<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 1999
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from___________ to ___________
Commission file number 000-27244
---------
USABANCSHARES.COM, INC.
- - --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Pennsylvania 23-2806495
- - --------------------------------------- ---------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1535 Locust Street, Philadelphia, PA 19102
- - ---------------------------------------- ---------------------------
(Address of Principal Executive Offices) (Zip Code)
(215) 569-4200
- - --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $1.00 par value
- - --------------------------------------------------------------------------------
(Title of Class)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES __X__ NO ____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]
The Issuer's revenues for its most recent fiscal year were $23.6 million.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates as of March 29, 2000 was $46.0 million, based on the
average of the closing bid and asked prices of the Registrant's Class A common
stock as reported by the Nasdaq National Capital Market.
<PAGE>
As of March 29, 2000 the Issuer had outstanding shares of 5,490,284
Class A common stock and 10,000 shares of Class B common stock (which are
convertible into 216,460 shares of Class A Common Stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be utilized in connection with the
2000 Annual Meeting of Shareholders are incorporated by reference into Part III
hereof.
<PAGE>
USABANCSHARES.COM, INC.
Form 10-KSB
INDEX
Page
----
PART I
Item 1. Description of Business.............................................2
Item 2. Description of Property............................................34
Item 3. Legal Proceedings..................................................35
Item 4. Submission of Matters to a Vote of Security Holders................35
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...........35
Selected Financial and Other Data..................................37
Item 6. Management's Discussion and Analysis...............................38
Risk Factors.......................................................45
Item 7. Financial Statements...............................................54
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................54
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Act................................................54
Section 16(a) of the Exchange Act..................................54
Item 10. Executive Compensation.............................................54
Item 11. Security Ownership of Certain Beneficial Owners and Management.....54
Item 12. Certain Relationships and Related Transactions.....................54
Item 13. Exhibits, List and Reports on Form 8-K.............................54
Financial Statements and Report of Independent Certified Public Accountants..F-1
<PAGE>
FORWARD LOOKING STATEMENTS
Some of the statements contained in this report 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.
<PAGE>
Part I
General
Item 1. Description of Business
USABancShares.com, Inc. was the first "dot com" bank holding company in
the country. Management is committed to have USABancShares.com evolve into a
fully functional Internet bank dedicated to becoming a leading provider of
financial products and services over the Internet. We believe the financial
services industry has one of the highest degrees of functionality over the
Internet. We will strive to provide the ultimate application for Internet users
through our website, www.usabancshares.com, and website affiliates (b2banc.com,
CDenergy, worldchange, and usaTV.) We have created the first ever real time
broadband financial services solution, in addition to our dynamic Hypertext
Mark-up Language, ("HTML") site. Our broadband site combines our dynamic banking
platform with an entertaining on-line experience that we believe no other
financial-based site provides. With the release of our wireless application for
Personal Digital Assistants ("PDAs") and cellular phones, USABancShares.com now
offers our customers a convenient, secure, cost-efficient and user-friendly
medium for financial products and services that can be accessed from virtually
anywhere. We have established and are continuing to pursue strategic alliances
and marketing programs with leading Internet entities to attract new
USABancShares.com customers. We currently offer on-line interest-bearing
checking accounts, statement savings accounts, certificates of deposit,
electronic bill payment services, overdraft protection, ATM and debit cards,
mortgage loans, retail loan products, credit cards, and on-line brokerage
services through our website. In addition to offering banking products and
services, our site offers portal applications such as live news feeds and stock
quotes, as well as links to other sites. Our website also features news and
commentary at usaTV, a streaming media application which offers customers and
users a unique opportunity to learn more about USABancShares.com,Inc. via live
and on-demand streaming video and audio. In January 2000 we launched b2banc.com
in order to facilitate e-commerce transactions seamlessly to our business
customers and members of business-to-business portals that b2banc.com is
serving.
We intend to capitalize on the increasing consumer and business use of
the Internet by aggressively marketing our Internet banking platforms on a
national basis. While our origin is in Philadelphia as a traditional "brick and
mortar" bank, we believe we can provide financial services more efficiently and
economically to customers nationally through the Internet, wireless technology
and other electronic forms. Our customers are able to conduct banking activities
from any location, access their account data, and get information about
USABancShares.com products and services 24-hours-a-day, seven days a week.
Internet Industry Background
Overview. The Internet enables millions of people worldwide to access
news and information, communicate with each other and conduct business
electronically. International Data Corporation reports that the number of
worldwide Internet users is projected to grow from approximately 150 million in
1998 to approximately 300 million in 2000 and over 700 million users by 2005.
The U.S. market currently accounts for over 50% of worldwide usage with over 80
million users, and is expected to grow to over 200 million users by 2005.
Improvements in broadband and wireless technology are allowing more and
more users to access the Internet whenever and wherever they so choose. As the
broadband infrastructure grows, more users will be able to access the Internet
with high-speed DSL and cable-modem connections. Jupiter Research projects that
U.S. households with broadband service will grow from 3.3 million in 1999 to
over 17 million households in 2004. Wireless usage is growing even faster as
cellular phone and PDA manufacturers continue to offer more web-enabled devices
at lower prices. Jupiter projects that more than 91 million web-enabled
cell-phones and handheld devices will be in use by 2003, up from only 6 million
in 1999.
2
<PAGE>
The Internet has become a global marketplace for buying and selling
goods and services. Gartner Group's Dataquest forecasts that total worldwide
business-to-consumer ("B2C") e-commerce will grow from an estimated $31 billion
in 1999 to over $320 billion by 2003, with the U.S. accounting for nearly half
at $147 billion. Growth projections for business-to-business ("B2B") e-commerce
are even greater, as Dataquest projects $4 trillion in online procurement by
2003, up from $145 billion in 1999.
With the emergence of the Internet as a globally accessible, fully
interactive medium, many companies that have traditionally conducted business in
person, through the mail, or over the telephone are increasingly using
electronic commerce. Many consumers are showing strong preferences for
transacting certain types of business, such as paying bills, booking airline
tickets, trading securities and purchasing consumer products electronically
rather than in person or over the telephone. Individuals can now conduct these
transactions virtually anywhere at any time. Many consumers have accepted and
even welcomed on-line transactions because such transactions can be faster, less
expensive and more convenient than transactions conducted through a human
intermediary.
In addition to its use as a general commercial medium, the Internet
has rapidly emerged as an accepted means of providing financial services. Many
companies are increasingly offering a variety of financial services, including
credit cards, brokerage services, insurance products and banking services via
the Internet, and finance-related websites continue to grow in popularity.
Electronic and Wireless Banking Services.
The increasing level of consumer and business interest to perform
financial transactions over the Internet has prompted the development of several
electronic and wireless banking delivery systems. The two types of electronic
banking currently available are PC-based home banking and Internet banking.
Additionally, wireless technologies have evolved for use on cellular phones and
PDAs such as the Palm Pilot.
o PC-based Home Banking. PC-based home banking was the first form of Home
Banking. PC Banking requires PC-based financial services software
products such as Intuit's Quicken, Microsoft's Money or a bank's
proprietary software. Each product carries its own set of instructions
that the customer must learn before commencing any banking transactions.
The software resides on the customer's PC along with his or her account
data and requires a dial-up modem and manual downloading. Limitations to
such technology require the customer to conduct banking transactions from
the PC containing their software and account data. Customers generally
must back up their account data at frequent intervals to counteract the
risk of losing data. Because the customer must connect with the financial
institution via modem and download his or her account data, real-time
transactions are not generally possible.
o Internet Banking. Unlike PC-based home banking, Internet banking requires
only a secure Web browser for access to the Internet and the financial
institution. Internet banking requires no particular software and does
not restrict the customer's operations to the location of his or her own
PC. Instead, the customer accesses the financial institution through the
Internet and deposits or transfers funds, pays bills, or transacts other
business on a real-time basis. Account data remains stored on the bank's
secure server at all times, protected by technology designed specifically
to safeguard such information. No downloading or back up is required, as
the bank's server backs up all data and transactions on a continuous
basis. With Internet banking, the information presented to the customer
remains current at all times. Customers who use personal financial
software, such as Quicken, retain the option to download transactions for
financial or tax planning purposes.
3
<PAGE>
Wireless Banking.
Wireless banking allows users to access their account anywhere they
may be without the need of a computer. Wireless banking allows even more
flexibility by introducing true mobile computing and access to financial
information. Web-enabled PDAs and cell phones allow users to transact business
while away from any sort of physical network connection. Wireless security is
crucial to the acceptance of devices for processing financial transactions over
the airwaves; double and triple encryption algorithms have been implemented to
provide the level of security needed on these devices. One limitation of such
units is the smaller screen size that reduces the amount of data that can be
presented. This limitation is far less critical for on-line financial services
than for other web usage that is very content-heavy. New developments in the
field of wireless devices continues to increase the flexibility and power of
these units. Wireless devices should continue to penetrate the market at a
growing rate as the technology improves, attracting more users that seek
enhanced functionality.
The use of electronic banking delivery systems, and particularly Internet
banking, is growing as consumers find that electronic banking is both convenient
and cost-effective. According to Gomez Advisors, the number of Americans banking
on-line will grow from an estimated 11 million in 1999 to over 48 million in
2003. Gomez further indicates that over half of all web-banking customers are
active customers - banking online at least once a month, and have high average
incomes and substantial financial services needs.
Demographic surveys indicate that Internet users represent an ideal target
market for Internet banking. Studies by Jupiter Communications revealed that, in
the United States, approximately 49% of Internet users are college graduates and
that approximately 30% are engaged in professional or managerial occupations.
The survey also indicated that the median age of Internet users is 33, that
approximately 61% of Internet users are under the age of 45 and that the average
annual income of an Internet user is over $60,000. When looking at the
demographics of Internet users engaging in e-commerce transactions, the average
annual income exceeds $80,000 and over 80% of users are under the age of 45.
The attractive demographics of Internet users facilitate the growth of
Internet banking. Internet users tend to be young and mobile and thus
comfortable with and receptive to the convenience of on-line commercial
transactions. We believe that as Internet users enter their prime earnings and
savings years, there will be an increased demand for high-yielding savings
products. Additionally, Internet users tend to be professionals with limited
amounts of discretionary time and are attracted to the convenience of "one-stop
shopping" for a full range of financial services.
Strategy
Our strategic objective is to become a financial service leader
through electronic and wireless medium. Our objective will be achieved by
diligently creating brand awareness, maintaining our competitive edge on new
technologies, form strategic alliances that will provide customer access to our
site and provide our user an experience beyond financial services.
o Pursuing strategic alliances and customer incentive programs. We have
strategic marketing agreements with several leading Internet entities
which provide us access to customers of established Internet companies.
We also have strategic alliances with other Internet entities that
provide hardware and software, which give us access to customers at the
"point of sale." Specifically, we have formed strategic alliances with
(i) Earthlink, the second largest Internet service provider, under a
two-year agreement by which its subscribers (currently 3.1 million) will
have direct access to a co-branded USABancShares.com, site providing both
on-line banking and brokerage services; (ii) UltraStar under a one-year
agreement by which its brand specific ISP's such as www.yankees.com,
www.orioles.com and www.davidbowie.com will promote and offer exclusive
on-line banking and brokerage services by USABancShares.com Inc. We have
also entered into agreements with Systemax and eMachine which give
USABancShares.com the exclusive right to be on 900,000 desktop
interfaces; (shipped in the first and second quarter of 2000) via a
hotlinked icon on 300,000 Systemax computers and a keyboard button
located on 600,000 eMachine computers. Per our agreement
USABancShares.com will have the ability to continue shipping on these
computers, if we so desire. Under our agreements, bounties are generally
payable by us for the first year of point of sale advertising. We intend
to continue to actively pursue additional strategic alliances, implement
several innovative customer acquisition and retention programs designed
for new and existing USABancShares.com customers and co-brand these
programs with select USABancShares.com partners.
4
<PAGE>
o Expanding our national marketing campaign. We intend to continue to
expand our brand awareness through our national marketing campaign. This
campaign includes Internet advertising through portals such as Yahoo! and
Excite, television campaigns on networks such as CNBC and MSNBC,
sponsorship of nationally televised special events on networks such as
VH-1, radio advertising, and newspaper and magazine advertising in
national publications such as the Wall Street Journal, New York Times and
Fast Company.
o Establishing the USABancShares.com website as a leading and comprehensive
source for financial services on the Internet. We have created our
Internet banking platforms to allow our customers to choose between
platforms using either HTML or Macromedia's innovative "Flash" generator
technology. We were certified to begin offering our Internet banking and
brokerage products and services through the HTML website on July 15,
1999, and we expect to begin offering products and services through the
"Flash" website in the second quarter of 2000. We believe the "Flash"
platform will significantly enhance our customers' experience on our
website and differentiate us from other Internet banks. Additionally,
because our "Flash" platform was developed in anticipation of the greater
bandwidth that is now widely available, we will be able to deliver our
services at the speed expected by today's on-line user. We believe
www.usabancshares.com, broadband interface will attract users who demand
not only efficient and convenient financial services, but entertaining
content as well. We intend to attract customers by:
o Offering a broad selection of financial products and services. We provide
the convenience of "one-stop shopping" to consumers. We currently offer
on-line interest-bearing checking accounts, statement savings accounts,
certificates of deposit, electronic bill payment services, overdraft
protection, debit cards, mortgage loans and retail loans, and credit
cards. USACapital, Inc., ("USACapital"), our wholly owned subsidiary,
offers on-line trading, real-time quotes, low commissions and direct
access to funds held on deposit with vBank our wholly owned subsidiary.
Through b2banc.com we offer a full array of commercial business products
highlighted by b2banc.com's cash management services, business checking,
saving certificates of deposit, analysis checking accounts, as well as
business term loans, business leasing facilities and business working
capital lines of credit. We intend to continue to develop innovative
financial products such as CDEnergy.com, the first live auction site for
FDIC-insured certificates of deposit. Although most of our products are
offered by us directly, some of our products, such as our credit cards
and mortgage loans, are offered through partners such as Low Cost Loans.
We anticipate expanding our product offerings in the future through
strategic partnerships with other companies to include various types of
consumer loans and insurance products.
o Offering attractive interest rates and low or no fees. We expect our
operating costs will be generally lower than those of traditional "brick
and mortar" banks because we will not require a traditional branch
network to generate deposits and conduct operations. We intend to pass
our savings in operating costs on to our customers by offering attractive
interest rates and low or no fees.
o Offering superior service, convenience and ease of access. As with our
traditional banking operations, we will continually seek ways to enhance
customer satisfaction. For example, unlike many other banks, we offer
services such as electronic bill payment and ATM cards without imposing
service charges. Our customers are able to access account data and
information regarding products and services and conduct banking
activities 24-hours-a-day. Our customers can also reach our customer
service representatives 24-hours-a-day by telephone or e-mail.
5
<PAGE>
o Offering interesting and entertaining content through a real-time
interactive medium. Our website was designed to be utilized by Internet
users who are attracted to the innovative features contained on our
website and not just by persons who are solely interested in executing
financial transactions. In addition to a wide array of financial products
and services, we offer live news feeds, news and commentary and links to
other sites on the Internet.
o Offering advanced security measures. Through the use of sophisticated
technology, we are able to provide security measures to our customers
that we believe to be among the most advanced security measures currently
available in the Internet banking industry. See "Security."
o Generating sponsorship and advertising revenues. We intend to establish
advertising relationships by offering advertising opportunities to
leading brand marketers and merchants in traffic intensive areas of the
USABancShares.com, network. These merchants will receive exposure through
banner advertising combined with promotional offers in exchange for which
we will collect a fee based on various arrangements such as cost per
click for each new visit to the third-party website made through our
network, and/or a share of revenues from each sale to USABancShares.com,
users.
o Expanding our Lending Efforts. Since our acquisition of vBank in November
1995, we have pursued an aggressive growth strategy, characterized by
purchases of pools of performing loans primarily at a discount secured by
single-family residential, multi-family residential and commercial
properties. Our net loan portfolio has grown from $7.0 million at
December 31, 1995 to $197.6 million at December 31, 1999. With our launch
of b2banc.com we will continue to expand our product line to cater to the
small to mid-size commercial business on b2banc.com portals as well as
direct customers of the bank that prefer banking on-line.
Products and Services
Deposit Products and Services. We offer a variety of deposit products
at attractive interest rates in order to build our customer base. We are able to
offer attractive interest rates as a result of our low operating costs. We also
seek to attract retail customers by offering convenient services such as free
electronic bill payment, and ATM/debit cards. Our on-line deposit products and
services include:
o Deposit Products. We offer an interest-bearing checking account, a
statement savings account and several fixed term certificates of deposit.
o Bill Payment Service. Through services provided by Electronic Data
Systems ("EDS"), customers can pay their bills on-line through electronic
funds transfer or a written draft prepared and sent to the creditor. We
do not charge a fee for this service.
o Overdraft Protection. If a customer has both an interest checking account
and a statement savings account, we will automatically establish
overdraft protection between those accounts.
o ATM/Debit Cards. Each customer automatically receives a debit card when
he or she opens an account with vBank. We do not charge our own fee for
ATM usage, but fees are generally imposed by the operator of the ATM.
vBank will reimburse ATM surcharges incurred at facilities charging $2.00
or less per transaction for up to five ATM transactions per monthly
statement cycle. Debit cards carry the MasterCard logo.
o For our business customers we offer PC-based and on-line cash management
services, as well as a full array of commercial business accounts and
services such as analysis accounts, zero balance accounts, account
reconciliation, and retirement plans.
6
<PAGE>
Lending Programs. To generate fee income and provide a convenient
service to our customers, we offer on-line loans and credit cards as described
below.
o Retail Loans. Our website enables customers to obtain interest rate
quotes and apply for retail loans on-line. Retail loans include
residential mortgage and consumer loans. We have an agreement with Low
Cost Loans, whereby we act as a loan originator on behalf of Low Cost
Loans.
o Credit Cards. We offer our customers Visa credit cards issued for no
annual fee. We are paid a fee for each cardholder referred through our
website. Customers can apply for these credit cards on-line.
o Commercial Loans. Through b2banc.com we offer a full array of Commercial
and Commercial Real Estate loan products. Products range from, capital
lines of credit, corporate credit cards, commercial term loans, leasing
products and commercial real estate.
Non-banking Financial Services. To serve as a single convenient source
for the financial services needs of Internet users and to generate additional
non-interest income, we offer non-banking financial services designed to attract
and retain customers. These services include on-line trading through USACapital,
Inc., our wholly owned broker-dealer subsidiary. Customers can purchase
securities without writing checks to their brokers, as trading fees are
automatically deducted from their checking or money market accounts with vBank.
Investment proceeds are automatically deposited into the customer's deposit
account with vBank. We provide customers 24-hour on-line access, real-time
quotes, low commissions and a professional brokerage staff.
Future Products and Services. To generate additional interest and fee
income and enhance customer convenience, in the future we plan to introduce a
variety of new products and services. Future products and services may include
insurance products, commercial and consumer lending, on-line bond trading
services, installment loans, business equipment leasing, timely search and
retrieval services through our website and various other products and services.
Marketing and Strategic Alliances
Our marketing strategy is aimed at making USABancShares.com, Inc. a
leading brand in the Internet financial services market. Our marketing strategy
is designed to increase our customer base by using both on-line and off-line
advertising. New initiatives will include print advertisements in publications
aimed at our target customers and potential strategic partners, direct mail
marketing, co-branded credit cards and other strategic partnerships with
Internet financial services providers. We realize that our new marketing
strategy will require a significant investment of resources and a commitment to
pursue new marketing relationships. We recently hired a director of marketing
and we plan to hire additional marketing/business development staff. We believe
that a significant increase in our investment in marketing initiatives will
enable us to increase our name recognition and grow our network user base on a
national scale.
We are developing strategic alliances and partnerships with several
top-performing and customer-based Internet sites. Additionally, as described
below, we are developing several innovative customer incentive programs. These
strategic relationships and customer incentive programs will be a key factor in
promoting and branding our core products and services.
7
<PAGE>
o Reaching Internet Service Provider ("ISP") Customers. We have entered
into agreements with several ISPs giving us the ability to market
USABancShares.com services directly to the ISP customers. In July 1999,
we entered into a two-year agreement with EarthLink, the second largest
ISP, pursuant to which we will provide EarthLink's subscribers (in excess
of 3.1 million) access to a USABancShares.com/EarthLink co-branded
website that promotes and exclusively offers our on-line financial
products and services. Under this agreement, we will pay EarthLink
promotion fees and a set fee for each customer generated under the
agreement. The per-customer fees will be credited against the promotion
fees until the promotion fees are completely offset, at which time we
will pay per-customer fees in cash. In connection with this agreement, we
granted EarthLink 120,000 warrants to purchase our common stock at an
exercise price of $12.00 per share which vest over a three-year period.
This agreement allows us to provide interactive, on-line banking services
to EarthLink members as the default on-line financial services provider
in select areas, such as the EarthLink Personal Start Page and the
EarthLink Finance Channel Jump Page, of the EarthLink network. In
September 1999, we entered into an annual agreement with UltraStar
whereby UltraStar's brand specific ISP's will promote and offer exclusive
on-line banking and brokerage services by USABancShares.com. We will pay
UltraStar a set fee for each customer who uses our on-line banking
services. These ISPs will include, among others, www.davidbowie.com,
www.yankees.com and www.orioles.com.
o In September 1999, we entered into a one-year agreement with Systemax
where we will be the exclusive financial service provider to the
purchasers of 300,000 nationally distributed personal computers through
an icon on the personal computer desktop interface containing a direct
link to our website. In addition, Systemax will ship our marketing
materials to their purchasers in the packaging with the personal
computers. Systemax will also market USABancShares.com through their
website, globally distributed direct mail catalog, mass e-mail newsletter
promotions, television advertisements and infomercials on the Home
Shopping Network and co-branded marketing campaigns. Under this
agreement, we will pay a fee for every customer based upon the average
deposit or loan. We will also pay a fee for every computer shipped with
our direct linked icon on the computer desktop. In connection with this
agreement, we granted Systemax warrants to purchase up to 40,000 shares
of our common stock. Systemax may exercise 10,000 of the warrants at any
time prior to August 19, 2001 at an exercise price of $10.00 per share.
Systemax may exercise the remaining 30,000 warrants upon certain
conditions being met at an exercise price equal to the closing market bid
price on the day prior to the day the conditions are fulfilled by
Systemax.
In November 1999, we entered into an agreement with eMachines where we
will be the exclusive financial service provider to the purchasers of two
million nationally distributed personal computers through a hard coded button
placed on the keyboard which provides a direct link to the USABancShares.com
website. eMachines will also market USABancShares.com through marketing
materials which accompanies each eMachine, direct mail and televised home
shopping programs featuring the eMachine. We will pay a fixed fee per unit
shipped as well as a fee based upon customer conversion rates.
Operations
Customers are able to access USABancShares.com through any Internet
service provider by means of an acceptable secure web browser and through
Internet accessible phone services and PDA's. When customers access
USABancShares.com's service menu, they are able to open a new account,
review the status of an existing account or engage in a transaction. To open a
new account, the customer completes the on-line enrollment form, prints the
signature card, signs it and mails it to us. Customers are able to make deposits
into an open account via direct deposit programs, by transferring funds between
accounts at vBank, by wire transfer, by mail or in person at our principal
executive offices. Customers also have the ability to make withdrawals and
access their accounts at ATMs that are affiliated with the MAC, Cirrus, Honor
and NYCE networks, which we believe provides added customer convenience.
Customers are able to apply for loans, review account activity, pay bills
electronically, conduct brokerage transactions, receive statements by mail and
print bank statement reports from any PC with a secure Web browser, regardless
of its location.
8
<PAGE>
We have negotiated relationships with a select group of service
providers who not only provide us with significant quality, security,
reliability, performance and marketing capabilities, but also play an integral
role in implementing our Internet banking strategy. Because we outsource our
principal operational functions to experienced third party service providers
that have the capacity to process a high volume of transactions, we believe we
will be able to respond easily to growth. Moreover, we intend to preserve a
degree of flexibility that will enable us to assess and evaluate our product
offerings and delivery structure on an ongoing basis and to incorporate other
alliance opportunities as they present themselves. Should any of these
relationships terminate however, we believe we will be able to secure the
required services from an alternative source without material interruption of
our operations. Our principal service providers are described below.
o Aurum Technology Inc., formerly EDS-Miser Division. We receive core
systems processing services, such as deposit accounting and year end
processing services, from Aurum Technology. Aurum's Miser III system
interfaces with EDS' secure Internet servers which verifies customer
passwords and identification. Miser III also operates our ATM/debit card
management systems.
o EDS. EDS licenses its Internet-based Electronic Banking System and
electronic bill paying services, provided through CheckFree, to us. EDS
provides operational support and hosting services for our Internet
banking and bill payment applications. Specifically, EDS provides a
secure website and software that performs services relating to our
infrastructure and other electronic banking services. EDS provides the
interface necessary to link our servers with those used by Aurum
Technology and CheckFree. EDS also provides software maintenance and
consulting services as needed.
Security
Our ability to provide our customers with secure financial services
over the Internet is of paramount importance. We will continually evaluate the
Internet systems, services and software used in our operations to ensure that
they meet the highest standards of security. The following are among the
security measures that we have in place for our Internet banking operations:
o Encrypted Transactions. All banking transactions and Internet
communications are encrypted so that sensitive information is not
transmitted over the Internet in a form that can be read or easily
deciphered. Encryption of Internet communications is accomplished through
the use of the Secure Sockets Layer ("SSL") technology. SSL is the
standard for encryption on the Internet and is currently used by
Netscape's Navigator (Version 3.03 or higher) and Microsoft's Internet
Explorer (Version 3.02 or higher). Messages between the web application
server and EDS-Miser system will use encrypted pins using EDS encryption,
which is described in "Isolated Bank Server" below.
o Secure Logon. To eliminate the possibility that a third party may
download vBank's or a customer's password file, user identification and
passwords are not stored on the Internet or the Web server. Furthermore,
passwords are strings of six to eight alphanumeric characters, which
makes the chance that a password can be randomly guessed less than one in
one trillion.
o Isolated Bank Server. The computer used to provide our operational
services cannot be accessed directly through the Internet. It is on a
private connection, or intranet, that provides two-way communication
between the isolated bank server and the EDS Internet server.
Consequently, an Internet user cannot directly access the computer that
actually provides our services. All banking services are routed from the
EDS application server through a firewall. The firewall is a combined
software and hardware product that precisely defines, controls and limits
9
<PAGE>
the access to "internal" computers from "outside" computers across a
network. Use of this firewall means that only authenticated bank
customers or administrators may send or receive transactions through it,
and the firewall itself is believed to be immune to penetration from the
network. The firewall is thus a mechanism used to protect the vBank
server from the freely accessible Internet. Furthermore, all messages
sent or received between the EDS application server and the vBank server
are carried on a proprietary internal EDS network and employ DES
encryption to increase security. Finally user passwords are additionally
protected using Atalla's hardware based encryption techniques. DES is a
symmetric key algorithm and is highly secure because it is not
susceptible to standard cipher-text attacks. Thus, even if a perpetrator
were able to route a message to the vBank server through the firewall,
the message could not be encrypted in a way that would be considered
valid by the server. As a result, the vBank server would reject the
message.
o Authenticated Session Integrity. An authenticated user is any user who
signs onto our website with a valid user ID and password. Although we
expect the vast majority of authenticated users to be legitimate bank
customers, the vBank server is programmed to limit exposure to an
authenticated user who is attempting to defraud vBank. If the
authenticated user alters the URL (the command or request that is sent
from the browser to the server) in any way in an attempt to gain access
to other users' accounts, the EDS server immediately detects that the
session integrity variables have been violated. The EDS server will
immediately stop the session and record the attempt in a log so that our
staff can investigate.
o Physical Security. All servers and network computers reside in Plano,
Texas and Rochelle Park, New Jersey in secure EDS facilities. Currently,
computer operations supporting our Internet access are based in Plano,
Texas. Only employees with proper photographic identification may enter
the primary building, which is monitored by guards at multiple levels
24-hours-per-day, 7-days-per-week. The computer operations are located in
a secure area, with admission only by key card. Key cards are restricted
to a specific group of employees. Access to the web server console
requires further password identification, which provides only limited
access to the system based on the role assigned to that password by the
security administrator.
o Secure Modem Access. A private leased line that is not accessible from
the public network connects vBank server and EDS' web application server.
A dial-up maintenance port also permits access to the vBank server. The
modem that provides the only access to this port is specially protected
and is only enabled on an as-needed basis to a restricted group of
employees.
o Service Continuity. EDS and EDS-Miser each provide a fully redundant
network with no single point of failure. The vBank server is also
"mirrored" so that hardware failures or software bugs should cause no
more than a few minutes of service outage. "Mirroring" means that the
various servers are backed up continuously so that all data is stored in
two physical locations. This network and server redundancy ensures that
access to vBank will be reliable. However, if customers are not able to
access vBank over the Internet, customers will retain access to their
funds through several means, including paper checks, ATM cards and
customer service.
o Monitoring. All customer transactions on the vBank server in EDS produce
one or more entries into transactional logs. We and EDS recognize that it
is critical to monitor these logs for unusual or fraudulent activity. As
mentioned previously, any attempt by an authenticated user to modify the
command or request that is sent from the browser to the server will be
logged. Additionally, all financial transactions will be logged. Our
personnel will review these logs regularly, and any abnormal or unusual
activity will be noted and we, EDS or both will take appropriate action.
Ultimately, vigilant monitoring is the best defense against fraud.
10
<PAGE>
o Security Assessment and Detection. EDS uses a service to simulate attacks
on the networks and systems to fortify the security features before the
system is breached. The system also has a feature that detects and stops
any unauthorized activity, whether from an internal or external source.
This feature can record the origin, type, destination, and time of the
attack and make this information immediately available to a monitor.
The preceding security measures are designed to ensure that our
Internet bank is set up in a secure manner. However, over the long term, the
security of our Internet bank depends upon the procedures and standards used for
administration of the Internet site. EDS is required to obtain SAS 70
certification from a national accounting firm. This is a certification by
independent auditors that EDS's computer systems are being managed and operated
in a manner consistent with accepted practices. EDS has received this
certification.
We believe the risk of fraud presented by Internet banking is not
materially different from the risk of fraud inherent in any banking
relationship. We believe the three principal reasons for a breach in bank
security are: (1) misappropriation from the user of the user's account number or
password, (2) penetration of the bank's server by an outside "hacker" and (3)
fraud committed by an employee of the bank or one of its service providers. Both
traditional banks and Internet banks are vulnerable to these types of fraud. By
establishing the security measures described above, we believe we have reduced
our vulnerability to the first two types of fraud. To counteract fraud by
employees, associates and consultants, we have established internal procedures
and policies designed to ensure that, as in any bank, proper control and
supervision is exercised over employees, associates and consultants. We will
also counteract all types of fraud through daily examination of our
transactional logs. In addition, we intend to provide, at no cost to the
depositor, $10,000 insurance coverage from Travelers Property Casualty to
protect the customer from any loss due to the unauthorized use of a depositor's
accounts and access to our Internet banking system.
Lending Activities
Since our acquisition of vBank in November 1995, we have aggressively
grown our loan portfolio through the acquisition of loan pools at a discount and
through loan originations. We intend to continue to expand our small
business community banking presence through b2banc.com nationally and through
vBank loan officers originating loans for small to mid-size business located in
the Philadelphia marketplace. We intend to emphasize the origination of
commercial real estate and commercial business loans, which generally carry
higher yields than traditional single-family residential loans. Although we
intend to continue to originate single-family residential and consumer loans,
retail loans will not be emphasized and they will be offered primarily as an
accommodation to our customers. Single-family residential loans originated
through our website will be originated through our alliance partner, Low Cost
Loans. We intend to fund our increased lending activities in part with deposit
growth we expect to achieve from our Internet banking operations.
Loan Portfolio. The principal components of our loan portfolio are real
estate loans, commercial real estate, and residential one-to-four family
mortgage loans, and to a much lesser extent, commercial business loans and home
equity loans, passbook and other consumer loans. At December 31, 1999 our total
loans receivable, net, amounted to $197.6 million, which represented 61.1% of
our total assets at that date.
11
<PAGE>
The following table sets forth the composition of our loan portfolio in
dollar amounts and as a percentage of the portfolio as of the dates indicated.
<TABLE>
<CAPTION>
December 31, December 31,
------------------------------- ------------------------------
(in Thousands) 1999 % 1998 %
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Real Estate:
1-4 family residential properties $ 31,729 15.9% $ 33,287 32.2%
Commercial real estate 143,428 71.7 66,351 64.2
Multifamily residential properties 7,726 3.9 1,446 1.4
Construction 9,467 4.7 992 1.0
Commercial and industrial 4,688 2.3 986 1.0
Consumer 2,967 1.5 243 0.2
--------- ----- --------- -----
Total loans, net of discount $ 200,005 100.0% $ 103,305 100.0%
========= ===== ========= =====
Deferred loan fees (267) (116)
Allowance for loan losses (2,115) (1,051)
--------- ---------
Net loans $ 197,623 $ 102,138
========= =========
</TABLE>
Loan Maturity. The following table sets forth the maturity or period of
repricing of our loan portfolio at December 31, 1999. Demand loans, loans having
no stated schedule of repayments and no stated maturity, and overdrafts are
reported as due within one year. Adjustable and floating rate loans are included
in the period in which interest rates are next scheduled to adjust rather than
in which they contractually mature. Fixed rate loans are included in the period
in which the final contractual repayment is due. The following table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
Within 1 1-3 3-5 5-15 Beyond
Year Years Years Years 15 Years Total
------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
(in Thousands)
1-4 family residential properties $ 5,216 $ 5,986 $ 7,756 $ 5,747 $ 7,024 $ 31,729
Commercial real estate 106,146 24,529 8,603 3,035 1,115 143,428
Multifamily residential properties - 483 5,795 1,448 - 7,726
Construction 959 2,978 3,530 2,000 - 9,467
Commercial and industrial 2,932 947 59 750 - 4,688
Consumer 565 969 657 776 - 2,967
------------- ------------ ------------ ------------ ------------ ------------
Total loans receivable $ 115,818 $ 35,892 $ 26,400 $ 13,756 $ 8,139 $ 200,005
============= ============ ============ ============ ============ ============
</TABLE>
Origination, Purchase and Sale of Loans. Our lending activities are
subject to the underwriting policies and loan origination and purchase
procedures established by the board of directors and management. Loan
originations are derived from a number of sources, such as existing customers,
our loan officers, borrowers, builders, attorneys, walk-in customers and
correspondent lenders. Upon receiving a loan application, we obtain a credit
report and employment verification to verify specific information relating to
the applicant's employment, income and credit standing. In the case of a real
estate loan, an appraiser approved by us appraises the real estate intended to
collateralize the proposed loan. An underwriter checks the loan application file
for accuracy and completeness, and verifies the information provided. If the
appraisal and credit information generally comply with our underwriting
guidelines, the loan is approved by the board of directors. We have not
delegated to any of our loan officers approval authority and all loan
originations are required to be approved by the board of directors. However, to
accommodate vBank's future growth, the board of directors is considering
implementing a committee system to approve loans. Such committee would approve
loans based on the board of directors' approved loan underwriting policies.
Loans in excess of $1.0 million would still require approval by the full board
of directors. For multi-family residential and commercial real estate loans, we
require that the borrower provide operating statements, pro forma cash flow
statements and, if applicable, rent rolls. In addition, we review the borrower's
credit standing and expertise in owning and managing the type of property that
will collateralize the loan. Fire and casualty insurance, and in certain cases,
flood insurance, are required on the property serving as collateral at the time
the loan is made and throughout the term of the loan.
12
<PAGE>
Our internal originations consist primarily of multi-family residential
and commercial real estate loans, which we intend to continue to emphasize. In
addition, although commercial business loans have historically not been a major
line of business for us, we intend to increase our emphasis on small business
commercial loan originations. Although we will and do originate single-family
residential and consumer loans, such originations have historically been made as
an accommodation to our customers and we generally do not emphasize such loans.
Since December 1995, we have been supplementing our originations with
purchases of loan pools at a discount. Such purchases have been the primary
factor in our substantial growth since 1995. Prior to 1997, we acquired loans at
a discount, generally from the FDIC and the Resolution Trust Corporation,
primarily in auctions of pools of loans acquired by such agencies from the large
number of financial institutions which had failed during the late 1980s and
early 1990s. Although governmental agencies, such as the FDIC, continue to be a
potential source of loans, in recent periods we have obtained discounted loans
primarily from various private sector sellers, such as banks, savings
institutions, mortgage companies and insurance companies which generally were
seeking to eliminate a loan or a category of loans from their portfolio.
At December 31, 1999 our net discounted loan portfolio amounted to
$121.3 million or 37.5% of our total assets. These loans had a face value of
$126.9 million, reflecting a discount of $5.5 million or 4.3%. At December 31,
1999, approximately 18% and 82% of the discounted loan portfolio was secured by
residential and commercial properties, respectively.
Substantially all of the loans we purchase at a discount were
performing in accordance with their terms at the time of purchase. We have
developed and maintain a proprietary model to determine what we believe to be
the appropriate purchase price to be paid for a discounted loan pool. The
discount is determined based on objective and subjective criteria. The objective
criteria includes geographic location, loan-to-value ratio, collateral type,
past payment performance, and the term and structure of the loan. The subjective
criteria relies on senior management's substantial experience with respect to
the acquisition and management of discounted real estate loans.
Real estate loans generally are acquired in pools, although
multi-family residential and commercial real estate loans may be acquired
individually. These pools generally are acquired in auctions or competitive bid
circumstances in which we face substantial competition. Although many of our
competitors have access to greater capital and have other advantages, we believe
we have a competitive advantage relative to many of our competitors as a result
of our experience in acquiring and managing loans purchased at a discount and
the strategic relationships and contacts we have developed in connection with
these activities.
Prior to making an offer to purchase a portfolio of loans, we conduct
an extensive investigation and evaluation of the loans in the portfolio.
Evaluations of potential loans are conducted primarily by our senior management
who specialize in the analysis of such loans. Our employees may use third
parties to assist them in conducting an evaluation of the value of the
collateral property as well as to assist them in the evaluation and verification
of information and the gathering of other information not previously made
available by the potential seller.
13
<PAGE>
Although we focus on acquiring loans in the Mid-Atlantic region, we
have acquired loans secured by real estate located in a number of other states
including Minnesota, Florida and California. We believe that the relatively
broad geographic distribution of our discounted loan portfolio reduces the risks
associated with concentrating such loans in limited geographic areas and that
due to our expertise and our policies and procedures, the geographic diversity
of our discounted loan portfolio does not place greater burdens on our ability
to administer and, if applicable, service such loans. The table below provides a
geographic analysis of the loan portfolio by state.
As of December 31, 1999
Principal Balance Number of
State (in Thousands) Loans
- - ------- ----------------- ------------
AL $ 9 2
AZ 3,852 10
CA 12,436 58
CO 954 3
CT 6,786 51
DC 946 1
DE 92 10
FL 12,342 67
GA 199 6
IL 40 4
IN 35 1
LA 33 1
MA 2,353 47
MD 4,872 15
KS 5 1
MN 12,768 18
NC 95 2
NH 533 9
NJ 38,109 212
NY 12,563 43
OH 2,585 4
OR 929 5
PA 74,836 452
RI 4,283 4
SC 11 1
TX 1,049 16
UT 283 13
VA 5,519 14
VT 31 1
WA 1,457 4
--------- -----
$ 200,005 1,075
========= =====
We expect loan originations to also be derived from our website in the
future. We have an agreement with Low Cost Loans whereby vBank acts as a loan
originator on behalf of Low Cost Loans with respect to retail loans, including
single-family residential and home equity loans.
One-to-Four Family Residential Mortgage Lending. At December 31, 1999
vBank had $31.7 million loans outstanding secured by one-to-four family
residental mortgages. We are not an active originator of single-family
residential loans and such loans have generally been originated as an
accommodation to our customers. These loans are generally made to borrowers who,
because of the size of the loan, prior credit problems, the absence of a credit
history or other factors, are unable to qualify as borrowers for a single-family
residential loan under Federal Home Loan Mortgage Corporation or Federal
National Mortgage Association guidelines ("conforming loans"). As a result,
these loans are not eligible for resale in the secondary mortgage market. Loans
to non-conforming borrowers are perceived by our management as being
advantageous to us because they generally have higher interest rates and
origination and servicing fees, and generally have lower loan-to-value ratios.
14
<PAGE>
Through the banks website www.usabancshares.com, we offer retail loans
to our network users. In this capacity we are considered a loan originator and
pass the loan applications on to our third party vendor Low Cost Loans, who will
process the loans and close the loans if the credit passes Low Cost Loans
underwriting standards. Low Cost Loans offers a full array of adjustable,
balloon and fixed rate one-to-four family mortgage loans, in each case with
terms typically ranging from 15 to 30 years.
Substantially all of our one-to-four family residential loans have been
acquired through loan purchases. A majority of these loans are located outside
of the greater Delaware Valley. Although our purchased single-family
residential loans carry a variety of terms, the majority of such loans have
loan-to-value ratios of 80% or below and carry fixed rates of interest. We
generally attempt to acquire the servicing rights with respect to purchased
single-family residential loans, which includes collecting and remitting loan
payments, inspecting the properties and making required insurance and tax
payments on behalf of the borrowers. In the past we purchased loans where the
seller retained the servicing rights. At December 31, 1999, we held in our
portfolio approximately $10.2 million of loans which were being serviced by
others and $16.1 million were being serviced by the lead bank of the loan which
vBank is participating in.
One-to-four family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option. The average
length of time that our one-to-four family residential mortgage loans remain
outstanding varies significantly depending upon trends in market interest rates
and other factors. In recent years, the average maturity of our mortgage loans
has decreased significantly due to the unprecedented volume of refinancing
activity. Accordingly, estimates of the average length of time that one-to-four
family loans may remain outstanding cannot be made with any degree of accuracy.
We are permitted under applicable law to lend up to 100% of the
appraised value of the real property securing a residential loan. However, if
the amount of a residential loan originated or refinanced exceeds 80% of the
appraised value, we are required by federal regulations to obtain private
mortgage insurance on the portion of the principal amount that exceeds 80% of
the appraised value of the secured property. Pursuant to underwriting
guidelines adopted by the board of directors, we will generally only lend up to
80% of the appraised value of the property securing a single-family residential
loan.
Construction and Land Development Lending. We will originate loans for
the construction of single-family residential properties. Such loans may be made
to individuals or builders. Although we do not expect to emphasize construction
lending in the near term, at December 31, 1999 we had $9.5 million of gross
construction loans with $9.0 million of construction loans outstanding. In 1998,
we acquired a land development loan which on December 31, 1999 had a loan
outstanding balance of $558,000 and is classified as non-performing. In February
2000 vBank signed a forbearance agreement to sell this property, which is to
close within 60 days of signing the forbearance agreement.
Commercial Real Estate and Multi-family Residential Real Estate
Lending. Our lending activities currently emphasize the origination and
acquisition of loans secured by existing commercial and multi-family residential
properties. As of December 31, 1999, a majority of our real estate loan
portfolio consisted of loans secured by commercial and multi-family residential
properties. We have generally targeted higher quality, smaller multi-family
residential and commercial real estate loans with principal balances up to $3.0
million. vBank's legal lending limit is $4.2 million at December 31, 1999. At
December 31, 1999 we had $143.4 million of commercial real estate loans and $7.7
million of multi-family residential loans outstanding.
15
<PAGE>
Our multi-family residential loans are secured by multi-family
properties of five units or more, while our commercial real estate loans are
secured primarily by industrial, warehouse and self-storage properties, office
buildings, office and industrial condominiums, retail space, strip shopping
centers and mixed-used commercial properties. At December 31, 1999 we had $143.4
million loans outstanding secured by commercial real estate, 35.6% in
Pennsylvania and 3.7% in New Jersey.
All of the properties securing our multi-family residential and
commercial real estate loans were located in the greater Delaware Valley. We
will originate multi-family residential and commercial real estate loans for
terms of up to 25 years. Some of these loans contain call or repayment option
features within three to seven years after origination. We will originate such
loans on both a fixed-rate or adjustable-rate basis, with the latter based on an
applicable prime rate. Adjustable-rate loans may have an established ceiling and
floor, and the maximum loan-to-value for these loan products is generally 80%.
Though historically vBank has originated and acquired loans with lower debt
coverage ratios, as part of the criteria for underwriting multi-family
residential and commercial real estate loans, vBank generally requires a debt
coverage ratio (the ratio of net cash from operations before payment of debt
service to debt service) of at least 1.25 to 1.0 on originated loans and at
least 1.15 to 1.0 on acquired loans. We generally seek additional protection,
such as secondary collateral and personal guarantees from the principals of the
borrowers, to mitigate any weaknesses identified in the underwriting process.
Loans collateralized by multi-family residential and commercial real
estate generally involve a greater degree of credit risk than one-to-four family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate and multi-family real estate is
typically dependent upon the successful operation of the related property. If
the cash flow from the project is reduced, the borrower's ability to repay the
loan can become impaired. At December 31, 1999, $74,000 of our commercial real
estate loans were classified as non-performing.
Commercial Business Loans. We originate commercial business loans
consisting primarily of lines of credit and term loans secured by equipment and
accounts receivable. At December 31, 1999, commercial business loans totaled
$4.7 million, or 2.3%, of our total loan portfolio. In addition, all of our
commercial business loans which are secured by real estate have been classified
as commercial real estate loans. Currently, we are placing greater emphasis on
the origination of commercial business loans. We recently hired two loan
officers with extensive commercial lending experience. Commercial business loans
generally have shorter terms and higher interest rates than mortgage loans
because of the type and nature of the collateral. At December 31, 1999, none of
our commercial business loans were classified as non-performing.
Consumer Loans. We originate consumer loans consisting primarily of
loans secured by deposit accounts and marketable securities, and home
improvement, personal and automobile loans. At December 31, 1999, consumer loans
totaled $3.0 million or 1.5%, of our total loan portfolio. We are not an active
originator of consumer loans. vBank has offered consumer loans as accommodations
to our existing customers.
Consumer loans are offered primarily on a fixed-rate basis with
maturities generally 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.
USABancShares.com through an affiliation with Low Cost Loans, offers
a full array of consumer loans, including Home Equity Loans, Installment loans
and Lines of Credit.
16
<PAGE>
Loan Origination Fees and Other Income. In addition to interest earned
on loans, we generally receive fees in connection with loan originations. Such
loan origination fees, net of costs to originate, are deferred and amortized
using the interest method over the contractual life of the loan. Fees deferred
are recognized as income immediately upon prepayment of the related loan. At
December 31, 1999, we had $267,000 of net deferred loan origination fees. Such
fees vary with the volume and type of loans and commitments made and purchased,
the principal repayments on such loans, and competitive conditions in the real
estate market that reflect the demand and availability of money. In addition to
loan origination fees, we also receive loan fees and service charges that
consist primarily of deposit transaction account service charges and late
charges.
Loans to One Borrower. Current regulations restrict loans to one
borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus
on an unsecured basis, and an additional amount equal to 10% of unimpaired
capital and unimpaired surplus if the loan is secured by readily marketable
collateral (generally, financial instruments). At December 31, 1999, our
regulatory limit on loans to one borrower was $4.2 million. Our five largest
loans or groups of loans to one borrower, including related entities, aggregated
approximately $3.0 million each. All five of these loans or loan concentrations
were secured by multi-family residential, commercial real estate or marketable
securities and were performing in accordance with their terms at December 31,
1999.
Asset Quality
Collection Procedures. Our collection procedures provide that when a
loan is 16 days past due, a computer generated late charge notice is sent to the
borrower requesting payment of the amount due under the loan, plus a late
charge. If such delinquency continues, on the first day of the next month, a
delinquent notice is mailed advising the borrower of the violation of the terms
of the loan. We attempt to contact borrowers whose loans are more than 30 days
past due. If such attempts are unsuccessful, we will engage counsel to
facilitate the collection process. A delinquent loan report is presented to the
board of directors on a monthly basis for their review. Historically, we have
instituted legal action on loans 90 days past due. It is sometimes necessary and
desirable to arrange special repayment schedules with borrowers to prevent
foreclosure or filing for bankruptcy. In such cases, we prepare a schedule
pursuant to discussions with the borrower and such schedule is reviewed by the
board of directors.
Delinquent Loans and Non-performing Assets. Loans are reviewed on a
monthly basis. Loans are typically placed on nonaccrual status when either
principal or interest is 90 days or more past due. Delinquent loans are charged
off when it appears no longer reasonable or probable that the loan will be
collected. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income.
Real estate acquired by us as a result of foreclosure or by deed in
lieu of foreclosure is deemed Other Real Estate ("ORE") until such time as it is
sold. When ORE is acquired, it is recorded at the lower of the unpaid principal
balance of the related loan or its estimated fair value, less estimated selling
expenses. Valuations are periodically performed or obtained by management and
any subsequent decline in fair market value is charged to operations. We had no
ORE as of December 31, 1999, and $66,000 as of December 31, 1998.
17
<PAGE>
The following table sets forth information with respect to our
delinquent loans at December 31, 1999.
Balance Number
----------- -------
(in Thousands)
Residential real estate:
Loans 30 to 89 days delinquent $ 301 11
Loans 90 or more days delinquent 634 17
------- -------
Total 935 28
Commercial real estate:
Loans 30 to 89 days delinquent 365 4
Loans 90 or more days delinquent (1) 632 2
------- -------
Total 997 6
Commercial business loans:
Loans 30 to 89 days delinquent 8 1
Loans 90 or more days delinquent - -
------- -------
Total 8 1
------- -------
Total delinquent loans $ 1,940 35
======= =======
- - -----------------------------------------
(1) Includes a land development loan for $558,000 that is classified in the
Construction and land development portfolio.
The following table presents information on our non-performing assets
at the dates indicated:
December 31,
1999 1998
-------- -------
(in Thousands)
Non-accruing loans:
One to four family $ 634 $ 666
Commercial real estate (1) 632 1,138
Commercial business - -
------- -------
Total non-performing loans $ 1,266 $ 1,804
Accruing loans greater than 90 days delinquent - 152
------- -------
Total non-performing loans 1,266 1,956
Other real estate owned - 66
------- -------
Total non-performing assets $ 1,266 $ 2,022
======= =======
Total non-performing loans, net of discount,
as a percentage of total loans, net of
discount 0.63% 1.89%
======= =======
Total non-performing assets, net of discount,
as a percentage of total assets, net of
discount 0.39% 1.22%
======= =======
- - -----------------------------------------
(1) Includes a land development loan for $558,000 that is classified in the
Construction and land development portfolio.
18
<PAGE>
Classification of Assets. Federal regulations provide for the
classification of delinquent or non-homogeneous loans and other assets such as
debt and equity securities as "substandard," "doubtful," or "loss" assets. In
analyzing loans for purchase as well as for purposes of our loan classification,
we have placed increased emphasis on the payment history of the obligor and, to
a lesser extent, the purchase discount associated with a specific loan. Assets
that do not expose us to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess some weaknesses, are required to be
designated "special mention" by management. Loans designated as special mention
are generally loans that, while current in required payment, have exhibited some
potential weaknesses that, if not corrected, could increase the level of risk in
the future. An asset is considered "substandard" if it is inadequately protected
by the current net worth and paying capacity of the obligor. "Substandard"
assets include those characterized by the "distinct possibility" that we will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets is not warranted and are charged against the loan
loss reserve. Pursuant to internal procedures, loans with a history of 30-89 day
delinquencies will generally be classified either special mention or
substandard. However, all loans 90 days or more delinquent are classified either
substandard, doubtful or loss.
The following table sets forth the aggregate amount of our special
mention and classified assets at December 31, 1999:
(in Thousands)
Special mention ............................................ $ 340
Substandard ................................................ 1,454
Doubtful ................................................... --
Loss ....................................................... --
------
Total special mention and classified assets ................ $1,794
Other real estate owned .................................... --
------
Total special mention and classified assets, including other
real estate .............................................. $1,794
======
Allowance for Loan Losses. Our policy is to provide for estimated
losses on our loan portfolio based on management's evaluation of the probable
losses that may be incurred. Our method of determining provisions for loan
losses is based partially on the Pennsylvania Department of Banking's and the
FDIC's Allowance for Loan and Lease Loss Guidelines, and partially on an
in-house asset classification policy. The policy provides for the monthly
evaluation of concentrations of credit, past loan experience, current economic
conditions, amount and composition of the loan portfolio, estimated fair value
of collateral, delinquencies and other factors.
The asset classifications are reviewed monthly by senior management
with respect to the loan portfolio and the adequacy of the allowance for loan
losses. Based upon that review, management determines whether any loans require
the establishment of appropriate reserves or allowances for losses. Such
evaluation, which includes a review of all loans for which full collectability
of interest and principal may not be reasonably assured, considers, among other
matters, the estimated fair value of the underlying collateral. Other factors
considered by management include the site and risk exposure of each segment of
the loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in future
periods. Management also prepares a summary classifying all delinquent loans and
non-homogenous loans as special mention, substandard, doubtful or loss.
Management then recommends the general allowance for loan losses in part based
on past experience, and in part based on specified loan balances within each
classification.
19
<PAGE>
Based on the recommendation of management, the board of directors makes
determinations as to any reserves and changes to the provision for loan losses
and allowance for loan losses. Both general and specific loan loss allowances
are charged against earnings; however, general loan loss allowances are added
back to capital in computing total risk-based capital under Pennsylvania
Department of Banking and FDIC regulations, subject to certain limitations.
We will continue to monitor the allowance for loan losses and make
future adjustments to the allowance through the provision for loan losses as
conditions indicate. Although we maintain our allowance for loan losses at a
level that we consider to be adequate to provide for the inherent risk of loss
in the loan portfolio, there can be no assurance that future losses will not
exceed estimated amounts or that additional provisions for loan losses will not
be required in future periods. In addition, our determination as to the amount
of our allowance for loan losses is subject to review by the Pennsylvania
Department of Banking and the FDIC as part of their examination process, which
may result in the establishment of an additional allowance based upon the
judgment of the applicable regulator.
The following table sets forth activity in our allowance for loan
losses at or for the specified periods.
<TABLE>
<CAPTION>
At or for the Year Ended
December 31,
------------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Total loans outstanding. ............................ $197,623 $ 103,305
Average loans outstanding. .......................... 150,182 78,797
Allowance balance (at beginning of period) .......... 1,051 568
Provision for loan losses ........................... 1,175 510
Charge-offs, net of recoveries ...................... 111 27
-------- --------
Allowance balance (at end of period) ................ $ 2,115 $ 1,051
======== ========
Allowance for loan losses as a percent of total
loans, net of discount, at end of period ........... 1.06% 1.02%
======== ========
Allowance for loan losses as a percent of total
non-performing loans, net of discount, at
end of period ...................................... 167.06% 53.72%
======== ========
Allowance for loan losses and purchase
discount as a percentage of total loans ............ 3.82% 5.85%
======== =======
Net loans charged off as a percent of average
loans outstanding. ................................. 0.09% 0.03%
======== =======
</TABLE>
The following tables set forth our percentage of allowance for loan
losses to total allowance for loan losses and the percentage of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
------------------------------------------ ------------------------------------------
Percentage of Percentage of Percentage of Percentage of
Allowance Loans in Each Allowance Loans in Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
-------- --------------- --------------- -------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance
for loan losses at end of
period applicable to:
Real estate ................. $1,990 94.1% 97.6% $1,037 98.8% 98.8%
Commercial business ......... 100 4.7 1.9 11 1.0 1.0
Consumer .................... 25 1.2 0.5 3 0.2 0.2
------ ----- ----- ------ ----- -----
Total ...................... $2,115 100.0% 100.0% $1,051 100.0% 100.0%
====== ===== ===== ====== ===== =====
</TABLE>
Investment Activities
Our securities portfolio is managed by our Chief Executive Officer 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.
20
<PAGE>
At December 31, 1999, our securities portfolio equaled $101.8 million,
or 31.5% of our total assets. Our investment portfolio is comprised of trust
preferred securities, mortgage-backed securities, U.S. government agency
securities, corporate and municipal obligations and equity securities. At
December 31, 1999, our trust preferred securities amounted to $36.0 million,
corporate and municipal obligations amounted to $38.1 million, mortgage-backed
securities amounted to $15.2 million, equity securities (consisting of common
stock of a local financial institution, a self-service photocopy business, stock
in our computer vendor and a financial institution managed fund) equaled $5.5
million, and U.S. government agency securities amounted to $7.0 million.
We classify securities as either available for sale or held to maturity
based upon our intent and ability to hold such securities. Securities available
for sale include debt and equity securities that are held for an indefinite
period of time and are not intended to be held to maturity. Securities available
for sale include securities that we intend to use as part of our overall
asset/liability management strategy and that may be sold in response to changes
in interest rates and resultant prepayment risk and other factors related
thereto. Securities available for sale are carried at fair value, and unrealized
gains and losses (net of related tax effects) on such securities are excluded
from earnings but are included in stockholders' equity. Upon realization, such
gains and losses will be included in our earnings. Investment securities and
mortgage-backed securities, other than those designated as available for sale,
are comprised of debt securities that we have the affirmative intent and ability
to hold to maturity. Securities held to maturity are carried at cost, and are
adjusted for amortization of premiums and accretion of discounts over the
estimated terms of the securities.
We are required under federal regulations to maintain a minimum amount
of liquid assets that may be invested in specified short-term securities and
certain other investments. We have maintained a portfolio of liquid assets that
exceeds regulatory requirements. Our Asset Liability Management Committee meets
on a monthly basis to decide, based on market levels and conditions, current
economic data, political and regulatory information, and internal needs, whether
any alterations need to be made to our investment portfolio. Based on the
parameters of our Investment Policy, we endeavor to diversify our holdings
through the purchase of medium-term and long-term, fixed-rate and variable-rate
instruments, which provide both an adequate return and moderate risk. The
Investment Officers of USABancShares.com, Inc. make all investment decisions in
accordance with the Investment Policy and Asset Liability Management Committee
guidelines.
Our securities portfolio composition is designed to provide a liquid
portfolio yet maximize yield on a risk-adjusted basis. The process by which we
decide to acquire debt instruments, trust preferred securities and corporate and
municipal obligations are similar to that of underwriting a loan. We evaluate
the potential credit risk associated with these types of investment instruments
by becoming familiar with the institution, its earnings history, its ability to
meet its debt obligation and, if possible, by meeting its management team. The
trust preferred securities are fixed-rate long-term obligations with a weighted
average yield of 9.09% as of December 31, 1999. The trust preferred securities
are obligations of primarily non-rated financial institutions located throughout
the United States, and thus there is a limited market in which to purchase and
sell these securities. As long-term instruments, this portfolio is also subject
to interest rate risk. If interest rates were to rise, these securities would
lose value and require us to reflect a charge to our stockholders' equity.
21
<PAGE>
Our investments include mortgage-backed securities, which represent an
interest in, or are collateralized by, pools of mortgage loans originated by
private lenders that have been grouped by various governmental,
government-related or private organizations. Mortgage-backed securities
generally enhance the quality of our assets by virtue of the insurance or
guarantees that back such securities, are more liquid than individual mortgage
loans and may be used to collateralize borrowings or other obligations.
Investments in mortgage-backed securities, however, may involve risks not
present with mortgage loans. Specifically, mortgage-backed securities are
subject to the risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such
instruments, thereby reducing the net yield on such securities. Like mortgage
loans, there is also reinvestment risk associated with the cash flows from such
securities in the event such securities are redeemed by the issuer. In addition,
the market value of such securities may be adversely affected by changes in
interest rates. As interest rates increase, the value of such securities may
decrease as mortgages with higher rates are refinanced. Our mortgage-backed
securities are primarily pass-through securities, which provide us with payments
consisting of both principal and interest as mortgage loans in the underlying
mortgage pool are paid off by the borrowers. The average maturity of
pass-through mortgage-backed securities varies with the maturities of the
underlying mortgage instruments and with the occurrence of unscheduled
prepayments of those mortgage instruments.
22
<PAGE>
The following tables present the book values and estimated market
values at December 31, 1999 and December 31, 1998, respectively, for each major
category of our investment securities.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------------
(in Thousands)
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Available-for-Sale
U.S. Government and agency
securities $ 1,399 $ - $ (51) $ 1,348
Mortgage-backed securities 9,101 - (457) 8,644
Corporate securities 19,326 6 (311) 19,021
Trust preferred securities 7,588 - (608) 6,980
Other securities 2,058 2 (575) 1,485
-------- ----- -------- --------
Total Available-for-Sale $ 39,472 $ 8 $ (2,002) $ 37,478
======== ===== ======== ========
Held-to-Maturity
U.S. Government and agency
securities $ 5,694 $ - $ (262) $ 5,432
Mortgage-backed securities 6,514 8 (152) 6,370
Corporate obligations 16,079 - (1,355) 14,724
Trust preferred securities 29,676 139 (3,595) 26,220
Municipal securities 3,170 - (321) 2,849
-------- ----- -------- --------
Total Held-to-Maturity $ 61,133 $ 147 $ (5,685) $ 55,595
======== ===== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------
(in Thousands)
Gross Gross Approximate
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 securities 1,322 13 (89) 1,246
Trust preferred securities 22,987 243 (605) 22,625
Other securities 1,957 - (59) 1,898
------- ----- ----- -------
Total Available-for-Sale $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 2,313 65 - 2,378
Other securities 3,425 14 (56) 3,383
------- ----- ----- -------
Total Held-to-Maturity $15,755 $ 253 $ (57) $15,951
======= ===== ===== =======
</TABLE>
23
<PAGE>
The following table shows the contractual maturity of our investment
securities portfolio at December 31, 1999.
<TABLE>
<CAPTION>
(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 within one year $ 2,546 $ 2,487 11.86% $ 746 $ 726 9.77%
Due after one year through five years 14,029 13,874 9.04 7,023 6,663 11.62
Due after five years through ten years 4,150 4,008 8.25 10,628 9,626 10.60
Due after ten years 7,588 6,980 8.97 36,220 32,211 8.59
Mortgage-backed securities 9,101 8,644 6.79 6,516 6,369 7.41
Equity Securities 2,058 1,485 - - - -
------- ------- ------- -------
$39,472 $37,478 $61,133 $55,595
======= ======= ======= =======
</TABLE>
Sources of Funds
General. Deposits are the major source of our funds for lending and
other investment purposes. We expect our Internet banking operations to generate
significant deposit growth. In addition to deposits, we derive funds from the
scheduled payments as well as prepayment of loans, the maturity of investment
securities and the sale of assets available for sale. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and market conditions. Borrowings may be used to compensate for reductions
in the availability of funds from other sources or on a longer-term basis for
general business purposes.
Deposits. Consumer and commercial deposits have historically been
attracted principally from within our market area through the offering of a
broad selection of deposit instruments, including non interest-bearing demand
accounts, NOW accounts, passbook savings accounts, money market accounts, term
certificate accounts and individual retirement accounts. We expect to attract
deposits on a national basis through our Internet banking operations. Deposit
account terms vary according to the minimum balance required, the period of time
during which the funds must remain on deposit, and the interest rate, among
other factors. Deposits have increased $234.2 million from $20.8 million at
December 31, 1995 to $255.0 million at December 31, 1999. The largest area of
increase occurred in certificates of deposit as we continued to rely primarily
on non-retail certificates of deposits. At December 31, 1999 we had $224.9
million of certificates of deposit, $149.4 million of which were in excess of
$100,000, of which $93.1 million mature within twelve months.
We regularly evaluate our internal cost of funds, survey rates offered
by competing institutions, review our cash flow requirements for lending and
liquidity, and execute rate changes when deemed appropriate. We anticipate that
the mix of deposits will shift toward transaction accounts as we expand our
commercial line of business. We anticipate that the growth in deposits would be
accomplished through aggressive marketing of our Internet banking operations and
our virtual branch network in surrounding communities, competitive pricing of
retail products and the ability to provide loan and deposit products to
consumers and commercial businesses on a national level through our Internet
banking operations and in the Mid-Atlantic region through our community banking
franchise. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources."
24
<PAGE>
The following table sets forth the balance of each deposit type and the
weighted average yield paid on each deposit type of vBank for the periods
indicated.
<TABLE>
<CAPTION>
(in Thousands)
December 31, 1999 December 31, 1998
------------------------------------- ---------------------------------------
Amount Percent Yield Amount Percent Yield
------------ ----------------------- ------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 5,168 2.03% - $ 1,439 1.26% -
NOW 4,692 1.84 3.92% 846 0.74 2.31%
Money Market 973 0.38 4.36 2,345 2.05 4.41
Savings and Passbook 19,271 7.56 4.17 5,281 4.62 3.66
Time 224,934 88.19 5.87 104,476 91.33 5.73
-------- ------- -------- ------
$255,038 100.00% 5.58% $114,387 100.00% 5.53%
======== ======= ======== ======
</TABLE>
At December 31, 1999, our time deposits had the following stated
maturities.
Maturity Period Amount
--------------- ---------------
(In Thousands)
Within 12 months............................ $142,907
Within 13 to 36 months ..................... 60,856
Beyond 36 months ........................... 21,171
--------
Total ...................................... $224,934
========
The following table presents, by various rate categories, the amount of
certificates of deposit outstanding at December 31, 1999.
Outstanding
Certificate Rates: Amount
- - ------------------ ---------------
(In Thousands)
0 to 3.99% ..................... $ 24
4.00% to 5.99% ................. 152,661
6.00% to 7.99% ................. 72,121
Over 8.00% ..................... 128
--------
Total .......................... $224,934
========
The following table summarizes the maturity composition of certificates
of deposit with balances of $100,000 or more at December 31, 1999.
Balance %
--------- ---------
(Dollars in Thousands)
Three months or less ..................... $ 26,496 17.74%
Over three months to six months .......... 14,400 9.64
Over six months to twelve months ......... 52,201 34.95
Over twelve months ....................... 56,256 37.67
------- ------
$149,353 100.00%
======= ======
Borrowings. If the need arises, we may rely upon advances from the FHLB
and the Board of Governors of the Federal Reserve System discount window to
supplement our supply of lendable funds and to meet deposit withdraw
requirements. Advances from the FHLB typically are collateralized by our stock
in the FHLB and a portion of our first mortgage loans. At December 31, 1999, we
had approximately $43.8 million in borrowing capacity under a collateralized
line of credit with the FHLB, of which $35.0 million had been drawn upon as of
such date.
25
<PAGE>
The FHLB functions as a central reserve bank providing credit for vBank
and other member savings and financial institutions. As a member, vBank is
required to own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities that are obligations of, or guaranteed by,
the United States) provided certain standards related to creditworthiness have
been met. Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness.
At December 31, 1999, we had five callable fixed-rate advances for
$35.0 million from the FHLB. Of these callable advances, $15.0 million mature
within five years, and $20.0 million mature between six and ten years with call
options ranging from 4 months to 45 months. The interest rates on the callable
advances range from 4.84% to 6.31%, with a weighted average interest rate of
5.61% at December 31, 1999.
The following table sets forth certain information regarding our
borrowed funds, which consist solely of the advances from the FHLB, at or for
the periods ended on the dates indicated.
At or for the
Year Ended December 31,
---------------------------
1999 1998
---------------------------
(Dollars in Thousands)
FHLB advances:
Maximum month-end balance .......... $ 35,000 $ 31,000
Balance at end of period ........... 35,000 30,000
Average balance .................... 32,018 22,482
Weighted average interest rate on:
Balance at end of period ........... 5.61% 5.30%
Average balance for period ......... 5.31% 5.29%
USACapital, Inc.
USACapital, Inc., a registered broker-dealer with the National
Association of Securities Dealers, Inc. is a Pennsylvania corporation wholly
owned by USABancShares.com, Inc. USABancShares.com, Inc. acquired USACapital in
April 1997 for a purchase price of $75,000, paid in shares of USABancShares.com,
Inc. common stock. USACapital trades stocks, bonds, annuities, and other
investment related products to the general public. In connection with our
Internet banking operations, USACapital offers on-line trading, real time
quotes, low commissions and direct access to funds held on deposit with vBank
through USAForce.com.
During the year ended December 31, 1999, USACapital increased its staff
from eight persons to fifteen persons, which we believe will facilitate the
growth of USACapital's business. The majority of the additional employees at
USACapital are compensated on a commission basis, which will maintain a variable
expense base related to performance. USACapital operates out of our corporate
office and under the name USAForce.com.
USACredit, Inc.
USACredit, Inc., ("USACredit"), our wholly owned subsidiary, is a
Pennsylvania corporation engaged in business equipment leasing services. We have
entered into an agreement with USACredit that allows our customers, many of whom
are independent business owners or managers, to lease small business equipment
through USACredit. Leases range in amounts from $5,000 to $500,000 and cover
virtually all types of business equipment. USACredit will act as a broker and
provide advice, comparison quotes and immediate equipment lease financing
through a network of financial institutions.
26
<PAGE>
USACredit holds a 20% interest in USACredit Ventures LLC, a Delaware
limited liability company in the business of purchasing judgements,
deficiencies, and charge-offs, and pursuing collections on such claims.
USACredit also provides on-line leasing arrangements for telecommunication
equipment and office products.
USARealEstate, Inc.
USARealEstate, Inc. is a Pennsylvania corporation that acquires and
manages foreclosed real estate property from vBank for the purpose of eventual
liquidation of the property.
USA Capital Trust I
USA Capital Trust I is a Delaware statutory business trust with the
exclusive purpose of issuing and selling trust securities and using the proceeds
from the sale of the Trust securities to acquire the Junior Subordinated
Debenture's issued by USABancShares.com, Inc. The sole asset of the Trust is the
Junior Subordinated Debentures.
Personnel
As of December 31, 1999, we had a total of 76 full-time and 2 part-time
employees.
REGULATION OF USABANCSHARES.COM, INC. AND vBANK
USABancShares.com, Inc. and vBank are extensively regulated under both
federal and state law. From time to time, various new types of federal and state
legislation have been proposed that could result in additional or diminished
regulation of and restrictions on, or altered forms of supervision of, banks or
bank holding companies. We cannot predict whether any such legislation will be
adopted or how such legislation, if adopted, would affect USABancShares.com,
Inc.'s business or vBank's business. As a consequence of the extensive
regulation of commercial banking activities and financial institutions in the
United States, the business and activities of USABancShares.com, Inc. and vBank
are susceptible to changes in federal and state legislation which may affect the
scope, nature and costs of such business and activities. The following
description of statutory and regulatory provisions, which is not intended to be
a complete description of these provisions or their effects on
USABancShares.com, Inc. or vBank, is qualified in its entirety by reference to
the particular statutory or regulatory provisions.
USABancShares.com, Inc.
General. USABancShares.com, Inc. is a registered bank holding company
pursuant to the Bank Holding Company Act of 1956, as amended, and
USABancShares.com, Inc. is subject to regulation and supervision by the Board of
Governors of the Federal Reserve System and the Pennsylvania Department of
Banking. USABancShares.com, Inc. is required to file annually a report of its
operations with, and is subject to examination by, the Board of Governors of the
Federal Reserve System and the Pennsylvania Department of Banking. The Bank
Holding Company Act and other federal laws subject bank holding companies to
particular restrictions on the types of activities in which they may engage, and
to a range of supervisory requirements and activities, including regulatory
enforcement actions for violations of laws and regulations. Certain of these
laws and regulations are described below.
Bank Holding Company Act of 1956 Activities and Other Limitations. As a
registered bank holding company, USABancShares.com, Inc.'s activities and those
of its banking and non-banking subsidiaries are limited to the business of
banking and activities closely related or incidental to banking.
With certain limited exceptions, the Bank Holding Company Act requires
every bank holding company to obtain the prior approval of the Board of
Governors of the Federal Reserve System before (i) acquiring substantially all
of the assets of any bank, (ii) acquiring direct or indirect ownership or
control of any voting shares of any bank if after such acquisition it would own
or control more than 5% of the voting shares of such bank (unless it already
owns or controls the majority of such shares), or (iii) merging or consolidating
with another bank holding company.
27
<PAGE>
The Bank Holding Company Act also prohibits a bank holding company,
with certain exceptions discussed below, from acquiring the voting shares or
assets of any company that is not a bank and from engaging in any business other
than banking or managing or controlling banks. Under the Bank Holding Company
Act, the Board of Governors of the Federal Reserve System is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Board of Governors of the Federal Reserve System has
determined to be so closely related to banking or to managing or controlling
banks as to be a proper incident thereto. In making such determinations, the
Board of Governors of the Federal Reserve System is required to weigh the
expected benefit to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.
The Board of Governors of the Federal Reserve System has by regulation
determined that certain activities are closely related to banking within the
meaning of the Bank Holding Company Act. These activities include operating a
mortgage company, finance company, credit card company, factoring company, trust
company or savings association; performing certain data processing operations;
providing limited securities brokerage services; acting as an investment or
financial advisor; acting as an insurance agent for certain types of
credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing tax planning and preparation services; operating
a collection agency; and providing certain courier services.
In addition, and subject to certain exceptions, the Bank Holding
Company Act and the Change in Control Act, together with regulations thereunder,
require approval of the Board of Governors of the Federal Reserve System (or,
depending on the circumstances, no notice of disapproval) prior to any person or
company acquiring "control" of a bank holding company, such as
USABancShares.com, Inc. Control is conclusively presumed to exist if any
individual or company acquires 25% or more of any class of voting securities of
the bank holding company. With respect to corporations with securities
registered under the Securities Exchange Act of 1934, as amended (such as
USABancShares.com, Inc.), control will be presumed to exist if a person acquires
at least 10% of any class of voting securities of the corporation.
A registered bank holding company is generally required to give the
Board of Governors of the Federal Reserve System prior notice of any redemption
or repurchase of its own equity securities if the consideration to be paid,
together with the consideration paid for any repurchases or redemptions in the
preceding year, is equal to 10% or more of its consolidated net worth. The
Federal Reserve Board may oppose the transaction if it believes that the
transaction would constitute an unsafe or unsound practice or would violate any
law or regulation.
Anti-Tying Restriction. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a bank holding company or its affiliates.
28
<PAGE>
Capital Adequacy Requirements. The Board of Governors of the Federal
Reserve System has adopted capital adequacy guidelines pursuant to which it
assesses the adequacy of capital in examining and supervising a bank holding
company and in analyzing applications to it under the Bank Holding Company Act.
The Board of Governors of the Federal Reserve System capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-weighted assets, with at least one-half of that amount (4%)
consisting of Tier 1 or core capital and up to one-half of that amount
consisting of Tier 2 or supplementary capital. Tier 1 capital for bank holding
companies generally consists of the sum of common stockholders' equity and
perpetual preferred stock (subject in the case of the latter to limitations on
the kind and amount of such stocks which may be included as Tier 1 capital),
less goodwill and, with certain exceptions, intangibles. Tier 2 capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as Tier 1 capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Under the risk-based capital guidelines, specific
categories of assets and certain off-balance sheet assets such as letters of
credit are assigned different risk weights to take into account different risk
characteristics of the assets. These risk weights are multiplied by
corresponding asset balances to determine a "risk-weighted" asset base. The risk
weightings range from 0% (requiring no additional capital) for assets such as
cash to 100% for the bulk of assets which are typically held by a bank holding
company, including multi-family residential and commercial real estate loans,
commercial business loans and consumer loans. Single-family residential first
mortgage loans which are not past-due (90 days or more) or non-performing and
which have been made in accordance with prudent underwriting standards are
assigned a 50% level in the risk-weighting system, as are certain
privately-issued mortgage-backed securities representing indirect ownership of
such loans. Off-balance sheet items also are adjusted to take into account
certain risk characteristics.
In addition to the risk-based capital guidelines, the Board of
Governors of the Federal Reserve System uses a leverage ratio as an additional
tool to evaluate the capital adequacy of bank holding companies. The leverage
ratio is a company's Tier 1 capital divided by its average total consolidated
assets. Total assets for this purpose does not include goodwill, certain
mortgage and non-mortgage servicing assets, purchased credit card relationships
and any other intangible assets and investments that the Board of Governors of
the Federal Reserve System determines should be deducted from Tier 1 capital.
Bank holding companies must maintain a minimum leverage ratio of at least 3%,
although most organizations are expected to maintain leverage ratios that are
100 to 200 basis points above this minimum ratio.
The risk-based and leverage ratios are minimum supervisory ratios
generally applicable to banking organizations that meet certain specified
criteria, assuming that they have the highest regulatory rating. Banking
organizations not meeting these criteria are expected to operate with capital
positions well above the minimum ratios. The federal bank regulatory agencies
may set capital requirements for a particular banking organization that are
higher than the minimum ratios when circumstances warrant. Federal Reserve Board
guidelines also provide that banking organizations experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant reliance
on intangible assets. In addition, the regulations of the Federal Reserve Board
provide that concentration of credit risk and certain risks arising from
nontraditional activities, as well as an institution's ability to manage these
risks, are important factors to be taken into account by regulatory agencies in
assessing an organization's overall capital adequacy.
As of December 31, 1999, USABancShares.com, Inc. was in compliance with
the minimum regulatory capital requirements established by the Board of
Governors of the Federal Reserve System.
Financial Support of Affiliated Institutions. In accordance with
established policy of the Board of Governors of the Federal Reserve System,
USABancShares.com, Inc. will be expected to act as a source of financial
strength to vBank and to commit resources to support vBank in circumstances when
it might not do so absent such policy.
29
<PAGE>
vBank
General. vBank operates as a state-chartered savings bank incorporated
under the Pennsylvania Banking Code and is subject to extensive regulation and
examination by the Pennsylvania Department of Banking and by the FDIC. These
regulatory authorities regulate or monitor all areas of vBank's operations,
including capital requirements, loans, interest rates, investments, borrowings,
deposits, record keeping, security devices, issuances of securities, payment of
dividends, interest rate risk management, acquisitions, mergers, establishment
of branches, and corporate reorganizations. There are periodic examinations by
the Pennsylvania Department of Banking and the FDIC to test vBank's compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether by the
Pennsylvania Department of Banking, the FDIC or the Congress could have a
material adverse impact on USABancShares.com, Inc., and vBank, and their
operations.
Federal Deposit Insurance Corporation Assessments. The deposits of
vBank are insured by the Bank Insurance Fund of the FDIC, up to applicable
limits, and are subject to deposit premium assessments by the Bank Insurance
Fund. Under the FDIC's risk-based insurance system, Bank Insurance Fund-assessed
deposits have been subject to premiums which have varied, depending upon the
institution's capital position and other supervisory factors.
The FDIC may terminate the deposit insurance of any insured depository
institution, including vBank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. The FDIC may also suspend deposit insurance temporarily prior to the
hearing process for the permanent termination of insurance, if, among other
things, the institution has no tangible capital. If insurance of accounts is
terminated, the accounts at the institution at the time of the termination, less
subsequent withdrawals, shall continue to be insured for a period of six months
to two years, as determined by the FDIC. USABancShares.com, Inc. is not aware of
any circumstances which would result in termination of vBank's deposit
insurance.
Capital Requirements. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like vBank, are not members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Board of
Governors of the Federal Reserve System regarding bank holding companies, as
previously described.
The FDIC's capital regulations establish a minimum 3% Tier 1 leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the
minimum Tier 1 leverage ratio for such other banks to 4% to 5% or more. Under
the FDIC's regulation, highest-rated banks are those that the FDIC determines
are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization and are rated composite 1 under the
Uniform Financial Institutions Rating System. Tier 1 or core capital is defined
as the sum of common stockholders' equity (including retained earnings),
non-cumulative 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.
30
<PAGE>
The FDIC also requires that banks meet a risk-based capital standard.
Risk-based capital standard for banks requires the maintenance of total capital
(which is defined as Tier 1 capital and supplementary (Tier 2) capital) to
risk-weighted assets of 8.0%, of which at least 4.0% shall be Tier 1 capital. In
determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on
risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the
leverage capital standard. The components of supplementary capital include
certain perpetual preferred stock, certain mandatory convertible securities,
certain subordinated debt and intermediate preferred stock and general
allowances for loan and lease losses. Allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. As of December 31,
1999, vBank 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.
A bank may be subject to higher minimum requirements than those
described above if, for example, a bank has previously received special
attention or has a high susceptibility to interest rate risk. Banks with capital
ratios below the required minimum are subject to certain administrative actions,
including prompt corrective action, the termination of deposit insurance upon
notice and hearing, or a temporary suspension of insurance without a hearing.
vBank is also subject to more stringent Pennsylvania Department of
Banking capital guidelines. Although not adopted in regulation form, the
Pennsylvania Department of Banking utilizes capital standards requiring a
minimum of 6% leverage capital and 10% risk-based capital. The components of
leverage and risk-based capital are substantially the same as those defined by
the FDIC. As of December 31, 1999, vBank exceeded the Pennsylvania Department of
Banking's capital guidelines.
Prompt Corrective Action. In addition to the capital adequacy
guidelines, the FDIC is required to take "prompt corrective action" with respect
to any state-chartered bank which does not meet specified minimum capital
requirements. Federal regulations applicable to financial institutions establish
five capital levels: "well capitalized," "adequately capitalized,"
"undercapitalized," "severely undercapitalized" and "critically
undercapitalized."
o An institution is considered "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater, and it is
not subject to an order, written agreement, capital directive, or prompt
corrective action directive to meet and maintain a specific capital level
for any capital measure.
o An institution is considered "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of at least 4% and leverage capital ratio of 4% or greater (or a
leverage ratio of 3% or greater if the institution is rated composite 1
in its most recent report of examination, subject to appropriate federal
banking agency guidelines), and the institution does not meet the
definition of an undercapitalized institution.
o A bank is considered "undercapitalized" if it has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based capital ratio
that is less than 4%, or a leverage ratio that is less than 4% (or a
leverage ratio that is less than 3% if the institution is rated composite
1 in its most recent report of examination, subject to appropriate
federal banking agency guidelines).
31
<PAGE>
o A "significantly undercapitalized" institution is one which has a total
risk-based capital ratio that is less than 6%, a Tier 1 risk-based
capital ratio that is less than 3%, or a leverage ratio that is less than
3%.
o A "critically undercapitalized" institution is one which has a ratio of
tangible equity to total assets that is equal to or less than 2%.
Under certain circumstances, a "well capitalized," "adequately
capitalized" or "undercapitalized" institution may be treated as if the
institution were in the next lower capital category.
Federal banking regulators are authorized to take "prompt corrective
action" with respect to capital-deficient institutions. In addition to requiring
the submission of a capital restoration plan, federal law contains broad
restrictions on certain activities of undercapitalized institutions involving
asset growth, acquisitions, branch establishment, and expansion into new lines
of business. With certain exceptions, an insured depository institution is
prohibited from making capital distributions, including dividends, and is
prohibited from paying management fees to control persons (e.g., a holding
company) if the institution would be undercapitalized after any such
distribution or payment.
As an institution's capital decreases, the powers of the federal
regulators become greater. A significantly undercapitalized institution is
subject to mandated capital raising activities, restrictions on interest rates
paid and transactions with affiliates, removal of management, and other
restrictions. The regulators have very limited discretion in dealing with a
critically undercapitalized institution and are virtually required to appoint a
receiver or conservator if the capital deficiency is not corrected promptly.
Activities and Investments of Insured State-chartered Banks. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements. An insured state bank is not prohibited from, among other
things, (1) acquiring or retaining a majority interest in a subsidiary, (2)
investing as a limited partner in a partnership the sole purpose of which is
direct or indirect investment in the acquisition, rehabilitation or new
construction of a qualified housing project, provided that such limited
partnership investments may not exceed 2% of the bank's total assets, (3)
acquiring up to 10% of the voting stock of a company that solely provides or
reinsures directors', trustees' and officers' liability insurance coverage or
bankers' blanket bond group insurance coverage for insured depository
institutions, and (4) acquiring or retaining the voting shares of a depository
institution if certain requirements are met. In addition, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
Pennsylvania Banking Law. The Pennsylvania Banking Code contains
detailed provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of vBank
and its affairs. The Pennsylvania Banking Code delegates extensive rulemaking
power and administrative discretion to the Pennsylvania Department of Banking so
that the supervision and regulation of state-chartered savings banks may be
flexible and readily responsive to changes in economic conditions and in savings
and lending practices.
32
<PAGE>
One of the purposes of the Pennsylvania Banking Code is to provide
banks with the opportunity to be competitive with each other and with other
financial institutions existing under other Pennsylvania laws and other state,
federal and foreign laws. A Pennsylvania bank may locate or change the location
of its principal place of business and establish an office anywhere in the
Commonwealth, with the prior approval of the Pennsylvania Department of Banking.
The Pennsylvania Department of Banking generally examines each savings
bank not less frequently than once every two years. Although the Pennsylvania
Department of Banking may accept the examinations and reports of the FDIC in
lieu of the Pennsylvania Department of Banking's examination, the present
practice is for the Pennsylvania Department of Banking to conduct individual
examinations. The Pennsylvania Department of Banking may order any savings bank
to discontinue any violation of law or unsafe or unsound business practice and
may direct any trustee, officer, attorney or employee of a savings bank engaged
in an objectionable activity, after the Pennsylvania Department of Banking has
ordered the activity to be terminated, to show cause at a hearing before the
Pennsylvania Department of Banking why such person should not be removed.
Restrictions on Payment of Dividends. Under the Federal Deposit
Insurance Act, insured depository institutions such as vBank are prohibited from
making capital distributions, including the payment of dividends, if, after
making any such distribution, the institution would become "undercapitalized"
(as such term is used in the statute). Under the Federal Deposit Insurance Act,
no dividends may be paid by an insured bank if the bank is in arrears in the
payment of any insurance assessment due to the FDIC. Dividend payments by vBank
are subject to the Pennsylvania Banking Code. Under the Pennsylvania Banking
Code, no dividends may be paid except from "accumulated net earnings"
(generally, undivided profits). As previously discussed, state and federal
regulatory authorities have adopted standards for the maintenance of adequate
levels of capital by banks. Adherence to such standards further limits the
ability of vBank to pay dividends. In addition, vBank's regulators have
authority to prohibit us or vBank from engaging in an unsafe or unsound practice
in conducting their business. The payment of dividends, depending upon our
financial condition or the financial condition of vBank, could be deemed to
constitute such an unsafe or unsound practice.
Regulatory Enforcement Authority. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities.
Limitations on Transactions with Affiliates and Insiders. Transactions
between banks and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a bank is any company or entity which
controls, is controlled by or is under common control with the bank. In a
holding company context, the parent holding company of a bank (such as
USABancShares.com, Inc.) and any companies which are controlled by such parent
holding company are affiliates of the bank. Generally, Section 23A places limits
on the amount of loans or extensions of credit to, or investments in, or certain
other transactions with, affiliates. In addition, limits are placed on the
amount of advances to third parties collateralized by the securities or
obligations of affiliates. Most of these loans and certain other transactions
must be secured in prescribed amounts. Section 23B of the Federal Reserve Act,
among other things, prohibits an institution from engaging in transactions with
certain affiliates unless the transactions are on terms substantially the same,
or at least as favorable to such institution or its subsidiaries, as those
prevailing at the time for comparable transactions with non-affiliated
companies.
In addition, USABancShares.com, Inc. is subject to restrictions on
extensions of credit to executive officers, directors, certain principal
stockholders, and their related interests. Such extensions of credit (i) must be
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with third parties
and (ii) must not involve more than the normal risk of repayment or present
other unfavorable features.
Community Reinvestment Act. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions, the federal
regulatory authorities evaluate the record of such financial institutions in
meeting the credit needs of their local communities, including low and
moderate-income neighborhoods, consistent with the safe and sound operation of
those institutions. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility.
33
<PAGE>
Other Regulations
Internet and Electronic Commerce Activities. A number of legislative
and regulatory proposals currently under consideration by federal, state, local
and foreign governmental organizations may lead to laws or regulations
concerning the electronic commerce market and use of the Internet, including,
but not limited to, on-line content, user privacy, taxation, access charges,
liability or third-party activities and jurisdiction. Congress has held hearings
on whether to regulate the electronic commerce market, while numerous states are
considering adopting their own laws to regulate Internet banking. Moreover, the
FDIC has proposed other guidelines governing Internet operations.
These and any other proposed laws, rules and regulations could force us
to comply with more complex and perhaps more burdensome regulatory requirements,
which could materially adversely affect our business, financial condition,
results of operations and cash flows.
The Gramm Leach-Bliley Act of 1999 ("Act") was enacted on November 12,
1999. The Act permits the creation of new financial services holding companies
that can offer a full range of financial and banking products and services. The
Act eliminates legal barriers which previously prevented affiliations among
banks and bank holding companies with securities firms, insurance companies and
other financial services companies. The Corporation is qualified under the Act
as a "Financial Holding Company" and can expand into a wide variety of services
that are financial in nature, provided that its depository institution
subsidiaries are well managed, well capitalized and have received a
"Satisfactory" rating on their last Community Reinvestment Act Examinations.
The Act preserves the role of the Federal Reserve Board as the umbrella
supervisor for holding companies while at the same time incorporating a system
of functional regulation designed to assure that various financial activities
will be overseen by the appropriate state or federal regulator with the
corresponding regulatory experience and expertise. Banking related activities
will be supervised by the banking regulators, securities activities will be
regulated by the Securities and Exchange Commission and state regulators, and
insurance activities by the state insurance regulators.
Lending Activities. Interest and certain other charges collected or
contracted for by vBank are subject to state usury laws and certain federal laws
concerning interest rates. vBank's loan operations are also subject to certain
federal laws applicable to credit transactions, such as (i) the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, (ii) the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves, (iii) the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit, (iv) the Fair Credit Reporting Act of
1978 governing the use and provision of information to credit reporting
agencies, (v) the Fair Debt Collection Act governing the manner in which
consumer debts may be collected by collection agencies, and (vi) the rules and
regulations federal agencies charged with the responsibility of implementing
such federal laws.
Deposit Activities. The deposit operations of vBank also are subject to
(i) the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records, and (ii) the
Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
Board to implement that act, which govern automatic deposits to and withdrawals
from deposit accounts and customers' rights and liabilities arising from the use
of automated teller machines and other electronic banking services.
Item 2. Description of Properties
On December 23, 1997, we purchased a building at 1535 Locust Street in
Center City Philadelphia, formerly owned and operated by PNC Bank, which serves
34
<PAGE>
as our corporate offices and flagship retail operation. This location consists
of approximately 10,000 square feet of space, and includes not only a first
floor retail operation, but also houses senior management of USABancShares.com,
Inc. and USACapital, Inc., in addition to selected members of vBanks staff.
Pursuant to a lease dated July 27, 1998, we lease a building at 18 East
Wynnewood Road, Wynnewood, Pennsylvania. We opened a retail branch at this
location in April 1999. The lease is for an initial period of 10 years with an
option to renew for an additional 10 years. The annual lease payments total
$48,000.
We lease the building located at 930 Germantown Pike in Plymouth
Meeting, Pennsylvania, which contains a retail branch as well as administrative
offices, on a month-to-month basis. The monthly lease payment is $3,643.
We also lease an additional "mini" branch, known as "eBank" in the
office, restaurant and retail complex known as "the Bellevue" which is located
in Center City Philadelphia. The annual lease payments total $8,200.
Deposits are received at the Locust Street headquarters, the Norristown
branch, the Wynnewood branch and the eBank. At December 31, 1999, our branches
had the following deposits: Locust Street, $169.3 million; Norristown, $42.0,
Wynnewood, $9.1 million; eBank, $5.1 million, and USABancShares.com, (the
Internet operations) $29.5 million.
In February 2000, USABancShares.com opened its first eCommerce center
in San Francisco, California. The office will be used to develop business and
cultivate additional strategic alliances with eCommerce companies with
USABancShares.com. The operating lease is for five years for 2,200 square feet.
The operating lease will increase USABancShares.com's future lease payments by
approximately $110,000 per year over the term of the lease.
In March 2000, USABancShares.com acquired a facility to house its
Internet operations in Chestnut Hill, Pennsylvania. The purchases price of the
building and surrounding land was $1.6 million and will be depreciated over 31.5
years.
Item 3. Legal Proceedings
We are not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. We believe that
such routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders during the fourth
quarter of 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The common stock of USABancShares.com is listed for trading on the
NASDAQ National Market under the symbol "USAB". As of December 31, 1999, there
were approximately 248 holders of record of USABancShares.com's common stock.
USABancShares.com has not, since its inception, paid any cash dividends. All
prices have been adjusted to reflect a 33% stock dividend paid on July 18, 1997
and August 17, 1998 and a two-for-one stock split effected in the form of a
dividend paid on June 15, 1999.
USABancShares.com is a bank holding company regulated by the Board of
Governors of the Federal Reserve System (the "FRB"), all of the operating assets
of USABancShares.com are owned by vBank and USACapital. USABancShares.com relies
primarily on capital raising efforts, management fees and, to a much lesser
extent, dividends from vBank to meet its corporate expenses and to satisfy its
35
<PAGE>
financial obligations. Dividend payments from vBank are subject to (1)
regulatory limitations, generally based on current and retained earnings,
imposed by the various regulatory agencies with authority over vBank, (2)
regulatory restrictions if such dividends would impair the capital of vBank or
cause vBank to be undercapitalized, (3) FRB prudent banking standards relating
to the amount of net income available to common shareholders and the prospective
rate of earnings retention, and (4) vBank's profitability, financial condition
and capital expenditures and other cash flow requirements.
Our common stock has been quoted on the Nasdaq SmallCap Market under
the symbol "USAB" since the first quarter of 1996 and on the Nasdaq National
Market under the same symbol since September 16, 1999. All prices have been
adjusted to reflect all stock dividends and stock splits. The following table
shows trading prices for USABancShares.com from January 1, 1997 through March
21, 2000, adjusted for all common stock dividends and splits:
2000 High Low
- - ---- --------- ----------
First Quarter (1) $11 3/8 $7 3/4
1999
- - ----
Fourth Quarter 12 3/4 5 3/8
Third Quarter 16 1/2 6 7/8
Second Quarter 11 4
First Quarter 4 1/2 4
1998
- - ----
Fourth Quarter 4 1/2 3 3/8
Third Quarter 6 49/64 3 3/4
Second Quarter 5 59/64 4 51/64
First Quarter 5 41/64 3 19/64
(1) Through and including March 21, 2000.
36
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
Set forth below are selected financial and other data of
USABancShares.com, Inc. and vBank. This financial data is derived in part from,
and it should be read in conjunction with the consolidated financial statements
and related notes included in this report beginning on page F-1.
<TABLE>
<CAPTION>
At or for the
Twelve Months Ended
December 31,
------------------------
(in Thousands, except per share data) 1999 1998
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $323,335 $165,106
Loans receivable, net 197,623 102,138
Securities(1) 97,815 44,144
Deposits 255,038 114,387
Borrowings(2) 35,000 35,305
Guaranteed preferred beneficial interests in subordinated debt 10,000 -
Stockholders' equity 17,928 13,597
Non-performing assets, net of discount(3) 1,266(4) 2,022(4)
Book value per share(5) $ 3.18 $ 3.21
AVERAGE BALANCE DATA:
Total assets $250,427 $128,448
Loans receivable, net 150,182 78,797
Securities 76,720 36,510
Deposits 188,612 91,657
Borrowings 40,352 22,482
Stockholders' equity 15,424 11,632
SELECTED OPERATIONS DATA:
Total interest income $ 21,870 $ 12,352
Total interest expense 13,110 6,454
-------- --------
Net interest income 8,760 5,898
Provision for loan losses 1,175 510
-------- --------
Net interest income after provision for loan losses 7,585 5,388
Total non-interest income 1,767 759
Total non-interest expense 12,430 3,700
-------- --------
(Loss) income before income taxes (3,078) 2,447
Income tax (benefit) provision (588) 957
-------- --------
Net (loss) income $ (2,490) $ 1,490
-------- --------
Net (loss) income per share (fully-diluted) $ (0.54) $ 0.36
======== ========
PERFORMANCE RATIOS(6):
(Loss) return on average assets (0.99)% 1.16%
(Loss) return on average stockholders' equity (16.14) 12.81
Net interest margin(7) 3.72 4.87
Interest rate spread(7) 3.57 4.54
Efficiency Ratio(8) 137.65 58.93
Non-interest expense to average total assets 4.96 2.88
Average interest-earning assets to average interest-bearing liabilities 102.75 106.14
ASSET QUALITY RATIOS:
Non-performing loans, net of discount, to total loans, net of discount 0.63% 1.89%
Non-performing assets, net of discount, to total assets 0.39 1.22
Allowance for loan losses to total loans, net of discount 1.06 1.02
Allowance for loan losses and purchase discount as a percentage of total loans 3.82 5.85
Allowance for loan losses to total non-performing loans, net of discount 167.06 53.72
CAPITAL RATIOS(9):
Stockholders' equity to assets 5.54% 8.23%
Tier 1 leverage capital ratio 8.83 8.73
Tier 1 risk-based capital ratio 10.32 10.70
Total risk-based capital ratio 11.07 12.07
OTHER:
Number of full-service branches 4 3
Number of full-time employee equivalents 77 39
</TABLE>
37
<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.
(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. This loan was still
classified as non-performing at December 31, 1999. In February 2000 a
forbearance agreement to sell the property within 60 days was signed. See
"Business of the Bank-Asset Quality-Delinquent Loans and Non-performing
Assets."
(5) 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) With the exception of end of period ratios, all ratios are based on average
monthly balances and are annualized where appropriate.
(7) 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.
(8) 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).
(9) 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 "Regulation of
USABancShares.com, Inc. and vBank."
Item 6. Management's Discussion and Analysis.
On April 16, 1999, we announced our intentions to launch
www.usabancshares.com, vBank's Internet financial services initiative. This
announcement strategically altered the focus of USABancShares.com to grow its
user network versus increasing total assets. We had launched an aggressive
business strategy to gain online market share and name brand recognition through
national advertising campaigns, as well as, forming strategic e-commerce
alliances. These initiatives dramatically impacted the financial results of
USABancShares.com in 1999. Management fully anticipates to continue the
investment in and the growth of our network, which will result in operating
losses into the calendar year 2001.
Financial Condition
USABancShares.com's total assets increased from $165.1 million at
December 31, 1998 to $323.5 million at December 31, 1999, an increase of $158.4
million, or 95.9%. The increase was due primarily to increases in the loan and
securities portfolios of $95.5 million and $54.2 million, respectively. This
growth was funded by increases in certificates of deposit (primarily non-retail
certificates of deposit), trust preferred debt and common equity of $120.5
million, $10.0 million and $8.1 million respectively. The increase in the loan
portfolio was primarily due to the purchase of adjustable rate commercial real
estate loans. These purchased loans, which had an aggregate unpaid principal
balance of approximately $108.2 million as of the date of acquisition, were
acquired for approximately $105.9 million (reflecting an aggregate discount of
38
<PAGE>
$2.3 million, or 2.1%). The increase in the securities portfolio was primarily
due to the acquisition of trust preferred securities and financial institution
bonds. Total deposits increased $140.7 million to $255.0 million at December 31,
1999. The increase in deposits was comprised of an increase in certificates of
deposit of $120.5 million and an increase in transaction accounts of $20.2
million during the period. Borrowed funds consist of fixed-rate callable
advances from the FHLB. The Company issued $10.0 million of trust preferred
securities in March of 1999 and raised approximately $8.1 million of net
proceeds in September of 1999 in a secondary public offering. Both capital
market efforts funded USABancShares.com's asset growth and Internet
infrastructure investment. The increases in deposits and in borrowed funds were
utilized to fund increases in loans and securities as part of vBanks's overall
growth strategy. Management plans to continue to utilize FHLB advances, deposit
expansion through the Internet and capital raising efforts to provide the
necessary funding for vBank's continued growth. vBank's borrowing limit at the
FHLB as of December 31, 1999, was approximately $43.8 million, of which $35.0
was drawn upon as of such date. USABancShares.com stockholders' equity increased
from $13.6 million at December 31, 1998 to $17.9 million at December 31, 1999.
The $4.3 million or 31.9% increase in stockholders' equity was primarily due to
the Company's capital raising efforts, net of the operating losses incurred.
Results of Operations
USABancShares.com reported a net loss of $2.5 million, or $(0.54) per
share, for the year ended December 31, 1999, compared to net income of $1.5
million, or $0.36 per share, diluted, for the year ended December 31, 1998. Our
operating loss was the result of the investment in our Internet strategy. Other
expenses increased $8.7 million to $12.4 million primarily from increases in
advertising expense of $3.7 million and compensation expense of $2.1 million,
respectively relating to the Internet strategy. The Company's net interest
income before provision for loan losses increased 48.5% to $8.7 million and
non-interest income increased $1.0 million to $1.8 million for 1999.
Interest Income. Interest income increased 76.6% or $9.5 million to
$21.9 million, for the year ended December 31, 1999, compared to the prior year.
The increase in interest income was the result of an increase in interest income
on loans and investment securities, of $5.6 million, and $3.9 million,
respectively. The increase in interest income on loans was due to an increase in
the average balance of the loan portfolio. The increase in income associated
with the increase in average loans outstanding was offset by a decrease in the
accretion income from previously acquired discounted loans in 1999 and a
decrease of 70 basis points earned on the loan portfolio, respectively. The
discount associated with 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, 1999 and
1998, the Bank recognized $952,000 and $1.3 million in accretion income,
respectively, representing 4.4% and 10.5% of total interest income on loans,
respectively. The significant increase in the average balance of the Bank's loan
portfolio reflects the $108.2 million of loans purchased and the more than $53.0
million of loan originations (including participations with local financial
institutions) which were closed during the year ended December 31, 1999.
Interest Expense. Interest expense increased 103.1% or $6.7 million to
$13.1 million, for the year ended December 31, 1999, compared to the year ended
December 31, 1998, due to higher volumes of new certificates of deposit and the
trust preferred securities. In order to fund our substantial growth during the
year ended December 31, 1999, we relied primarily on non-retail certificates of
deposit and, to a lesser extent, transaction accounts generated from our
Internet operations. The increase in interest expense during the year ended
December 31, 1999 was also due to vBank relying on higher cost of fund
certificates of deposits and FHLB advances. The average cost of funds, including
borrowings, increased 0.08% to 5.73% for the year ended December 31, 1999.
Net Interest Income. USABancShares.com's profitability, like that of
many financial institutions, is dependent to a large extent upon net interest
39
<PAGE>
income. Net interest income is the difference betweek interest income
(principally from loans and investment and mortgage-backed securities) and
interest expense (principally on customer deposits and borrowings). Changes in
net interest income result from changes in the mix of rates and volumes of
interest-earning assets and interest-bearing liabilities that occur over time.
Volume refers to the average dollar level of interest-earning assets and
interest bearing liabilities. Net interest spread refers to the differences
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Net interest margin refers to net interest income
divided by average interest-earning assets.
Net interest income for the year ended December 31, 1999 increased $2.9
million, or 48.5% to $8.8 million from $5.9 million for the same period in 1998.
Average interest-earning assets increased by $114.1 million, or 94.2% to $235.3
million, for the year ended December 31, 1999 compared to the same period in
1998. Average interest-bearing liabilities increased $114.8 million, or 100.6%
over the same period. The net interest spread and net interest margin decreased
for the year ended December 31, 1999 compared to December 31, 1998, from 4.54%
to 3.57% and from 4.87% to 3.72%, respectively. The decrease in net interest
margin and net interest spread is reflective of several items: first, $952,000
of discount was accreted into interest income versus $1.3 million in 1998,
second, the yield on the loan portfolio decreased 173 basis points as vBank
acquired and originated more adjustable rate loans as higher yielding fixed rate
loans paid-off and lastly our reliance on higher cost of funds such as the Trust
Preferred securities and institutional certificate of deposits increased our
cost of funds.
Analysis of Net Interest Income. The following table presents
information regarding yields on interest-earning assets, expense on interest
bearing liabilities and net yield on interest earning assets for the period
indicated:
(in Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------------
1999 1998
--------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
-------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans $150,182 $14,609 9.73% $ 78,797 $ 9,028 11.46%
Investment securities 76,720 6,934 9.04 36,510 3,015 8.26
Interest-bearing deposits and other 8,367 327 3.91 5,842 309 5.30
-------- ------- ------ -------- ------- ------
Total interest-earning assets $235,269 $21,870 9.30% $121,149 $12,352 10.20%
Interest-bearing liabilities:
Deposits:
NOW $ 1,879 $ 57 3.03% $ 842 $ 21 2.48%
Money Market 1,615 75 4.64 3,573 134 3.76
Savings and Passbook 17,224 802 4.66 3,650 70 1.91
Certificates of deposit 167,894 9,737 5.80 83,592 5,041 6.03
Borrowings 40,352 2,439 6.04 22,482 1,188 5.29
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities $228,964 $13,110 5.73% $114,139 $ 6,454 5.66%
-------- ------- ------ -------- ------- ------
Excess of interest-earning assets over
interest-bearing liabilities $ 6,305 $ 7,010
======== ========
Net interest income $ 8,760 $ 5,898
======= =======
Net interest rate spread 3.57% 4.54%
====== ======
Net interest margin 3.72% 4.87%
====== ======
Average earning assets to average
interest bearing liabilities 102.75% 106.14%
====== ======
</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
40
<PAGE>
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 $665,000 during the year ended December 31,
1999, compared to the prior year. The increase in the provision for loan losses
during the year ended December 31, 1999, as compared to the prior year was due
primarily to the substantial growth in our loan portfolio and the shift in such
loan portfolio from predominantly residential loans to a mix of commercial real
estate and commercial loans. The allowance for loan losses as a percentage of
loans outstanding, net of discount, was 1.06% at December 31, 1999, compared to
1.02% at December 31, 1998. In addition, the allowance for loan losses as a
percentage of total non-performing loans, net of discount, was 167.06% at
December 31, 1999, compared 53.72% at December 31, 1998.
Management believes that the allowance for loan losses is adequate to
cover actual and potential losses in the loan portfolio under current
conditions. Nevertheless, there can be no assurance that additions to such
allowance will not be necessary in future periods, particularly if the growth in
the Bank's commercial loan originations and purchases continues.
Non-Interest Income. Non-interest income increased by $1.0 million to
$1.8 million, for the year ended December 31, 1999. The increase was primarily
the result of an increase in gain on sales of loans receivable of $1.4 million,
an increase in service charges and fees of $89,000 and other income of $198,000,
partially from income received on bank owned life insurance of $100,000. These
increases were offset by an operating loss in brokerage operations of $257,000
generated by USABancShares.com's brokerage subsidiary, USACapital.
Non-Interest Expense. Non-interest expense increase $8.7 million to
$12.4 million, for the year ended December 31, 1999. Compensation and benefits
expense increased $2.1 million due primarily to the hiring of 38 additional
persons to assist in our Internet operations, including personnel for our
customer service, Internet engineering staff and staff to service our increased
number of loans. Advertising expenses increased $3.7 million due to advertising
the launch of www.usabancshares.com and national brand advertising. Occupancy
expense increased $264,000 due to the costs associated with USABancShares.com
headquarters, branch network and customer service facilities. Data Processing
Expenses increased $412,000 due to our core processing systems conversion to
EDS. Professional fees increased $585,000 related to litigation and contract
negotiations with e-commerce companies. Office and supplies expense increased
due to customer service initiatives. Our branding efforts as well as travel
expenses increased $312,000 as it relates to expanding our e-commerce alliances.
Income Tax Recovery. USABancShares.com has recorded a tax benefit as a
result of its operating loss for 1999.
Asset and Liability Management. A principal objective of our asset and
liability management is to minimize vBank's exposure to changes in interest
rates. vBank's policy is to attempt to manage assets and liabilities in such a
way as to maximize net interest income through changing interest rate
environments. An interest rate sensitive asset or liability is one that, within
a defined time period, either matures or experiences an interest rate change in
line with general market rates. Interest rate sensitivity measures the relative
volatility of our 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, 1999
and the difference or "gap" between them on an actual and cumulative basis for
the periods indicated. The table was prepared with the following assumptions:
(1) 50% of the vBank's transaction accounts are considered core deposits and are
assumed to mature in the "Over 5 Years" category; the remaining 50% are not
considered to be core transaction accounts, are sensitive to rate changes, and,
41
<PAGE>
as such, are placed in the "1-90 Days" category; (2) interest-earning assets are
calculated based on contractual adjustments, stated maturities in the
instruments and instruments with stated maturities that are homogeneous such
that prepayment assumptions can be used based on experience, are adjusted to
better reflect the sensitivity of the asset for prepayment; and (3) certificates
of deposit and borrowings are scheduled based on the applicable stated
maturities.
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------------------------
(in Thousands)
1 - 90 Days 91 - 364 Days 1 - 5 Years Over 5 Years Balance
----------- ------------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
Interest-earning assets
Loans receivable $ 80,949 $ 34,869 62,292 $21,895 $200,005
Investments 16,973 7,528 46,690 30,635 101,826
Interest-bearing deposits and other 286 286
Bank Owned Life Insurance 5,149 5,149
-------- -------- ------ ------- --------
Total Assets $103,357 $ 42,397 $108,982 $52,530 $307,266
======== ======== ======== ======= ========
Interest-bearing liabilites
Demand $ 2,584 $ - $ - $ 2,584 $ 5,168
Now accounts 2,346 - - 2,346 4,692
Money Market accounts 486 - - 487 973
Savings & Passbook accounts 9,635 - - 9,636 19,271
Borrowings - 15,000 20,000 - 35,000
Guaranteed Subordinated Debt - - - 10,000 10,000
Certificates of deposit 40,915 101,992 80,895 1,132 224,934
-------- -------- ------ ------- --------
Total interest-bearing liabilites $ 55,966 $116,992 $100,895 $26,185 $300,038
======== ======== ======== ======= ========
Periodic gap $ 47,391 $(74,595) $ 8,087 $26,345 $ 7,228
======== ======== ======== ======= ========
Cumulative gap $ 47,391 $(27,204) $(19,117) $ 7,228
======== ======== ======== =======
Ratio of gap to interest-earning
assets 15.4% (24.3)% 2.6% 8.6%
======== ======== ======== =======
Ratio of cumulative gap to interest-
earning assets 15.4% (8.9)% (6.2)% 2.4%
======== ======== ======== =======
</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 vBank's assets and liabilities were equally flexible
and moved concurrently, the impact of an increase or decrease in interest rates
on net income would be minimal. At December 31, 1999, vBank had a negative
cumulative one year gap, which suggests that net interest income may decrease
during periods of rising interest rates.
The method used to analyze interest rate sensitivity in the table above
has a number of limitations. Certain assets and liabilities may react
differently to changes in interest rates even though they reprice or mature in
the same or similar time periods. The interest rates on certain assets and
liabilities may change at different times than changes in market interest rates,
with some changing in advance of changes in market rates and some lagging behind
changes in market rates. Also, certain assets, such as adjustable-rate loans,
often have provisions which may limit changes in interest rates each time market
interest rates change and on a cumulative basis over the life of the loan.
Additionally, the actual prepayments and withdrawals experienced by vBank in the
event of a change in interest rates may deviate significantly from those assumed
in calculating the data shown in the table.
42
<PAGE>
In the event that we 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, we have a number of options which we could utilize to
remedy such mismatch. vBank could restructure its investment portfolio through
sales or purchases of securities with more favorable repricing attributes. It
could also emphasize loan products with appropriate maturities or repricing
attributes, or it could attract deposits or obtain borrowings with desired
maturities.
Liquidity and Capital Resources
Liquidity. As vBank is the primary operating subsidiary of
USABancShares.com, Inc., liquidity management is generally handled by vBank's
management. Liquidity refers to a company's ability to generate sufficient cash
to meet the funding needs of current loan demand, deposit withdrawals, principal
and interest payments with respect to outstanding borrowings and to pay
operating expenses. It is our policy to maintain greater liquidity than required
by the applicable regulatory authorities in order to be in a position to fund
loan originations and purchases, to meet withdrawals from deposit accounts, to
make principal and interest payments with respect to outstanding borrowings and
to make investments that take advantage of interest rate spreads. We monitor our
liquidity in accordance with guidelines established by the Board of Directors
and applicable regulatory requirements. vBank can minimize the cash required
during times of heavy loan demand by modifying its credit policies or reducing
its marketing efforts. Liquidity demand caused by net reductions in deposits are
usually caused by factors over which we have limited control. vBank derives its
liquidity from both its assets and liabilities. Liquidity is derived from assets
by receipt of interest and principal payments and prepayments, by the ability to
sell assets at market prices and by utilizing unpledged assets as collateral for
borrowings. Liquidity is derived from liabilities by maintaining a variety of
funding sources, including deposits, advances from the FHLB and other short and
long-term borrowings.
vBank's liquidity management is both a daily and long-term function of
funds management. Liquid assets are generally invested in short-term investment
securities and other short-term investments. If vBank requires funds beyond its
ability to generate them internally, various forms of both short and long-term
borrowings provide an additional source of funds. At December 31, 1999, vBank
had $43.8 million in borrowing capacity under a collateralized line of credit
with the FHLB of which $35.0 million had been drawn upon through five long term
fixed rate callable advances.
At December 31, 1999, we had outstanding commitments, including unused
lines of credit, of $4.3 million and letters of credit of $1.1 million.
Certificates of deposit which are scheduled to mature within one year totaled
$142.9 million at December 31, 1999. vBank anticipates that it will have
sufficient funds available to meet its current loan commitments.
We intend to continue to expend significant financial and management
resources in connection with our Internet banking operations; consequently we
expect to incur losses. Over the next twenty-four months, we expect to incur
$15.0 million in marketing and bounty expenses and $4.0 million in connection
with the development of our Internet banking operations.
USABancShares.com, Inc., believes that the execution of our business
plan will require us to raise additional capital in the future to support the
growth of the network and the growth of the bank. There can be no assurance that
USABancShares.com, Inc., will be successful in raising additional capital when
required in sufficient amounts and on terms acceptable to USABancShares.com,
Inc. The failure to raise such capital could have a material adverse affect on
USABancShares.com's business, results of operations and financial condition. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our current shareholders would be reduced.
Capital Resources. USABancShares.com, Inc., and vBank are subject to
various regulatory capital requirements administered by federal and state
banking agencies. Failure to meet minimum capital requirements can result in
certain mandatory and possibly additional discretionary actions by regulators
that, if
43
<PAGE>
undertaken, could have a direct material effect on USABancShares.com's financial
condition or results of operations. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, USABancShares.com and vBank
must meet specific capital guidelines that involve quantitative measures of
USBancShares.com's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. USABancShares.com and vBank's
capital amounts and classifications are also subject to qualitative judgements
by the regulators about components, risk weightings, and other factors. See
"Regulation of USABancShares.com, Inc. and vBank".
Quantitative measures established by regulation to ensure capital
adequacy require USABancShares.com and vBank to maintain minimum amounts and
ratios (set forth in the table below) of Total and Tier 1 capital to
risk-weighted assets and of Tier 1 capital to average assets. As of December 31,
1999, USABancShares.com and vBank exceeded all capital adequacy requirements to
which they were subject.
On September 30, 1999, USABancShares.com, Inc., issued 1,400,000 common
shares in a secondary offering. The Company issued these share at $6.75, with
net proceeds of $8.1 million, subsequent to offering costs of $1.4 million.
At December 31, 1999 and December 31, 1998, vBank's actual and required
minimum capital ratios were as follows:
<TABLE>
<CAPTION>
To be well
Capitalized under
For Capital Prompt Corrective
(in Thousands) Adequacy Purposes Action Provisions
--------------------------- -------------------
As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
- - ----------------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $28,266 10.1% $22,460 8.0% $28,075 10.0%
Tier I Capital
(to Risk Weighted Assets) 26,151 9.3 11,230 4.0 16,845 6.0
Tier I Capital
(to Average Assets) 26,151 7.9 13,171 4.0 16,464 5.0
As of December 31, 1998:
- - ------------------------
Total Capital
(to Risk Weighted Assets) $13,930 11.2% $ 9,987 8.0% $12,483 10.0%
Tier 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
</TABLE>
44
<PAGE>
At December 31, 1999 and December 31, 1998, USABancShares.com, Inc.'s
actual and required minimum capital ratios were as follows:
<TABLE>
<CAPTION>
For Capital
(in Thousands) Adequacy Purposes
As of December 31, 1999 Amount Ratio Amount Ratio
- - ----------------------- ------ ----- ------ -----
<S> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $31,101 11.1% $22,473 8.0%
Tier I Capital
(to Risk Weighted Assets) 28,986 10.3 11,237 4.0
Tier I Capital
(to Average Assets) 28,986 8.8 13,124 4.0
As of December 31, 1998:
- - ------------------------
Total Capital
(to Risk Weighted Assets) $15,566 12.1% $10,317 8.0%
Tier I Capital
(to Risk Weighted Assets) 13,782 10.7 5,159 4.0
Tier I Capital
(to Average Assets) 13,782 8.7 6,319 4.0
</TABLE>
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. We monitor our asset and
liability position with particular emphasis on the mix of interest-sensitive
assets and liabilities in order to reduce the effect of inflation upon 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.
RISK FACTORS
You should consider carefully the following risks before making a
decision to buy our common stock. If any of the following risks actually occur
our business, our financial condition and/or results of operations would likely
suffer in such case, the trading price of our common stock could decline, and
you may lose all or part of the money you paid to buy our common stock. The risk
factors below do not necessarily appear in order of importance. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial
may also impair our business operations.
We expect to incur substantial losses and we may not achieve or maintain
profitability.
During 1999, we began to expend significant resources on technology,
website development, marketing, hiring of personnel and other startup costs
related to the development and operation of our Internet banking platform. We
intend to continue to expend significant financial and management resources in
expanding our user network, Internet infrastructure, and marketing initiatives.
As a result of these efforts, we expect to incur substantial losses in 2000 and
2001. If we are successful in executing our business plan, we expect to be
profitable in 2002, although there can be no assurance that we will return to
profitability within such time frame. We intend to achieve profitability by
obtaining the on-line banking market through strategic alliances and brand
awareness. To the extent that increases in operating expenses precede or are not
subsequently followed by increased revenues, our business, financial condition,
results of operations, capital levels and cash flows will be materially
adversely affected. There can be no assurance that our revenues will increase or
even continue at
45
<PAGE>
their current level or that we will achieve or maintain profitability or
generate positive cash flow from operations in future periods. Because of these
projected operating losses, the market price of our common stock could decline.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We face strong competition
The financial services industry is highly competitive and is rapidly
evolving, both on-line and through traditional channels. In implementing our
Internet strategy, we face strong competition from more established providers of
direct-marketed savings and investment products, such as Wells Fargo, First
Union, E-Trade, Siebert Financial and other Internet-based financial
institutions, such as NetB@nk, Telebanc and Wingspan Bank. We also face
competition from traditional banks and non-bank financial institutions many of
which are adopting or have adopted their own Internet strategies. Additionally,
new competitors and competitive factors are likely to emerge, particularly in
light of the rapid development of the Internet and electronic commerce and the
relatively low barriers to entry. As a consequence, other financial services
companies may be able to adopt strategies similar to ours with relative ease.
Most of our competitors have financial and other resources greater than ours and
have other competitive advantages over us. There can be no assurance that we
will be able to successfully compete with our competitors.
Internet banking customers may be more price sensitive and more willing
to try new technologies than customers of traditional financial services firms,
which rely on branches and face-to-face customer service. Consequently, the
following competitive factors are of particular importance to the successful
execution of our Internet banking strategy and our profitability:
o price competition for deposits and borrowings;
o introduction of new products by us and our competitors;
o changes in the mix of products and services we sell; and
o the level of use of the Internet for banking services and electronic
commerce generally.
We may not succeed in implementing our Internet banking strategy
Our success depends on our ability to execute our Internet banking
strategy. We were certified to begin offering our Internet banking and brokerage
products and services through our website on July 15, 1999. Due to our limited
operating history, it is difficult to evaluate the effectiveness of our Internet
banking strategy. We may not succeed in implementing our business strategy and,
even if we do succeed, such strategy may not have the favorable impact on
operations that we anticipate. We may not be able to manage effectively the
expansion of our Internet bank operations or achieve the rapid execution
necessary to fully capitalize on the market for our electronic services or
offset the significant expenditures we are incurring to implement our Internet
banking strategy. In addition, the market for financial products and services
through the Internet is new and evolving, and the degree to which customers will
use it for their financial transactions is not yet fully determined. If we are
unable to manage growth effectively, or to otherwise implement our business
strategy, our business, financial condition, results of operations and cash
flows could be materially adversely affected.
Our success depends on the continued growth in use and commercial viability of
the Internet
Our future success depends substantially on continued growth in use of
the Internet in general and for commercial and financial services transactions
in particular. The Internet is a relatively new commercial marketplace and may
not continue to grow. Consequently, Internet banking may not become as widely
accepted as traditional forms of banking. Critical issues concerning the
commercial use of the Internet such as reliability, cost, ease of access,
46
<PAGE>
quality of service and security will impact the growth of Internet use. If
Internet use does not continue to grow we may not succeed in implementing our
business strategy and our business, financial condition, results of operations
and cash flows could be materially adversely affected.
Additionally, if the number of Internet users and the level of use
continues to grow, the Internet's technical infrastructure may become unable to
support the demands placed upon it. Furthermore, third party vendors might not
be able to timely and adequately develop the necessary technical infrastructure
for significant increases in electronic commerce, such as a reliable network
backbone, or introduce performance improvements, such as high-speed modems. The
Internet could also lose its viability due to delays in the development or
adoption of new standards and protocols required to handle increased levels of
activity or due to increased governmental regulation. Changes in or insufficient
availability of telecommunications services could produce slower response times
and adversely affect use of the Internet. Furthermore, the general public's
security concerns regarding the transmittal of confidential information, such as
credit card numbers, over the Internet might persist or even worsen. Issues like
these could lead to resistance against acceptance of the Internet as a viable
commercial marketplace. To the extent the Internet's technical infrastructure or
security concerns adversely affect its potential growth, our business, financial
condition, results of operations and cash flows could be materially adversely
affected.
Network and computer systems could fail, which could adversely affect our
business
Our computer systems and network infrastructure could be vulnerable to
unforeseen problems. Because we intend to conduct a substantial portion of our
business over the Internet and outsource several critical functions to third
parties, our operations depend on our ability, as well as that of our
third-party service providers, to protect our computer systems and network
infrastructure against damage from fire, power loss, telecommunications failure,
physical break-ins or similar catastrophic events. Customers may become
dissatisfied by any system failure that interrupts our ability to provide our
services to them. Sustained or repeated system failures would reduce the
attractiveness of the electronic banking services which we provide. Slower
response time or system failures may also result from straining the capacity of
our software or hardware due to an increase in the volume of services delivered
through our servers. To the extent that we do not effectively address any
capacity constraints or system failures, our customers could seek other
providers of banking services. Any damage or failure that causes interruptions
in our operations, could materially adversely affect our business, financial
condition, results of operations and cash flows. See "Business-Security."
Our security could be breached, which could damage our reputation and deter
customers from using our services
We must protect our computer systems and network from physical
break-ins, security breaches and other disruptive problems caused by the
Internet or other users. Computer break-ins could jeopardize the security of
information stored in and transmitted through our computer systems and network,
which would likely adversely affect our ability to retain or attract customers,
could damage our reputation and could subject us to litigation. Although we rely
on encryption and authentication technology to provide the security and
authentication necessary to effect secure transmissions of confidential
information, and although we intend to continue to implement security technology
and establish operational procedures to prevent break-ins, damage and failures,
these security measures may fail. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments could result in a
compromise or breach of the algorithms vBank and its third-party service
providers use to protect customer transaction data. If any compromise of our
security were to occur, it could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
We are part of a rapidly evolving electronic commerce market acceptance
of Internet banking depends substantially on widespread adoption of the Internet
for general commercial and financial services transactions. If another provider
of commercial services through the Internet were to suffer damaging from a
physical break-in, security breach or other disruptive problem caused by the
47
<PAGE>
Internet or other users, the growth and public acceptance of the Internet for
commercial transactions could suffer. Such an event could deter potential
customers of vBank or cause customers to leave vBank and thereby materially
adversely affect our business, financial condition, results of operations and
cash flows.
Rapidly changing technologies may cause us to delay introduction of new
products, services and enhancements, which may result in a loss of existing
customers or a failure to attract new customers
Our future success will depend on our ability to adapt to rapidly
changing technologies. We also will have to enhance existing products and
services and develop and introduce a variety of new products and services to
address our customers' changing demands. If we are unable to develop and bring
additional products and services to market in a timely manner, we could lose
market share to competitors who are able to offer these services, which could
materially adversely affect our business, financial condition, results of
operations and cash flows.
We outsource many essential services to third-party providers who may
terminate their agreements with us, resulting in interruptions to our Internet
banking operations
We receive essential technical and customer service support from
third-party providers. We outsource webhosting, check processing, check imaging,
electronic bill payment, Internet processing, Internet software, statement
rendering services and other additional services to third party vendors.
Specifically, we receive essential webhosting, electronic bill payment and core
systems processing services on an outsourced basis from EDS. Our agreements with
each service provider are generally cancelable without cause by either party
upon specified notice periods. If one of our third-party service providers
terminates its agreement with us and we are unable to replace such provider with
another service provider, our operations may be interrupted. If an interruption
were to continue for a significant period of time, our business, financial
condition, results of operations and cash flows could be materially adversely
affected.
Our success in introducing new financial products and services through
the Internet and attracting new customers will depend in part upon our ability
to increase the brand name awareness of USABancShares.com, vBank and other names
related to us
We are making a substantial investment in the promotion and marketing
of the USABancShares.com and vBank brands. We currently own federal registration
for the service mark "USABancShares.com". We currently do not own federal
registration for the service mark "vBank," although an application for such
service mark is pending. Infringement claims by competitors challenging our
ability to use such name, even if without merit, could result in the expenditure
of significant financial and managerial resources. Further, if such claims are
successful, we could lose our right to use such name and the benefits of the
brand awareness we are spending significant resources to develop.
In that regard, U.S. Bank National Association and its holding company,
U.S. Bancorp, recently brought a legal proceeding against us alleging that our
use of the name "USABanc.com" infringed on certain service marks allegedly owned
by U.S. Bancorp. We have entered into a settlement agreement resolving such
dispute. As a result, we ceased use of the name USABanc.com, under which we had
been actively marketing our Internet bank, and changed our name to
USABancShares.com. See "Business-Legal Proceedings." If a competitor
successfully challenges our ability to use the name USABancShares.com or vBank,
significant financial resources in developing brand awareness would be lost.
Our competitive position depends on our ability to attract and retain key
employees
Our success depends heavily on the expertise and guidance of our
President and Chief Executive Officer, Kenneth L. Tepper, and certain other
senior executive officers, including Brian M. Hartline, our Chief Financial
Officer, and Craig J. Scher, President of vBank. We have entered into
employment agreements with Messrs. Tepper, Hartline and Scher. We do not
maintain key-man life insurance on Messrs.
48
<PAGE>
Tepper, Hartline or Scher. If we lose the services of Messrs. Tepper, Hartline
or Scher, or if we are unable to attract additional qualified employees, our
business would likely be adversely affected.
Changes in interest rates could adversely affect us
Like most financial institutions, our results of operations are
primarily dependent on net interest income. Net interest income results from the
"margin" between interest earned on interest-earning assets, such as investments
and loans, and interest paid on interest-bearing liabilities, such as deposits
and borrowings. As of December 31, 1999, based on certain assumptions, vBank's
interest-bearing liabilities that were estimated to mature or reprice within one
year exceeded similar interest-earning assets by $27.2 million, or 8.9% of total
interest-earning assets.
Interest rates are highly sensitive to many factors that are beyond our
control. Some of these factors include: governmental monetary policies;
inflation; recession; unemployment; the money supply; domestic and international
economic and political conditions; and domestic and international crises.
Changes in interest rates could have adverse effects on our operations.
Historically, we have relied on short-term and institutional deposits as a
source of funds, and we will continue to rely on these types of deposits
pursuant to our Internet strategy. Our ability to retain these deposits is
directly related to the rate of interest paid by us. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets, in a
particular period of time, a significant increase in interest rates could
adversely impact our net interest income. Changes in interest rates could
adversely affect:
o the volume of loans we originate;
o the value of our purchased loans and other interest-earning assets,
particularly the fixed rate debt instruments in our investment securities
portfolio;
o our ability to recognize income on loans purchased at a discount; and
o loan repayments and prepayments.
Our commercial lending activity exposes us to credit risks
At December 31, 1999, a majority of our real estate loan portfolio
consisted of loans secured by multi-family residential real estate and
commercial real estate properties. In addition, as of December 31, 1999, we had
an aggregate of $4.7 million of commercial business loans and we expect to
increase our emphasis on commercial business lending in the future. Furthermore,
all of our commercial business loans which are secured by real estate have in
the past been classified as real estate loans. We make commercial real estate
and commercial business loans following analysis of credit risk, the value of
the underlying collateral and other more intangible factors. This commercial
lending activity exposes us to risks, particularly in the case of loans to small
businesses and individuals. These risks include possible errors in our credit
analysis, the uncertainty of the borrower's ability to repay the loans, the
uncertainty of future economic conditions and the possibility of loan defaults.
Commercial lending generally includes higher interest rates and shorter terms of
repayment than non-commercial lending. Accordingly, we are subject to greater
credit risk with our commercial lending. As of December 31, 1999, we had no
non-performing commercial business loans and $632,000 of non-performing loans
secured by commercial real estate and undeveloped land.
Our loan acquisition strategy involves significant risks
In addition to originating loans, our lending activities include
identifying and purchasing loans, which we believe to be undervalued at
discounts. We have historically purchased loans either from institutions which
were seeking to eliminate certain loans or categories of loans from their
portfolios or in connection with the failure or consolidation of other financial
institutions. Our loan acquisition strategy subjects us to risks, including some
risks not experienced by financial institutions engaged in more traditional
lending activities. There can be no assurance that this component of our
49
<PAGE>
operations will continue to provide the same level of profitability we have
experienced in the past. Our loan acquisition strategy is subject to the
following risks:
o the shrinking pool of assets available because the decreasing number of
failed or failing financial institutions that are being resolved by the
FDIC may result in us not meeting our targeted level of loan purchases;
o the competitive nature of the market for loan pools may result in us
having to acquire such loans at less attractive prices than we have in
the past;
o the cost of resolving non-performing loan pools may be greater than that
contemplated at the time of acquisition;
o the accretion of the discount associated with purchased loans is subject
to management's assumptions with respect to the estimated value of the
loans and future cash flows, all of which is uncertain and is subject to
change, resulting in inter-period variations in income; and
o geographic concentrations of purchased loans, including loans in
geographic areas with which we have little or no familiarity.
We also originate loans by purchasing participations in loans from
other financial institutions. We consider such loan participations to be
originations because we underwrite each participation as an origination and the
participation is closed using our underwriting criteria. Although we have
participated in loans with four other financial institutions, as of December 31,
1999, we had seven loan participations with an aggregate principal balance of
$10.7 million with affiliates of a local specialty finance and real estate
company. In each of these seven loan participations, our interest and rights to
principal recovery are senior to the rights of the junior participant, are
collateralized by assets of an affiliate of the specialty finance company and
are serviced by the specialty finance company. The senior rights created under
the participation agreements were significant considerations in our
qualification of the loan. Although the finance company has agreed, in several
(but not all) transactions, to cause the participated loans owned by its
affiliates which may become non-performing to be substituted for performing
underlying loans, we are subject to risk to the extent the finance company
experiences financial difficulties and is unable to comply with its replacement
obligations. Furthermore, to the extent the finance company experiences
financial difficulties, our ability to receive principal and interest payments
on a timely basis from the finance company, as servicer of the loans, could be
temporarily interrupted.
We could sustain losses if our asset quality deteriorates
Our results of operations are significantly dependent on the quality of
our assets, which is measured by the level of our non-performing assets.
Non-performing assets consist of non-accrual loans, net of discount, loans which
are 90 days or more overdue but still accruing interest and other real estate.
At December 31, 1999, our non-performing assets, net of discount, amounted to
$1.3 million or 0.39% of total assets. Although we purchase loan pools at a
discount to the face value of such loans, we face the risk that in the event one
or more of such purchased loans becomes non-performing, the underlying discount
may not be sufficient to cover our cost of acquiring, servicing and, if
necessary, taking legal action, with respect to such loans. Although we have
recently enhanced our policies and procedures relating to monitoring asset
quality and we continue to devote a significant amount of time and resources to
the identification, collection and work-out of non-performing assets, the real
estate markets and the overall economy in the markets where we originate and
purchase loans are likely to be significant determinants of the quality of our
assets in future periods and, thus, our financial condition and results of
operations.
50
<PAGE>
Increases in our reserve coverage for loan losses would adversely affect our
business
At December 31, 1999, our allowance for loan losses amounted to 1.06%
of total loans, net of discount, and 167.06% of total non-performing loans, net
of discount. In addition, the applicable purchase discount for an individual
acquired loan may act as an additional reserve against loss for such loan to the
extent that the collectability of such loan becomes questionable. Although we
believe that we have established an adequate allowance for losses on our loan
portfolio, including purchased loans, material future additions to the allowance
for loan losses may be necessary due to changes in economic conditions, the
performance of our loan portfolio and increases in both loan originations and
purchases. In addition, the Pennsylvania Department of Banking and the FDIC, as
an integral part of their examination process, periodically review our allowance
for loan losses and could require increases in such allowance. Increases in the
allowance for loan losses would adversely affect our results of operations.
Our yield on loans purchased at a discount is uncertain
At the time we purchase a pool of loans, the difference between the
note amount and the purchase price is accounted for as a discount. The purchase
price is based on our estimate of the value of the loan, including an estimate
of future cash flows. In accordance with generally accepted accounting
principles, to the extent we believe a purchased loan will be collected in full,
the discount associated with such purchased loan will be recognized as an
increase in the yield of the loan and will be included as interest income over
the estimated life of the loan. To the extent that we believe full repayment of
principal and interest is not reasonable and probable, the discount will be set
up as a cash discount and will not be recognized as an increase in the yield of
the loan until all principal and interest is received or a final resolution is
determined. To the extent that cash flows from the purchased loans may be
uncertain, recognition of this income will also be uncertain. The yield on our
portfolio of loans which have been purchased at a discount is subject to
significant inter-period variations due to the fact that the timing of actual
repayments and prepayments of the loans may differ from the original
assumptions. Such inter-period variations can also result from the
reclassification of loans from performing to non-performing status.
We rely on short-term deposits
We employ a wholesale funding strategy consisting primarily of
marketing retail and non-retail certificates of deposit. We have been able to
maintain sufficient funds to support our lending activities by offering rates of
interest on certificates of deposit marginally higher than rates offered by
other banks on comparable deposits. As of December 31, 1999, $224.9 million, or
88.2%, of our deposits consisted of certificates of deposit. Of this amount,
$169.5 million, or 75.0%, were placed with institutional investors. In addition,
as of December 31, 1999, $142.9 million, or 63.5%, of our total certificates of
deposit are due to mature within one year. Our ability to attract and maintain
deposits, as well as our cost of funds, has been, and will continue to be,
significantly affected by money market rates, general economic conditions and
our regulatory capital levels. In addition, our ability to internally fund any
additional growth through lending will be impacted by our ability to maintain or
generate deposits. In the event we increase interest rates further to retain
deposits, earnings may be negatively affected.
We are vulnerable to unfavorable economic conditions
The performance of financial institutions like vBank is sensitive to
general economic conditions. Unfavorable economic conditions at the local,
national or international level may adversely affect vBank's performance. For
example, much of the United States experienced a significant economic decline in
the late 1980's and early 1990's. This decline adversely affected the real
estate market and the banking industry. As a result of this decline, loan
repayment delinquencies increased and the value of properties underlying secured
loans declined. Numerous bank failures resulted in the placement of many
properties in the hands of a federal banking agency with the primary objective
of prompt liquidation. In addition, recent activity in financial markets in the
United States and the rest of the world has demonstrated an increasing
interdependency among the various world markets and economies and has raised
51
<PAGE>
concerns among those in the banking industry. The implications of this
interdependency are very uncertain and present risks to financial institutions
such as vBank, particularly in light of the current turmoil in some foreign
markets and economies. Economic conditions are unpredictable and the potential
for downturns is always present.
Although we have historically focused on acquiring loans in the
Mid-Atlantic region of the United States, we have acquired loans secured by real
estate located in a number of other states including Minnesota, Florida and
California and we may acquire loans throughout the nation. In the future, we may
acquire or originate loans throughout the United States through our Internet
banking operations or through other means. To the extent such loans are secured
by real estate outside the Mid-Atlantic region, such loans may present a greater
risk of collectability than loans located in our historical primary market area.
Thus, adverse economic conditions affecting any of these market areas could have
a negative impact on our financial condition and results of operations.
We could be adversely affected by government regulation
Bank regulation. We are subject to a complex body of federal and state
banking laws and regulations which are intended primarily for the protection of
depositors. Governmental or regulatory authorities could revise existing
regulations or adopt new regulations at any time. Certain revisions could
subject vBank to more demanding regulatory compliance requirements and could
thereby adversely affect our ability to conduct, or the cost of conducting,
business. Legislation and regulatory initiatives containing wide-ranging
proposals for altering the structure, regulation and competitive relationships
of financial institutions are introduced regularly. We cannot predict whether or
what form of proposed statute or regulation will be adopted or the extent to
which such adoption will affect our business. Furthermore, given the rapid
expansion of the electronic commerce market, many regulatory bodies are adopting
measures to ensure that their regulations are keeping pace. For example,
Congress has held hearings on whether to regulate the electronic commerce
market, while numerous states are considering adopting their own laws to
regulate Internet banking. Furthermore, Congress is considering proposing new
laws relating to customer privacy. Moreover, the FDIC has proposed other
guidelines governing Internet operations. These and any other proposed laws,
rules and regulations could force us to comply with more complex and perhaps
more burdensome regulatory requirements, which could materially adversely affect
our business, financial condition, results of operations and cash flows.
Internet regulation. A number of legislative and regulatory proposals
currently under consideration by federal, state, local and foreign governmental
organizations may lead to laws or regulations concerning various other aspects
of the Internet, including, but not limited to, on-line content, user privacy,
taxation, access charges, information sharing, community development, data
security, liability or third-party activities and jurisdiction. Moreover, it is
uncertain how existing laws relating to these issues will be applied to the
Internet. The adoption of new laws or the application of existing laws could
decrease the growth in the use of the Internet, which could in turn decrease the
demand for our products and services, increase our cost of doing business or
otherwise have a material adverse effect on our business, financial condition,
results of operations and cash flows. Furthermore, government restrictions on
Internet content could slow the growth of Internet use and decrease acceptance
of the Internet as a communications and commercial medium, and thereby have a
material adverse effect on our business, financial condition and results of
operations.
Although certain local telephone carriers have asserted that the
growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure and caused interruptions in telephone service
in areas with high Internet use, the Federal Communications Commission ("FCC")
has declined the request of such carriers to impose access fees on Internet
service providers or commercial on-line service providers. If the FCC or state
regulatory agencies were to impose such access fees, the costs of transacting
business on the Internet could increase substantially, potentially slowing the
growth in use of the Internet, which could in turn decrease demand for our
Internet bank services or increase our cost of doing business, and thus have a
52
<PAGE>
material adverse effect on our business, financial condition, results of
operations and cash flows.
Internet privacy
Internet user privacy has become an issue both in the United States and
abroad. Numerous bills have been introduced in the House and Senate that would
force companies to comply with certain specified core information practices.
Such privacy legislation could affect in a materially adverse manner the way in
which USABancShares.com is allowed to conduct its Internet bank business,
especially those aspects that involve the collection or use of personal
information.
USABancShares.com does not intend to pay cash dividends and the ability of vBank
to pay cash dividends to USABancShares.com is restricted
USABancShares.com has never paid or declared a cash dividend and we do
not anticipate paying cash dividends in the foreseeable future.
USABancShares.com currently intends to retain earnings, if any, to further the
development and growth of its business. USABancShares.com's ability to pay
dividends to its shareholders is limited by vBank's ability to pay dividends to
USABancShares.com. vBank is subject to substantial regulatory restrictions on
its ability to pay dividends to USABancShares.com. See "Regulation of
USABancShares.com, Inc. and vBank."
We need to maintain adequate capital to support our anticipated growth
We are required by federal and state regulatory authorities to maintain
adequate levels of capital to support our operations. To the extent our
operations expand, we will be required to support such growth by increasing our
capital to acceptable regulatory levels. We expect our operations, including our
asset base, to grow substantially as a result of implementing our Internet
banking strategy. Accordingly, we may need to raise additional capital in the
future to support our operations should they continue to expand. This may be
accomplished through the sale of additional securities of USABancShares.com,
Inc. including the issuance of additional shares of our common stock. There is
no assurance that we will be able to raise additional capital when needed. If we
cannot raise additional capital when needed, our business, financial condition,
results of operations, capital levels and cash flows will be materially
adversely affected. If we issue additional common stock, shareholders of
USABancShares.com do not have a right to purchase any new issue of shares of our
common stock in order to maintain their proportionate ownership interests in
USABancShares.com. Should we choose to raise capital through the sale of our
common stock, such action would dilute the ownership and voting power of the
outstanding shares and reduce the portion of any dividend and liquidation
proceeds payable to the holders of the common stock.
Provisions of our Articles of Incorporation and Bylaws have certain
anti-takeover effects
Certain provisions of our amended and restated articles of
incorporation and our bylaws may delay, deter or prevent a change in control of
USABancShares.com that is not approved by our board of directors. These
provisions include our ability to issue shares of preferred stock in one or more
series without further authorization of the shareholders and a majority
shareholder approval requirement for certain transactions, including a merger,
consolidation, liquidation or disposition of all or substantially all of our
assets.
The voting rights of the shares of common stock are identical to the
voting rights of the Class B common stock with one exception: the holders of the
shares of common stock are entitled to elect two-thirds of our directors and the
holder of the Class B common stock is entitled to elect one third of our
directors. Kenneth L. Tepper, our President and Chief Executive Officer, is the
sole holder of Class B common stock. This concentration of voting power could
have the effect of delaying or preventing a change of control.
Our articles also give our board of director's broad discretion to
evaluate a takeover attempt. In particular, our articles give our board of
director's broad discretion to prevent a change of control, including the use of
a "poison pill" defense. See "Description of Capital Stock."
53
<PAGE>
Environmental Liabilities
In the course of the Bank's business, vBank 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 we may be required to bear the cost of removing hazardous substances from
any affected properties. The cost of such removal could exceed the value of the
affected properties or the loans secured by the properties. In addition, we 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.
Item 7. Financial Statements.
The financial statements of USABancShares.com, Inc., are attached to
this report and begin on page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The information required by this Item is incorporated by reference from
the definitive proxy materials of USABancShares.com, Inc., to be filed with the
Commission in connection with USABancShares.com, Inc.'s, 2000 Annual Meeting of
Shareholders.
Item 10. Executive Compensation.
The information required by this Item is incorporated by reference from
the definitive proxy materials of USABancshares.com, Inc., to be filed with the
Commission in connection with USABancShares.com, Inc.'s, 2000 Annual Meeting of
Shareholders.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this Item is incorporated by reference from
the definitive proxy materials of USABancShares.com, Inc., to be filed with the
Commission in connection with USABancShares.com, Inc.'s, 2000 Annual Meeting of
Shareholders.
Item 12. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference from
the definitive proxy materials of USABancShares.com, Inc.'s, 2000 to be filed
with the Commission in connection with USABancShares.com, Inc.'s 2000 Annual
Meeting of Shareholders.
Item 13. Exhibits, List and Reports on Form 8-K.
(A) Exhibits
The following Exhibits are filed as part of this report. (Exhibit
numbers correspond to the exhibits required by Item 601 of Regulation S-B.)
54
<PAGE>
Exhibit No.
10.1 Employment Agreement between Registrant and Kenneth L. Tepper and
Brian M Hartline*
10.2 Employment agreements between Registrant and Craig J. Scher
10.3 Employment agreements between Registrant and Sean Sweeney
10.4 Agreement by and between Kenneth L. Tepper and the registrant dated
January 2, 1998**
10.5 Registration Rights Agreement between the Registrant and certain
shareholders dated February 13, 1998**.
10.6 Warrant Agreement between the Registrant and Sandler O'Neill dated
February 13, 1998**
10.7 Agreement by and between USABancshares.com, Inc. and Earthlink and
Systemax*
11 Computation of Per Share Earnings (Included in Financial Statements on
Page F-21)
21 Subsidiaries of the Corporation
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
- - ------------------------------------
* Incorporated by reference from the Registration Statement on Form SB-2 of the
Registrant, as amended, Registration No. 33-92506.
**Incorporated by reference from the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997.
(B) Reports on Form 8-K
USABancShares.com, Inc.did not file any reports on Form 8-K during the
fourth quarter of 1999.
55
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania on March 30, 2000.
USABANCSHARES.COM, INC.
By: /s/ Kenneth L. Tepper
-------------------------------------------
Kenneth L. Tepper, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Brian M. Hartline
-------------------------------------------
Brian M. Hartline, Chief Financial Officer
(Principal Accounting and Financial Officer)
In accordance with the Securities Exchange Act of 1934, this Report has
been duly signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
March 30, 2000 /s/ George M. Laughlin
------------------------------------------------
George M. Laughlin
Chairman of the Board
March 30, 2000 /s/ Kenneth L. Tepper
------------------------------------------------
Kenneth L. Tepper
President, Chief Executive Officer and Director
March 30, 2000 /s/ Clarence L. Rader
------------------------------------------------
Clarence L. Rader
Director
March 30, 2000 /s/ George C. Fogwell, III
------------------------------------------------
George C. Fogwell, III
Director
March 30, 2000 /s/ John A. Gambone
------------------------------------------------
John A. Gambone
Director
March 30, 2000 /s/ Brian M. Hartline
------------------------------------------------
Brian M. Hartline
Director
56
<PAGE>
March 30, 2000 /s/ Carol J. Kauffman
------------------------------------------------
Carol J. Kauffman
Director
March 30, 2000 /s/ Wayne O. Leevy
------------------------------------------------
Wayne O. Leevy
Director
March 30, 2000 /s/ Daniel Stechow
------------------------------------------------
Daniel Stechow
Director
57
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
USABANCSHARES.COM, INC. AND SUBSIDIARIES
December 31, 1999 and 1998
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>
Board of Directors
USABancShares.com, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
USABancShares.com, Inc., and Subsidiaries as of December 31, 1999 and 1998, 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 USABancShares.com, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
USABancShares.com, Inc., and Subsidiaries as of December 31, 1999 and 1998, 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
February 25, 2000
F-3
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in Thousands, except per share data)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 3,813 $ 1,335
Interest-bearing deposits with banks 821 7,706
Securities available-for-sale 37,478 28,389
Securities held-to-maturity (fair value: 1999 - $55,195;
1998 - $15,951) 60,337 15,755
Federal Home Loan Bank of Pittsburgh (FHLB) Stock 4,011 3,523
Loans receivable, net 197,623 102,138
Premises and equipment, net 2,851 2,023
Accrued interest receivable 2,906 1,633
Other real estate - 66
Goodwill, net 70 69
Deferred income taxes 1,475 573
Bank owned life insurance 5,149 -
Other assets 6,801 1,896
--------- ---------
Total assets $ 323,335 $ 165,106
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 5,168 $ 1,439
NOW 4,692 846
Money Market 973 2,345
Savings and Passbook 19,271 5,281
Time 224,934 104,476
--------- ---------
Total deposits 255,038 114,387
Borrowed funds:
Short term borrowings - 6,106
Long term borrowings 35,000 25,000
Guaranteed preferred beneficial interests in subordinated debt 10,000 -
Collateralized borrowings - 4,199
Accrued interest payable 4,132 399
Accrued expenses and other liabilities 1,237 1,418
--------- ---------
Total liabilities 305,407 151,509
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 5,000,000 authorized shares;
no shares issued and outstanding - -
Common stock, $1.00 par value; 10,000,000 authorized shares;
5,423,784 shares issued and outstanding in 1999; 2,007,392 shares issued and
outstanding in 1998; and 216,460 and 108,230 shares of converted and
un-issued Class B common stock in 1999 and 1998, respectively actual
5,640,244 shares issued and outstanding in 1999, as adjusted
actual 2,115,622 shares issued and outstanding in 1998, as adjusted 5,640 2,116
Additional paid-in capital 15,368 10,683
Accumulated (deficit) earnings (1,378) 1,112
Accumulated other comprehensive (loss) - unrealized
depreciation on securities available-for-sale (1,702) (314)
--------- ---------
Total stockholders' equity 17,928 13,597
--------- ---------
Total liabilities and stockholders' equity $ 323,335 $ 165,106
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
F-4
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in Thousands, except per share data)
Year ended December 31,
-----------------------
1999 1998
--------- --------
Interest income:
Loans $ 14,609 $ 9,028
Investment securities 6,934 3,015
Interest-bearing deposits and other 327 309
--------- -------
Total interest income 21,870 12,352
Interest expense:
Deposits 10,671 5,266
Borrowed funds 2,439 1,188
--------- -------
Total interest expense 13,110 6,454
--------- -------
Net interest income 8,760 5,898
Provision for loan losses 1,175 510
--------- -------
Net interest income after provision for loan losses 7,585 5,388
Non-interest income:
Service fee income 183 94
Gain on sales of investment securities 31 378
Gain on sales of loans receivable 1,402 -
Gain on sale of other real estate 64 -
Brokerage operations (loss) gain (257) 141
Other 344 146
--------- -------
Total non-interest income 1,767 759
Non-interest expense:
Salaries and employee benefits 3,640 1,539
Net occupancy expense 787 523
Professional fees 860 275
Office expenses 406 270
Data processing fees 611 199
Advertising expense 3,832 177
Insurance expense 111 68
Travel expense 366 54
Loan servicing expense 114 -
Internet content expense 237 -
Other operating expenses 1,466 595
--------- -------
Total non-interest expense 12,430 3,700
--------- -------
(Loss) income before income tax (benefit) expense (3,078) 2,447
Income tax (benefit) expense (588) 957
--------- -------
Net (loss) income $ (2,490) $ 1,490
========= =======
(Loss) earnings per share - basic (1) $ (0.54) $ 0.38
========= =======
(Loss) earnings per share - diluted (1) $ (0.54) $ 0.36
========= =======
The accompanying notes are an integral part of these consolidated financial
statements.
(1) All per share data has been adjusted to reflect all stock dividends and
stock splits.
(Continued)
F-5
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Consolidated Statement Of Changes In Stockholders' Equity
And Comprehensive Income (Loss)
(in Thousands)
<TABLE>
<CAPTION> Accumulated
Additional other Total
Common paid-in Accumulated comprehensive stockholders' Comprehensive
Stock capital earnings (deficit) income (loss) equity income (loss)
------ -------- ------------------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C>
Balances, 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
Net loss - - (2,490) - (2,490) $(2,490)
Other comprehensive loss,
net of reclassification
adjustments and taxes - - - (1,388) (1,388) (1,388)
------
Total comprehensive
loss $(3,878)
=======
Secondary offering 1,400 6,675 - - 8,075
Warrants - 109 - - 109
Exercise of stock options 9 16 - - 25
100% stock dividend 2,115 (2,115) - - -
------ ------- ------ ------ -------
Balance, December 31, 1999 $5,640 $15,368 $(1,378) $(1,702) $17,928
====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
F-6
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1999 1998
----------------------- -----------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (2,490) $ 1,490
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Provision for possible loan losses 1,175 510
Depreciation and amortization 418 219
Fixed asset writedown for obsolescence 266 -
(Increase) decrease of goodwill (1) 11
Net accretion of discounts on purchased loan portfolios (952) (1,306)
Net accretion amortization of securities discount/premiums (155) (9)
Net gains on sale of securities (31) (378)
Net gains on sale of loan assets (1,402) -
Net gains on sale of real estate owned (64) -
Increase in accrued interest receivable (1,273) (786)
Increase in deferred tax asset (902) (166)
Increase in bank owned life insurance (149) -
Increase in other assets (4,905) (977)
Increase in accrued interest payable 3,733 324
(Decrease) increase in accrued expenses and other liabilities (31) 645
--------- --------
Net cash used in operating activities (6,763) (423)
--------- --------
Cash flows from investing activities:
Investment securities available for sale
Purchases (47,484) (29,512)
Sales 2,688 9,286
Maturities and principal repayments 2,307 1,250
Investment securities held to maturity
Purchases (23,262) (8,012)
Sales 1,200 1,444
Maturities and principal repayments 10,880 5,580
Purchases of FHLB Stock (488) (2,622)
Purchase of bank owned life insurance (5,000) -
Increase (decrease) in interest bearing deposits with banks 6,885 (3,731)
Principal payments on loans 63,424 23,631
Purchases of loans (105,909) (38,428)
Originations of loans (53,000) (30,543)
Decrease (increase) in other real estate, net 66 (66)
Purchases of premises and equipment (1,512) (1,089)
--------- --------
Net cash used in investing activities (149,205) (72,812)
--------- --------
Cash flows from financing activities:
Net increase in deposits 140,651 43,913
Net (decrease) increase in borrowings (305) 22,667
Common equity offering proceeds, net 8,075 7,110
Exercise of stock options 25 47
Trust preferred proceeds 10,000 -
--------- --------
Net cash provided by financing activities 158,446 73,737
--------- --------
Net increase in cash and cash equivalents 2,478 502
Cash and cash equivalents, beginning 1,335 833
--------- --------
Cash and cash equivalents, end $ 3,813 $ 1,335
========= ========
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest $ 9,377 $ 6,137
========= ========
Income taxes $ 444 $ 975
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
F-7
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
NOTE A - ORGANIZATION
USABancShares.com, Inc. ("USABancShares.com") is a registered bank holding
company and is subject to regulation and supervision by the Board of
Governors of the Federal Reserve System and the Pennsylvania Department of
Banking. USABancShares.com through its subsidiaries, vBank, USACapital,
Inc. ("USACapital"), USACredit, Inc. ("USACredit") USARealEstate, Inc.,
and USA Capital Trust I (the "Trust") provides a full range of banking and
non-depository services through the Internet on a national basis, and
retail channels to the Philadelphia market area.
USABancShares.com was organized in November 1995 to facilitate the
acquisition of People's Thrift Savings Bank, which changed its name to
vBank in July 1999.
vBank is a Pennsylvania chartered stock savings institution which acquires
deposits and provides loans primarily to commercial businesses or for
commercial properties. vBank competes with other on-line financial service
providers, commercial banks, brokerage firms, insurance companies, savings
banks, and credit unions for such products and services.
vBank 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,
vBank'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 as well as its on-line presence USAForce.com.
USACapital introduces customer accounts on a fully disclosed basis to
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 Pennsylvania corporation which owns a minority (20%)
interest in a Delaware limited liability company in the business of
purchasing judgements, deficiencies, and charge-offs, and pursuing
collections on such claims. USACredit also provides on-line leasing
arrangements for telecommunication, equipment and office products.
USARealEstate, Inc. is a Pennsylvania corporation that acquires and
manages foreclosed real estate property from vBank for the purpose of
eventual liquidation of the property.
USA Capital Trust I is a Delaware statutory business trust with the
exclusive purpose of issuing and selling trust securities and using the
proceeds from the sale of the Trust securities to acquire the Junior
Subordinated Debenture's issued by USABancShares.com. The sole asset of
the Trust will be the Junior Subordinated Debentures.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Financial Statement Presentation
The accounting and reporting policies of USABancShares.com and its
subsidiaries conform with generally accepted accounting principles and
(Continued)
F-8
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
predominant practices within the banking industry. All significant
inter-company balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. These estimates and assumptions also affect reported amounts of
revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
The principal estimates particularly susceptible to significant change in
the near term relates to the allowance for loan losses. The evaluation of
the adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different
loan portfolios, and takes into consideration current economic and market
conditions, the capability of specific borrowers to pay specific loan
obligations, and current loan collateral values. However, actual losses on
specific loans, which also are encompassed in the analysis, may vary from
estimated losses.
In 1998, USABancShares.com 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 USABancShares.com and its subsidiaries' operating
segments. Management has determined USABancShares.com operates in three
business segments, namely, Internet banking, community banking and broker
dealer operations. (see Note T - Segment Reporting).
2. Investment Securities
USABancShares.com accounts for its investment securities in accordance with
SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. USABancShares.com classifies its securities as held for
investment purposes (held to maturity) and available for sale. Investment
securities for which USABancShares.com 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 operations upon sale. USABancShares.com had no securities held for
trading purposes at December 31, 1999 and 1998.
(Continued)
F-9
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
On April 1, 1999, USABancShares.com adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 137.
Based on USABancShares.com's minimal use of derivatives at the current time,
the adoption of SFAS No. 133, as amended by SFAS No. 137, had no impact on
the financial position or results of operations of USABancShares.com.
Coinciding with the adoption of this standard, USABancShares.com transferred
$33,400,000 of investment securities from available for sale to held to
maturity. An unrealized loss of $817,000 associated with the transferred
securities is being accreted back into the carrying value of the securities
over the estimated remaining life of the securities. $21,000 was accreted
during 1999.
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.
USABancShares.com'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 collectability 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 collectability 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 origination 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.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
USABancShares.com 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
USABancShares.com accounts for its transfers and servicing of 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 leases or estimated useful lives, whichever is shorter.
Depreciation and amortization are computed 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, USABancShares.com 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.
USABancShares.com 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.
7. Other Real Estate
Properties acquired by foreclosure are other real estate ("ORE") and are
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 less estimated cost to sell. 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.
(Continued)
F-11
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. Income Taxes
USABancShares.com recognizes deferred tax assets and liabilities for
the expected future tax consequences of events that have been
recognized in the 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. USABancShares.com files a
consolidated federal income tax return
as the Parent. Federal income taxes are calculated as if the
subsidiaries filed on a separate return basis, and the amount of the
current tax calculated is remitted to USABancShares.com. If losses are
generated on a consolidated basis, any benefit associated with the loss
is first applied to vBank. The amount of the current and deferred taxes
payable or refundable is recognized as of the date of the financial
statements for the changes in deferred tax liabilities or assets
between years.
9. Per Share Amounts
USABancShares.com follows 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 ("diluted EPS") in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings
per share ("basic EPS") 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
USABancShares.com follows the provisions of 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.
(Continued)
F-12
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The income tax effects allocated to comprehensive income (loss) is as
follows, for the year indicated:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------------------- ------------------------------------------
Net of Net of
Before tax Tax tax Before tax Tax tax
amount benefit amount amount benefit amount
------------- ------------ ------------ ------------ ------------ ------------
(in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Unrealized holding gains
(losses) arising during period $ (2,306) $ 899 $ (1,407) $ (1,038) $ 388 $ (650)
Less reclassification
adjustment for (losses) gains
realized in net income (31) 12 (19) (378) 144 (234)
------------- ------------ ------------ ------------ ------------ ------------
Other comprehensive income
(loss), net $ (2,275) $ 887 $ (1,388) $ (660) $ 244 $ (416)
============= ============ ============ ============ ============ ============
</TABLE>
11. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and amounts due from
banks.
12. Advertising Costs
USABancShares.com expenses advertising costs as incurred.
13. Restrictions on Cash and Due from Banks
As of December 31, 1999, USABancShares.com did not maintain reserves
(in the form of deposits with the Federal Home Loan Bank ("FHLB")). As
of December 31, 1999, USACapital has $100,000 segregated in special
reserve bank accounts as required by the clearing organizations.
14. Bank Owned Life Insurance
During 1999, USABancShares.com entered into a $5,000,000 investment
of bank owned life insurance ("BOLI"). BOLI involves the purchasing
of life insurance by USABancShares.com on a chosen group of
employees. USABancShares.com is the owner and beneficiary of the
policies. This pool of insurance, due to tax advantages to the Bank,
is profitable to USABancshares.com. This profitability is used to
offset a portion of future benefit cost increases of
USABancShares.com. Earnings from BOLI are recognized as other
income.
15. Certain reclassifications have been made to the 1998 financial
statements to conform with the 1999 presentation.
(Continued)
F-13
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE C - PRIVATE PLACEMENT
On February 18, 1998, USABancShares.com issued 769,231 shares of its
common shares in conjunction with a private placement offering (the
"offering"). Total cash received was $7.1 million, net of offering
costs of $390,000.
In connection with the offering, USABancShares.com granted warrants
convertible for a period of five years into 3.25% of USABancShares.com
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 - TRUST PREFERRED
On March 9, 1999, USABancShares.com issued $10,000,000 principal
amount of 9.50% junior subordinated deferrable interest debentures due
March 5, 2029(the debentures) to USA Capital Trust I (the "Trust"), a
Delaware business trust, in which USABancShares.com owns all the
common equity. The debentures are the sole asset of the Trust. The
Trust issued $10,000,000 of Trust preferred securities to investors.
USABancShares.com's obligations under the debentures and related
documents, taken together, constitute a full and unconditional
guarantee by USABancShares.com of the Trust's obligations under the
Trust preferred securities. Although the subordinated debentures will
be treated as debt of USABancShares.com, they currently qualify for
Tier 1 capital treatment, subject to certain limitations. The Trust
preferred securities are callable by USABancShares.com on or after
March 15, 2009, or earlier in the event the deduction of related
interest for federal income taxes is prohibited, treatment as Tier 1
capital is no longer permitted or certain other contingencies arise.
The Trust preferred securities must be redeemed upon maturity of the
debentures in 2029.
NOTE E - SECONDARY OFFERING
On September 30, 1999, USABancShares.com issued 1,400,000 common
shares in a secondary public offering. USABancShares.com issued these
share at $6.75, with net proceeds of $8.1 million, subsequent to
offering costs of $1.4 million.
(Continued)
F-14
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE F - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair market value
of USABancShares.com's investment securities available-for-sale and held-to-
maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------------
(in Thousands)
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Available-for-Sale
U.S. Government and agency
securities $ 1,399 $ - $ (51) $ 1,348
Mortgage-backed securities 9,101 - (457) 8,644
Corporate securities 19,326 6 (311) 19,021
Trust preferred securities 7,588 - (608) 6,980
Other securities 2,058 2 (575) 1,485
--------------- -------------- -------------- ---------------
Total Available-for-Sale $ 39,472 $ 8 $ (2,002) $ 37,478
=============== ============== ============== ===============
Held-to-Maturity
U.S. Government and agency
securities $ 5,694 $ - $ (262) $ 5,432
Mortgage-backed securities 6,514 8 (152) 6,370
Corporate obligations 16,079 - (1,355) 14,724
Trust preferred securities 29,676 139 (3,595) 26,220
Municipal securities 3,170 - (321) 2,849
--------------- -------------- -------------- ---------------
Total Held-to-Maturity $ 61,133 $ 147 $ (5,685) $ 55,595
=============== ============== ============== ===============
December 31, 1998
-----------------------------------------------------------------
(in Thousands)
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ---------------
Available-for-Sale
Mortgage-backed securities $ 2,628 $ - $ (8) $ 2,620
Corporate securities 1,322 13 (89) 1,246
Trust preferred securities 22,987 243 (605) 22,625
Other securities 1,957 - (59) 1,898
--------------- -------------- -------------- ---------------
Total Available-for-Sale $ 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 2,313 65 - 2,378
Other securities 3,425 14 (56) 3,383
--------------- -------------- -------------- ---------------
Total Held-to-Maturity $ 15,755 $ 253 $ (57) $ 15,951
=============== ============== ============== ===============
</TABLE>
(Continued)
F-15
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE F - INVESTMENT SECURITIES - Continued
The amortized cost and fair market value of investment securities, by
contractual maturity, as of December 31, 1999, are shown below.
<TABLE>
<CAPTION>
(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 within one year $ 2,546 $ 2,487 11.86% $ 746 $ 726 9.77%
Due after one year through five years 14,029 13,874 9.04 7,023 6,663 11.62
Due after five years through ten years 4,150 4,008 8.25 10,628 9,626 10.60
Due after ten years 7,588 6,980 8.97 36,220 32,211 8.59
Mortgage-backed securities 9,101 8,644 6.79 6,516 6,369 7.41
Equity Securities 2,058 1,485 - - - -
------------ -------------- ------------ ---------------
$ 39,472 $ 37,478 $ 61,133 $ 55,595
============ ============== ============ ===============
</TABLE>
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 1999 and 1998, USABancShares.com 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 $1.2 million in 1999 and $1.4 million in 1998. Proceeds on the sale of
investment securities classified as available-for-sale were $2.7 million in
1999 and $9.3 million in 1998. Gross gains of $76,000 and gross losses of
$45,000 were realized on 1999 sales. Gross gains of $393,000 and gross
losses of $15,000 were realized on 1998 sales.
NOTE G - LOANS RECEIVABLE
Loans outstanding by classification are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
------------------------------- -------------------------------
(in Thousands) 1999 % 1998 %
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Real Estate:
1-4 family residential properties $ 31,729 15.9% $ 33,287 32.2%
Commercial real estate 143,428 71.7 66,351 64.2
Multifamily residential properties 7,726 3.9 1,446 1.4
Construction 9,467 4.7 992 1.0
Commercial and industrial 4,688 2.3 986 1.0
Consumer 2,967 1.5 243 0.2
-------------- --------------- -------------- --------------
Total loans, net of discount $ 200,005 100.0% $ 103,305 100.0%
============== =============== ============== ==============
Deferred loan fees (267) (116)
Allowance for loan losses (2,115) (1,051)
-------------- --------------
Net loans $ 197,623 $ 102,138
============== ==============
</TABLE>
(Continued)
F-16
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE G - LOANS RECEIVABLE - Continued
At December 31, 1999 and 1998, loans outstanding to certain officers and
directors of vBank and their affiliated interests amounted to $4.9 million
and $2.5 million, respectively. An analysis of activity in loans to related
parties at December 31, 1999 and 1998, resulted in new loans of $2.8 million
and $2.7 million respectively, and reductions of $400,000 and $483,000
respectively, representing payments.
An analysis of the allowance for possible loan losses is as follows:
(in Thousands)
<TABLE>
<CAPTION>
For the twelve months ended December 31,
1999 1998
--------------------- --------------------
<S> <C> <C>
Balance at beginning of period $1,051 $ 568
Provision for loan losses 1,175 510
Charge-offs (141) (43)
Recoveries 30 16
--------------------- --------------------
Balance at end of period $2,115 $1,051
===================== ====================
</TABLE>
Included in loans receivable are non-accrual loans of $1.3 million and $1.8
million at December 31, 1999 and 1998, respectively. Interest income that
would have been recorded in the financial statements had the non-accrual
loans been performing in accordance with their terms would have been $91,000
and $140,000 in 1999 and 1998, respectively.
Also, included in loans receivable are loans past due 90 days or more and
accruing in the amount of $0 and $152,000 at December 31, 1999 and 1998,
respectively, which have not been classified as non-accrual due to
management's belief that the loans are well-secured and in the process of
collection.
NOTE H - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
At December 31,
--------------------------------
(in Thousands) useful lives 1999 1998
----------------- --------------- -------------
<S> <C> <C> <C>
Building 31.5 years $ 754 $ 754
Premises and improvements 5 to 20 years 1,246 726
Furniture and equipment 5 to 7 years 1,504 969
--------------- -------------
3,504 2,449
Less accumulated depreciation and amortization (653) (426)
--------------- -------------
$ 2,851 $ 2,023
=============== =============
</TABLE>
Depreciation and amortization charged to operations was $418,000 and
$219,000 for the years ended December 31, 1999 and 1998, respectively.
(Continued)
F-17
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE I- DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was approximately $149.4 million and $34.7 million
at December 31, 1999 and 1998, respectively.
At December 31, 1999, the schedule of maturities of certificates of deposit
is as follows:
(in Thousands)
2000 $142,907
2001 44,860
2002 15,996
2003 10,564
2004 9,475
Thereafter 1,132
---------------
$224,934
===============
NOTE J - BORROWINGS
At December 31, 1999, vBank had five callable fixed-rate advances
outstanding with the FHLB. The callable advances mature within five to ten
years with call options ranging from 4 months to 45 months. The interest
rates on the callable advances range from 4.84% to 6.31% with a weighted
average interest rate of 5.61% at December 31, 1999.
The following table sets forth certain information regarding vBank's FHLB
advances, at or for the period ended December 31:
1999 1998
---- ----
(in thousands)
Balance outstanding, December 31 $35,000 $30,000
Average balance outstanding during year 32,018 22,482
Weighted average interest rate for the period 5.31% 5.29%
Maximum outstanding balance at any month end 35,000 31,000
No collateralized borrowings were outstanding at December 31, 1999. At
December 31, 1998 vBank had $4.2 million in collateralized borrowings that
represent participations by other banks in certain loans; such amounts are
non-interest bearing.
No credit facilities were available at December 31, 1999. At December 31,
1998 USABancShares.com had 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 K - STOCKHOLDERS' EQUITY
In connection with the formation of USABancShares.com, the President & CEO
(Continued)
F-18
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE K - STOCKHOLDERS' EQUITY - Continued
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 Common Stock on January 1, 2001. As a result of the mandatory
conversion provision, the Class B Common Stock is deemed converted for
financial statement purposes.
On August 17, 1998, USABancShares.com paid a 33% stock dividend on its
common stock to stockholders of record as of August 3, 1998.
On June 15, 1999, USABancShares.com paid a 100% stock dividend on its
common stock to stockholders of record as of June 1, 1999.
NOTE L - EMPLOYEE BENEFIT PLANS
On October 1, 1999, USABancShares.com began a defined contribution 401(k)
plan (the "Plan") covering eligible employees. Participants may contribute
up to 15% of their salary to a maximum of $10,000. USABancShares.com will
match fifty percent of contributions up to six percent of eligible
compensation per year. Contributions for the year ended December 31, 1999
were $12,000. USABancShares.com's previous 401(k) plan was terminated in
January 1999, and all funds were distributed to employees.
NOTE M - INCOME TAXES
The components of income tax (benefit)expense are as follows:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------
(in Thousands) 1999 1998
---------------- ----------------
<S> <C> <C>
Federal
Current $ (582) $ 935
Deferred (6) (165)
Benefit applied to reduce goodwill - -
---------------- ----------------
(588) 770
State
Current - 187
Benefit applied to reduce goodwill - -
---------------- ----------------
- 187
---------------- ----------------
Income tax (benefit) expense $ (588) $ 957
================ ================
</TABLE>
(Continued)
F-19
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE M - INCOME TAXES - Continued
The reconciliation of the tax computed at the statutory federal rate was as
follows:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------
(in Thousands) 1999 1998
---------------- ----------------
<S> <C> <C>
Tax (benefit) expense at statutory rate $ (1,098) $ 832
Increase (decrease) in taxes resulting from
tax-exempt income (111) (76)
Nondeductible expenses, including goodwill and
meals and entertainment 21 31
Increase in valuation allowance 493 -
State income taxes, net of federal income
tax benefit - 124
Other, net 107 46
---------------- ----------------
Income tax (benefit) expense $ (588) $ 957
================ ================
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and the tax basis of USABancShares.com's assets
and liabilities. Cumulative temporary differences are as follows at December
31,:
<TABLE>
<CAPTION>
(in Thousands) 1999 1998
---------------- ----------------
<S> <C> <C>
Deferred tax assets
Allowance for possible loan losses $ 664 $ 346
Deferred compensation 21 24
Unrealized losses on securities available-for-sale 1,088 191
State net operating losses 170 -
Valuation allowance (493) -
Other 25 12
---------------- ----------------
Net deferred tax asset $ 1,475 $ 573
================ ================
</TABLE>
A valuation allowance has been recorded for deferred tax assets that
USABancShares.com believes will more likely than not expire before the
benefit can be realized.
(Continued)
F-20
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE N - EARNINGS PER SHARE
The following table illustrates the reconciliation of the basic and diluted
EPS computations.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
(in Thousands, except per share data)
1999 1998
----------------- -----------------
<S> <C> <C>
Basic EPS Computation:
Numerator - Net (loss) earnings $ (2,490) $ 1,490
Denominator - Weighted average shares outstanding 4,591 3,972
----------------- -----------------
Basic (loss) earnings per share (1) $ (0.54) $ 0.38
================= =================
Diluted EPS Computation:
Numerator - Net (loss) earnings $ (2,490) $ 1,490
Denominator - Weighted average shares outstanding 4,591 3,972
Effect of dilutive securities - 133
----------------- -----------------
Diluted (loss) earnings per share (1) $ (0.54) $ 0.36
================= =================
</TABLE>
(1) All per share data has been adjusted to reflect all stock dividends and
stock splits.
For the year ended December 31, 1999 no options or warrants to purchase
common stock were included in the computation of diluted EPS due to
USABancShares.com generating a loss. Options to purchase 124,000 shares of
common stock with exercise prices ranging from $5.64 to $15.00 per share
were outstanding during 1998 and were not included in the computation of
diluted EPS because the options exercise price were greater than the
average market price of the common shares.
NOTE O - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
vBank 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 notational amounts of those instruments reflect
the extent of involvement vBank has in particular classes of financial
instruments.
vBank'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
notational amount of those instruments. vBank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
(Continued)
F-21
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE O - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK - Continued
Unless noted otherwise, vBank does not require collateral or other security
to support financial instruments with credit risk. The approximate contract
amounts are as follows:
<TABLE>
<CAPTION>
At December 31,
---------------
1999 1998
---- ----
(in Thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $4,333 $1,070
Standby letters of credit and financial guarantees written 404 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. vBank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by vBank upon extension of credit,
is based on management's credit evaluation.
Standby letters of credit are conditional commitments issued by vBank 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.
vBank's originated loan portfolio primarily consists of loans secured by
real estate in the greater Delaware Valley region. vBank's acquired loan
portfolio consists of individual loans and loan pools throughout the
domestic United States purchased at sales conducted by governmental agencies
and large financial institutions. vBank, as with any lending institution, is
subject to the risk that 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.
NOTE P - COMMITMENTS AND CONTINGENCIES
1. Leases
USABancShares.com has entered into operating lease arrangements for branch
facilities. USABancShares.com is responsible for pro-rata operating expense
escalations.
(Continued)
F-22
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE P - COMMITMENTS AND CONTINGENCIES - Continued
As of December 31, 1999, future approximate minimum rental payments are as
follows, (in Thousands):
2000 $200
2001 220
2002 224
2003 227
2004 233
Thereafter 361
------
$1,465
======
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 vBank or USABancShares.com. Rent expense for the years
ended December 31, 1999 and 1998, amounted to $109,000 and $147,000,
respectively.
2. Employee Agreements
USABancShares.com has employment agreements with certain key executives that
provide severance pay benefits if there is a change in control of
USABancShares.com. The agreements will continue in effect on a year-to-year
basis until terminated or not renewed by USABancShares.com or key
executives. Upon a change in control, vBank and USABancShares.com 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, 1999 was approximately $2.0 million.
In connection with the private placement offering (Note C),
USABancShares.com and the President & CEO have entered into an agreement
whereby USABancShares.com 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 USABancShares.com 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 common stock issued during
the year of non-payment. USABancShares.com has paid Mr. Tepper $150,000 in
1998, 1999 and 2000.
3. Other
USABancShares.com 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 USABancShares.com will not be materially
affected by the final outcome of any present legal proceedings.
NOTE Q - 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
USABancShares.com, 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
USABancShares.com's general practice and intent to hold its financial
(Continued)
F-23
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE Q - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
instruments to maturity and not to engage in trading or sales activities.
Therefore, USABancShares.com 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 USABancShares.com using the
best available data and an estimation methodology suitable for each category
of financial instruments. The estimation methodologies used and recorded
book balances at December 31, 1999 and 1998, 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 $3.8
million and $821,000 respectively, as of December 31, 1999 and $1.3 million
and $7.7 million, respectively, at December 31, 1998, 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, 1999 and 1998, has been valued using
a present value discounted cash flow where market prices were not available.
The discount rate used in these calculations is the estimated current market
rate adjusted for credit risk. The carrying value of accrued interest
approximates fair value.
The estimated fair values of demand deposits (i.e., interest-bearing and
non-interest-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>
1999 1998
---------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
(in Thousands) amount fair value amount fair value
--------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Investment securities $ 101,826 $ 96,288 $ 47,667 $ 47,867
Loans receivable 205,268 206,214 103,189 110,242
Deposits 255,038 253,724 114,357 114,777
</TABLE>
The fair values of borrowings totaling $35.6 million and $35.3 million are
estimated to approximate their recorded book balances at December 31, 1999
and 1998, respectively.
(Continued)
F-24
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE Q - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
There was no material difference between the notational amount and the
estimated fair value of off-balance-sheet items, which totaled approximately
$4.7 million and $2.2 million at December 31, 1999 and 1998, respectively,
which are primarily comprised of unfunded loan commitments, due to such
instruments are generally priced at market at the time of funding.
NOTE R - STOCK OPTION PLAN
The FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which
contains a fair value 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 Accounting Principal Bulletin ("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. USABancShares.com has determined it will follow APB Opinion No. 25.
During 1999, 130,000 warrants were issued to non-employees, which were
accounted for under SFAS No. 123. These warrants vest over 3 years.
Compensation costs associated with these warrants for the year ended
December 31, 1999 was $109,000.
USABancShares.com has a Stock Option Plan (the "Option Plan") for the
benefit of officers, employees and Directors of USABancShares.com. The
Option Plan was designed to attract and retain qualified personnel in key
positions, provide employees with a proprietary interest in
USABancShares.com as an incentive to contribute to the success of
USABancShares.com, and reward employees for outstanding performance and the
attainment of targeted goals. The Option Plan was also designed to retain
qualified directors for USABancShares.com, 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 Option 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 512,000 shares remained
reserved for future issuance under the Option Plan. The options, which have
a term of between 4 and 10 years when issued, vest either immediately or
over a period specified by USABancShares.com's compensation committee. The
exercise price of each option is equal to or above the market value on the
date of grant.
(Continued)
F-25
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE R - STOCK OPTION PLAN - Continued
Accordingly, no compensation costs have been recognized for the Option Plan.
Had compensation costs for the Option 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, USABancShares.com's results of
operations and per share amounts would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------
(in Thousands, except per share data) 1999 1998
------------- --------------
<S> <C> <C>
Net (loss) income
As reported $ (2,490) $ 1,490
Proforma (2,835) 1,180
Basic (loss) earnings per share
As reported (0.54) 0.38
Proforma (0.62) 0.30
Diluted (loss) earnings per share
As reported (0.54) 0.36
Proforma (0.62) 0.28
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect the pro forma compensation expense
related to grants before 1995.
A summary of the status of USABancShares.com fixed stock option plans as of
December 31, 1999, and changes for each of the years in the two-year period
then ended was as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- --------------------------
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 876,000 $ 3.60 646,000 $ 2.83
Options granted 245,600 6.47 304,000 4.89
Options exercised (26,600) 2.83 (18,000) 2.83
Options forfeited (73,600) 5.31 (56,000) 2.83
-------------- -----------
Outstanding at end of year 1,021,400 $ 4.07 876,000 $ 3.60
Options exercisable at year end 745,000 686,000
============== ===========
Weighted average fair value of
options granted during year $ 3.69 $ 1.79
</TABLE>
(Continued)
F-26
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE R - STOCK OPTION PLAN - Continued
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 1999 and 1998: no dividend yield for all
years; expected volatility of 52% and 20%, risk-free interest rate of 5.65%
and 5.55%, and an expected life of ten years for all options.
The following table summarizes information about stock options outstanding
at December 31, 1999:
<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 1999 life (years) price 1999 price
----------------- -------------- ------------ -------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2.83 to $ 4.25 700,553 4.92 years $3.07 665,000 $3.03
$ 4.36 to $ 6.50 139,800 8.16 years 5.80 80,000 5.64
$ 6.51 to $10.00 179,050 9.33 years 6.63 - -
$ 10.00 to $15.00 2,000 9.67 years 11.56 - -
</TABLE>
NOTE S - REGULATORY CAPITAL REQUIREMENTS
USABancShares.com and vBank 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 USABancShares.com's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, USABancShares.com must meet specific capital guidelines
that involve quantitative measures of USABancShares.com's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. USABancShares.com and vBank'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 USABancShares.com and vBank 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, 1999, that USABancShares.com and vBank meet all capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the FDIC
categorized USABancShares.com as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized, USABancShares.com 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.
(Continued)
F-27
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE S - REGULATORY CAPITAL REQUIREMENTS - Continued
USABancShares.com actual capital amounts and ratios are presented in the
following table:
<TABLE>
<CAPTION>
For Capital
(in Thousands) Adequacy Purposes
As of December 31, 1999 Amount Ratio Amount Ratio
--------------------- -------------- --------------- ---------
<S> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 31,101 11.1% $ 22,473 8.0%
Tier I Capital
(to Risk Weighted Assets) 28,986 10.3 11,237 4.0
Tier I Capital
(to Average Assets) 28,986 8.8 13,124 4.0
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $ 15,566 12.1% $ 10,317 8.0%
Tier I Capital
(to Risk Weighted Assets) 13,782 10.7 5,159 4.0
Tier I Capital
(to Average Assets) 13,782 8.7 6,319 4.0
</TABLE>
vBank's actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
To be well
Capitalized under
For Capital Prompt Corrective
(in Thousands) Adequacy Purposes Action Provisions
--------------------------- ------------------------
As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
--------------------- -------------- --------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 28,266 10.1% $ 22,460 8.0% $ 28,075 10.0%
Tier I Capital
(to Risk Weighted Assets) 26,151 9.3 11,230 4.0 16,845 6.0
Tier I Capital
(to Average Assets) 26,151 7.9 13,171 4.0 16,464 5.0
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $ 13,930 11.2% $ 9,987 8.0% $ 12,483 10.0%
Tier 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
</TABLE>
State Banking statutes restrict the amount of dividends paid on capital
stock. Accordingly, no dividends shall be paid by a Bank on its capital
stock unless, following the payment of such dividends, the capital stock of
(Continued)
F-28
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE S - REGULATORY CAPITAL REQUIREMENTS - Continued
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
USABancShares.com 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,
1999, vBank had a loan to USABancShares.com, in aggregate, of $2.4 million,
or 8.7% of vBank's capital stock and surplus.
NOTE T - SEGMENT REPORTING (unaudited)
SFAS No. 131 redefines how operating segments are determined and requires
disclosures of certain financial and descriptive information about
USABancShares.com and its subsidiaries operating segments. Management has
determined USABancShares.com operates in three business segments, namely,
Internet banking, community banking and broker dealer operations for 1999
and had no segments for 1998.
The following chart highlights the segments USABancShares.com, Inc. operates
under:
<TABLE>
<CAPTION>
December 31, 1999
- - -----------------------------------------------------------------------------------------------------------------------------------
Segment Consolidated
(in Thousands) USACapital, Inc. USABancShares.com Others Total Adjustments Totals
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue from external
customers 1,249 - 2,024 3,273 1,759 1,514
Intersegment revenues 253 - - 253 - 253
Interest revenue 17 - 22,734 22,751 881 21,870
Interest expense - 335 13,639 13,974 864 13,110
------ ------ ------- -------- ------ -------
Net interest revenue 17 (335) 9,095 8,777 17 8,760
Provision for loan losses - - 1,175 1,175 - 1,175
Depreciation 42 14 397 453 - 453
Other significant noncash items:
Fixed asset writedown
for obsolscenece - - 266 266 - 266
Contingent accrual for
ongoing litigation - - 418 418 - 418
Tax recovery - - 588 588 - 588
Segment profit (loss) (257) (5,292) 3,059 (2,490) - (2,490)
Total assets 918 3,021 357,959 361,898 38,563 323,335
</TABLE>
(Continued)
F-29
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE T - SEGMENT REPORTING (unaudited)- Continued
USACapital is USABancShares.com's wholly owned broker/dealer subsidiary.
USACapital generates revenue primarily from the sales of equity, corporate
and municipal securities. USACapital also has several employees dedicated to
a real estate brokerage operation, which generates approximately 12% of
gross revenues. USACapital's expenses are associated with the broker/dealer
business. USACapital generates its trading income through a sales force of
retail equity and fixed income brokers, in addition to on-line trading
through USAForce.com, its on-line line of business.
USABancShares.com is vBank's on-line banking segment. USABancShares.com is a
fully operational website to serve online banking customers.
USABancShares.com launched in August 1999. 1999 was a year that
USABancShares.com invested in infrastructure (computer systems and customer
service technology, as well as human resources), and marketing/branding
campaigns to brand itself and develop strategic alliances. USABancShares.com
has over 15,000 network users across the United States. USABancShares.com
offers a variety of banking products: deposit products (checking, savings
and certificates of deposit accounts) and credit products such as one to
four family residential mortgages, consumer loans and credit card loans
through third party vendors.
The "Others" column includes vBank, USABancShares.com, Inc., USARealEstate
and USACredit, Inc. vBank's operations contain the traditional brick and
mortar operations, including four retail branch locations, a commercial
banking operation and loan servicing department. The other operating
subsidiaries provide complimentary services to the bank, but are immaterial
to the overall financial operations of USABancShares.com.
USABancShares.com uses accrual accounting methods, with segments being
either accounted for as separate subsidiaries or separate departments. No
allocations have been applied to the segments with direct expenses being
accounted for by the segments.
(Continued)
F-30
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for USABancShares.com, Inc., (parent company
only) follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(in Thousands) 1999 1998
--------- ----------
ASSETS
<S> <C> <C>
Cash and due from banks $ 7 $ 23
Securities available-for sale 3,300 1,931
Investment in subsidiaries 25,419 13,281
Other assets 1,938 708
-------- --------
Total assets $ 30,664 $ 15,943
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Other borrowed money $ 10,850 $ 1,957
Other liabilities 1,886 389
-------- --------
Total liabilities 12,736 2,346
Stockholders' equity 17,928 13,597
-------- --------
Total liabilities and stockholders' equity $ 30,664 $ 15,943
======== ========
</TABLE>
(Continued)
F-31
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
STATEMENTS OF OPERATIONS
For the year ended
December 31,
------------------------
1999 1998
------- -------
(in Thousands)
INCOME
Interest income $ 217 $ 49
Other income 49 19
-------- -------
Total income 266 68
EXPENSES
Compensation 150 150
Interest 857 89
Other 221 10
-------- -------
Total expenses 1,228 249
Loss before undistributed earnings
of subsidiaries (962) (181)
Provision for income taxes - 1
-------- -------
Loss before undistributed earnings
of subsidiaries (962) (182)
Undistributed (losses) earnings of subsidiaries (1,528) 1,672
-------- -------
Net (loss) income $ (2,490) $ 1,490
======== =======
(Continued)
F-32
<PAGE>
USABANCSHARES.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 1999 and 1998
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended
December 31,
--------------------------
<S> <C> <C>
1999 1998
---- ----
(in Thousands)
Cash flows from operating activities
Net (loss) income $ (2,490) $ 1,490
Adjustments to reconcile net income to net cash
(used in) operating activities
Undistributed loss (earnings) from subsidiaries 1,528 (1,672)
(Gain) loss on sale of investments (16) 5
Net change in assets and liabilities 267 (146)
-------- -------
Net cash used in operating activities (711) (323)
Cash flows from investing activities
Capital distribution to subsidiaries (14,332) (7,078)
Principal repayments securities available for sale 98 -
Sales of investment securities available for sale 1,367 -
Purchase of investment securities available for sale (3,431) (1,603)
-------- -------
Net cash used in investing activities (16,298) (8,681)
-------- -------
Cash flows from financing activities
Net (decrease) increase in borrowings (1,107) 1,616
Common equity offering proceeds, net 8,075 -
Trust preferred proceeds 10,000 -
Exercise of stock options 25 -
Proceeds from issuance of common stock - 7,157
-------- -------
Net cash provided by financing activities 16,993 8,773
-------- -------
Net decrease in cash (16) (231)
Cash at beginning of year 23 254
-------- -------
Cash at end of year $ 7 $ 23
======== =======
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 857 $ 89
======== =======
Cash paid during the year for income taxes $ - $ 1
======== =======
</TABLE>
NOTE V - SUBSEQUENT EVENT
In February 2000, USABancShares.com opened its' first eCommerce center in
San Francisco, California. The office will be used to develop business and
cultivate additional strategic alliances with eCommerce companies with
USABancShares.com. The operating lease is for five years for 2,200 square
feet. The operating lease will increase USABancShares.com's future lease
payments by approximately $110,000 per year over the term of the lease.
In March 2000, USABancShares.com acquired a facility to house its Internet
operations in Chestnut Hill, Pennsylvania. The purchase price of the
building and surrounding land was $1.6 million and will be depreciated over
31.5 years.
(Continued)
F-33
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into this 29th day of October, 1999, by and
between vBank (at times hereinafter referred to as the "Company") and Craig J.
Scher (hereinafter referred to as "Executive") for the position and title of
President of vBank
W I T N E S S E T H :
WHEREAS, vBank wishes to assure itself of the services of Executive for
the period provided in this Agreement, and Executive is willing to serve in
VBANK's employ on a full time basis for said period;
WHEREAS, the Board of Directors of VBANK have determined that the best
interests of VBANK would be served by providing the Executive with protection
and special benefits provided for herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereby agree as follows:
Section I. Employment
A. Duties of Employment. VBANK agrees to employ Executive, and
Executive agrees to remain in the employ of VBANK for the period stated in
paragraph B hereof and upon the other terms and conditions herein provided.
VBANK employs Executive and Executive agrees to serve as a member of senior
management of VBANK for the term and on the conditions hereinafter set forth,
with the title of President and with the responsibilities related therewith as
shall be further setforth from time to time by the CEO of VBANK. Executive
agrees to perform such services not inconsistent with his position as shall from
time to time be assigned to him.
B. Term of Employment. The duties and obligations of the
Executive and VBANK under this Agreement shall commence as of the date of this
Agreement, and shall continue for a period of three (3) years (said three (3)
year period being hereinafter referred to as the "Term of Employment"). This
Agreement shall automatically renew annually for an additional three-year period
unless written notice is given by either Executive or VBANK 60 days prior to
expiration hereof.
<PAGE>
Section II. Compensation
A. Salary. Bank agrees to pay the Executive during the Term of
Employment an annual base salary equal to One Hundred Seventy Five Thousand
Dollars ($175,000.00) (hereinafter referred to as "Salary"). Such Salary shall
be payable on a biweekly basis as concomitant with all employees of vBank.
B. Incentive Compensation. Bank shall pay Executive incentive
compensation as follows:
i.) Executive will receive $100,000 cash bonus upon the opening of the
50,000th Deposit Account and an additional $100,000 cash bonus upon the
opening of Deposit Accounts in increments of 50,000 thereafter. "Deposit
Account" (excludes brokered accounts) shall mean every such account opened,
including but not limited to, transaction accounts, savings accounts, money
market accounts and certificates of deposit (or, time deposits).
ii.) Company's earnings per share per annum as follows:
a.) exceed $ .50 per share: $ 50,000
b.) exceed $ .75 per share: $ 75,000
c.) exceed $1.00 per share: $100,000
C. Bonus. Bank will further consider payment to the Executive
of an annual bonus (hereinafter referred to as "Bonus"). Such Bonus shall be
entirely discretionary and may or may not be granted if so determined by the CEO
of the Bank.
Section III. Duty of Loyalty and Attention
A. Executive shall devote his full-time and best effort to the
performance of his employment under this Agreement and shall perform his duties
under this Agreement in accordance with such reasonable standards expected of
employees of comparable positions in comparable organizations and as may be
established from time to time by VBANK's Board of Directors and /or the CEO of
VBANK.
B. During the Executive's Term of Employment, the Executive
shall not, at any time or place, either directly or indirectly engage in any
business or activity in competition with the business affairs or interests of
VBANK.
<PAGE>
Section IV. Executive Benefits
A. Executive will be entitled to receive benefits under any
present or future group hospitalization, retirement, health, dental care,
vacation or sick leave plan, life or other insurance, as made available to other
members of Bank.
B. Executive shall be reimbursed for reasonable
business-related expenses on a monthly basis and have available to him a parking
space.
Section V. Termination and Termination Pay
A. Event of Termination. Upon the occurrence of an Event of
Termination (as hereinafter defined) during the period of Executive's employment
under this Agreement, the provisions of this paragraph A shall apply. As used in
this Agreement, an "Event of Termination" shall mean the termination by VBANK of
Executive's employment hereunder for any reason other than because of
retirement. A termination for "cause" shall include termination because of the
Executive's personal dishonesty, misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of this
Agreement. In the event of termination for cause the Executive shall have no
right to receive further compensation, Salary, or Bonus of any kind, or other
benefits for any period after such termination.
B. Event of Termination Without Cause. Upon the occurrence of
an Event of Termination other than for "Cause" as hereinabove defined, VBANK
shall pay the Executive on a biweekly basis, while living, during the lessor
period of obtaining employment or the Employment Agreement, the Executive's
current salary, medical benefits and the use of a company automobile. VBANK
shall also pay any earned bonuses, as well as any expense reimbursements due to
the Executive. Payments shall commence on the pay cycle immediately following
said occurrence, which said occurrence shall be viewed as a determination by
VBANK not to extend the agreement beyond the Term of Employment as set forth in
section I, paragraph B. Executive must be provided written notice at least 60
days prior to termination as set forth herein.
C. In the event of a Change in Control, as described in the
USABancShares.com Inc, Stock Option Plan, the Executive shall be entitled to his
current salary, medical benefits and the use a of a company automobile for the
period of time equal to twenty-four (24) months, if he is not offered continued
employment with the same job title, responsibilities, locality and compensation,
noted herein.
D. Event of Executive Terminating Employment If the Executive
terminates employment or does not renew the Employment Agreement the Executive
is entitled to all earned compensation (salary and bonuses), and all expense
reimbursements due to the Executive through his last day of employment with
VBANK.
<PAGE>
E. Power of CEO to Terminate Executive. The CEO of
USABancShares.com, Inc. may terminate the Executive at any time; in the event of
such termination the provisions of Section VI, Paragraphs A and B shall apply.
F. Suspension of Employment. If the Executive is suspended
and/or temporarily prohibited from participating in the conduct of VBANK's
affairs by a notice served under applicable regulatory guidelines, VBANK's
obligations under the Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, VBANK shall: (i) pay the Executive all of the compensation withheld
while its contract obligations were suspended; and (ii) reinstate its
obligations which were suspended.
Section VI. Proprietary Information
A. Fiduciary Obligations. In the course of service to VBANK,
the Executive may have access to confidential information (hereinafter referred
to a "Proprietary Information"). Proprietary Information shall include all
information which gives VBANK a competitive advantage, including without
limitation, know-how, strategic or technical data, processes, business or
financial documents or information, sales and marketing data, marketing research
data, all customer and prospective customer lists, customer account records,
personnel records, placement information, all financial information of the
Association and its customers, and sources of supply and trade secrets, all of
which are confidential and proprietary, owned or used by any of the above
companies. Proprietary Information shall also include any and all items
constituting a "trade secret" whether or not enumerated in the preceding
sentence, and coming within the scope of VBANK business as to which the
Executive may have access. Proprietary Information shall not include any
records, data, or information which are in the public domain during the term of
this Agreement, provided the same are not in the public domain as a consequence
of disclosure directly or indirectly by the Executive in violation of this
Agreement. The Executive acknowledges and agrees that Proprietary Information is
of critical importance to VBANK, and a violation of this Agreement would
seriously and irreparably impair and damage VBANK's business. The Executive
shall keep all Proprietary Information in a fiduciary capacity for the sole and
exclusive benefit of VBANK.
B. Non-disclosure. The Executive shall not, during the term of
this Agreement, or for a period of two (2) years thereafter, use for his own
benefit, or disclose, directly or indirectly, any Proprietary Information to any
person other than VBANK or authorized employees thereof at the time of such
disclosure, or such other persons to whom the Executive has been specifically
instructed to make disclosure by the Board, and in all such cases only to the
extent required in the course of the Executive's service to VBANK. At the
termination of the Executive's employment, the Executive shall deliver to VBANK
all notes, letters, documents, and records which may contain Proprietary
Information which are then in his possession or control an shall not retain or
use any copies or summaries thereof.
C. Survival of Covenants. The covenants of the Executive in
this Section shall survive the termination or expiration of this Agreement
hereunder and shall expire two (2) years from the date of termination or
expiration of this Agreement.
<PAGE>
Section VII. Successors and Assigns
A. Successor in Interest. This Agreement shall inure to the
benefit of and be binding upon any corporate or other successor of VBANK and/or
USABancShares.com, Inc which shall acquire, directly or indirectly, by merger,
consolidation, purchase, or otherwise, all or substantially all of the assets of
VBANK and/or USABancShares.com, Inc.
B. Prohibition of Assignment. Since vBank is contracting for
the unique and personal skills of the Executive, the Executive shall be
precluded from assigning or delegating his rights or duties as President
hereunder without first obtaining written consent of VBANK.
Section VIII. Amendments / Applicable Law
A. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
B. This Agreement shall be governed by all respects whether as
to validity, construction, capacity, performance, or otherwise, by the laws of
the Commonwealth of Pennsylvania, except to the extent that federal law shall be
deemed to apply.
Section IX. Severability
A. In the event any one or more of the provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, the invalidity, illegality, or unenforceability
shall not affect any other provision, and this Agreement shall be construed as
if the invalid, illegal, or unenforceable provision had never been contained
therein. This Agreement shall replace in full any existing agreement that
Executive has with VBANK.
<PAGE>
(INTENTIONALLY LEFT BLANK)
Section X. Arbitration
A. In the event of any dispute or claim arising out of or
relating to this Agreement, or to any interpretation of any terms hereof, or of
any action to be taken or not be taken by any of the parties hereto in
compliance herewith, or as to the breach hereof such matters shall be settled
exclusively by submission to arbitration in accordance with the rules of the
American Arbitration Association of the City of Philadelphia.
In Witness Whereof, the parties have executed this Agreement on the day
and year first hereinabove written.
VBANK
Kenneth L. Tepper
Chief Executive Officer
---------------------
Witness:
----------------------
Craig J. Scher - Executive
---------------------
Witness:
----------------------
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into this ____ day of________ 1999, by and
between USACapital, Inc., (hereinafter referred to as USA), and Sean M. Sweeney
(hereinafter referred to as "Executive") for the position and title of
President and Chief Executive Officer ("CEO")
W I T N E S S E T H :
WHEREAS, USA wishes to assure itself of the services of Executive for
the period provided in this Agreement, and Executive is willing to serve in the
USA's employ on a full time basis for said period;
WHEREAS, the Board of Directors of USA have determined that the best
interests of USA would be served by providing the Executive with protection and
special benefits provided for herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereby agree as follows:
Section I. Employment
A. Duties of Employment. USA agrees to employ Executive, and
Executive agrees to remain in the employ of USA for the period stated in
paragraph B hereof and upon the other terms and conditions herein provided. USA
employs Executive and Executive agrees to serve as a member of senior management
of USA for the term and on the conditions hereinafter set forth, with the title
President and CEO of USA and with the responsibilities related therewith as
shall be further setforth by the Chairman of the Board of Directors of USA.
Executive agrees to perform such services not inconsistent with his position as
shall from time to time be assigned to him.
B. Term of Employment. The duties and obligations of the
Executive and USA under this Agreement shall commence as of the date of this
Agreement, and shall continue for a period of two (2) years (said two (2) year
period being hereinafter referred to as the "Term of Employment"). This
Agreement shall automatically renew annually for an additional two-year period
unless written notice is given by either Executive or USA 60 days prior to
expiration hereof.
<PAGE>
Section II. Compensation
A. Salary. USA agrees to pay the Executive during the Term of
Employment an annual base salary equal to One Hundred Fifty Thousand Dollars
($150,000.00) (hereinafter referred to as "Salary"). Such Salary shall be
payable on a biweekly basis as concomitant with all employees of USA.
B. Bonus. USA will further consider payment to the Executive
of an annual bonus (hereinafter referred to as "Bonus"). Such Bonus shall be
entirely discretionary and may or may not be granted if so determined by the
Chairman of the Board of Directors of USA.
Section III. Duty of Loyalty and Attention
A. Executive shall devote his full-time and best effort to the
performance of his employment under this Agreement and shall perform his duties
under this Agreement in accordance with such reasonable standards expected of
employees of comparable positions in comparable organizations and as may be
established from time to time by USA's Board of Directors.
B. During the Executive's Term of Employment, the Executive
shall not, at any time or place, either directly or indirectly engage in any
business or activity in competition with the business affairs or interests of
USA.
Section IV. Executive Benefits
A. Executive will be entitled to receive benefits under any
present or future group hospitalization, retirement, health, dental care,
vacation or sick leave plan, life or other insurance, as made available to other
members of USA.
B. Executive shall be reimbursed for reasonable
business-related expenses on a monthly basis and have available to him a parking
space.
Section V. Termination and Termination Pay
A. Event of Termination. Upon the occurrence of an Event of
Termination (as hereinafter defined) during the period of Executive's employment
under this Agreement, the provisions of this paragraph A shall apply. As used in
this Agreement, an "Event of Termination" shall mean the termination by USA of
Executive's employment hereunder for any reason other than because of
retirement. A termination for "cause" shall include termination because of the
Executive's personal dishonesty, misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of this
Agreement. In the event of termination for cause the Executive shall have no
right to receive further compensation, Salary, or Bonus of any kind, or other
benefits for any period after such termination.
<PAGE>
B. Event of Termination Without Cause. Upon the occurrence of
an Event of Termination other than for "Cause" as hereinabove defined, USA shall
pay the Executive on a biweekly basis, while living, during the lessor period of
obtaining employment or the Employment Agreement, the Executive's current
salary, medical benefits and the use of a company automobile. USA shall also pay
any earned bonuses, as well as any expense reimbursements due to the Executive.
Payments shall commence on the pay cycle immediately following said occurrence,
which said occurrence shall be viewed as a determination by USA not to extend
the agreement beyond the Term of Employment as set forth in section I, paragraph
B. Executive must be provided written notice at least 60 days prior to
termination as set forth herein.
C. In the event of a Change in Control, as described in the
USABancShares.com Inc, Stock Option Plan, the Executive shall be entitled to his
current salary, medical benefits for the period of time equal to twenty four
(24) months, if he is not offered continued employment with the same job title,
responsibilities, locality and compensation, noted herein.
D. Event of Executive Terminating Employment If the Executive
terminates employment or does not renew the Employment Agreement the Executive
is entitled to all earned compensation (salary and bonuses), and all expense
reimbursements due to the Executive through his last day of employment with USA.
E. Power of Chairman of the Board of Directors to Terminate
Executive. The Chairman of the Board of Directors of USA may terminate the
Executive at any time; in the event of such termination the provisions of
Section VI, Paragraphs A and B shall apply.
F. Suspension of Employment. If the Executive is suspended
and/or temporarily prohibited from participating in the conduct of USA's affairs
by a notice served under applicable regulatory guidelines, USA's obligations
under the Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, USA
shall: (i) pay the Executive all of the compensation withheld while its contract
obligations were suspended; and (ii) reinstate its obligations which were
suspended.
Section VI. Proprietary Information
A. Fiduciary Obligations. In the course of service to USA, the
Executive may have access to confidential information (hereinafter referred to a
"Proprietary Information"). Proprietary Information shall include all
information which gives USA a competitive advantage, including without
limitation, know-how, strategic or technical data, processes, business or
financial documents or information, sales and marketing data, marketing research
data, all customer and prospective customer lists, customer account records,
personnel records, placement information, all financial information of the
Association and its customers, and sources of supply and trade secrets, all of
which are confidential and proprietary, owned or used by any of the above
companies. Proprietary Information shall also include any and all items
constituting a "trade secret" whether or not enumerated in the preceding
<PAGE>
sentence, and coming within the scope of USA business as to which the Executive
may have access. Proprietary Information shall not include any records, data, or
information which are in the public domain during the term of this Agreement,
provided the same are not in the public domain as a consequence of disclosure
directly or indirectly by the Executive in violation of this Agreement. The
Executive acknowledges and agrees that Proprietary Information is of critical
importance to USA, and a violation of this Agreement would seriously and
irreparably impair and damage USA's business. The Executive shall keep all
Proprietary Information in a fiduciary capacity for the sole and exclusive
benefit of USA.
B. Non-disclosure. The Executive shall not, during the term of
this Agreement, or for a period of two (2) years thereafter, use for his own
benefit, or disclose, directly or indirectly, any Proprietary Information to any
person other than USA or authorized employees thereof at the time of such
disclosure, or such other persons to whom the Executive has been specifically
instructed to make disclosure by the Board, and in all such cases only to the
extent required in the course of the Executive's service to USA. At the
termination of the Executive's employment, the Executive shall deliver to USA
all notes, letters, documents, and records which may contain Proprietary
Information which are then in his possession or control and shall not retain or
use any copies or summaries thereof.
C. Survival of Covenants. The covenants of the Executive in
this Section shall survive the termination or expiration of this Agreement
hereunder and shall expire two (2) years from the date of termination or
expiration of this Agreement.
Section VII. Successors and Assigns
A. Successor in Interest. This Agreement shall inure to the
benefit of and be binding upon any corporate or other successor of USA which
shall acquire, directly or indirectly, by merger, consolidation, purchase, or
otherwise, all or substantially all of the assets of USA.
B. Prohibition of Assignment. Since USA is contracting for the
unique and personal skills of the Executive, the Executive shall be precluded
from assigning or delegating his rights or duties hereunder without first
obtaining written consent of USA.
Section VIII. Amendments/Applicable Law
A. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
B. This Agreement shall be governed by all respects whether as
to validity, construction, capacity, performance, or otherwise, by the laws of
the Commonwealth of Pennsylvania, except to the extent that federal law shall be
deemed to apply.
<PAGE>
Section IX. Severability
A. In the event any one or more of the provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, the invalidity, illegality, or unenforceability
shall not affect any other provision, and this Agreement shall be construed as
if the invalid, illegal, or unenforceable provision had never been contained
therein. This Agreement shall replace in full any existing agreement that
Executive has with USA.
(INTENTIONALLY LEFT BLANK)
Section X. Arbitration
A. In the event of any dispute or claim arising out of or
relating to this Agreement, or to any interpretation of any terms hereof, or of
any action to be taken or not be taken by any of the parties hereto in
compliance herewith, or as to the breach hereof such matters shall be settled
exclusively by submission to arbitration in accordance with the rules of the
American Arbitration Association of the City of Philadelphia.
In Witness Whereof, the parties have executed this Agreement on the day
and year first hereinabove written.
USACapital, Inc.
Kenneth L. Tepper
Chairman of the Board of Directors
-------------------------------------
Witness:
-------------------------------------
Sean M. Sweeney - Executive
-------------------------------------
Witness:
-------------------------------------
<PAGE>
Subsidiaries of the Corporation
vBank
USACapital Inc
USARealEstate Inc.
USACredit Inc.
USA Capital Trust I
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 25, 2000, accompanying the
consolidated financial statements included in Form 10-KSB of USABancShares.com,
Inc. for the year ended December 31, 1999. We hereby consent to the
incorporation by reference of said report in the Registration Statement of
USABancShares.com, Inc. on Forms S-8 (File No. 333-84135, effective July 30,
1999, and File No. 333-68955, effective December 15, 1998).
GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE REPORT TO WHICH THIS SCHEDULE RELATES AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000945532
<NAME> USABancShares.com, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,813
<INT-BEARING-DEPOSITS> 821
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,478
<INVESTMENTS-CARRYING> 60,337
<INVESTMENTS-MARKET> 55,595
<LOANS> 197,623
<ALLOWANCE> 2,115
<TOTAL-ASSETS> 323,335
<DEPOSITS> 255,038
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,369
<LONG-TERM> 45,000
0
0
<COMMON> 5,640
<OTHER-SE> 12,288
<TOTAL-LIABILITIES-AND-EQUITY> 323,335
<INTEREST-LOAN> 14,609
<INTEREST-INVEST> 6,934
<INTEREST-OTHER> 327
<INTEREST-TOTAL> 21,870
<INTEREST-DEPOSIT> 10,671
<INTEREST-EXPENSE> 13,110
<INTEREST-INCOME-NET> 8,760
<LOAN-LOSSES> 1,175
<SECURITIES-GAINS> 31
<EXPENSE-OTHER> 12,430
<INCOME-PRETAX> (3,078)
<INCOME-PRE-EXTRAORDINARY> (3,078)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,490)
<EPS-BASIC> (0.54)
<EPS-DILUTED> (0.54)
<YIELD-ACTUAL> 9.30
<LOANS-NON> 1,266
<LOANS-PAST> 1,940
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,051
<CHARGE-OFFS> (141)
<RECOVERIES> 30
<ALLOWANCE-CLOSE> 2,115
<ALLOWANCE-DOMESTIC> 2,115
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
