylvania Department of Banking and the FDIC, as
an integral part of their examination process, periodically review our allowance
for loan losses and could require increases in such allowance. Increases in the
allowance for loan losses would adversely affect our results of operations.
Our yield on loans purchased at a discount is uncertain
At the time we purchase a pool of loans, the difference between the
note amount and the purchase price is accounted for as a discount. The purchase
price is based on our estimate of the value of the loan, including an estimate
of future cash flows. In accordance with generally accepted accounting
principles, to the extent we believe a purchased loan will be collected in full,
the discount associated with such purchased loan will be recognized as an
increase in the yield of the loan and will be included as interest income over
the estimated life of the loan. To the extent that we believe full repayment of
principal and interest is not reasonable and probable, the discount will be set
up as a cash discount and will not be recognized as an increase in the yield of
the loan until all principal and interest is received or a final resolution is
determined. To the extent that cash flows from the purchased loans may be
uncertain, recognition of this income will also be uncertain. The yield on our
portfolio of loans which have been purchased at a discount is subject to
significant inter-period variations due to the fact that the timing of actual
repayments and prepayments of the loans may differ from the original
assumptions. Such inter-period variations can also result from the
reclassification of loans from performing to non-performing status.
We rely on short-term deposits
We employ a wholesale funding strategy consisting primarily of
marketing retail and non-retail certificates of deposit. We have been able to
maintain sufficient funds to support our lending activities by offering rates of
interest on certificates of deposit marginally higher than rates offered by
other banks on comparable deposits. As of March 31, 1999, $109.0 million, or
86.7%, of our deposits consisted of certificates of deposit. Of this amount,
$74.0 million, or 67.8%, were placed with institutional investors. In addition,
as of March 31, 1999, $52.8 million, or 48.4%, of our total
12
<PAGE>
certificates of deposit were due to mature within one year. In the current
economic environment of low interest rates, we have been focusing on extending
the maturities of our certificates of deposit and borrowings. We have extended
the average maturities on our certificates of deposit to approximately 16
months. Our ability to attract and maintain deposits, as well as our cost of
funds, has been, and will continue to be, significantly affected by money market
rates and general economic conditions. In addition, our ability to internally
fund any additional growth through lending will be impacted by our ability to
maintain or generate deposits. In the event we increase interest rates further
to retain deposits, earnings may be negatively affected.
We are vulnerable to unfavorable economic conditions
The performance of financial institutions like vBank is sensitive to
general economic conditions. Unfavorable economic conditions at the local,
national or international level may adversely affect vBank's performance. For
example, much of the United States experienced a significant economic decline in
the late 1980's and early 1990's. This decline adversely affected the real
estate market and the banking industry. As a result of this decline, loan
repayment delinquencies increased and the value of properties underlying secured
loans declined. Numerous bank failures resulted in the placement of many
properties in the hands of a federal banking agency with the primary objective
of prompt liquidation. In addition, recent activity in financial markets in the
United States and the rest of the world has demonstrated an increasing
interdependency among the various world markets and economies and has raised
concerns among those in the banking industry. The implications of this
interdependency are very uncertain and present risks to financial institutions
such as vBank, particularly in light of the current turmoil in some foreign
markets and economies. Economic conditions are unpredictable and the potential
for downturns is always present.
Although we have historically focused on acquiring loans in the
Mid-Atlantic region of the United States, we have acquired loans secured by real
estate located in a number of other states including Texas, Florida and
California and we may acquire loans throughout the nation. In the future, we may
acquire or originate loans throughout the United States through our Internet
banking operations or through other means. To the extent such loans are secured
by real estate outside the Mid-Atlantic region, such loans may present a greater
risk of collectability than loans located in our historical primary market area.
Thus, adverse economic conditions affecting any of these market areas could have
a negative impact on our financial condition and results of operations.
Problems related to "Year 2000" issues could adversely affect our business
We are aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000" problem
is pervasive and complex. Virtually every computer operation will be affected in
some way by the rollover of the two digit year value to 00. The issue is whether
computer systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize this information
could generate incorrect data or cause a system to fail. We have consulted with
our outside vendors as well as our third-party computer and software providers
and are preparing our systems to operate without significant modification as a
result of Year 2000 issues (including any new hardware and software which are
integral to the proposed conversion of our computer-based systems). We have not
been advised by any of our primary outside vendors and service providers that
they do not have plans in place to address and correct any Year 2000 problems.
Nevertheless, unanticipated problems could cause our systems to malfunction or
cause us to incur significant costs to remediate such problems. We anticipate
incurring approximately $120,000 in additional costs during the year ending
December 31, 1999 related to the proposed implementation of our Year 2000 Plan.
See "Management's Discussion and Analysis and Analysis of Financial Condition
and Results of Operations--Year 2000 Compliance."
We could be adversely affected by government regulation
Bank regulation. We are subject to a complex body of federal and
state banking laws and regulations which are intended primarily for the
protection of depositors. Governmental or regulatory authorities could revise
existing regulations or adopt new regulations at any time. Certain revisions
could subject vBank to more demanding regulatory compliance requirements and
could thereby adversely affect our ability to conduct, or the cost of
conducting, business. Legislation and regulatory initiatives containing
wide-ranging proposals for altering the structure, regulation and competitive
relationships of financial institutions are introduced regularly. We cannot
predict whether or what form of proposed statute or regulation will be adopted
or the extent to which such adoption will affect our business. Furthermore,
given the rapid expansion of the electronic commerce market, many regulatory
bodies are adopting
13
<PAGE>
measures to ensure that their regulations are keeping pace. For example,
Congress has held hearings on whether to regulate the electronic commerce
market, while numerous states are considering adopting their own laws to
regulate Internet banking. Furthermore, Congress is considering proposing new
laws relating to customer privacy. Moreover, the FDIC has proposed other
guidelines governing Internet operations. These and any other proposed laws,
rules and regulations could force us to comply with more complex and perhaps
more burdensome regulatory requirements, which could materially adversely affect
our business, financial condition, results of operations and cash flows.
Internet regulation. A number of legislative and regulatory proposals
currently under consideration by federal, state, local and foreign governmental
organizations may lead to laws or regulations concerning various other aspects
of the Internet, including, but not limited to, on-line content, user privacy,
taxation, access charges, information sharing, community development, data
security, liability or third-party activities and jurisdiction. Moreover, it is
uncertain how existing laws relating to these issues will be applied to the
Internet. The adoption of new laws or the application of existing laws could
decrease the growth in the use of the Internet, which could in turn decrease the
demand for our products and services, increase our cost of doing business or
otherwise have a material adverse effect on our business, financial condition,
results of operations and cash flows. Furthermore, government restrictions on
Internet content could slow the growth of Internet use and decrease acceptance
of the Internet as a communications and commercial medium, and thereby have a
material adverse effect on our business, financial condition and results of
operations.
Although certain local telephone carriers have asserted that the
growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure and caused interruptions in telephone service
in areas with high Internet use, the Federal Communications Commission ("FCC")
has declined the request of such carriers to impose access fees on Internet
service providers or commercial on-line service providers. If the FCC or state
regulatory agency were to impose such access fees, the costs of transacting
business on the Internet could increase substantially, potentially slowing the
growth in use of the Internet, which could in turn decrease demand for our
Internet bank services or increase our cost of doing business, and thus have a
material adverse effect on our business, financial condition, results of
operations and cash flows.
Internet privacy. Internet user privacy has become an issue both in
the United States and abroad. Numerous bills have been introduced in the House
and Senate that would force companies to comply with certain specified core
information practices. Such privacy legislation could affect in a materially
adverse manner the way in which USABanc.com is allowed to conduct its Internet
bank business, especially those aspects that involve the collection or use of
personal information.
At the international level, the European Union (the "EU") has already
adopted a Directive on Data Protection (the "Directive") that permits EU member
countries to impose restrictions on the collection and use of personal data. The
Directive could, among other things, affect United States companies that collect
information over the Internet from individuals in EU member countries, and may
impose restrictions that are more stringent than current Internet privacy
standards in the United States. In response to the Directive, on November 4,
1998, the United States Department of Commerce published for comment a set of
"safe harbor" principles designed to help United States organizations comply
with the Directive. The "safe harbor" principles were subsequently revised and
reissued for comment on April 19, 1999. On June 21, 1999, the EU and the United
States Department of Commerce presented a joint report to the EU/United States
Summit in Bonn, Germany on the topic of the EU/United States Data Protection
Dialogue. The joint report indicates that the EU and the United States expect to
finalize the "safe harbor" arrangement by Autumn 1999. It is intended that the
"safe harbor" arrangement would provide a predictable framework for the
application of the Directive to the transfer of personal data from the EU to the
United States with adequate protection for privacy. A number of aspects to the
"safe harbor" arrangement remain to be finalized, and there can be no assurance
that such principles will be implemented.
Future sales of our common stock in the public market could adversely affect our
stock price and our ability to raise funds in new stock offerings
If our shareholders sell substantial amounts of common stock in the
public market following this Offering, including shares issued upon the exercise
of outstanding options and warrants, the market price of our common stock could
fall. These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of the Offering, we will have ____ shares of common
stock
14
<PAGE>
outstanding, assuming no exercise of outstanding options or warrants as of
_________ , 1999. ___________________ of these shares constitute "restricted
securities" within the meaning of Rule 144 under the Securities Act of 1933 and
may be sold in compliance with Rule 144. Of these shares, _________________ are
subject to the 180 day lock-up period described below.
As of ________, 1999, holders of _______________ of our shares of
common stock have rights to require us to register their shares for sale with
the Securities and Exchange Commission. By exercising their registration rights
and causing a large number of shares to be sold in the public market, these
shareholders may cause the market price of the common stock to fall. In
addition, if such shareholders demand to include their shares in one of our
registration statements, our ability to raise needed capital could be adversely
effected. Our Company, our directors and officers who will beneficially own,
collectively, _______ shares of common stock after this Offering, have agreed
not to offer or sell any shares of common stock for 180 days following the date
of this prospectus without prior written consent from the underwriters. We may,
however, issue shares of common stock pursuant to employee stock plans, upon
conversion of outstanding securities or in connection with acquisitions,
business combinations or strategic investments.
As of _______, 1999, there were outstanding options to purchase
________ shares of our common stock and warrants to acquire ________ shares of
our common stock. The common stock underlying these options and warrants will be
eligible for sale in the public market from time to time subject to vesting and
other requirements. The stock options and warrants generally have exercise
prices significantly below the current market price of our common stock. The
possible sale of a significant number of these shares may cause the market price
of our common stock to fall.
USABanc.com does not intend to pay cash dividends and the ability of vBank to
pay cash dividends to USABanc.com is restricted
USABanc.com has never paid or declared a cash dividend and we do not
anticipate paying cash dividends in the foreseeable future. USABanc.com
currently intends to retain earnings, if any, to fund the development and growth
of its business. USABanc.com's ability to pay dividends to its shareholders is
limited by vBank's ability to pay dividends to USABanc.com. vBank is subject to
substantial regulatory restrictions on its ability to pay dividends to
USABanc.com. See "Dividend Policy."
We need to maintain adequate capital to support our anticipated growth
We are required by federal and state regulatory authorities to
maintain adequate levels of capital to support our operations. To the extent our
operations expand, we will be required to support such growth by increasing our
capital to acceptable regulatory levels. We expect our operations, including our
asset base, to grow substantially as a result of implementing our Internet
banking strategy. Accordingly, we may need to raise additional capital in the
future to support our operations should they continue to expand. This may be
accomplished through the sale of additional securities of USABanc.com, including
the issuance of additional shares of our common stock. Shareholders of
USABanc.com do not have a right to purchase any new issue of shares of our
common stock in order to maintain their proportionate ownership interests in
USABanc.com. Should we choose to raise capital through the sale of our common
stock, such action would dilute the voting power of the outstanding shares and
reduce the portion of any dividend and liquidation proceeds payable to the
holders of the common stock.
Provisions of our Articles of Incorporation and Bylaws have certain
anti-takeover effects
Certain provisions of our amended and restated articles of
incorporation and our bylaws may delay, deter or prevent a change in control of
USABanc.com that is not approved by our board of directors. These provisions
include our ability to issue shares of preferred stock in one or more series
without further authorization of the shareholders and a supermajority
shareholder approval requirement for certain transactions, including a merger,
consolidation, liquidation or disposition of all or substantially all of our
assets. See "Description of Capital Stock--Change in Control."
The voting rights of the shares of Class A common stock are identical
to the voting rights of the Class B common stock with one exception: the holders
of the shares of Class A common stock are entitled to elect two-thirds of our
directors and the holder of the Class B common stock is entitled to elect
one-third of our directors. Kenneth L.
15
<PAGE>
Tepper, our President and Chief Executive Officer, is the sole holder of Class B
common stock. This concentration of voting power could have the effect of
delaying or preventing a change of control.
Our articles also give our board of directors broad discretion to
evaluate a takeover attempt. In particular, our articles give our board of
directors broad discretion to prevent a change of control, including the use of
a "poison pill" defense. See "Description of Capital Stock."
The book value of the shares you purchase in this Offering will be diluted
The public offering price of our common stock is substantially higher
than the book value per share of our outstanding common stock immediately after
the Offering. If you purchase common stock in this Offering, you will incur
immediate dilution of approximately $__________ in the book value per share of
the common stock from the price you pay for the common stock. You will
experience further dilution as holders of options and warrants to purchase our
common stock at exercise prices below the public offering price in this Offering
exercise their options and warrants.
16
<PAGE>
USE OF PROCEEDS
We estimate our net proceeds from the sale of the 3,000,000 shares of
common stock we are offering to be $_____ million at the initial price to the
public of $_____ per share, after deducting the underwriting discount and
estimated offering expenses. If the underwriters exercise their over-allotment
option in full, then our net proceeds will be $_____ million.
We intend to use approximately $_____ million of the net proceeds to
invest as additional capital of vBank. vBank intends to use approximately $_____
million of the additional capital to launch a national marketing campaign for
our Internet banking operations and approximately $_____ to fund the
infrastructure for our Internet banking operations. vBank intends to use the
remaining additional capital, approximately $_____ million, to maintain its
well-capitalized status under regulatory capital guidelines. We intend to retain
the remaining net proceeds, approximately $_____ million, in USABanc.com for
general corporate purposes, including payments on our guaranteed preferred
beneficial interests in subordinated debt. See "Capitalization" and notes
__________ and __________ to the financial statements included in this
prospectus beginning on page F-1. We intend to invest the net proceeds of this
Offering in U.S. government agency securities, mortgage-backed securities and
other investment securities pending their use.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq SmallCap Market under
the symbol "USAB" since the first quarter of 1996. We have made application to
have our common stock quoted on the Nasdaq National Market under the same
symbol. The following table sets forth, for the periods indicated, the range of
high and low sales prices per share of our common stock as reported on the
Nasdaq SmallCap Market. All prices have been adjusted to reflect (a) a 33% stock
dividend paid on July 18, 1997, (b) a 33% stock dividend paid on August 17, 1998
and (c) a two-for-one stock split effected in the form of a dividend paid on
June 15, 1999.
Sales Price
-----------------------
Period High Low
- ------ --------- ---------
1997
- ----
First Quarter....................................... $2 61/64 $2 39/64
Second Quarter...................................... 3 1/64 2 5/16
Third Quarter....................................... 3 29/32 2 25/32
Fourth Quarter...................................... 3 3/8 3
1998
- ----
First Quarter....................................... 5 1/4 3 9/32
Second Quarter...................................... 5 13/16 5 1/16
Third Quarter....................................... 6 29/32 3 3/4
Fourth Quarter...................................... 4 1/2 3 3/8
1999
- ----
First Quarter....................................... 4 1/2 4
Second Quarter...................................... 11 4
Third Quarter (through July 15, 1999).............. 15 1/4 6 7/8
On July 15, 1999, the last reported sale price of our common stock
on the Nasdaq SmallCap Market was $13.25 per share.
As of June 1, 1999, there were 4,014,784 shares of common stock
outstanding, held by approximately 214 holders of record.
17
<PAGE>
DIVIDEND POLICY
USABanc.com has never paid or declared a cash dividend and we do not
anticipate paying cash dividends in the foreseeable future. USABanc.com
currently intends to retain future earnings, if any, to fund the development and
growth of its business. During each of the last two fiscal years, USABanc.com
paid a 33% stock dividend to the holders of shares of its common stock.
Effective June 15, 1999, USABanc.com paid a dividend to the holders of shares of
its common stock in the form of a two-for-one stock split. In the future, our
board of directors will determine our dividend policy based on an analysis of
factors that the board of directors deems relevant and subject to applicable
legal restrictions. We expect that those factors will include our earnings,
financial condition, cash requirements, the capital requirements of vBank and
investment opportunities at the time any such payment is considered.
In addition, USABanc.com's ability to pay dividends to its shareholders
is limited by vBank's ability to pay dividends to USABanc.com. Dividend payments
from vBank are subject to:
o regulatory limitations, generally based on current and retained
earnings, imposed by the various regulatory agencies with authority
over vBank;
o regulatory restrictions if such dividends would impair the capital of
vBank or cause vBank to be undercapitalized;
o Federal Reserve Board prudent banking standards relating to the
amount of net income available to common shareholders and the
prospective rate of earnings retention; and
o vBank's profitability, financial condition and capital expenditures
and other cash flow requirements.
18
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization at March
31, 1999, (1) on an actual basis, and (2) as adjusted to give effect to the sale
of common stock in this Offering, assuming the underwriters do not exercise
their over-allotment option. See "Use of Proceeds." This table excludes _____
shares of common stock issuable upon exercise of stock options and warrants.
This table should be read in conjunction with our consolidated financial
statements and notes thereto, which are included in this prospectus beginning on
Page F-1, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
At March 31, 1999
-------------------------------
As
Actual Adjusted(1)
--------------------------------
(Dollars in Thousands)
<S> <C> <C>
Liabilities:
Deposits............................................................................ $125,765 $125,765
Borrowings.......................................................................... 34,163 34,163
Guaranteed Preferred Beneficial Interests in Subordinated Debt...................... 10,000 10,000
Accrued expenses and other liabilities.............................................. 2,606 2,606
-------- --------
Total liabilities................................................................ 172,534 172,534
-------- --------
Stockholders' Equity:
Preferred stock, $1.00 par value; 5,000,000 authorized shares; no shares issued and
outstanding...................................................................... -- --
Common stock, $1.00 par value; 10,000,000 authorized shares; 4,014,784 shares issued
outstanding and 216,460 shares of converted and unissued Class B common stock,
actual; __________ shares issued and outstanding, as adjusted.................... 4,232
Additional paid-in-capital.......................................................... 8,567
Accumulated earnings................................................................ 1,526 1,526
Accumulated other comprehensive (loss) income - unrealized depreciation on
securities available-for-sale.................................................... (629) (629)
-------- --------
Total stockholders' equity....................................................... 13,696
-------- --------
Total liabilities and stockholders' equity..................................... $186,230
======== ========
</TABLE>
- --------------------
(1) Assumes that the net proceeds to USABanc.com, after deducting the estimated
underwriting discount and estimated offering expenses, are $_______________.
19
<PAGE>
REGULATORY CAPITAL
Under regulations adopted by the Board of Governors of the Federal
Reserve System, we are required to maintain Tier 1 capital equal to at least
4.0% and total capital (Tier 1 plus Tier 2 capital) equal to at least 8.0% of
our risk weighted assets, and Tier 1 capital equal to at least 4.0% of our
average total assets (calculated quarterly). See "Regulation of USABanc.com and
vBank."
The following tables set forth USABanc.com's actual regulatory capital
and regulatory capital ratios at March 31, 1999 and USABanc.com's pro forma
regulatory capital and regulatory capital ratios at March 31, 1999, as adjusted
to give effect to the receipt of the net proceeds from the sale of the common
stock in the Offering. See "Use of Proceeds." The amount of average adjusted
total assets used for the Tier 1 leverage ratio was approximately $177.0
million. Risk-weighted assets used for the risk-based capital ratios amounted to
approximately $149.0 million. The following tables assume the investment of the
proceeds of the Offering in assets with an average risk-weighting of 20%.
<TABLE>
<CAPTION>
Actual Pro Forma (2)
----------------------------- ------------------------------
Risk-Based Risk-Based
----------------- -------------------
Tier 1 Tier 1
Leverage Tier 1 Total Leverage Tier 1 Total
Capital Capital Capital Capital Capital Capital
------- ------- ------- -------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity..................... $14,325 $14,325 $14,325 $ $ $
Minority interest--Guaranteed
Preferred Beneficial Interests in
Subordinated Debt (1)................. 4,541 4,541 10,000
Unrealized losses on securities
available for sale.................... (629) (629) (629)
Non-allowable capital:
Direct real estate investments........ -- -- --
Intangible assets..................... (74) (74) (74)
Supplemental capital:
Allowance for loan losses............. -- -- 1,175
------- ------- ------- ------- ------- -------
Regulatory capital....................... $18,163 $18,163 $24,797
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Actual Pro Forma (2)
----------------------------- ------------------------------
Risk-Based Risk-Based
----------------- -------------------
Tier 1 Tier 1 Total Tier 1 Tier 1 Total
Leverage Capital Capital Leverage Capital Capital
Ratio Ratio Ratio Ratio Ratio Ratio
-------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital....................... 10.3% 12.2% 16.6% % % %
Regulatory requirement................... 4.0 4.0 8.0
---- ---- ---- ---- ---- ----
Excess above required ratio.............. 6.3% 8.2% 8.6% % % %
==== ==== ==== ==== ==== ====
</TABLE>
- -------------------
(1) On March 9, 1999, USABanc.com issued $10.0 million of 9.5% junior
subordinated debentures to USA Capital Trust I, a Delaware business trust,
in which USABanc.com owns all of the common equity. The trust issued $10.0
million of trust preferred securities to investors in a private offering,
secured by the junior subordinated debentures and the guarantee of
USABanc.com. The trust preferred securities are Tier 1 eligible except
that, in accordance with Federal Reserve Board regulations, no more than
25% of Tier 1 capital may be comprised of trust preferred securities. At
March 31, 1999, 25% of USABanc.com's Tier 1 capital equaled approximately
$4.5 million. Accordingly, only $4.5 million of the trust preferred
securities were eligible as Tier 1 capital as of such date. Assuming
completion of the Offering, however, USABanc.com's Tier 1 capital would
increase to a level such that
20
<PAGE>
the entire amount of the trust preferred securities would be eligible for
treatment as Tier 1 capital on a pro forma basis.
(2) Pro Forma calculations assume that the net proceeds from the sale of common
stock of USABanc.com, approximately $______ million, are invested in assets
that have a risk-weight equivalent to investment securities assigned to
the 20% category. While a portion of the net proceeds of the
Offering will be used to maintain capital levels above minimum regulatory
levels, USABanc.com, intends to immediately deploy a portion of the net
proceeds of the Offering to launch a national marketing campaign for its
Internet banking operations and to fund the infrastructure of its Internet
banking operations. See "Use of Proceeds." The pro forma regulatory levels
and ratios set forth in the tables above reflect anticipated levels and
ratios immediately upon completion of the Offering and are not necessarily
indicative of such levels and ratios at any time following completion of
the Offering.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Capital Resources"
for a discussion of vBank's regulatory capital and regulatory capital ratios at
March 31, 1999.
21
<PAGE>
USABANC.COM STATEMENTS OF OPERATIONS
The following Statements of Operations of USABanc.com for each of the
years in the two-year period ended December 31, 1998 are derived from financial
statements that have been audited by Grant Thornton LLP, independent auditors,
whose report thereon appears elsewhere in this prospectus. The information for
the three months ended March 31, 1999 and 1998 is derived from unaudited
financial statements, and, in the opinion of management, all adjustments
necessary for a fair presentation of such interim periods have been included and
are only of a normal recurring nature. Results for the three months ended March
31, 1999 are not indicative of the results that may be expected for the year
ending December 31, 1999. These statements should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the consolidated financial statements and notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
------------------------- ---------------------------
1999 1998 1998 1997
------ ------ ------- ------
(unaudited)
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans............................................... $2,756 $1,647 $ 9,028 $3,090
Investment securities............................... 1,044 548 3,015 1,637
Interest-bearing deposits and other................. 81 92 309 152
------ ------ ------- ------
Total interest income............................ 3,881 2,287 12,352 4,879
Interest expense:
Deposits............................................ 1,667 1,080 5,266 2,285
Borrowed funds...................................... 488 94 1,188 245
------ ------ ------- ------
Total interest expense........................... 2,155 1,174 6,454 2,530
Net interest income................................. 1,726 1,113 5,898 2,349
Provision for loan losses........................... 100 35 510 415
------ ------ ------- ------
Net interest income after provision for loan
losses....................................... 1,626 1,078 5,388 1,934
Non-interest income:
Gain on sales of investment securities.............. 56 39 378 127
Brokerage operations................................ 126 162 141 102
Other............................................... 138 20 240 85
------ ------ ------- ------
Total non-interest income........................ 320 221 759 314
Non-interest expense:
Compensation and benefits........................... 506 272 1,539 1,346
Occupancy........................................... 164 72 523 202
Other............................................... 586 274 1,638 909
------ ------ ------- ------
Total non-interest expense....................... 1,256 618 3,700 2,457
Income (loss) before income taxes..................... 690 681 2,447 (209)
Income taxes.......................................... 276 268 957 17
------ ------ ------- ------
Net income (loss)..................................... $ 414 $ 413 $ 1,490 $ (226)
====== ====== ======= ======
Earnings (loss) per share--basic....................... $ 0.10 $ 0.13 $ 0.38 $(0.10)
====== ====== ======= ======
Earnings (loss) per share--diluted..................... $ 0.09 $ 0.12 $ 0.35 $(0.10)
====== ====== ======= ======
Weighted average number of shares
outstanding -- basic................................. 4,231,244 3,210,540 3,971,672 2,164,727
Weighted average number of shares
outstanding -- diluted............................... 4,465,770 3,393,776 4,239,638 2,164,727
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We currently offer a full range of banking services through vBank and a
wide range of investment-related products through USACapital, Inc., a wholly
owned subsidiary of USABanc.com. Our goal is to become a leading provider of
financial products and services over the Internet.
In pursuit of this goal, we have recently expended significant
resources on technology, Website development, marketing, hiring of personnel and
other startup costs related to the development and operation of our Internet
banking platform. Given that we intend to continue to expend significant
financial and management resources in connection with our Internet banking
operations, we expect to incur substantial losses. Moreover, to the extent that
increases in operating expenses precede or are not subsequently followed by
increased revenues, our business, financial condition, results of operations and
cash flows will be materially adversely affected.
Our revenue consists of interest income and, to a lesser degree,
non-interest income, which includes income primarily from services and gains on
the sale of loans and securities. Our net interest income is the difference
between the rates of interest earned on our loans and other interest-earning
assets and the rates of interest paid on our deposits and borrowed funds. An
indicator of an institution's profitability is its net interest margin or net
yield on interest-earning assets, which is its annualized net interest income
divided by the average balance of interest-earning assets. Fluctuations in
interest rates as well as volume and composition changes in interest-earning
assets and interest-bearing liabilities may materially affect net interest
income.
Since our acquisition of vBank in November 1995, we have aggressively
grown our loan portfolio through the acquisition of loan pools at a discount and
through loan originations. Our net loan portfolio has grown from $7.0 million at
December 31, 1995 to $110.0 million at March 31, 1999. We intend to continue to
expand our small business community banking presence in the Mid-Atlantic region
primarily through increased loan originations and purchases of pools of
discounted loans. We intend to emphasize the origination and purchase of
commercial real estate and commercial business loans, which generally carry
higher yields than traditional single-family residential loans. Although we
intend to continue to originate single-family residential and consumer loans,
such loans will not be emphasized and will be offered primarily as an
accommodation to our customers. Single-family residential loans originated
through our Website will be originated through our alliance partner, Fidelity
Mortgage Trust dba Low Cost Loans ("Low Cost Loans"). We intend to fund our
increased lending activities in part with deposit growth we expect to achieve
from our Internet banking operations.
We actively monitor our net interest rate sensitivity position.
Effective interest rate sensitivity management seeks to ensure that net interest
income and the market value of equity are protected from the impact of changes
in interest rates. To this end, we have established risk measurement guidelines
employing market value of equity and gap methodologies and other measures.
Comparison of Financial Condition and Results of Operations for the
Three Months Ended March 31, 1999 and March 31, 1998
Financial Condition
USABanc.com's total assets increased from $165.1 million at December
31, 1998 to $186.2 million at March 31, 1999, an increase of $21.1 million, or
12.8%. The increase was due primarily to increases in the loan and securities
portfolios of $7.9 million and $20.8 million, respectively. This growth was
funded by increases in deposits of $11.3 million (primarily non-retail
certificates of deposit) and of $10.0 million of guaranteed preferred beneficial
interests in subordinated debentures which were issued with the proceeds from a
private placement issuance of trust preferred securities. The increase in the
securities portfolio was primarily due to the acquisition of corporate trust
preferred securities and federal agency bonds. Management plans to utilize
deposit expansion to provide the necessary funding for vBank's continued growth,
although management may also use advances from the FHLB in conjunction with
deposit expansion to fund vBank's growth as it has done in the past. At March
31, 1999, vBank had $33.8 million in borrowing capacity under a collateralized
line of credit with the FHLB, of which $30.0 million was drawn upon as of such
date. USABanc.com's stockholders' equity increased from $13.6 million at
December 31, 1998 to $13.7 million at March 31, 1999, as the earnings of
USABanc.com were offset by an increase in the unrealized losses on
23
<PAGE>
USABanc.com's securities portfolio, which pursuant to Statement of Financial
Accounting Standards No. 115, are treated as a separate component of
stockholders' equity. At March 31, 1999, such unrealized losses amounted to
$629,000.
Results of Operations
Net Income. USABanc.com reported net income of $414,000 or $0.09 per
share (diluted), for the three months ended March 31, 1999, compared to
$413,000, or $0.12 per share (diluted), for the three months ended March 31,
1998. The slight increase in net income was primarily due to the increase in net
interest income of $613,000 and the increase in non-interest income of $99,000
as compared to the same period in 1998. These increases were partially offset by
an increase of non-interest expense of $638,000 due to the cost of enhancing
USABanc.com's infrastructure, primarily an increase in salaries, occupancy
expense and professional fees.
Interest Income. Total interest income increased $1.6 million, or
69.7%, for the three months ended March 31, 1999, compared to the three months
ended March 31, 1998, due to the higher volume of net loans receivable and
securities. The increase in interest income on loans of $1.1 million is due to
an increase of $47.8 million in the average balance of the loan portfolio, as
well as accretion income recognized on discounted loan pools purchased by vBank.
The total increase was related to an increase of $45.9 million in the average
balance of real estate loans and an increase of $1.9 million in the average
balance of commercial business loans. This increase in the average balance of
our loans reflects USABanc.com's strategy to continue to grow its commercial
business and commercial real estate loan portfolio. The discount associated with
such discounted loan pools is recognized as a yield adjustment and is included
as interest income. During the three months ended March 31, 1999 vBank
recognized $301,000 in accretion income compared to $258,000 of accretion income
for the three months ended March 31, 1998. The increase in accretion income is
due to an increased volume of loans. The increase in interest income on
securities of $496,000 is due to an increase of $25.2 million in the average
balance of the securities portfolio. The total 6.8 % increase was comprised of
an increase of $13.4 million of trust preferred securities with an average yield
of 9.22% and an increase of $11.8 million of mortgage-backed obligations with an
average yield of 6.78%.
Interest Expense. Total interest expense increased $981,000, or 83.6%,
for the three months ended March 31, 1999, compared to the three months ended
March 31, 1998, due to the higher volume of certificates of deposit and advances
from the FHLB. Interest expense on borrowings increased $394,000 due to the
increase in the average outstanding balance of FHLB advances of $29.0 million.
Interest expense incurred on certificates of deposit increased $537,000 due to
the average balance of certificates of deposit increasing $41.2 million. This
increase in interest expense reflects USABanc.com's growth strategy of
increasing certificates of deposit to fund the growth of vBank. Increases in
interest expenses due to volume were partially offset by decreases in the
interest rates paid on FHLB advances and certificates of deposit by
approximately 37 basis points. The average cost of funds, including other
borrowings, was 5.62% for the first three months of 1999 compared to 5.89% over
the same period in 1998.
Net Interest Income. USABanc.com's profitability, like that of many
financial institutions, is dependent to a large extent upon net interest income.
Net interest income is the difference between interest income (principally from
loans and investment and mortgage-backed securities) and interest expense
(principally on customer deposits and borrowings). Changes in net interest
income result from changes in the mix of rates and volumes of interest-earning
assets and interest-bearing liabilities that occur over time. Volume refers to
the average dollar level of interest-earning assets and interest bearing
liabilities. Net interest spread refers to the differences between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to net interest income divided by
average interest-earning assets.
Net interest income for the three months ended March 31, 1999 increased
$613,000, or 55.1%, to $1.7 million from $1.1 million for the same period in
1998. Average interest-earning assets increased by $70.5 million, or 77.0%, to
$162.0 million, for the three months ended March 31, 1999 compared to the same
period in 1998. Average interest-bearing liabilities increased $73.6 million, or
92.2%, over the same period. The net interest spread and net interest margin
decreased for the period ended March 31, 1999 compared to March 31, 1998, from
4.11% to 3.96% and from 4.86% to 4.26%, respectively. The major reason for the
spread and margin compression relates to the proportion of the amount of
accretion of the discount on loans acquired to total interest income. For the
three months ended March 31, 1999, $301,000 of discount was accreted into
interest income, or 7.7% of the total interest income. This compares to $259,000
of discount accreted into interest income for the three month period ended March
31, 1998, or 11.3% of total interest income. Excluding the income attributable
to the accretion of discount on loans acquired, the net interest margin
24
<PAGE>
would have declined 20 basis points for the three months ended March 31, 1999
compared to the three months ended March 31, 1998 to 3.52% from 3.73%,
respectively.
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>
Three Months Ended March 31,
---------------------------------------------------------------------------
1999 1998
------------------------------------ -------------------------------------
Average Average Average Average
Balance(1) Interest Yield/Rate Balance(1) Interest Yield/Rate
----------- ---------- ----------- ----------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.............................. $102,169 $ 2,756 10.79% $57,674 $1,647 11.43%
Securities......................... 52,976 1,044 7.88 27,746 548 7.89
Interest-bearing deposits and
other............................ 6,818 81 4.75 6,093 92 6.02
-------- ------- ------ ------- ------ -----
Total interest-earning assets.... $161,963 $ 3,881 9.58% $91,513 $2,287 10.00%
-------- ------- ------ ------- ------ -----
Interest-bearing liabilities:
Deposits:
Passbook......................... $ 7,671 $ 85 4.43% $ 1,876 $ 13 2.65%
NOW accounts..................... 1,001 6 2.40 935 9 3.95
Money market accounts............ 3,369 40 4.75 5,770 59 4.05
Certificates of deposit.......... 106,033 1,536 5.79 64,857 999 6.17
Borrowings......................... 35,298 488 5.53 6,340 94 5.90
-------- ------- ---- ------- ------ ----
Total interest-bearing liabilities $153,372 $ 2,155 5.62% $79,778 $1,174 5.89%
-------- ------- ---- ------- ------ ----
Excess of interest-earning assets over
interest-bearing liabilities...... $ 8,591 $11,735
======== =======
Net interest income................... $ 1,726 $1,113
======= ======
Interest rate spread.................. 3.96% 4.11%
==== ====
Net interest margin .................. 4.26% 4.86%
==== ====
</TABLE>
- ----------------
(1) Average balances are calculated on a monthly basis.
Rate/Volume Analysis. The following schedule presents the dollar amount
of changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between changes (a) related to outstanding balances and (b) due to the changes
in interest rates. Information is provided in each category with respect to: (1)
changes attributable to changes in volume (changes in volume multiplied by prior
rate); (2) changes attributable to changes in rate (changes in rate multiplied
by prior volume); and (3) the net change in rate/volume (change in rate
multiplied by change in volume). The changes attributable to the combined impact
of volume and rate have been allocated proportionately to the changes due to
volume and the changes due to rate.
25
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999 vs. March 31, 1998
----------------------------------------------
Increase or (Decrease)
Due to Change in
-------------------------
Average Average Total Increase
Volume Rate (Decrease)
------------ ----------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Variance in interest income on:
Interest-earning assets:
Loans................................. $1,212 $(103) $1,109
Securities............................ 497 (1) 496
Interest-bearing deposits and other... 8 (19) (11)
------ ----- ------
Total interest-earning assets...... $1,717 $(123) $1,594
------ ----- ------
Interest-bearing liabilities:
Deposits:
Passbook........................... $ 51 $ 21 $ 72
NOW accounts....................... 1 (4) (3)
Money market accounts.............. (27) 8 (19)
Certificates of deposit............ 596 (59) 537
Borrowings............................ 400 (6) 394
------ ----- ------
Total interest-bearing liabilities. $1,021 $ (40) $ 981
------ ----- ------
Change in net interest income............ $ 696 $ (83) $ 613
====== ===== ======
</TABLE>
Provision for Loan Losses. Management records a provision for loan
losses in an amount that it believes will result in an allowance for loan losses
sufficient to cover all potential net charge-offs and risks believed to be
inherent in the loan portfolio. Management's evaluation includes such factors as
past loan loss experience as related to current loan portfolio mix, evaluation
of actual and potential losses in the loan portfolio, prevailing regional and
national economic conditions that might have an impact on the portfolio, regular
reviews and examinations of the loan portfolio conducted by bank regulatory
authorities, and other factors that management believes deserve current
recognition. As a result of management's evaluation of these factors, the
provision for loan losses was $100,000 during the three months ended March 31,
1999 compared to $35,000 during the same period in 1998. The increase in the
provision for loan losses during the three months ended March 31, 1999, as
compared to the same period in the prior year, was due primarily to the
substantial growth in vBank's loan portfolio. The allowance for loan losses as a
percentage of loans outstanding was 1.05% at March 31, 1999, compared to 1.02%
at December 31, 1998 and 1.00% at March 31, 1998. In addition, the allowance for
loan losses as a percentage of total non-performing loans, net of discount, was
58.75% at March 31, 1999, compared to 294.55% at March 31, 1998. The significant
decline in this ratio during the three months ended March 31, 1999 compared to
the same period in the prior year was due, in large part, to a single acquired
commercial real estate loan which became non-performing during the third quarter
of 1998. vBank is pursuing an aggressive strategy of resolution with respect to
this loan, and vBank expects to resolve the loan to its satisfaction within the
next 12 months. Management will continue to record a provision for loan losses
to maintain the allowance for loan losses at a level deemed adequate by
management on a quarterly basis. No charge-offs on loans were recorded during
the first quarter of 1999 compared to $8,000 of charge-offs for the first
quarter of 1998.
Management believes that the allowance for loan losses is adequate to
cover actual and potential losses in the loan portfolio under current
conditions. Nevertheless, there can be no assurance that additions to such
allowance will not be necessary in future periods, particularly if the growth in
vBank's commercial loan originations and purchases continues.
Non-Interest Income. Non-interest income increased $99,000, or 44.8%,
in the first three months of 1999 compared to the same three months of 1998.
Gains on sales of securities classified as available-for-sale increased $17,000
and service charges on deposit accounts, other service charges, loan review
fees, letter of credit fees and other miscellaneous income increased $82,000
during the period.
26
<PAGE>
Non-Interest Expense. Other expense increased an aggregate of $638,000
or 103.2%, compared to the first three months of 1998. Compensation expense
increased $234,000 due to the hiring of additional personnel. Occupancy expense
increased $92,000 due to the addition of two branches. Advertising expense
increased $36,000 due to a new marketing campaign. Other expenses increased
$192,000 primarily as a result of computer expenses related to certain software
and hardware purchases for the www.usabanc.com Website, expenses related to loan
acquisitions and other miscellaneous items. Professional fees increased $84,000
due to an increase in outside consulting and legal services provided during the
quarter.
Income Tax Expense. Income tax expense recorded for the three months
ended March 31, 1999 and 1998 was $276,000 and $268,000, or 40.0% and 39.4%
effective tax rate, respectively.
Asset and Liability Management
A principal objective of vBank's asset and liability management is to
minimize vBank's exposure to changes in interest rates. vBank's policy is to
attempt to manage assets and liabilities in such a way as to maximize net
interest income through changing interest rate environments. An interest rate
sensitive asset or liability is one that, within a defined time period, either
matures or experiences an interest rate change in line with general market
rates. Interest rate sensitivity measures the relative volatility of a bank's
net interest margin resulting from changes in market interest rates.
The following table summarizes repricing intervals for interest-earning
assets and interest-bearing liabilities for the period ended March 31, 1999 and
the difference or "gap" between them on an actual and cumulative basis for the
periods indicated. The table was prepared with the following assumptions: (1)
50% of vBank's transaction accounts are considered core deposits and are assumed
to mature in the "Over 5 Years" category; the remaining 50% are not considered
to be core transaction accounts, are sensitive to rate changes, and, as such,
are placed in the "1-90 Days" category; (2) interest-earning assets are
calculated based on contractual adjustments or stated maturities in the
instruments without any adjustments for prepayment; and (3) certificates of
deposit and borrowings are scheduled based on the applicable stated maturities.
<TABLE>
<CAPTION>
3/31/99
1-90 Days 91-364 Days 1-5 Years Over 5 Years Balance
-------------- ----------------- ------------- ---------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable................... $ 7,810 $ 7,138 $ 40,981 $ 55,406 $111,335
Investments........................ 2,561 -- 5,113 61,024 68,698
------- -------- -------- -------- --------
Total interest-earning assets.. $10,371 $ 7,138 $ 46,094 $116,430 $180,033
======= ======== ======== ======== ========
Interest-bearing liabilities:
Demand............................. $ 665 $ -- $ -- $ 664 $ 1,329
NOW accounts....................... 454 -- -- 454 908
Money market accounts.............. 1,055 -- -- 1,054 2,109
Passbook accounts.................. 6,184 -- -- 6,183 12,367
Certificates of deposit............ 11,217 41,603 56,232 -- 109,052
Borrowings......................... -- 5,000 29,163 -- 34,163
Guaranteed Preferred Beneficial
Interests in Subordinated Debt. -- -- -- 10,000 10,000
------- -------- -------- -------- --------
Total interest-bearing
liabilities................ $19,575 $ 46,603 $ 85,395 $ 18,355 $169,928
======= ======== ======== ======== ========
Periodic gap............................. $(9,204) $(39,465) $(39,301) $ 98,075 $ 10,105
======= ======== ======== ======== ========
Cumulative gap........................... $(9,204) $(48,669) $(87,970) $ 10,105 --
======= ======== ======== ======== ========
Ratio of gap to interest-earning
assets............................. (5.1)% (21.9)% (21.8)% 54.5% --
======= ======== ======== ======== ========
Ratio of cumulative gap to interest-
earning assets..................... (5.1)% (27.0)% (48.9)% 5.6% --
======= ======== ======== ======== ========
</TABLE>
A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds
27
<PAGE>
interest rate sensitive assets. During a period of falling interest rates, a
positive gap would tend to adversely affect net interest income, while a
negative gap would tend to result in an increase in net interest income. During
a period of rising interest rates, a positive gap would tend to result in an
increase in net interest income while a negative gap would tend to affect net
interest income adversely.
If repricing of vBank's assets and liabilities were equally flexible
and moved concurrently, the impact of an increase or decrease in interest rates
on net income would be minimal. At March 31, 1999, vBank had a negative
cumulative one year gap, which suggests that net interest income may decrease
during periods of rising interest rates.
The method used to analyze interest rate sensitivity in the previous
table has a number of limitations. Certain assets and liabilities may react
differently to changes in interest rates even though they reprice or mature in
the same or similar time periods. The interest rates on certain assets and
liabilities may change at different times than changes in market interest rates,
with some changing in advance of changes in market rates and some lagging behind
changes in market rates. Also, certain assets, such as adjustable-rate loans,
often have provisions which may limit changes in interest rates each time market
interest rates change and on a cumulative basis over the life of the loan.
Additionally, the actual prepayments and withdrawals experienced by vBank in the
event of a change in interest rates may deviate significantly from those assumed
in calculating the data shown in the table.
In the event vBank should experience a mismatch in its desired gap
ranges or an excessive decline in its market value of equity resulting from
changes in interest rates, it has a number of options which it could utilize to
remedy such mismatch. vBank could restructure its investment portfolio through
sales or purchases of securities with more favorable repricing attributes. It
could also emphasize loan products with appropriate maturities or repricing
attributes, or it could attract deposits or obtain borrowings with desired
maturities.
Comparison of Financial Condition and Results of Operations
for the Years Ended December 31, 1998 and December 31, 1997
Financial Condition
USABanc.com's total assets increased from $89.3 million at December 31,
1997 to $165.1 million at December 31, 1998, an increase of $75.8 million, or
84.8%. The increase was due primarily to increases in the loan and securities
portfolios of $46.1 million and $22.3 million, respectively. This growth was
funded by increases in certificates of deposit (primarily non-retail
certificates of deposit) and borrowed funds of $41.8 million and $22.7 million,
respectively. The increase in the loan portfolio was primarily due to the
purchase of commercial and single-family residential real estate loans at a
discount. These purchased loans, which had an aggregate unpaid principal balance
of approximately $37.3 million (38% of commercial and 62% of residential loans)
as of the date of acquisition, were acquired for approximately $35.2 million
(reflecting an aggregate discount of $2.1 million, or 5.6%). The increase in the
securities portfolio was primarily due to the acquisition of trust preferred
securities and financial institution bonds. Total deposits increased $43.9
million to $114.4 million at December 31, 1998. The increase in deposits was
comprised of an increase in certificates of deposit of $41.8 million and an
increase in transaction accounts of $2.1 million during the period which
resulted from vBank's marketing efforts to attract new customers. Borrowed funds
consist of fixed-rate callable advances from the FHLB. Total borrowed funds
increased to $35.3 million at December 31, 1998, from $12.6 million at December
31, 1997. The increases in deposits and in borrowed funds were utilized to fund
increases in loans and securities as part of vBank's overall growth strategy.
Management plans to continue to utilize advances from the FHLB in conjunction
with deposit expansion to provide the necessary funding for vBank's continued
growth. vBank's borrowing limit at the FHLB as of December 31, 1998, was
approximately $30.0 million, all of which was drawn upon as of such date.
USABanc.com's stockholders' equity increased from $5.4 million at December 31,
1997 to $13.6 million at December 31, 1998. The $8.2 million, or 151.8%,
increase in stockholders' equity was primarily due to USABanc.com's private
placement of $7.5 million of common stock in February 1998.
Results of Operations
Net Income. USABanc.com reported net income of $1.5 million, or $0.35
per share, diluted, for the year ended December 31, 1998, compared to a net loss
of $226,000, or $0.10 per share, diluted, for the year ended December 31, 1997.
The increase in net income was primarily the result of an increase in net
interest income of $3.5 million and an increase in non-interest income of
$445,000. These increases were partially offset by an increase in the
28
<PAGE>
provision for loan losses of $95,000, an increase in non-interest expense of
$1.2 million, and an increase in income tax expense of $940,000.
Interest Income. Interest income increased 153.2% or $7.5 million to
$12.4 million, for the year ended December 31, 1998, compared to the prior year.
The increase in interest income was the result of an increase in interest income
on loans, investment securities, and interest-bearing deposits of $5.9 million,
$1.4 million, and $157,000, respectively. The increase in interest income on
loans was due to an increase in the average balance of the loan portfolio, as
well as accretion income recognized on loan pools purchased by vBank at a
discount since 1995. The discount associated with such loan pools is recognized
as a yield adjustment and is included as interest income using the level yield
method (to the extent that the timing and amount of cash flows can reasonably be
determined). Any changes from original estimates used in the purchase price
could result in either an increase or decrease in accretion income. During the
years ended December 31, 1998 and 1997, vBank recognized $1.3 million and
$691,000 in accretion income, respectively, representing 10.5% and 14.2% of
total interest income, respectively. The significant increase in the average
balance of vBank's loan portfolio reflects the $37.3 million of loan purchases
and the more than $30.0 million of loan originations (including participations
with local financial institutions) which were closed during the year ended
December 31, 1998.
Interest Expense. Interest expense increased 155.1% or $3.9 million to
$6.5 million, for the year ended December 31, 1998, compared to the year ended
December 31, 1997, due to higher volumes of new certificates of deposit and
advances from the FHLB. In order to fund USABanc.com's substantial growth during
the year ended December 31, 1998, USABanc.com relied primarily on non-retail
certificates of deposit and, to a lesser extent, long term callable advances
from the FHLB. The increase in interest expense during the year ended December
31, 1998 was also due to vBank extending the average maturity of its
certificates of deposit from approximately 9 months to approximately 16 months.
The average cost of funds, including borrowings, decreased 0.08% to 5.65% for
the year ended December 31, 1998 when compared to the prior year.
Net Interest Income. The earnings of USABanc.com depend primarily on
its level of net interest income, which is the difference between interest
earned on USABanc.com's interest-earning assets (loans and investment
securities) and the interest paid on interest-bearing liabilities (deposits and
borrowings). Net interest income is a function of USABanc.com's interest rate
spread, which is the difference between the yield earned on interest-earning
assets and the rate paid on interest-bearing liabilities, as well as a function
of the average balance of interest-earning assets as compared to the average
balance of interest-bearing liabilities. Net interest income for the year ended
December 31, 1998, increased $3.5 million, or 151.1%, to $5.9 million from $2.3
million for the same period in 1997. Average interest-earning assets increased
by $69.3 million, or 133.6%, to $121.2 million, for the year ended December 31,
1998. Average interest-bearing liabilities increased $70.0 million or 158.6%
over the same period. USABanc.com's interest rate spread increased from 3.68% to
4.54% while USABanc.com's net interest margin increased from 4.53% to 4.87%. The
increase in USABanc.com's interest rate spread and margin reflects USABanc.com's
significant growth in loans and securities which were funded at a positive
spread with deposits and borrowings.
Analysis of Net Interest Income. Net interest income is affected by
changes in both average interest rates and average volumes of interest-earning
assets and interest-bearing liabilities. The following table presents
information regarding yields on interest-earning assets, expense on
interest-bearing liabilities, and net yields on interest-earning assets for the
periods indicated:
29
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
Average Average Average Average
Balance(1) Interest Yield/Rate Balance(1) Interest Yield/Rate
----------- ---------- ----------- ----------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans................................ $ 78,797 $ 9,028 11.46% $26,421 $3,090 11.70%
Securities........................... 36,510 3,015 8.26 22,696 1,637 7.21
Interest-bearing deposits and other.. 5,842 309 5.30 2,739 152 5.55
-------- ------- ----- ------- ------ -----
Total interest-earning assets...... $121,149 $12,352 10.20% $51,856 $4,879 9.41%
-------- ------- ----- ------- ------ -----
Interest-bearing liabilities:
Deposits:
Passbook........................... $ 3,650 $ 70 1.91% $ 1,888 $ 47 2.49%
NOW accounts....................... 842 21 2.48 705 16 2.27
Money market accounts.............. 3,573 134 3.76 1,684 63 3.74
Certificates of deposit............ 83,592 5,041 6.03 35,627 2,158 6.06
Borrowings........................... $ 22,482 $ 1,188 5.29% $ 4,227 $ 246 5.82%
-------- ------- ----- ------- ------ -----
Total interest-bearing liabilities. $114,139 $ 6,454 5.66% $44,131 $2,530 5.73%
-------- ------- ----- ------- ------ -----
Excess of interest-earning assets over
interest-bearing liabilities......... $ 7,010 $ 7,725
======== =======
Net interest income..................... $ 5,898 $2,349
======= ======
Interest rate spread.................... 4.54% 3.68%
===== =====
Net interest margin .................... 4.87% 4.53%
===== =====
</TABLE>
- ---------------------
(1) Average balances are calculated on a monthly basis.
Rate/Volume Analysis. The following schedule presents the dollar amount
of changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between changes (a) related to outstanding balances and (b) due to the changes
in interest rates. Information is provided in each category with respect to: (1)
changes attributable to changes in volume (changes in volume multiplied by prior
rate); (2) changes attributable to changes in rate (changes in rate multiplied
by prior volume); and (3) the net change in rate/volume (change in rate
multiplied by change in volume). The changes attributable to the combined impact
of volume and rate have been allocated proportionately to the changes due to
volume and the changes due to rate.
30
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 vs. December 31, 1997
----------------------------------------------
Increase or Decrease
Due to Change in
------------------------
Average Average Total Increase
Volume Rate (Decrease)
------- ------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Variance in interest income on:
Interest-earning assets:
Loans................................. $6,000 $ (62) $5,938
Securities............................ 1,113 265 1,378
Interest-bearing deposits and other... 164 (7) 157
------ ----- ------
Total interest-earning assets....... $7,277 $ 196 $7,473
------ ----- ------
Interest-bearing liabilities:
Deposits:
Passbook........................ 30 (7) 23
NOW accounts.................... 3 2 5
Money market accounts........... 71 -- 71
Certificates of deposit......... 2,892 (9) 2,883
Borrowings........................... 962 (20) 942
------ ----- ------
Total interest-bearing liabilities... $3,958 $ (34) $3,924
------ ----- ------
Change in net interest income............... $3,319 $ 230 $3,549
====== ===== ======
</TABLE>
Provision for Loan Losses. Management records a provision for loan
losses in an amount that it believes will result in an allowance for loan losses
sufficient to cover all potential net charge-offs and risks believed to be
inherent in the loan portfolio. Management's evaluation includes such factors as
past loan loss experience as related to current loan portfolio mix, evaluation
of actual and potential losses in the loan portfolio, prevailing regional and
national economic conditions that might have an impact on the portfolio, regular
reviews and examinations of the loan portfolio conducted by bank regulatory
authorities, and other factors that management believes deserve current
recognition. As a result of management's evaluation of these factors, the
provision for loan losses increased $95,000 during the year ended December 31,
1998, compared to the same period in 1997. The increase in the provision for
loan losses during the year ended December 31, 1998, as compared to the same
period in the prior year was due primarily to the substantial growth in vBank's
loan portfolio and the shift in such loan portfolio from predominantly
residential loans to a mix of residential and commercial real estate loans. The
allowance for loan losses as a percentage of loans outstanding, net of discount,
was 1.02% at December 31, 1998, compared to 1.01% at December 31, 1997. In
addition, the allowance for loan losses as a percentage of total non-performing
loans, net of discount, was 53.72% at December 31, 1998, compared to 197.96% at
December 31, 1997. The significant decline in this ratio during the year ended
December 31, 1998 was due, in large part, to a single acquired commercial real
estate loan which became non-performing during the third quarter of 1998. vBank
is pursuing an aggressive strategy of resolution with respect to this loan, and
vBank expects to resolve the loan to its satisfaction within the next twelve
months. See "Risk Factors--Our Yield on Loans Purchased at a Discount is
Uncertain" and "Business --Asset Quality--Delinquent Loan and Non-performing
Assets."
Management believes that the allowance for loan losses is adequate to
cover actual and potential losses in the loan portfolio under current
conditions. Nevertheless, there can be no assurance that additions to such
allowance will not be necessary in future periods, particularly if the growth in
vBank's commercial loan originations and purchases continues.
Non-Interest Income. Non-interest income increased by $445,000 to
$759,000, for the year ended December 31, 1998. The increase was primarily the
result of an increase in gain on sales of investment securities of $251,000, an
increase in other non-interest income of $155,000 and brokerage operating income
of $39,000 generated by USABanc.com's brokerage subsidiary, USACapital.
Non-Interest Expense. Non-interest expense increased 50.6%, or $1.2
million to $3.7 million, for the year ended December 31, 1998. Compensation and
benefits expense increased $194,000 due primarily to the hiring of 21
31
<PAGE>
additional persons to assist in vBank's retail operations, including personnel
for a new branch, persons to service vBank's increased number of loans and staff
to assist with USABanc.com's financial reporting and other compliance issues.
Occupancy expense increased $321,000 due to the costs associated with the
opening of vBank's headquarters and branch in Center City, Philadelphia.
Advertising expense increased $115,000 as a result of opening vBank's Center
City branch and corporate headquarters, a promotional campaign for the branch
opening and an image campaign. Office and supplies expense increased $150,000
due to vBank changing its name in July 1998. Data processing expense increased
$84,000 as a result of the increase in the number of loans and deposit accounts,
as well as the number of transactions processed.
Income Tax Expense. Income tax expense increased $940,000 to $957,000,
for the year ended December 31, 1998, compared to the same period in 1997. The
increase in income tax expense reflected the increase in earnings before income
taxes.
Liquidity and Capital Resources
Liquidity. As vBank is the primary operating subsidiary of USABanc.com,
liquidity management is generally handled by vBank's management. Liquidity
refers to a company's ability to generate sufficient cash to meet the funding
needs of current loan demand, deposit withdrawals, principal and interest
payments with respect to outstanding borrowings and to pay operating expenses.
It is management's policy to maintain greater liquidity than required by the
applicable regulatory authorities in order to be in a position to fund loan
originations and purchases, to meet withdrawals from deposit accounts, to make
principal and interest payments with respect to outstanding borrowings and to
make investments that take advantage of interest rate spreads. vBank monitors
its liquidity in accordance with guidelines established by vBank and applicable
regulatory requirements. vBank can minimize the cash required during times of
heavy loan demand by modifying its credit policies or reducing its marketing
effort. Liquidity demand caused by net reductions in deposits are usually caused
by factors over which vBank has limited control. vBank derives its liquidity
from both its assets and liabilities. Liquidity is derived from assets by
receipt of interest and principal payments and prepayments, by the ability to
sell assets at market prices and by utilizing unpledged assets as collateral for
borrowings. Liquidity is derived from liabilities by maintaining a variety of
funding sources, including deposits, advances from the FHLB and other short and
long-term borrowings.
vBank's liquidity management is both a daily and long-term function of
funds management. Liquid assets are generally invested in short-term investment
securities and other short-term investments. If vBank requires funds beyond its
ability to generate them internally, various forms of both short and long-term
borrowings provide an additional source of funds. At March 31, 1999, vBank had
$33.8 million in borrowing capacity under a collateralized line of credit with
the FHLB, of which $30.0 million had been drawn upon as of such date.
At March 31, 1999, vBank had outstanding commitments, including unused
lines of credit, of $1.4 million and letters of credit of $649,000. Certificates
of deposit that are scheduled to mature within one year totaled $52.8 million at
March 31, 1999, and USABanc.com, on a consolidated basis, had $5.0 million of
borrowings scheduled to mature within one year. vBank anticipates that it will
have sufficient funds available to meet its current loan commitments.
We intend to continue to expend significant financial and management
resources in connection with our Internet banking operations; consequently we
expect to incur losses. Over the next twenty-four months, we expect to incur
$15.0 million in marketing expenses and $3.5 million in connection with the
development of our Internet banking operations.
USABanc.com believes that the net proceeds of this Offering, short and
long-term borrowings and advances from the FHLB will be sufficient to fund its
operating activities, capital expenditures and other obligations for at least
the next 12 months. While the execution of USABanc.com's current business plan
does not require raising additional capital in the near term, we may seek to
raise additional capital within such period to fund additional growth in excess
of that contemplated in our current business plan. There can be no assurance
that USABanc.com will be successful in raising additional capital when required
in sufficient amounts and on terms acceptable to USABanc.com. The failure to
raise such capital could have a material adverse affect on USABanc.com's
business, results of operations and financial condition. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
USABanc.com's then-current shareholders would be reduced.
32
<PAGE>
Capital Resources. USABanc.com and vBank are subject to various
regulatory capital requirements administered by federal and state banking
agencies. Failure to meet minimum capital requirements can result in certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on USABanc.com's financial
condition and results of operations. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, USABanc.com and vBank must
meet specific capital guidelines that involve quantitative measures of
USABanc.com's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. USABanc.com and vBank's
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. See
"Regulation of USABanc.com and vBank."
Quantitative measures established by regulation to ensure capital
adequacy require USABanc.com and vBank to maintain minimum amounts and ratios
(set forth in the table below) of Total and Tier 1 capital to risk-weighted
assets and of Tier 1 capital to average assets. As of March 31, 1999,
USABanc.com and vBank exceeded all capital adequacy requirements to which they
were subject.
On March 9, 1999, USABanc.com issued $10.0 million of 9.5% junior
subordinated debentures to USA Capital Trust I, a Delaware business trust, in
which USABanc.com owns all of the common equity. The trust issued $10.0 million
of trust preferred securities to investors in a private offering, secured by the
junior subordinated debentures and the guarantee of USABanc.com. The junior
subordinated debentures mature in 2029. The trust preferred securities are Tier
1 eligible except that, in accordance with Federal Reserve Board regulations, no
more than 25% of Tier 1 capital may be comprised of trust preferred securities.
USABanc.com is thus limited to recognizing $4.5 million as Tier 1 capital.
USABanc.com invested $6.0 million of the proceeds from the trust preferred
securities offering in vBank.
At March 31, 1999 and December 31, 1998, vBank's actual and required
minimum capital ratios were as follows:
<TABLE>
<CAPTION>
To Be "Well
Capitalized" Under
For Capital Adequacy Prompt Corrective
Actual: Purposes: Action Provisions:
------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total Capital (to Risk Weighted Assets) .... $20,233 13.9% $11,640 8.0% $14,550 10.0%
Tier 1 Capital (to Risk Weighted Assets) ... 19,058 13.1 5,820 4.0 8,730 6.0
Leverage..................................... 19,058 11.2 6,815 4.0 8,519 5.0
As of December 31, 1998:
Total Capital (to Risk Weighted Assets) .... 13,930 11.2 9,987 8.0 12,483 10.0
Tier 1 Capital (to Risk Weighted Assets) ... 12,879 10.3 4,994 4.0 7,490 6.0
Leverage............................. ....... 12,879 8.5 6,068 4.0 7,585 5.0
</TABLE>
At March 31, 1999 and December 31, 1998, USABanc.com's actual and
required minimum capital ratios were as follows:
<TABLE>
<CAPTION>
Actual: For Capital Adequacy Purposes:
-----------------------------------------------------------------
Amount Ratio Amount Ratio
-----------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
As of March 31, 1999:
Total Capital (to Risk Weighted Assets).............. $24,797 16.6% $11,942 8.0%
Tier 1 Capital (to Risk Weighted Assets)............. 18,163 12.2 5,971 4.0
Leverage.............................................. 18,163 10.3 7,027 4.0
As of December 31, 1998:
Total Capital (to Risk Weighted Assets).............. 15,566 12.1 10,317 8.0
Tier 1 Capital (to Risk Weighted Assets)............. 13,782 10.7 5,159 4.0
Leverage.............................................. 13,782 8.7 6,319 4.0
</TABLE>
33
<PAGE>
Year 2000 Compliance
Changing from the year 1999 to 2000 has the potential to cause problems
in data processing and other date-sensitive systems. The Year 2000 date change
can affect any system that uses computer software programs or computer chips,
including automated equipment and machinery. The Year 2000 problem is the result
of computer programs using two digits rather than four to define the year. Any
of our programs that are time sensitive may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a major system failure
or miscalculations. We use computer systems to perform financial calculations,
track deposits and loan payments, transfer funds and make direct deposits. The
primary processing of our loan and deposit transactions is currently performed
by Intrieve Incorporated, a third-party data processing vendor. We intend to
convert our data processing systems to EDS-Miser III during the third quarter of
1999. Upon such conversion, the primary processing of our loan and deposit
transactions will be performed by EDS-Miser, a third-party data processing
vendor. We also use computer software and computer chips to run security
systems, communications networks and other essential bank equipment. Because of
our reliance on these systems (including those used by our existing and
anticipated future third-party data processing vendors), we are following a
comprehensive process to ensure that such systems are ready for the Year 2000
date change. To become Year 2000 compliant, we are following guidelines
suggested by federal bank regulatory agencies and the Securities and Exchange
Commission. A description of each of the steps and the status of our efforts in
completing the steps is as follows.
During 1997, we formed a Year 2000 committee that has investigated the
Year 2000 problem and its potential impact on our systems. The Year 2000
committee reports to the Year 2000 committee of the board of directors which, in
turn, reports to the full board of directors.
An independent consulting firm has been engaged to assist us in
developing our approach to becoming Year 2000 compliant. The initial phase of
achieving Year 2000 compliance includes educating our employees and customers
about Year 2000 issues. We have completed this initial awareness and
understanding phase.
We have identified all potentially affected systems. This step has
included a review of all major information technology and non-information
technology systems to determine how Year 2000 issues affect them. We have
completed our assessment of which systems and equipment are most prone to
placing USABanc.com at risk if they are not Year 2000 compliant (i.e., mission
critical systems).
The Year 2000 committee has developed an inventory of our vendors and
actions to be taken, identified the team members responsible for completion of
each action and prepared a timetable and a project tracking methodology.
Significant vendors have been requested to advise us in writing of their Year
2000 readiness, including actions to become compliant if they are not already
compliant. A plan has been developed to repair or replace systems and equipment
not currently Year 2000 compliant. Although responses from certain vendors have
not yet been received, this step is substantially complete and we expect it to
be completed by September 1999.
Our current third party data processing servicer as well as vendors who
provide significant technology-related services have represented to us that they
have modified their systems to become Year 2000 compliant. We have developed
scripts involving typical transactions to test the proper functioning of the
modified systems. Additionally, in contemplation of our anticipated conversion
from Intrieve to EDS-Miser III in the third quarter of 1999, we have performed
such Year 2000 compliance checks on the EDS-Miser III system. We have arranged
for repair or replacement of equipment programs affected by Year 2000 issues.
Most of the testing and corrections have taken place and all of our mission
critical applications have been deemed compliant through testing or vendor
certification, or a plan has been developed for the software upgrades required.
This step was completed by June 30, 1999. The monitoring of certain vendors will
continue throughout 1999.
Year 2000 issues also affect certain of our customers, particularly in
the areas of access to funds and additional expenditures to achieve compliance.
As of December 31, 1998, we had contacted our commercial credit customers and
borrowers regarding the customers' awareness of Year 2000 issues. While no
assurance can be given that our customers will be Year 2000 compliant, we
believe, based on representations of such customers and a review of their
operations (including assessments of the borrowers' level of sophistication and
data and record keeping requirements), that the customers are either addressing
the appropriate issues to insure compliance or that they are not faced with
material Year 2000 issues. In addition, in substantially all cases the credit
extended to such borrowers is collateralized
34
<PAGE>
by real estate which inherently minimizes our exposure in the event that such
borrowers do experience problems or delays becoming Year 2000 compliant.
Our efforts to become Year 2000 compliant are being monitored by our
federal banking regulators. Failure to be Year 2000 compliant could subject us
to formal supervisory or enforcement actions. We expensed $20,000 during the
year ended December 31, 1998 relating to costs incurred as a result of our Year
2000 plan. We anticipate incurring approximately $120,000 in additional costs
related to the implementation of our Year 2000 plan. We presently believe Year
2000 issues will not pose significant operating problems for us. However, if
implementation and testing plans are not completed in a satisfactory and timely
manner by third parties on which we depend, or other unforeseen problems arise,
Year 2000 issues could potentially have an adverse effect on our operations. See
"Risk Factors--Problems Related to "Year 2000" Issues Could Adversely Affect Our
Business."
Inflation and Changing Prices
We are aware of the impact of inflation on interest rates and the
corresponding impact on a bank's performance. The ability of a financial
institution to cope with inflation can only be determined by ongoing analysis
and monitoring of its asset and liability structure. We monitor our asset and
liability position with particular emphasis on the mix of interest-sensitive
assets and liabilities in order to reduce the effect of inflation upon our
performance.
Inflation can have a more direct impact on categories of non-interest
expenses such as salaries and wages, supplies, and employee benefit costs. We
closely monitor expenses for both the effect of inflation and non-inflationary
increases in such items as staffing levels, usage of supplies and occupancy
costs.
35
<PAGE>
BUSINESS
General
USABanc.com is a financial services company dedicated to becoming a
leading provider of financial products and services over the Internet. We
believe the financial services industry has the highest degree of functionality,
next to research, over the Internet. We will strive to provide the ultimate
application for Internet users through our Website, www.usabanc.com. To achieve
our objective, we have created a dynamic Internet banking platform that will
offer our customers a convenient, cost-efficient, secure and user-friendly
medium for financial products and services, together with an entertaining
on-line experience that we believe no other financial based site provides. In
addition to offering traditional banking products and services, our site will
provide users portal applications such as live news feeds, timely search and
retrieval services, message boards, stock quotes, broker/dealer services and
links to other interesting sites on the Internet. Users can currently purchase
certificates of deposit and obtain stock quotes through our Website. We expect
www.usabanc.com to begin offering our Internet banking and brokerage products
and services in early August 1999.
We intend to capitalize on the increasing consumer use of the Internet
by launching and aggressively marketing our Internet banking platform on a
national basis. Although our origin is in Philadelphia as a traditional "brick
and mortar" bank, we believe we can provide financial services more efficiently
and economically to customers nationally through electronic delivery channels
rather than through further expansion of traditional "brick and mortar" branch
network delivery facilities. Through our Internet banking operations, our
customers will be able to access account data and information about products and
services we offer and conduct banking activities 24-hours-a-day every day of the
year from anyplace.
Internet Industry Background
Overview. The Internet enables millions of people worldwide to access
news and information, communicate with each other and conduct business
electronically. International Data Corporation reports that the number of
worldwide Internet users is projected to grow from approximately 97 million in
1998 to approximately 320 million by 2002.
The Internet has become a significant marketplace for buying and
selling goods and services. International Data Corporation forecasts that total
worldwide commerce on the Internet will grow from an estimated $32.4 billion in
1997 to an estimated $1.0 trillion in 2002. With the emergence of the Internet
as a globally accessible, fully interactive medium, many companies that have
traditionally conducted business in person, through the mail or over the
telephone are increasingly using electronic commerce. Many consumers are showing
strong preferences for transacting certain types of business, such as paying
bills, booking airline tickets, trading securities and purchasing consumer
products, electronically rather than in person or over the telephone.
Individuals can now conduct these transactions virtually anywhere at any time.
Many consumers have accepted and even welcomed self-directed on-line
transactions because such transactions can be faster, less expensive and more
convenient than transactions conducted through a human intermediary.
In addition to its use as a general commercial medium, the Internet has
rapidly emerged as a means of providing financial services. Many companies are
increasingly offering a variety of financial services, including credit cards,
brokerage services, insurance products and banking services, via the Internet,
and finance-related Websites continue to grow in popularity.
Electronic Banking. The increasing level of commerce transacted on the
Internet has prompted the development of electronic banking delivery systems.
These forms of electronic delivery systems provide convenience for customers and
allow financial institutions to lower their overhead costs. The two types of
electronic banking currently available, PC-based home banking and Internet
banking, are very different. The characteristics of each are as follows:
o PC-based Home Banking. PC-based home banking requires PC-based
financial services software products such as Intuit's Quicken,
Microsoft's Money or a bank's proprietary software. Each product
carries its own set of instructions that the customer must learn
before commencing any banking transactions. The software resides on
the customer's PC along with his or her account data and requires a
dial-up modem and manual
36
<PAGE>
downloading. Consequently, customers must conduct PC-based home
banking from the PC containing the customer's software and account
data. Customers generally must back up their account data at frequent
intervals to counteract the risk of losing data. Because the customer
must connect with the financial institution via modem and download
his or her account data, real-time transactions are not generally
possible.
o Internet Banking. Unlike PC-based home banking, Internet banking
requires only a secure Web browser for access to the Internet and the
financial institution. Internet banking requires no particular
software and does not restrict the customer's operations to the
location of his or her PC. Instead, the customer accesses the
financial institution through the Internet and deposits or transfers
funds, pays bills or transacts other business on a real-time basis.
Account data remains stored on the bank's secure server at all times
protected by technology designed specifically to safeguard such
information. No downloading or back-up is required, as the bank's
server backs up all data and transactions on a continuous basis. With
Internet banking, the information presented to the customer remains
current at all times. Customers who use personal financial software
retain the option to download transactions for financial or tax
planning purposes.
The use of electronic banking delivery systems, and particularly
Internet banking, is growing as consumers find that electronic banking is both
convenient and cost-effective. According to Cyber Dialogue, the number of
Americans banking on-line will triple from an estimated 6.9 million in 1998 to
an estimated 24.2 million in 2002. Cyber Dialogue further indicates that
web-banking customers are active customers.
Demographic surveys indicate that Internet users represent an ideal
target market for Internet banking. Recent studies by Jupiter Communications
revealed that, in the United States, approximately 49% of Internet users are
college graduates and that approximately 30% are engaged in professional or
managerial occupations. The survey also indicated that the median age of
Internet users is 33, that approximately 61% of Internet users are under the age
of 45 and that the average annual income of an Internet user is over $60,000.
The attractive demographics of Internet users facilitate the growth of Internet
banking. Internet users tend to be young and mobile and thus comfortable with
and receptive to the convenience of on-line commercial transactions. We believe
that as Internet users enter their prime earnings and savings years, there will
be an increased demand for high-yielding savings products. Additionally,
Internet users tend to be professionals with limited amounts of discretionary
time and are attracted to the convenience of "one-stop shopping" for a full
range of financial services.
The USABanc.com Strategy
We intend to execute our strategy of becoming a leading provider of
financial products and services over the Internet by:
o Establishing the USABanc.com Website as a leading and comprehensive
source for financial services on the Internet. We have created our
Internet banking platforms to allow our customers to choose between
platforms using either Hypertext Mark-up Language, more commonly
known as "HTML," or Macromedia's innovative "Flash" technology. We
expect the HTML Website to begin offering our Internet banking and
brokerage products and services in early August 1999, and we expect
the "Flash" Website to begin offering products and services in
September 1999. We believe the "Flash" platform will significantly
enhance our customers' experience on our Website and differentiate us
from other Internet banks. Additionally, because our "Flash" platform
was developed in anticipation of the greater bandwidth that is now
widely available, we will be able to deliver our services at the
speed expected by today's on-line user. We believe www.usabanc.com's
unique audio/visual interface will attract users who demand not only
efficient and convenient financial services, but entertaining content
as well. We intend to attract customers by providing the following
benefits:
o Offering a broad selection of financial products and
services. We will provide the convenience of "one-stop
shopping" to consumers. We currently offer certificates of
deposit and, beginning in early August 1999, we will begin
to offer our Internet banking and brokerage products and
services, which we expect to include on-line
interest-bearing checking accounts, money market accounts,
bill payment services, overdraft protection, ATM and debit
cards, mortgage loans, business equipment leases and
credit cards. USACapital, Inc., our wholly owned
subsidiary, is expected to offer on-line trading,
real-time quotes, low commissions and direct access to
funds
37
<PAGE>
held on deposit with vBank. We intend to continue to
develop innovative financial products such as
CDEnergy.com, the first ever live auction site for
FDIC-insured certificates of deposit. Although most of our
products will be offered by us directly, some of our
products, such as our credit cards and mortgage loans,
will be offered through our alliance partners such as
Low Cost Loans. We intend to expand our product offerings
further through strategic partnerships with other
companies to include various types of consumer loans and
insurance products. See "--Products and Services."
o Offering attractive interest rates and low or no fees. Our
operating costs will be generally lower than those of
traditional "brick and mortar" banks because we will not
require a traditional branch network to generate deposits
and conduct operations. We intend to pass our savings in
operating costs on to our customers by offering attractive
interest rates and low or no fees.
o Building national brand awareness through extensive
marketing efforts. We are creating a national marketing
campaign designed to acquire new customers and promote the
USABanc.com brand as a premier provider of financial
services over the Internet. We are working with a
nationally known marketing company to build national
awareness of the USABanc.com name through a variety of
marketing initiatives. Such initiatives include Internet
advertising, national print, television and radio
advertising, direct mail, strategic alliances with other
companies, affinity partnerships and customer referral
programs. We expect to spend $7.0 million to fund our
marketing efforts during the last six months of 1999 and
an additional $10.0 million over the following two years.
While our marketing efforts are intended to enhance our
market share and provide us with a competitive advantage
over both our existing and potential competition, our
marketing expenditures are expected to result in our
recognizing net losses during the next two years. See
"--Marketing and Strategic Alliances."
o Offering superior service, convenience and ease of access.
As with our traditional banking operations, we will
continually seek ways to enhance customer satisfaction.
For example, unlike many other banks, we expect to offer
services such as electronic bill payment and ATM cards
without imposing service charges. Our Website also offers
a higher level of convenience than can be achieved in a
traditional bank branch or through PC-based home banking.
Our customers will be able to access account data and
information regarding products and services and conduct
banking activities 24-hours-a-day. Our customers can also
currently reach our customer service representatives
24-hours-a-day by telephone or e-mail. We have developed
our Website to be a user-friendly Internet banking
platform.
o Offering interesting and entertaining content through a
real-time interactive medium. Our Website was designed to
be utilized by Internet users who are attracted to the
innovative features contained on our Website and not just
by persons who are solely interested in executing
financial transactions. In addition to a wide array of
financial products and services, we intend to offer live
news feeds, timely search and retrieval services, message
boards, and links to other sites on the Internet.
o Offering advanced security measures. Through the use of
sophisticated technology, we are able to provide security
measures to our customers that we believe to be among the
most advanced security measures currently available in the
Internet banking industry. See "--Security."
o Pursuing strategic alliances and affinity partnerships. We are
currently negotiating strategic marketing agreements with several
leading Internet entities. We intend to establish an affinity
marketing program which will allow various trade groups and other
organizations to brand and market USABanc.com's savings and
investment products. These programs will allow us to reach targeted
groups of consumers with the support of a virtual endorsement of each
parent community. Additionally, we plan to implement several
innovative customer acquisition and retention programs designed for
new and existing USABanc.com customers. Our cost per new customer
acquisition will initially be higher than industry averages, but we
expect these costs to decline as awareness of the USABanc.com brand
increases. We intend to co-brand
38
<PAGE>
these programs with select USABanc.com partners. We believe such
co-branding will maximize customer conversion effectiveness and
ultimately reduce the cost per new customer acquisition.
o Intensive national marketing campaign. We intend to use a national
marketing campaign to expand our brand awareness. The campaign will
include Internet advertising through portals such as Yahoo! and
Excite, television campaigns on networks such as CNBC and MSNBC,
radio advertising such as our spots on the Howard Stern Show, and
newspaper and magazine advertising in national publications such as
the Wall Street Journal, New York Times and Fast Company. We expect
our costs of acquiring new customers to decline as we gain market
share and brand recognition. As a result of our marketing efforts, we
expect to incur losses in 1999 and 2000. As we increase our market
share and become a leading provider during this early stage of
Internet banking, we expect our revenues to increase and to return to
profitability, although there can be no assurance that we will return
to profitability within such time frame.
o Generating sponsorship and advertising revenues. We intend to
establish advertising relationships by offering advertising
opportunities to leading brand marketers and merchants in traffic
intensive areas of the USABanc.com network. These merchants will
receive exposure through banner advertising combined with promotional
offers in exchange for which we will collect a fee based on various
arrangements such as cost per click for each new visit to the
third-party website made through our network, and/or a share of
revenues from each sale to USABanc.com users.
o Expanding our Lending Efforts. Since our acquisition of vBank in
November 1995, we have pursued an aggressive growth strategy,
characterized by purchases of pools of primarily performing loans
secured by single-family residential, multi-family residential and
commercial properties. Our net loan portfolio has grown from
$7.0 million at December 31, 1995 to $110.0 million at March 31,
1999. We intend to increase our originations of commercial real
estate and commercial business loans. We also intend to continue to
purchase primarily performing loan pools at a discount. These loans
may consist of multi-family residential loans, commercial property
loans and one-to-four family residential mortgage loans.
Our Internet banking strategy also involves the streamlining of our
existing branch network. We are currently negotiating the sale of one of our
four "brick and mortar" branch facilities. Additionally, we are in the process
of selling the building which serves as our corporate headquarters. We will use
any gains on these dispositions for the execution of our Internet business
strategy. We intend to lease this building following the sale and to maintain
our retail and lending operations in such facility. See "--Description of
Properties."
Products and Services
Deposit Products and Services. We plan to offer a variety of deposit
products at attractive interest rates in order to build our customer base. We
will be able to offer attractive interest rates as a result of our low operating
costs. We also plan to attract customers by offering convenient services such as
free electronic bill payment, and ATM/debit cards. We expect our on-line deposit
products and services to include:
o Deposit Products. We intend to offer a tiered-rate checking account,
a tiered-rate money market account, a statement savings account and
several fixed term certificates of deposit.
o Bill Payment Service. Through services expected to be provided by
EDS, we intend that customers will be able to pay their bills on-line
through electronic funds transfer or a written draft prepared and
sent to the creditor. We do not intend to charge a fee for this
service initially.
o Overdraft Protection. If a customer has both an interest checking
account and a money market account or a statement savings account, we
will automatically establish overdraft protection between those
accounts.
o ATM/Debit Cards. Each customer will automatically receive an ATM card
when he or she opens an account with vBank. We do not charge our own
fee for ATM usage, but fees are generally imposed by the operator of
the ATM. Debit features of the card will carry the Mastercard logo.
vBank will reimburse ATM surcharges incurred at facilities for up to
six ATM transactions per monthly statement cycle.
39
<PAGE>
Lending Programs. To generate fee income and provide a convenient
service to its customers, we plan to offer on-line loans and credit cards as
described below.
o Mortgage Loans. We intend for the Website to enable customers to
obtain interest rate quotes and apply for mortgage loans on-line. We
have an agreement with Low Cost Loans, whereby we will act as a loan
originator on behalf of Low Cost Loans.
o Credit Cards. We expect to offer our customers Visa and MasterCard
credit cards issued for no annual fee. We will be paid a
fee for each cardholder referred through our Website.
Customers will be able to apply for these credit cards on-line. We
plan for the cards to prominently display the "USABanc.com" logo with
the Visa or MasterCard emblem appearing in the lower right corner of
the card.
Non-banking Financial Services. To serve as a single convenient source
for the financial services needs of Internet users and to generate additional
non-interest income, we plan to offer a full range of non-banking financial
services designed to attract and retain customers. These services are expected
to include securities brokerage through USACapital, Inc. and business equipment
leasing services through USACredit, Inc., each as described below.
o Securities Brokerage Services. We intend to provide our customers
with access to on-line brokerage services through USACapital, Inc.,
our wholly owned broker-dealer subsidiary. We have a fee-sharing
agreement with USACapital. Customers will be able to purchase
securities without writing checks to their brokers, as trading fees
will be automatically deducted from their checking or money market
accounts with vBank. Investment proceeds will be automatically
deposited into the customer's deposit account with vBank. We expect
to provide customers 24-hour on-line access, real-time quotes, low
commissions and a professional brokerage staff.
o Business Equipment Leasing. We have entered into an agreement with
USACredit, Inc., a wholly owned subsidiary of USABanc.com, that
allows our customers, many of whom are independent business owners or
managers, to lease small business equipment. Leases range in amounts
from $5,000 to $500,000 and cover virtually all types of business
equipment. USACredit will act as a broker and provide advice,
comparison quotes and immediate equipment lease financing through a
network of financial institutions.
Future Products and Services. To generate additional interest and fee
income and enhance customer convenience, in the future we plan to introduce a
variety of new products and services. Future products and services may include
insurance products, commercial and consumer lending, cash management accounts,
installment loans and various other products and services.
Marketing and Strategic Alliances
Our marketing strategy is aimed at making USABanc.com a leading brand
in the Internet financial services market. Our marketing strategy is designed to
increase our customer base and includes on-line and off-line advertising. We are
developing strategic alliances and partnerships with several top-performing and
customer-based Internet sites. These strategic relationships will be a key
factor in promoting and branding our core products and services. Additionally,
we expect to derive marketing benefits from media coverage that we generate
through our public relations campaign. We believe such coverage will increase
the general public's awareness of USABanc.com and simultaneously build our
customer base.
40
<PAGE>
Our marketing strategies will extend beyond our on-line advertising and
public relations campaigns. New initiatives will include print advertisements in
publications aimed at our target customers and potential strategic partners,
direct mail marketing, co-branded credit cards and other strategic partnerships
with Internet financial services providers.
We realize that our new marketing strategy will require a significant
investment of resources and a commitment to pursue new marketing relationships.
We recently hired a director of marketing and we plan to hire additional
marketing support staff. We believe that a significant increase in our
investment in marketing initiatives will enable us to increase our name
recognition and grow our customer and deposit base on a national scale.
Operations
Customers will be able to access our Internet bank through any Internet
service provider by means of an acceptable secure Web browser. When customers
access USABanc.com's service menu, they will be able to open a new account,
review the status of an existing account or engage in a transaction. To open a
new account, the customer will complete the on-line enrollment form on our
Website, print the signature card, sign it and mail it to us. Customers will be
able to make deposits into an open account via direct deposit programs, by
transferring funds between accounts at vBank, by wire transfer, by mail or in
person at our principal executive offices. Customers will also have the ability
to make withdrawals and access their accounts at ATMs that are affiliated with
the MAC, Cirrus, Honor and NYCE networks, which we believe will provide added
customer convenience. Customers will be able to apply for loans, review account
activity, pay bills electronically, conduct brokerage transactions, receive
statements by mail and print bank statement reports from any PC with a secure
Web browser, regardless of its location.
We have negotiated relationships with a select group of service
providers who not only provide us with significant quality, security,
reliability, performance and marketing capabilities, but also play an integral
role in implementing our Internet banking strategy. Because we expect to
outsource our principal operational functions to experienced third-party service
providers that have the capacity to process a high volume of transactions, we
believe we will be able to respond easily to growth. Moreover, we intend to
preserve a degree of flexibility that will enable us to assess and evaluate our
product offerings and delivery structure on an ongoing basis and to incorporate
other alliance opportunities as they present themselves. Should any of these
relationships terminate however, we believe we will be able to secure the
required services from an alternative source without material interruption of
our operations. Our principal service providers are described below.
o EDS-Miser. We will receive core systems processing services, such as
deposit account, loan and year-end processing services, from
EDS-Miser. The EDS-Miser's Miser III system will interface with EDS'
secure Internet servers and will verify customer passwords and
identification. Miser III will also operate our ATM/debit card
management systems.
o EDS. EDS licenses its Internet-based Electronic Banking System and
electronic bill paying services, provided through CheckFree, to us.
EDS will provide operational support and hosting services for our
Internet banking and bill payment applications. Specifically, EDS
will provide a secure Website and software that performs services
relating to our infrastructure and other electronic banking services.
EDS will provide the interface necessary to link our servers with
those used by EDS-Miser and CheckFree. EDS will also provide software
maintenance and consulting services as needed.
Security
Our ability to provide our customers with secure financial services
over the Internet is of paramount importance. We will continually evaluate the
Internet systems, services and software used in our operations to ensure that
they meet the highest standards of security. The following are among the
security measures that we have in place for our Internet banking operations:
o Encrypted Transactions. All banking transactions and Internet
communications will be encrypted so that sensitive information is not
transmitted over the Internet in a form that can be read or easily
deciphered. Encryption of Internet communications is accomplished
through the use of the Secure Sockets Layer ("SSL") technology. SSL
is the standard for encryption on the Internet and is currently used
by Netscape's Navigator (Version 3.03 or higher) and Microsoft's
Internet Explorer (Version 3.02 or higher). Messages between the
41
<PAGE>
web application server and EDS-Newtrends system will use encrypted
pins using EDS encryption, which is described in "--Isolated Bank
Server" below.
o Secure Logon. To eliminate the possibility that a third party may
download vBank's or a customer's password file, user identification
and passwords will not be stored on the Internet or the Web server.
Furthermore, passwords are strings of six to eight alphanumeric
characters, which makes the chance that a password can be randomly
guessed less than one in one trillion.
o Isolated Bank Server. The computer used to provide our operational
services cannot be accessed directly through the Internet. It is on a
private connection, or intranet, that provides two-way communication
between the isolated bank server and the EDS Internet Server.
Consequently, an Internet user cannot directly access the computer
that actually provides our services. All banking services will be
routed from the EDS application server through a firewall. The
firewall is a combined software and hardware product that precisely
defines, controls and limits the access to "internal" computers from
"outside" computers across a network. Use of this firewall means that
only authenticated bank customers or administrators may send or
receive transactions through it, and the firewall itself is believed
to be immune to penetration from the network. The firewall is thus a
mechanism used to protect vBank server from the freely accessible
Internet. Furthermore, all messages sent or received between the EDS
application server and vBank server are carried on a proprietary
internal EDS network and employ DES encryption to increase security.
Finally user passwords are additionally protected using Atalla's
hardware based encryption techniques. DES is a symmetric key
algorithm and is highly secure because it is not susceptible to
standard cipher-text attacks. Thus, even if a perpetrator were able
to route a message to vBank server through the firewall, the message
could not be encrypted in a way that would be considered valid by the
server. As a result, vBank server would reject the message.
o Authenticated Session Integrity. An authenticated user is any user
who signs onto our Website with a valid user ID and password.
Although we expect the vast majority of authenticated users to be
legitimate bank customers, vBank server is programmed to limit
exposure to an authenticated user who is attempting to defraud vBank.
If the authenticated user alters the URL (the command or request that
is sent from the browser to the server) in any way in an attempt to
gain access to other users' accounts, the EDS server immediately
detects that the session integrity variables have been violated. The
EDS server will immediately stop the session and record the attempt
in a log so that our staff can investigate.
o Physical Security. All servers and network computers reside in Plano,
Texas and Rochelle Park, New Jersey in secure EDS facilities.
Currently, computer operations supporting our Internet access are
based in Plano, Texas. Only employees with proper photographic
identification may enter the primary building, which is monitored by
guards at multiple levels 24-hours-per-day, 7-days-per-week. The
computer operations are located in a secure area, with admission only
by key card. Key cards are restricted to a specific group of
employees. Access to the Web server console requires further password
identification, which provides only limited access to the system
based on the role assigned to that password by the security
administrator.
o Secure Modem Access. A private leased line that is not accessible
from the public network connects vBank server and EDS' web
application server. A dial-up maintenance port also permits access to
vBank server. The modem that provides the only access to this port is
specially protected and is only enabled on an as-needed basis to a
restricted group of employees.
o Service Continuity. EDS and EDS-Newtrend each provide a fully
redundant network with no single point of failure. vBank server is
also "mirrored" so that hardware failures or software bugs should
cause no more than a few minutes of service outage. "Mirroring" means
that the various servers are backed up continuously so that all data
is stored in two physical locations. This network and server
redundancy ensures that access to vBank will be reliable. However, if
customers are not able to access vBank over the Internet, customers
will retain access to their funds through several means, including
paper checks, ATM cards and customer service.
o Monitoring. All customer transactions on vBank server in EDS produce
one or more entries into transactional logs. We and EDS recognize
that it is critical to monitor these logs for unusual or fraudulent
activity. As mentioned previously, any attempt by an authenticated
user to modify the command or request
42
<PAGE>
that is sent from the browser to the server will be logged.
Additionally, all financial transactions will be logged. Our
personnel will review these logs regularly, and any abnormal or
unusual activity will be noted and we, EDS or both will take either
appropriate action. Ultimately, vigilant monitoring is the best
defense against fraud.
o Security Assessment and Detection. EDS uses a service to simulate
attacks on the networks and systems to fortify the security features
before the system is breached. The system also has a feature that
detects and stops any unauthorized activity, whether from an internal
or external source. This feature can record the origin, type,
destination, and time of the attack and make this information
immediately available to a monitor.
The preceding security measures are designed to ensure that our
Internet bank is set up in a secure manner. However, over the long term, the
security of our Internet bank depends upon the procedures and standards used for
administration of the Internet site. EDS is required to obtain SAS 70
certification from a national accounting firm. This is a certification by
independent auditors that EDS computer systems are being managed and operated in
a manner consistent with accepted practices. EDS has received this
certification.
We believe the risk of fraud presented by Internet banking is not
materially different from the risk of fraud inherent in any banking
relationship. We believe the three principal reasons for a breach in bank
security are: (1) misappropriation from the user of the user's account number or
password, (2) penetration of the bank's server by an outside "hacker" and (3)
fraud committed by an employee of the bank or one of its service providers. Both
traditional banks and Internet banks are vulnerable to these types of fraud. By
establishing the security measures described above, we believe we have reduced
our vulnerability to the first two types of fraud. To counteract fraud by
employees, associates and consultants, we have established internal procedures
and policies designed to ensure that, as in any bank, proper control and
supervision is exercised over employees, associates and consultants. We will
also counteract all types of fraud through daily examination of our
transactional logs. In addition, we intend to provide, at no cost to the
depositor, $10,000 insurance coverage from Travelers Property Casualty to
protect the customer from any loss due to the unauthorized use of a depositor's
accounts and access to our Internet banking system.
Lending Activities
Since our acquisition of vBank in November 1995, we have aggressively
grown our loan portfolio through the acquisition of loan pools at a discount and
through loan originations. We intend to continue to expand our small business
community banking presence in the Mid-Atlantic region primarily through
increased loan originations and purchases of pools of discounted loans. We
intend to emphasize the origination and purchase of commercial real estate and
commercial business loans, which generally carry higher yields than traditional
single-family residential loans. Although we intend to continue to originate
single-family residential and consumer loans, such loans will not be emphasized
and will be offered primarily as an accommodation to our customers.
Single-family residential loans originated through our Website will be
originated through our alliance partner, Low Cost Loans. We intend to fund our
increased lending activities in part with deposit growth we expect to achieve
from our Internet banking operations.
Loan Portfolio. The principal components of our loan portfolio are
first mortgage loans secured by residential real estate and commercial real
estate and, to a much lesser extent, home equity loans, passbook and other
consumer loans and commercial business loans. At March 31, 1999, our total loans
receivable, net amounted to $110.0 million, which represented 59.1% of our
$186.2 million in total assets at that date.
43
<PAGE>
The following table sets forth the composition of our loan portfolio in
dollar amounts and as a percentage of the portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
------------ ---------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate(1)(2).................... $110,197 98.9% $102,076 98.8% $54,262 95.1%
Commercial business(3)............... 1,071 1.0 986 1.0 1,091 1.9
Consumer(4).......................... 67 0.1 243 0.2 1,694 3.0
-------- ----- -------- ----- ------- -----
Total loans receivable............... $111,335 100.0% $103,305 100.0% $57,047 100.0%
======== ===== ======== ===== ======= =====
Less
Loans in process.................. -- -- 260
Deferred loan fees................ (147) (116) 217
Allowance for loan losses......... (1,175) (1,051) 568
-------- -------- -------
Net loans receivable................. $110,013 $102,138 $56,002
======== ======== =======
</TABLE>
- --------------
(1) Consists of loans secured by single-family residential, multi-family
residential and commercial real estate.
(2) At March 31, 1999, over a majority of vBank's real estate loans consisted of
loans secured by multi-family residential and commercial real estate.
(3) Consists primarily of inventory and working capital loans.
(4) Consists primarily of home equity loans and installment loans.
Loan Maturity. The following table sets forth the maturity or period of
repricing of our loan portfolio at March 31, 1999. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due within one year. Adjustable and floating rate loans are included
in the period in which interest rates are next scheduled to adjust rather than
in which they contractually mature. Fixed rate loans are included in the period
in which the final contractual repayment is due. The following table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
Within 1 1-3 3-5 5-15 Beyond
Year Years Years Years 15 Years Total
-------- ----- ----- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate(1)................... $14,948 $13,524 $27,390 $21,091 $33,244 $110,197
Commercial business(2)........... -- -- -- 1,071 -- 1,071
Consumer(3)...................... -- -- 67 -- -- 67
------- ------- ------- ------- ------- --------
Total loans receivable........ $14,948 $13,524 $27,457 $22,162 $33,244 $111,335
======= ======= ======= ======= ======= ========
</TABLE>
- ---------------
(1) Consists of loans secured by single-family residential, multi-family
residential and commercial real estate.
(2) Consists primarily of inventory and working capital loans.
(3) Consists primarily of home equity loans and installment loans.
Origination, Purchase and Sale of Loans. Our lending activities are
subject to the underwriting policies and loan origination and purchase
procedures established by the board of directors and management. Loan
originations are derived from a number of sources, such as existing customers,
our loan officers, borrowers, builders, attorneys, walk-in customers and
correspondent lenders. We expect loan originations to also be derived from our
Website in the future. As described in "--Products and Services--Lending
Programs--Mortgage Loans," we have an agreement with Low Cost Loans whereby
vBank acts as a loan originator on behalf of Low Cost Loans with respect to
retail loans, including single-family residential and home equity loans. Upon
receiving a loan application, we obtain a credit report and
44
<PAGE>
employment verification to verify specific information relating to the
applicant's employment, income and credit standing. In the case of a real estate
loan, an appraiser approved by us appraises the real estate intended to
collateralize the proposed loan. An underwriter checks the loan application file
for accuracy and completeness, and verifies the information provided. If the
appraisal and credit information generally comply with our underwriting
guidelines, the loan is approved by the board of directors. We have not
delegated to any of our loan officers approval authority and all loan
originations are required to be approved by the board of directors. However, to
accommodate vBank's future growth, the board of directors is considering
implementing a committee system to approve loans. Such committee would approve
loans based on the board of directors' approved loan underwriting policies.
Loans in excess of $1.0 million would still require approval by the full board
of directors. For multi-family residential and commercial real estate loans, we
require that the borrower provide operating statements, pro forma cash flow
statements and, if applicable, rent rolls. In addition, we review the borrower's
credit standing and expertise in owning and managing the type of property that
will collateralize the loan. Fire and casualty insurance, and in certain cases,
flood insurance, are required on the property serving as collateral at the time
the loan is made and throughout the term of the loan.
Our internal originations consist primarily of multi-family residential
and commercial real estate loans, which we intend to continue to emphasize. In
addition, although commercial business loans have historically not been a major
line of business for us, we intend to increase our emphasis on small business
commercial loan originations. Although we will and do originate single-family
residential and consumer loans, such originations have historically been made as
an accommodation to our customers and we generally do not emphasize such loans.
Since December 1995, we have been supplementing our originations with
purchases of loan pools at a discount. Such purchases have been the primary
factor in our substantial growth since 1995. Prior to 1997, we acquired loans at
a discount, generally from the FDIC and the Resolution Trust Corporation,
primarily in auctions of pools of loans acquired by such agencies from the large
number of financial institutions which had failed during the late 1980s and
early 1990s. Although governmental agencies, such as the FDIC, continue to be a
potential source of loans at a discount, in recent periods we have obtained
discounted loans primarily from various private sector sellers, such as banks,
savings institutions, mortgage companies and insurance companies which generally
were seeking to eliminate a loan or a category of loans from their portfolio.
At March 31, 1999, our net discounted loan portfolio amounted to $57.6
million or 31.7% of our total assets. These loans had a face value of $62.1
million, reflecting a discount of $4.5 million or 7.3%. Management believes
that, at March 31, 1999, approximately 54% and 46% of the discounted loan
portfolio was secured by residential and commercial properties, respectively.
Substantially all of the loans we purchase at a discount were
performing in accordance with their terms at the time of purchase. We have
developed and maintain a proprietary model to determine what we believe to be
the appropriate purchase price to be paid for a discounted loan pool. The
discount is determined based on objective and subjective criteria. The objective
criteria includes geographic location, loan-to-value ratio, collateral type,
past payment performance, and the term and structure of the loan. The subjective
criteria relies on senior management's substantial experience with respect to
the acquisition and management of discounted real estate loans.
Real estate loans generally are acquired in pools, although
multi-family residential and commercial real estate loans may be acquired
individually. These pools generally are acquired in auctions or competitive bid
circumstances in which we face substantial competition. Although many of our
competitors have access to greater capital and have other advantages, we believe
we have a competitive advantage relative to many of our competitors as a result
of our experience in acquiring and managing loans purchased at a discount and
the strategic relationships and contacts we have developed in connection with
these activities.
Prior to making an offer to purchase a portfolio of loans, we conduct
an extensive investigation and evaluation of the loans in the portfolio.
Evaluations of potential loans are conducted primarily by our senior management
who specialize in the analysis of such loans. Our employees may use third
parties to assist them in conducting an evaluation of the value of the
collateral property as well as to assist them in the evaluation and verification
of information and the gathering of other information not previously made
available by the potential seller.
Although we focus on acquiring loans in the Mid-Atlantic region, we
have acquired loans secured by real estate located in a number of other states
including Texas, Florida and California. We believe that the relatively broad
geographic distribution of our discounted loan portfolio reduces the risks
associated with concentrating such loans in
45
<PAGE>
limited geographic areas and that due to our expertise and our policies and
procedures, the geographic diversity of our discounted loan portfolio does not
place greater burdens on our ability to administer and, if applicable, service
such loans.
One-to-Four Family Residential Mortgage Lending. We have historically
not been an active originator of single-family residential loans and such loans
have generally been originated as an accommodation to our customers. These loans
are generally made to borrowers who, because of the size of the loan, prior
credit problems, the absence of a credit history or other factors, are unable to
qualify as borrowers for a single-family residential loan under Federal Home
Loan Mortgage Corporation or Federal National Mortgage Association guidelines
("conforming loans"). As a result, these loans are not eligible for resale in
the secondary mortgage market. Loans to non-conforming borrowers are perceived
by our management as being advantageous to us because they generally have higher
interest rates and origination and servicing fees and generally lower
loan-to-value ratios.
Substantially all of our one-to-four family residential loans have been
acquired through loan purchases. A majority of these loans are located outside
of the greater Delaware Valley. Although our purchased single-family residential
loans carry a variety of terms, we believe the majority of such loans have
loan-to-value ratios of 80% or below and carry fixed rates of interest. We
generally attempt to acquire the servicing rights with respect to purchased
single-family residential loans, which includes collecting and remitting loan
payments, inspecting the properties and making certain insurance and tax
payments on behalf of the borrowers. However, we may on occasion purchase such
loans where the seller retains the servicing rights. At March 31, 1999, we held
in our portfolio approximately $25.8 million of loans which were being serviced
by others.
We currently offer fixed rate one-to-four family mortgage loans and,
through an affiliation with Low Cost Loans, we will offer a full array of
adjustable, balloon and fixed rate one-to-four family mortgage loans, in each
case with terms typically ranging from 15 to 30 years. One-to-four family
residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The average length of time that our one-to-four family
residential mortgage loans remain outstanding varies significantly depending
upon trends in market interest rates and other factors. In recent years, the
average maturity of our mortgage loans has decreased significantly due to the
unprecedented volume of refinancing activity. Accordingly, estimates of the
average length of time that one-to-four family loans may remain outstanding
cannot be made with any degree of accuracy.
We are permitted under applicable law to lend up to 100% of the
appraised value of the real property securing a residential loan. However, if
the amount of a residential loan originated or refinanced exceeds 80% of the
appraised value, we are required by federal regulations to obtain private
mortgage insurance on the portion of the principal amount that exceeds 80% of
the appraised value of the security property. Pursuant to underwriting
guidelines adopted by the board of directors, we will generally only lend up to
80% of the appraised value of the property securing a single-family residential
loan.
From time to time, we will originate loans for the construction of
single-family residential properties. Such loans may be made to individuals or
builders. We do not expect to emphasize construction lending in the near term
and at March 31, 1999, we had no construction loans outstanding.
Multi-family Residential Real Estate and Commercial Real Estate
Lending. Our lending activities currently emphasize the origination and
acquisition of loans secured by existing multi-family residential and commercial
properties. As of March 31, 1999, over a majority of our real estate loan
portfolio consisted of loans secured by multi-family residential and commercial
properties. We have generally targeted higher quality, smaller multi-family
residential and commercial real estate loans with principal balances up to
vBank's legal lending limit of $3.0 million.
Our multi-family residential loans are secured by multi-family
properties of five units or more, while our commercial real estate loans are
secured primarily by industrial, warehouse and self-storage properties, office
buildings, office and industrial condominiums, retail space, strip shopping
centers and mixed-used commercial properties. At March 31, 1999, substantially
all of the properties securing our multi-family residential and commercial real
estate loans were located in the greater Delaware Valley. We will presently
originate multi-family residential and commercial real estate loans for terms of
up to 25 years. Some of these loans contain call or repayment option features
within three to seven years after origination. We will originate such loans on
both a fixed-rate or adjustable-rate basis, with the latter based on an
applicable prime rate. Adjustable-rate loans may have an established ceiling and
floor, and the maximum loan-to-value for these loan products is generally 80%.
Though historically vBank has originated and acquired loans
46
<PAGE>
with lower debt coverage ratios, as part of the criteria for underwriting
multi-family residential and commercial real estate loans, vBank generally
requires a debt coverage ratio (the ratio of net cash from operations before
payment of debt service to debt service) of at least 1.25 to 1.0 on originated
loans and at least 1.15 to 1.0 on acquired loans. We generally seek additional
protection, such as secondary collateral and personal guarantees from the
principals of the borrowers, to mitigate any weaknesses identified in the
underwriting process.
Loans collateralized by multi-family residential and commercial real
estate generally involve a greater degree of credit risk than one-to-four family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate and multi-family real estate is
typically dependent upon the successful operation of the related property. If
the cash flow from the project is reduced, the borrower's ability to repay the
loan can become impaired. At March 31, 1999, $832,000 of our commercial real
estate loans were classified as non-performing. As of such date, a significant
portion of our non-performing commercial real estate loans was comprised of one
purchased loan.
Commercial Business Loans. We originate commercial business loans
consisting primarily of lines of credit and term loans secured by equipment and
accounts receivable. At March 31, 1999, commercial business loans totaled $1.1
million, or 1.0%, of our total loan portfolio. In addition, all of our
commercial business loans which are secured by real estate have been classified
as commercial real estate loans. Currently, we are placing greater emphasis on
the origination of commercial business loans. We recently hired two loan
officers with extensive commercial lending experience. Commercial business loans
generally have shorter terms and higher interest rates than mortgage loans
because of the type and nature of the collateral. At March 31, 1999, none of our
commercial business loans were classified as non-performing.
Consumer Loans. We originate consumer loans consisting principally of
loans secured by deposit accounts and marketable securities, and home
improvement, personal and automobile loans. At March 31, 1999, consumer loans
totaled $67,000, or 0.1%, of our total loan portfolio. We offer consumer loans
as a service to our customers. Consumer loans are offered primarily on a
fixed-rate basis with maturities generally of less than ten years. Consumer
loans entail greater credit risk than do residential mortgage loans but have
smaller balances and tend to have higher interest rates. At March 31, 1999, none
of our consumer loans were classified as non-performing.
Loan Origination Fees and Other Income. In addition to interest earned
on loans, we generally receive fees in connection with loan originations. Such
loan origination fees, net of costs to originate, are deferred and amortized
using the interest method over the contractual life of the loan. Fees deferred
are recognized as income immediately upon prepayment of the related loan. At
March 31, 1999, we had $147,000 of net deferred loan origination fees. Such fees
vary with the volume and type of loans and commitments made and purchased, the
principal repayments on such loans, and competitive conditions in the real
estate market that reflect the demand and availability of money. In addition to
loan origination fees, we also receive loan fees and service charges that
consist primarily of deposit transaction account service charges and late
charges.
Loans to One Borrower. Current regulations restrict loans to one
borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus
on an unsecured basis, and an additional amount equal to 10% of unimpaired
capital and unimpaired surplus if the loan is secured by readily marketable
collateral (generally, financial instruments). At March 31, 1999, our regulatory
limit on loans to one borrower was $3.0 million and our five largest loans or
groups of loans to one borrower, including related entities, aggregated $3.7
million, $3.2 million, $3.0 million, $2.2 million and $1.9 million. All five of
these loans or loan concentrations were secured by multi-family residential,
commercial real estate or marketable securities and were performing in
accordance with their terms at March 31, 1999. Although two of these extensions
of credit may appear to exceed our regulatory lending limit at March 31, 1999,
management has taken appropriate measures to conform such loans. The largest
extension of credit is currently conforming as a result of permanent principal
reductions exceeding $700,000 on the aggregate loan relationship. The $3.2
million extension is conforming as of June 30, 1999 based on our sale of a
$200,000 participation to another financial institution.
Asset Quality
Collection Procedures. Our collection procedures provide that when a
loan is 16 days past due, a computer generated late charge notice is sent to the
borrower requesting payment of the amount due under the loan, plus a late
47
<PAGE>
charge. If such delinquency continues, on the first day of the next month, a
delinquent notice is mailed advising the borrower of the violation of the terms
of the loan. We attempt to contact borrowers whose loans are more than 30 days
past due. If such attempts are unsuccessful, we will engage counsel to
facilitate the collection process. A delinquent loan report is presented to the
board of directors on a monthly basis for their review. Historically, we have
instituted legal action on loans 90 days past due. It is sometimes necessary and
desirable to arrange special repayment schedules with borrowers to prevent
foreclosure or filing for bankruptcy. In such cases, we prepare a schedule
pursuant to discussions with the borrower and such schedule is reviewed by the
board of directors.
Delinquent Loans and Non-performing Assets. Loans are reviewed on a
monthly basis. Loans are typically placed on nonaccrual status when either
principal or interest is 90 days or more past due. Delinquent loans are charged
off when it appears no longer reasonable or probable that the loan will be
collected. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income.
Real estate acquired by us as a result of foreclosure or by deed in
lieu of foreclosure is deemed other real estate owned ("OREO") until such time
as it is sold. When OREO is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its estimated fair value, less
estimated selling expenses. Valuations are periodically performed, or obtained,
by management and any subsequent decline in fair market value is charged to
operations. We had no OREO as of December 31, 1997 and $66,000 as of December
31, 1998. At March 31, 1999, OREO totaled $65,000 and consisted of one parcel of
commercial real estate.
48
<PAGE>
The following table sets forth information with respect to our delinquent
loans at March 31, 1999. At March 31, 1999, we had no delinquent consumer loans.
Balance Number
------- ------
(Dollars in Thousands)
Residential real estate(1):
Loans 30 to 89 days delinquent.................... $1,065 24
Loans 90 or more days delinquent.................. 1,156 24
------ --
Total........................................... 2,221 48
------ --
Commercial real estate:
Loans 30 to 89 days delinquent.................... -- --
Loans 90 or more days delinquent.................. 832 3
------ --
Total........................................... 832 3
------ --
Commercial business loans:
Loans 30 to 89 days delinquent.................... -- --
Loans 90 or more days delinquent.................. -- --
------ --
Total........................................... -- --
------ --
Total delinquent loans.............................. $3,053 51
====== ==
- ----------------------
(1) Consists solely of loans secured by single-family residential real estate.
The following table presents information on our non-performing assets at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
March 31, -----------------------
1999 1998 1997
--------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
Residential real estate(1)................................... $1,156 $ 666 $258
Commercial real estate....................................... 832 1,138 (2) --
Commercial business.......................................... -- -- 29
Consumer..................................................... -- -- --
------ ------ ----
Total...................................................... 1,988 1,804 287
------ ------ ----
Accruing loans greater than 90 days delinquent................. -- 152 --
------ ------ ----
Total non-performing loans(3).............................. 1,988 1,956 287
------ ------ ----
Other real estate owned (4).................................... 65 66 --
------ ------ ----
Total non-performing assets.................................... $2,053 $2,022 $287
====== ====== ====
Total non-performing loans, net of discount, as a
percentage of total loans, net of discount.................... 1.87% 1.89% 0.50%
==== ==== ====
Total non-performing assets, net of discount, as a
percentage of total assets, net of discount................... 1.10% 1.22% 0.32%
==== ==== ====
</TABLE>
- ------------------------
(1) Consists solely of loans secured by single-family residential real estate.
(2) The significant increase in non-performing commercial real estate loans
during the year ended December 31, 1998 was due, in large part, to a single
acquired loan. We believe that this loan does not present a significant
risk of loss to us on the basis of a current appraisal on the real estate
securing the loan, the loan-to-value ratio thereon, as well as the purchase
discount and specific reserve applied to such loan.
(3) All of our non-performing loans as of December 31, 1998 consisted of
acquired loans.
(4) Consists of one parcel of commercial real estate.
The interest income that would have been recorded during the quarter ended
March 31, 1999 if our non-accrual loans at the end of such period had been
current in accordance with their terms during such period was $47,000.
49
<PAGE>
Classification of Assets. Federal regulations provide for the
classification of delinquent or non-homogeneous loans and other assets such as
debt and equity securities as "substandard," "doubtful," or "loss" assets. In
analyzing loans for purchase as well as for purposes of our loan classification,
we have placed increased emphasis on the payment history of the obligor and, to
a lesser extent, the purchase discount associated with a specific loan. Assets
that do not expose us to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess some weaknesses, are required to be
designated "special mention" by management. Loans designated as special mention
are generally loans that, while current in required payment, have exhibited some
potential weaknesses that, if not corrected, could increase the level of risk in
the future. An asset is considered "substandard" if it is inadequately protected
by the current net worth and paying capacity of the obligor. "Substandard"
assets include those characterized by the "distinct possibility" that we will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets is not warranted and are charged against the loan
loss reserve. Pursuant to internal procedures, loans with a history of 30-89 day
delinquencies will generally be classified either special mention or
substandard. However, all loans 90 days or more delinquent are classified either
substandard, doubtful or loss.
The following table sets forth the aggregate amount of our special mention
and classified assets at March 31, 1999:
(Dollars in Thousands)
Special mention.................................. $ 368
Substandard...................................... 1,664
Doubtful......................................... 393
Loss............................................. --
------
Total special mention and classified assets...... 2,425
Other real estate owned.......................... 65
------
Total special mention and classified assets,
including other real estate owned............... $2,490
======
Allowance for Loan Losses. Our policy is to provide for estimated losses on
our loan portfolio based on management's evaluation of the probable losses that
may be incurred. Our method of determining provisions for loan losses is based
partially on the Pennsylvania Department of Banking's and the FDIC's Allowance
for Loan and Lease Loss Guidelines, and partially on an in-house asset
classification policy. The policy provides for the monthly evaluation of
concentrations of credit, past loan experience, current economic conditions,
amount and composition of the loan portfolio, estimated fair value of
collateral, delinquencies and other factors.
The asset classifications are reviewed monthly by senior management with
respect to the loan portfolio and the adequacy of the allowance for loan losses.
Based upon that review, management determines whether any loans require the
establishment of appropriate reserves or allowances for losses. Such evaluation,
which includes a review of all loans for which full collectability of interest
and principal may not be reasonably assured, considers, among other matters, the
estimated fair value of the underlying collateral. Other factors considered by
management include the site and risk exposure of each segment of the loan
portfolio, present indicators such as delinquency rates and the borrower's
current financial condition, and the potential for losses in future periods.
Management also prepares a summary classifying all delinquent loans and
non-homogenous loans as special mention, substandard, doubtful or loss.
Management then recommends the general allowance for loan losses in part based
on past experience, and in part based on specified loan balances within each
classification.
Based on the recommendation of management, the board of directors makes
determinations as to any reserves and changes to the provision for loan losses
and allowance for loan losses. Both general and specific loan loss allowances
are charged against earnings; however, general loan loss allowances are added
back to capital in computing total risk-based capital under Pennsylvania
Department of Banking and FDIC regulations, subject to certain limitations.
We will continue to monitor the allowance for loan losses and make future
adjustments to the allowance through the provision for loan losses as conditions
indicate. Although we maintain our allowance for loan losses at a level that we
consider to be adequate to provide for the inherent risk of loss in the loan
portfolio, there can be no
50
<PAGE>
assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, our determination as to the amount of our allowance for loan losses is
subject to review by the Pennsylvania Department of Banking and the FDIC as part
of their examination process, which may result in the establishment of an
additional allowance based upon the judgment of the applicable regulator.
The following table sets forth activity in our allowance for loan losses at
or for the specified periods.
<TABLE>
<CAPTION>
At or for the Three Months At or for the Year Ended
Ended March 31, December 31,
----------------------------- ----------------------------
1999 1998 1998 1997
-------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total loans outstanding...................................... $111,335 $59,345 $103,305 $57,047
Average loans outstanding.................................... 106,076 57,674 78,797 26,421
Allowance balance (at beginning of period)................... 1,051 568 568 182
Provision for loan losses.................................... 100 35 510 415
Charge-offs (recoveries), net of recoveries.................. (24) (8) 27 29
-------- ------- -------- -------
Allowance balance (at end of period)......................... $ 1,175 $ 595 $ 1,051 $ 568
======== ======= ======== =======
Allowance for loan losses as a percent of total loans, net
of discount, at end of period............................... 1.07% 1.00% 1.02% 1.01%
======== ======= ======== =======
Allowance for loan losses as a percent of total non-
performing loans, net of discount, at end of period 58.75% 294.55% 53.72% 197.96%
======== ======= ======== =======
Allowance for loan losses and purchase discount as a
percentage of total loans................................... 5.20% 8.35% 5.85% 8.89%
======== ======= ======== =======
Net loans charged off as a percent of average loans
outstanding................................................. 0.00% 0.01% 0.03% 0.11%
======== ======= ======== =======
</TABLE>
The following tables set forth our percentage of allowance for loan losses
to total allowance for loan losses and the percentage of loans to total loans in
each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
At March 31, 1999 At December 31, 1998
------------------------------------------- -------------------------------------------
Percentage of Percentage of Percentage of Percentage of
Allowance Loans in Each Allowance Loans in Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for loan
losses at end of period
applicable to:
Real estate...................... $1,158 98.6% 98.9% $1,037 98.8% 98.8%
Commercial business.............. 11 0.9 1.0 11 1.0 1.0
Consumer......................... 6 0.5 0.1 3 0.2 0.2
------ ----- ----- ------ ----- -----
Total ......................... $1,175 100.0% 100.0% $1,051 100.0% 100.0%
====== ===== ===== ====== ===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------
Percentage of Percentage of
Allowance Loans in Each
to Total Category to
Amount Allowance Total Loans
------ --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance of allowance for loan
losses at end of period
applicable to:
Real estate...................... $528 93.0% 95.1%
Commercial business.............. 30 5.3 1.9
Consumer......................... 10 1.7 3.0
---- ----- -----
Total ......................... $568 100.0% 100.0%
==== ===== =====
</TABLE>
Investment Activities
Our securities portfolio is managed by our President and the Chief
Financial Officer (the "Investment Officers") in accordance with a written
investment policy of the board of directors which addresses strategies, types
and levels of allowable investments.
At March 31, 1999, our securities portfolio equaled $64.9 million, or 34.9%
of our total assets. Our investment portfolio is comprised of trust preferred
securities, mortgage-backed securities, U.S. government agency securities,
corporate and municipal obligations and equity securities. At March 31, 1999,
our trust preferred securities amounted to $25.8 million, mortgage-backed
securities amounted to $15.6 million, equity securities (consisting of common
stock of a local financial institution, a self-service photocopy business, stock
in our computer vendor and a financial institution managed fund) equaled $5.9
million, financial institution debt obligations totaled $3.1 million, corporate
and municipal obligations amounted to $12.6 million, and U.S. government agency
securities amounted to $1.9 million.
We classify securities as either available for sale or held to maturity
based upon our intent and ability to hold such securities. Securities available
for sale include debt and equity securities that are held for an indefinite
period of
51
<PAGE>
time and are not intended to be held to maturity. Securities available for sale
include securities that we intend to use as part of our overall asset/liability
management strategy and that may be sold in response to changes in interest
rates and resultant prepayment risk and other factors related thereto.
Securities available for sale are carried at fair value, and unrealized gains
and losses (net of related tax effects) on such securities are excluded from
earnings but are included in stockholders' equity. Upon realization, such gains
and losses will be included in our earnings. Investment securities and
mortgage-backed securities, other than those designated as available for sale,
are comprised of debt securities that we have the affirmative intent and ability
to hold to maturity. Securities held to maturity are carried at cost, and are
adjusted for amortization of premiums and accretion of discounts over the
estimated terms of the securities.
We are required under federal regulations to maintain a minimum amount of
liquid assets that may be invested in specified short-term securities and
certain other investments. We have maintained a portfolio of liquid assets that
exceeds regulatory requirements. Our Asset Liability Management Committee
generally meets on a monthly basis to decide, based on market levels and
conditions, current economic data, political and regulatory information, and
internal needs, whether any alterations need to be made to our investment
portfolio. Based on the parameters of our Investment Policy, we endeavor to
diversify our holdings through the purchase of medium-term and long-term,
fixed-rate and variable-rate instruments, which provide both an adequate return
and moderate risk. The Investment Officers of USABanc.com make all investment
decisions in accordance with the Investment Policy and Asset Liability
Management Committee guidelines.
Our securities portfolio composition is designed to provide a liquid
portfolio yet maximize yield on a risk adjusted basis. The process by which we
decide to acquire debt instruments, trust preferred securities and corporate and
municipal obligations is similar to that of underwriting a loan. We evaluate the
potential credit risk associated with these types of investment instruments by
becoming familiar with the institution, its earnings history, its ability to
meet its debt obligation and, if possible, by meeting its management team. The
trust preferred securities are fixed-rate long-term obligations with a weighted
average yield of 9.22% as of March 31, 1999. The trust preferred securities are
obligations of primarily non-rated financial institutions located throughout the
United States, and thus there is a limited market in which to purchase and sell
these securities. As long-term instruments, this portfolio is also subject to
interest rate risk. If interest rates were to rise, these securities would lose
value and require us to reflect a charge to our stockholders' equity.
Our investments include mortgage-backed securities, which represent an
interest in, or are collateralized by, pools of mortgage loans originated by
private lenders that have been grouped by various governmental,
government-related or private organizations. Mortgage-backed securities
generally enhance the quality of our assets by virtue of the insurance or
guarantees that back such securities, are more liquid than individual mortgage
loans and may be used to collateralize borrowings or other obligations.
Investments in mortgage-backed securities, however, may involve risks not
present with mortgage loans. Specifically, mortgage-backed securities are
subject to the risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such
instruments, thereby reducing the net yield on such securities. Like mortgage
loans, there is also reinvestment risk associated with the cash flows from such
securities in the event such securities are redeemed by the issuer. In addition,
the market value of such securities may be adversely affected by changes in
interest rates. As interest rates decrease, the value of such securities may
decrease as mortgages with higher rates are refinanced. At March 31, 1999 $1.3
million, or 11.5%, of our total mortgage-backed securities portfolio of
$15.6 million had adjustable interest rates. We are seeking to increase our
portfolio of adjustable-rate mortgage-backed securities. Our mortgage-backed
securities are primarily pass-through securities, which provide us with payments
consisting of both principal and interest as mortgage loans in the underlying
mortgage pool are paid off by the borrowers. The average maturity of
pass-through mortgage-backed securities varies with the maturities of the
underlying mortgage instruments and with the occurrence of unscheduled
prepayments of those mortgage instruments.
52
<PAGE>
The following tables present the book values and estimated market values at
March 31, 1999, December 31, 1998 and December 31, 1997, respectively, for each
major category of our investment securities.
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available-for-Sale:
Mortgage-backed securities ............ $10,529 $ -- $ (65) $10,464
Corporate obligations ................. 12,829 52 (295) 12,586
Trust preferred securities ............ 25,393 72 (737) 24,728
Other securities ...................... 2,503 58 (133) 2,428
------- ---- ----- -------
Total available-for-sale ........... $51,254 $182 $(1,230) $50,206
======= ==== ======== =======
Held-to-Maturity:
U.S. Government agency
securities ......................... $ 1,964 $ -- $ (27) $1,937
Mortgage-backed securities ........... 5,045 61 (16) 5,090
Municipal securities ................. 3,167 45 -- 3,212
Trust preferred securities ........... 1,113 41 (27) 1,127
Other securities ..................... 3,433 -- (134) 3,299
------- ---- ----- -------
Total held-to-maturity ............. $14,722 $147 $(204) $14,665
======= ==== ===== =======
<CAPTION>
December 31, 1998
-------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available-for-Sale:
Mortgage-backed securities ............ $ 2,628 $ -- $(8) $ 2,620
Corporate obligations ................. 1,322 13 (89) 1,246
Trust preferred securities and
other securities (1) ................. 24,944 243 (664) 24,523
------- ---- ----- -------
Total available-for-sale ........... $28,894 $256 $(761) $28,389
======= ==== ===== =======
Held-to-Maturity:
U.S. Government agency
securities ........................... $ 1,201 $ 1 $-- $ 1,202
Mortgage-backed securities ............ 5,650 104 (1) 5,753
Municipal securities .................. 3,166 69 -- 3,235
Trust preferred securities and
other securities (1) ................. 5,738 79 (56) 5,761
------- ---- ----- -------
Total held-to-maturity ............. $15,755 $253 $(57) $15,951
======= ==== ===== =======
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available-for-Sale:
U.S. Government agency
securities ........................... $ 1,243 $ 16 $ -- $ 1,259
Trust preferred securities and
other securities(1) .................. 6,737 150 (11) 6,876
------- ---- ----- -------
Total available-for-sale ........... $ 7,980 $166 $(11) $ 8,135
======= ==== ===== =======
Held-to-Maturity:
U.S. Government agency
securities ........................... $ 3,557 $ -- $(10) $ 3,547
Mortgage-backed securities ............ 6,306 50 -- 6,356
Municipal securities .................. 3,163 101 -- 3,264
Trust preferred securities and
other securities (1) ................. 2,393 84 -- 2,477
------- ---- ----- -------
Total held-to-maturity ............. $15,419 $235 $(10) $15,644
======= ==== ===== =======
</TABLE>
(1) Trust preferred securities and other securities are primarily comprised of
trust preferred securities of financial institutions located throughout the
United States. At December 31, 1998, we held $22.6 million of trust
preferred securities available-for-sale and $2.3 million held-to-maturity.
Also included in the available-for-sale category was approximately $1.9
million of equity securities consisting of equity securities of a local
financial institution and a self-service photocopy business, equity
securities of our computer vendor and a financial institution managed fund.
At December 31, 1997, trust preferred securities available for sale totaled
$7.3 million with the remaining $325,000 being equity securities of the
FHLB. At December 31, 1997, trust preferred securities held to maturity
totaled $500,000. The remaining $1.9 million of other securities in the
held to maturity category at such date consisted of debt instruments of
financial institutions on the East Coast of the United States. We do not
hold more than $2.0 million of trust preferred securities of any one
issuer.
The following table shows the contractual maturity of our investment
securities portfolio at March 31, 1999.
<TABLE>
<CAPTION>
Available-for-Sale
-------------------------------------------
Weighted
Amortized Approximate Average
Cost Fair Value Yield
--------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Due after one year through five years ..... $ 3,193 $ 3,103 10.78%
Due after five years through ten years .... 9,636 9,483 11.95
Due after ten years ....................... 25,393 24,728 8.87
Mortgage-backed securities ................ 10,529 10,464 6.78
Equity securities ......................... 2,503 2,428 --
------- -------
$51,254 $50,206
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Held-to-Maturity
--------------------------------------------
Weighted
Amortized Approximate Average
Cost Fair Value Yield
--------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Due after one year through five years ..... $ 2,010 $ 1,911 9.45%
Due after five years through ten years .... 1,423 1,388 8.60
Due after ten years ....................... 6,244 6,276 6.49
Mortgage-backed securities ................ 5,045 5,090 6.45
Equity securities ......................... -- -- --
------- -------
$14,722 $14,665
======= =======
</TABLE>
Sources of Funds
General. Deposits are the major source of our funds for lending and other
investment purposes. We expect our Internet banking operations to generate
significant deposit growth. In addition to deposits, we derive funds from the
scheduled payments as well as prepayment of loans, the maturity of investment
securities and the sale of assets available for sale. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and market conditions. Borrowings may be used to compensate for reductions
in the availability of funds from other sources or on a longer term basis for
general business purposes.
54
<PAGE>
Deposits. Consumer and commercial deposits have historically been attracted
principally from within our market area through the Offering of a broad
selection of deposit instruments, including non interest-bearing demand
accounts, NOW accounts, passbook savings accounts, money market accounts, term
certificate accounts and individual retirement accounts. We expect to attract
deposits on a national basis through our Internet banking operations. Deposit
account terms vary according to the minimum balance required, the period of time
during which the funds must remain on deposit, and the interest rate, among
other factors. Deposits have increased 450% from $20.8 million at December 31,
1995 to $125.8 million at March 31,1999. The largest area of increase occurred
in certificates of deposit as we continued to rely primarily on non-retail
certificates of deposits. At March 31, 1999, we had $109.1 million of
certificates of deposit, $38.1 million of which were in excess of $100,000, of
which $13.7 million mature within twelve months.
We regularly evaluate our internal cost of funds, survey rates offered by
competing institutions, review our cash flow requirements for lending and
liquidity, and execute rate changes when deemed appropriate. We anticipate that
the mix of deposits will shift towards transaction accounts as we expand our
commercial line of business. We anticipate that the growth in deposits would be
accomplished through aggressive marketing of our Internet banking operations and
our virtual branch network in surrounding communities, competitive pricing of
retail products and the ability to provide loan and deposit products to
consumers and commercial businesses on a national level through our Internet
banking operations and in the Mid-Atlantic region through our community banking
franchise. See "Management's Discussion and Analysis and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
The following table sets forth the balance of each deposit type and the
weighted average rate paid on each deposit type of vBank for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999
---------------------------------------------
Percent of Weighted
Total Average
Balance Deposits Yield
--------- ---------- --------
<S> <C> <C> <C>
Non-interest-bearing demand ...... $ 1,329 1.06% --
NOW accounts ..................... 908 0.72 2.40%
Passbooks ........................ 12,367 9.83 4.43
Money market deposit accounts .... 2,109 1.68 4.75
Certificates of deposit ........ 109,052 86.71 5.79
-------- ------ ----
Total deposits ................... $125,765 100.00% 5.55%
======== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998
----------------------------------------------
Percent of Weighted
Total Average
Balance Deposits Yield
-------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-interest-bearing demand ...... $ 1,439 1.26% --
NOW accounts ..................... 846 0.73 2.31%
Passbooks ........................ 5,281 4.62 4.40
Money market deposit accounts .... 2,345 2.05 3.66
Certificates of deposit ........ 104,476 91.34 5.73
-------- ------ ----
Total deposits ................... $114,387 100.00% 5.53%
======== ====== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997
---------------------------------------------
Percent of Weighted
Total Average
Balance Deposits Yield
-------- ----------- ---------
<S> <C> <C> <C>
Non-interest-bearing demand ...... $ 257 0.37% --
NOW accounts ..................... 688 0.98 2.27%
Passbooks ........................ 2,019 2.86 2.49
Money market deposit accounts .... 4,802 6.81 3.74
Certificates of deposit ........ 62,708 88.98 6.06
------- ------ ----
Total deposits ................... $70,474 100.00% 5.72%
======= ====== ====
</TABLE>
At March 31, 1999, our certificates of deposit had the following stated
maturities.
Maturity Period Amount
- --------------- --------------
(In Thousands)
Within 12 months ................ $52,820
Within 13 to 36 months .......... 41,937
Beyond 36 months ................ 14,295
--------
Total ........................... $109,052
========
55
<PAGE>
The following table presents, by various rate categories, the amount of
certificates of deposit outstanding at March 31, 1999.
Certificate Rates: Outstanding Amount
- ------------------ ------------------
(In Thousands)
0 to 3.99% ...................... $ 1,420
4.00% to 5.99% .................. 68,046
6.00% to 7.99% .................. 39,589
--------
Total ........................... $109,052
========
The following table summarizes the maturity composition of certificates of
deposit with balances of $100,000 or more at March 31, 1999.
March 31, 1999
--------------
Balance %
---------------------------
(Dollars in Thousands)
Three months or less ...................... $ 2,489 6.5%
Over three months to six months ........... 1,675 4.4
Over six months to twelve months .......... 9,554 25.1
Over twelve months ........................ 24,409 64.0
-------- -----
$38,127 100.0%
======= =====
Borrowings. If the need arises, we may rely upon advances from the FHLB and
the Board of Governors of the Federal Reserve System discount window to
supplement our supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB typically are collateralized by our stock
in the FHLB and a portion of our first mortgage loans. At March 31, 1999, we had
$33.8 million in borrowing capacity under a collateralized line of credit with
the FHLB, of which $30.0 million had been drawn upon as of such date.
The FHLB functions as a central reserve bank providing credit for vBank and
other member savings and financial institutions. As a member, vBank is required
to own capital stock in the FHLB and is authorized to apply for advances on the
security of such stock and certain of its home mortgages and other assets
(principally, securities that are obligations of, or guaranteed by, the United
States) provided certain standards related to creditworthiness have been met.
Advances are made pursuant to several different programs. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
a member institution's net worth or on the FHLB's assessment of the
institution's creditworthiness.
At March 31, 1999, we had five callable fixed-rate advances for $30.0
million from the FHLB. The callable advances mature within five to ten years
with call options ranging from 18 months to five years. The interest rates on
the callable advances range from 4.83% to 5.63%, with a weighted average
interest rate of 5.31% at March 31, 1999.
56
<PAGE>
The following table sets forth certain information regarding our borrowed
funds, which consist solely of the advances from the FHLB, at or for the periods
ended on the dates indicated.
<TABLE>
<CAPTION>
At or for the Three At or for the
Months Ended March 31, Year Ended December 31,
------------------------- -------------------------
1999 1998 1998 1997
-------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
FHLB advances:
Maximum month-end balance ................ $30,000 $6,000 $31,000 $12,700
Balance at end of period ................. 30,000 3,000 30,000 9,000
Average balance .......................... 30,000 4,833 22,482 7,000
Weighted average interest rate on:
Balance at end of period ................. 5.30% 6.38% 5.30% 5.87%
Average balance for period ............... 5.30% 6.20% 5.29% 5.87%
</TABLE>
USACapital, Inc.
USACapital, Inc., a registered broker-dealer with the National Association
of Securities Dealers, is a Pennsylvania corporation wholly owned by
USABanc.com. A subsidiary of USABanc.com acquired USACapital in April 1997 for a
purchase price of $75,000, paid in shares of USABanc.com's common stock.
USACapital trades stocks, bonds, annuities, and other investment related
products to the general public. In connection with our Internet banking
operations, we expect USACapital to offer on-line trading, real time quotes, low
commissions and direct access to funds held on deposit with vBank in early
August 1999. During the year ended December 31, 1998, USACapital increased its
staff from two persons to 8 persons, which we believe will facilitate the growth
of USACapital's business. The majority of the additional employees at USACapital
are compensated on a commission basis, which will maintain a variable expense
base related to performance. USACapital operates out of our corporate office.
USACapital generated pre-tax earnings of $106,000 for the quarter ended March
31, 1999 and $227,133 from the time of our acquisition of USACapital in April
1997 through December 31, 1998. Although we do not expect commission charges and
fees to meet costs, we expect the operations of USACapital to be consistent with
our goal of attaining market share.
USACredit, Inc.
USACredit, Inc., our wholly-owned subsidiary, is a Pennsylvania corporation
engaged in business equipment leasing services. We have entered into an
agreement with USACredit that allows our customers, many of whom are independent
business owners or managers, to lease small business equipment through credit.
Leases range in amounts from $5,000 to $500,000 and cover virtually all types of
business equipment. USACredit will act as a broker and provide advice,
comparison quotes and immediate equipment lease financing through a network of
financial institutions.
USACredit holds a 20% interest in USACredit Ventures LLC, a Delaware
limited liability company in the business of acquiring, owning, servicing,
selling or otherwise disposing of nonperforming financial assets. USACredit had
two loans outstanding to USACredit Ventures LLC at March 31, 1999 totaling
approximately $98,000. These loans partially fund the purchase judgments and
deficiency claims with respect to nonperforming loans and other delinquent
claims against third-party debtors.
Personnel
As of March 31, 1999, we had a total of 47 full-time and 2 part-time
employees.
57
<PAGE>
Description of Properties
On December 23, 1997, we purchased a building at 1535 Locust Street in
Center City Philadelphia, formerly owned and operated by PNC Bank, which serves
as our corporate offices and flagship retail operation. This location consists
of approximately 10,000 square feet of space, and includes not only a first
floor retail operation, but also houses senior management of USABanc.com and
USACapital, Inc., in addition to selected members of vBank staff. We are in the
process of selling this facility, but we intend to maintain our retail operation
and lending operations in such facility following such sale pursuant to a lease
to be entered into with the purchaser. We will use any gains on this disposition
to execute our Internet business strategy.
Pursuant to a lease dated July 27, 1998, we lease a building at 18 East
Wynnewood Road, Wynnewood, Pennsylvania. We opened a retail branch at this
location in April 1999. The lease is for an initial period of 10 years with an
option to renew for an additional 10 years. The annual lease payments total
$48,000.
We lease the building located at 803 East Germantown Pike in Norristown,
Pennsylvania, which contains a retail branch as well as administrative offices,
on a month-to-month basis. The monthly lease payment is $3,117. We are currently
negotiating the sale of the Norristown branch.We will use any gains on this
disposition to execute our Internet business strategy.
We also lease an additional "mini" branch, known as "eBank" in the office,
restaurant and retail complex known as "the Bellevue" which is located in Center
City Philadelphia. The annual lease payments total $8,200.
Deposits are received at the Locust Street headquarters, the Norristown
branch, the Wynnewood branch and the eBank. At March 31, 1999, our branches had
the following deposits: Locust Street, $62.0 million; Norristown, $56.8 million;
and eBank, $7.0 million. The Wynnewood Branch had no deposits at March 31, 1999,
as the branch opened for business on April 19, 1999.
We are currently engaged in discussions to lease approximately 23,000
square feet of warehouse space in Philadelphia to house our Internet banking
operations and to serve as our corporate offices. We have not yet reached a
definitive agreement and there can be no guarantee that we will be able to
negotiate acceptable lease terms for such space.
Legal Proceedings
We are not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. We believe that
such routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operation.
58
<PAGE>
REGULATION OF USABANC.COM AND VBANK
USABanc.com and vBank are extensively regulated under both federal and
state law. From time to time, various new types of federal and state legislation
have been proposed that could result in additional or diminished regulation of
and restrictions on, or altered forms of supervision of, banks or bank holding
companies. We cannot predict whether any such legislation will be adopted or how
such legislation, if adopted, would affect USABanc.com's business or vBank's
business. As a consequence of the extensive regulation of commercial banking
activities and financial institutions in the United States, the business and
activities of USABanc.com and vBank are susceptible to changes in federal and
state legislation which may affect the scope, nature and costs of such business
and activities. The following description of statutory and regulatory
provisions, which is not intended to be a complete description of these
provisions or their effects on USABanc.com or vBank, is qualified in its
entirety by reference to the particular statutory or regulatory provisions.
USABanc.com
General. We are a registered bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended, and we are subject to regulation and
supervision by the Board of Governors of the Federal Reserve System and the
Pennsylvania Department of Banking. We are required to file annually a report of
our operations with, and are subject to examination by, the Board of Governors
of the Federal Reserve System and the Pennsylvania Department of Banking. The
Bank Holding Company Act and other federal laws subject bank holding companies
to particular restrictions on the types of activities in which they may engage,
and to a range of supervisory requirements and activities, including regulatory
enforcement actions for violations of laws and regulations. Certain of these
laws and regulations are described below.
Bank Holding Company Act of 1956 Activities and Other Limitations. As a
registered bank holding company, USABanc.com's activities and those of its
banking and nonbanking subsidiaries are limited to the business of banking and
activities closely related or incidental to banking.
With certain limited exceptions, the Bank Holding Company Act requires
every bank holding company to obtain the prior approval of the Board of
Governors of the Federal Reserve System before (i) acquiring substantially all
of the assets of any bank, (ii) acquiring direct or indirect ownership or
control of any voting shares of any bank if after such acquisition it would own
or control more than 5% of the voting shares of such bank (unless it already
owns or controls the majority of such shares), or (iii) merging or consolidating
with another bank holding company.
The Bank Holding Company Act also prohibits a bank holding company, with
certain exceptions discussed below, from acquiring the voting shares or assets
of any company that is not a bank and from engaging in any business other than
banking or managing or controlling banks. Under the Bank Holding Company Act,
the Board of Governors of the Federal Reserve System is authorized to approve
the ownership of shares by a bank holding company in any company, the activities
of which the Board of Governors of the Federal Reserve System has determined to
be so closely related to banking or to managing or controlling banks as to be a
proper incident thereto. In making such determinations, the Board of Governors
of the Federal Reserve System is required to weigh the expected benefit to the
public, such as greater convenience, increased competition or gains in
efficiency, against the possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or unsound
banking practices.
The Board of Governors of the Federal Reserve System has by regulation
determined that certain activities are closely related to banking within the
meaning of the Bank Holding Company Act. These activities include operating a
mortgage company, finance company, credit card company, factoring company, trust
company or savings association; performing certain data processing operations;
providing limited securities brokerage services; acting as an investment or
financial advisor; acting as an insurance agent for certain types of
credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing tax planning and preparation services; operating
a collection agency; and providing certain courier services.
In addition, and subject to certain exceptions, the Bank Holding Company
Act and the Change in Control Act, together with regulations thereunder, require
approval of the Board of Governors of the Federal Reserve System (or, depending
on the circumstances, no notice of disapproval) prior to any person or company
acquiring "control" of a bank holding company, such as USABanc.com. Control is
conclusively presumed to exist if any individual or
59
<PAGE>
company acquires 25% or more of any class of voting securities of the bank
holding company. With respect to corporations with securities registered under
the Securities Exchange Act of 1934, as amended (such as USABanc.com), control
will be rebuttably presumed to exist if a person acquires at least 10% of any
class of voting securities of the corporation.
A registered bank holding company is generally required to give the Board
of Governors of the Federal Reserve System prior notice of any redemption or
repurchase of its own equity securities if the consideration to be paid,
together with the consideration paid for any repurchases or redemptions in the
preceding year, is equal to 10% or more of USABanc.com's consolidated net worth.
The Federal Reserve Board may oppose the transaction if it believes that the
transaction would constitute an unsafe or unsound practice or would violate any
law or regulation.
Anti-Tying Restriction. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a bank holding company or its affiliates.
Capital Adequacy Requirements. The Board of Governors of the Federal
Reserve System has adopted capital adequacy guidelines pursuant to which it
assesses the adequacy of capital in examining and supervising a bank holding
company and in analyzing applications to it under the Bank Holding Company Act.
The Board of Governors of the Federal Reserve System capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-weighted assets, with at least one-half of that amount (4%)
consisting of Tier 1 or core capital and up to one-half of that amount
consisting of Tier 2 or supplementary capital. Tier 1 capital for bank holding
companies generally consists of the sum of common stockholders' equity and
perpetual preferred stock (subject in the case of the latter to limitations on
the kind and amount of such stocks which may be included as Tier 1 capital),
less goodwill and, with certain exceptions, intangibles. Tier 2 capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as Tier 1 capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Under the risk-based capital guidelines, specific
categories of assets and certain off-balance sheet assets such as letters of
credit are assigned different risk weights to take into account different risk
characteristics of the assets. These risk weights are multiplied by
corresponding asset balances to determine a "risk-weighted" asset base. The risk
weightings range from 0% (requiring no additional capital) for assets such as
cash to 100% for the bulk of assets which are typically held by a bank holding
company, including multi-family residential and commercial real estate loans,
commercial business loans and consumer loans. Single-family residential first
mortgage loans which are not past-due (90 days or more) or non-performing and
which have been made in accordance with prudent underwriting standards are
assigned a 50% level in the risk-weighing system, as are certain
privately-issued mortgage-backed securities representing indirect ownership of
such loans. Off-balance sheet items also are adjusted to take into account
certain risk characteristics.
In addition to the risk-based capital guidelines, the Board of Governors of
the Federal Reserve System uses a leverage ratio as an additional tool to
evaluate the capital adequacy of bank holding companies. The leverage ratio is a
company's Tier 1 capital divided by its average total consolidated assets. Total
assets for this purpose does not include goodwill, certain mortgage and
non-mortgage servicing assets, purchased credit card relationships and any other
intangible assets and investments that the Board of Governors of the Federal
Reserve System determines should be deducted from Tier 1 capital. Bank holding
companies must maintain a minimum leverage ratio of at least 3%, although most
organizations are expected to maintain leverage ratios that are 100 to 200 basis
points above this minimum ratio.
The risk-based and leverage ratios are minimum supervisory ratios generally
applicable to banking organizations that meet certain specified criteria,
assuming that they have the highest regulatory rating. Banking organizations not
meeting these criteria are expected to operate with capital positions well above
the minimum ratios. The federal bank regulatory agencies may set capital
requirements for a particular banking organization that are higher than the
minimum ratios when circumstances warrant. Federal Reserve Board guidelines also
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible
assets. In addition, the regulations of the Federal Reserve Board provide that
concentration of credit risk and certain risks arising from nontraditional
activities, as well as an institution's ability to manage these risks, are
important factors to be taken into account by regulatory agencies in assessing
an organization's overall capital adequacy.
As of March 31, 1999, we were in compliance with the minimum regulatory
capital requirements established by the Board of Governors of the Federal
Reserve System.
60
<PAGE>
Financial Support of Affiliated Institutions. In accordance with
established policy of the Board of Governors of the Federal Reserve System, we
will be expected to act as a source of financial strength to vBank and to commit
resources to support vBank in circumstances when it might not do so absent such
policy.
vBank
General. vBank operates as a state-chartered savings bank incorporated
under the Pennsylvania Banking Code and is subject to extensive regulation and
examination by the Pennsylvania Department of Banking and by the FDIC. These
regulatory authorities regulate or monitor all areas of vBank's operations,
including capital requirements, loans, interest rates, investments, borrowings,
deposits, record keeping, security devices, issuances of securities, payment of
dividends, interest rate risk management, acquisitions, mergers, establishment
of branches, and corporate reorganizations. There are periodic examinations by
the Pennsylvania Department of Banking and the FDIC to test vBank's compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether by the
Pennsylvania Department of Banking, the FDIC or the Congress could have a
material adverse impact on us, vBank and their operations.
Federal Deposit Insurance Corporation Assessments. The deposits of vBank
are insured by Bank Insurance Fund of the FDIC, up to applicable limits, and are
subject to deposit premium assessments by vBank Insurance Fund. Under the FDIC's
risk-based insurance system, Bank Insurance Fund-assessed deposits have been
subject to premiums which have varied, depending upon the institution's capital
position and other supervisory factors.
The FDIC may terminate the deposit insurance of any insured depository
institution, including vBank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. The FDIC may also suspend deposit insurance temporarily prior to the
hearing process for the permanent termination of insurance, if, among other
things, the institution has no tangible capital. If insurance of accounts is
terminated, the accounts at the institution at the time of the termination, less
subsequent withdrawals, shall continue to be insured for a period of six months
to two years, as determined by the FDIC. We are aware of no circumstances which
would result in termination of vBank's deposit insurance.
Capital Requirements. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like vBank, are not members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Board of
Governors of the Federal Reserve System regarding bank holding companies, as
previously described.
The FDIC's capital regulations establish a minimum 3% Tier 1 leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier 1 leverage ratio for such other banks to 4% to 5% or more. Under the FDIC's
regulation, highest-rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, which are considered a strong banking
organization and are rated composite 1 under the Uniform Financial Institutions
Rating System. Tier 1 or core capital is defined as the sum of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, and minority interests in consolidated
subsidiaries, minus all intangible assets other than certain qualifying
supervisory goodwill and certain purchased mortgage servicing rights.
The FDIC also requires that banks meet a risk-based capital standard.
Risk-based capital standard for banks requires the maintenance of total capital
(which is defined as Tier 1 capital and supplementary (Tier 2) capital) to
risk-weighted assets of 8.0%, of which at least 4.0% shall be Tier 1 capital. In
determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on
risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the
leverage capital standard. The components of supplementary capital include
certain perpetual preferred stock, certain mandatory convertible securities,
certain subordinated debt and intermediate preferred stock and general
allowances for loan and lease losses. Allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. As of March 31, 1999,
vBank met each of its capital requirements.
61
<PAGE>
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate risk
in assessing a bank's capital adequacy. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies also
have issued a joint policy statement providing guidance on interest rate risk
management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
A bank may be subject to higher minimum requirements than those described
above if, for example, a bank has previously received special attention or has a
high susceptibility to interest rate risk. Banks with capital ratios below the
required minimum are subject to certain administrative actions, including prompt
corrective action, the termination of deposit insurance upon notice and hearing,
or a temporary suspension of insurance without a hearing.
vBank is also subject to more stringent Pennsylvania Department of Banking
capital guidelines. Although not adopted in regulation form, the Pennsylvania
Department of Banking utilizes capital standards requiring a minimum of 6%
leverage capital and 10% risk-based capital. The components of leverage and
risk-based capital are substantially the same as those defined by the FDIC. As
of March 31, 1999, vBank exceeded the Pennsylvania Department of Banking's
capital guidelines.
Prompt Corrective Action. In addition to the capital adequacy guidelines,
the FDIC is required to take "prompt corrective action" with respect to any
state-chartered bank which does not meet specified minimum capital requirements.
Federal regulations applicable to financial institutions establish five capital
levels: "well capitalized," "adequately capitalized," "undercapitalized,"
"severely undercapitalized" and "critically undercapitalized."
o An institution is considered "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater, and it is
not subject to an order, written agreement, capital directive, or prompt
corrective action directive to meet and maintain a specific capital level
for any capital measure.
o An institution is considered "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of at least 4% and leverage capital ratio of 4% or greater (or a
leverage ratio of 3% or greater if the institution is rated composite 1
in its most recent report of examination, subject to appropriate federal
banking agency guidelines), and the institution does not meet the
definition of an undercapitalized institution.
o A bank is considered "undercapitalized" if it has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based capital ratio
that is less than 4%, or a leverage ratio that is less than 4% (or a
leverage ratio that is less than 3% if the institution is rated composite
1 in its most recent report of examination, subject to appropriate
federal banking agency guidelines).
o A "significantly undercapitalized" institution is one which has a total
risk-based capital ratio that is less than 6%, a Tier 1 risk-based
capital ratio that is less than 3%, or a leverage ratio that is less than
3%.
o A "critically undercapitalized" institution is one which has a ratio of
tangible equity to total assets that is equal to or less than 2%.
Under certain circumstances, a "well capitalized," "adequately capitalized"
or "undercapitalized" institution may be treated as if the institution were in
the next lower capital category.
Federal banking regulators are authorized to take "prompt corrective
action" with respect to capital-deficient institutions. In addition to requiring
the submission of a capital restoration plan, federal law contains broad
restrictions on certain activities of undercapitalized institutions involving
asset growth, acquisitions, branch establishment, and expansion into new lines
of business. With certain exceptions, an insured depository institution is
prohibited from making capital distributions, including dividends, and is
prohibited from paying management fees to control persons (e.g., a holding
company) if the institution would be undercapitalized after any such
distribution or payment.
62
<PAGE>
As an institution's capital decreases, the powers of the federal regulators
become greater. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management, and other restrictions. The
regulators have very limited discretion in dealing with a critically
undercapitalized institution and are virtually required to appoint a receiver or
conservator if the capital deficiency is not corrected promptly.
Activities and Investments of Insured State-chartered Banks. The activities
and equity investments of FDIC-insured, state-chartered banks are generally
limited to those that are permissible for national banks. Under regulations
dealing with equity investments, an insured state bank generally may not
directly or indirectly acquire or retain any equity investment of a type, or in
an amount, that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements. An insured state bank is not prohibited from, among other
things, (1) acquiring or retaining a majority interest in a subsidiary, (2)
investing as a limited partner in a partnership the sole purpose of which is
direct or indirect investment in the acquisition, rehabilitation or new
construction of a qualified housing project, provided that such limited
partnership investments may not exceed 2% of the bank's total assets, (3)
acquiring up to 10% of the voting stock of a company that solely provides or
reinsures directors', trustees' and officers' liability insurance coverage or
bankers' blanket bond group insurance coverage for insured depository
institutions, and (4) acquiring or retaining the voting shares of a depository
institution if certain requirements are met. In addition, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
Pennsylvania Banking Law. The Pennsylvania Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of vBank
and its affairs. The Pennsylvania Banking Code delegates extensive rulemaking
power and administrative discretion to the Pennsylvania Department of Banking so
that the supervision and regulation of state-chartered savings banks may be
flexible and readily responsive to changes in economic conditions and in savings
and lending practices.
One of the purposes of the Pennsylvania Banking Code is to provide banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania bank may locate or change the location of its
principal place of business and establish an office anywhere in the
Commonwealth, with the prior approval of the Pennsylvania Department of Banking.
The Pennsylvania Department of Banking generally examines each savings bank
not less frequently than once every two years. Although the Pennsylvania
Department of Banking may accept the examinations and reports of the FDIC in
lieu of the Pennsylvania Department of Banking's examination, the present
practice is for the Pennsylvania Department of Banking to conduct individual
examinations. The Pennsylvania Department of Banking may order any savings bank
to discontinue any violation of law or unsafe or unsound business practice and
may direct any trustee, officer, attorney or employee of a savings bank engaged
in an objectionable activity, after the Pennsylvania Department of Banking has
ordered the activity to be terminated, to show cause at a hearing before the
Pennsylvania Department of Banking why such person should not be removed.
Restrictions on Payment of Dividends. Under the Federal Deposit Insurance
Act, insured depository institutions such as vBank are prohibited from making
capital distributions, including the payment of dividends, if, after making any
such distribution, the institution would become "undercapitalized" (as such term
is used in the statute). Under the Federal Deposit Insurance Act, no dividends
may be paid by an insured bank if the bank is in arrears in the payment of any
insurance assessment due to the FDIC. Dividend payments by vBank are subject to
the Pennsylvania Banking Code. Under the Pennsylvania Banking Code, no dividends
may be paid except from "accumulated net earnings" (generally, undivided
profits). As previously discussed, state and federal regulatory authorities have
adopted standards for the maintenance of adequate levels of capital by banks.
Adherence to such standards further limits the ability of vBank to pay
dividends. In addition, vBank's regulators have authority to prohibit us or
vBank from engaging in an unsafe or unsound practice in conducting their
business. The payment of dividends, depending upon our financial condition or
the financial condition of vBank, could be deemed to constitute such an unsafe
or unsound practice.
63
<PAGE>
Regulatory Enforcement Authority. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities.
Limitations on Transactions with Affiliates and Insiders. Transactions
between banks and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a bank is any company or entity which
controls, is controlled by or is under common control with the bank. In a
holding company context, the parent holding company of a bank (such as us) and
any companies which are controlled by such parent holding company are affiliates
of the bank. Generally, Section 23A places limits on the amount of loans or
extensions of credit to, or investments in, or certain other transactions with,
affiliates. In addition, limits are placed on the amount of advances to third
parties collateralized by the securities or obligations of affiliates. Most of
these loans and certain other transactions must be secured in prescribed
amounts. Section 23B of the Federal Reserve Act, among other things, prohibits
an institution from engaging in transactions with certain affiliates unless the
transactions are on terms substantially the same, or at least as favorable to
such institution or its subsidiaries, as those prevailing at the time for
comparable transactions with non-affiliated companies.
In addition, we are subject to restrictions on extensions of credit to
executive officers, directors, certain principal stockholders, and their related
interests. Such extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with third parties and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features.
Community Reinvestment Act. The Community Reinvestment Act requires that,
in connection with examinations of financial institutions, the federal
regulatory authorities evaluate the record of such financial institutions in
meeting the credit needs of their local communities, including low- and
moderate-income neighborhoods, consistent with the safe and sound operation of
those institutions. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility.
Other Regulations
Lending Activities. Interest and certain other charges collected or
contracted for by vBank are subject to state usury laws and certain federal laws
concerning interest rates. vBank's loan operations are also subject to certain
federal laws applicable to credit transactions, such as (i) the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, (ii) the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves, (iii) the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit, (iv) the Fair Credit Reporting Act of
1978 governing the use and provision of information to credit reporting
agencies, (v) the Fair Debt Collection Act governing the manner in which
consumer debts may be collected by collection agencies, and (vi) the rules and
regulations federal agencies charged with the responsibility of implementing
such federal laws.
Deposit Activities. The deposit operations of vBank also are subject to (i)
the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records, and (ii) the
Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
Board to implement that act, which govern automatic deposits to and withdrawals
from deposit accounts and customers' rights and liabilities arising from the use
of automated teller machines and other electronic banking services.
Internet and Electronic Commerce Activities. A number of legislative and
regulatory proposals currently under consideration by federal, state, local and
foreign governmental organizations may lead to laws or regulations concerning
the electronic commerce market and use of the Internet, including, but not
limited to, on-line content, user privacy, taxation, access charges, liability
or third-party activities and jurisdiction. Congress has held hearings on
whether to regulate the electronic commerce market, while numerous states are
considering adopting their own laws to regulate Internet banking. Moreover, the
FDIC has proposed other guidelines governing Internet operations.
These and any other proposed laws, rules and regulations could force us to
comply with more complex and perhaps more burdensome regulatory requirements,
which could materially adversely affect our business, financial condition,
results of operations and cash flows.
64
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information concerning our current
directors and executive officers. The term of office for each director is one
year or until the next meeting of shareholders, at which time elections are held
for each seat on the board of directors.
<TABLE>
<CAPTION>
Director and/or
Position with USABanc.com Executive Officer
Name and/or vBank Age Since
- ---- ------------------------- --- -----------------
<S> <C> <C> <C>
George M. Laughlin ................. Chairman 78 1995
Zeev Shenkman ...................... Vice-Chairman 47 1998
Kenneth L. Tepper .................. President and Chief Executive Officer/Director 37 1995
Clarence L. Rader................... Director/Chairman of vBank 68 1995
Jeffrey A. D'Ambrosio .............. Director 44 1995
George C. Fogwell, III ............. Director 52 1995
John A. Gambone .................... Director 60 1995
Carol J. Kauffman .................. Director 52 1997
Wayne O'Leevy ...................... Director 55 1996
Brian M. Hartline .................. Chief Financial Officer and Director/Chief 34 1998
Operating Officer of vBank
Craig J. Scher...................... Senior Vice President and Director of 35 1998
Lending/Credit of vBank
</TABLE>
Following is a brief summary of each director's and executive officer's
occupation over the last five years.
George M. ("Dewey") Laughlin is a real estate investor and insurance broker
and the founder/owner of Best Auto Tags and Abat's Auto Tags, one of the first
companies to originate 24-hour licensed messenger service in Pennsylvania. Mr.
Laughlin owns and manages a total of twenty-four branch locations throughout the
Commonwealth of Pennsylvania. He is a veteran of the United States Navy, having
served on the aircraft carrier U.S.S. Independence in every major South Pacific
campaign of World War II.
Zeev Shenkman has been the Chief Executive Officer of Shen Management
Corporation since September 1995. From 1996 through 1997, Mr. Shenkman was Chief
Financial Officer of Global Sports, Inc. Prior thereto, from May 1984 through
March 1995, Mr. Shenkman was the Chief Financial Officer of Today's Man, Inc. In
1996, Today's Man filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code, and emerged under a plan approved in 1998.
Kenneth L. Tepper has been our Director, President and Chief Executive
Officer since 1995. Mr Tepper has been a Director, President and Chief Executive
Officer of vBank since 1995. Mr. Tepper served as an agent of the FDIC assigned
to the Resolution Trust Corporation from 1990 through 1991. Thereafter, Mr.
Tepper was Director of Merchant Banking at Tucker Federal SLA, and from 1994
through 1995 was Managing Director of Merchant*BancShares, Inc., an investment
banking firm specializing in community bank mergers and loan portfolio
acquisitions. He was Finance Chairman of the Pennsylvania Republican State
Committee during the 1994 gubernatorial campaign, and a principal of the 1995
Congressional Medal of Honor Society Convention. He serves on the board of
directors of TRM Corporation, a public company in the self-service photocopy
business in which USABanc.com maintains a $500,000 investment in debt
securities.
Clarence L. Rader has served as Chairman of vBank since November 1995. Mr.
Rader served as President and Chief Executive Officer of vBank from 1986 to
1995. Mr. Rader was President of the Norristown School Board, and Chairman of
the Central Montgomery Chamber of Commerce from 1991 to 1992. He is a senior
appraiser with the American Society of Appraisers.
65
<PAGE>
Jeffrey A. D'Ambrosio has been the owner and is Chief Executive Officer of
D'Ambrosio Dodge in Downingtown, Pennsylvania since 1985. Mr. D'Ambrosio
presently owns and manages 11 auto franchises in Chester County, Pennsylvania.
Mr. D'Ambrosio is a member of the Dodge Dealers National Advertising Council and
serves on the Pennsylvania Board of Vehicle Manufacturers, Dealers and
Salespersons.
George C. Fogwell, III is an active securities investor, who is also a
senior international Captain for Delta Airlines. Mr. Fogwell, as a certified
flight instructor, is a member of the Air Line Pilots Association, the Seaplane
Pilots Association and the owner of Clinton Aviation. Mr. Fogwell works for the
American Heart Association and has been a member of the Board of Directors for
USABanc.com, USACapital and vBank since their inception.
John A. Gambone is the Chairman, President and Chief Executive Officer of
Gambone Bros. Organization, Inc., a real estate development concern founded in
1958 and headquartered in Fairview Village, Pennsylvania. He is a member of the
Pennsylvania Horse Breeders Association as well as numerous professional
organizations related to the building industry.
Carol J. Kauffman has served as the Director of Business Development for
Lawyers' Travel Service Division of the World Travel Specialists Group since
1996. Prior to Lawyers' Travel, Ms. Kauffman was Senior Account Executive,
Account Services for Reimel Carter Public Relations firm after successfully
selling the firm she founded over ten years ago, Lawlor Jackson, Inc.
Wayne O. Leevy is the Managing Partner of Mitchell & Titus, LLP, a public
accounting firm. Prior to Mitchell & Titus, Mr. Leevy was Managing Officer of
Leevy, Redcross and Co., which merged with Mitchell & Titus in 1990.
Brian M. Hartline is currently our Director and Chief Financial Officer and
Chief Operating Officer of vBank, where he has been employed since December
1998. Prior to joining USABanc.com, Mr. Hartline served from 1994 through 1998
in a number of positions, including Executive Vice President and Chief Financial
Officer, at ML Bancorp, Inc. in Villanova, Pennsylvania, and from 1990 to 1994
as Vice President and Controller of PNC Bank (Central Region), formerly United
Federal Bank, in State College, Pennsylvania. Mr. Hartline is a licensed
certified public accountant.
Craig J. Scher is currently Senior Vice President and Director of
Lending/Credit of vBank, where he has been employed since July 1998. Prior to
joining vBank, Mr. Scher served from 1989 to 1998 in a number of positions,
including Senior Vice President, at Equity National Bank, in Marlton, New
Jersey, and from 1985 to 1989 with Midlantic Bank, formerly Continental Bank in
Philadelphia, Pennsylvania.
Compensation of the Board of Directors
Directors of USABanc.com receive a fee of $400 for each meeting of the
board of directors attended. Directors of USABanc.com also receive a fee of $100
for each committee meeting attended. Mr. Laughlin receives $1,000 per month,
plus reimbursement of reasonable out-of-pocket expenses not to exceed $12,000
per year. Mr. Shenkman receives $25,000 per year pursuant to his election as
Vice-Chairman of USABanc.com. During 1998, an aggregate of $58,800 was paid to
directors for their services. No director received more than $14,200 in 1998.
During 1998, Ms. Kauffman was awarded options to purchase 2,660 shares of
common stock at an exercise price of $3.76 per share and options to purchase
13,300 shares of common stock at an exercise price of $5.64 per share. Mr.
Shenkman was awarded options to purchase 66,500 shares of common stock at an
exercise price of $5.64 per share. Also, Mark A. Kearney was awarded options to
purchase 13,300 shares of common stock at an exercise price of $5.64 per share.
Such options were subsequently forfeited in connection with Mr. Kearney's
resignation from the board of directors.
Executive Compensation
The following table sets forth compensation paid in the fiscal year ended
December 31, 1998 for services performed in all capacities for USABanc.com and
vBank with respect to the Chief Executive Officer, the Chief Financial Officer
and vBank's Chief Operating Officer and Director of Lending/Senior Vice
President. USABanc.com and vBank had no other executive officer whose salary and
bonus exceeded $100,000 in the fiscal year ended December 31, 1998 or whose
current salary exceeds $100,000.
66
<PAGE>
<TABLE>
<CAPTION>
Long Term
Compensation
No. of Securities All Other
Name and Principal Position Fiscal Year Annual Salary Underlying Options Compensation
--------------------------- ----------- ------------- ------------------ ------------
<S> <C> <C> <C> <C>
Kenneth L. Tepper, President and CEO .................. 1998 $219,462(1) 106,134 $162,000(2)(3)
1997 $120,000 -- $ 12,000(3)
1996 $120,000 -- $ 12,000(3)
Brian M. Hartline, Chief Financial Officer/ Chief
Operating Officer of vBank ........................ 1998 $ 11,692(4) 40,000
Craig J. Scher, Senior Vice President and
Director of Lending/Credit of vBank ............... 1998 $ 42,115(5) 20,000
</TABLE>
- --------------------------
(1) Mr. Tepper's annual base salary was increased to $245,000 effective March
1, 1998.
(2) Mr. Tepper received a payment of $150,000 in connection with his agreement
to cap the anti-dilutive feature of the Class B common stock. See
"--Certain Relationships and Related Transactions."
(3) In addition to his base salary, Mr. Tepper received $12,000 in additional
compensation which was used to purchase a deferred compensation life
insurance policy.
(4) Mr. Hartline was employed by USABanc.com on December 1, 1998 at an annual
base salary of $160,000.
(5) Mr. Scher was employed by vBank in July 1998 at an annual base salary of
$120,000.
Stock Options
The following table sets forth certain information concerning grants of
stock options to the Chief Executive Officer and Chief Financial Officer in the
fiscal year ended December 31, 1998. We had no other executive officers whose
salary and bonus exceeded $100,000 in the fiscal year ended December 31, 1998 or
whose salary currently exceeds $100,000.
Option Grants During 1998
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------------------------------
% of Total Options
Number of Granted to
Securities Underlying Employees Exercise Expiration
Name Options Granted During 1998 Price Date
---- --------------------- ------------------ -------- ----------
<S> <C> <C> <C> <C>
Kenneth L. Tepper .......... 70,756(1) 23.3% $3.76/share 2/11/03
35,374(2) 11.6% $3.76/share 2/11/03
Brian M. Hartline .......... 40,000 13.2% $3.75/share 12/01/09
Craig J. Scher ............. 20,000 6.6% $3.75/share 12/01/09
</TABLE>
- ----------------------
(1) These options vest over a three year period beginning February 1999.
(2) These options vest over a three year period beginning February 2002.
The following table sets forth certain information concerning the exercise
of options to purchase common stock of USABanc.com in the fiscal year ended
December 31, 1998 and the unexercised options to purchase
67
<PAGE>
common stock of USABanc.com held by the named executive officers at December 31,
1998. Year-end values are based upon the closing market price of a share of
common stock on December 31, 1998 of $4.50.
Aggregated Option Exercises in Fiscal Year
1998 and December 31, 1998 Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998 (#) at December 31, 1998 ($)
------------------------------ -----------------------------
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth L. Tepper ........ 8,800 $24,595 399,860 42,454 $559,804 $31,416
Brian M. Hartline ........ -- -- -- 40,000 -- $30,000
Craig J. Scher ........... -- -- -- 20,000 -- $15,000
</TABLE>
Employment Agreements
On November 30, 1995, we entered into a five-year employment agreement with
Mr. Tepper pursuant to which Mr. Tepper received an annual base salary of
$120,000 and may receive an annual cash bonus and grant of stock options as
determined by the board of directors. Mr. Tepper has not received any cash
bonuses. Pursuant to the agreement, Mr. Tepper was granted options to purchase
100,000 shares of common stock at an exercise price of $10.00 per share. All of
the options are exercisable and expire in November 2005. As a result of the
stock dividends declared and issued in July 1997, August 1998 and June 1999, Mr.
Tepper's options were adjusted to 353,780 and the exercise price was adjusted to
$2.83 per share. The agreement provides that in the event Mr. Tepper is
discharged other than for cause, as defined in the employment agreement,
disability or incapacity, or Mr. Tepper terminates his employment with us upon
the occurrence of certain specified events or occurrences, including a change of
control of USABanc.com, as defined in the employment agreement, Mr. Tepper will
receive a severance payment equal to his accrued but unpaid base compensation
and incentive compensation plus a lump sum equal to no more than 2.99 times the
average of his total annual compensation over the previous five years. On
February 13, 1998, we extended Mr. Tepper's agreement through February 12, 2001,
at an annual base salary of $245,000 and an annual cash bonus and grants of
stock options as may be determined by the board of directors. Pursuant to the
agreement, Mr. Tepper was granted options to purchase 70,756 shares of common
stock at $3.76 per share, and options to purchase 35,374 shares of common stock
at $5.66 per share. Of the 70,756 options, 31,840 vested on August 13, 1998,
31,840 vested on February 13, 1999, and 7,076 will vest on February 13, 2000. Of
the 35,374 options granted, 13,796 will vest on February 13, 2000, 17,688 will
vest on February 13, 2001 and 3,890 will vest on February 13, 2002.
On November 30, 1998, USABanc.com and vBank, entered into a three-year
employment agreement with Mr. Hartline pursuant to which Mr. Hartline serves as
USABanc.com's Chief Financial Officer and Chief Operating Officer of vBank. Mr.
Hartline receives an annual base salary of $160,000 and will receive incentive
compensation in the amount of $40,000 if we earn in excess of $0.50 per share
(as adjusted for stock splits, stock dividends, etc.) in any fiscal year.
Pursuant to the agreement, Mr. Hartline was granted or will be granted options
to purchase 40,000 shares of common stock on November 30 of each of 1998, 1999
and 2000, for a total of 120,000 options. The options vest over a three year
period using the following vesting schedule: 20,000 in year one, 10,000 in year
two and 10,000 in year three. The exercise price of the options will be the last
reported sale price on the Nasdaq SmallCap Market of our common stock for the
business day preceding the date of grant. If Mr. Hartline's employment is
terminated without cause, as defined in the employment agreement, Mr. Hartline
will receive, until the earlier of the remaining term of the employment
agreement or obtaining employment elsewhere, his current salary, medical
benefits, use of an automobile and any earned bonuses. In the event of a change
in control, Mr. Hartline shall receive his current salary, medical benefits and
the use of an automobile for twenty-four months, if he is not offered continued
employment with the same job title, responsibilities and compensation following
the change in control.
On November 30, 1998, vBank entered into a three-year employment agreement
with Mr. Scher pursuant to which Mr. Scher serves as the Senior Vice President
and Director of Lending/Credit. Mr. Scher receives an annual base salary of
$120,000 and will receive incentive compensation in the amount of $50,000 if we
earn in excess of $0.50 per share (as adjusted for stock splits, stock
dividends, etc.) in any four consecutive reporting periods. Pursuant to the
68
<PAGE>
agreement, Mr. Scher was granted or will be granted options to purchase 20,000
shares of common stock on November 30 of each of 1998, 1999 and 2000, for a
total of 60,000 options. The options vest over a three-year period, ratably. The
exercise price of the options will be the last reported sale price on the Nasdaq
SmallCap Market of our common stock of the business day preceding the date of
grant. If Mr. Scher's employment is terminated without cause, as defined in the
employment agreement, Mr. Scher will receive, until the earlier of the remaining
term of the employment agreement or obtaining employment elsewhere, his current
salary, medical benefits, use of an automobile and any earned bonuses. In the
event of a change in control, Mr. Scher will receive his current salary, medical
benefits and the use of an automobile for twenty-four months, if he is not
offered continued employment with the same job title, responsibilities and
compensation following the change in control.
Indemnification of Directors and Officers
Our articles and bylaws provide that we will indemnify every person who is
or was our director or executive officer to the fullest extent permitted by law.
This indemnification applies to all expenses and liabilities reasonably incurred
in connection with any proceeding to which the director or executor officer may
become involved by reason of being or having been a director or executive
officer. Pennsylvania law, under which we are incorporated, allows
indemnification of directors and officers if the indemnified person acted in
good faith and in a manner such person reasonably believed to be in, or not
opposed to, our best interest and, with respect to any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful. We maintain a director
and officer liability insurance policy covering each of our directors and
executive officers.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information concerning the beneficial
ownership of our common stock, as of June 1, 1999, by each director, each named
executive officer, all directors and executive officers as a group, and each
person known to us to beneficially own 5% or more of our outstanding common
stock. The information in the table concerning persons known by us to own
beneficially 5% or more of the common stock is derived, without independent
investigation on our part, from the most recent filings made by such persons
with the Securities and Exchange Commission on Schedule 13D and Schedule 13G
pursuant to Rule 13d-3 of the Securities Exchange Act of 1934. Mr. Tepper, our
President and Chief Executive Officer, owns all 10,000 shares of the issued and
outstanding Class B common stock. The address for each listed executive officer
and director is 1535 Locust Street, Philadelphia, Pennsylvania 19102.
<TABLE>
<CAPTION>
Shares of Percentage of Shares of
Common Stock Common Stock
Name of Beneficial Owner Beneficially Owned (1) Beneficially Owned (1)
------------------------ ---------------------- ----------------------
<S> <C> <C>
George M. Laughlin ................................. 124,086(2)(3) 3.1
Zeev Shenkman ...................................... 119,400(4) 2.7
Clarence L. Rader .................................. 35,378(2) *
Kenneth L. Tepper .................................. 542,644(5) 12.3
Jeffrey A. D'Ambrosio .............................. 85,734(2) 2.1
George C. Fogwell, III ............................. 89,506(2)(6) 2.2
John A. Gambone .................................... 112,802(2)(7) 2.8
Carol J. Kauffman .................................. 122,674(8)(9) 3.0
Wayne O. Leevy ..................................... 23,690(2) *
Brian M. Hartline................................... 80,000 2.0
Craig J. Scher ..................................... 50,684 1.3
Directors and Executive Officers
(11 persons) ...................................... 1,386,598(10) 29.4%
========= ====
</TABLE>
- ------------------
* Less than one percent (1%)
69
<PAGE>
(1) Based upon 4,014,784 shares of common stock outstanding as of June 1, 1999
(which does not include the shares of Class B common stock which are
convertible into shares of common stock). Calculated in accordance with
Rule 13d-3 promulgated under the Securities Exchange Act of 1934. Also
includes shares owned by (a) a spouse, minor children or by relatives
sharing the same home, (b) entities owned or controlled by the named
person and (c) other persons if the named person has the right to acquire
such shares within 60 days of June 1, 1999 by the exercise of any right
or option. Unless otherwise noted, shares are owned of record and
beneficially by the named person.
(2) Includes options to purchase 17,690 shares of common stock within 60 days
of June 1, 1999.
(3) Includes 35,378 shares held by Mr. Laughlin's wife and 1,764 shares held
by his daughter.
(4) Includes options to purchase 66,500 shares of common stock within 60 days
of June 1, 1999.
(5) Includes 354 shares of common stock held by Mr. Tepper as custodian for
his minor son. Also includes options to purchase 399,860 shares within 60
days of June 1, 1999. Does not include 10,000 shares of Class B common
stock beneficially owned by Mr. Tepper and convertible in 2001 into
216,460 shares of common stock.
(6) Includes 1,062 shares of common stock held by Mr. Fogwell's children.
(7) Mr. Gambone's shares of common stock are held in the name of a trust, of
which Mr. Gambone is trustee (53,066 shares), and in the name of a
corporation (37,888 shares) of which Mr. Gambone is president. Includes
620 shares of common stock owned by family members who reside in Mr.
Gambone's home, as to which Mr. Gambone disclaims beneficial ownership
owned by family members who reside in Mr. Gambone's home.
(8) Includes 3,240 shares of common stock owned by Mrs. Kauffman's husband,
options to purchase 106,134 shares of common stock within 60 days of June
1, 1999 held by Mrs. Kauffman's husband and options to purchase 2,660
shares of common stock within 60 days of June 1, 1999.
(9) Includes options to purchase 13,300 shares of common stock within 60 days
of June 1, 1999.
(10) Includes 694,294 options exercisable within 60 days of June 1, 1999
prospectus; does not include 316,004 options that are not exercisable
within 60 days of June 1, 1999.
70
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following summarizes certain material agreements between us and our
officers, directors and certain of our existing shareholders. The summary is not
a complete description of such agreements and therefore this discussion is
qualified in its entirety by reference to the agreements, copies of which will
be made available for inspection upon written request. It is our intention that
in the future, transactions with our directors, officers, employees or
affiliates will be minimal and will be approved in advance by a majority of the
disinterested members of our board of directors.
vBank has engaged in, and expects in the future to engage in, banking
transactions in the ordinary course of business with its directors, executive
officers and principal shareholders, or their affiliate organizations, on
substantially the same terms as those prevailing for comparable transactions
with others. vBank made all loans to such persons (1) in the ordinary course of
business, (2) on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and (3) without involving more than the normal risk of
collectability or present other unfavorable features. As of March 31, 1999,
certain of our executive officers and directors and certain executive officers
and directors of vBank had outstanding indebtedness in amounts exceeding $60,000
to vBank as follows: As of March 31, 1999, two companies in which Mr. Gambone
owns a minority interest had outstanding indebtedness totaling $409,263. Of this
amount, $267,791 is secured by real estate and $141,472 is secured by titles to
motor vehicles, with all loans personally guaranteed by Mr. Gambone. Mr. Tepper
had outstanding loan commitments totaling $693,920, of which $643,920 is secured
by a residential mortgage and $50,000 is an unsecured line of credit. Mr.
Shenkman has outstanding two loan commitments totaling $1.2 million. Both loans
are secured by marketable securities and a second mortgage on residential real
estate. Additionally, Mr. Laughlin had outstanding loan commitments totaling
$188,556, of which $138,556 is secured by commercial real estate and $50,000 is
an unsecured line of credit. The aggregate amount of loans outstanding to
executive officers and directors of vBank as of March 31, 1999 equaled 18.1% of
stockholder's equity.
Mr. Tepper, President and Chief Executive Officer, is the sole holder of
Class B common stock. The terms of the Class B common stock provide that on
January 1, 2001, all of the authorized shares of Class B common stock will
automatically convert into 10% of the then issued shares of Class A common
stock, rounded up to the nearest whole share. In connection with a private
placement of our common stock in February 1998, we entered into an agreement
with Mr. Tepper by which we have an option to pay Mr. Tepper $150,000 per year
for each of the three years beginning in 1998 in exchange for Mr. Tepper
agreeing to cap the non-dilutive feature of the Class B common stock to 10% of
the Class A common stock outstanding prior to the February 1998 private
placement of Class A common stock, or 216,460 shares, and waive any future
exercise of the non-dilutive feature of the Class B common stock. The first
payment was made upon the closing of the February 1998 private placement. The
second payment was made in January 1999. The third optional payment is
anticipated to be made in January 2000.
In March 1999, our USA Capital Trust I subsidiary completed an offering of
$10,000,000 aggregate principal amount of Series A 9.50% trust preferred
securities. Royal BancShares of Pennsylvania, Inc. ("Royal") purchased
$3,000,000 of the Trust Preferred Securities. Daniel M. Tabas, the Chairman of
the Board of Royal, is the father-in-law of Mr. Tepper, our President, Chief
Executive Officer and director.
DESCRIPTION OF CAPITAL STOCK
USABanc.com's authorized capital stock consists of 10,000,000 shares of
common stock, par value $1.00 per share, 10,000 shares of Class B common stock,
par value $0.01 per share, and 5,000,000 shares of preferred stock, par value
$1.00 per share. The following summary does not purport to be complete and is
qualified by reference to our articles and bylaws, which are incorporated by
reference as exhibits to the registration statement of which this prospectus is
a part, and by provisions of applicable law.
As of June 15, 1999, 4,014,784 shares of common stock, 10,000 shares of
Class B common stock and no shares of preferred stock were outstanding. Kenneth
L. Tepper, our President and Chief Executive Officer, presently owns all of the
authorized shares of Class B common stock.
71
<PAGE>
Common Stock
Dividends. Holders of common stock are entitled to receive dividends, if
any, as may be declared by the board of directors out of legally available funds
subject to the payment of any preferential dividend to the holders of preferred
stock, if any. To date, we have not paid any cash dividends with respect to the
common stock.
Voting Rights. The voting rights of the shares of common stock are
identical to the voting rights of the Class B common stock with one exception:
the holders of the shares of common stock are entitled to elect two-thirds of
our directors and the holders of the Class B common stock are entitled to elect
one-third of our directors. Excluding the election of directors, the common
stock and the Class B common stock vote together as a single class on all
matters submitted to a vote of the holders of common stock, unless applicable
law requires that each class vote separately. Mr. Tepper, the holder of all of
the issued and outstanding Class B common stock, waived his right to elect
one-third of the directors for our Annual Meeting on July 15, 1999. Mr. Tepper's
waiver of his voting rights applies only to the meeting of July 15, 1999, and
there is no assurance that Mr. Tepper will waive his voting rights in the
future.
Holders of common stock do not have cumulative voting rights. Holders of
common stock are entitled to one vote for each share held, subject to certain
limitations on such voting rights provided by our articles. Our articles provide
that no one person or group may hold or vote more than 10% of the common stock
without the board of directors' consent.
Our articles provide that a director, or the entire board of directors, may
only be removed for "cause" and only with the vote of at least 75% of the
outstanding shares entitled to vote. "Cause" is defined to mean only (1)
conviction of the director of a felony, (2) declaration by order of court that
the director is of unsound mind, or (3) gross abuse of trust. Under this
provision, no director may be removed by shareholders without cause regardless
of the vote in favor of such removal. This provision could make the removal of
directors more difficult to accomplish since the holders of more than 25% of our
capital stock then eligible to vote, which could include directors and officers,
would have a veto power over any attempted removal even if "cause" is
established. As of June 1, 1999, our directors and executive officers as a group
owned 29.4% of our shares of common stock.
Our articles provide that the affirmative vote of at least 80% of the
outstanding shares of capital stock then eligible to vote is required for the
adoption of any shareholder proposal to amend the bylaws which has not been
previously approved by the board of directors. This provision could make
shareholder proposals to amend the bylaws more difficult to adopt since the
holders of more than 20% of stock then eligible to vote, which could include
directors and officers, would have a veto power over any changes to our bylaws.
Our articles also provide that a three-quarters vote of directors and
two-thirds vote of the outstanding shares of common stock is necessary to
approve a merger, consolidation, liquidation or dissolution or any action that
would result in the sale or other disposition of all or substantially all of our
assets. However, these voting requirements are not required if a bylaw amendment
is subsequently adopted by all of the members of the board of directors to
modify or eliminate such requirements. Under such circumstances, Pennsylvania's
Business Corporation Law would require only a majority vote of both the board of
directors and shareholders.
Preemptive Rights. Holders of common stock have no preemptive rights.
Liquidation. In the event of our liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in the assets available
for distribution after payment or provision for payment of our debts and other
liabilities, subject to the rights of any series of preferred stock, if any,
then outstanding.
Conversion of Class B Common Stock. Mr. Tepper, President and Chief
Executive Officer, is the sole holder of Class B common stock. The terms of the
Class B common stock provide that on January 1, 2001, all of the authorized
shares of Class B common stock will automatically convert into 10% of the then
issued shares of Class A common stock, rounded up to the nearest whole share. In
connection with a private placement of our common stock in February 1998, we
entered into an agreement with Mr. Tepper by which we have an option to pay Mr.
Tepper $150,000 per year for each of the three years beginning in 1998 in
exchange for Mr. Tepper agreeing to cap the non-dilutive feature of the Class B
common stock to 10% of the Class A common stock outstanding prior to the
February 1998 private placement of Class A common stock, or 216,460 shares, and
waive any future exercise of the non-dilutive feature of the Class B common
stock. The first payment was made upon the closing of the February 1998 private
placement. The second payment was made in
72
<PAGE>
January 1999. The third optional payment is anticipated to be made in January
2000. Following the exchange, those shares of the Class B common stock will no
longer be available for issuance.
Preferred Stock
The authorized preferred stock may be issued from time to time in one or
more designated series or classes. The board of directors, without approval of
the shareholders, is authorized to establish the voting, dividend, redemption,
conversion, liquidation and other relative provisions as may be provided in a
particular series or class. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of common stock and, under certain circumstances, make it more difficult
for a third party to acquire, or discourage a third party from acquiring, a
majority of the outstanding voting stock of USABanc.com. We have no present
intention to issue any series or class of preferred stock.
Warrants
Sandler O'Neill & Partners, L.P. received warrants which are convertible
into 3.25% of our common stock in connection with its service as placement agent
in a $7.5 million private placement of our common stock in February 1998. The
exercise price of the warrants, as adjusted for an August 1998 stock dividend
and a June 1999 two-for-one stock split effected in the form of a stock
dividend, is $3.85 per share. The warrants include anti-dilution protection
provisions whereby the number of warrants will be adjusted for future stock
splits, stock dividends, and the issuance of additional shares of common stock
for a period of three years from the closing of the private placement and are
exercisable for five years from such date.
Change in Control
Our articles and bylaws contain the following provisions that could delay,
defer or prevent a change in control:
o any merger, consolidation, liquidation or dissolution must be approved
by the affirmative vote of 75% of directors and 66-2/3% of
shareholders;
o one person or group may not hold or vote more than 10% of the shares of
common stock without the consent of the board of directors;
o directors may be removed only for cause and only by a vote of 75% of
the outstanding shares of common stock;
o the holders of the Class B common stock, currently only Mr. Tepper, are
entitled to elect one-third of the directors;
o the board of directors has broad discretion in evaluating any takeover
attempt and is authorized to use a "poison pill" defense; and
o the board of directors is authorized to issue "blank check" preferred
stock which provides the board of directors broad discretion to
determine the number of shares, voting rights and preferences of the
preferred stock.
73
<PAGE>
UNDERWRITING
USABanc.com and Sandler O'Neill & Partners, L.P., as the representative of
the underwriters for the Offering named below, have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table.
Underwriters Number of Shares
------------ ----------------
Sandler O'Neill & Partners, L.P.......... _______
Total............................. =======
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional _____
shares from us to cover such sales. They may exercise that option for 30 days.
If any shares are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $_____ per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to $_____ per share from the initial
price to public. If all the shares are not sold at the initial price to public,
Sandler O'Neill & Partners, L.P. may change the offering price and the other
selling terms.
USABanc.com, our directors and executive officers have agreed with the
underwriters not to dispose of any equity securities of the Company or
securities convertible into or exchangeable for equity securities of the Company
during the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus, except with the prior written
consent of Sandler O'Neill & Partners, L.P. This agreement does not apply to any
securities issued pursuant to employee benefit plans existing on the date of the
underwriting agreement.
In connection with this Offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the Offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the Offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters have repurchased shares sold by
or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discounted by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
As permitted by Rule 103 under the Securities Exchange Act of 1934,
underwriters and selling group members, if any, that are market makers in the
common stock may make bids for or purchases of the common stock in the Nasdaq
National Market until such time, if any, when a stabilizing bid for the
securities has been made. Rule 103 generally provides that (1) a passive market
maker's net daily purchases of the common stock may not exceed 30% of its
average daily trading volume in such securities for the two full consecutive
calendar months, or any 60 consecutive days ending within the 10 days,
immediately preceding the filing date of the registration statement of which
this prospectus forms a part, (2) a passive market maker may not effect
transactions or display bids for the common stock at a price that exceeds
74
<PAGE>
the highest independent bid for the common stock by persons who are not passive
market makers and (3) bids made by passive market makers must be identified as
such.
We estimate that the total expenses of this Offering, excluding
underwriting discounts and commissions, will be approximately $_____.
We have agreed to indemnify the several underwriters against specified
liabilities, including liabilities under the Securities Act of 1933.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the Securities
and Exchange Commission. Our Securities and Exchange Commission filings are also
available over the Internet at the Securities and Exchange Commission's website
at http://www.sec.gov. You may also read and copy any document we file at the
Securities and Exchange Commission's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for more information on the public reference room and their
copy charges.
You may request a copy of any filings referenced above, excluding exhibits,
at no cost, by contacting USABanc.com's Chief Financial Officer, Brian M.
Hartline, at the following address:
USABanc.com, Inc.
1535 Locust Street
Philadelphia, Pennsylvania 19102
(215) 569-4200
We have filed a registration statement on Form SB-2 with the Securities and
Exchange Commission covering the Offering. For further information about us and
the Offering, you should refer to our registration statement and its exhibits.
Since the prospectus may not contain all the information that you may find
important, you should review the full text of the documents included or
incorporated by reference in the registration statement.
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with difference information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not, and the underwriters are not, making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing or incorporated by reference in
this prospectus is accurate as of the date on the front cover of this prospectus
only. Our business, financial condition, results of operations and prospects may
have changed since that date.
FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus are forward-looking statements.
These forward-looking statements include statements in the "Business" section of
this prospectus relating to trends in Internet use and electronic commerce.
These forward-looking statements also include statements relating to our
performance in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Use of Proceeds" and "Business" sections of this
prospectus. In addition, we may make forward-looking statements in future
filings with the Securities and Exchange Commission and in written material,
press releases and oral statements issued by us or on our behalf.
Forward-looking statements include statements regarding our intent, belief or
current expectations (including statements preceded by, followed by or including
forward-looking terminology such as "may," "will," "should," "believe,"
"expect," "anticipate," "estimate," "continue" or similar expressions or
comparable terminology) with respect to various matters.
It is important to note that our actual results could differ materially
from those anticipated from the forward-looking statements depending on various
important factors. These important factors include a possible decline in asset
quality, the evolving nature of the market for Internet banking, the possible
adverse effects of unexpected changes in the interest rate environment,
increasing competition and regulatory changes. See "Risk Factors" beginning on
page 7 for more information on these and other risks we face.
75
<PAGE>
All forward-looking statements in this prospectus are based on information
available to us on the date of this prospectus. We do not undertake to update
any forward-looking statements that may be made by us or on our behalf in this
prospectus or otherwise. In addition, please note that matters set forth under
the caption "Risk Factors" constitute cautionary statements identifying
important factors with respect to the forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for USABanc.com by Jenkens & Gilchrist, a Professional Corporation, Dallas,
Texas. Certain legal matters in connection with the Offering will be passed upon
for the underwriters by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C.
As of the date of this prospectus, certain members of Elias, Matz, Tiernan &
Herrick L.L.P. own approximately _____ shares of common stock of USABanc.com.
EXPERTS
The consolidated financial statements of USABanc.com and its subsidiaries
as of December 31, 1998 and 1997, and for the two years ended December 31, 1998
have been included in this prospectus and in the registration statement in
reliance on the report of Grant Thornton LLP, independent accountants, on the
authority of that firm as experts in accounting and auditing.
76
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
USABANC.COM, INC.
(formerly USABancShares, Inc.)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants ..........................................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.................................................F-3
Consolidated Statements of Operations as of December 31, 1998 and 1997.......................................F-4
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income as of December 31, 1998 and 1997..................................................F-5
Consolidated Statements of Cash Flows........................................................................F-6
Notes to Consolidated Financial Statements...................................................................F-7
Consolidated Balance Sheets as of December 31, 1998 and March 31, 1999 (unaudited) .........................F-34
Consolidated Statements of Income for the three months ended March 31, 1999 and 1998 (unaudited) ...........F-35
Consolidated Statements of Comprehensive Income for the three months ended March 31, 1999
and 1998 (unaudited) ..............................................................................F-36
Consolidated Statement of Changes in Stockholders' Equity for the three months ended
March 31, 1999 (unaudited) ........................................................................F-37
Consolidated Statements of Cash Flows for the three months ended March 31, 1999
and 1998 (unaudited) .......................................................................................F-38
Notes to Consolidated Financial Statements..................................................................F-39
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
USABanc.com, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
USABanc.com, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and comprehensive income (loss) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
USABanc.com, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
March 22, 1999 (except for
Note 21, as to which the
Date is June 15, 1999)
F-2
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------------
(in thousands, except per share data)
ASSETS 1998 1997
---------- ---------
<S> <C> <C>
Cash and due from banks......................................................... $ 1,335 $ 833
Interest bearing deposit with banks............................................. 7,706 3,975
Investment securities available for sale........................................ 28,389 9,035
Investment securities held to maturity (fair market value of $15,951 and
$15,644 in 1998 and 1997, respectively) ..................................... 15,755 15,419
FHLB Stock .................................................................. 3,523 900
Loans receivable, net........................................................... 102,138 56,002
Premises and equipment, net..................................................... 2,023 1,153
Accrued interest receivable..................................................... 1,633 847
Other real estate .............................................................. 66 --
Goodwill, net .................................................................. 69 80
Deferred income taxes........................................................... 573 163
Other assets .................................................................. 1,896 919
---------- ---------
Total assets.............................................................. $ 165,106 $ 89,326
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand .................................................................. $ 1,439 $ 257
NOW .................................................................. 846 688
Money Market................................................................ 2,345 4,802
Savings and passbook ....................................................... 5,281 2,019
Time .................................................................. 104,476 62,708
---------- ---------
Total deposits ........................................................... 114,387 70,474
Borrowings ................................................................ 35,305 12,638
Accrued interest payable ....................................................... 399 75
Accrued expenses and other liabilities ......................................... 1,418 773
---------- ---------
Total liabilities ........................................................ $ 151,509 $ 83,960
========== =========
STOCKHOLDERS' EQUITY
Preferred stock $1.00 par value, 5,000,000 shares authorized, no shares issued
and outstanding in 1998 and 1997
Common stock $1.00 par value, 10,000,000 shares authorized, 4,014,784 shares
issued and outstanding in 1998; 1,627,614 shares issued and outstanding in
1997 and 216,460 shares of converted and unissued Class B common stock in
1998; 162,762 converted and unissued 1997.................................... 4,232 814
Additional paid-in capital...................................................... 8,567 4,828
Accumulated (deficit) earnings.................................................. 1,112 (378)
Accumulated other comprehensive income.......................................... (314) 102
---------- ---------
Total stockholders' equity................................................ 13,597 5,366
---------- ---------
Total liabilities and stockholders' equity................................ $ 165,106 $ 89,326
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1998 1997
------- --------
(in thousands, except per share data)
<S> <C> <C>
Interest income:
Loans.................................................................... $ 9,028 $ 3,090
Investment securities.................................................... 3,015 1,637
Interest bearing deposits with banks and other........................... 309 152
------- --------
Total interest income............................................... 12,352 4,879
------- --------
Interest expense:
Deposits................................................................. 5,266 2,285
Other borrowings......................................................... 1,188 245
------- --------
Total interest expense.............................................. 6,454 2,530
------- --------
Net interest income................................................. 5,898 2,349
Provision for possible loan losses........................................... 510 415
------- --------
Net interest income after provision for
possible loan losses........................................... 5,388 1,934
------- --------
Other income:
Service charges on deposit accounts...................................... 94 26
Gain on sale of securities............................................... 378 127
Brokerage operations..................................................... 141 102
Other income............................................................. 146 59
------- --------
Total other income.................................................. 759 314
------- --------
Other expenses:
Salaries and employee benefits........................................... 1,539 1,345
Net occupancy expense.................................................... 523 202
Professional fees........................................................ 275 175
Office expenses.......................................................... 270 120
Data processing fees..................................................... 199 115
Advertising expense...................................................... 177 62
Goodwill amortization.................................................... 10 8
Other operating expenses................................................. 707 430
------- --------
Total other expense................................................. 3,700 2,457
------- --------
Income (loss) before income tax expense............................. 2,447 (209)
Income tax expense:.......................................................... 957 17
------- --------
Net income (loss)............................................................ $ 1,490 $ (226)
======= ========
Net income (loss) per share - basic (1)...................................... $ 0.38 $ (0.10)
======= ========
Net income (loss) per share - diluted (1).................................... $ .35 $ (0.10)
======= ========
</TABLE>
- ----------
(1) 1998 and 1997 per share amounts have been restated to reflect a 33% stock
dividend paid August 17, 1998 and a two-for-one stock split effected in the
form of a dividend paid on June 15, 1999.
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
USABanc.com, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income
Unearned Accumulated
Additional Accumulated compensation other Total
Common paid-in (deficit) Class B comprehensive stockholders' Comprehensive
stock capital earnings Common Stock income equity income(loss)
------- ---------- ----------- ------------ ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997.................. $ 597 $ 4,878 $ (152) $ (425) $ (2) $ 4,896
Net loss.............................. - - (226) - - (226) $ (226)
Other comprehensive income,
net of reclassification adjustments
and taxes.......................... - - - - 104 104 104
---------
Total comprehensive loss.............. $ (122)
=========
Stock issued to acquire Knox Financial 8 67 - - - 75
33% common stock dividend............. 200 (200) - - - -
Conversion of Class B common stock.... 9 83 - - - 92
Amortization of unearned compensation
Class B common stock............... - - - 425 - 425
------- -------- ------ ------- ------- -------
Balance, December 31, 1997................ 814 4,828 (378) - 102 5,366
Net income............................ - - 1,490 - - 1,490 $ 1,490
Other comprehensive loss,
net of reclassification adjustments
and taxes.......................... - - - - (416) (416) (416)
---------
Total comprehensive income............ $ 1,074
=========
Private placement offering............ 769 6,341 - - - 7,110
Exercise of stock options ............ 9 38 - - 47
33% stock dividend.................... 524 (524)
100% stock dividend................... 2,116 (2,116) - - - -
-------- -------- ------ ------- ------- -------
Balance, December 31, 1998................ $ 4,232 $ 8,567 $1,112 $ - $ (314) $13,597
======= ======== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................................... $ 1,490 $ (226)
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses ..................................... 510 415
Depreciation and amortization............................................ 219 60
Decrease in goodwill..................................................... 11 49
Accretion of discounts on purchased loan portfolio....................... (1,306) (691)
(Accretion) amortization of securities (discount) premium, net........... (9) (5)
Amortization of Class B common stock..................................... -- 425
Class B common stock conversion.......................................... -- 92
Gain on sale of securities .............................................. (378) (127)
Increase in accrued interest receivable ................................. (786) (540)
Decrease (increase) in deferred tax asset................................ (166) (216)
Increase in other assets................................................. (977) (621)
Increase in accrued interest payable .................................... 324 56
Increase in accrued expenses and other liabilities....................... 645 565
--------- ----------
Net cash provided by operating activities.......................... (423) (764)
--------- ----------
Cash flows from investing activities:
Investment securities available for sale
Purchases ............................................................ (29,512) (11,433)
Sales ............................................................... 9,286 4,524
Maturities and principal repayments................................... 1,250 4,218
Investment securities held to maturity
Purchases............................................................. (8,012) (9,131)
Sales ............................................................... 1,444 2,001
Maturities and principal repayments................................... 5,580 1,959
Purchases of FHLB Stock.................................................. (2,622) (650)
(Increase) decrease in interest bearing deposits with banks.............. (3,731) 41
Net increase in loans ................................................... (45,340) (39,196)
Increase in other real estate, net ...................................... (66) --
Cash of entity acquired.................................................. -- 45
Purchase of premises and equipment....................................... (1,089) (1,067)
--------- ----------
Net cash used in investing activities.............................. (72,812) (48,689)
--------- ----------
Cash flows from financing activities:
Net increase in deposits................................................. 43,913 42,500
Net increase in borrowings .............................................. 22,667 7,588
Private placement proceeds............................................... 7,110 --
Exercise of stock options................................................ 47 --
--------- ----------
Net cash provided by financing activities ......................... 73,737 50,088
--------- ----------
Net increase in cash and cash equivalents.......................... 502 635
Cash and cash equivalents, beginning of year ................................ 833 198
--------- ----------
Cash and cash equivalents, end of year ...................................... $ 1,335 $ 833
--------- ----------
Supplemental disclosure of cash flow information
Cash paid during the year for
interest.............................................................. $ 6,137 $ 2,231
--------- ----------
Income taxes.......................................................... $ 975 $ 237
========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
Note 1 -- Organization
USABanc.com, Inc. (the "Corporation"), through its subsidiaries, vBank
(the "Bank"), USACapital, Inc. ("USACapital") and USACredit, Inc.
("USACredit"), provides a full range of banking and non-depository services
to individual and corporate customers located in the greater Delaware Valley
region.
The Corporation was organized in November 1995 in order to facilitate
the acquisition of People's Thrift Savings Bank, which changed its name to
"vBank" in July 1999.
The Bank is a Pennsylvania chartered stock savings institution which
competes with other banking and financial institutions in its primary market
communities, including financial institutions with resources substantially
greater than its own. Commercial banks, savings banks, savings and loan
associations, and credit unions actively compete for savings and time
deposits and for types of loans. Such institutions, as well as consumer
finance, insurance, and brokerage firms, may be considered competitors of
the Bank with respect to one or more of the services it provides.
The Bank is subject to regulations of certain state and federal
agencies and, accordingly, is periodically examined by those regulatory
authorities. As a consequence of the extensive regulation of commercial
banking activities, the Bank's business is particularly susceptible to being
affected by state and federal legislation and regulations.
USACapital is a broker dealer registered with the Securities and
Exchange Commission ("SEC") and the National Association of Securities
Dealers ("NASD"). USACapital conducts business through its clearing brokers
for its proprietary accounts. USACapital also introduces customer accounts
on a fully disclosed basis to the clearing brokers and earns revenues and
incurs expenses from activities on those accounts. The clearing and
depository operations for USACapital's customer accounts and proprietary
accounts are performed by its clearing brokers pursuant to clearance
agreements.
USACredit is a majority owner of a Delaware limited liability company
in the business of purchasing judgements, deficiencies, and claims, and
pursuing collections on such claims.
Note 2 -- Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The accounting and reporting policies of the Corporation and its
subsidiaries conform with generally accepted accounting principles and
predominant practices within the banking industry. All significant
intercompany balances and transactions have been eliminated.
F-7
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. These estimates and assumptions also affect reported amounts of
revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
The principal estimates particularly susceptible to significant change
in the near term relates to the allowance for loan losses. The evaluation of
the adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different
loan portfolios, and takes into consideration current economic and market
conditions, the capability of specific borrowers to pay specific loan
obligations, and current loan collateral values. However, actual losses on
specific loans, which also are encompassed in the analysis, may vary from
estimated losses.
In 1998, the Corporation adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 redefines
how operating segments are determined and requires disclosures of certain
financial and descriptive information about the Corporation and its
subsidiaries operating segments. Management has determined the Corporation
operates in one business segment, namely community banking.
Investment Securities
The Corporation accounts for its investment securities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities. The Corporation
classifies its securities as held for investment purposes (held to maturity)
and available for sale. Investment securities for which the Corporation has
the ability and intent to hold until maturity are classified as held to
maturity. These investment securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts on a straight-line
basis, which is not materially different from the effective interest method.
Investment securities which are held for indefinite periods of time,
which management intends to use as part of its asset/liability strategy, or
which may be sold in response to changes in interest rates, changes in
prepayment risk, increases in capital requirements or other similar factors,
are classified as available for sale and are carried at fair value.
Differences between a security's amortized cost and fair value is
charged/credited directly to shareholders' equity, net of income taxes. The
cost of securities sold is determined on a specific identification basis.
Gains and losses on sales of securities are recognized in the consolidated
statements of income upon sale. The Corporation had no securities held for
trading purposes at December 31, 1998 and 1997.
F-8
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge.
The accounting for changes in the fair value of a derivative (gains and
losses) depends on the intended use of the derivative and resulting
designation. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Earlier application is permitted only
as of the beginning of any fiscal quarter. The adoption of SFAS No. 133 is
not anticipated to have a material impact on the Corporation's consolidated
financial position or results of operations.
Loans and Allowance for Possible Loan Losses
Loans receivable, which management has the intent and ability to hold
for the foreseeable future or until maturity or payoff are reported at their
outstanding principal, adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. The
Corporation's management maintains the allowance for possible loan losses at
a level considered adequate to provide for potential loan losses. The
allowance is increased by provisions charged to expense and reduced by net
charge-offs. Loans are charged against the allowance for possible loan
losses when management believes that the collectibility of the principal is
unlikely. The level of the allowance is based on management's evaluation of
potential losses in the loan portfolio after consideration of appraised
collateral values, financial condition of the borrowers, and prevailing and
anticipated economic conditions. Credit reviews of the loan portfolio,
designed to identify potential charges to the allowance, are made on a
periodic basis during the year by senior management.
Interest on loans is credited to operations primarily based upon the
principal amount outstanding. When management believes there is sufficient
doubt as to the ultimate collectibility of interest on any loan, the accrual
of applicable interest is discontinued. Interest income is subsequently
recognized only to the extent cash payments are received. Net loan
origination fees and loan discounts on purchased loan pools are deferred and
amortized over the life of the related loan using the level yield method.
The net loan originations fees recognized as yield adjustments are reflected
in total interest income in the consolidated statement of operations. The
unamortized balance of loan origination net fees is reported in the
consolidated balance sheet as part of unearned income; the unamortized
portion of discounts on purchased loans reduces the carrying value of loans
receivable on the consolidated balance sheet.
F-9
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
The Corporation accounts for its impaired loans in accordance with SFAS
No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
SFAS No. 118, Accounting by Creditors for Impairment of a Loan Income
Recognition and Disclosures. This standard requires that a creditor measure
impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. Regardless of the measurement method, a creditor must measure
impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The Corporation accounts for its transfers and servicing financial
assets in accordance with SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, as amended
by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of
SFAS No. 125. This standard provides accounting guidance on transfers of
financial assets, servicing of financial assets, and extinguishments of
liabilities.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Building and leasehold improvements are amortized over the
term of the lease or estimated useful life, whichever is shorter.
Depreciation and amortization is computed primarily on the straight-line
method over the estimated useful lives of the assets.
Goodwill
Goodwill is stated at cost less accumulated amortization, and is being
amortized on the straight-line method over 15 years. On an ongoing basis,
management reviews the valuation and amortization of goodwill. As part of
this review, the Corporation estimates the value of and the estimated
undiscounted future net income expected to be generated by the related
subsidiaries to determine that no impairment has occurred.
The Corporation accounts for impairment under SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of. This standard provides accounting guidance on when to recognize and how
to measure impairment losses of long-lived assets and certain identifiable
intangibles and how to value long-lived assets to be disposed of.
F-10
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
Other Real Estate
Properties acquired by foreclosure are other real estate (ORE) and
recorded at the lower of recorded investment in the related loan or fair
value based on appraised value at the date actually or constructively
received. Loan losses arising from the acquisition of such properties are
charged against the allowance for possible loan losses. Subsequent
adjustments to the carrying values of ORE properties are charged to
operating expense. ORE is stated at the lower of cost or fair value less
estimated cost to sell.
Income Taxes
The Corporation recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Bank's financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on their difference between the
financial statement carrying amounts and the tax basis of assets and
liabilities. The Corporation files a consolidated federal income tax return
and the amount of income tax expense or benefit is computed and allocated on
a separate return basis.
Per Share Amounts
On January 1, 1997, the Corporation adopted the provisions of SFAS No.
128, Earnings Per Share. SFAS No. 128 eliminated primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings
per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common shareholders
by the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could
occur if securities or other contracts to issue common stock were exercised
and converted into common stock. All weighted average actual shares or per
share information in the financial statements have been adjusted
retroactively for the effect of a stock dividend.
Comprehensive Income
On January 1, 1998, the Bank adopted SFAS No. 130, Reporting
Comprehensive Income. This standard establishes new standards for reporting
comprehensive income which includes net income as well as certain other
items which result in a change to equity during the period. These financial
statements have been reclassified to reflect the provisions of SFAS No. 130.
F-11
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 2 -- Summary of Significant Accounting Policies -- (Continued)
The income tax effects allocated to comprehensive income (loss) is as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------------------- ---------------------------------
Tax Net of Net of
Before tax expense tax Before tax Tax tax
amount (benefit) amount amount expense amount
------ --------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains (losses)
on securities
Unrealized holding gains
(losses) arising during
period....................... $(282) $ 100 $(182) $296 $ (113) $183
Less reclassification
adjustment for gains
realized in net income.... 378 (144) 234 127 (48) 79
----- ----- ----- ---- ------ ----
Other comprehensive income
(loss), net.................. $(660) $ 244 $(416) $169 $ (65) $104
===== ===== ===== ==== ====== ====
</TABLE>
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and amounts due from
banks.
Advertising Costs
The Corporation expenses advertising costs as incurred.
Restrictions on Cash and Due from Banks Costs
As of December 31, 1998, the Corporation did not maintain reserves (in
the form of deposits with the Federal Home Loan Bank ("FHLB")) to satisfy
federal regulatory requirements. As of December 31, 1998, USACapital has
segregated $130,000 in special reserve bank accounts for the benefit of
customers as required by the clearing organizations.
Reclassifications
Certain reclassifications have been made to the 1997 financial
statements to conform with the 1998 presentation.
Note 3 -- Private Placement
On February 18, 1998, the Company issued 769,231 shares of its Class A
common stock in conjunction with a private placement offering (the
"offering"). Total cash received was $7.1 million, net of offering cost of
$390,000.
F-12
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 3 -- Private Placement -- (Continued)
In connection with the offering, the Company granted warrants
convertible for a period of five years into 3.25% of the Corporation's
common stock on the date of conversion. The number of warrants will be
adjusted for stock splits, stock dividends and the issuance of additional
shares so as to maintain the holder's ownership of the fully diluted common
stock at 3.25% for a period of three years from the close of the offering.
Note 4 -- Acquisition
In 1997, the Corporation acquired Knox Financial Services Group, Inc.
The Corporation distributed 28,000(1) shares of common stock of its parent
to effect the combination. The purchase method of accounting was used to
account for this business combination. Subsequent to the acquisition, Knox
Financial Services Group, Inc. was renamed USACapital, Inc. The results of
operations of USACapital are included in the accompanying financial
statements since the date of acquisition.
(1) Adjusted for 33% stock dividends paid by the Corporation on July 18,
1997 and August 17, 1998 and a two-for-one stock split effected in the form
of a dividend paid on June 15, 1999.
Note 5 -- Investment Securities
The amortized cost, gross unrealized gains and losses, and fair market
value of the Bank's investment securities available for sale and held to
maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------
(in thousands)
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available for sale
Mortgage-backed securities ........ $ 2,628 $ -- $ (8) $ 2,620
Corporate obligations.............. 1,322 13 (89) 1,246
Trust preferred securities
and other securities........... 24,944 243 (664) 24,523
-------- -------- ------ -------
$ 28,894 $ 256 $ (761) $28,389
======== ======== ====== =======
Held to maturity
U.S. Government and agency
securities..................... $ 1,201 $ 1 $ -- $ 1,202
Mortgage-backed securities......... 5,650 104 (1) 5,753
Municipal securities............... 3,166 69 -- 3,235
Trust preferred securities
and other securities........... 5,738 79 (56) 5,761
-------- -------- ------ -------
$ 15,755 $ 253 $ (57) $15,951
======== ======== ====== =======
</TABLE>
F-13
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
December 31, 1998 and 1997
Note 5 -- Investment Securities -- (Continued)
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------
(in thousands)
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available for sale
U.S. Government and agency
securities ................ $ 1,243 $ 16 $ -- $ 1,259
Trust preferred securities .... 7,637 150 (11) 7,776
-------- -------- -------- --------
$ 8,880 $ 166 $ (11) $ 9,035
======== ======== ======== ========
Held to maturity
U.S. Government and agency
securities ................ $ 3,557 $ -- $ (10) $ 3,547
Mortgage-backed securities of . 6,306 50 -- 6,356
Municipal securities .......... 3,163 101 -- 3,264
Trust preferred securities
and other securities ...... 2,393 84 -- 2,477
-------- -------- -------- --------
$ 15,419 $ 235 $ (10) $ 15,644
======== ======== ======== ========
</TABLE>
The amortized cost and fair market value of investment securities, by
contractual maturity, as of December 31, 1998, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
repayment penalties.
<TABLE>
<CAPTION>
(Dollars in Thousands) Available for sale Held to maturity
----------------------------------------- ---------------------------------------
Weighted Weighted
Average Amortized Approximate Average Amortized Approximate
Yield Cost Fair Value Yield Cost Fair Value
-------- --------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Due after one year through five years .. $ 1,246 $ 1,170 11.92% $ 2,001 $ 2,015 7.31%
Due after five years through ten years.. 816 770 9.88% 2,635 2,581 7.90
Due after ten years .................... 22,312 21,996 9.61 5,479 5,613 7.06
Mortgage-backed securities ............. 2,628 2,620 7.00 5,640 5,742 6.59
Equity securities ...................... 1,892 1,833 -- -- -- --
------- ------- ----- ------- ------- ------
$28,894 $28,389 $15,755 $15,951
======= ======= ======= =======
</TABLE>
F-14
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 5 -- Investment Securities -- (Continued)
Expected maturities will differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without call
or prepayment penalties. In 1998, the Corporation sold securities which
were classified as held-to-maturity due to unforeseen circumstances that
could not have been anticipated.
Proceeds on the sale of investment securities classified as
held-to-maturity were $1.4 million and $2 million in 1998 and 1997,
respectively. Proceeds on the sale of investment securities classified as
available-for-sale were $9.3 million and $4.5 million in 1998 and 1997,
respectively. Gross gains of $393,000 and gross losses of $15,000 were
realized on 1998 sales.
Note 6 -- Loans Receivable
Loans outstanding by classification are as follows:
December 31,
---------------
1998 1997
---- ----
(in thousands)
Real estate .................................. $ 102,076 $ 54,262
Commercial and industrial loans .............. 986 1,091
Other ........................................ 243 1,694
--------- ---------
103,305 57,047
Loans in process ............................. -- (260)
Unearned income .............................. (116) (217)
Allowance for possible loan losses ........... (1,051) (568)
--------- ---------
$ 102,138 $ 56,002
========= =========
At December 31, 1998 and 1997, loans outstanding to certain officers
and directors of the Bank and their affiliated interests amounted to $2.5
million and $233,000, respectively. An analysis of activity in loans to
related parties at December 31, 1998 and 1997, resulted in new loans of
$2.7 and $122,000, respectively, and reductions of $483,000 and $504,000,
respectively, representing payments.
An analysis of the allowance for possible loan losses is as follows:
December 31,
--------------------
1998 1997
---- ----
(in thousands)
Balance, beginning of year .................. $ 568 $ 182
Provision charged to expense ................ 510 415
Charge-offs, net of recoveries .............. (27) (29)
------ -------
Balance, end of year ........................ $1,051 $ 568
====== =======
F-15
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 6 -- Loans Receivable -- (Continued)
Included in loans receivable are nonaccrual loans of $1.8 million and
$287,000 at December 31, 1998 and 1997, respectively. Interest income that
would have been recorded in the financial statements had the nonaccrual
loans been performing in accordance with their terms would have been
$140,000 in 1998.
Also included in loans receivable are loans past due 90 days or more
and accruing in the amount of $152,000 and $165,000 at December 31, 1998 and
1997, respectively, which have not been classified as nonaccrual due to
management's belief that the loans are well-secured and in the process of
collection.
Note 7 -- Premises And Equipment
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
Estimated ------------------------
useful lives 1998 1997
------------ ---- ----
<S> <C> <C> <C>
Building ............................................ 31.5 years $ 754 $ 754
Premises and improvements ........................... 5 to 20 years 726 135
Furniture and equipment ............................. 5 to 7 years 969 367
------- -------
2,449 1,256
Less accumulated depreciation and amortization ...... (426) (103)
------- -------
$ 2,023 $ 1,153
======= =======
</TABLE>
Depreciation and amortization charged to operations was $219,000 and
$60,000 for the years ended December 31, 1998 and 1997, respectively.
Note 8 -- Deposits
The aggregate amount of jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $34.7 million and $9.3
million at December 31, 1998 and 1997, respectively.
At December 31, 1998, the schedule of maturities of certificates of
deposit is as follows:
1999.................................................... $ 47,067
2000.................................................... 28,399
2001.................................................... 14,769
2002.................................................... 5,663
2003.................................................... 7,670
Thereafter.............................................. 908
--------
$104,476
========
F-16
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 9 -- Borrowings
At December 31, 1998, the Bank had five callable fixed-rate advances
outstanding with the FHLB. The callable advances mature within five to ten
years with call options ranging from 18 months to five years. The interest
rates on the callable advances range from 4.83% to 5.63% with a weighted
average interest rate of 5.31% at December 31, 1998.
The following table sets forth certain information regarding the Bank's
FHLB advances, at or for the period ended December 31:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Balance outstanding, December 31.................................. $30,000 $ 9,000
Average balance outstanding during year........................... $22,482 $ 7,000
Weighted average interest rate for the period..................... 5.29% 5.87%
Maximum outstanding balance at any month end...................... $31,000 $12,700
</TABLE>
The Bank also has $4.2 million in collateralized borrowings that
represent participations by other banks in certain loans; such amounts are
non-interest bearing.
The Corporation has three line of credit facilities with local
financial institutions totaling $2.0 million. The aggregate outstanding
balance on the lines of credit at December 31, 1998 was $1.1 million. The
interest rates paid on these advances are floating, prime based rates,
ranging from prime to prime plus one percentage point, with the average
interest rate at December 31, 1998 equaling 8.21%.
Note 10 -- Shareholders' Equity
In connection with the formation of the Corporation, the President &
CEO purchased 10,000 shares, par value $.01, of Class B Common Stock for
$500. These shares mandatorily convert into ten percent of the then issued
shares of Class A Common Stock on January 1, 2001. Unearned compensation of
$543,000 was recorded at the close of the offering on November 30, 1995,
based on the offering price of $10.00 per share. As a result of the
mandatory conversion provision, the Class B Common Stock was deemed
converted on November 30, 1995 for financial statement purposes.
Unearned compensation, which is shown as a separate component of
Stockholders' equity, was being amortized over five years. In connection
with the offering (Note 2), the President & CEO agreed to cap the amount of
Class A common stock into which the Class B common stock could be converted,
into an amount equal to 10% of the Class A common stock outstanding at
December 31, 1997, adjusted for any future stock dividends, or stock splits.
In conjunction with this agreement, the Corporation fully recognized the
remaining unearned compensation as compensation expense in 1997.
F-17
<PAGE>
USABanc.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998 and 1997
Note 10 -- Shareholders' Equity -- (Continued)
On July 18, 1997, the Corporation paid a 33% stock dividend on its
common stock to stockholders of record as of July 1, 1997.
On August 17, 1998, the Corporation paid a 33% stock dividend on its
common stock to stockholders of record as of August 3, 1998.
On June 15, 1999, the Corporation effected a two-for-one stock split in
the form of a stock dividend to stockholders of records as of June 1, 1999.
Note 11 -- Employee Benefit Plans
The Bank had a defined contribution plan, 401(k), covering eligible
employees, as defined under the plan document. Employees could contribute up
to 10% of compensation, as defined under the plan document. The Bank could
make discretionary contributions. The Bank did not make any contributions
into the plan during the period ended December 31, 1998 or 1997. The plan
was terminated in 1998, and all funds were distributed to the employees.
Note 12 -- Income Taxes
The components of income taxes (benefit) are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
Federal
Current .......................................................... $ 935 $ 193
Deferred.......................................................... (165) (216)
Benefit applied to reduce goodwill................................ -- 22
----- -----
770 (1)
State
Current .......................................................... 187 9
Benefit applied to reduce goodwill................................ -- 9
-----
187 18
----- -----
Income taxes........................................................... $ 957 $ 17
===== =====
</TABLE>
F-18
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 12 -- Income Taxes -- (Continued)
The reconciliation of the tax computed at the statutory federal rate
was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
Tax at statutory rate............................................... $ 832 $ (71)
Increase (decrease) in taxes resulting from
Tax-exempt income................................................ (76) --
Nondeductible compensation....................................... -- 144
Nondeductible expenses, including goodwill and
meals and entertainment...................................... 31 16
Increase (decrease) in valuation allowance....................... -- (103)
State income taxes, net of federal income
tax benefit.................................................. 124 12
Other, net....................................................... 46 19
----- -----
Income tax expense ................................................. $ 957 $ 17
===== =====
</TABLE>
Deferred income taxes are provided for the temporary difference between
the financial reporting basis and the tax basis of the Corporation's assets
and liabilities. Cumulative temporary differences are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
Deferred tax assets
Allowance for possible loan losses............................... $ 346 $ 184
Deferred loan fees............................................... 7 9
Deferred compensation............................................ 24 23
Fixed asset...................................................... 5 --
Unrealized losses on securities available for sale............... 191 --
----- -----
573 216
Deferred tax liabilities
Fixed assets..................................................... $ -- (1)
Unrealized gains on securities available-for-sale................ -- (52)
----- -----
(53)
-----
Net deferred tax asset ............................................. $ 573 $ 163
===== =====
</TABLE>
During 1997, the Corporation realized a tax benefit related to the net
operating loss carryovers from the acquisition of the Bank which was treated
as a reduction to goodwill in accordance with SFAS No. 109. The Corporation
believes it is more likely than not to realize the net deferred tax asset,
and accordingly, no valuation allowance has been provided at December 31,
1997.
F-19
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 13 -- Earnings Per Share
The following table illustrates the reconciliation of the basic and
diluted EPS computations (in thousands, except per share data).
<TABLE>
<CAPTION>
For the year ended December 31, 1998(1)
----------------------------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common stockholders......... $ 1,490 3,972 $ 0.38
Effect of dilutive securities
Options............................................. -- 266 --
------- ----- ------
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions........................ $ 1,490 4,238 $ 0.35
======= ====== ======
</TABLE>
Options to purchase 124,000 shares of common stock at exercise prices
ranging from $5.64 to $15.00 per share were outstanding during 1998 which
were not included in the computation of diluted EPS because the options
exercise price were greater than the average market price of the common
shares.
<TABLE>
<CAPTION>
For the year ended December 31, 1997 (1)
--------------------------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share
Net loss available to common stockholders........... $ (226) 2,164 $ (0.10)
Effect of dilutive securities
Options............................................. -- -- --
------ ----- -------
Diluted earnings per share
Net loss available to common stockholders
plus assumed conversions........................ $ (226) 2,164 $ (0.10)
====== ===== =======
</TABLE>
Options to purchase 645,640 shares of common stock at $2.83 per share
were outstanding during 1997 which were not included in the computation
of diluted EPS because the options were anti-dilutive.
(1) Adjusted for 33% stock dividend paid by the Corporation in August
1998 and a two-for-one stock split effected in the form of a dividend
paid by the Corporation in June 1999.
F-20
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 14 -- Financial Instruments with Off-Balance-Sheet Risk and Concentrations
of Credit Risk
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Such financial instruments are recorded in
the financial statements when they become payable. Those instruments
involve, to varying degrees, elements of credit and interest rate risks in
excess of the amount recognized in the consolidated balance sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual or notional
amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk. The approximate
contract amounts are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit......................................... $ 1,070 $ 1,322
Standby letters of credit and financial guarantees written........... 1,098 --
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
The Bank's originated loan portfolio primarily consists of loans
secured by real estate in the greater Delaware Valley region. The Bank's
acquired loan portfolio consist of individual loans and loan pools
throughout the domestic United States purchased at sales conducted by
governmental agencies. The Bank, as with any lending institution, is subject
to the risk that residential real estate values in the primary lending area
will deteriorate, thereby potentially impairing collateral values in the
primary lending area. However, management believes that real estate values
are presently stable in its primary lending area and that loan loss
allowances have been provided in amounts commensurate with its current
perception of the foregoing risks of the portfolio.
F-21
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 15 -- Commitments And Contingencies
Leases
The Bank and the Corporation have entered into operating lease
arrangement for branch facilities. Both the Bank and the Corporation are
responsible for pro-rata operating expense escalations.
As of December 31, 1998, future approximate minimum rental payments are
as follows (in thousands):
1999........................................................ $ 91
2000........................................................ 96
2001........................................................ 104
2002........................................................ 106
2003........................................................ 108
Thereafter.................................................. 386
----
$891
====
The above amount represents minimum rentals not adjusted for possible
future increases due to escalation provisions and assumes that all option
periods will be exercised by the Bank or the Corporation.
Rent expense for the years ended December 31, 1998 and 1997, amounted
to $147,000 and $125,000, respectively.
Employee Agreements
The Corporation has employment agreements with certain key executives
that provide severance pay benefits if there is a change in control of the
Corporation. The agreements will continue in effect on a year-to-year basis
until terminated or not renewed by the Corporation or key executives. Upon a
change in control, the Corporation shall continue to pay the key executives'
salaries per the agreements and certain benefits for the agreed upon time
periods. The maximum contingent liability under the agreements at December
31, 1998 was $1.2 million.
In addition, in connection with the offering (Note 2), the Corporation
and the President & CEO have entered into an agreement by which the
Corporation has the option to pay $150,000 per year for each of the three
years beginning in 1998 in exchange for the President agreeing to waive any
future exercise of the non-dilutive feature of the Class B common stock. If
the Corporation does not make the optional payment on January 2nd of each
year, the President will be entitled to implement the anti-dilutive feature
for 10% of any shares of Class A common stock issued during the year of
non-payment. The Corporation exercised its option for 1998 upon the close of
the offering, and has also exercised its option for 1999.
F-22
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 15 -- Commitments And Contingencies
Other
The Corporation may, in the ordinary course of business, become a party
to litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business. In management's
judgment, the financial position of the Corporation will not be materially
affected by the final outcome of any present legal proceedings.
Note 16 -- Fair Value of Financial Instruments
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For
the Corporation, as for most financial institutions, the majority of its
assets and liabilities are considered financial instruments. However, many
such instruments lack an available trading market, as characterized by a
willing buyer and seller engaging in an exchange transaction. Also, it is
the Corporation's general practice and intent to hold its financial
instruments to maturity and not to engage in trading or sales activities,
except for certain loans. Therefore, the Corporation had to use significant
estimations and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair
values may materially affect the estimated amounts. Also, management is
concerned that there may not be reasonable comparability between
institutions due to the wide range of permitted assumptions and
methodologies in the absence of active markets. This lack of uniformity
gives rise to a high degree of subjectivity in estimating financial
instrument fair values.
Estimated fair values have been determined by the Corporation using the
best available data and an estimation methodology suitable for each
category of financial instruments. The estimation methodologies used, the
estimated fair values, and recorded book balances at December 31, 1998 and
1997, are outlined below.
For cash and cash equivalents, including cash and due from banks and
interest bearing deposits with banks, the recorded book values of $1.3
million and $7.7 million, respectively, as of December 31, 1998 and $833,000
and $4.0 million, respectively, at December 31, 1997, approximate fair
values. The estimated fair values of investment securities, including FHLB
stock, are based on quoted market prices, if available. Estimated fair
values are based on quoted market prices of comparable instruments if quoted
market prices are not available.
The net loan portfolio at December 31, 1998 and 1997, has been valued
using a present value discounted cash flow where market prices were not
available. The discount rate used in these calculations is the estimated
current market rate adjusted for credit risk. The carrying value of accrued
interest approximates fair value.
F-23
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 16 -- Fair Value Of Financial Instruments -- (Continued)
The estimated fair values of demand deposits (i.e., interest- and
noninterest-bearing checking accounts, savings, and certain types of money
market accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amounts). The fair values of
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered to a
schedule of aggregated expected monthly time deposit maturities. The
carrying amount of accrued interest payable approximates its fair value.
<TABLE>
<CAPTION>
1998 1997
------------------------ ----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Investment securities..................... $ 47,667 $ 47,862 $24,454 $24,678
Loans receivable.......................... 103,189 110,242 56,570 57,647
Deposits.................................. 114,387 114,777 70,474 70,645
</TABLE>
The fair values of borrowings totaling $35.3 million and $12.7 million
are estimated to approximate their recorded book balances at December 31,
1998 and 1997, respectively.
There was no material difference between the notional amount and the
estimated fair value of off-balance-sheet items, which totalled
approximately $2.2 million and $1.3 million at December 31, 1998 and 1997,
respectively, and primarily comprise unfunded loan commitments, which are
generally priced at market at the time of funding.
Note 17 -- Stock Option Plan
The FASB issued SFAS No. 123, Accounting for Stock-Based Compensation,
which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, the standard permits entities to continue accounting for
employee stock options and similar equity instruments under APB Opinion No.
25, Accounting for Stock Issued to Employees. Entities that continue to
account for stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
The Corporation has determined it will follow APB Opinion No. 25.
F-24
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 17 -- Stock Option Plan -- (Continued)
The Corporation has a Stock Option Plan (the "Plan") for the benefit of
key officers and employees of the Corporation. The Plan was designed to
attract and retain qualified personnel in key positions, provide officers
and key employees with a proprietary interest in the Corporation as an
incentive to contribute to the success of the Corporation, and reward key
employees for outstanding performance and the attainment of targeted goals.
The Plan was also designed to retain qualified directors for the
Corporation, and will provide for the grant of non-qualified stock options
and incentive options intended to comply with the requirements of Section
422 of the Internal Revenue Code of 1986, as amended.
The Plan is administered and interpreted by a Committee of the Board of
Directors, and unless sooner terminated, will be in effect for a period of
ten years from the Effective Date. The options, which have a term of between
4 and 10 years when issued, vest either immediately or over a period
specified by the Corporation's compensation committee. The exercise price of
each option is equal to or above the market value on the date of grant.
Accordingly, no compensation cost has been recognized for the Plan. Had
compensation cost for the Plan been determined based on the fair value of
options at the grant dates consistent with the method of SFAS No. 123,
Accounting for Stock-Based Compensation, the Corporation's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
<S> <C> <C>
Net income
As reported...................................................... $ 1,490 $ (226)
Pro forma........................................................ $ 1,180 $ (226)
Basic earnings (loss) per share
As reported...................................................... $ 0.38 $ (0.10)
Pro forma........................................................ $ 0.30 $ (0.10)
Diluted earnings (loss) per share
As reported...................................................... $ 0.35 $ (0.10)
Pro forma........................................................ $ 0.28 $ (0.10)
</TABLE>
These pro forma amounts may not be representative of future
disclosures because they do not take into effect the pro forma compensation
expense related to grants before 1995.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1998: no dividend yield for all
years; expected volatility of 20%, risk-free interest rate of 5.55%, and an
expected lives of ten years for all options. No options were granted in
1997.
F-25
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 17 -- Stock Option Plan -- (Continued)
A summary of the status of the Corporation's fixed stock option plans
as of December 31, 1998, and changes for each of the years in the two-year
period then ended was as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- -----------------------
Weighted Weighted
average average
Number exercise Number exercise
of price per of price per
shares share shares share
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.......... 646,000 $ 2.83 666,000 $ 2.83
Options granted........................... 304,000 4.89 -- --
Options exercised......................... (18,000) 2.83 -- --
Options forfeited......................... (56,000) 2.83 (20,000) 2.83
-------- --------
Outstanding at end of year................ 876,000 $ 3.60 646,000 $ 2.83
======= =======
Options exercisable at year-end........... 686,000 646,000
======= =======
Weighted average fair value of
options granted during year............. $ 1.79 $ --
======= ========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
Weighted
Number average Weighted Number Weighted
outstanding at remaining average exercisable at average
Range of exercise December 31, contractual exercise December 31, exercise
prices 1998 life (years) price 1998 price
----------------- --------------- ------------ -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 2.83 to $ 4.24 730,000 5.92 years $ 3.03 680,000 $ 3.05
$ 4.33 to $ 6.50 120,000 9.42 years 5.40 -- --
$ 7.52 to $11.28 22,000 9.67 years 8.55 6,000 10.00
$12.50 to $15.00 4,000 9.67 years 13.75 -- --
</TABLE>
F-26
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 18 -- Regulatory Capital Requirements
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines
that involve quantitative measures of the Corporation's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Corporation's and the Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain minimum amounts
and ratios (set forth in the following table) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1998, that the Corporation and the Bank meet
all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Corporation as adequately
capitalized under the regulatory framework for prompt corrective action. To
be categorized as adequately capitalized, the Corporation must maintain
minimum total risk-based, Tier I risk- based and Tier I leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
The Corporation's actual capital amounts and ratios are presented in
the following table.
<TABLE>
<CAPTION>
For capital
Actual adequacy purposes
------------------ -----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
As of December 31, 1998:
Total capital
(to Risk-Weighted Assets)........ $15,566 12.1% $10,317 8.0%
Tier I capital
(to Risk-Weighted Assets)........ 13,782 10.7 5,159 4.0
Tier I capital
(to Average Assets).............. 13,782 8.7 6,319 4.0
As of December 31, 1997:
Total capital
(to Risk-Weighted Assets)........ $ 5,752 8.5% $ 5,431 8.0%
Tier I capital
(to Risk-Weighted Assets)........ 5,184 7.6 2,715 4.0
Tier I capital
(to Average Assets).............. 5,184 5.8 3,570 4.0
</TABLE>
F-27
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 18 -- Regulatory Capital Requirements -- (Continued)
The Bank's actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purpose action provisions
----------------- ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital
(to Risk-Weighted Assets)........ $13,930 11.2% $9,987 8.0% $12,483 10.0%
Tier I capital
(to Risk-Weighted Assets)........ 12,879 10.3 4,994 4.0 7,490 6.0
Tier I capital
(to Average Assets).............. 12,879 8.5 6,068 4.0 7,585 5.0
As of December 31, 1997:
Total capital
(to Risk-Weighted Assets)........ $ 5,315 7.9% $5,400 8.0% $ 6,750 10.0%
Tier I capital
(to Risk-Weighted Assets)........ 4,747 7.0 2,700 4.0 4,050 6.0
Tier I capital
(to Average Assets).............. 4,747 5.4 3,548 4.0 4,435 5.0
</TABLE>
At December 31, 1997, the Bank's Total capital ratio of 7.90% did not
meet the minimum requirement of 8.0% in order to consider the Bank
adequately capitalized. However, upon completion of the offering (Note 2)
the Corporation raised $7.1 million, of which $6.9 million was contributed
to the Bank. As a result, the Bank's Total capital ratio increased to 17.8%.
State Banking statutes restrict the amount of dividends paid on capital
stock. Accordingly, no dividends shall be paid by the Bank on its capital
stock unless, following the payment of such dividends, the capital stock of
the Bank will be unimpaired, and (1) the Bank will have surplus of not less
than 50% of its capital, or, if not (2) the payment of such dividend will
not reduce the surplus of the Bank.
Additionally, banking regulations limit the amount of investment,
loans, extensions of credit and advances that one subsidiary bank can make
to the Corporation at any time to 10% and in the aggregate 20% of the Bank's
capital stock and surplus. These regulations also require that any such
investment, loan, extension of credit or advance be secured by securities
having a market value in excess of the amounts thereof. At December 31,
1998, loans from the Bank to the Corporation amounted, in aggregate, to
$976,000, or 7.50%, of the Bank's capital stock and surplus. There were no
investments, extensions of credits or advances at December 31, 1998. At
December 31, 1997, there were no investments, loans, extensions of credit or
advances from the Bank to the Corporation.
F-28
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 19 -- Condensed Financial Information -- Parent Company Only
Condensed financial information for USABanc.com, Inc. (parent company only)
follows:
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
ASSETS (in thousands)
<S> <C> <C>
Cash and Due from banks......................................................... $ 23 $ 254
Securities available-for sale................................................... 1,931 328
Investment in subsidiaries...................................................... 13,281 5,088
Other assets ................................................................. 708 211
------- ------
Total assets............................................................... $15,943 $5,881
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Other borrowed money........................................................ $ 1,957 $ 340
Other liabilities........................................................... 389 175
------- ------
Total liabilities........................................................ 2,346 515
Stockholders' equity............................................................ 13,597 5,366
-------- ------
Total liabilities and stockholders' equity............................... $15,943 $5,881
======= ======
</TABLE>
F-29
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 19 -- Condensed Financial Information -- Parent Company Only -- (Continued)
STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
------- --------
(in thousands)
<S> <C> <C>
Income:
Interest income ................................................ $ 49 $ --
Other income.................................................... 19 77
------- --------
Total income................................................. 68 77
------- --------
Expenses:
Compensation.................................................... 150 517
Interest........................................................ 89 14
Other ......................................................... 10 29
------- --------
Total expenses............................................... 249 560
------- -------
Income (loss) before undistributed earnings
of subsidiaries.......................................... (181) (483)
Provision (benefit) for income taxes..................... 1 (16)
------- -------
Income (loss) before undistributed earnings
of subsidiaries.......................................... (182) (467)
Undistributed earnings of subsidiaries............................. 1,672 241
------- -------
Net Income (loss)............................................ $1,490 $ (226)
======= ======
</TABLE>
F-30
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 19 -- Condensed Financial Information -- Parent Company Only -- (Continued)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 1,490 $ (226)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Undistributed earnings (loss) from subsidiaries...................... (1,672) 241
(Gain) loss on sale of investments................................... 5 (28)
Net change in assets and liabilities................................. (146) 99
------- --------
Net cash provided by (used in) operating activities............... (323) 86
------- --------
Cash flows from investing activities:
Capital distribution (to) from subsidiaries.......................... (7,078) --
Purchase of investment securities available-for-sale ................ (1,603) (135)
------ --------
Net cash used in investing activities............................. (8,681) (135)
------- --------
Cash flows from financing activities:
Net increase in borrowings........................................... 1,616 290
Proceeds from issuance of common stock............................... 7,157 --
------- --------
Net cash provided by financing activities......................... 8,773 290
------- --------
Net increase (decrease) in cash................................... (231) 241
Cash at beginning of year............................................... 254 13
------- --------
Cash at end of year..................................................... $ 23 $ 254
======= ========
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes............................ $ 1 $ --
======= ========
</TABLE>
F-31
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 20 -- Guaranteed Subordinated Debt
On March 9, 1999, the Corporation issued $10 million of 9.50% Capital
Securities in conjunction with a trust-preferred offering (the "trust
preferred"). Total cash received was $9.1 million, net of related offering
cost of $900,000. Had this transaction occurred as of December 31, 1998, the
Corporation's condensed balance sheet would have been as follows:
<TABLE>
<CAPTION>
Actual Pro-Forma
------- ---------
(in thousands
except share data)
ASSETS
<S> <C> <C> <C>
Cash and due from banks (1) $ 1,335 $ 10,435
Interest bearing deposit with banks 7,706 7,706
Investment securities 47,667 47,667
Loans receivable, net 102,138 102,138
Premises and equipment, net 2,023 2,023
Other assets (2) 4,237 5,137
-------- --------
Total assets $165,106 $175,106
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $114,387 $114,387
Borrowings 35,305 35,305
Guaranteed preferred beneficial interest in subordinated debt -- 10,000
Accrued expenses and other liabilities 1,817 1,817
-------- --------
Total liabilities 151,509 161,509
======== ========
STOCKHOLDERS' EQUITY
Preferred stock $1.00 par value, 5,000,000 shares authorized, no shares
issued and outstanding in 1998 and 1997
Common stock $1.00 par value, 10,000,000 shares authorized, 2,007,386 shares
issued and outstanding in 1998; 813,807 shares issued and outstanding in
1997, and 108,236 shares of converted and unissued Class B common stock in
1998; 81,381 converted and unissued 1997 2,116 2,116
Additional paid-in capital 10,683 10,683
Accumulated (deficit) earnings 1,112 1,112
Accumulated other comprehensive income (314) (314)
-------- --------
Total stockholders' equity 13,597 13,597
-------- --------
Total liabilities and stockholders' equity $165,106 $175,106
======== ========
</TABLE>
- -----------
(1) Total cash received was $9.1 million, net of trust preferred offering cost
of $900,000.
(2) $900,000 of trust preferred offering costs will be amortized over the life
of the related junior subordinated debentures.
F-32
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997
Note 20 -- Guaranteed Subordinated Debt -- (Continued)
Although the junior subordinated debentures will be treated as debt of
the Corporation, they currently qualify for Tier I capital investments, subject
to the 25% limitation under risk-based capital guidelines of the Federal
Reserve. The portion of the Trust Preferred Securities that exceeds this
limitation qualifies as Tier II capital of the Corporation. Had the trust
preferred offering occurred as of December 31, 1998, the Corporation's Total
Capital, Tier 1 Capital, and Tier 1 Leverage capital ratios would have been
19.82%, 13.36% and 10.91%, respectively.
Note 21 -- Subsequent Event
On June 15, 1999 the Corporation effected a two-for-one stock split in
the form of a dividend paid to stockholders of record as of June 1, 1999. All
weighted average actual shares or per share information in the financial
statements have been adjusted retroactively for the effect of stock dividends.
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
---------- ------------
1999 1998
---------- ------------
(unaudited)
-----------
ASSETS
<S> <C> <C>
Cash and due from banks......................................................... $ 1,071 $ 1,335
Interest bearing deposit with banks............................................. 247 7,706
Securities available-for-sale................................................... 50,206 28,389
Securities held-to-maturity (fair value: 1999 - $14,665;
1998 - $15,951).............................................................. 14,722 15,755
FHLB Stock ..................................................................... 3,523 3,523
Loans receivable, net........................................................... 110,013 102,138
Premises and equipment, net..................................................... 2,175 2,023
Accrued interest receivable..................................................... 1,829 1,633
Other real estate .............................................................. 65 66
Goodwill, net .................................................................. 74 69
Deferred income taxes........................................................... 449 573
Other assets.................................................................... 1,856 1,896
-------- --------
Total assets.............................................................. $186,230 $165,106
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand ..................................................................... $ 1,329 $ 1,439
NOW ........................................................................ 908 846
Money Market................................................................ 2,109 2,345
Savings and passbook ....................................................... 12,367 5,281
Time ....................................................................... 109,052 104,476
-------- --------
Total deposits ........................................................... 125,765 114,387
Borrowed funds
Short-term borrowings....................................................... 5,000 6,106
Long-term borrowings........................................................ 25,000 25,000
Guaranteed subordinated debt................................................ 10,000 --
Collateralized borrowings................................................... 4,163 4,199
Accrued interest payable ....................................................... 517 399
Accrued expenses and other liabilities ......................................... 2,089 1,418
-------- --------
Total liabilities ........................................................ 172,534 151,509
======== ========
STOCKHOLDERS' EQUITY
Preferred stock $1.00 par value, 5,000,000 shares authorized, no shares issued
and outstanding in 1998 and 1997
Common stock $1.00 par value, 10,000,000 shares authorized, 4,014,772 shares
issued and outstanding in 1998............................................... 2,116 2,116
Additional paid-in capital...................................................... 10,683 10,683
Accumulated earnings (deficit) ................................................. 1,526 1,112
Accumulated other comprehensive (loss) income................................... (629) (314)
-------- --------
Total stockholders' equity................................................ 13,696 13,597
-------- --------
Total liabilities and stockholders' equity................................ $186,230 $165,106
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months
ended March 31,
-------------------------
1999 1998
------- --------
<S> <C> <C>
Interest income:
Loans.................................................................... $ 2,756 $ 1,647
Investment securities.................................................... 1,044 548
Interest bearing deposits and other...................................... 81 92
------- --------
Total interest income............................................... 3,881 2,287
------- --------
Interest expense:
Deposits................................................................. 1,667 1,080
Borrowed funds........................................................... 488 94
------- --------
Total interest expense.............................................. 2,155 1,174
------- -------
Net interest income................................................. 1,726 1,113
Provision for loan losses.................................................... 100 35
------- ---------
Net interest income after provision for
loan losses.......................................................... 1,626 1,078
------ -------
Non-interest income:
Gain on sales of investment securities................................... 56 39
Brokerage operations..................................................... 126 162
Other ............................................................... 138 20
------- --------
Total non-interest income........................................... 320 221
------- --------
Non-interest expenses:
Salaries and employee benefits........................................... 506 272
Net occupancy expense.................................................... 164 72
Professional fees........................................................ 100 16
Office expenses.......................................................... 52 31
Data processing fees..................................................... 51 28
Advertising expense...................................................... 45 9
Other operating expenses................................................. 338 190
------- --------
Total non-interest expense.......................................... 1,256 618
------- --------
Earnings before income taxes................................................. 690 681
Taxes on income:............................................................. 276 268
-------- --------
Net earnings ............................................................... $ 414 $ 413
======== ========
Earnings per share - basic (1)............................................... $ 0.10 $ 0.13
======== ========
Earnings per share - diluted (1)............................................. $ 0.10 $ 0.12
======== ========
</TABLE>
- ------------
(1) 1998 and 1997 per share amounts have been restated to reflect a 33% stock
dividend paid August 17, 1998 and a two-for-one stock split effected in the
form of a dividend paid on June 15, 1999.
The accompanying notes are an integral part of these statements.
F-35
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months
ended March 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Net earnings ............................................................. $ 414 $ 413
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period,
net of taxes...................................................... (315) (104)
----- -----
Comprehensive income....................................................... $ 99 $ 309
===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended March 31, 1999
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Accumulated other
Common paid-in earnings comprehensive
Stock capital (deficit) income Total
------ ---------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1998................. $2,116 $10,683 $1,112 $ (314) $13,597
Net unrealized loss on......................
securities available-for-sale............... -- -- -- (315) (315)
Net income ................................. -- -- 414 -- 414
------ ------- ------ ------- -------
Balances, March 31, 1999.................... $2,116 $10,683 $1,526 $ (629) $13,696
====== ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
USABanc.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months
ended March 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income ................................................................. $ 414 $ 413
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for possible loan losses ........................................ 100 35
Depreciation................................................................ 88 29
(Increase) Decrease in goodwill............................................. (5) 1
Net accretion of discounts on purchased loan portfolios..................... (301) (259)
Net accretion of securities discount........................................ (13) (14)
Net gains on sale of securities ............................................ (56) (39)
Net gains on sale of loan assets............................................ (42) --
Increase in accrued interest receivable ................................... (196) (97)
Increase in deferred tax asset.............................................. (56) (42)
Decrease (increase) in other assets......................................... 40 (64)
Increase in accrued interest payable ....................................... 118 81
Increase in accrued expenses and other liabilities.......................... 671 (320)
-------- --------
Net cash provided by (used in) operating activities............... 762 (276)
-------- --------
Cash flows from investing activities:
Investment securities available for sale
Purchases ............................................................... (22,921) (8,570)
Sales .................................................................. 1,081 1,840
Maturities and principal repayments...................................... 23 750
Investment securities held to maturity
Purchases................................................................ (1,979) --
Sales .................................................................. 1,200 --
Maturities and principal repayments...................................... 1,812 1,048
Purchases redemptions of FHLB Stock......................................... -- (57)
Decrease (Increase) in interest bearing deposits with banks................. 7,459 (4,235)
Net increase in loans ...................................................... (7,698) 3,120
Decrease in other real estate, net ......................................... 1 --
Purchases of premises and equipment......................................... (240) (273)
-------- -------
Net cash used in investing activities............................. (21,262) (12,617)
-------- -------
Cash flows from financing activities:
Net increase in deposits.................................................... 11,378 12,007
Net (decrease) in borrowings ............................................... (1,142) (6,004)
Private placement proceeds.................................................. -- 7,136
Trust preferred proceeds.................................................... 10,000 --
-------- --------
Net cash provided by financing activities ........................ 20,236 13,139
-------- --------
Net (decrease) increase in cash and cash equivalents.............. (264) 246
Cash and cash equivalents, beginning of period ................................. 1,335 833
-------- --------
Cash and cash equivalents, end of period ....................................... $ 1,071 $ 1,079
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
USABanc.com, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of USABanc.com, Inc. (the "Company"), vBank (the "Bank"), a
Pennsylvania chartered stock savings bank, USACapital, Inc., a Pennsylvania
corporation, USACredit, Inc., a Pennsylvania corporation, USAHoldings, Inc., a
Pennsylvania corporation, and USA Capital Trust I, a Delaware business trust.
All significant intercompany accounts and transactions have been eliminated. The
interim financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments including normal recurring accruals necessary for
fair presentation of results of operations for the interim periods included
herein have been made. The unaudited consolidated financial statements as of
March 31, 1999 and for the three months ended March 31, 1999 and 1998, are not
necessarily indicative of results to be anticipated for the full year.
2. Trust Preferred Securities
On March 9, 1999, the Company issued $10.0 million of 9.5% junior
subordinated debentures to USA Capital Trust I, a Delaware business trust, in
which the Company owns all of the common equity. The trust issues $10.0 million
of trust preferred securities to investors, secured by the junior subordinated
debentures and the guarantee of the Company. The junior subordinated debentures
mature in 2029.
3. Computation of Per Share Earnings
Basic earnings per share ("EPS") amounts are computed by dividing net
earnings by the weighted average number of common shares outstanding during the
period. Diluted earnings per share amounts are computed by dividing net earnings
by the weighted average number of shares and all dilutive potential shares
outstanding during the period.
<TABLE>
<CAPTION>
(Dollars in Thousands), except per share data
1999 1998
------ ------
<S> <C> <C>
Basic EPS Computation:
Numerator -- Net earnings............................................... $ 414 $ 413
Denominator -- Weighted average shares outstanding...................... 2,116 1,605
--------- --------
Basic EPS .................................................................. $ 0.20 $ 0.26
========= ========
Diluted EPS Computation:
Numerator -- Net earnings............................................... $ 414 $ 413
Denominator -- Weighted average shares outstanding...................... 2,116 1,605
Effect of dilutive securities........................................... 117 92
--------- --------
Diluted EPS ................................................................ $ 0.19 $ 0.24
========= ========
</TABLE>
F-39
<PAGE>
================================================================================
No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is an offer to sell
only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
Page
Prospectus Summary.....................................2
Risk Factors...........................................7
Use of Proceeds.......................................17
Price Range of Common Stock...........................17
Dividend Policy.......................................18
Capitalization........................................19
Regulatory Capital....................................20
USABanc.com Statements of Operations..................22
Management's Discussion and Analysis of
Financial Condition and Results of Operations.....23
Business..............................................36
Regulation of USABanc.com and vBank...................59
Management............................................66
Certain Relationships and Related Transactions........72
Description of Capital Stock..........................72
Underwriting..........................................75
Where You Can Find More Information...................76
Forward Looking Statements............................76
Legal Matters.........................................77
Experts...............................................77
Index to Financial Statements........................F-1
================================================================================
<PAGE>
================================================================================
_________ Shares
USABANC.COM, INC.
Common Stock
---------------------------
PROSPECTUS
---------------------------
____________, 1999
-----------------
Sandler O'Neill & Partners, L.P.
-----------------
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
USABanc.com's articles and by-laws provide that USABanc.com will indemnify
every person who is or was a director or executive officer of USABanc.com to the
fullest extent permitted by law. This indemnification applies to all expenses
and liabilities reasonably incurred in connection with any proceeding to which
the director or executor officer may become involved by reason of being or
having been a director or executive officer of USABanc.com. Pennsylvania law,
under which USABanc.com is incorporated, allows USABanc.com to indemnify its
directors and officers if the indemnified person acted in good faith and in a
manner such person reasonably believed to be in, or not opposed to, the best
interest of USABanc.com and, with respect to any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful. USABanc.com maintains a
director and officer liability insurance policy covering each of USABanc.com's
directors and executive officers.
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:
Securities and Exchange Commission registration fee...........$ 9,660
NASD filing fee ..............................................$ 3,950
NASDAQ National Market fee for listing of additional shares...$ *
Blue Sky fees and expenses....................................$ *
Accountants' fees and expenses................................$ *
Legal fees and expenses.......................................$ *
Printing and EDGAR expenses...................................$ *
Registrar and Transfer Agent's fees ..........................$ *
Miscellaneous............................................ $ *
_____________
Total.........................................$ *
============
- -----------
*To be provided by amendment.
Item 26. Recent Sales of Unregistered Securities
On March 9, 1999, USABanc.com issued $10,000,000 of 9.50% Junior
Subordinated Debentures of USA Capital Trust I, a newly-formed, special purpose
business trust, which in turn issued $10,000,000 of 9.50% Capital Securities to
a limited number of qualified institutional buyers and institutional accredited
investors pursuant to Rule 144A and Rule 506 of Regulation D promulgated under
the Securities Act. Sandler O'Neill & Partners, L.P. acted as placement agent in
the Offering. The net proceeds to USABanc.com were $8,734,000. The expenses of
the Offering were $916,000.
On February 13, 1998, USABanc.com issued 2,046,134 shares (as adjusted
to reflect a 33% stock dividend paid August 17, 1998 and a two-for-one stock
split effected in the form of a dividend paid on June 15, 1999) of its common
stock for cash to a limited number of accredited investors in a private
placement pursuant to section 4(2) of the Securities Act. Sandler O'Neill &
Partners, L.P. acted as placement agent in the Offering. The net proceeds to
USABanc.com were $7,136,420. The Offering expenses were $363,580.
On April 11, 1997, USABanc.com issued 27,930 shares (as adjusted to
reflect 33% stock dividends paid July 18, 1997 and August 17, 1998 and a
two-for-one stock split effected in the form of a dividend paid on June 15,
1999) of common stock to Thomas J. Knox pursuant to Section 4(2) of the
Securities Act in connection with the acquisition of USACapital.
II-1
<PAGE>
Item 27. Exhibits
The following exhibits are filed as part of this registration
statement. Exhibit numbers correspond to the exhibits required by Item 601 of
Regulation S-B.
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
1.1 Underwriting Agreement among USABanc.com and Sandler O'Neill & Partners, L.P.+
3.1 Amended and Restated Articles of Incorporation of USABanc.com*
3.1.1 Articles of Amendment to the Amended and Restated Articles of Incorporation of USABanc.com
3.2 Bylaws of USABanc.com *
5 Opinion and consent of Jenkens & Gilchrist, a Professional Corporation, as to legality of the
common stock to be issued by USABanc.com+
10.1 Stock Option Plan, as amended and restated
10.2 Employment agreement between USABanc.com and Kenneth L. Tepper*
10.3 Employment agreement between USABanc.com and Brian M. Hartline***
10.4 Employment agreement between USABanc.com and Craig J. Scher
10.5 Agreement by and between Kenneth L. Tepper and USABanc.com dated January 2, 1998**
10.6 Warrant Agreement between USABanc.com and Sandler O'Neill & Partners, L.P. dated
February 13, 1998**
10.7 Registration Rights Agreement between USABanc.com and certain shareholders dated
February 13, 1998**
10.8 Indenture of USABanc.com relating to the Junior Subordinated Debentures****
10.9 Registration Rights Agreement among USABanc.com, USA Capital Trust I and Sandler
O'Neill & Partners, L.P., as representative of the investors****
11 Statement regarding computation of per share earnings (included in Financial Statements on Pages F-11 and
F-20)
21 Subsidiaries of USABanc.com
23.1 Consent of Grant Thornton LLP
23.2 Consent of Jenkens & Gilchrist, a Professional Corporation (included in Exhibit 5.1)+
24.1 Power of Attorney of certain officers and directors of USABanc.com (included on
signature page hereto)
- ------------------------
+ To be filed by amendment.
* Incorporated by reference from the Registration Statement on Form SB-2 of USABanc.com, as amended,
Registration No. 33-92506.
** Incorporated by reference from USABanc.com's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997.
*** Incorporated by reference from USABanc.com's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998.
**** Incorporated by reference from the Registration Statement on Form S-4 of USABanc.com, Registration No.
333-78348.
</TABLE>
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the undersigned registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the undersigned registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being
II-2
<PAGE>
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(2) For determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1), or (4) or 497(h) under
the Securities Act (ss.ss. 230.424(b)(1), (4) or 230.497(h)) shall be deemed to
be part of this registration statement as of the time the Commission declared it
effective.
(3) For determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time shall be deemed to be the
initial bona fide offering of those securities.
II-3
<PAGE>
SIGNATURES
In accordance with to the requirements of the Securities Act of 1933,
USABanc.com, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirements on filing or 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 July 15, 1999.
USABanc.com, Inc.
By:/s/ Kenneth L. Tepper
_________________________________
Kenneth L. Tepper, President and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following persons in the
capacities and on the dates stated. Each of the directors and/or officers of
USABanc.com, Inc. whose signature appears below hereby appoints Brian M.
Hartline, as his or her attorney-in-fact to sign in his or her name and behalf,
in any and all capacities stated below and to file with the Securities and
Exchange Commission any and all amendments, including post-effective amendments,
to this registration statement on Form SB-2, making such changes in the
registration statement as appropriate, and generally to do all such things on
their behalf in their capacities as directors and/or officers to enable
USABanc.com, Inc. to comply with the provisions of the Securities Act, and all
requirements of the Securities and Exchange Commission.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Kenneth L. Tepper
- --------------------------------- President, Chief Executive Officer July 15, 1999
Kenneth L. Tepper and Director (Principal Executive
Officer)
/s/ Brian M. Hartline
- --------------------------------- Chief Financial Officer and Director July 15, 1999
Brian M. Hartline (Principal Accounting and Financial
Officer)
/s/ George M. Laughlin Chairman of the Board July 15, 1999
- ---------------------------------
George M. Laughlin
/s/ Clarence L. Rader Director and Chairman of vBank July 15, 1999
- ---------------------------------
Clarence L. Rader
/s/ Zeev Shenkman Vice Chairman of the Board July 15, 1999
- ---------------------------------
Zeev Shenkman
/s/ Jeffrey A. D'Ambrosio
- --------------------------------- Director July 15, 1999
Jeffrey A. D'Ambrosio
/s/ George C. Fogwell, III
- --------------------------------- Director July 15, 1999
George C. Fogwell, III
/s/ John A. Gambone
- --------------------------------- Director July 15, 1999
John A. Gambone
/s/ Carol J. Kauffman
- --------------------------------- Director July 15, 1999
Carol J. Kauffman
/s/ Wayne O'Leevy
- --------------------------------- Director July 15, 1999
Wayne O'Leevy
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
1.1 Underwriting Agreement among USABanc.com and Sandler O'Neill & Partners, L.P.+
3.1 Amended and Restated Articles of Incorporation of USABanc.com*
3.1.1 Articles of Amendment to the Amended and Restated Articles of Incorporation of USABanc.com
3.2 Bylaws of USABanc.com *
5 Opinion and consent of Jenkens & Gilchrist, a Professional Corporation, as to legality of the
common stock to be issued by USABanc.com+
10.1 Stock Option Plan, as amended and restated
10.2 Employment agreement between USABanc.com and Kenneth L. Tepper*
10.3 Employment agreement between USABanc.com and Brian M. Hartline***
10.4 Employment agreement between USABanc.com and Craig J. Scher
10.5 Agreement by and between Kenneth L. Tepper and USABanc.com dated January 2, 1998**
10.6 Warrant Agreement between USABanc.com and Sandler O'Neill & Partners, L.P. dated
February 13, 1998**
10.7 Registration Rights Agreement between USABanc.com and certain shareholders dated
February 13, 1998**
10.8 Indenture of USABanc.com relating to the Junior Subordinated Debentures****
10.9 Registration Rights Agreement among USABanc.com, USA Capital Trust I and Sandler
O'Neill & Partners, L.P., as representative of the investors****
11 Statement regarding computation of per share earnings (included in Financial Statements on Pages F-11 and
F-20)
21 Subsidiaries of USABanc.com
23.1 Consent of Grant Thornton LLP
23.2 Consent of Jenkens & Gilchrist, a Professional Corporation (included in Exhibit 5.1)+
24.1 Power of Attorney of certain officers and directors of USABanc.com (included on
signature page hereto)
- ------------------------
+ To be filed by amendment.
* Incorporated by reference from the Registration Statement on Form SB-2 of USABanc.com, as amended,
Registration No. 33-92506.
** Incorporated by reference from USABanc.com's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997.
*** Incorporated by reference from USABanc.com's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998.
**** Incorporated by reference from the Registration Statement on Form S-4 of USABanc.com, Registration No.
333-78348.
</TABLE>
<PAGE>
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
XXXXXXXXXXXXXXXXXXXX
In compliance with the requirements of 16 Pa.C.S. ss. 1916 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
<TABLE>
<CAPTION>
<S> <C>
1. The name of the corporation is: USABancShares, Inc.
2. The (a) address of this corporation's current registered office in this Commonwealth or (b) name of its commercial registered
office provider and the county of venue is (the Department is hereby authorized to correct the following information to
conform to the records of the Department):
(a) One Penn Square, 30 South 16th St., Philadelphia, PA 19102 Philadelphia
Number and Street City State Zip County
(b) c/o:
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider, the county in (b) shall be deemed the county in which the
corporation is located for venues and official publication purposes.
3. The statute by or under which it was incorporated is: 15 Pa.C.S. ss.1306
4. The date of its incorporation is: March 13, 1999
5. (Check, and if appropriate complete, one of the following):
___X___ The amendment shall be effective upon filing these Articles of Amendment in the Department of State.
_______ The amendment shall be effective on: ________________________________ at ___________________
Date Hour
6. (Check one of the following):
_______ The amendment was adopted by the shareholders (or members) pursuant to 15 Pa.C.S. ss. 1914(a) and (b).
___X___ The amendment was adopted by the board of directors pursuant to 15 Pa.C.S. ss. 1914(c).
7. (Check, and if appropriate complete, one of the following):
___X___ The amendment adopted by the corporation, set forth in full, is as follows:
1. The name of the corporation is: USABanc.com, Inc.
2. The address of this corporation's registered office in this Commonwealth and the county of venue is:
1535 Locust Street, Philadelphia, PA, 19102, Philadelphia County
_______ The amendment adopted by the corporation as set forth in full in Exhibit A attached hereto and made a part hereof.
(Check if the amendment restates the Articles):
_______ The restated Articles of Incorporation supersede the original Articles and all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of Amendment to be signed by a duly authorized
officer thereof this 13th day of May, 1999.
</TABLE>
USABancShares, Inc.
By: /s/ Kenneth L. Tepper, President
------------------------------------
Kenneth L. Tepper, President
<PAGE>
USABanc.com, Inc.
STOCK OPTION PLAN
Approved by the Board of Directors May 19, 1999, subject to shareholder
approval
1. Purpose. USABanc.com, Inc. (the "Company") hereby adopts the amended
and restated USABanc.com, Inc. Stock Option Plan (the "Plan"). The Plan is
intended to recognize the contributions made to the Company by officers and
other employees of the Company or any Affiliate (as defined below),
non-employee members of the Board of Directors (as defined below) and
independent contractors and other consultants of the Company and its
Affiliates, to provide such persons with additional incentive to devote
themselves to the future success of the Company or an Affiliate, and to improve
the ability of the Company or an Affiliate to attract, retain, and motivate
individuals upon whom the Company's sustained growth and financial success
depend, by providing such persons with an opportunity to acquire or increase
their proprietary interest in the Company through receipt of rights to acquire
the Company's Class A Common Stock, par value $1.00 per Share (the "Common
Stock").
2. Definitions. Unless the context clearly indicates otherwise, the
following terms shall have the following meanings:
"Act" means the Securities Act of 1933, as amended.
"Affiliate" means a corporation which is a parent corporation or a
subsidiary corporation with respect to the Company within the meaning of Section
424(e) or (f) of the Code.
"Award Limit" means 125,000 shares of Common Stock.
"Board of Directors" means the Board of Directors of the Company.
"Change of Control" shall have the meaning as set forth in Section 10 of
the Plan.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" shall have the meaning set forth in Section 3 of the Plan.
"Company" means USABanc.com, Inc., a Pennsylvania business corporation.
"Disability" shall have the meaning set forth in Section 22(e)(3) of the
Code.
"Disinterested Director" shall mean a member of the Board of Directors
of the Company who is "disinterested" within the meaning of Rule 16b-3.
-1-
<PAGE>
"Fair Market Value" shall have the meaning set forth in Subsection 8(b)
of the Plan.
"Family Transfer" shall mean a transfer described in Subsection 8(f) of
the Plan.
"Grantee" shall mean a person to whom an Option has been granted
pursuant to the Plan.
"ISO" means an Option granted under the Plan which is intended to
qualify as an "incentive stock option" within the meaning of Section 422(b) of
the Code.
"Non-qualified Stock Option" means an Option granted under the Plan
which is not intended to qualify, or otherwise does not qualify, as an
"incentive stock option" within the meaning of Section 422(b) of the Code.
"Option" means either an ISO or a Non-qualified Stock Option granted
under the Plan.
"Optionee" means a person to whom an option has been granted under the
Plan, which Option has not been exercised and has not expired or terminated.
"Option Document" means the document described in Section 8 or Section 9
of the Plan, as applicable, which sets forth the terms and conditions of each
grant of Options.
"Option Price" means the price at which Shares may be purchased upon
exercise of an Option, as calculated pursuant to Subsection 8(b) or Subsection
9(a) of the Plan.
"Plan" means the Amended and Restated USABanc.com, Inc. Stock Option
Plan, as amended from time to time.
"Rule 16b-3 means Rule 16b-3 promulgated under the Securities Exchange
Act of 1934, as amended.
"Section 16 Officer" means any person who is an "officer" within the
meaning of Rule 16a-l (f) promulgated under the Securities Exchange Act of 1934,
as amended, or any successor rule.
"Shares" means the shares of Common Stock of the Company which are the
subject of Options under the Plan.
3. Administration of the Plan. The Plan shall be administered by the Board
of Directors of the Company if all members of the Board of Directors are
Disinterested Directors; provided, however, that if all members of the Board of
Directors are Disinterested Directors, the Board of Directors may designate a
committee or committee(s) of the Board of Directors composed of two or more
directors to administer the Plan with respect to the Section 16 Officers,
directors, and/or key employees. If any of
-2-
<PAGE>
the members of the Board of Directors are not Disinterested Directors, the
Board of Directors shall (i) designate a committee composed of two or more of
directors, each of whom is a Disinterested Director (the "Disinterested
Director Committee"), to operate and administer the Plan in its stead, or (ii)
designate two committees to operate and administer the Plan in its stead, a
Disinterested Director Committee to operate and administer the Plan with
respect to the Company's Section 16 Officers and the directors who are not
members of the Disinterested Director Committee, and another committee composed
of two or more directors (which may include directors who are not Disinterested
Directors) to operate and administer the Plan with respect to persons other
than Section 16 Officers or directors or (iii) designate a Disinterested
Director Committee to operate and administer the Plan with respect to the
Company's Section 16 Officers and directors (other than those directors serving
on the Disinterested Director Committee) and itself operate and administer the
Plan with respect to persons other than Section 16 Officers or directors. Any
of such committees designated by the Board of Directors, and the Board of
Directors itself in its administrative capacity with respect to the Plan, is
referred to as the "Committee." With the exception of the timing of grants of
Options, the price at which Shares may be purchased and the number of Shares
covered by Options granted to each member of the Disinterested Director
Committee, all of which shall be determined pursuant to Section 9, the other
provisions set forth herein, as it pertains to members of the Disinterested
Director Committee, shall be administered by the Board of Directors.
Notwithstanding the foregoing, in the event the Board of Directors does not
have at least two Disinterested Directors, the Plan shall be administered by a
committee consisting of those members of the Board of Directors who are
designated by the Board of Directors to serve in that capacity.
(a) Meetings. The Committee shall hold meetings at such times and places
as it may determine, shall keep minutes of its meetings, and shall adopt, amend
and revoke such rules or procedures as it may deem proper; provided, however,
that it may take action only upon the agreement of a majority of the whole
Committee. Any action which the Committee shall take through a written
instrument signed by a majority of its members shall be as effective as though
it had been taken at a meeting duly called and held. The Committee shall report
all actions taken by it to the Board of Directors.
(b) Grants. Except with respect to options granted to non-employee
members of the Board of Directors pursuant to Section 9, the Committee shall
from time to time at its discretion direct the Company to grant Options
pursuant to the terms of the Plan. The Committee shall have plenary authority
to (i) determine the persons to whom, the times at which, and the price at
which Options shall be granted, (ii) determine the type of Option to be granted
and the number of Shares subject thereto and (iii) approve the form and terms
and conditions of the Option Documents; all subject, however, to the express
provisions of the Plan. In making such determinations, the Committee may take
into
-3-
<PAGE>
account the nature of the Grantee's services and responsibilities, the
Grantee's present and potential contribution to the Company's success and such
other factors as it may deem relevant. Notwithstanding the foregoing, grants of
Options to non-employee members of the Board of Directors under Section 9 shall
be made exclusively in accordance with the provisions of Section 9. The
interpretation and construction by the Committee of any provisions of the Plan
or of any Option granted under it shall be final, binding and conclusive.
(c) Exculpation. No member of the Committee shall be personally liable
for monetary damages as such for any action taken or any failure to take any
action in connection with the administration of the Plan or the granting of
Options thereunder unless (i) the member of the Committee has breached or
failed to perform the duties of his office under Subchapter B of Chapter 17 of
the Pennsylvania Business Corporation Law of 1988, as amended, and (ii) the
breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness; provided, however, that the provisions of this Subsection 3(c)
shall not apply to the responsibility or liability of a member of the Committee
pursuant to any criminal statute or to the liability of a member of the
Committee for the payment of taxes pursuant to local, state or federal law.
(d) Indemnification. Service on the Committee shall constitute service
as a member of the Board of Directors of the Company. Each member of the
Committee shall be entitled, without further action on his part, to
indemnification from the Company and limitation of liability to the fullest
extent provided by applicable law and by the Company's Articles of
Incorporation and/or By-laws in connection with or arising out of any action,
suit or proceeding with respect to the administration of the Plan or the
granting of Options thereunder in which he or she may be involved by reason of
his or her being or having been a member of the Committee, whether or not he or
she continues to be such member of the Committee at the time of the action,
suit or proceeding.
4. Options under the Plan. Options under the Plan may be in the form of a
Non-qualified Stock Option, an ISO, or a combination thereof, at the discretion
of the Committee, except as provided in Section 9.
5. Eligibility. All officers, other employees, members of the Board of
Directors, independent contractors and consultants of the Company or an
Affiliate shall be eligible to receive Non-qualified Stock Options hereunder.
Only employees (as determined in accordance with the withholding tax rules of
Section 3401(c) of the Code) are eligible to receive ISOs.
6. Shares Subject to Plan. The aggregate maximum number of Shares for
which Options may be granted pursuant to the Plan is 771,870, subject to
adjustment as provided in Section 11 of the Plan. The Shares shall be issued
from authorized and
-4-
<PAGE>
unissued Common Stock or Common Stock held in or hereafter acquired for the
treasury of the Company. If an Option terminates or expires without having been
fully exercised for any reason, the Shares for which the Option was not
exercised may again be the subject of one or more Options granted pursuant to
the Plan. The maximum number of shares which may be subject to Options granted
under the Plan to any individual in any fiscal year shall not exceed the Award
Limit. To the extent required by Section 162(m) of the Code, shares subject to
options which are canceled continue to be counted against the Award Limit and
if, after the grant of an Option, the price of shares subject to such Option is
reduced, the transaction is treated as a cancellation of the Option and a grant
of a new Option, and both the Option deemed to be canceled and the Option
deemed to be granted are counted against the Award Limit.
7. Term of the Plan. The Plan, as amended and restated, is effective as of
May 19, 1999, the date on which it was adopted by the Board of Directors,
subject to the approval (within twelve (12) months before or after the date the
Plan is adopted) by a majority of the votes cast at a duly called meeting of
the shareholders at which a quorum representing a majority of all outstanding
voting stock of the Company is, either in person or by proxy, present and
voting, by the unanimous consent in writing of the shareholders or by a method
and in a degree that would be treated as adequate under applicable state law in
the case of an action requiring shareholder approval within twelve months of
the date the Plan is adopted. No Option may be granted under the Plan after the
earlier of May 18, 2009 or ten (10) years from the date the Plan is approved by
the shareholders.
8. Option Documents and Terms. Each Option granted under the Plan shall be
a Non-qualified Stock Option unless the option shall be specifically designated
at the time of grant to be an ISO for federal income tax purposes. To the
extent any Option designated an ISO is determined for any reason not to qualify
as an incentive stock option within the meaning of Section 422 of the Code,
such Option shall be treated as a Non-qualified Stock Option for all purposes
under the provisions of the Plan. Options granted pursuant to the Plan shall be
evidenced by the Option Documents in such form as the Committee shall from time
to time approve, which Option Documents shall comply with and be subject to the
following terms and conditions and such other terms and conditions as the
Committee shall from time to time require which are not inconsistent with the
terms of the Plan. However, the provisions of this Section 8 shall not be
applicable to Options granted to non-employee members of the Board of Directors
under Section 9, except as otherwise provided in Subsection 9(c).
(a) Number of Option Shares. Each Option Document shall state the number
of Shares to which it pertains. An Optionee may receive more than one option,
which may include Options which are intended to be ISO's and Options which are
not intended to be ISO's, but only on the terms and subject to the conditions
and restrictions of the Plan.
-5-
<PAGE>
(b) Option Price. Each Option Document shall state the Option Price
which shall in all events be at least 100%; of the Fair Market Value of the
Shares on the date the Option is granted as determined by the Committee in
accordance with this Subsection 8(b); provided, however, that if an ISO is
granted to an Optionee who then owns, directly or by attribution under Section
424(d) of the Code, shares possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or an Affiliate,
then the Option Price shall be at least 110% of the Fair Market Value of the
Shares on the date the Option is granted. If the Common Stock is traded in a
public market, then the Fair Market Value per share shall be, if the Common
Stock is listed on a national securities exchange or included in the NASDAQ
National Market System, the last reported sale price thereof on the relevant
date, or, if the Common Stock is not so listed or included, the mean between the
last reported "bid" and "asked" prices thereof on the relevant date, as reported
on NASDAQ or, if not so reported, as reported by the National Daily Quotation
Bureau, Inc. or as reported in a customary financial reporting service, as
applicable and as the Committee determines acting in good faith.
(c) Exercise. No Option shall be deemed to have been exercised prior to
the receipt by the Company of written notice of such exercise and of payment in
full of the Option Price for the Shares to be purchased. Each such notice shall
specify the number of Shares to be purchased and shall (unless the Shares are
covered by a then current registration statement or a Notification under
Regulation A under the Act), contain the Optionee's acknowledgment in form and
substance satisfactory to the Company that (a) such Shares are being purchased
for investment and not for distribution or resale (other than a distribution or
resale which, in the opinion of counsel satisfactory to the Company, may be made
without violating the registration provisions of the Act) , (b) the Optionee has
been advised and understands that (i) the Shares have not been registered under
the Act and are "restricted securities" within the meaning of Rule 144 under the
Act and are subject to restrictions on transfer and (ii) the Company is under no
obligation to register the Shares under the Act or to take any action which
would make available to the Optionee any exemption from such registration, (c)
such Shares may not be transferred without compliance with all applicable
federal and state securities laws, and (d) an appropriate legend referring to
the foregoing restrictions on transfer and any other restrictions imposed under
the Option Documents may be endorsed on the certificates. Notwithstanding the
foregoing, if the Company determines that issuance of Shares should be delayed
pending (A) registration under federal or state securities laws, (B) the receipt
of an opinion of counsel satisfactory to the Company that an appropriate
exemption from such registration is available, (C) the listing or inclusion of
the Shares on any securities exchange or an automated quotation system or (D)
the consent or approval of any governmental regulatory body whose consent or
approval is necessary in connection with the issuance of such Shares, the
Company may defer exercise of any option granted hereunder until any of the
events described in this sentence has occurred.
-6-
<PAGE>
(d) Medium of Payment. An Optionee shall pay for Shares (i) in cash,
(ii) by certified or cashier's check payable to the order of the Company, or
(iii) by such other mode of payment as the Committee may approve, including
payment through a broker in accordance with procedures permitted by Regulation T
of the Federal Reserve Board. Furthermore, the Committee may provide in an
Option Document that payment may be made in whole or in part in shares of the
Company's Common Stock held by the Optionee. If payment is made in whole or in
part in shares of the Company's Common Stock, then the Optionee shall deliver to
the Company certificates registered in the name of such Optionee representing
the shares owned by such Optionee, free of all liens, claims and encumbrances of
every kind and having an aggregate Fair Market Value on the date of delivery
that is at least as great as the Option Price of the Shares (or relevant portion
thereof) with respect to which such Option is to be exercised by the payment in
shares of Common Stock, endorsed in blank or accompanied by stock powers duly
endorsed in blank by the Optionee. In the event that certificates for shares of
the Company's Common Stock delivered to the Company represent a number of shares
of Common Stock in excess of the number of shares of Common Stock required to
make payment for the Option Price of the Shares (or relevant portion thereof)
with respect to which such Option is to be exercised by payment in shares of
Common Stock, the stock certificate issued to the Optionee shall represent (i)
the Shares in respect of which payment is made, and (ii) such excess number of
shares of Common Stock. Notwithstanding the foregoing, the Committee may impose
from time to time such limitations and prohibitions on the use of shares of the
Common Stock to exercise an option as it deems appropriate.
(e) Termination of Options.
(i) No Option shall be exercisable after the first to occur of the
following:
(A) Expiration of the Option term specified in the Option
Document;
(B) Ten (10) years from the date of grant, or five years from
the date of grant of an ISO if the Optionee on the date of grant owns, directly
or by attribution under Section 424(d) of the Code, shares possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or of an Affiliate;
(C) Expiration of three months from the date the Optionee's
employment or service with the Company or its Affiliates terminates for any
reason;
(D) Except to the extent otherwise provided in an Optionee's
Option Document, a finding by the Committee, after full consideration of the
facts presented on behalf of both the Company and the Optionee, that the
Optionee has breached his or her employment or service contract with the Company
or an Affiliate, or has been engaged in disloyalty to the Company or an
Affiliate, including, without limitation, fraud, embezzlement, theft, commission
of a felony or proven dishonesty in the course of his or
-7-
<PAGE>
her employment or service, or has disclosed trade secrets or confidential
information of the Company or an Affiliate. In such event, in addition to
immediate termination of the Option, the Optionee shall automatically forfeit
all Shares for which the Company has not yet delivered the share certificates
upon refund by the Company of the Option Price. Notwithstanding anything herein
to the contrary, the Company may withhold delivery of share certificates
pending the resolution of any inquiry that could lead to a finding resulting in
a forfeiture;
(E) The date, if any, set by the Board of Directors as an
accelerated expiration date in the event of the liquidation or dissolution of
the Company; or
(F) The occurrence of such other event or events as may be set
forth in the Option Document as causing an accelerated expiration of the Option.
(ii) Notwithstanding the foregoing, the Committee may extend the
period during which all or any portion of an Option may be exercised to a date
no later than the option term specified in the Option Document pursuant to
Subsection 8(e)(i)(A), or to a date that is no later than five years from the
date the Option would have otherwise terminated, whichever date occurs first,
provided that any change pursuant to this Subsection 8(e)(ii) which would cause
an ISO to become a Non-qualified Stock Option may be made only with the consent
of the Optionee.
(iii) Notwithstanding anything to the contrary contained in the Plan
or an Option Document, an ISO shall be treated as a Non-qualified Stock Option
to the extent such ISO is exercised at any time after the expiration of the time
period permitted under the Code for the exercise of an ISO.
(f) Transfers. No Option granted under the Plan may be transferred,
except by will or by the laws of descent and distribution. During the lifetime
of the person to whom an option is granted, such Option may be exercised only by
such person. Notwithstanding the foregoing, a Non-qualified Stock option may be
transferred pursuant to the terms of a (i) "qualified domestic relations order,"
within the meaning of Sections 401(a)(13) and 414(p) of the Code or within the
meaning of Title I of the Employee Retirement Income Security Act of 1974, as
amended, and (ii) the Committee may provide, in an Option Document, that an
Optionee may transfer Options to his or her children, grandchildren or spouse or
to one or more trusts for the benefit of such family members or to partnerships
in which such family members are the only partners (a "Family Transfer"),
provided that the Optionee receives no consideration for a Family Transfer and
the Option Documents relating to Options transferred in a Family Transfer
continue to be subject to the same terms and conditions that were applicable to
such options immediately prior to the Family Transfer.
(g) Holding Period. No Option granted under the Plan may be exercised
before the later of (i) the expiration of six months from the date of grant or
(ii) the expiration of such greater period of time as may be specified in the
Option Documents.
-8-
<PAGE>
(h) Limitation on ISO Grants. To the extent that the aggregate Fair
Market Value of stock with respect to which ISOs issued under the Plan and
incentive stock options issued under any other incentive stock option plan of
the Company or its Affiliates are exercisable for the first time by any
individual during any calendar year exceeds $100,000, such ISOs shall be treated
as Non-qualified Stock Options issued under the Plan. For purposes of this
subsection 8(h), the Fair Market Value of stock shall be determined as of the
date of grant of the ISO or other incentive stock option.
(i) Other Provisions. Subject to the provisions of the Plan, the Option
Documents shall contain such other provisions including, without limitation,
provisions authorizing the Committee to accelerate the exercisability of all or
any portion of an Option granted pursuant to the Plan, additional restrictions
upon the exercise of the option or additional limitations upon the term of the
Option, as the Committee shall deem advisable.
(j) Amendment. Subject to the provisions of the Plan, the Committee
shall have the right to amend option Documents issued to an Optionee, subject to
the Optionee's consent if such amendment is not favorable to the Optionee,
except that the consent of the Optionee shall not be required for any amendment
made pursuant to Subsection 8(e)(i)(E) or Section 10 of the Plan, as applicable.
9. Special Provisions Relating to Grants of Options to non-employee
members of the Board of Directors. Options granted pursuant to the Plan to
non-employee members of the Board of Directors shall be granted in accordance
with the terms and conditions set forth in this Section 9. Options granted
pursuant to this Section 9 shall be evidenced by Option Documents in such form
as the Committee shall from time to time approve, which Option Documents shall
comply with and be subject to the following terms and conditions and such other
terms and conditions as the Committee shall from time to time require which are
not inconsistent with the terms of the Plan.
(a) Timing of Grants; Number of Shares Subject of Options;
Exercisability of Options; Option Price. Each non-employee member of the Board
of Directors may be granted options to purchase Shares at such time and in such
amount as the Committee determines in its complete discretion; provided,
however, that grants to members of the Committee shall be made, if at all,
pursuant to a determination of a majority of the members of the entire Board of
Directors. Each such Option shall be a Non-qualified Stock Option. The Option
Price shall be at Fair Market Value with respect to all other Options granted
under this Section 9.
(b) Termination of Options Granted Pursuant to Section 9. All Options
granted pursuant to this Section 9 shall be exercisable until the first to occur
of the following:
(i) Expiration of ten (10) years from the date of grant;
-9-
<PAGE>
(ii) Expiration of three (3) months from the date the Optionee's
service as a member of the Board of Directors terminates for any reason other
than Disability or death; provided, however that if the Optionee dies within
three years following the date the Optionee's service as a member of the Board
of Directors terminates as a result of disability, retirement or resignation
without having fully exercised the option, the Optionee's executors,
administrators, legatees or distributees of his or her estate shall have the
right to exercise the Option during the twelve month period following Optionee's
death, but only to the extent such Option could have been exercised by the
Optionee had the optionee continued to serve as a non-employee member of the
Board of Directors during such period; or
(iii) Expiration of one (1) year from the date the Optionee's
service as a director terminates due to the Optionee's Disability or death.
(c) Applicability of Provisions of Section 8 to Options Granted Pursuant
to Section 9. The following provisions of Section 8 shall be applicable to
options granted pursuant to this Section 9: Subsection 8(a)(provided that all
Options granted pursuant to this Section 9 shall be Non-qualified Stock
Options); the last sentence of Subsection 8(b); Subsection 8(c); Subsection 8(d)
(provided that Option Documents relating to Options granted pursuant to this
Section 9 shall provide that payment may be made in whole or in part in shares
of Company Common Stock); Subsection 8(f); and Subsection 8(i).
(d) Election to Waive Grant. Any person who would otherwise be granted
an Option under this Section 9 shall be permitted to elect not to receive such
Option (in which case such person will receive nothing in lieu thereof) and may
also revoke any previous election not to receive such Option at any time prior
to the date on which such Option would, but for an election under this
Subsection 9(d), be granted. In either case, the election or the revocation of
the election will be effective only for Options under this Section 9 that
otherwise were scheduled to be made after the date of the election.
10. Change of Control. In the event of a Change of Control, the Committee
may take whatever action it deems necessary or desirable with respect to the
Options outstanding (other than Options granted pursuant to Section 9),
including, without limitation, accelerating the expiration or termination date
in the respective Option Documents to a date no earlier than thirty (30) days
after notice of such acceleration is given to the Optionees. In addition to the
foregoing, in the event of a Change of Control, Options granted pursuant to the
Plan and held by Optionees at the time of a Change of Control shall become
immediately exercisable in full. Any amendment to this Section 10 which
diminishes the rights of Optionees, other than the acceleration of the
expiration or termination date to a date no earlier than thirty (30) days after
notice of such acceleration, shall not be effective with respect to Options
outstanding at the time of adoption of such amendment, whether or not such
outstanding Options are then exercisable.
-10-
<PAGE>
A "Change of Control" shall be deemed to have occurred upon the earliest
to occur of the following events: (i) the date the shareholders of the Company
(or the Board of Directors, if shareholder action is not required) approve a
plan or other arrangement pursuant to which the Company will be dissolved or
liquidated, or (ii) the date the shareholders of the Company (or the Board of
Directors, if shareholder action is not required) approve a definitive
agreement to sell or otherwise dispose of substantially all of the assets of
the Company, or (iii) the date the shareholders of the Company (or the Board of
Directors, if shareholder action is not required) and the shareholders of the
other constituent corporation (or its board of directors if shareholder action
is not required) have approved a definitive agreement to merge or consolidate
the Company with or into such other corporation, other than, in either case, a
merger or consolidation of the Company in which holders of shares of the
Company's Common Stock immediately prior to the merger or consolidation will
have at least a majority of the ownership of common stock of the surviving
corporation (and, if one class of common stock is not the only class of voting
securities entitled to vote on the election of directors of the surviving
corporation, a majority of the voting power of the surviving corporation's
voting securities) immediately after the merger or consolidation, which common
stock (and, if applicable, voting securities) is to be held in the same
proportion as such holders, ownership of Common Stock of the Company
immediately before the merger or consolidation, or (iv) the date any entity,
person or group, within the meaning of Section 13 (d) (3) or Section 14 (d) (2)
of the Securities Exchange Act of 1934, as amended, other than the Company or
any of its subsidiaries or any employee benefit plan (or related trust)
sponsored or maintained by the Company or any of its subsidiaries shall have
become the beneficial owner of, or shall have obtained voting control over,
more than fifty percent (50%) of the outstanding Shares of the Company's Common
Stock, or (v) the first day after the date this Plan is effective when
individuals who are Incumbent Directors (as defined below) cease to constitute
a majority of the members of the Board of Directors ("Incumbent Directors" for
this purpose being the members of the Board of Directors on the date of the
adoption of the Plan, provided that any persons becoming a member of the Board
of Directors subsequent to such date whose election or nomination for election
was supported by two-thirds of the members of the Board of Directors who then
comprised the Incumbent Directors shall be considered to be an Incumbent
Director).
11. Adjustments on Changes in Capitalization.
(a) In the event that the outstanding Shares are changed by reason of a
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, combination or exchange of shares and the like (not including the
issuance of Common Stock on the conversion of other securities of the Company
which are outstanding on the date of grant and which are convertible into Common
Stock) or dividends payable in Shares, an equitable adjustment shall be made by
the Committee in the aggregate number
-11-
<PAGE>
of shares available under the Plan and in the number of Shares and price per
Share subject to outstanding Options. Unless the Committee makes other
provisions for the equitable settlement of outstanding Options, if the Company
shall be reorganized, consolidated, or merged with another corporation, or if
all or substantially all of the assets of the Company shall be sold or
exchanged, an Optionee shall at the time of issuance of the stock under such
corporate event be entitled to receive upon the exercise of his or her Option
the same number and kind of shares of stock or the same amount of property,
cash or securities as he or she would have been entitled to receive upon the
occurrence of any such corporate event as if he or she had been, immediately
prior to such event, the holder of the number of shares covered by his or her
Option.
(b) Any adjustment under this Section 11 in the number of Shares
subject to Options shall apply proportionately to only the unexercised portion
of any Option granted hereunder. If fractions of a Share would result from any
such adjustment, the adjustment shall be revised to the next lower whole number
of Shares.
(c) The Committee shall have authority to determine the adjustments to
be made under this Section, and any such determination by the Committee shall be
final, binding and conclusive.
12. Amendment of the Plan. The Board of Directors of the Company may amend
the Plan from time to time in such manner as it may deem advisable.
Nevertheless, the Board of Directors of the Company may not change the class of
individuals eligible to receive an ISO or increase the maximum number of shares
as to which Options may be granted without obtaining approval, within twelve
months before or after such action, by vote of a majority of the votes cast at
a duly called meeting of the shareholders at which a quorum representing a
majority of all outstanding voting stock of the Company is, either in person or
by proxy, present and voting on the matter, by the unanimous consent in writing
of the shareholders, or by a method and in a degree that would be treated as
adequate under applicable state law in the case of an action requiring
shareholder approval. In addition, the provisions of Section 9 that determine
(i) which directors shall be granted Options pursuant to Section 9; (ii) the
amount of Shares subject to Options granted pursuant to Section 9; (iii) the
price at which shares subject to Options granted pursuant to Section 9 may be
purchased and (iv) the timing of grants of Options pursuant to Section 9 shall
not be amended more than once every six months, other than to comport with
changes in the Code or the Employee Retirement Income Security Act of 1974, as
amended. No amendment to the Plan shall adversely affect any outstanding
Option, however, without the consent of the Grantee.
13. No Commitment to Retain. The grant of an Option pursuant to the Plan
shall not be construed to imply or to constitute evidence of any agreement,
express or implied,
-12-
<PAGE>
on the part of the Company or any Affiliate to retain the Grantee in the employ
of the Company or an Affiliate and/or as a member of the Company's Board of
Directors or in any other capacity.
14. Withholding of Taxes. Whenever the Company proposes or is required to
deliver or transfer Shares in connection with the exercise of an Option, the
Company shall have the right to (a) require the recipient to remit or otherwise
make available to the Company an amount sufficient to satisfy any federal,
state and/or local withholding tax requirements prior to the delivery or
transfer of any certificate or certificates for such Shares or (b) take
whatever other action it deems necessary to protect its interests with respect
to tax liabilities. The Company's obligation to make any delivery or transfer
of Shares shall be conditioned on the Grantee's compliance, to the Company's
satisfaction, with any withholding requirement.
15. Interpretation. The Plan is intended to enable transactions under the
Plan with respect to directors and officers (within the meaning of Section
16(a) under the Securities Exchange Act of 1934, as amended) to satisfy the
conditions of Rule 16b-3; to the extent that any provision of the Plan would
cause a conflict with such conditions or would cause the administration of the
Plan as provided in Section 3 to fail to satisfy the conditions of Rule 16b-3,
such provision shall be deemed null and void to the extent permitted by
applicable law. This section shall not be applicable if no class of the
Company's equity securities is then registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended.
-13-
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into this 30th day of November 1998, by and
between, BankPhiladelphia, (hereinafter referred to as "Bank"), and Craig J.
Scher (hereinafter referred to as "Executive") for the position and title of
Senior Vice President
Director of Lending/Credit
W I T N E S S E T H :
WHEREAS, Bank wishes to assure itself of the services of Executive for the
period provided in this Agreement, and Executive is willing to serve in Bank's
employ on a full time basis for said period;
WHEREAS, the Board of Directors of the Bank have determined that the best
interests of Bank would be served by providing the Executive with protection and
special benefits provided for herein;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereby agree as follows:
Section I. Employment
A. Duties of Employment. Bank agrees to employ Executive, and Executive
agrees to remain in the employ of Bank for the period stated in paragraph B
hereof and upon the other terms and conditions herein provided. Bank employs
Executive and Executive agrees to serve as a member of senior management of Bank
for the term and on the conditions hereinafter set forth, with the title Vice
President, Director of Operations of the Bank, and with the responsibilities
related therewith as shall be further setforth by the Chief Operating Officer
and the President & CEO of the Bank. Executive agrees to perform such services
not inconsistent with his position as shall from time to time be assigned to
him.
B. Term of Employment. The duties and obligations of the Executive and Bank
under this Agreement shall commence as of the date of this Agreement, and shall
continue for a period of three (3) years (said three (3) year period being
hereinafter referred to as the "Term of Employment"). This Agreement shall
automatically renew annually for an additional three year period unless written
notice is given by either Executive or Bank 60 days prior to expiration hereof.
<PAGE>
Section II. Compensation
A. Salary. Bank agrees to pay the Executive during the Term of Employment
an annual base salary equal to One Hundred Twenty Thousand Dollars ($120,000.00)
(hereinafter referred to as "Salary"). Such Salary shall be payable on a
biweekly basis as concomitant with all employees of the Bank.
B. Incentive Compensation. Bank shall pay Executive incentive compensation
as follows:
1.) Earnings per share: $50,000 shall be paid to executive in the
event that USABancShares earns in excess of $1.00 per share in any
four consecutive reporting periods subsequent to the date hereof,
and during which time Executive remains as an employee of the Bank
or Holding Company.
2.) A $60,000 bonus will be payable when the loan assets and
non-performing assets reach $200,000,000 and 1.85%, respectively.
C. Bonus. Bank will further consider payment to the Executive of an annual
bonus (hereinafter referred to as "Bonus"). Such Bonus shall be entirely
discretionary and may or may not be granted if so determined by the President &
CEO of the Bank.
Section III. Duty of Loyalty and Attention
A. Executive shall devote his full-time and best effort to the performance
of his employment under this Agreement and shall perform his duties under this
Agreement in accordance with such reasonable standards expected of employees of
comparable positions in comparable organizations and as may be established from
time to time by Bank's Board of Directors or the President & CEO of the Bank.
B. During the Executive's Term of Employment, the Executive shall not, at
any time or place, either directly or indirectly engage in any business or
activity in competition with the business affairs or interests of BANK.
Section V. Executive Benefits
A. Executive will be entitled to receive benefits under any present or
future group hospitalization, retirement, health, dental care, vacation or sick
leave plan, life or other insurance, as made available to other members of Bank.
B. Executive shall be reimbursed for reasonable business-related expenses
on a monthly basis and have available to him a parking space.
<PAGE>
Section VI. Termination and Termination Pay
A. Event of Termination. Upon the occurrence of an Event of Termination (as
hereinafter defined) during the period of Executive's employment under this
Agreement, the provisions of this paragraph A shall apply. As used in this
Agreement, an "Event of Termination" shall mean the termination by Bank of
Executive's employment hereunder for any reason other than because of
retirement. A termination for "cause" shall include termination because of the
Executive's personal dishonesty, misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of this
Agreement. In the event of termination for cause the Executive shall have no
right to receive further compensation, Salary, or Bonus of any kind, or other
benefits for any period after such termination.
B. Event of Termination Without Cause. Upon the occurrence of an Event of
Termination other than for "Cause" as hereinabove defined, BANK shall pay the
Executive on a biweekly basis, while living, during the lessor period of
obtaining employment or the Employment Agreement, the Executive's current
salary, medical benefits and the use of a company automobile. BANK shall also
pay any earned bonuses, as well as any expense reimbursements due to the
Executive. Payments shall commence on the pay cycle immediately following said
occurrence, which said occurrence shall be viewed as a determination by BANK not
to extend the agreement beyond the Term of Employment as set forth in section I,
paragraph B. Executive must be provided written notice at least 60 days prior to
termination as set forth herein.
C. In the event of a Change in Control, as described in the USABancShares,
Inc. Stock Option Plan, the Executive shall be entitled to his current salary,
medical benefits and the use a of a company automobile for the period of time
equal to twenty-four (24) months, if he is not offered continued employment with
the same job title, responsibilities, locality and compensation, noted herein.
D. Event of Executive Terminating Employment. If the Executive terminates
employment or does not renew the Employment Agreement the Executive is entitled
to all earned compensation (salary and bonuses), and all expense reimbursements
due to the Executive through his last day of employment with BANK.
E. Power of President & CEO to Terminate Executive. The President & CEO of
BANK may terminate the Executive at any time; in the event of such termination
the provisions of Section VI, Paragraphs A and B shall apply.
F. Suspension of Employment. If the Executive is suspended and/or
temporarily prohibited from participating in the conduct of Bank's affairs by a
notice served under applicable regulatory guidelines, Bank's obligations under
the Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, Bank shall:
(i) pay the Executive all of the compensation withheld while its contract
obligations were suspended; and (ii) reinstate its obligations which were
suspended.
<PAGE>
Section VII. Proprietary Information
A. Fiduciary Obligations. In the course of service to BANK, the Executive
may have access to confidential information (hereinafter referred to a
"Proprietary Information"). Proprietary Information shall include all
information which gives BANK a competitive advantage, including without
limitation, know-how, strategic or technical data, processes, business or
financial documents or information, sales and marketing data, marketing research
data, all customer and prospective customer lists, customer account records,
personnel records, placement information, all financial information of the
Association and its customers, and sources of supply and trade secrets, all of
which are confidential and proprietary, owned or used by any of the above
companies. Proprietary Information shall also include any and all items
constituting a "trade secret" whether or not enumerated in the preceding
sentence, and coming within the scope of BANK business as to which the Executive
may have access. Proprietary Information shall not include any records, data, or
information which are in the public domain during the term of this Agreement,
provided the same are not in the public domain as a consequence of disclosure
directly or indirectly by the Executive in violation of this Agreement. The
Executive acknowledges and agrees that Proprietary Information is of critical
importance to BANK, and a violation of this Agreement would seriously and
irreparably impair and damage BANK's business. The Executive shall keep all
Proprietary Information in a fiduciary capacity for the sole and exclusive
benefit of BANK.
B. Non-disclosure. The Executive shall not, during the term of this
Agreement, or for a period of two (2) years thereafter, use for his own benefit,
or disclose, directly or indirectly, any Proprietary Information to any person
other than BANK or authorized employees thereof at the time of such disclosure,
or such other persons to whom the Executive has been specifically instructed to
make disclosure by the Board, and in all such cases only to the extent required
in the course of the Executive's service to BANK. At the termination of the
Executive's employment, the Executive shall deliver to Bank all notes, letters,
documents, and records which may contain Proprietary Information which are then
in his possession or control an shall not retain or use any copies or summaries
thereof.
C. Survival of Covenants. The covenants of the Executive in this Section
shall survive the termination or expiration of this Agreement hereunder and
shall expire two (2) years from the date of termination or expiration of this
Agreement.
Section VIII. Successors and Assigns
A. Successor in Interest. This Agreement shall inure to the benefit of and
be binding upon any corporate or other successor of USABancShares, Inc and Bank
which shall acquire, directly or indirectly, by merger, consolidation, purchase,
or otherwise, all or substantially all of the assets of USABancShares, Inc or
Bank.
B. Prohibition of Assignment. Since Bank is contracting for the unique and
personal skills of the Executive, the Executive shall be precluded from
assigning or delegating his rights or duties as Executive Vice President and
Director of Lending/Credit hereunder without first obtaining written consent of
Bank.
<PAGE>
Section IX. Amendments / Applicable Law
A. No amendments or additions to this Agreement shall be binding unless in
writing and signed by both parties, except as herein otherwise provided.
B. This Agreement shall be governed by all respects whether as to validity,
construction, capacity, performance, or otherwise, by the laws of the
Commonwealth of Pennsylvania, except to the extent that federal law shall be
deemed to apply.
Section X. Severability
A. In the event any one or more of the provisions contained in this
Agreement shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, the invalidity, illegality, or unenforceability
shall not affect any other provision, and this Agreement shall be construed as
if the invalid, illegal, or unenforceable provision had never been contained
therein. This Agreement shall replace in full any existing agreement that
Executive has with BANK.
Section XI. Arbitration
A. In the event of any dispute or claim arising out of or relating to this
Agreement, or to any interpretation of any terms hereof, or of any action to be
taken or not be taken by any of the parties hereto in compliance herewith, or as
to the breach hereof such matters shall be settled exclusively by submission to
arbitration in accordance with the rules of the American Arbitration Association
of the City of Philadelphia.
<PAGE>
In Witness Whereof, the parties have executed this Agreement on the day and
year first hereinabove written.
BankPhiladelphia
Kenneth L. Tepper
President and Chief Executive Officer
______________________
Attest: ______________________
Craig J. Scher - Executive
______________________
Witness: ______________________
<PAGE>
Exhibit 21
Subsidiaries of USABanc.com
1. vBank, a Pennsylvania chartered stock saving bank (formerly
BankPhiladelphia).
2. USACapital, Inc., a Pennsylvania corporation.
3. USACredit, Inc., a Pennsylvania corporation.
4. USA Capital Trust I, a Delaware business trust.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 22, 1999 (except for Note 21, as to which
the date is June 15, 1999) accompanying the consolidated financial statements of
USABanc.com, Inc. and Subsidiaries included in Form 10-KSB for the year ended
December 31, 1998 which are incorporated by reference in this Registration
Statement. We consent to the incorporation by reference in the Registration
Statement of the aforementioned report, and to the use of our name as it appears
under the caption "Experts."
/s/ Grant Thornton LLP
- -----------------------
Grant Thornton
Philadelphia, Pennsylvania
July 16, 1999
