<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1999
Registration No. 333-68675
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------------
USABANCSHARES, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Pennsylvania 551111 23-2806495
------------ ------ ----------
(State or Other Jurisdiction of (Primary North American (IRS Employer
Incorporation or Organization) Classification System Number) Identification Number)
</TABLE>
USABancShares, Inc.
1535 Locust Street
Philadelphia, PA 19102
(215) 569-4200
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(Address and Telephone Number
of Registrant's Principal Executive Offices and Principal Place of Business)
Mr. Kenneth L. Tepper
President and Chief Executive Officer
USABancShares, Inc.
1535 Locust Street
Philadelphia, PA 19102
(215) 569-4200
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(Name, Address and Telephone Number of Agent for Service)
with copy to:
Stephen T. Burdumy, Esquire
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
1401 Walnut Street
Philadelphia, PA 19102
(215) 568-6060
-----------------------------------
Approximate date of proposed sale to the public: As soon as practicable
following the date on which this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Up to 1,287,032 Shares
USABancShares, Inc.
Certain shareholders of USABancShares, Inc. are offering and selling up
to 1,287,032 shares of common stock pursuant to this Prospectus. The
Corporation's common stock is traded on the Nasdaq SmallCap Market under the
symbol "USAB."
---------------------------------------------
See "Risk Factors" beginning on page 3 of this Prospectus for a
discussion of certain factors that you should consider before investing.
---------------------------------------------
The information in this Prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
---------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the Prospectus. Any representation to the contrary is a
criminal offense.
---------------------------------------------
The shares of common stock are not bank deposits and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
---------------------------------------------
This Prospectus is dated April __, 1999.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY ...................................................................1
FORWARD LOOKING STATEMENTS..................................................3
RISK FACTORS................................................................3
USE OF PROCEEDS.............................................................9
DIVIDEND POLICY............................................................10
MARKET FOR COMMON STOCK....................................................10
SELECTED FINANCIAL AND OTHER DATA..........................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................13
BUSINESS ..................................................................22
REGULATION OF THE CORPORATION AND THE BANK.................................35
MANAGEMENT OF THE CORPORATION..............................................40
SELLING SHAREHOLDERS.......................................................46
DESCRIPTION OF SECURITIES..................................................48
PLAN OF DISTRIBUTION.......................................................49
LEGAL MATTERS..............................................................50
EXPERTS ..................................................................50
FINANCIAL STATEMENTS......................................................F-1
<PAGE>
SUMMARY
This summary highlights selected information from this Prospectus and may not
contain all the information that is important to you. To understand the stock
offering fully, you should carefully read this entire Prospectus. References in
this Prospectus to the "Corporation" refer to USABancShares, Inc. References to
the "Bank" refer to BankPhiladelphia. References to USACapital refer to
USACapital, Inc. References to "we," "us," and "our" refer to USABancShares,
Inc., BankPhiladelphia and/or USACapital, Inc., either individually or as a
group, depending on the context.
USABancShares, Inc.
1535 Locust Street
Philadelphia, PA 19102
(215) 569-4200
USABancShares, Inc. (the "Corporation") is a bank holding company registered
under the Bank Holding Company Act of 1956. The Corporation was incorporated in
Pennsylvania on March 14, 1995. The Corporation is not an operating company and
has not engaged in any significant business to date.
BankPhiladelphia
1535 Locust Street
Philadelphia, PA 19102
(215) 569-4200
BankPhiladelphia (the "Bank") is a Pennsylvania chartered stock savings bank.
The Bank is wholly-owned by the Corporation. The Bank has operated as a
community based financial institution for over 110 years.
USACapital, Inc.
1535 Locust Street
Philadelphia, PA 19102
(215) 569-4200
USACapital, Inc. ("USACapital") is a Pennsylvania corporation wholly-owned by
the Corporation. USACapital is a broker-dealer registered with the National
Association of Securities Dealers and is engaged in the business of selling
stocks, bonds, annuities, and other investment related products to the general
public. USACapital operates out of the Corporation's Locust Street office.
The Offering
Up to 1,287,032 shares of common stock of the Corporation are being offered by
the selling shareholders listed in this Prospectus at market prices which will
vary from time to time.
Use of the Proceeds
The offering is on behalf of selling shareholders. The Corporation will not
receive any proceeds from the sale of the common stock. Certain selling
shareholders will pay the exercise price of the warrants to purchase common
stock in connection with an exercise of such warrants. The Corporation will use
the proceeds from such exercises for working capital and general corporate
purposes.
Dividends
The Corporation does not intend to pay any cash dividends on the common stock.
See "Dividend Policy."
<PAGE>
Market for the Common Stock
There is a limited market for the common stock, which trades on the NASDAQ
SmallCap Market under the symbol "USAB."
Important Risks in Owning the Corporation's Common Stock
Before you decide to purchase stock in the offering, you should read the "Risk
Factors" section of this Prospectus beginning on page 3.
Where You Can Get More Information
At your request, we will provide you, without charge, a copy of any exhibits to
the Registration Statement of which this Prospectus is a part. If you would like
more information, write or call us at:
USABancShares, Inc.
1535 Locust Street
Philadelphia, PA 19102
(215) 569-4200
Attn: Chief Financial Officer
Our fiscal year ends on December 31. We intend to provide to our shareholders
annual reports containing audited financial statements and other appropriate
reports. In addition, we file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). You may read and copy any reports, statements or other information
we file at the SEC's public reference room in Washington, D.C. You can request
copies of these documents, upon payment of a duplicating fee, by writing to the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our SEC filings are also available to
the public free of charge on the SEC Internet site at http:\\www.sec.gov.
2
<PAGE>
FORWARD LOOKING STATEMENTS
Some of the statements contained in this Prospectus discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and was
derived using numerous assumptions.
Important factors that may cause actual results to differ from
projections include, for example,
o general economic conditions, including their impact on capital
expenditures;
o business conditions in the financial services industry;
o the regulatory environment;
o rapidly changing technology and evolving banking industry
standards;
o competitive factors, including increased competition with
community, regional and national financial institutions;
o new services and products offered by competitors; and
o price pressures.
RISK FACTORS
An investment in the Corporation's common stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors
before making an investment.
Loan Acquisition Strategy
The Bank's lending activities include identifying and purchasing loans
which management believes to be undervalued at discounts. The Bank purchases
primarily performing loans at a discount from the Federal Deposit Insurance
Corporation (the "FDIC"), private sellers and the former Resolution Trust
Corporation. See "-Purchase Discount." Although the Bank focuses on acquiring
single-family residential, multi-family residential and commercial real estate
loans secured by properties located in the Mid-Atlantic region, the Bank has
acquired loans secured by real estate located in a number of other states,
including Texas, Florida and California. To the extent such loans are secured by
real estate located outside the Bank's primary market area, such loans could
present greater risks of collectability than loans located within the Bank's
primary market area.
The Bank has 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. The Bank has developed and maintains a proprietary model to
determine what management believes to be the appropriate price to be paid for
these loans. The Bank's model is based upon a combination of objective and
subjective criteria. The objective criteria includes applicable loan to value
ratios, collateral type, payment history and geographic location. The more
subjective criteria includes management's past experience with purchasing and
administering such loans. The prices paid to acquire loans at a discount are
based on the Bank's estimate of the market value of such loans. As of December
31, 1998, the Bank's net outstanding purchased loan portfolio totaled $51.7
million, or 50.0% of the Bank's total loans outstanding and 31.3% of the Bank's
total assets.
The Bank's loan acquisition strategy subjects the Bank 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
the Bank's operations will continue to provide the same level of profitability
it has experienced in the past. The Bank's 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 the Bank not meeting
its targeted level of loan purchases;
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o the competitive nature of the market for loan pools may result
in the Bank having to acquire such loans at less attractive
prices than it has 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 the Corporation has little or
no familiarity.
The Bank also originates loans by purchasing participations in loans
from other financial institutions. The Bank considers such loan participations
to be originations because the Bank underwrites each participation as an
origination and the participation is closed under the Bank's loan participation
documentation. As of December 31, 1998, the Bank had $10.0 million of loan
participations in its portfolio, substantially all of which consist of
multi-family residential and commercial real estate loans. Although the Bank has
participated in loans with four other financial institutions, as of December 31,
1998, the Bank had six loan participations with an aggregate principal balance
of $8.9 million with affiliates of a local specialty finance and real estate
company. In each of these six loan participations, the Bank's interest and
rights to principal recovery are senior to the rights of the junior participant
which may be an affiliate of the specialty finance company and may also be the
servicer of the loan. The senior rights created under the participation
agreements were significant considerations in the Bank's 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
become non-performing to be substituted for performing underlying loans, the
Bank is 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, the Bank's ability to receive principal and interest payments on a
timely basis from the finance company, as servicer of the loans, could be
temporarily interrupted.
Purchase Discount
At the time the Bank purchases 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 the Bank's estimate of the value of the loan,
including an estimate of future cash flows. In accordance with generally
accepted accounting principles, to the extent management believes 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
management believes 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. As of December 31, 1998, the total discount associated
with purchased loans amounted to $5.3 million or 9.3% of total purchased loans.
As of such date, $4.0 million or 75.5% of such aggregate discount is being
accreted into income, while the remaining $1.3 million of such discount is
currently not being accreted into income. The $1.3 million currently not being
accreted into income has been identified as a cash discount and will not be
amortized into income as a yield adjustment until final resolution or collection
of principal and interest is achieved. The yield on the Bank's 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.
<PAGE>
Commercial Lending Risk
At December 31, 1998, a majority of the Bank's real estate loan
portfolio consisted of loans secured by multi-family residential real estate and
commercial real estate properties. In addition, as of December 31, 1998, the
Bank had an aggregate of $986,000 of commercial business loans. Furthermore, all
of the Bank's commercial business loans which are secured by real estate have in
the past been classified as real estate loans. The Bank makes 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 the Bank to risks, particularly in the case
of loans to small businesses and individuals. These risks include possible
errors in the Bank's 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, the Bank is subject to greater credit risk with its commercial
lending. As of
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December 31, 1998, the Bank had no non-performing commercial business loans and
$1.1 million of non-performing loans secured by commercial real estate.
Reliance on Short-term Deposits
The Bank has historically employed a wholesale funding strategy
consisting primarily of marketing non-retail certificates of deposit. The Bank
has been able to maintain sufficient funds to support its lending activities by
offering rates of interest on certificates of deposit marginally higher than
rates offered by other banks on comparable deposits. As of December 31, 1998,
$104.5 million or 91.3% of the Bank's deposits consisted of certificates of
deposit. Of this amount, $73.1 million or 70.0% were placed with institutional
investors. In addition, as of December 31, 1998, $47.1 million, or 45.1% of the
Bank's total certificates of deposit were due to mature within one year. In the
current economic environment of low interest rates, the Bank has been focusing
on extending the maturities of its certificates of deposit and borrowings. The
Bank has extended the average maturities on its certificates of deposit to
approximately 18 months from nine months. The Bank's ability to attract and
maintain deposits, as well as the Bank's cost of funds, has been, and will
continue to be, significantly affected by money market rates and general
economic conditions. In addition, the Bank's ability to internally fund any
additional growth through lending will be impacted by its ability to maintain or
generate deposits. In the event the Bank increases interest rates further to
retain deposits, earnings may be negatively affected.
Credit Risk
A significant source of risk for the Corporation arises from the
possibility that borrowers, guarantors and related parties may fail to repay
their loans or otherwise abide by the terms of their loans. To address risks
related to past loan documentation, management of the Corporation is enhancing
the Bank's loan underwriting, documentation and credit monitoring procedures,
including delinquency reporting, collections, loan classifications and loan loss
allowance analysis. Management believes such procedures are appropriate to
minimize the Bank's credit risk. The enhancements to such policies and
procedures may not, however, prevent unexpected credit losses that could
negatively affect the Corporation's results of operations.
Asset Quality
The Corporation's results of operations are significantly dependent on
the quality of its assets, which is measured by the level of its 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 real
estate acquired by foreclosure or deed-in-lieu thereof. At December 31, 1998,
the Corporation's non-performing assets, net of discount, amounted to $2.0
million or 1.2% of total assets, which reflects an increase of $1.7 million in
non-performing assets, net of discount, since December 31, 1997. All of the $2.0
million of non-performing assets, net of discount, consisted of purchased loans.
Although the Bank purchases loan pools at a discount to the face value of such
loans, the Bank faces the risk that in the event one or more of such purchased
loans becomes non-performing, the underlying discount will not be sufficient to
cover the Bank's cost of acquiring, servicing and, if necessary, taking legal
action, with respect to such loans. Although management of the Bank is currently
in the process of enhancing policies and procedures for monitoring asset quality
and devotes 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 the Bank originates and purchases loans
are likely to be significant determinants of the quality of the Bank's assets in
future periods and, thus, its financial condition and results of operations.
Reserve Coverage for Loans
At December 31, 1998, the Corporation's allowance for loan losses
amounted to 1.02% of total loans, net of discount, and 53.72% 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 the Corporation believes that it has established
an adequate allowance for losses on its 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 the
Corporation's loan portfolio and increases in both loan originations and
purchases. In addition, the Pennsylvania Banking Department (the "Department")
and the FDIC, as an integral part of their examination process, periodically
review the Corporation's allowance for loan losses. Increases in the allowance
for loan losses would adversely affect the Corporation's results of operations.
5
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Effect of Rapid Growth on Internal Operations
The Corporation has undergone tremendous growth in recent years, but has
experienced a lag in its infrastructure to accommodate this growth. Total assets
have increased from $25.8 million at December 31, 1995 to $165.1 million at
December 31, 1998. This growth was due in large part to the increase in loans,
primarily through the purchase of loan pools at a discount. In order to
accommodate such growth in the future, the Corporation must upgrade its internal
systems of accounting and monitoring. Among the Corporation's goals for fiscal
1999 are to improve its internal operating systems and the experience level of
its staff at key positions throughout the Corporation. Accordingly, the Bank
intends to upgrade its computer-based systems and applications. Currently, the
Corporation is evaluating the upgrading of its computer systems and intends to
convert its systems in the latter part of 1999 or early in 2000. Management is
aware that investing and upgrading its infrastructure will increase non-interest
expenses, but believes that overall efficiencies obtained from such expenditures
will allow for overall higher profit levels to be achieved. As a consequence,
management anticipates that as the Corporation continues to grow, its
non-interest expense as a percentage of average assets should decrease over
time.
Leverage Risk
The Bank utilizes a leverage strategy in originating and purchasing
residential and commercial real estate loans. Originations and purchases are
funded primarily through increases in deposits, primarily non-retail
certificates of deposit and borrowings from the Federal Home Loan Bank of
Pittsburgh ("FHLB"). Management's leverage strategy is premised on the
assumption that it will earn a positive spread on the yield generated from its
originated and purchased loans over the rate paid on its incremental deposits
and that the spread generated from such strategy will assist the Corporation in
enhancing its earnings. To the extent that maturities and cash flows differ, or
if market rates of interest fluctuate in such a manner that the Corporation is
unable to earn a positive spread as a result of its leverage strategy, the
Corporation's net interest margin and net income will be adversely affected in
future periods.
Vulnerability to Interest Rate Risk
Like most financial institutions, the Corporation's 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. As of December 31, 1998, based on certain
assumptions, the Bank's interest-bearing liabilities that were estimated to
mature or reprice within one year exceeded similar interest-earning assets by
$26.4 million, or 17.5% of total interest-earning assets.
Interest rates are highly sensitive to many factors that are beyond the
Bank's 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 the Bank's operations.
Specifically,
o Historically, the Bank has relied on short-term and
institutional deposits as a source of funds. The Bank's
ability to retain these deposits is directly related to the
rate of interest paid by the Bank.
o When interest-bearing liabilities mature or reprice more
quickly than interest-earning assets, in a particular period
of time, a significant increase in interest rates could
adversely impact the Bank's net interest income.
o Changes in interest rates could adversely affect:
o the volume of loans the Bank originates;
o the value of the Bank's purchased loans and other
interest-earning assets, particularly the investment
securities and trust preferred securities portfolio;
o the Bank's ability to recognize income on loans
purchased at a discount; and
o loan prepayments.
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Holding Company Structure
The Corporation is a holding company and does not have material assets
other than its ownership interests in its subsidiaries, including the Bank. As a
holding company, the Corporation is dependent upon its subsidiaries for cash to
meet its operating expenses. The Corporation's ability to pay dividends to its
shareholders is limited by the Bank's ability to pay dividends to the
Corporation. See "Dividend Policy." In addition, the Corporation may engage in
business combinations with other companies, may acquire interests in other types
of businesses and may dispose of or reduce its current interests in its
subsidiaries.
Voting Control, Ability to Direct Management
Management effectively exercises voting and operational control of the
Corporation. Information regarding Management's ownership of the Corporation's
capital stock is provided in this Prospectus under the heading "Security
Ownership of Certain Beneficial Owners and Management."
Impediments to Takeover Attempts and Removal of Directors
There are provisions in the Corporation's charter and other restrictions
that would make it difficult and expensive to pursue a change in control or
takeover attempt which the Board of Directors opposes. As a result, shareholders
may not have an opportunity to participate in these types of transactions. These
restrictions may make the removal of the current Board of Directors difficult
and could have the effect of reducing the trading price of the shares of common
stock. These restrictions include:
o Management has effective voting and operational control of the
Corporation.
o Federal law imposes restrictions on the acquisition of control
of a bank such as the Bank, including regulatory approval
requirements.
o Pennsylvania law, under which the Corporation is incorporated,
imposes restrictions on certain business combinations and
gives the Board of Directors broad discretion to resist
takeover attempts, even if such a transaction would be in the
best interests of the Corporation's shareholders.
o Provisions in the Corporation's charter and by-laws providing
that:
o any merger, consolidation, liquidation or dissolution
of the Corporation must be approved by the affirmative
vote of 75% of the Corporation's directors and 66 2/3%
of the Corporation's shareholders;
o one person or group may not hold or vote more than 10%
of the shares of common stock without the consent of
the Board of Directors;
o directors may be removed only for cause and only by a
vote of 75% of the outstanding shares of common stock;
o Mr. Tepper, as the only holder of the Class B common
stock, is entitled to elect 1/3 of the directors;
o shareholders do not have cumulative voting rights, so
that those shareholders who hold a majority of the
outstanding shares of common stock can elect the
entire Board of Directors;
o the Board of Directors is authorized to use a "poison
pill" defense to any unwanted takeover attempt and
given broad discretion in evaluating any such attempt;
and
o the Board of Directors is authorized to issue "blank
check" preferred stock, which could be issued as part
of a takeover defense.
Limited Public Market for Common Stock
The shares of common stock are traded on the NASDAQ SmallCap Market
under the symbol "USAB," but there is a limited public trading market for the
shares of common stock. We can provide no assurance that the shares of common
stock will trade at prices at or about their present level. An inactive or
illiquid trading market may have an
7
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adverse impact on the market price of the shares of common stock. Moreover,
price fluctuations and the trading volume in the shares of common stock may not
necessarily reflect our performance.
Dependence on Key Employees
The success of the Corporation will depend heavily on the expertise and
guidance of its President and Chief Executive Officer, Kenneth L. Tepper and
certain other senior executive officers, including Brian M. Hartline, the
Corporation's Chief Financial Officer. The Corporation has entered into
employment agreements with Mr. Tepper and Mr. Hartline. The loss of the services
of Mr. Tepper or Mr. Hartline would have a negative effect on the Corporation.
We do not maintain key-man life insurance on Mr. Tepper or Mr. Hartline.
"Year 2000" Issues
Management of the Corporation is 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. The Corporation has consulted with its outside vendors as well as its
third-party computer and software providers and is preparing its 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 its computer-based systems). The Corporation has not been advised
by any of its 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 the Corporation's systems to malfunction or
cause the Corporation to incur significant costs to remediate such problems. The
Corporation anticipates incurring approximately $120,000 in additional costs
during the year ended December 31, 1999 related to the proposed implementation
of its Year 2000 Plan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Year 2000 Compliance."
Competition
The Bank faces strong competition from larger more established banks and
from non-bank financial institutions which are aggressively expanding into the
Philadelphia market. Most of these competitors have facilities and financial
resources greater than the Bank's and have other competitive advantages over the
Bank. Among the advantages of these larger institutions are their ability to:
make larger loans; finance extensive advertising campaigns; conduct retail
operations at a significant number of branches; and to allocate their investment
assets to business lines of highest yield and demand.
The Bank's profits in recent periods have been largely attributable to
the identification and purchase of loans at a discount and the origination of
commercial loans. The primary factors in competing for loan pool acquisitions
are knowledge of the availability of such loans, the ability to efficiently and
accurately evaluate such loans and the ability to accurately price such loans.
The primary factors in competing for commercial loans are interest rates, loan
origination fees and the quality and range of lending services offered. The Bank
faces strong competition in attracting and retaining deposits and in purchasing
and originating loans. There can be no assurance that the Bank will maintain its
competitive position in the future or continue to operate profitably.
Economic Conditions
The performance of financial institutions like the Bank is sensitive to
general economic conditions. Unfavorable economic conditions at the local,
national or international level may adversely affect the Bank'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 the Bank, particularly in light of the current turmoil in some foreign
markets and economies. Economic conditions are unpredictable and the potential
for downturns is always present.
Although the Bank focuses on acquiring loans in the Mid-Atlantic region,
the Bank has acquired loans secured by real estate located in a number of other
states including Texas, Florida and California. To the extent such loans are
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secured by real estate outside the Bank's primary market area, such loans may
present a greater risk of collectability than loans located in the Bank's
primary market area. Thus, adverse economic conditions affecting any of these
market areas could have a negative impact on the financial condition and results
of operations of the Bank.
Federal and State Government Regulation and Deregulation of the Financial
Services Industry
The Bank is subject to a complex body of federal and state banking laws
and regulations which are intended primarily for the protection of depositors.
In addition, there are several bills relating to the regulation and deregulation
of the financial services industry pending in the U.S. Congress. Any resulting
legislation could significantly affect the operations and oversight of financial
institutions such as the Bank as well as the competitive environment in which
the Bank operates. Further, the laws and regulations which affect the Bank, as
well as the interpretation by the authorities who examine the Bank, may be
changed at any time. It is not possible to predict the content, timing or effect
of regulation by federal, state and local regulatory bodies. However, compliance
with, or any violation of, current and future laws or regulations could require
material expenditures by the Corporation or otherwise adversely affect the
Corporation's business or financial results.
Environmental Liabilities
In the course of the Bank's business, the Bank may acquire properties
through foreclosure. There is a risk that hazardous substances could be
discovered on such properties. Various federal, state and local laws subject
property owners or operators to liability for the costs of removal or
remediation of certain hazardous substances released on a property. Such laws
often impose liability without regard to whether the owner or operator knew of,
or was responsible for, the release of hazardous substances. There is a risk
that the Bank may be required to bear the cost of removing hazardous substances
from any affected properties. The cost of such removal could exceed the value of
the affected properties or the loans secured by the properties. In addition, the
Bank may not have adequate remedies against the prior owner or other responsible
parties and may find it difficult or impossible to sell the affected properties.
USE OF PROCEEDS
The Corporation will not receive any proceeds from the sale of the
shares of common stock offered by the selling shareholders pursuant to this
Prospectus. Certain selling shareholders will pay the exercise price of warrants
to purchase common stock in connection with an exercise of such warrants. The
Corporation will use the proceeds from such exercises for working capital and
general corporate purposes.
9
<PAGE>
DIVIDEND POLICY
We have never paid a cash dividend. We can provide no assurance that the
Corporation will pay cash dividends in the future. During each of the last two
fiscal years, we paid a 33% stock dividend to the holders of shares of Class A
common stock. Our Board of Directors will determine our future dividend policy
based on an analysis of factors that the Board of Directors deems relevant and
subject to applicable legal restrictions. We expect that such factors will
include our results of operations, financial condition and capital needs.
The Corporation's ability to pay dividends to its shareholders is
limited by the Bank's ability to pay dividends to the Corporation. Dividend
payments from the Bank are subject to:
o regulatory limitations, generally based on current and
retained earnings, imposed by the various regulatory agencies
with authority over the Bank,
o regulatory restrictions if such dividends would impair the
capital of the Bank or cause the Bank 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 the Bank's profitability, financial condition and capital
expenditures and other cash flow requirements.
MARKET FOR COMMON STOCK
The common stock of the Corporation is listed for trading on the NASDAQ
SmallCap Market under the symbol "USAB" and began trading during the first
quarter of 1996. As of April 21, 1999, the Corporation had 2,007,392 shares of
common stock outstanding, held by approximately 246 holders of record.
The following table shows trading prices for the Corporation's common
stock from January 1, 1997 through April 21, 1999, adjusted to reflect 33% stock
dividends effective August 17, 1998 and July 1, 1997:
1999 Low Price High Price
- ---- --------- ----------
Second Quarter (1) $ 8 $ 22
First Quarter 8 $ 9
1998
- ----
Fourth Quarter 6 3/4 9
Third Quarter 7 1/2 13 5/6
Second Quarter 10 1/8 11 5/8
First Quarter 6 9/16 10 1/2
1997
- ----
Fourth Quarter 6 7 7/8
Third Quarter 5 9/16 7 5/6
Second Quarter 4 59/64 6 3/64
First Quarter 5 13/64 5 29/32
(1) Through and including April 21, 1999.
10
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
Set forth below are selected financial and other data of the
Corporation and the Bank. This financial data is derived in part from, and it
should be read in conjunction with the Corporation's consolidated financial
statements and related notes included in this Prospectus beginning on page F-1.
<TABLE>
<CAPTION>
(Dollars in Thousands, except per share data) At or for the Year Ended December 31,
-------------------------------------
1998 1997
---- ----
<S> <C> <C>
Selected Financial Condition Data:
Total assets ............................................................. $165,106 $89,326
Loans receivable, net .................................................... 102,138 56,002
Securities (1) ........................................................... 44,144 24,454
Deposits ................................................................. 114,387 70,474
Borrowings (2) ........................................................... 35,305 12,638
Stockholders' equity ..................................................... 13,597 5,366
Non-performing assets, net of discount (3) ............................... 2,022(4) 287
Book value per share (5) ................................................. $6.43 $4.95
Selected Operations Data:
Total interest income .................................................... $ 12,352 $4,879
Total interest expense ................................................... 6,454 2,530
-------- -------
Net interest income ...................................................... 5,898 2,349
Provision for loan losses ................................................ 510 415
-------- -------
Net interest income after
provision for loan losses .............................................. 5,388 1,934
Total non-interest income ................................................ 759 314
Total non-interest expense ............................................... 3,700 2,457(6)
-------- -------
Income before income taxes ............................................... 2,447 (209)
Income tax provision ..................................................... 957 17
-------- -------
Net income (loss) ........................................................ $ 1,490 $ (226)
======== =======
Net income (loss) per share (fully-diluted)(5) ........................... $ 0.70 $ (0.21)
======== =======
Performance Ratios (7):
Return (loss) on average assets ........................................... 1.16% (0.09)%
Return (loss) on average equity ........................................... 12.81 (1.10)
Net interest margin (8) ................................................... 4.87 4.53
Interest rate spread (8) .................................................. 4.54 3.68
Efficiency ratio (9) ...................................................... 58.93 79.35
Non-interest expense to average total assets .............................. 2.88 1.93
Average interest-earning assets to average interest-bearing liabilities ... 106.14 117.50
Asset Quality Ratios:
Non-performing loans, net of discount, to total loans, net of discount(3) . 1.89 0.50
Non-performing assets, net of discount, to total assets(3) ................ 1.22 0.32
Allowance for loan losses to total loans, net of discount ................. 1.02 1.01
Allowance for loan losses and purchase discount as a percentage of total
loans ................................................................... 5.85 8.88
Allowance for loan losses to total non-performing loans, net of discount(3) 53.72(10) 197.96
Capital Ratios(11):
Equity to assets .......................................................... 8.2 6.01
Tier 1 leverage capital ratio ............................................. 8.5 5.4
Tier 1 risk-based capital ratio ........................................... 10.3 7.0
Total risk-based capital ratio ............................................ 11.2 7.9
Other:
Number of full-service branches ........................................... 3 2
Number of full-time employee equivalents .................................. 39 18
</TABLE>
11
<PAGE>
- ------------------------
(1) Includes securities classified as held-to-maturity and available for sale.
(2) Consists of FHLB advances and, to a lesser extent, borrowings pursuant to
line of credit facilities with local financial institutions.
(3) Non-performing loans consist of non-accrual loans and accruing loans 90
days or more overdue, net of applicable purchase discounts. 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 10. See
also "Business-Asset Quality-Delinquent Loans and Non-performing Assets."
(5) On each of July 18, 1997 and August 17, 1998, the Corporation paid a 33%
stock dividend on its common stock. All per share data has been adjusted to
reflect such stock dividends 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 Class A
common stock. See "Management of the Corporation-Certain Relationships and
Related Transactions."
(6) 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 the Corporation's Class B common stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(7) With the exception of end of period ratios, all ratios are based on average
monthly balances and are annualized where appropriate.
(8) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities, and net interest margin represents net
interest income as a percentage of average interest-earning assets.
(9) 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).
(10) 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 the Bank 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 the Bank'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-Purchase Discount" and "Business-Asset
Quality-Delinquent Loans and Non-performing Assets."
(11) The ratio of equity to assets is presented on a consolidated basis while
the ratios of Tier 1 leverage capital, Tier 1 risk-based capital and total
risk-based capital relate only to the Bank. For information on the
Corporation's and Bank's regulatory capital requirements, see
"Business-Regulation of the Corporation and the Bank."
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion is to focus on significant and ongoing
changes in the financial condition and results of operations of the Corporation
and its subsidiaries during the periods indicated. The discussion and analysis
is intended to supplement and highlight information contained in the
accompanying consolidated financial statements and the selected financial data
presented elsewhere in this Prospectus.
On each of July 18, 1997 and August 17, 1998, the Corporation paid a 33%
stock dividend on its common stock. All prior period stock, per share, and
option information included in this Prospectus has been adjusted to reflect such
stock dividends.
Comparison of Financial Condition and Results of Operations
for the Years Ended December 31, 1998 and December 31, 1997
Financial Condition
The Corporation'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 $23.3 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 the Bank'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 the Bank's overall growth
strategy. Management plans to continue to utilize FHLB advances in conjunction
with deposit expansion to provide the necessary funding for the Bank's continued
growth. The Bank's borrowing limit at the FHLB as of December 31, 1998, was
approximately $30.0 million, all of which was drawn upon as of such date. The
Corporation'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 the Corporation's private placement
of $7.5 million of common stock in February 1998.
Results of Operations
Net Income. The Corporation reported net income of $1.5 million, or $0.70
per share, diluted, for the year ended December 31, 1998, compared to a net loss
of $226,000, or $0.21 per share, diluted, for the year ended December 31, 1997.
The increase in net income was primarily the result of an increase in net
interest income of $3.5 million and an increase in non-interest income of
$445,000. These increases were partially offset by an increase in the provision
for loan losses of $95,000, an increase in non-interest expense of $1.2 million,
and an increase in income tax expense of $940,000.
Interest Income. Interest income increased 153.2% or $7.5 million to
$12.4 million, for the year ended December 31, 1998, compared to the prior year.
The increase in interest income was the result of an increase in interest income
on loans, investment securities, and interest-bearing deposits of $5.9 million,
$1.4 million, and $157,000, respectively. The increase in interest income on
loans was due to an increase in the average balance of the loan portfolio, as
well as accretion income recognized on loan pools purchased by the Bank 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, the Bank 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 the Bank'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.
13
<PAGE>
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 FHLB
advances. In order to fund the Corporation's substantial growth during the year
ended December 31, 1998, the Corporation 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 the Bank extending the average maturity of its
certificates of deposit from approximately nine months to approximately 18
months. The average cost of funds, including borrowings, decreased 0.08% to
5.65% for the year ended December 31, 1998 compared to the prior year.
Net Interest Income. The earnings of the Corporation depend primarily on
its level of net interest income, which is the difference between interest
earned on the Corporation'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 the Corporation'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. The Corporation's interest rate spread
increased from 3.68% to 4.54% while the Corporation's net interest margin
increased from 4.53% to 4.87%. The increase in the Corporation's interest rate
spread and margin reflects the Corporation's significant growth in loans and
securities which were funded at a positive spread with deposits and borrowings.
Average Balance Sheet and Yield/Rate Analysis. Net interest income is
affected by changes in both average interest rates and average volumes of
interest-earning assets and interest-bearing liabilities. The following table
presents for the periods indicated the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
(Dollars in Thousands) Average Average Average Average
Balance (1) Interest Yield/Rate Balance (1) Interest Yield/Rate
------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ................................. $ 78,797 $ 9,028 11.46% $26,421 $3,090 11.70%
Securities ............................ 36,510 3,015 8.26 22,696 1,637 7.21
Interest-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
======= ======
Effective interest differential (spread). 4.54% 3.68%
==== ====
Net interest margin ..................... 4.87% 4.53%
==== ====
</TABLE>
____________
(1) Average balances are calculated on a monthly basis.
14
<PAGE>
Rate/Volume Analysis. The following schedule presents the dollar amount
of changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between changes (a) related to outstanding balances and (b) due to the changes
in interest rates. Information is provided in each category with respect to: (i)
changes attributable to changes in volume (changes in volume multiplied by prior
rate); (ii) changes attributable to changes in rate (changes in rate multiplied
by prior volume); and (iii) the net change in rate/volume (change in rate
multiplied by change in volume). The changes attributable to the combined impact
of volume and rate have been allocated proportionately to the changes due to
volume and the changes due to rate.
<TABLE>
<CAPTION>
December 31, 1998 vs. December 31, 1997
----------------------------------------------------
(Dollars in Thousands) Increase or Decrease
Due to Change in
----------------------------------
Average Volume Average Rate Total Increase
(Decrease)
------------------ --------------- -----------------
<S> <C> <C> <C>
Variance in interest income on:
Interest-earning assets:
Loans ............................................. $ 6,000 $(62) $5,938
Securities ........................................ 1,113 265 1,378
Interest-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 last year. 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 the
Bank'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 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.
Management believes that this loan does not present a significant risk of loss
to the Bank on the basis of a current appraisal on the real estate securing the
loan, the loan-to-value ratio thereon, the applicable purchase discount and
specific reserve applied to such loan. See "Risk Factors-Purchase Discount" and
"Business of the Bank-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
the Bank's commercial loan originations and purchases continues.
15
<PAGE>
Non-Interest Income. Non-interest income increased by $445,000 to
$759,000, for the year ended December 31, 1998. The increase was primarily the
result of an increase in gain on sales of investment securities of $251,000, an
increase in other non-interest income of $155,000 and brokerage operating income
of $39,000 generated by the Corporation'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 additional
persons to assist in the Bank's retail operations, including personnel for a new
branch, persons to service the Bank's increased number of loans and staff to
assist with the Corporation's financial reporting and other compliance issues.
Occupancy expense increased $321,000 due to the costs associated with the
opening of the Bank's headquarters and branch in Center City, Philadelphia.
Advertising expense increased $115,000 as a result of opening the Bank'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 the Bank changing its name to BankPhiladelphia in July 1998. Data
processing expense increased $84,000 as a result of the increase in the number
of loans and deposit accounts, as well as the number of transactions processed.
Income Tax Expense. Income tax expense increased $940,000 to $957,000,
for the year ended December 31, 1998, compared to the same period in 1997. The
increase in income tax expense reflected the increase in earnings before income
taxes.
Asset and Liability Management. A principal objective of the Bank's
asset and liability management is to minimize the Bank's exposure to changes in
interest rates. The Bank's policy is to attempt to manage assets and liabilities
in such a way as to maximize net interest income through changing interest rate
environments. An interest rate sensitive asset or liability is one that, within
a defined time period, either matures or experiences an interest rate change in
line with general market rates. Interest rate sensitivity measures the relative
volatility of a bank's 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 December 31, 1998
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 the Bank'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.
16
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands) 12/31/98
1-90 Days 91-364 Days 1-5 Years Over 5 Years Balance
--------- ----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ...................... $6,955 $ 6,245 $ 35,108 $ 54,997 $103,305
Investments ........................... 22,004 -- 3,247 22,416 47,667
-------- ------- -------- -------- --------
Total Assets ....................... $ 28,959 $ 6,245 $ 38,355 $ 77,413 $150,972
======== ======= ======== ======== ========
Interest-bearing liabilities:
NOW accounts .......................... $ 846 $ -- $ -- $ -- $ 846
Money Market accounts ................. 2,345 -- -- -- 2,345
Passbook savings accounts ............. 5,281 -- -- -- 5,281
Certificates of deposit ............... 12,599 34,469 56,501 907 104,476
Borrowings ............................ -- 6,106 25,000 -- 31,106
Collateralized borrowings ............. -- -- 3,202 997 4,199
-------- ------- -------- -------- --------
Total interest-bearing liabilities.. $ 21,071 $ 40,575 $ 84,703 $ 1,904 $148,253
======== ======= ======== ======== ========
Periodic gap ............................. $7,888 $(34,330) $(46,348) $ 75,509 $ 2,719
======== ======= ======== ========= =======
Cumulative gap ........................... $ 7,888 $(26,442) $(72,790) $ 2,719 --
======== ======= ======== ========= =======
Ratio of gap to interest-earning assets .. 5% (22)% (31)% 50% --
Ratio of cumulative gap to interest-
earning assets ...................... 5% (17)% (48)% 2% --
</TABLE>
A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds interest rate sensitive assets. During a period of falling interest
rates, a positive gap would tend to adversely affect net interest income, while
a negative gap would tend to result in an increase in net interest income.
During a period of rising interest rates, a positive gap would tend to result in
an increase in net interest income while a negative gap would tend to affect net
interest income adversely.
If repricing of the Bank's assets and liabilities were equally flexible
and moved concurrently, the impact of an increase or decrease in interest rates
on net income would be minimal. At December 31, 1998, the Bank had a negative
cumulative one year gap, which suggests that net interest income may decrease
during periods of rising interest rates.
The method used to analyze interest rate sensitivity in the table above
has a number of limitations. Certain assets and liabilities may react
differently to changes in interest rates even though they reprice or mature in
the same or similar time periods. The interest rates on certain assets and
liabilities may change at different times than changes in market interest rates,
with some changing in advance of changes in market rates and some lagging behind
changes in market rates. Also, certain assets, such as adjustable-rate loans,
often have provisions which may limit changes in interest rates each time market
interest rates change and on a cumulative basis over the life of the loan.
Additionally, the actual prepayments and withdrawals experienced by the Bank in
the event of a change in interest rates may deviate significantly from those
assumed in calculating the data shown in the table.
In the event the Bank should experience a mismatch in its desired gap
ranges or an excessive decline in its market value of equity resulting from
changes in interest rates, it has a number of options which it could utilize to
remedy such mismatch. The Bank could restructure its investment portfolio
through sales or purchases of securities with more favorable repricing
attributes. It could also emphasize loan products with appropriate maturities or
repricing attributes, or it could attract deposits or obtain borrowings with
desired maturities.
Liquidity and Capital Resources
Liquidity. As the Bank is the primary operating subsidiary of the
Corporation, liquidity management is generally handled by the Bank'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
17
<PAGE>
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.
The Bank monitors its liquidity in accordance with guidelines established by the
Bank and applicable regulatory requirements. The Bank 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 the Bank has limited control.
The Bank 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.
The Bank'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 the Bank 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
December 31, 1998, the Bank had $30.0 million in borrowing capacity under a
collateralized line of credit with the FHLB (all of which had been drawn upon as
of such date) and an additional $2.0 million of borrowing capacity under lines
of credit maintained with several local financial institutions ($1.1 million of
which had been drawn upon as of such date).
At December 31, 1998, the Bank had outstanding commitments, including
unused lines of credit, of $1.1 million and letters of credit of $1.1 million.
Certificates of deposit which are scheduled to mature within one year totaled
$47.1 million at December 31, 1998, and the Corporation, on a consolidated
basis, had no borrowings scheduled to mature within one year. The Bank
anticipates that it will have sufficient funds available to meet its current
loan commitments.
Capital Resources. The Corporation and the Bank 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 the Corporation's financial
condition and results of operations. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and the Bank
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 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 table below) of Total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). As of December 31, 1998, the
Corporation and the Bank exceeded all capital adequacy requirements to which
they were subject.
18
<PAGE>
At December 31, 1998 and December 31, 1997, the Bank's actual and
required minimum capital ratios were as follows:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
(Dollars in Thousands) Actual Purposes Action Provisions
------------------------ ----------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ---------- ----------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) ......... $13,930 11.2% $9,987 8.0% 10.0%
$12,483
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
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) ......... 5,315 7.9 5,400 8.0 6,750 10.0
Tier 1 Capital
(to Risk Weighted Assets) ......... 4,747 7.0 2,700 4.0 4,050 6.0
Leverage ........................... 4,747 5.4 3,548 4.0 4,435 5.0
</TABLE>
At December 31, 1998 and December 31, 1997, the Corporation's actual and
required minimum capital ratios were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) Actual For Capital Adequacy Purposes
----------------------------- -----------------------------------
Amount Ratio Amount Ratio
------------- ------------- -------------- ------------------
<S> <C> <C> <C> <C>
As of 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
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) ...... 5,752 8.5 5,431 8.0
Tier 1 Capital
(to Risk Weighted Assets) ...... 5,184 7.6 2,715 4.0
Leverage ........................ 5,184 5.8 3,570 4.0
</TABLE>
Subsequent Event. On March 9, 1999, the Corporation issued $10,000,000
of 9.50% cumulative trust preferred securities through USA Capital Trust I, a
newly-formed, special purpose business trust. The Corporation contributed $6.0
million of the net proceeds to the Bank to increase the Bank's capital position.
The Bank expects to leverage the proceeds contributed to it by increasing its
origination and purchase of loans. An aggregate of $1.9 million of the net
proceeds was placed in a reserve account to be held for two years and thereafter
applied to payment of interest on the trust preferred securities. The remaining
net proceeds of $1.2 million were retained by the Corporation for general
corporate purposes, including the repayment of outstanding debt.
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 the Corporation's programs that are time sensitive
19
<PAGE>
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. Regarding the
Corporation, computer systems are used to perform financial calculations, track
deposits and loan payments, transfer funds and make direct deposits. The primary
processing of the Corporation's loan and deposit transactions is performed by
Intrieve Incorporated, a third-party data processing vendor. Computer software
and computer chips also are used to run security systems, communications
networks and other essential bank equipment. Because of its reliance on these
systems (including those used by its existing third-party data processing
vendor), the Corporation is following a comprehensive process to assure that
such systems are ready for the Year 2000 date change. To become Year 2000
compliant, the Corporation is following guidelines suggested by federal bank
regulatory agencies and the SEC. A description of each of the steps and the
status of the Corporation's efforts in completing the steps follows.
During 1997, the Corporation formed a Year 2000 Committee that has
investigated the Year 2000 problem and its potential impact on the Corporation's
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 the
Corporation in developing its approach to becoming Year 2000 compliant. The
initial phase of achieving Year 2000 compliance includes educating the
Corporation's employees and customers about Year 2000 issues. The Corporation
has completed this initial awareness and understanding phase.
The Bank has identified all potentially affected systems. This step has
included a review of all major information technology and non-information
technology systems to determine how Year 2000 issues affect them. In connection
with the foregoing, the Corporation has completed its assessment of which
systems and equipment are most prone to placing the Corporation at risk if they
are not Year 2000 compliant (i.e., mission critical systems).
The Year 2000 Committee has developed an inventory of its vendors, an
inventory of actions to be taken, identification of the team members responsible
for completion of each action, a completion timetable and a project tracking
methodology. Significant vendors have been requested to advise the Corporation
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 is expected to be completed by September 1999.
The Corporation's third party data processing servicer as well as
vendors who provide significant technology-related services have modified their
systems to become Year 2000 compliant. The Corporation has developed scripts
involving typical transactions to test the proper functioning of the modified
systems. It has also arranged for repair or replacement of equipment programs
affected by Year 2000 issues. Most of the testing and corrections have taken
place and all of the Corporation's 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 is expected to be
completed by June 30, 1999. The monitoring of certain vendors will continue into
1999.
The Bank is preparing a contingency plan for how the Corporation would
resume business if unanticipated problems arise from non-performance by vendors.
Such plans are expected to be completed in the first quarter of 1999.
The Year 2000 issues also affect certain of the Corporation's
customers, particularly in the areas of access to funds and additional
expenditures to achieve compliance. As of December 31, 1998, the Corporation had
contacted its commercial credit customers and borrowers regarding the customers'
awareness of the Year 2000 Issue. While no assurance can be given that its
customers will be Year 2000 compliant, management believes, based on
representations of such customers and a review of their operations (including
assessments of the borrowers' level of sophistication and data and record
keeping requirements), that the customers are either addressing the appropriate
issues to insure compliance or that they are not faced with material Year 2000
issues. In addition, in substantially all cases the credit extended to such
borrowers is collateralized by real estate which inherently minimizes the
Corporation's exposure in the event that such borrowers do experience problems
or delays becoming Year 2000 compliant.
The Corporation's efforts to become Year 2000 compliant are being
monitored by its federal banking regulators. Failure to be Year 2000 compliant
could subject the Corporation to formal supervisory or enforcement actions. The
Corporation has expensed $20,000 during the year ending December 31, 1998
relating to costs incurred as a result of the Corporation's Year 2000 Plan. The
Corporation anticipates incurring approximately $120,000 in additional costs
related to the implementation of the Corporation's Year 2000 plan. The
Corporation presently believes the Year 2000 issue will not pose significant
operating problems for the Corporation. However, if implementation and testing
plans are not completed in a satisfactory and timely manner by third parties on
which the Corporation is
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<PAGE>
dependent, or other unforeseen problems arise, the Year 2000 issue could
potentially have an adverse effect on the operations of the Corporation.
Inflation and Changing Prices
Management is aware of the impact of inflation on interest rates and
the corresponding impact on a bank's performance. The ability of a financial
institution to cope with inflation can only be determined by ongoing analysis
and monitoring of its asset and liability structure. The Corporation monitors
its asset and liability position with particular emphasis on the mix of
interest-sensitive assets and liabilities in order to reduce the effect of
inflation upon its performance.
Inflation can have a more direct impact on categories of non-interest
expenses such as salaries and wages, supplies, and employee benefit costs. These
expenses are very closely monitored by management for both the effects of
inflation and non-inflationary increases in such items as staffing levels, usage
of supplies and occupancy costs.
21
<PAGE>
BUSINESS
General
The Corporation is a Pennsylvania corporation headquartered in
Philadelphia, Pennsylvania and was organized in November 1995 in order to
facilitate the acquisition of People's Thrift Savings Bank, which changed its
name to "BankPhiladelphia" in July 1998. The Bank, which is the primary business
of the Corporation, has operated as a community-based financial institution for
over 110 years. The Bank was originally organized in 1887 as a mutual building
and loan association and converted to a Pennsylvania-chartered stock savings
bank in December 1990. Since the Corporation's acquisition of the Bank in
November 1995, the Corporation has experienced rapid growth which was fueled
primarily by the purchase of loan pools at a discount from a wide variety of
sources. Recently, these sources consist primarily of private sector sellers
and, to a lesser extent, governmental agencies. The Corporation has historically
funded its loan growth primarily through certificates of deposit and, to a
lesser extent, advances from the FHLB. The Corporation expects growth to
continue as the Bank leverages its deposit inflows into new loan originations
with continued purchases of pools of loans at a discount, consisting primarily
of performing loans secured by single-family residential, multi-family
residential and commercial properties. From December 31, 1995 through December
31, 1998, the Corporation's total assets, net loans receivable, deposits and
stockholders' equity have increased by $139.3 million, $95.1 million, $93.6
million and $8.9 million or 540%, 1,359%, 450% and 189%, respectively. At
December 31, 1998, the Corporation had total assets of $165.1 million, net loans
receivable of $102.1 million, total deposits of $114.4 million and total
stockholders' equity of $13.6 million.
Strategy
The Corporation's business strategy focuses on achieving attractive
returns consistent with the Corporation's risk management objectives. The
Corporation seeks to implement this strategy by: (i) aggressively growing the
Bank's loan portfolio through the acquisition of loan pools at a discount,
together with an increasing emphasis on loan originations; (ii) expanding the
Bank's retail franchise through new branch openings and pursuing strategic
acquisition opportunities; (iii) making a substantial investment in the Bank's
management, data processing systems and internal controls while at the same time
enhancing the Bank's policies, procedures and credit risk management functions
in order to support the Bank's ongoing growth strategy; (iv) reducing funding
costs through the attraction of lower cost transaction accounts; (v) maintaining
a community focus and capitalizing on recent consolidation within the Bank's
primary market area; and (vi) improving operating efficiency by reducing the
level of non-interest expense relative to interest-earning assets.
Market Area and Competition
The Bank's primary market area encompasses the greater Delaware Valley,
which is served by several major commercial banks such as First Union, PNC Bank
and Mellon Bank as well as a number of mid-sized commercial banks, savings banks
and thrifts such as Commerce Bank, Jefferson Bank, Royal Bank, Progress Bank,
Prime Bank and Crusader Savings Bank, and other small community banks and
thrifts.
The Bank encounters strong competition both in attracting deposits and
in originating loans. Its most direct competition for deposits comes from
financial institutions in its market area as well as brokerage operations and
mutual funds. The Bank's direct competition for originated loans comes from
small to mid-size financial institutions located in the greater Delaware Valley,
while its most direct competition for purchased loans comes from local and
national companies in the business of acquiring loans. The Bank expects
continued strong competition in the foreseeable future, including increased
competition from a number of growing mid-size regional banks in the Bank's
market area. The Bank competes for savings deposits by offering depositors a
higher level of personal service and a range of competitively priced financial
services. The Bank competes for loan originations and purchases by pricing its
products competitively and by providing superior customer service.
Based upon statistics provided by the Federal Reserve Bank of
Philadelphia, as of December 31, 1998, there were 116 different banking
institutions operating approximately 1,500 branch offices and having total
deposits of approximately $76.4 billion within the Philadelphia banking market
as identified by the Federal Reserve Bank of Philadelphia. Three of such
institutions had approximately 77% of deposits in the Philadelphia banking
market. As of December 31, 1998, the Bank had approximately .15% of deposits in
the Philadelphia banking market and .22% of deposits in the two counties in
which the Bank maintains branches.
22
<PAGE>
Lending Activities
Loan Portfolio. The principal components of the Bank's 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 December 31, 1998, the Bank's
total loans receivable, net amounted to $102.1 million, which represented 61.8%
of the Corporation's $165.1 million in total assets at that date.
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio as of the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
(Dollars in Thousands) 1998 1997
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Real estate(1)(2) ................. $102,076 98.8% $54,262 95.1%
Commercial business (3) ........... 986 1.0 1,091 1.9
Consumer(4) ....................... 243 0.2 1,694 3.0
-------- ----- ------- -----
Total loans receivable ............ 103,305 100.0% 57,047 100.0%
===== =====
Less
Loans in process ................ -- 260
Deferred loan fees .............. 116 217
Allowance for loan losses ....... 1,051 568
-------- -------
Net loans receivable .............. $102,138 $56,002
======== =======
</TABLE>
__________
(1) Consists of loans secured by single-family residential, multi-family
residential and commercial real estate.
(2) At December, 31, 1998, a majority of the Bank'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 the Bank's loan portfolio at December 31, 1998. 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, and fixed rate loans are
included in the period in which the final contractual repayment is due. The
table does not include the effect of future principal prepayments.
<TABLE>
<CAPTION>
Within 1 1-3 3-5 5-15 Beyond
(Dollars In Thousands) Year Years Years Years 15 years Total
---- ----- ----- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Real estate (1): ..................... $13,200 $11,837 $23,028 $19,143 $34,868 $102,076
Commercial business(2) ............... -- -- -- 986 -- 986
Consumer (3) ......................... -- -- 243 -- -- 243
------- ------- ------- ------- ------- --------
Total loans receivable .......... $13,200 $11,837 $23,271 $20,129 $34,868 $103,305
======= ======= ======= ======= ======= ========
</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. The lending activities of the
Bank are subject to the underwriting policies and loan origination and purchase
procedures established by the Board of Directors and management. Loan
23
<PAGE>
originations are derived from a number of sources, such as existing customers,
the Bank's loan officers, borrowers, builders, attorneys, walk-in customers and
correspondent lenders. Upon receiving a loan application, the Bank obtains a
credit report and employment verification to verify specific information
relating to the applicant's employment, income and credit standing. In the case
of a real estate loan, an appraiser approved by the Bank 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 the Bank's underwriting guidelines, the loan is approved by the Board of
Directors. The Bank has not delegated to any of its loan officers approval
authority and all loan originations are required to be approved by the Board of
Directors. For multi-family residential and commercial real estate loans, the
Bank requires that the borrower provide operating statements, pro forma cash
flow statements and, if applicable, rent rolls. In addition, the Bank reviews
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.
The Bank's internal originations consist primarily of multi-family
residential and commercial real estate loans. Although the Bank will and does
originate single-family residential and consumer loans, such originations have
historically been made as an accommodation to the Bank's customers and such
loans are generally not emphasized by the Bank. In addition, although commercial
business loans have also historically not been a major line of business for the
Bank, the Bank's current business focus is to increase its emphasis on small
business commercial loan originations.
Since December 1995, the Bank has been supplementing its originations
with purchases of loan pools at a discount. Such purchases have been the primary
factor in the Bank's substantial growth since 1995. Prior to 1997, the Bank
acquired loans at a discount, generally from the Federal Deposit Insurance
Corporation ("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 the Bank has 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 December 31, 1998, the Bank's net discounted loan portfolio amounted
to $51.7 million or 31.3% of the Corporation's total assets. These loans had a
face value of $57.0 million, reflecting a discount of $5.3 million or 9.3%. The
Bank's discounted loan portfolio is secured by residential and commercial real
estate properties. At December 31, 1998, management believes that approximately
59% and 41% of its discounted loan portfolio was secured by residential and
commercial properties, respectively.
Substantially all of the loans purchased by the Bank at a discount were
performing in accordance with their terms at the time of purchase. The Bank has
developed and maintains a proprietary model to determine what management
believes 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 the Corporation faces substantial competition. Although
many of the Corporation's competitors have access to greater capital and have
other advantages, the Corporation believes that it has a competitive advantage
relative to many of its competitors as a result of its experience in acquiring
and managing loans purchased at a discount and the strategic relationships and
contacts which it has developed in connection with these activities.
Prior to making an offer to purchase a portfolio of loans, the
Corporation conducts an extensive investigation and evaluation of the loans in
the portfolio. Evaluations of potential loans are conducted primarily by the
Corporation's senior management who specialize in the analysis of such loans.
The Corporation's 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 the Bank focuses on acquiring loans in the Mid-Atlantic
region, the Bank has acquired loans secured by real estate located in a number
of other states including Texas, Florida and California. The Bank believes that
the relatively broad geographic distribution of its discounted loan portfolio
reduces the risks associated with concentrating
24
<PAGE>
such loans in limited geographic areas and that due to its expertise and the
Bank's policies and procedures, the geographic diversity of its discounted loan
portfolio does not place greater burdens on the Bank's ability to administer
and, if applicable, service such loans.
One-to-Four Family Residential Mortgage Lending. The Bank has
historically not been an active originator of single-family residential loans
and such loans have generally been originated as an accommodation to the Bank's
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 the Bank's management as being advantageous to the
Bank because they generally have higher interest rates and origination and
servicing fees and generally lower loan-to-value ratios.
Substantially all of the Bank's 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 the Bank's purchased
single-family residential loans carry a variety of terms, management believes
the majority of such loans have loan-to-value ratios of 80% or below and carry
fixed rates of interest. The Bank generally attempts 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, the Bank
may on occasion purchase such loans where the seller retains the servicing
rights. At December 31, 1998, the Bank held in its portfolio approximately $22.0
million of loans which were being serviced by others.
The Bank currently offers fixed rate one-to-four family mortgage loans
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 the Bank's 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 the Bank's 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.
The Bank is 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, the Bank is 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, the Bank will generally only lend
up to 80% of the appraised value of the property securing a single-family
residential loan.
From time to time, the Bank will originate loans for the construction
of single-family residential properties. Such loans may be made to individuals
or builders. The Bank does not expect to emphasize construction lending in the
near term and at December 31, 1998, the Bank had no construction loans
outstanding.
Multi-family Residential Real Estate and Commercial Real Estate
Lending. The Bank's lending activities currently emphasize the origination and
acquisition of loans secured by existing multi-family residential and commercial
properties. As of December 31, 1998, over a majority of the Bank's real estate
loan portfolio consisted of loans secured by multi-family residential and
commercial properties. The Bank has generally targeted higher quality, smaller
multi-family residential and commercial real estate loans with principal
balances up to its legal lending limit.
The Bank's multi-family residential loans are secured by multi-family
properties of five units or more, while the Bank's commercial real estate loans
are secured primarily by industrial, warehouse and self-storage properties,
office buildings, office and industrial condominiums, retail space and strip
shopping centers and mixed-used commercial properties. At December 31, 1998,
substantially all of the properties securing the Bank's multi-family residential
and commercial real estate loans were located in the greater Delaware Valley.
The Bank 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. The
Bank 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%. As part of the criteria for underwriting
multi-family residential and commercial real estate loans, the Bank generally
requires a debt coverage ratio (the ratio of net cash from operations before
payment of debt service to debt service) of at least 1.1 to 1.0 on originated
loans and at least 1.0 to 1.0 on acquired loans. It is also the Bank's general
policy to 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.
25
<PAGE>
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 December 31, 1998, $1.1 million of the Bank's
commercial real estate loans were classified as non-performing. As of such date,
a significant portion of the Bank's non-performing commercial real estate loans
was comprised of one purchased loan.
Commercial Business Loans. The Bank originates commercial business
loans consisting primarily of lines of credit and term loans secured by
equipment and accounts receivable. At December 31, 1998, commercial business
loans totaled $986,000 or 1.0%, of the Bank's total loan portfolio. In addition,
all of the Bank's commercial business loans which are secured by real estate
have been classified as commercial real estate loans. Currently, the Bank is
placing greater emphasis on the origination of commercial business loans and, in
connection with the expansion of its community banking franchise, the Bank is
currently in the process of hiring additional commercial business lenders.
Commercial business loans generally have shorter terms and higher interest rates
than mortgage loans because of the type and nature of the collateral. At
December 31, 1998, none of the Bank's commercial business loans were classified
as non-performing.
Consumer Loans. The Bank originates consumer loans consisting
principally of loans secured by deposit accounts and marketable securities, and
home improvement, personal and automobile loans. At December 31, 1998, consumer
loans totaled $243,000, or 0.02%, of the Bank's total loan portfolio. The Bank
offers consumer loans as a service to its 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
December 31, 1998, none of the Bank's consumer loans were classified as
non-performing.
Loan Origination Fees and Other Income. In addition to interest earned
on loans, the Bank generally receives 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 December 31, 1998, the Bank had $116,000 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, the Bank also
receives 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 December 31, 1998, the Bank's
regulatory limit on loans to one borrower was $2.1 million and its five largest
loans or groups of loans to one borrower, including related entities, aggregated
$1.9 million, $1.9 million, $1.8 million, $1.8 million and $1.8 million. All
five of these loans or loan concentrations were secured by multi-family
residential or commercial real estate and were performing in accordance with
their terms at December 31, 1998.
Asset Quality
Collection Procedures. The Bank's collection procedures provide that
when a loan is 16 days past due, a computer generated late charge notice is sent
to the borrower requesting payment of the amount due under the loan, plus a late
charge. If such delinquency continues, on the first day of the next month, a
delinquent notice is mailed advising the borrower of the violation of the terms
of the loan. A representative of the Bank attempts to contact borrowers whose
loans are more than 30 days past due. If such attempts are unsuccessful, the
Bank will engage counsel to facilitate the collection process. A delinquent loan
report is presented to the Board of Directors on a regular basis for their
review. Historically, the Bank has 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. The
schedule is prepared by the Bank pursuant to discussions with the borrower and
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.
26
<PAGE>
Real estate acquired by the Bank 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. The Bank had no OREO as of December 31, 1997. At December 31, 1998,
OREO totaled $66,000 and consisted of one parcel of commercial real estate.
The following table sets forth information with respect to the Bank's
delinquent loans at December 31, 1998. At December 31, 1998, the Bank had no
delinquent consumer loans.
Balance Number
------- ------
(Dollars in Thousands)
Residential real estate (1):
Loans 30 to 89 days delinquent........... $1,272 28
Loans 90 or more days delinquent ........ 818 20
------ ---
Total .............................. 2,090 48
------ ---
Commercial real estate:
Loans 30 to 89 days delinquent........... 382 2
Loans 90 or more days delinquent......... 1,138 5
------ ---
Total.................................. 1,520 7
------ ---
Commercial business loans:..................
Loans 30 to 89 days delinquent........... -- --
Loans 90 or more days delinquent......... 58 1
------ ---
Total.................................. 58 1
------ ---
Total delinquent loans ..................... $3,668 56
====== ===
__________
(1) Consists solely of loans secured by single-family residential real estate.
The following table presents information on the Corporation's
non-performing assets at the dates indicated. The Corporation did not have any
troubled debt restructurings at any of the dates presented.
(Dollars in thousands) December 31,
------------------------
1998 1997
---------- ----------
Non-accruing loans:
Residential real estate(1) ....................... $ 666 $ 258
Commercial real estate ........................... 1,138(2) --
Commercial business .............................. -- 29
Consumer ......................................... -- --
------ -----
Total ........................................ 1,804 287
------ -----
Accruing loans greater than 90 days delinquent ...... 152 --
------ -----
Total non-performing loans(3) ................ 1,956 287
------ -----
Other real estate owned (4) ......................... 66 --
------ -----
Total non-performing assets ......................... $2,022 $ 287
====== =====
Total non-performing loans, net of discount, as
a percentage of total loans, net of discount ...... 1.89% 0.50%
====== =====
Total non-performing assets, net of discount, as
a percentage of total assets, net of discount ..... 1.22% 0.32%
====== =====
___________
(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. Management believes that this loan does not present a
significant risk of loss to the Bank 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 the Corporation's non-performing loans as of December 31, 1998
consisted of acquired loans.
(4) Consists of one parcel of commercial real estate.
27
<PAGE>
The interest income that would have been recorded during the year ended
December 31, 1998 if the Bank's non-accrual loans at the end of such period had
been current in accordance with their terms during such period was $140,000.
Classification of Assets. Federal regulations provide for the
classification of delinquent or non-homogeneous loans and other assets such as
debt and equity securities as "special mention," "substandard," "doubtful," or
"loss" assets. In analyzing loans for purchase as well as for purposes of the
Bank's loan classification, management has 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 the Bank 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 the Bank 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 the Bank's
special mention and classified assets at December 31, 1998:
(Dollars in thousands)
Special mention................................... $ 422
Substandard....................................... 1,500
Doubtful ......................................... 211
Loss.............................................. --
---------
Total special mention and classified assets....... 2,133
Other real estate owned........................... 66
---------
Total special mention and classified assets,
including other real estate owned............... $2,199
=========
Allowance for Loan Losses. Management's policy is to provide for
estimated losses on the Bank's loan portfolio based on management's evaluation
of the probable losses that may be incurred. The Bank's method of determining
provisions for loan losses is based partially on the Department'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 Department and FDIC
regulations, subject to certain limitations.
28
<PAGE>
The Bank 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 the Bank maintains its allowance for loan
losses at a level that it considers to be adequate to provide for the inherent
risk of loss in the loan portfolio, there can be no assurance that future losses
will not exceed estimated amounts or that additional provisions for loan losses
will not be required in future periods. In addition, the Bank's determination as
to the amount of its allowance for loan losses is subject to review by the
Department 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 the Bank's allowance for
loan losses at or for the specified periods.
<TABLE>
<CAPTION>
At or for the Year
Ended December 31,
--------------------------------
(Dollars in Thousands) 1998 1997
---- ----
<S> <C> <C>
Total loans outstanding................................................ $103,305 $57,047
Average loans outstanding.............................................. 78,797 26,421
Allowance balance (at beginning of period)............................. 568 182
Provision for loan losses.............................................. 510 415
Charge offs, net of recoveries......................................... 27 29
-------- -------
Allowance balance (at end of period)................................... $ 1,051 $ 568
======== =======
Allowance for loan losses as a percent of
total loans, net of discount, at end of period.................... 1.02% 1.01%
======== =======
Allowance for loan losses as a percent of total
non-performing loans, net of discount, at end of period........ 53.72% 197.96%
======== =======
Allowance for loan losses and purchase discount
as a percentage of total loans..................................... 5.85% 8.88%
======== =======
Net loans charged off as a percent of average loans outstanding........ 0.03% 0.11%
======== =======
</TABLE>
The following tables set forth the Bank's 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 December 31, 1998 At December 31, 1997
---------------------------------------- -------------------------------------
Percentage of Percentage of Percentage Percentage
Allowance Loans in Each of Allowance of Loans in
(Dollars in Thousands) to Total Category to to Total Each Category
Amount Allowance Total Loans Amount Allowance to Total Loans
------ ------------- ------------- ------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for loan
losses at end of period applicable to:
Real estate ........................... $1,037 98.8% 98.8% $528 93.0% 95.1%
Commercial business ................... 11 1.0 1.0 30 5.3 1.9
Consumer .............................. 3 0.3 0.2 10 1.7 3.0
------ ----- ----- ---- ----- -----
Total ................................. $1,051 100.0% 100.0% $568 100.0% 100.0%
====== ===== ===== ==== ===== =====
</TABLE>
Investment Activities
The Corporation's securities portfolio is managed by the 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 December 31, 1998, the Corporation's securities portfolio amounted
to $44.1 million or 26.7% of the Corporation's total assets. The Corporation's
investment portfolio is comprised of trust preferred securities, mortgage-backed
securities, U.S. Government agency securities, corporate and municipal
obligations and equity securities. At December 31, 1998, the Corporation's trust
preferred securities amounted to $24.9 million, mortgage-backed securities
amounted to $8.3 million, equity securities (consisting of common stock of a
local financial institution, a self-service
29
<PAGE>
photocopy business, stock in the Bank's computer vendor and a financial
institution managed fund) equaled $1.9 million, financial institution debt
obligations totaled $4.6 million, corporate and municipal obligations amounted
to $3.2 million, and U.S. Government agency securities amounted to $1.2 million.
Securities are classified by management as either available for sale or
held to maturity based upon the Corporation's intent and ability to hold such
securities. Securities available for sale include debt and equity securities
that are held for an indefinite period of time and are not intended to be held
to maturity. Securities available for sale include securities that management
intends to use as part of its 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 the Corporation's earnings. Investment securities and mortgage-backed
securities, other than those designated as available for sale, are comprised of
debt securities that the Bank has 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.
The Bank is 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. The Bank has maintained a portfolio of liquid
assets that exceeds regulatory requirements. The Bank's 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 the
Bank's investment portfolio. Based on the parameters of the Bank's Investment
Policy, the Bank endeavors to diversify its 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. All investment decisions are
made by the Investment Officers of the Corporation in accordance with the
Investment Policy and Asset Liability Management Committee guidelines.
The Corporation's securities portfolio composition is designed to
provide a liquid portfolio yet maximize yield on a risk adjusted basis. The
process by which management decides to acquire debt instruments, trust preferred
securities and corporate and municipal obligations is similar to that of
underwriting a loan. Management evaluates 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 9.21% as of
December 31, 1998. 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 the
Corporation to reflect a charge to its equity.
The Bank's 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 the Bank's 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 of the
Bank. 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. At December 31, 1998, $1.8 million, or 21.7%, of the Bank's
total mortgage-backed securities portfolio of $8.3 million had adjustable
interest rates. Management is seeking to increase its portfolio of
adjustable-rate mortgage-backed securities. The Bank's mortgage-backed
securities are primarily pass-through securities, which provide the Bank 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.
30
<PAGE>
The following tables present the book values and estimated market
values at December 31, 1998 and December 31, 1997, for each major category of
the Corporation's investment securities:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------------------
(Dollars in Thousands) Amortized Gross Unrealized Gross Unrealized Approximate 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 (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
======= ==== ===== =======
December 31, 1997
-----------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Approximate Fair
(Dollars in Thousands) Cost Gains Losses Value
-------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
Available-for-Sale:
U.S. Government agency ............ $1,243 $ 16 $ -- $ 1,259
securities
Trust preferred securities ........ 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, the Bank 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 the Bank's computer vendor and a financial institution managed
fund. At December 31, 1997, trust preferred securities held to maturity
totaled $500,000. The remaining $1.9 million in the held to maturity
category at such date consisted of debt instruments of financial
institutions on the East Coast of the United States. The Corporation does
not hold more than $2.0 million of trust preferred securities of any one
issuer.
31
<PAGE>
The following table shows the contractual maturity of the Corporation's
investment securities portfolio at December 31, 1998:
<TABLE>
<CAPTION>
(Dollars in Thousands) Available-for-Sale Held-to-Maturity
--------------------------------------------------------------------------
Weighted Weighted
Amortized Approximate Average Amortized Approximate Average
Cost Fair Value Yield Cost Fair Value Yield
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 5,724 6.59
Equity securities ....................... 1,892 1,833 -- -- -- --
------- ------- ------- -------
$28,894 $28,389 $15,755 $15,951
======= ======= ======= =======
</TABLE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from the scheduled payments as well as prepayment of loans, the maturity of
investment securities and the sale of assets available for sale. Scheduled loan
principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions. Borrowings may be used to
compensate for reductions in the availability of funds from other sources or on
a longer term basis for general business purposes.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's 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. 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 $114.4
million at December 31, 1998. The largest area of increase occurred in
certificates of deposit as the Bank continued to rely primarily on non-retail
certificates of deposits. At December 31, 1998, the Bank had $104.5 million of
certificates of deposit, $34.7 million of which were in excess of $100,000, of
which $10.1 million mature within twelve months.
The Bank regularly evaluates its internal cost of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity, and executes rate changes when deemed appropriate. The
Bank will open a new branch office during the second quarter of 1999 in
Montgomery County, Pennsylvania. Management anticipates that the mix of deposits
will shift towards transaction accounts as the Bank expands its commercial line
of business. The Bank anticipates that the growth in deposits would be
accomplished through aggressive marketing of its retail branch network in
surrounding communities, competitive pricing of retail products and the ability
to provide loan and deposit products to consumers and commercial businesses in
its market area. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."
32
<PAGE>
The following table sets forth the balance of each deposit type and the
weighted average rate paid on each deposit type of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------
1998 1997
---- ----
(Dollars in Thousands) Percent of Weighted Percent of Weighted
Total Average Total Average
Balance Deposits Yield Balance Deposits Yield
------- -------- ------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand ............ $ 1,439 1.26% -- $ 257 0.37% --
NOW accounts .......................... 846 .73 2.31% 688 0.98 2.27
Savings and Passbook accounts ......... 5,281 4.62 4.40 2,019 2.86 2.49
Money market deposit accounts ......... 2,345 2.05 3.66 4,802 6.81 3.74
Certificates of deposit ............... 104,476 91.34 5.73 62,708 88.98 6.06
-------- ------ ------- -----
Total deposits ........................ $114,387 100.00% 5.53% $70,474 100.0% 5.72%
======== ====== ======= =====
</TABLE>
At December 31, 1998, the Bank's certificates of deposit had the following
stated maturities:
Amount
Maturity Period (In Thousands)
Within 12 months.................. $ 47,067
Within 13 to 36 months............ 43,168
Beyond 36 months.................. 14,241
--------
Total............................. $104,476
========
The following table presents, by various rate categories, the amount of
certificates of deposit outstanding at December 31, 1998.
Certificate Rates: Outstanding Amount
(In Thousands)
0 to 3.99%......................... $ 1,584
4.00% to 5.99%.................... 58,356
6.00% to 7.99%..................... 44,534
Over 8.00%......................... 2
--------
Total.............................. $104,476
========
The following table summarizes the maturity composition of certificates of
deposit with balances of $100,000 or more at December31, 1998:
(Dollars in Thousands) December 31, 1998
-----------------------------------
Balance %
------------ -------------
Three months or less.............. $ 3,227 9.30%
Over three months to six months .. 1,130 3.26
Over six months to twelve months . 5,757 16.59
Over twelve months................ 24,590 70.85
------- ------
$34,704 100.00%
======= ======
Borrowings. If the need arises, the Bank may rely upon advances from the
FHLB and the Federal Reserve Board ("FRB") discount window to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. Advances
from the FHLB typically are collateralized by the Bank's stock in the FHLB and a
portion of the Bank's first mortgage loans. At December 31, 1998, the Bank had
$30.0 million of FHLB advances available, which amount had been fully drawn as
of such date.
33
<PAGE>
The FHLB functions as a central reserve bank providing credit for the
Bank and other member savings and financial institutions. As a member, the Bank
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 December 31, 1998, the Bank 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 December 31, 1998.
The following table sets forth certain information regarding the Bank's
borrowed funds, which consist solely of FHLB advances, at or for the years ended
on the dates indicated:
At or for the
Year Ended December 31,
-----------------------
(Dollars in Thousands) 1998 1997
---- ----
FHLB advances:
Maximum month-end balance............... $31,000 $12,700
Balance at end of period............... 30,000 9,000
Average balance........................ 22,482 7,000
Weighted average interest rate on:
Balance at end of period............... 5.30% 5.87%
Average balance for period............. 5.29% 5.87%
The Corporation also 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%.
USACapital
USACapital, Inc. (USACapital"), a registered broker-dealer with the
National Association of Securities Dealers, is a Pennsylvania corporation wholly
owned by the Corporation. A subsidiary of the Corporation acquired USACapital in
April 1997 for a purchase price of $75,000, paid in shares of the Corporation's
common stock. USACapital is engaged in the business of trading stocks, bonds,
annuities, and other investment related products to the general public. The
operations of USACapital presently represent less than 10% of the Corporation's
consolidated net income. However, during the year ended December 31, 1998,
USACapital increased its staff from two persons to 18 persons, which management
believes 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 the Corporation's corporate office. USACapital generated pre-tax
earnings of $141,000 for the year ended December 31, 1998 and $102,000 from the
Corporation's acquisition of USACapital in April 1997 through December 31, 1997.
Personnel
As of December 31, 1998, the Corporation, the Bank and USACapital have
a total of 38 full-time and 2 part-time employees.
Description of Property
On December 23, 1997, the Bank purchased a building at 1535 Locust
Street in Center City Philadelphia, formerly owned and operated by PNC Bank,
which serves as its corporate offices and flagship retail operation. This new
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 the
Corporation and USACapital, in addition to selected members of the Bank staff.
34
<PAGE>
Pursuant to a lease dated May 11, 1989, the Bank leases its building
located at 803 East Germantown Pike in Norristown, Pennsylvania, which contains
a retail branch as well as administrative offices. The lease is for an initial
period of 10 years, with an option to renew or extend the lease for an
additional 10 years. The annual lease payments total $37,400. The Bank intends
to renew the lease upon expiration.
Pursuant to a lease dated July 27, 1998, the Bank leases a building at
18 East Wynnewood Road, Wynnewood, Pennsylvania. The Corporation will open a
retail branch at this location during the second quarter of 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.
The Bank also leases 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 and the eBank, and the Bank will receive deposits in the Wynnewood branch
when the branch is opened. At December 31, 1998, the Bank's branches had the
following deposits: Locust Street, $53.0 million; Norristown, $54.8 million; and
eBank, $6.3 million.
The Bank may acquire or lease other real estate in the future for
purposes of opening new branch locations. In addition, the Bank may acquire or
lease real estate parcels for purposes of establishing mini-branch locations,
which would likely include state of the art automated teller facilities that
would involve minimal staffing requirements.
Legal Proceedings
The Corporation is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of the Bank's
business. Such routine legal proceedings, in the aggregate, are believed by
management to be immaterial to the Corporation's and the Bank's financial
condition and results of operation.
REGULATION OF THE CORPORATION AND THE BANK
The Corporation and the Bank 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. It cannot be predicted whether any such legislation will
be adopted or how such legislation, if adopted, would affect the business of the
Bank or the Corporation. As a consequence of the extensive regulation of
commercial banking activities and financial institutions in the United States,
the business and activities of the Bank 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 the Corporation or the Bank, is qualified in its
entirety by reference to the particular statutory or regulatory provisions.
The Corporation
General. The Corporation is a registered bank holding company pursuant
to the Bank Holding Company Act of 1956, as amended (the "BHCA"), and is subject
to regulation and supervision by the Federal Reserve Board ("FRB") and the
Pennsylvania Banking Department (the "Department"). The Corporation is required
to file annually a report of its operations with, and is subject to examination
by, the FRB and the Department.
BHCA Activities and Other Limitations. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the FRB. The BHCA also generally
prohibits a bank holding company from acquiring any bank located outside of the
state in which the existing bank subsidiaries of the bank holding company are
located unless specifically authorized by applicable state law. No approval
under the BHCA is required, however, for a bank holding company already owning
or controlling 50% of the voting shares of a bank to acquire additional shares
of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the FRB is authorized to approve the
ownership of shares by a bank holding company in any company, the activities of
which the FRB 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 FRB is required
35
<PAGE>
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 FRB has by regulation determined that certain activities are
closely related to banking within the meaning of the BHCA. 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. The FRB also has
determined that certain other activities, including real estate brokerage and
syndication, land development, property management and underwriting of life
insurance not related to credit transactions, are not closely related to banking
and a proper incident thereto.
Limitations on Transactions with Affiliates. 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 the Corporation) and any
companies which are controlled by such parent holding company are affiliates of
the bank. Generally, Sections 23A and 23B (i) limit the extent to which the Bank
or its subsidiaries may engage in "covered transactions" with any one affiliate
to an amount equal to 10% of such bank's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the Bank or subsidiary as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar transactions. In addition to the restrictions
imposed by Sections 23A and 23B, no bank may (i) loan or otherwise extend credit
to an affiliate, except for any affiliate which engages only in activities which
are permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the Bank.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
shareholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% shareholder of a bank, and certain affiliated interests of
either, may not exceed, together with all other outstanding loans to such person
and affiliated interests, the Bank's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
shareholders be made on terms substantially the same as offered in comparable
transactions to other persons unless the loans are made pursuant to a benefit or
compensation program that (i) is widely available to employees of the
institution and (ii) does not give preference to any director, executive officer
or principal shareholder, or certain affiliated interests of either, over other
employees of the Bank. Section 22(h) also requires prior board approval for
certain loans. In addition, the aggregate amount of extensions of credit by a
bank to all insiders cannot exceed the institution's unimpaired capital and
surplus. Furthermore, Section 22(g) places additional restrictions on loans to
executive officers.
Capital Requirements. The FRB 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
BHCA. The FRB 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 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. Assets are adjusted
under the risk-based capital guidelines to take into account different risk
characteristics, with the categories ranging 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.
36
<PAGE>
In addition to the risk-based capital requirements, the FRB requires bank
holding companies to maintain a minimum leverage capital ratio of Tier 1 capital
to average total assets of 3.0%. 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 FRB
determines should be deducted from Tier 1 capital. The FRB has announced that
the 3.0% Tier 1 leverage capital ratio requirement is the minimum for the
top-rated bank holding companies without any supervisory, financial or
operational weaknesses or deficiencies or those which are not experiencing or
anticipating significant growth. Other bank holding companies will be expected
to maintain Tier 1 leverage capital ratios of at least 4.0% or more, depending
on their overall condition.
As of December 31, 1998, the Corporation was in compliance with the
above-described FRB regulatory capital requirements.
Financial Support of Affiliated Institutions. Under FRB policy, the
Corporation will be expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances when it might
not do so absent such policy. The legality and precise scope of this policy is
unclear, however, in light of recent judicial precedent.
The Bank
General. The Bank is incorporated under the Pennsylvania Banking Code
and is subject to extensive regulation and examination by the Department and by
the FDIC. The federal and state laws and regulations which are applicable to
banks regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the availability of
deposited funds and the nature and amount of and collateral for certain loans.
There are periodic examinations by the Department and the FDIC to test the
Bank'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 Department, the FDIC or the Congress could have a material adverse impact on
the Corporation, the Bank and their operations.
FDIC Assessments. The deposits of the Bank are insured by the Bank
Insurance Fund (the "BIF") of the FDIC, up to applicable limits, and are subject
to deposit premium assessments by the BIF. Under the FDIC's risk-based insurance
system, BIF-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 the Bank, 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 during the
hearing process for the permanent termination of insurance, if 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. Management is aware of no circumstances which would
result in termination of the Bank'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 the Bank, will not be members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the FRB regarding
bank holding companies, as described above.
The FDIC's capital regulations establish a minimum 3.0% 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 4.0% to 5.0% 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. Leverage 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.
37
<PAGE>
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings 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 the 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 3.0% 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 December
31, 1998, the Bank met each of its capital requirements.
In August 1995, the FDIC, along with the other federal banking
agencies, adopted a regulation providing that the agencies will take account of
the exposure of a bank's capital and economic value to changes in interest rate
risk in assessing a bank's capital adequacy. According to the agencies,
applicable considerations include the quality of the bank's interest rate risk
management process, the overall financial condition of the bank and the level of
other risks at the bank for which capital is needed. Institutions with
significant interest rate risk may be required to hold additional capital. The
agencies also have issued a joint policy statement providing guidance on
interest rate risk management, including a discussion of the critical factors
affecting the agencies' evaluation of interest rate risk in connection with
capital adequacy.
The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department 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 December 31, 1998, the Bank exceeded
the Department's capital guidelines.
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. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) 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, (iii) 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 (iv) 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 the
Bank and its affairs. The Pennsylvania Banking Code delegates extensive
rulemaking power and administrative discretion to the Department 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 Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct individual examinations. The
Department 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 Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
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<PAGE>
Restrictions on Payment of Dividends. Under the FDIA, insured
depository institutions such as the Bank 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 FDIA, 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 the Bank 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). 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 the Bank to pay dividends. In addition, the Bank's regulators have
authority to prohibit the Bank or the Corporation from engaging in an unsafe or
unsound practice in conducting their business. The payment of dividends,
depending upon the financial condition of the Bank or the Corporation, could be
deemed to constitute such an unsafe or unsound practice.
Regulatory Enforcement Authority. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities.
39
<PAGE>
MANAGEMENT OF THE CORPORATION
Directors and Executive Officers
Certain information concerning the present directors and executive
officers of the Corporation is set forth below. The term of office for each
director is one year or until the date of the Corporation's next meeting of
shareholders, at which time elections are held for each seat on the Board of
Directors.
<TABLE>
<CAPTION>
Name Position with Corporation Age Director Since
- ---- ------------------------- --- --------------
<S> <C> <C> <C>
George M. Laughlin ............ Chairman 78 1995
Zeev Shenkman ................. Vice-Chairman 46 1998
Kenneth L. Tepper ............. President and Chief Executive Officer/Director 36 1995
Clarence L. Rader ............. Director/Chairman of the Bank 67 1995
Jeffrey A. D'Ambrosio ......... Director 43 1995
George C. Fogwell, III ........ Director 51 1995
John A. Gambone ............... Director 59 1995
Carol J. Kauffman ............. Director 51 1997
Wayne O'Leevy ................. Director 54 1996
Brian M. Hartline ............. Chief Financial Officer 34 N/A
</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 is the founder/owner of Best Auto Tags and Abat's Auto Tags, one of
the first companies to originate 24-hour licensed messenger service in
Pennsylvania. Mr. Laughlin owns and manages a total of twenty-four branch
locations throughout the Commonwealth of Pennsylvania. He is a veteran of the
United States Navy, having served on the aircraft carrier U.S.S. Independence in
every major South Pacific campaign of World War II.
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 a Director and President and Chief Executive
Officer of the Corporation and of the Bank since 1995. Prior thereto, Mr. Tepper
served as an agent of the FDIC assigned to the RTC from 1990 through 1991.
Thereafter, Mr. Tepper was Director of Merchant Banking at Tucker Federal SLA,
and from 1994 through 1995 was Managing Director of Merchant*BancShares, Inc.,
an investment banking firm specializing in community bank mergers and loan
portfolio acquisitions. He was Finance Chairman of the Pennsylvania Republican
State Committee during the 1994 gubernatorial campaign, and a principal of the
1995 Congressional Medal of Honor Society Convention. He serves on the Board of
Directors of TRM Corporation, a public company in the self-service photocopy
business in which the Corporation maintains a $500,000 investment in debt
securities.
Clarence L. Rader has served as Chairman of the Bank since November
1995. Prior thereto, he served as President and Chief Executive Officer of the
Bank from 1986 to 1995. Mr. Rader was President of the Norristown School Board,
and Chairman of the Central Montgomery Chamber of Commerce from 1991-1992. He is
a senior appraiser with the American Society of Appraisers.
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 a Senior Captain with Delta Airlines, where
he also serves as a flight instructor.
40
<PAGE>
John A. Gambone is the Chairman, President and Chief Executive Officer
of Gambone Bros. Organization, Inc., a real estate development concern founded
in 1958 and headquartered in Fairview Village, Pennsylvania. He is a member of
the Pennsylvania Horse Breeders Association as well as numerous professional
organizations related to the building industry.
Carol J. Kauffman has served as the Director of Business Development
for Lawyers' Travel Service Division of the World Travel Specialists Group since
1996. Prior to Lawyers' Travel, Ms. Kauffman was Senior Account Executive,
Account Services for Reimel Carter Public Relations firm after successfully
selling the firm she founded over ten years ago, Lawlor Jackson, Inc.
Wayne O. Leevy is the Managing Partner of Mitchell & Titus, LLP, a
public accounting firm. Prior to Mitchell & Titus, Mr. Leevy was Managing
Officer of Leevy, Redcross and Co., which merged with Mitchell & Titus in 1990.
Brian M. Hartline is currently Chief Financial Officer of the
Corporation and Chief Operating Officer of the Bank, where he has been employed
since December 1998. Prior to joining the Corporation, 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.
Compensation of the Board of Directors
During 1998, members of the Boards of Directors of the Corporation and
the Bank were compensated at the following rates for their services: $200 per
meeting of the Board of Directors and $100 per meeting of any committee of the
Board of Directors.
During 1998, an aggregate of $58,880 was paid to directors for their
services. No director received more than $14,200.
Executive Compensation
The following table sets forth compensation paid in fiscal 1998 for
services performed in all capacities for the Corporation and the Bank with
respect to the Chief Executive Officer. With the exception of Mr. Tepper, no
executive officer of the Corporation earned over $100,000 in fiscal year 1998.
Long Term Compensation
No. of Securities
Name and Principal Position Fiscal Year Annual Salary Underlying Options
- --------------------------- ----------- ------------- ----------------------
Kenneth L. Tepper, President
and CEO ................... 1998 $245,000(1) --
1997 $132,000(1) --
1996 $132,000(1) 100,000
__________
(1) In addition to a base salary of $120,000, Mr. Tepper received $12,000 in
additional compensation which was used to purchase a deferred compensation
life insurance policy. Mr. Tepper's salary was increased to $245,000
effective March 1, 1998. In addition, Mr. Tepper has received from the
Corporation payments of $150,000 per year for each of 1998 and 1999 and may
receive a third payment in January 2000 in connection with his agreement to
cap the non-dilutive feature of the Class B common stock. See "-Certain
Relationships and Related Transactions."
41
<PAGE>
Stock Options
The following table sets forth certain information concerning options
to purchase Common Stock of the Corporation made to the executive officer named
in the Summary Compensation Table in the fiscal year ended December 31, 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------------------------
Number of % of Total Options
Securities Underlying Granted to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price Date
- ---- --------------------- -------------------- -------- ----------
<S> <C> <C> <C> <C>
Kenneth L. Tepper .............. 26,600(1) 17.5% $10.00/sh 2/11/03
Kenneth L. Tepper .............. 13,300(1) 8.75% $15.04/sh 2/11/03
</TABLE>
(1) All information set forth gives effect to the 33% stock dividend which the
Corporation paid on July 18, 1997 and August 17, 1998.
The following table sets forth certain information concerning the
exercise in the fiscal year ended December 31, 1998 of options to purchase
Common Stock of the Company by the executive officer named in the Summary
Compensation Table and the unexercised options to purchase Common Stock of the
Company held by Mr. Tepper at December 31, 1998. Year-end values are based upon
the closing market price of a share of the Corporation's Common Stock on
December 31, 1998 of $9.00.
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
FY-End(#) at FY-End ($)(1)
-------------------------- --------------------------
Shares
Acquired on Value
Name Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth L. Tepper .... 8,800 $24,595 179,980 27,930 $562,834 0
</TABLE>
__________
(1) All information set forth gives effect to the 33% stock dividend which the
Corporation paid on July 18, 1997 and August 17, 1998. Values are calculated
by subtracting the exercise price from the fair market value as of the
exercise date or fiscal year end, as appropriate. Values are reported before
any taxes associated with exercise or subsequent sale of the underlying
stock.
Employment Agreements
On November 30, 1995, the Corporation 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. Pursuant to the stock dividends declared and issued in July 1997 and
August 1998, Mr. Tepper's options were adjusted to 176,890 and the exercise
price was adjusted to $5.65 per share. The agreement provides that in the event
the Corporation discharges Mr. Tepper other than for cause (as defined in the
employment agreement), disability or incapacity, or Mr. Tepper terminates his
employment with the Corporation upon the occurrence of certain specified events
or occurrences, including a change of control (as defined in employment
agreement) of the Corporation, Mr. Tepper will receive severance payments equal
to his accrued but unpaid base compensation and incentive compensation plus a
lump sum equal to no more than 2.99 times the average of his total annual
compensation over the previous five years. Effective
42
<PAGE>
March 1, 1998, the Corporation extended Mr. Tepper's agreement through February
12, 2001, at an annual base salary of $245,000 and an annual cash bonus and
grants of stock options as may be determined by the Board of Directors. Pursuant
to the agreement, Mr. Tepper was granted options to purchase 26,600 shares of
common stock at $10.00 per share, and options to purchase 13,300 shares of
common stock at $15.04 per share. Of the 26,600 options, 11,970 vested on August
13, 1998, 11,970 vested on February 13, 1999, and 2,660 will vest on February
13, 2000. Of the 13,300 options granted, 5,187 will vest on February 13, 2000,
6,650 will vest on February 13, 2001 and 1,463 will vest on February 13, 2002.
On November 30, 1998, the Corporation and the Bank entered into a
three-year employment agreement with Mr. Hartline pursuant to which Mr. Hartline
serves as Chief Financial Officer of the Corporation and Chief Operating Officer
of the Bank. Mr. Hartline receives an annual base salary of $160,000 and will
receive incentive compensation in the amount of $40,000 if the Corporation earns
in excess of $1.00 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 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 using the following vesting schedule: 10,000 in year
one, 5,000 in year two and 5,000 in year three. The exercise price of the
options will be the last reported sale price on the Nasdaq SmallCap Market of
the Corporation's common stock for the business day preceding the date of grant.
If Mr. Hartline's employment is terminated by the Corporation 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 (as defined in the
Corporation's Stock Option Plan), 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.
Indemnification of Officers and Directors
The Corporation's charter and by-laws provide that the Corporation will
indemnify every person who is or was a director or executive officer of the
Corporation to the fullest extent permitted by law. This indemnification applies
to all expenses and liabilities reasonably incurred in connection with any
proceeding to which the director or executor officer may become involved by
reason of being or having been a director or executive officer of the
Corporation. Pennsylvania law, under which the Corporation is incorporated,
allows the Corporation to indemnify its directors and officers if the
indemnified person acted in good faith and in a manner such person reasonably
believed to be in, or not opposed to, the best interest of the Corporation and,
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful. The Corporation maintains a director and officer liability
insurance policy covering each of the Corporation's directors and executive
officers.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information concerning the beneficial
ownership of the Corporation's shares of common stock as of March 31, 1999, by
each director, the Chief Executive Officer, all directors and officers as a
group, and each person known to the Corporation to beneficially own 5% or more
of the Corporation's outstanding Class A common stock. The information in the
table concerning persons known by the Corporation to own beneficially 5% or more
of the Corporation's common stock is derived, without independent investigation
on the part of the Corporation, from the most recent filings made by such
persons with the Commission on Schedule 13D and Schedule 13G pursuant to Rule
13d-3 of the Exchange Act. Mr. Tepper, the Corporation's President and Chief
Executive Officer, owns all 10,000 shares of the issued and outstanding Class B
common stock. Except as otherwise noted, the address for each such person is
1535 Locust Street, Philadelphia, Pennsylvania 19102. All share information set
forth gives effect to 33% stock dividends which the Corporation paid on July 18,
1997 and August 17, 1998.
43
<PAGE>
<TABLE>
<CAPTION>
Shares of Class A Percentage of Shares of
Common Stock Class A Common Stock
Name of Beneficial Owner Beneficially Owned (1) Beneficially Owned (1)
- ------------------------ ---------------------- ----------------------
<S> <C> <C>
George M. Laughlin .................................... 62,043(2)(3) 3.1
Zeev Shenkman ......................................... 55,700(4) 2.7
Clarence L. Rader ..................................... 17,689(2) *
Kenneth L. Tepper ..................................... 271,322(5) 12.3
Jeffrey A. D'Ambrosio ................................. 53,067(2) 2.6
George C. Fogwell, III ................................ 44,753(2)(6) 2.2
John A. Gambone ....................................... 56,401(2)(7) 2.8
Carol J. Kauffman ..................................... 61,337(8)(9) 3.0
Wayne O. Leevy ........................................ 10,613(2) *
Sandler O'Neill Asset Management LLC (10) ............. 143,060 7.1
Investors of America Limited (11) ..................... 115,949 5.8
Financial Stocks LP (12) .............................. 127,525 6.4
Rainbow Partners LP (13) .............................. 136,410 6.8
------- ----
Directors and Executive Officers ...................... 642,925 27.5%
(9 persons) ======= ====
</TABLE>
___________
* Less than one percent (1%)
(1) Based upon 2,007,392 shares of common stock outstanding as of March 24,
1999 (which does not include the shares of Class B common stock which are
convertible into shares of Class A common stock). Calculated in accordance
with Rule 13d-3 promulgated under the Exchange Act. Also includes shares
owned by (i) a spouse, minor children or by relatives sharing the same
home, (ii) entities owned or controlled by the named person and (iii) other
persons if the named person has the right to acquire such shares within 60
days by the exercise of any right or option. Unless otherwise noted, shares
are owned of record and beneficially by the named person.
(2) Includes options to purchase 8,845 shares which are exercisable at $5.65
per share.
(3) Includes 17,689 shares held by Mr. Laughlin's wife and 884 shares held by
his daughter.
(4) Includes options to purchase 33,250 shares of common stock which are
exercisable at $11.28 per share.
(5) Includes 177 shares of common stock held by Mr. Tepper as custodian for his
minor son. Also includes options to purchase 168,090 shares of common stock
which are exercisable at $5.65 per share and options to purchase 23,940
shares of common stock which are exercisable at $7.85 per share. Does not
include 10,000 shares of the Corporation's Class B common stock which are
beneficially owned by Mr. Tepper and which are convertible in 2001 into
108,237 shares of Class A common stock.
(6) Includes 531 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 (26,533 shares), and in the name of a
corporation (18,944 shares), of which Mr. Gambone is president. Includes
310 shares of common stock owned by family members who reside in Mr.
Gambone's home, as to which Mr. Gambone disclaims beneficial ownership.
(8) Includes 1,620 shares of common stock owned by Mrs. Kauffman's husband,
options to purchase 53,067 shares of common stock held by Mrs. Kauffman's
husband, which are exercisable at $5.65 per share and options to purchase
1,330 shares of common stock presently exercisable at $7.52.
(9) Includes options to purchase 6,650 shares of common stock which are
exercisable at $11.28 per share.
(10) The address for Sandler O'Neill Asset Management LLC is 712 Fifth Avenue,
22nd Floor, New York, New York 10019.
(11) The address for Investors of America Limited is 39 Glen Eagles, St Louis,
Missouri 63124.
(12) The address for Financial Stocks LP is 441 Vine Street, Suite 507,
Cincinnati, Ohio 45202.
(13) The address for Rainbow Partners LP is 375 Park Avenue, New York, New York
10152.
44
<PAGE>
Certain Relationships and Related Transactions
The Bank has engaged in, and expects in the future to engage in,
banking transactions in the ordinary course of business with its directors,
executive officers and principal shareholders (or their affiliate organizations)
on substantially the same terms as those prevailing for comparable transactions
with others. All loans by the Bank to such persons (i) were made in the ordinary
course of business, (ii) were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and (iii) did not involve more than the normal
risk of collectability or present other unfavorable features. As of December 31,
1998, certain executive officers and directors of the Corporation or the Bank
had outstanding indebtedness in amounts exceeding $60,000 to the Bank as
follows: As of December 31, 1998, two companies in which Mr. Gambone owns a
minority interest had outstanding indebtedness totaling $431,093. Of this
amount, $278,523 is secured by real estate and $152,570 is secured by titles to
motor vehicles, with all loans personally guaranteed by Mr. Gambone. Mr. Tepper
had outstanding loan commitments totaling $695,770, of which $645,770 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
$190,000, of which $140,000 is secured by commercial real estate and $50,000 is
an unsecured line of credit. The aggregate amount of loans outstanding to
executive officers and directors of the Bank as of December 31, 1998 equaled
21.7% of stockholder's equity.
Mr. Tepper, the Corporation's President and Chief Executive Officer, is
the sole holder of the Corporation's 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 the Corporation's common stock in
February 1998, the Corporation and Mr. Tepper entered into an agreement by which
the Corporation has 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 81,381 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 on January 2, 2000.
In March 1999, the Corporation's USA Capital Trust I subsidiary
completed an offering of $10,000,000 aggregate principal amount of Series A
9.50% Capital Securities (the "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, the President and Chief Executive Officer and a
Director of the Corporation.
45
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth the names of the selling shareholders,
the number of shares of common stock beneficially owned by the selling
shareholders and the number of shares of common stock which may be offered for
sale pursuant to this Prospectus by such selling shareholder. The offered shares
of common stock may be offered from time to time by each of the selling
shareholders named below. See "Plan of Distribution." However, the selling
shareholders are under no obligation to sell all or any portion of the shares of
common stock offered hereby, nor are the selling shareholders obligated to sell
such shares of common stock immediately under this Prospectus. Because the
selling shareholders may sell all or part of the shares of common stock offered
hereby, no estimate can be given as to the number of shares of common stock that
will be held by the selling shareholders upon termination of any offering made
hereby.
Pursuant to Rule 416(a) under the Securities Act, the shares of common
stock issuable upon exercise of warrants are subject to adjustment by reason of
stock splits, stock dividends, and other similar transactions in the common
stock.
<TABLE>
<CAPTION>
Common Shares Beneficially
Owned After Offering (1)
----------------------------
Number of Common
Shares Beneficially Common Shares Percent of
Name of Selling Shareholder Owned Prior to Offering Offered Hereby Number Outstanding
- ---------------------------------------------------------------- ------------------- ----------- -------------
<S> <C> <C> <C> <C>
Howard Amster 13,640 13,640 -0- -0-
Antin & Haas Partnership 10,230 10,230 -0- -0-
Barlow Partners, Inc. (2) 4,091 4,091 -0- -0-
Bay Pond Investors (Bermuda) LP (2) 46,378 46,378 -0- -0-
Bay Pond Partners LP (2) 85,939 85,939 -0- -0-
Boston Provident Partners LP 15,283 15,283 -0- -0-
BP Institutional Partners LP 3,300 3,300 -0- -0-
BP Overseas Partners Ltd. 2,800 2,800 -0- -0-
Endeavor Capital Partners 27,282 27,282 -0- -0-
Everest Partners LP 40,922 40,922 -0- -0-
Financial Stocks LP 127,525 127,525 -0- -0-
First Western Investment Services Co. 6,820 6,820 -0- -0-
Investors of America 115,949 115,949 -0- -0-
King Street Capital, L.P. 40,266 40,266 -0- -0-
King Street Capital, Ltd. 14,298 14,298 -0- -0-
Thomas J. Knox 13,965 13,965 -0- -0-
Lawrence Partners 26,600 26,600 -0- -0-
Lawrence Offshore Partners 17,324 17,324 -0- -0-
Malta Hedge Fund LP (3) 36,841 36,841 -0- -0-
Malta Hedge Fund II LP (3) 28,680 28,680 -0- -0-
Malta Partners LP (3) 47,747 47,747 -0- -0-
Malta Partners II LP (3) 23,142 23,142 -0- -0-
Anthony Maltese 1,705 1,705 -0- -0-
Terry Maltese (4) 1,705 1,705 -0- -0-
Radio Partnership LP 13,640 13,640 -0- -0-
Rainbow Partners LP 136,410 136,410 -0- -0-
Rising Stars Offshore Fund LP (5) 8,884 8,884 -0- -0-
J. David Rosenberg 20,462 20,462 -0- -0-
SOP Holdings LLC (6) 68,427(7) 250,000(8) -0- -0-
Kenneth L. Tepper 311,322(9) 40,000 271,322(9) -0-
Thistle Group Holdings Inc. 54,564 54,565 -0- -0-
Value Realization Fund 10,640 10,640 -0- -0-
--------- --------- ------- -----
TOTAL 1,105,459 1,287,032 -0- -0-
========= ========= ======= =====
</TABLE>
46
<PAGE>
____________
(1) Assumes the sale of all offered shares of common stock.
(2) Voting and investment power shared with Wellington Management Company, LLP.
(3) Voting and investment power shared with Sandler O'Neill Asset Management
LLC.
(4) Mr. Maltese is President of Sandler O'Neill Asset Management LLC.
(5) Investment discretion shared by Financial Stocks, Inc. and Ivy Asset
Management.
(6) May be deemed to be an affiliate of Sandler O'Neill & Partners, LP, which
acted as placement agent in a private placement of $7.5 million of the
Corporation's Common Stock on February 13, 1998.
(7) Consists of shares of common stock which may be issued upon exercise of
a warrant granted in connection with a private placement of $7.5 million of
the Corporation's common stock on February 13, 1998.
(8) Includes additional shares of common stock which the Corporation may be
obligated to issue to such selling shareholder pursuant to certain
anti-dilution provisions contained in the warrant described in footnote 7
to this table.
(9) Includes 177 shares of common stock held by Mr. Tepper as custodian for
his minor son. Also includes options to purchase 168,090 shares of common
stock which are exercisable at $5.65 per share and options to purchase
23,940 shares of common stock which are exercisable at $7.85 per share.
47
<PAGE>
DESCRIPTION OF SECURITIES
The Corporation's charter authorizes the issuance of 10,000,000 shares
of common stock, par value $1.00 per share, 10,000 shares of Class B common
stock, par value $1.00 per share, and 5,000,000 shares of preferred stock, par
value $1.00 per share. This Prospectus relates to shares of the Class A common
stock.
As of April 16, 1999, the Corporation had outstanding 2,007,392 shares
of common stock, 10,000 shares of Class B common stock and no shares of
preferred stock. Kenneth L. Tepper, the President and Chief Executive Officer of
the Corporation, presently owns all of the authorized shares of Class B common
stock.
The Corporation's charter authorizes the Board of Directors to provide
for the issuance of preferred stock in one or more series without further
shareholder action. The Board of Directors may determine the number of shares as
well as the applicable voting rights and preferences. It is not possible to
state the actual effect of the authorization of the preferred stock upon the
rights of holders of the common stock until the Board of Directors determines
the specific rights of the holders of any series of preferred stock. However,
the issuance of shares of preferred stock could adversely affect the rights of
the holders of common stock. To date, the Corporation has issued no shares of
preferred stock.
Conversion of Class B Common Stock
Pursuant to the Corporation's charter, on January 1, 2001, all of the
authorized shares of the Class B common stock will automatically convert into
10% of the then issued shares of Class A common stock, rounded up to the nearest
whole share. Mr. Tepper, the Corporation's President and Chief Executive
Officer, is the sole holder of the Corporation's Class B common stock. In
connection with a private placement of the Corporation's common stock in
February 1998, the Corporation and Mr. Tepper entered into an agreement by which
the Corporation has 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 81,381 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.
Shares of the Class B common stock received by the Corporation in exchange for
shares of common stock will be retired and canceled and will no longer be
available for issuance.
Dividends
Holders of Class A common stock are entitled to receive such dividends,
when, as and if declared by the Board of Directors out of legally available
funds subject to the payment of any preferential dividend to the holders of the
preferred stock, if any.
Voting Rights
The voting rights of the shares of 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 the
Corporation's directors and the holder of the Class B common stock is entitled
to elect one-third of the Corporation's directors. Excluding the election of
directors, the Class A common stock and the Class B common stock vote together
as a single class on all matters on which shareholders are entitled to vote,
unless applicable law requires that each class vote separately. Holders of
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 the Corporation's charter. The Corporation's charter
provides that no one person or group may hold or vote more than 10% of the
common stock without the Board of Directors' consent.
The Corporation's charter provides that individual directors or the
entire Board of Directors may be removed from office only for "cause" and only
with the vote of the holders of at least 75% of the outstanding shares of
capital stock of the Corporation then eligible to vote. "Cause" is defined to
mean only (1) conviction of the director of a felony, (2) declaration by order
of court that the director is of unsound mind, or (3) gross abuse of trust.
Under this provision, no director may be removed by shareholders without cause
regardless of the vote in favor of such removal. One effect of this provision
may be to make the removal of directors more difficult to accomplish since the
holders of more than 25% of the capital stock of the Corporation then eligible
to vote (which could include the directors and officers of the Corporation)
would have a veto power over any attempted removal.
The Corporation's charter provides that the affirmative vote of at
least 80% of the outstanding shares of capital stock of the Corporation then
eligible to vote is required for the adoption of any shareholder proposal to
amend the Corporation's bylaws which has not been previously approved by the
Board of Directors. One effect of this provision
48
<PAGE>
may be to make such proposals to amend the Corporation's bylaws more difficult
to accomplish since the holders of more than 20% of the stock of the Corporation
then eligible to vote (which could include members of the Board of Directors
and/or officers) would have a veto power over any changes to the Corporation's
bylaws.
The Corporation's charter also provides that a three-quarters vote of
directors and a two-thirds vote of the outstanding shares of common stock is
necessary to approve a merger, consolidation, liquidation or dissolution of the
Corporation or any action that would result in the sale or other disposition of
all or substantially all of the Corporation's assets. However, these voting
requirements are not required if a bylaw amendment is subsequently adopted by
all of the members of the Board of Directors to modify or eliminate such
requirements in certain circumstances. Under such circumstances, Pennsylvania's
Business Corporation Law would require only a majority vote of both the Board of
Directors and shareholders.
Preemptive Rights
Holders of the Corporation's common stock have no preemptive rights.
Liquidation
In the event of liquidation, dissolution or winding up of the
Corporation, holders of common stock would share pro rata in any distributable
assets only after payment or provision for payment of the debts and other
liabilities of the Corporation and subject to the rights of any series of
preferred stock which may be outstanding.
Change in Control
The Corporation's charter and by-laws contain the following provisions
that could delay, defer or prevent a change in control of the Corporation:
o any merger, consolidation, liquidation or dissolution of the
Corporation must be approved by the affirmative vote of 75% of
the Corporation's directors and 66 2/3% of the Corporation's
shareholders;
o one person or group may not hold or vote more than 10% of the
shares of common stock without the consent of the Board of
Directors;
o directors may be removed only for cause and only by a vote of 75%
of the outstanding shares of common stock;
o the holders of the Class B common stock (currently only Mr.
Tepper), are entitled to elect one-third of the directors;
o the Board of Directors is given broad discretion in evaluating any
takeover attempt and is authorized to use a "poison pill" defense;
and
o the Board of Directors is authorized to issue "blank check"
preferred stock.
PLAN OF DISTRIBUTION
The shares of common stock are being offered on behalf of the selling
shareholders and the Corporation will not receive any proceeds from the sale.
The shares of common stock may be sold or distributed from time to time by the
selling shareholders, or by pledgees, donees or transferees of, or other
successors in interest to, the selling shareholders, directly to one or more
purchasers (including pledgees) or through brokers, dealers or underwriters who
may act solely as agent or may acquire such shares as principals, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at negotiated prices, or at fixed prices, which may be changed.
The sale of the shares of common stock may be effected in one or more of the
following methods: (i) ordinary brokers' transactions, which may include long or
short sales; (ii) transactions involving cross or block trades or otherwise on
the Nasdaq SmallCap Market or any other exchange or inter-dealer quotation
system on which the shares of common stock may trade; (iii) purchases by
brokers, dealers or underwriters as principal and resale by such purchasers for
their own accounts pursuant to this Prospectus; (iv) "at the market" to or
through market makers or into established trading markets, including direct
sales to purchasers or sales effected through agents; (vi) any combination of
the foregoing, or by any other legally available means. In addition, the selling
shareholders or their successors in interest may enter into hedging transactions
with broker-dealers who may engage in short sales of shares of common stock in
the course of hedging the position they assume with the selling shareholders.
The selling shareholders or their successors in interest
49
<PAGE>
may also enter into option or other transactions with broker-dealers that
require the delivery by such broker-dealers of the shares of common stock, which
shares of common stock may be resold thereafter pursuant to this Prospectus.
There can be no assurance that all or any of the shares of common stock will be
issued to, or sold by, the selling shareholders.
Brokers, dealers, underwriters or agents participating in the sale of
the shares of common stock as agents may receive compensation in the form of
commissions, discounts or concessions from the selling shareholders and/or
purchasers of the shares of common stock for whom such broker-dealers may act as
agent, or to whom they may sell as principal, or both (which compensation to a
particular broker-dealer may be less than or in excess of customary
commissions). The selling shareholders and any broker-dealers or other persons
who act in connection with the sale of the shares of common stock hereunder may
be deemed to be "underwriters" within the meaning of the Securities Act, and any
commission they receive and proceeds of any sale of such shares may be deemed to
be underwriting discounts and commissions under the Securities Act. Neither the
Corporation nor the selling shareholders can presently estimate the amount of
such compensation. The Corporation knows of no existing arrangements between the
selling shareholders and any other shareholders, broker, dealer, underwriter or
agent relating to the sale or distribution of the shares of common stock.
The selling shareholders and any other persons participating in the
sale or distribution of the shares of common stock will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder, which
provisions may limit the timing of purchases and sales of any of the shares of
common stock by the selling shareholders or any other such persons. The
foregoing may affect the marketability of the shares of common stock.
The Corporation will pay substantially all of the expenses incident to
the registration, offering and sale of the shares of common stock to the public
other than commissions or discounts of underwriters, broker-dealers or agents.
LEGAL MATTERS
The validity of the shares of common stock offered hereby has been
passed upon for the Corporation by Klehr, Harrison, Harvey, Branzburg & Ellers
LLP, Philadelphia, Pennsylvania.
EXPERTS
The consolidated balance sheets of USABancShares, 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, included in this Prospectus have been so
included in reliance on the report of Grant Thornton LLP independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
50
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
USABANCSHARES, INC. and SUBSIDIARIES
December 31, 1998 and 1997
F-1
<PAGE>
C O N T E N T S
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS F-4
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS) F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-2
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
USABancShares, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
USABancShares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and comprehensive income (loss) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
USABancShares, 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
F-3
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(in thousands
except 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
LIABILITIES
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, 2,007,392 shares
issued and outstanding in 1998; 813,807 shares issued and outstanding in
1997, and 108,230 shares of converted and unissued Class B common stock in
1998; 81,381 converted and unissued 1997 2,116 814
Additional paid-in capital 10,683 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-4
<PAGE>
USABANCSHARES, 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) $ 0.75 $ (0.21)
======= =======
NET INCOME (LOSS) PER SHARE - DILUTED (1) $ 0.70 $ (0.21)
======= =======
</TABLE>
(1) 1997 per share amounts have been restated to reflect a 33% stock dividend
paid August 17, 1998.
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Loss)
<TABLE>
<CAPTION>
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) - - - -
------ ------- ------ ----- ----- -------
Balance, December 31, 1998 $2,116 $10,683 $1,112 $ - $(314) $13,597
====== ======= ====== ===== ===== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
(In Thousands) 1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,490 $ (226)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities
Provision for possible loan losses 510 415
Depreciation and amortization 219 60
Decrease in goodwill 11 49
Accretion of discounts on purchased loan portfolio (1,306) (691)
(Accretion) amortization of securities (discount) premium, net (9) (5)
Amortization of Class B common stock - 425
Class B common stock conversion - 92
Gain on sale of securities (378) (127)
Increase in accrued interest receivable (786) (540)
Decrease (increase) in deferred tax asset (166) (216)
Increase in other assets (977) (621)
Increase in accrued interest payable 324 56
Increase in accrued expenses and other liabilities 645 565
-------- -------
Net cash used in operating activities (423) (764)
-------- -------
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)
-------- ------
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-7
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE A - ORGANIZATION
USABancShares, Inc. (the Corporation), through its subsidiaries,
BankPhiladelphia (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
"BankPhiladelphia" in July 1998.
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 minority owner of a Delaware limited liability company in the
business of purchasing judgements, deficiencies, and claims, and pursuing
collections on such claims.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. 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.
(Continued)
F-8
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE B - 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 Statement of Financial Accounting Standards
(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.
2. Investment Securities
The Corporation accounts for its investment securities in accordance 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.
(Continued)
F-9
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE B - 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.
3. 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.
(Continued)
F-10
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE B - 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.
4. 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.
5. 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.
6. 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.
(Continued)
F-11
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
7. 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.
8. 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.
9. 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.
10. 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.
(Continued)
F-12
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE B - 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
---------- --------- ------ ---------- ------- -------
(in thousands)
<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>
11. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and amounts due from banks.
12. Advertising Costs
The Corporation expenses advertising costs as incurred.
13. Restrictions on Cash and Due from Banks
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.
14. Reclassifications
Certain reclassifications have been made to the 1997 financial statements to
conform with the 1998 presentation.
(Continued)
F-13
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE C - PRIVATE PLACEMENT
On February 18, 1998, the Company issued 769,231 shares of its Class A
common stock in conjunction with a private placement offering (the
"offering"). Total cash received was $7.1 million, net of offering cost of
$390,000.
In connection with the offering, the Company granted warrants convertible
for a period of five years into 3.25% of the Corporation's common stock on
the date of conversion. The number of warrants will be adjusted for stock
splits, stock dividends and the issuance of additional shares so as to
maintain the holder's ownership of the fully diluted common stock at 3.25%
for a period of three years from the close of the offering.
NOTE D - ACQUISITION
In 1997, the Corporation acquired Knox Financial Services Group, Inc. The
Corporation distributed 14,000 (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 in July 18,
1997 and August 17, 1998.
NOTE E - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair market value
of the Corporation's investment securities available for sale and held to
maturity are as follows:
<TABLE>
<CAPTION>
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>
(Continued)
F-14
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE E - INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>
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
Amortized Approximate Average Amortized Approximate Average
Cost Fair Value Yield Cost Fair Value Yield
---------- ----------- -------- ---------- ----------- --------
<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>
(Continued)
F-15
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE E - 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 $2.0 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 F - LOANS RECEIVABLE
Loans outstanding by classification are as follows:
1998 1997
---- ----
(in thousands)
Real estate $102,076 $54,262
Commercial and industrial loans 986 1,091
Other 243 1,694
-------- -------
103,305 57,047
Loans in process - (260)
Unearned income (116) (217)
Allowance for possible loan losses (1,051) (568)
-------- -------
$102,138 $56,002
======== =======
At December 31, 1998 and 1997, loans outstanding to certain officers and
directors of the Bank and their affiliated interests amounted to $2.5
million and $233,000, respectively. An analysis of activity in loans to
related parties at December 31, 1998 and 1997, resulted in new loans of $2.7
million and $122,000, respectively, and reductions of $483,000 and $504,000,
respectively, representing payments.
An analysis of the allowance for possible loan losses is as follows:
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
====== ====
(Continued)
F-16
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE F - 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 G - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
useful lives 1998 1997
------------ ---- ----
(in thousands)
<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 H - 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 (in thousands):
1999 $ 47,067
2000 28,399
2001 14,769
2002 5,663
2003 7,670
Thereafter 908
--------
$104,476
========
F-17
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE I - 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>
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 J - STOCKHOLDERS' 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.
(Continued)
F-18
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE J - STOCKHOLDERS' 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.
NOTE K - EMPLOYEE BENEFIT PLANS
The Bank had a defined contribution plan, 401(k), covering eligible
employees, as defined under the plan document. Employees could contribute
upto 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 L - INCOME TAXES
The components of income taxes (benefit) are as follows:
1998 1997
---- ----
Federal (in thousands)
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
===== =====
(Continued)
F-19
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE L - INCOME TAXES - Continued
The reconciliation of the tax computed at the statutory federal rate was as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Tax at statutory rate $832 $ (71)
Increase (decrease) in taxes resulting from
Tax-exempt income (76) -
Nondeductible compensation - 144
Nondeductible expenses, including goodwill and
meals and entertainment 31 16
Increase (decrease) in valuation allowance - (103)
State income taxes, net of federal income
tax benefit 124 12
Other, net 46 19
---- -----
Income tax expense $957 $ 17
==== =====
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and the tax basis of the Corporation's assets and
liabilities. Cumulative temporary differences are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets
Allowance for possible loan losses $346 $184
Deferred loan fees 7 9
Deferred compensation 24 23
Fixed asset 5 -
Unrealized losses on securities available for sale 191 -
---- ----
573 216
Deferred tax liabilities
Fixed assets - (1)
Unrealized gains on securities available-for-sale - (52)
---- ----
- (53)
---- ----
Net deferred tax asset $573 $163
==== ====
</TABLE>
During 1997, the Corporation realized a tax benefit related to the net
operating loss carryovers from the acquisition of the Bank that 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-20
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE M - 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
-----------------------------------------------
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 1,986 $0.75
Effect of dilutive securities
Options - 133 -
------ ------ -----
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $1,490 2,119 $0.70
====== ===== =====
</TABLE>
Options to purchase 62,000 shares of common stock at exercise prices ranging
from $11.28 to $30.00 per share were outstanding during 1998 and are 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) 1,082 $(0.21)
Effect of dilutive securities
Options - - -
----- ----- ------
Diluted earnings per share
Net loss available to common stockholders
plus assumed conversions $(226) 1,082 $(0.21)
====== ===== ======
</TABLE>
Options to purchase 322,820 shares of common stock at $5.65 per share were
outstanding during 1997 and are not included in the computation of diluted
EPS because the options were anti-dilutive.
(1) Adjusted for 33% stock dividends paid by the Corporation in August 1998.
F-21
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE N - 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-22
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE O - COMMITMENTS AND CONTINGENCIES
1. 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-rate 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.
2. 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 private placement offering (Note C), the
Corporation and the President & CEO have entered into an agreement whereby
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.
(Continued)
F-23
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE O - COMMITMENTS AND CONTINGENCIES
3. 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 P - 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.
(Continued)
F-24
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE P - 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
-------- ---------- -------- ----------
(in thousands)
<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 Q - 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.
(Continued)
F-25
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE Q - 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 terminated earlier, will be in effect for a period of
ten years from the Effective Date. A total of 531,000 shares have been
reserved for issuance under the Plan. 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 results of
operations and per share amounts would have been reduced to the pro forma
amounts indicated below, (in thousands, except per share data).
1998 1997
---- ----
Net income (loss)
As reported $1,490 $ (226)
Pro forma 1,180 (226)
Basic earnings (loss) per share
As reported 0.75 (0.21)
Pro forma 0.59 (0.21)
Diluted earnings (loss) per share
As reported 0.70 (0.21)
Pro forma 0.56 (0.21)
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.
(Continued)
F-26
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE Q - 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 323,000 $5.65 333,000 $5.65
Options granted 152,000 9.78 - -
Options exercised (9,000) 5.65 - -
Options forfeited (28,000) 5.65 (10,000) 5.65
------- -------
Outstanding at end of year 438,000 $7.20 323,000 $5.65
======= =======
Options exercisable at year-end 343,000 323,000
======= =======
Weighted average fair value of
options granted during year $3.58 $ -
</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>
$ 5.65 to $ 8.48 365,000 5.92 years $ 6.05 340,000 $ 6.10
$ 8.66 to $12.99 60,000 9.42 years 10.80 - -
$15.04 to $22.56 11,000 9.67 years 17.10 3,000 20.00
$25.00 to $30.00 2,000 9.67 years 27.50 - -
</TABLE>
F-27
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE R - 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
------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
As of December 31, 1998
Total capital (to risk-weighted assets) $15,566 12.1% $10,317 8.00%
Tier I capital (to risk-weighted assets) 13,782 10.7 5,159 4.00
Tier I capital (to average assets) 13,782 8.7 6,319 4.00
As of December 31, 1997
Total capital (to risk-weighted assets) 5,752 8.5 5,431 8.00
Tier I capital (to risk-weighted assets) 5,184 7.6 2,715 4.00
Tier I capital (to average assets) 5,184 5.8 3,570 4.00
</TABLE>
(Continued)
F-28
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE R - REGULATORY CAPITAL REQUIREMENTS - Continued
The Bank's actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- ----------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars 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-29
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for USABancShares, 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>
(Continued)
F-30
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
ar Ended 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
------ -----
Loss before undistributed earnings
of subsidiaries (181) (483)
Provision (benefit) for income taxes 1 (16)
------- -----
Loss before undistributed earnings
of subsidiaries (182) (467)
Undistributed earnings of subsidiaries 1,672 241
------ -----
NET INCOME (LOSS) $1,490 $(226)
====== =====
</TABLE>
(Continued)
F-31
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended 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-32
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE T - SUBSEQUENT EVENT
In March 1999, the Corporation issued $10 million of 9.50% junior
subordinated debentures ( the "trust preferred offering") to USA Capital
Trust 1, a Delaware Business Trust, in which the Corporation owns all of the
common equity. The trust issued $10 million of Preferred Securities to
investors, secured by the junior subordinated debentures and the guarantee
of the Corporation, The junior subordinated debentures mature in 2029. Had
the trust preferred offering occurred as of December 31, 1998, the
Corporation's condensed balance sheet would have been as follows:
<TABLE>
<CAPTION>
ASSETS Actual Pro-Forma
------------- ------------
(in thousands
except share
data)
<S> <C> <C>
Cash and due from banks (1) $ 1,335 $ 10,435
Interest bearing deposit with banks 7,706 7,706
Investment securities 47,667 47,667
Loans receivable, net 102,138 102,138
Premises and equipment, net 2,023 2,023
Other assets (2) 4,237 5,137
-------- --------
Total assets $165,106 $175,106
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
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.
(Continued)
F-33
<PAGE>
USABANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1998 and 1997
NOTE T - SUBSEQUENT EVENT - 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.
F-34
<PAGE>
________________________
Up to 1,287,032 Shares
of Common Stock
________________________
USABANCSHARES, INC.
________________________
________________________
PROSPECTUS
________________________
April __, 1999
________________________
You should rely only on the information contained in this Prospectus or that we
have referred you to. We have not authorized anyone to provide you with
information that is different. The information in this Prospectus may to be
accurate beyond the date indicated below, regardless of when this Prospectus is
delivered or when the securities described in this Prospectus are sold. This
Prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Corporation's charter and by-laws provide that the Corporation will
indemnify every person who is or was a director or executive officer of the
Corporation to the fullest extent permitted by law. This indemnification applies
to all expenses and liabilities reasonably incurred in connection with any
proceeding to which the director or executor officer may become involved by
reason of being or having been a director or executive officer of the
Corporation. Pennsylvania law, under which the Corporation is incorporated,
allows the Corporation to indemnify its directors and officers if the
indemnified person acted in good faith and in a manner such person reasonably
believed to be in, or not opposed to, the best interest of the corporation and,
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful. The Corporation maintains a director and officer liability
insurance policy covering each of the Corporation's directors and executive
officers.
Item 25. Other Expenses of Issuance and Distribution
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
shares of common stock offered hereby, other than underwriting discounts and
commissions:
Registration Fee--Securities and Exchange Commission..... $ 2,818.00
*Blue Sky fees and expenses............................... $ 1,000.00
*Accountants' fees and expenses .......................... $ 15,000.00
*Legal fees and expenses ................................. $ 15,000.00
*Printing and EDGAR expenses ............................. $ 2,500.00
*Miscellaneous ........................................... $ 1,000.00
-----------
Total ........................................... $ 37,318.00
===========
___________
* Estimate
Item 26. Recent Sales of Unregistered Securities
On February 13, 1998, the Corporation issued 1,023,067 shares (as
adjusted to reflect a 33% stock dividend paid August 17, 1998) 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 the
Corporation were $7,136,420. The offering expenses were $363,580.
On April 11, 1997, the Corporation issued 13,965 shares (as adjusted to
reflect 33% stock dividends paid July 18, 1997 and August 17, 1998) of common
stock to Thomas J. Knox pursuant to Section 4(2) of the Securities Act in
connection with the acquisition of USACapital.
On March 9, 1999, the Corporation issued $10,000,000 of 9.50% Junior
Subordinated Debentures to 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 the Corporation were $8,734,000. The expenses
of the offering were $916,000.
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.)
Exhibit No.
3.1 Amended and Restated Articles of Incorporation of the Corporation, as
amended*
3.2 Bylaws of the Corporation*
4 Specimen Stock Certificate of the Corporation*
5 Legal Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers LLP**
10.1 Stock Option Plan*
10.2 Employment agreement between the Registrant and Kenneth L. Tepper*
10.3 Employment agreement between the Registrant and Brian M. Hartline***
10.4 Agreement by and between Kenneth L. Tepper and the Registrant dated
January 2, 1998****
10.5 Warrant Agreement between the Registrant and Sandler O'Neill dated
February 13, 1998****
10.6 Registration Rights Agreement between the Registrant and certain
shareholders dated February 13, 1998****
11 Computation of Per Share Earnings (Included in Financial Statements on
Pages F-12 and F-21)
21 Subsidiaries of the Corporation***
23.1 Consent of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP (included
in Exhibit 5)**
23.2 Consent of Grant Thornton, LLP
* Incorporated by reference from the Registration Statement on Form SB-2
of the Corporation, as amended (Registration No. 33-92506).
** Incorporated by reference from the Registration Statement on Form SB-2
of the Corporation (Registration No. 333-68675).
*** Incorporated by reference from the Corporation's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998.
**** Incorporated by reference from the Corporation's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997.
Item 28. Undertakings
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to: (i) include any
prospectus required by Section 10 (a) (3) of the Securities Act; (ii) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information set forth in the Registration Statement,
and (iii) include any additional or changed material information with respect to
the plan of distribution.
2. That for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
4. That for the purpose of determining any liability under the
Securities Act, to treat the information omitted from the form of Prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant under Rule 424(b)(1)
or (4), or 497(h) under the Securities Act as part of this Registration
Statement as of the time the SEC declared it effective.
Insofar as indemnification for liabilities under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised
II-2
<PAGE>
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in a successful defense of any action, suit
or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issuer.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing Post-Effective Amendment No. 1 to Form SB-2 and
has duly authorized this Registration Statement to be signed on its behalf by
the undersigned, in the City of Philadelphia, Commonwealth of Pennsylvania, on
April 28, 1999.
USABANCSHARES, INC.
By: /s/ Kenneth L. Tepper
-----------------------------------
Kenneth L. Tepper, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on April 28, 1999.
April 28, 1999 /s/ Kenneth L. Tepper*
------------------------------------
Kenneth L. Tepper
President, Chief Executive Officer and Director
(Principal Executive Officer)
April 28, 1999 /s/ Brian M. Hartline
-----------------------------------------------
Brian M. Hartline, Chief Financial Officer
(Principal Accounting and Financial Officer)
April 28, 1999 /s/ George M. Laughlin*
-----------------------------------------------
George M. Laughlin
Chairman of the Board
April 28, 1999 /s/ Zeev Shenkman*
-----------------------------------------------
Zeev Shenkman
Vice Chairman of the Board
April 28, 1999 /s/ Jeffrey A. D'Ambrosio*
-----------------------------------------------
Jeffrey A. D'Ambrosio
Director
April 28, 1999 /s/ George C. Fogwell, III*
-----------------------------------------------
George C. Fogwell, III
Director
April 28, 1999 /s/ John A. Gambone*
-----------------------------------------------
John A. Gambone
Director
April 28, 1999 /s/ Carol J. Kauffman*
-----------------------------------------------
Carol J. Kauffman
Director
April 28, 1999 /s/ Wayne O. Leevy*
-----------------------------------------------
Wayne O. Leevy
Director
April 28, 1999 /s/ Clarence L. Rader*
-----------------------------------------------
Clarence L. Rader
Director
*Denotes signature pursuant to a Power of Attorney granted to Kenneth L. Tepper.
/s/ Kenneth L. Tepper
------------------------
By: Kenneth L. Tepper
Attorney-in-Fact
<PAGE>
INDEX TO EXHIBITS
23.2 Consent of Grant Thornton LLP
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We have issued our report dated March 22, 1999 accompanying the
consolidated financial statements of USABancShares, Inc. and Subsidiaries
included in the Annual Report on Form 10-KSB for the year ended December 31,
1998, which is included in this Registration Statement and Prospectus. We
consent to the incorporation by reference of the aforementioned report in the
Registration Statement and Prospectus and to the use of our name, as it appears
under the caption "Experts".
/s/ Grant Thornton LLP
April 28, 1999
Philadelphia, Pennsylvania
