Another Internet banking company disclosed big problems on Friday, as USABancShares.com Inc. said vBank, its online banking unit, was in trouble with regulators and that it had suffered a nearly $3 million loss involving a customer.
The Philadelphia company also said it could face delisting from the Nasdaq Stock Exchange.
USABancShares.com issued a press release Friday saying that it had agreed to cease-and-desist orders from the Federal Deposit Insurance Corp. and the Pennsylvania Department of Banking. The FDIC cited vBank for poor management, inadequate capital, a large amount of bad investments, improper internal controls, and excessive reliance on volatile funding.
In the strongly worded order the FDIC said vBank was operating with management whose policies and practices are detrimental to the bank, and that these practices jeopardize the safety of its deposits. It added that the board of directors had failed to provide adequate supervision over and direction to the active management of vBank.
Under the agreement, vBank will have to, among other things, submit a strategic plan to regulators within 60 days. That plan is required to establish objectives for asset growth, earnings performance, capital adequacy, noncore funding dependence, and interest rate risk exposure. The board has also agreed to undertake a review of vBanks management, and to hire a consultant for that effort.
The company said in its release that it had discovered a defalcation a misappropiation of funds involving a longstanding customer of the bank.
The loss is expected to result in second-quarter losses of $3.1 million, instead of the $140,000 originally estimated by the company. The statement said vBank is aggressively pursuing, through legal means, collection of the loss.
Craig J. Scher, president and chief executive officer of USABancShares.com, would not discuss the loss, saying only that the matter is in legal proceedings.
Nor would Mr. Scher specify the companys current assets before quarterly results are released in a few weeks. He said only that assets are valued at more than $300 million, and that the company had been on its way to profitability before the loss.
USABancShares.com was probably the victim of an unusually large check fraud, said Jerome Walker, a partner in the New York law firm of Salans, Hertzfeld, Heilbronn, Christy & Viener who specializes in financial services law and regulatory issues. This is an extraordinarily large amount, he said.
Mr. Walker said that the sum involved suggests that the companys internal controls are inadequate, and he said the structure of dot-com banks may leave them vulnerable to such occurrences.
One of the efficiencies about a dot-com is that they typically will have less of an infrastructure and fewer people, he said. That makes it easier to have a fraud perpetrated against them, because internal controls are typically monitored by either systems or people. So with a dot-com like this, its limited infrastructure is probably a contributing factor.
Fridays announcement is not the first trouble the bank has faced. USABancShares net loss more than tripled last year, to $9.7 million, or $1.70 per share. In March the company agreed with regulators to rein in its debt. It was cited for unspecified violations of sections 23A and 23B of the Federal Reserve Act, which deal with investments between affiliates. Kenneth L. Tepper, the companys founder, resigned the same month.
Mr. Walker said the previous regulatory action indicates that there are serious issues within the company. Clearly, this is not the first time the company has had problems with internal controls, he said.
The Nasdaq has advised the company that it has until Oct. 1 to improve its capital position or be delisted. USABancShares said its market capitalization has fallen below the markets listing standards.
Mr. Scher said USABancShares is cooperating with regulators and working to raise capital. According to documents filed with the Securities and Exchange Commission on June 15, Harron Finance Group LLC of Frazer, Pa., purchased a 9% stake in USABancShares.com.
Representatives of Harron could not be reached for comment Friday.
Mr. Scher said USABancShares.com will continue operating its Web site but will shift its focus to community banking.
