<PAGE>
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
(fee required)
For the Fiscal Year Ended December 31, 1996.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (no fee required)
For the transition period from_________to ___________
Commission file number 33-92506
USABANCSHARES, INC.
--------------------
(Name of Small Business Issuer In Its Charter)
Pennsylvania 23-2806495
-------------- ------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
One Penn Square, 30 South 15th Street, Philadelphia, PA 19102
- -------------------------------------------------------- ------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (215) 569-4200
Securities registered under Section 12(b) of the Act: None.
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
__________________________________ _________________________________________
__________________________________ _________________________________________
Securities registered under Section 12(g) of the Act:
Common Stock, $1.00 Par Value Per Share
----------------------------------------
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter periods 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 pursuant to Item 405 of
Regulation S-B contained herein, 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 $2,942,144.
The aggregate market value of the voting stock held by non-affiliates as of
February 28, 1997, was $3,834,158, based on the average of the bid and asked on
the National Association of Securities Dealers Automated Quotation System on
February 28, 1997.
The number of shares outstanding of each of the Issuer's classes of Common
Stock, as of February 28, 1997, was 597,082.
[Cover Page 1 of 2]
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be utilized in connection with the
registrant's Annual Meeting of Shareholders scheduled to be held in June, 1997
are incorporated by reference into Part III hereof.
___________________________
[Cover Page 2 of 2]
<PAGE>
USABancShares, Inc.
Form 10-KSB
This report contains "forward-looking" statements. The Company desires to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Act of 1995 and is including this statement for the express purpose of availing
itself of such safe harbor with respect to such statements. Forward-looking
information is subject to important risks and uncertainties that could
significantly affect anticipated results in the future and, accordingly, such
results may differ from those expressed in any forward-looking statements made
by the Company. These risks and uncertainties include, but are not limited to,
uncertainties affecting banking generally; risks relating to credit decisions;
sensitivity to fluctuations in interest rates; competition within the primary
markets in which the Company operates, and the ability to make and successfully
integrate acquisitions. The Company wishes to caution each reader of this report
to carefully consider the risks and uncertainties with respect to each such
forward-looking statement.
INDEX
PART I
- ------- Page
Item 1 Description of Business 1
Item 2 Description of Property 3
Item 3 Legal Proceedings 3
Item 4 Submission of Matters to a Vote of Security Holders 3
PART II
- -------
Item 5 Market for Common Equity and Related Stockholder Matters 3
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations 3
Item 7 Financial Statements 17
Item 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 17
PART III
- --------
Item 9 Directors, Executive Officers, Promoters and
Control Persons Compliance with Section 16(a)
Exchange Act 18
Item 10 Executive Compensation 18
Item 11 Security Ownership of Certain Beneficial Owners and Management 18
Item 12 Certain Relationships and Related Transactions 18
Item 13 Exhibits and Reports on Form 8-K 19
<PAGE>
PART I
Item 1: Description of Business
USABancShares, Inc.
USABancShares, Inc. (the "Company") is a one-bank holding company registered
under the Bank Holding Company Act of 1956, as amended. It was incorporated
under the laws of the Commonwealth of Pennsylvania on March 14, 1995, and
approved by the Federal Reserve System on October 3, 1995. On November 30, 1995
(the "Effective Date"), the Company completed its acquisition of Peoples Thrift
Savings Bank (the "Bank") pursuant to the Agreement and Plan of Merger dated
February 24, 1995, and Related Plan of Merger dated September 27, 1995, pursuant
to which the Bank thereby became a wholly-owned subsidiary of the Company.
The Company provides banking services through the Bank, and does not presently
engage in any activities other than banking related activities (see "Subsequent
Events"). The principal executive offices of the Company are located at One Penn
Square, 30 South 15th Street, Philadelphia, PA. The principal executive offices
of the Bank are located at 803 East Germantown Pike, Norristown, PA. Their
respective telephone numbers are (215) 569-4200 and (610) 272-3690.
The Company and the Bank have a total of 10 full-time and one part-time
employees. Management anticipates hiring additional staff during 1997.
Peoples Thrift Savings Bank
The Bank is presently the Company's sole subsidiary (see "Recent Events"). The
Bank is a 108 year-old FDIC insured financial institution organized under the
laws of the Commonwealth of Pennsylvania, with its principal office at 803 East
Germantown Pike, Norristown, Pennsylvania. The Bank was originally organized in
1887 as a mutual building and loan, and, in January 1988, converted to a
Pennsylvania chartered mutual savings bank. In December 1990, the Bank converted
to a Pennsylvania chartered stock savings bank, insured by the FDIC, through the
Bank Insurance Fund. The Bank is taking deposits and making loans in and around
the Plymouth Meeting/Norristown area, the Bank intends to maintain its community
banking operations within this and other geographically proximate locations.
As of December 31, 1996, the Bank had total assets of approximately $37.9
million, total stockholders' equity of approximately $4.6 million, total
deposits of approximately $27.9 million and loans receivable outstanding of
approximately $16.5 million. The Bank has historically followed a conservative
lending strategy focused on the origination of long-term, fixed-rate, single
family residential real estate loans in its primary market area.
The Company's primary strategy for further growth is to establish a reputation
and market presence as the "community bank to serve all your needs." The Bank
has sought to implement its strategy by targeting the banking needs of high net
worth or high income individuals and the businesses that they own or control, as
well as the banking needs of smaller businesses and their owners within its
service area. Commercial loans are typically working capital lines of credit,
term loans to purchase equipment, fixtures or furniture, commercial mortgages to
finance investment properties, and commercial mortgages to acquire business-
owner occupied properties. The Bank generally makes loans for a period not
greater than five years, with a strong preference for the origination of
adjustable rate loans tied to the Bank's prime lending rate. In general, the
Bank requires collateral for all commercial loans in the form of real estate,
(residential or commercial), cash, marketable securities, and potentially,
equipment or other fixed assets. The Bank typically does not make loans based on
accounts receivable or inventory. Notwithstanding the form or value of
collateral provided, the Bank seeks to obtain a personal guarantee from its
commercial borrowers. Loans may contain interest rate caps and floors, and
borrowers are expected to pay the Bank a prepayment privilege for loans paid off
prior to scheduled maturity.
1
<PAGE>
The Bank does not offer negative amortization loans, and will discourage any
extension of credit based upon an accrual, in part or in full, of any portion of
regularly scheduled principal or interest payments. The Bank seeks to make
commercial loans to a wide variety of service, retail, distribution and
manufacturing companies. Special attention is given to the origination of loans
to professional and small businesses; however the Bank seeks to avoid undue loan
concentration to any one type of business or industry. In addition to commercial
loans, the Bank makes personal loans to individuals. These loans include "swing
loans" to acquire a residential property when the existing home remains unsold,
mortgage loans, home equity lines of credit, home improvement loans, small
personal revolving lines of credit, and installment loans to purchase
automobiles. The Bank actively markets home equity lines of credit to consumers
who reside in the Bank's primary market area. In general, the Bank will lend up
to 80% of the value of a borrower's home, less any prior liens. The borrower
must demonstrate the financial ability to service the loan and must have an
acceptable credit repayment history. Management of the Bank believes that these
types of loans do not present undue risks or lending concentrations.
As another component of its strategy for growth, the Company emphasizes
specialized commercial lending and personal credit services. In particular, in
its commercial lending, the Company seeks to respond to its targeted market by
customizing the terms of its loans to the specific or special needs of
individual customers or their businesses. Such services are also intended to aid
in generating loans and deposits from the Company's targeted market. The Company
believes that satisfactory attention to this selected market requires a
combination of the services of the type described above (which the Company
believes are frequently unavailable at small banks), and the personal attention
of senior management (which the Company believes is often unavailable to such
customers at major financial institutions). The customers in this market
generally require relatively small amounts of credit ($1 million or less), but
often seek customized solutions to their financial requirements.
The Bank offers a high level of personalized service to its commercial and
consumer customers. The Bank offers both commercial and consumer deposit
accounts including checking accounts, interest-bearing "NOW" accounts, insured
money market accounts, certificates of deposit, savings accounts and Individual
Retirement Accounts, credit cards and access to an automated teller network.
The Bank's primary service area is in and around the Norristown/Plymouth Meeting
corridor, Montgomery County, PA and the surrounding area. The area is comprised
primarily of residential homes and neighborhoods, as well as areas of light
commercial usage. Norristown is the county seat of Montgomery County which has
one of the highest per capita personal incomes in the United States.
Competition
Southeast Montgomery County, the Bank's primary market area, is served by
several major commercial banks: CoreStates Bank, N.A., PNC Bank, Mellon Bank and
Commerce Bank. A number of mid-size savings banks and thrifts also serve the
area, such as Progress Federal and Harleysville Savings Bank. Other small
community banks and thrifts operate in the area as well. The Bank actively
competes with all of these institutions for retail and commercial accounts. The
Bank also faces competition from financial institutions located out of state,
but which conduct commercial calling efforts in the area and direct mail
promotions to consumers. Also, the Bank encounters competition for deposits from
outside the banking industry, such as money market mutual funds, stock brokers,
and the federal government. The larger competitors have much greater financial
and marketing resources than those of the Bank. In commercial transactions, the
Bank's legal lending limit to a single borrower restricts its ability to compete
effectively for the business of large local companies; however, smaller
commercial borrowers are effectively served through the Bank's personalized and
quick service response time. In order to compete, the Bank places a major
emphasis on superior service and will rely on the flexibility that its size and
independent status permits.
2
<PAGE>
The Company and the Bank believe that an independent community bank, operated by
responsive and experienced employees who are dedicated to personal service and
innovative thought, offers an attractive alternative to both larger and smaller
competing institutions.
Item 2. Description of Property
The Company and the Bank do not presently own any real estate. Pursuant to a
lease dated May 11, 1987, the Bank leases its building located at 803 East
Germantown Pike in Norristown, PA containing the retail banking operation as
well as administrative offices. The lease is for an initial period of 10 years,
with an option to renew or extend the lease for an additional 10 years. The net
book value of the Bank's investment in office property and equipment totaled
$145,421 at December 31, 1996. The Bank may acquire or lease other real estate
in the future for purposes of opening new executive offices and branch
locations. In addition, the Bank may acquire or lease real estate outparcels for
purposes of establishing mini-branch locations, which would likely include state
of the art automated teller facilities that would involve minimal staffing
requirements. The Company currently leases 5,000 square feet of space at One
Penn Square, 30 South 15th Street, Philadelphia, PA. This space is utilized for
the Company's executive offices. All loans are funded by and housed at the Bank,
and no deposits are taken at the Company office. The Company's lease, which
began June 1, 1995, is $3,750 per month through month 15, and escalates to
$5,906 for months 16 through 27 and $6,012 for months 28 through 39. Total lease
expense for the period ended December 31, 1996, for both locations, was
approximately $91,000.
Item 3. Legal Proceedings
There are no legal actions or proceedings to which the Company or the Bank is a
party.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock of the Company is listed for trading on the NASDAQ SmallCap
Market under the symbol "USAB" and began trading during the first quarter of
1996. As of February 28, 1997, there were approximately 273 holders of record of
the Company's Common Stock. The Company has not, since its inception, paid any
cash or stock dividends.
- --------------------------------------------------------------------------------
Price of Common Stock
1996 Low Price High Price Dividend
- --------------------------------------------------------------------------------
First Quarter $ 9.00 $ 12.00 $ -
Second Quarter $ 8.00 $ 10.00 $ -
Third Quarter $ 8.00 $ 9.00 $ -
Fourth Quarter $ 8.50 $ 10.25 $ -
- --------------------------------------------------------------------------------
Market quotations reflect inter-dealer prices, without retail markups, markdowns
or commissions and may not necessarily rflect actual transactions.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis is intended to assist in understanding the
financial condition and results of operations of the Bank at and for the period
from March 14, 1995 (inception) through December 31, 1995 and should be read in
conjunction with the consolidated financial statements and related consolidated
notes included elsewhere herein. The results of operations, liquidity and
capital resources, asset and liability management and financial conditions are
presented at December 31, 1996, and for the period from March 14, 1995
(inception) through December 31, 1995 (hereafter referred to as the period ended
December 31, 1995).
3
<PAGE>
The results of operations of the Bank are included from the date of acquisition,
November 30, 1995, through December 31, 1995. Since the results of operations,
for the period ended December 31, 1995, are not representative of a full year of
operations, year-to-year percentage differences will be excluded from the
comparisons. Management feels that such information would not be considered
meaningful.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Selected Financial Condition Data: 1996 1995
------------ ------------
Total assets $ 38,145,499 $ 25,785,523
Loans receivable, net 16,529,483 6,997,197
Securities 16,324,746 9,984,345
Deposits 27,973,147 20,798,909
Total borrowings 5,050,000 -
Stockholders'equity 4,894,847 4,658,842
Selected Operations Data:
Total interest income $ 2,942,144 $ 171,274
Total interest expense 1,225,116 96,492
------------ ------------
Net interest income 1,717,028 74,782
Provision for loan losses 125,000 50,000
------------ ------------
Net interest income after provision for loan losses 1,592,028 24,782
Total noninterest income 103,232 1,596
Total noninterest expense 1,500,996 305,221
------------ ------------
Income (loss) before income taxes 194,264 (278,843)
Income tax provision 67,995
------------ ------------
Net income (loss) $ 126,269 (278,843)
============ ============
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets) 0.39% -1.23%
Return on equity (ratio of net income to average equity) 2.64% -5.99%
Interest Rate Spread Information:
Average during period 5.29% 3.66%
Net interest margin (net interest income / average earning assets) 6.11% 4.05%
Ratio of operating expense to average total assets 5.36% 1.18%
Ratio of average interest-earning assets to average interest-bearing
liabilities 118.83% 107.44%
Asset Quality Ratios:
Non-performing assets to total assets at end of period 3.50% (a)
Allowance for loan losses to non-performing loans 58.38% (a)
Allowance for loan losses to loans receivable, net 1.10% 0.85%
Capital Ratios:
Stockholders' equity to total assets at end of period 12.83% 18.07%
Other Data:
Number of full-time employees 10 9
Number of full-service offices 1 1
- --------------------------------------------------------------------------------
(a) The Bank had no non-performing loans at December 31, 1995.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
Quarterly Financial Data (unaudited)
The following represents summarized quarterly financial data of the Company
which, in the opinion of Management, reflects all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the Company's
results of operations.
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------------------
1996 31-Dec 30-Sep 30-Jun 31-Mar
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total interest income $ 796,679 $ 817,053 $ 831,886 $ 496,526
Total interest expense 379,352 291,871 276,723 277,170
------------ ---------- ---------- ----------
Net interest income 417,327 525,182 555,163 219,356
Provision for loan losses - 50,000 75,000 -
------------ ---------- ---------- ----------
Net interest income after provision for loan losses 417,327 475,182 480,163 219,356
Total noninterest income 7,142 28,412 5,377 62,301
Total noninterest expense 413,767 387,291 426,966 272,972
------------ ---------- ---------- ----------
Income before income taxes 10,702 116,303 58,574 8,685
Income tax provision 67,995 - - -
------------ ---------- ---------- ----------
Net income $ (57,293) $ 116,303 $ 58,574 $ 8,685
============ ========== ========== ==========
Per share data
Average common shares outstanding 597,082 597,082 597,082 597,082
Net income per common share - primary $ (0.10) $ 0.19 $ 0.10 $ 0.01
Net income per common share - fully diluted $ (0.10) $ 0.19 $ 0.10 $ 0.01
Three months ended
----------------------------------------------------------------------
1995 31-Dec 30-Sep 30-Jun 31-Mar
-------------- -------------- -------------- --------------
Total interest income $ 171,274 $ - $ - $ -
Total interest expense 96,492 - - -
------------ ---------- ---------- ----------
Net interest income 74,782 - - -
Provision for loan losses 50,000 -
------------ ---------- ---------- ----------
Net interest income after provision for loan losses 24,782 - - -
Total noninterest income 1,596 - - -
Total noninterest expense 305,221 - - -
------------ ---------- ---------- ----------
Income before income taxes (278,843) - - -
Income tax provision - - - -
------------ ---------- ---------- ----------
Net income $ (278,843) $ - $ - $ -
============ ========== ========== ==========
Average common shares outstanding 597,082 - - -
Net income per common share - primary $ (0.47) $ - $ - $ -
Net income per common share - fully diluted $ (0.47) $ - $ - $ -
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
Financial Condition
The Company's total assets increased from $25.8 million at December 31, 1995 to
$38.1 million at December 31, 1996, an increase of $12.4 million, or 47.9%. The
increase was due primarily to increases in the loan and investment portfolios of
$9.5 million and $6.3 million, respectively. This growth was funded by a
decrease in cash and cash equivalents, and increases in certificates of deposit
and advances from Federal Home Loan Bank ("FHLB") during the year of ($3.9
million), $7.2 million, and $5.0 million, respectively. The increase in the loan
portfolio, during 1996, was primarily due to the acquisition of two commercial
and residential real estate loan pools. These loan pools, having unpaid
principal balances of approximately $7.0 million, were acquired for
approximately $4.8 million.
Total deposits increased $7.2 million to $28.0 million at December 31, 1996.
Substantially all of this increase was in certificates of deposit during 1996
and resulted directly from Bank's marketing efforts to attract new customers.
Borrowed funds consist primarily of advances from the FHLB with both fixed and
variable interest rates and stated maturities occurring during 1997. Total
borrowed funds increased to $5.0 million at December 31, 1996. The Company had
no outstanding borrowed funds at December 31, 1995. The increases in deposits,
described above, and in borrowed funds were utilized to fund increases in loans
and other earning assets as part of the Bank's overall growth strategy.
Management plans to continue to utilize FHLB advances in conjunction with
deposit expansion to provide the necessary funding for the Bank's continued
growth. The Bank's borrowing limit at the FHLB as of December 31, 1996, was
approximately $16.7 million.
Results of Operations
Comparison of the Year Ended December 31, 1996 and the Period Ended December 31,
1995
General. Net income for the year ended December 31, 1996 was $126,269, an
increase of $405,112 compared to a net loss of $278,843 for the period ended
December 31, 1995. This increase was primarily the result of an increase in
interest income of $2.8 million and an increase in noninterest income of
$101,636. The increase in net income was partially offset by an increase in
interest expense of $1.1 million and increases in noninterest expense, provision
for loan losses, and income tax expense of $1.2 million, $75,000 and $67,995,
respectively. Further details regarding changes in the major categories of
income and expense are discussed below.
Interest Income. Interest income increased $2,770,870 to $2,942,144 for the year
ended December 31, 1996, from $171,274 for the year ended December 31, 1995. The
increase in interest income was the result of an increase in interest income on
loans, investment securities, and interest-bearing deposits of $1.9 million,
$742,411, and $172,081, respectively. The increase in interest income on loans
is due to an increase in the average balance of the loan portfolio, as well as
accretion income recognized on discounted real estate loan pools purchased
during 1995 and 1996. The discount associated with such discounted loan pools is
recognized as a yield adjustment, included as interest income using the interest
method and applied on a loan-by- loan basis (to the extent that the timing and
amount of cash flows can reasonably be determined). During 1996, the Bank
recognized approximately $674,000 in accretion income associated with these
discounted loan pools. Negotiated settlements between the Bank and the borrower
accounted for approximately $376,000 of this total. The balance of
approximately $298,000 represents normal accretion based on the Bank's internal
estimates of future cash flows.
Interest Expense. Interest expense increased $1,128,624 to $1,225,116 for the
year ended December 31, 1996, from $96,492 for the year ended December 31,
1995. The majority of this increase was the result of higher interest expense of
$1.0 million on certificates of deposit resulting from higher outstanding
average balances during 1996.
6
<PAGE>
Net Interest Income. The earnings of the Bank depend primarily on its level of
net interest income, which is the difference between interest earned on the
Bank's interest-earning assets (loans and investment securities) and the
interest paid on interest-bearing liabilities (deposits). Net interest income is
a function of the Bank's interest rate spread, which is the difference between
the yield earned on interest-earning assets and the rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to the average balance of interest-bearing
liabilities. Net interest income increased $1.6 million, from $74,782 to
$1,717,028 for the year ended December 31, 1996. Approximately $376,000 of this
increase represents accretion income related to loan payoffs and is
non-recurring. The Bank's interest rate spread averaged 5.29% during 1996
compared to 3.66% during 1995. The increase in net interest spread during 1996
was due to a combination of non-recurring discount accretion, higher average
balances of loans during 1996 compared to 1995 and a lower average cost of funds
during 1996 compared to 1995.
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1996 was $125,000 compared to $50,000 in 1995. The provision for
loan losses, less net-charge-offs for the year of $2,921, increased the
allowance for loan losses to $182,079 at December 31, 1996, a 203% increase
compared to December 31, 1995. Management will continue to record a provision
for loan losses to maintain the allowance for loan losses at a level deemed
adequate by management based on a quarterly analysis.
Noninterest Income. Noninterest income increased to $103,232 for the year ended
December 31, 1996, from $1,596 for the period ended December 31, 1995. This
increase of $101,636, was the result of a $16,063 net gain on sales of
investment securities during 1996 as well as increases in fees and service
charges on loan and deposit accounts totaling $85,573.
Noninterest Expense. Noninterest expense increased to $1,500,996 for the year
ended December 31, 1996, from $305,221 for the year ended December 31, 1995.
This increase of $1,195,775 was the result of increases in compensation and
benefits, occupancy, and other expenses of $661,610, $90,598, and $443,567,
respectively, during the year ended December 31, 1996.
Income Tax Expense. Income tax expense increased to $67,995 for the year ended
December 31, 1996. The Company did not record an income tax provision for the
period ended December 31, 1995 because of prior net operating losses and the
absence of any taxes paid in the carryback period. During 1996, the Company
realized a tax benefit related to the net operating loss carryovers from the
acquisition of the Bank. The deferred tax asset associated with those loss
carryovers is fully offset by a valuation allowance. Accordingly, the realized
tax benefit is reflected as a reduction of the goodwill associated with the
acquisition and a corresponding reduction of deferred income tax benefit for the
year. As of December 31, 1996, the Bank had approximately $63,827 in Federal net
operating loss carryover available to offset future years' taxable income, which
must be utilized by the year 2007.
7
<PAGE>
Average Balance Sheets and Rate/Yield Analysis
Net interest income is affected by changes in both average interest rates and
average volumes of interest-earning assets and interest-bearing liabilities. The
following table presents for the period indicated the total dollar amount of
interest income from average interest-eaming assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in dollars and rates. As discussed above, the results of operations of the
Bank are included from the date of acquisition, November 30, 1995, through
December 31, 1995. No tax equivalent adjustments were necessary. All average
balances are monthly average balances. Non-accruing loans have been included in
the table as loans carrying a zero yield.(Note: average rates include the effect
of using truncated values for both average balances and interest income)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year-to-Date
-------------------------------------------------------------------------
1996 1995
-------------------------------------------------------------------------
Average Average Average
Assets: Balance Interest Rate Balance
------------ -------- ------- ---------
<S> <C> <C> <C> <C>
Interest earning assets:
Loans $ 11,706 $1,924 16.44% $ 4,185
Investment securities 12,320 807 6.55% 12,302
Interest-bearing deposits and other 4,084 212 5.18% 5,663
--------- ------- ------- ---------
Total earning assets 28,110 2,942 10.47% 22,150
Liabilities and Stockholders' Equity:
Deposits:
Passbook 2,354 61 2.59% 2,536
NOW accounts 585 12 2.05% 378
Certificates of deposit 19,966 1,110 5.56% 17,643
Other borrowings 750 43 5.73% 60
--------- ------- ------- ---------
Total interest-Bearing liabilities 23,656 1,226 5.18% 20,617
Excess of interest earning assets over --------- ---------
interest-bearing liabilities 4,454 1,533
========= -------- =========
Net interest income 1,717
========
Effective interest differential (spread) 5.29%
-------
Net yield on average interest earning assets 6.11%
=======
Average
Assets: Interest Rate
------------- ---------
<S> <C> <C>
Interest earning assets:
Loans $ 67 19.34%
Investment securities 64 6.26%
Interest-bearing deposits and other 40 8.39%
--------- --------
Total earning assets 171 9.28%
Liabilities and Stockholders' Equity:
Deposits:
Passbook 5 2.54%
NOW accounts 1 2.54%
Certificates of deposit 84 5.74%
Other borrowings 6 9.95%
--------- --------
Total interest-Bearing liabilities 96 5.62%
Excess of interest earning assets over
interest-bearing liabilities ---------
Net interest income 75
=========
Effective interest differential (spread) 3.66%
--------
Net yield on average interest earning assets .34%
========
</TABLE>
8
<PAGE>
Rate Volume Analysis
The following schedule presents the dollar amount of changes in interest income
an interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between changes (a) related to
outstanding balances and (b) due to the changes in interest rates. Information
is provided in each category with respect to: (i) changes attributable to
changes in volume (changes in volume multiplied by prior rate); (ii) changes
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) the net change in rate/volume (change in rate multiplied by change in
volume). The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
(Dollars in Thousands)
From 1995 to 1996
----------------------------------------
Increase or Decrease
Due to Change in
--------------------------- Total
Average Average Increase
Volume Rate (Decrease)
--------- --------- ----------
Variance in interest income on:
Interest-earning assets:
Loans $ 2,025 $ (169) $ 1,856
Investment securities 23 719 742
Interest-bearing deposits and other 73 100 173
--------- --------- ----------
Total interest-earning assets 2,121 650 2,771
Interest-bearing deposits:
Deposits:
Passbook 67 (12) 55
NOW accounts 17 (6) 11
Certificates of deposit 1,343 (317) 1,026
Other borrowings 38 (1) 37
--------- --------- ----------
Total interest-bearing liabilities 1,465 (336) 1,129
--------- ---------- ----------
Change in net interest income $ 656 $ 986 $ 1,642
========= ========= ========
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from principal and
interest payments on loans and mortgage-backed securities. While maturities and
scheduled amortization of loans and mortgage-backed securities are a predictable
source of funds, deposit flows and mortgage prepayments are influenced by
general interest rates, economic conditions and competition. The primary
investing activity of the Bank is the origination or purchase of loans and the
purchase of investment securities. These activities are funded primarily by
deposits, principal repayments on loans and securities, and, proceeds from FHLB
borrowings. The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. During the period ended December 31, 1996, the Bank used its
sources of funds primarily to fund loan and investment purchases, loan
commitments, and to pay maturing certificates of deposit and other deposit
withdrawals. At December 31, 1996, the Bank had approximately $332,000 of
commitments to extend credit.
9
<PAGE>
At December 31, 1996, certificates of deposit amounted to $25.0 million, or
89.4%, of the Bank's total deposits, including $14.0 million which are scheduled
to mature by December 31, 1997. Historically, the Bank has been able to retain a
significant amount of its certificates of deposit as they mature. Management of
the Bank believes it has adequate resources to fund all loan commitments through
deposits and FHLB advances. For regulatory purposes, liquidity is measured as
the ratio of cash and certain investments to withdrawable savings and short-term
borrowings. The Bank has established as an objective a minimum liquidity ratio
of 15%. The Bank is not aware of any adverse conditions which would impact its
short or long-term funding needs.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory-and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. At December 31, 1996 and
1995, the Bank's actual and required minimum capital ratios were as follows:
Risk-Based Capital Ratios:
(Dollars in Thousands)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
For the Bank: Actual: Adequacy Purposes: Action Provisions:
--------------------- -------------------- -----------------------
As of December 31, 1996: Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 4,657 25.6% $ 1,458 8.0% 1,822 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 4,475 24.6% $ 729 4.0% 1,093 6.0%
Tier I Capital
(Average Assets) $ 4,475 12.9% $ 1,387 4.0% 1,734 5.0%
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) $ 4,457 40.1% $ 888 8.0% 1,110 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 4,517 17.1% $ 444 4.0% 666 6.0%
Tier I Capital
(Average Assets) $ 4,517 14.9% $ 1,210 4.0% 1,513 5.0%
</TABLE>
10
<PAGE>
Asset and Liability Management
A principal objective of the Bank's asset and liability management is to
minimize the Bank's exposure to changes in interest rates. The Bank's policy is
to attempt to manage assets and liabilities in such a way as to stabilize net
interest income. An interest rate sensitive asset or liability is one that,
within a defined time period, either matures or experiences an interest rate
change in line with general market rates. Interest rate sensitivity measures the
relative volatility of a bank's interest margin resulting from changes in market
interest rates.
The following table summarizes repricing intervals for interest-earning assets
and interest-bearing liabilities for the period ended December 31, 1996 and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated: 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 failing
interest rates, a positive gap would tend to adversely affect net interest
income, while a negative gap would tend to result in an increase in net interest
income. During a period of rising interest rates, a positive gap would tend to
result in an increase in net interest income while a negative gap would tend to
affect net interest income adversely.
If repricing of the Bank's assets and liabilities were equally flexible and
moved concurrently, the impact of an increase or decrease in interest rates on
net income would be minimal. The Bank currently experiences a negative
cumulative one year gap, which suggests that net interest income may decrease
during periods of rising interest rates.
(Dollars in Thousands)
<TABLE>
<CAPTION>
Interest Rate Sensitivity Table 1-90 91-364 1-5 Over 5 12/31/96
Days Days Years Years Balance
---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest-eaming assets:
Loans receivable $ 7,209 $ 3,284 $ 6,219 $16,712
Investment securities 3,483 935 1,752 9,996 16,166
Other interest earning assets 4,016 4,016
---------- --------- ---------- --------- ---------
Total interest-eaming assets $ 14,708 $ 935 $ 5,036 $16,215 $36,894
Interest-bearing liabilities:
NOW accounts $ 892 $ 892
Passbook savings accounts 1,015 1,015 2,030
Certificates of deposit 4,294 9,675 9,812 1,212 24,993
Other borrowings 5,000 50 5,050
---------- --------- ---------- --------- ---------
Total interest-bearing liabilities $ 11,201 $ 9,725 $ 9,812 $ 2,227 $32,965
Periodic gap $ 3,507 $(8,790) $ (4,776) $13,988 $ 3,929
========== ========= ========== ========= =========
Cumulative gap $ 3,507 $(5,283) $(10,059) $ 3,929
========== ========= ========== =========
Gap to asset ratio 9% -23% -13% 37%
Cumulative gap to asset ratio 9% -14% -27% 10%
</TABLE>
The method used to analyze interest rate sensitivity in the table above has a
number of limitations. Certain assets and liabilities may react differently to
changes in interest rates even though they reprice or mature in the same or
similar time periods. The interest rates on certain assets and liabilities may
change at different times than changes in market interest rates, with some
changing in advance of changes in market rates and some lagging behind changes
in market rates. Also, certain assets, such as adjustable rate loans, often have
provisions which may limit changes in interest rates each time market interest
rates change and on a cumulative basis over the life of the loan. Additionally,
the actual prepayments and withdrawals experienced by the Bank in the event of a
change in interest rates may deviate significantly from those assumed in
calculating the data shown in the table. Finally, the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase.
11
<PAGE>
Investment Portfolio
The following table presents the book values and estimated market values at
December 31, 1996, and December 31, 1995, respectively, for each major category
of the Bank's investment securities:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ --------- --------- ----------------
<S> <C> <C> <C> <C>
Available for Sale
U.S. Government agency securities $ 3,614,740 $ 28,850 $ $ 3,643,590
Mortgage-backed securities 1,863,115 6,037 1,869,152
Corporate securities 461,429 3,044 458,385
Equity securities 161,626 - 35,126 126,500
------------ --------- --------- ----------------
Total available for sale $ 6,100,910 $34,887 $38,170 $ 6,097,627
============ ========= ========= ================
Held to Maturity
U.S. Government agency securities $ 1,498,179 $ - $ 1,884 $ 1,496,295
Mortgage-backed securities 6,820,038 3,602 - 6,823,640
Corporate securities 1,908,902 1,737 - 1,910,639
------------ --------- --------- ----------------
Total held to maturity $10,227,119 $ 5,339 $ 1,884 $ 10,230,574
============ ========= ========= ================
December 31, 1995
---------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ --------- --------- ----------------
<S> <C> <C> <C> <C>
Available for Sale
Mortgage-backed securities $ 2,480,495 $25,237 $ - $ 2,505,732
------------ --------- --------- ----------------
Total available for sale $ 2,480,495 $25,237 $ - $ 2,505,732
============ ========= ========= ================
Held to Maturity
Mortgage-backed securities $ 7,478,613 $67,894 $12,350 $ 7,534,157
------------ --------- --------- ----------------
Total held to maturity $ 7,478,613 $67,894 $12,350 $ 7,534,157
============ ========= ========= ================
</TABLE>
The Bank's investment portfolio is composed of interest-earning assets which not
only provide interest income but a source of liquidity and diversity. The
majority of the investment portfolio is held-to-maturity which are stated at
par value, plus any remaining unamortized premium paid or less any remaining
unamortized discount received. Available-for-sale securities are stated at fair
market value, plus any remaining unarnortized premium paid or less any remaining
unarnortized discount received The Bank invests in securities for yield income
and not to profit from trading activities.
12
<PAGE>
The following table shows the contractual maturity distribution of the
investment securities portfolio at December 31, 1996:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
--------------------------------------------------------------------
Approximate Approximate
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Due after one year through five years $ 750,000 $ 752,265 $ 1,106,290 $ 1,098,786
Due after five years through ten years 992,552 1,006,083 2,407,556 2,416,064
Due after ten years 4,196,732 4,212,779 6,713,273 6,715,724
Equity Securities 161,626 126,500 - -
------------ -------------- ------------ --------------
$ 6,100,910 $6,097,627 $10,227,119 $10,230,574
============ ============== ============ ==============
</TABLE>
The Bank's available funds have historically exceeded the loan demand in the
Bank's market area. To supplement its loan origination the Bank has made
substantial investments in mortgage-backed securities. To minimize rate risk,
the Bank's mortgage-backed securities portfolio contains both adjustable rate
and fixed rate instruments with contractual maturities occurring after ten
years.
Loan Porffolio
Historically, the Bank's lending business had been primarily real estate
mortgage loans secured by one-to-four family residences in the Bank's lending
area. Typically, these residences were single family homes that serve as the
primary residence of the owner. The Bank currently originates such loans in
amounts up to 80% of the appraised value of the property . The Bank has recently
expanded the focus of its lending program to include commercial lending,
primarily secured by real estate. In the future, the Bank may make loans
collateralized with marketable securities, cash, or potentially equipment. This
expanded focus will allow the Bank to compete more effectively in the community
banking marketplace.
Loans receivable, (net of the allowance for loan losses, unearned fees and
origination costs and loans in process) were $16.5 million at December 31, 1996
compared to $7.0 million at December 31, 1995. Loans receivable represented
43.3% of total assets and 58.9% of total deposits as of December 31, 1996
compared to 27.1 % and 33.7%, respectively, at December 31, 1995.
The following table summarizes the loan portfolio of the Bank by loan category
and amount at December 31, 1996, compared to December 31, 1995:
December 31,
-----------------------------------------
1996 % 1995 %
------------ ------ ------------ ------
Real estate $14,648,419 88.6% $6,849,692 97.9%
Commercial and industrial 1,138,000 6.9% 250,000 3.6%
Other 1,226,000 7.4% 83,861 1.2%
------------ ------ ------------ ------
Total loans 17,012,419 102.9% 7,183,553 102.7%
Less:
Loans in process 215,000 1.3% 88,070 1.3%
Unearned income 85,857 0.5% 38,286 .5%
Allowance for loan losses 182,079 1.1% 60,000 .9%
------------ ------ ------------ ------
Net loans $16,529,483 100.0% $6,997,197 100.0%
============ ====== ============ ======
13
<PAGE>
The following table summarizes the maturity and or repricing composition of
loans receivable at December 31, 1996, compared to December 31, 1995:
<TABLE>
<CAPTION>
December 31, (000's omitted)
------------------------------------------------------
1996 % 1995 %
------------- ------ ------------ ------
<S> <C> <C> <C> <C>
Within one year $ 7,209 42.4% $ 1,166 16.2%
Over one year through two years 958 5.6% 6 0.1%
Over two years through three years 31 0.2% 118 1.6%
Over three years through five years 2,295 13.5% 368 5.1%
Over five years through ten years 892 5.2% 3,280 45.7%
Over ten years 5,627 33.1% 2,246 31.3%
------------- ------ ------------ ------
$ 17,012 100.0% $ 7,184 100.0%
============= ====== ============ ======
</TABLE>
On December 31, 1996, the net book value of nonaccrual loans were $120,985 and
loans 90 days or more past due were $190,879. These amounts represented
nonaccrual and past due balances on the discounted commercial and residential
real estate loans purchased during 1996 and not on balances originated directly
by the Bank. There were no troubled debt restructured loans as of or during the
year ended December 31, 1996. Due in part to the Bank's conservative lending
practices, stringent credit underwriting and diligent file monitoring and
maintenance, the Bank had no nonperforming loans for the period ended December
31, 1995. The Bank will recognize income on nonaccrual loans, under the cash
basis, when the loans are brought current as to outstanding principal and
collateral on the loan is sufficient to cover the outstanding obligation to the
Bank.
Loans to directors, executive officers and their associates, are made in the
ordinary course of business and on substantially the same terms and conditions,
including interest rate and collateral, as those prevailing at the time for
comparable transaction with others. The aggregate amount of loans by the Bank to
its directors and executive officers, including loans to related persons and
entities was $630,361 at December 31, 1996, and $12,391 at December 31, 1995,
and represented 1.7% and .05%, respectively, of total assets. Activity of these
loans is as follows:
December 31,
------------------------
1996 1995
--------- ----------
Balance at beginning of year $ 12,391 $ -
New loans 610,000 12,391
Repayments (7,970) -
--------- ----------
Balance at end of year $630,361 $12,391
========= ==========
Allowance For Loan Losses
In originating loans, the bank recognizes that some degree of credit losses may
be experienced. The risk of loss will vary according to among other things, the
type of loan, the creditworthiness of the borrower, the type and quality of the
collateral as well as general economic conditions. The Bank determines the level
of its allowance for possible loan losses based upon a number of factors. In
connection with this analysis, the Bank considers both internal and external
factors which may affect the adequacy of the allowance for possible loan losses.
Such factors may include, but are not limited to, present and prospective
industry trends and regional and national economic conditions, past estimates of
possible loan losses as compared to actual losses and potential problems with
sizable loans, large concentrations, known and inherent risk in the portfolio,
prevailing market conditions, and management's judgment as to collectability.
14
<PAGE>
The following table summarizes the changes in the Bank's allowance for loan
losses for the period ended December 31, 1996, compared to December 31, 1995:
December 31,
-----------------------------
1996 1995
---------- ---------
Balance at beginning of year $60,000 $ -
Additions:
Allowance of acquired banks - 8,800
Provision for loan losses 125,000 51,200
---------- ---------
Total additions 125,000 60,000
---------- ---------
Deductions:
Loan losses $(2,921) 0
Less recoveries on loans 0 0
Net loan losses $(2,921) 0
---------- ---------
Balance at end of year $182,079 $60,000
========== =========
The allowance for loan losses represents a reserve against potential but
undetermined future losses. The allowance for loan losses is established through
a provision for loan losses based on Management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation, which
includes a review of all loans on which full collectability may not be
reasonably assured, considers among other matters, the estimated fair value of
the underlying collateral, economic conditions, historical loan loss experience
and other factors that warrant recognition in providing for an adequate loan
loss allowance. Although the Bank believes that its allowance for loan losses is
at a level which it considers to be adequate to provide for losses, there can be
no assurances that such losses will not exceed the estimated amounts.
Deposits
Deposits are the primary source of the Bank's funds for lending and other
investment purposes. Total deposits at December 31, 1996 were $28.0 million
compared to $20.8 million at December 31, 1995, an increase of $7.2 million or
34.6%. The Bank's current deposit products include statement savings accounts,
passbook savings accounts, personal and business checking accounts, NOW accounts
and certificates of deposit (ranging in terms from three months to eight years).
The Bank's deposits are obtained primarily from residents in its primary market
area, in and around the Plymouth Meeting /Norristown area, as well as from an
expanded customer base in and around greater Philadelphia.
The principal methods used by the Bank to attract deposit accounts include
offering a wide variety of services and accounts, competitive interest rates and
convenient office hours. The Bank still relies upon certificates of deposit as
its primary funding source, but it has instituted a program which emphasizes the
acquisition of more stable core deposits, using traditional marketing methods,
to attract new customers and savings deposits.
15
<PAGE>
The following table presents the weighted average rates paid on and composition
of deposit balances at December 31, 1996, compared to December 31, 1995:
<TABLE>
<CAPTION>
Weighted 1996 1995
Interest ---- ----
Rate
1996 Amount Percent Amount Percent
---------- ------------ -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Demand $ 58,659 0.21% $ 4,186 0.02%
NOW Accounts 1.67% 891,640 3.19% 401,664 1.93%
Passbook 2.51% 2,029,694 7.26% 2,591,172 12.46%
Certificates of deposit 5.83% 24,993,154 89.35% 17,801,887 85.59%
------------ -------- ------------ ---------
$27,973,147 100.00% $20,798,909 100.00%
============ ======== ============ =========
</TABLE>
The following table summarizes the maturity composition of
certificates of deposit at December 31, 1996, compared to
December 31, 1995:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1996 % 1995 %
------------- ------ ------------ ------
<S> <C> <C> <C> <C>
Within one year $13,968,430 55.9% $ 8,252,026 46.4%
Over one year through two years 4,199,501 16.8% 5,004,994 28.1%
Over two years through three years 4,289,518 17.2% 681,694 3.8%
Over three years through five years 1,322,451 5.3% 3,863,173 21.7%
Over five years through ten years 1,213,254 4.9% 0.0%
------------- ------ ------------ ------
$24,993,154 100.0% $17,801,887 100.0%
============= ====== ============ ======
</TABLE>
The following table summarizes the maturity composition of certificates of
deposit with balances of $100,000 or more at December 31, 1996, compared to
December 31, 1995:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1996 % 1995 %
------------- ------ ------------ ------
<S> <C> <C> <C> <C>
Within one year $ 1,495,338 59.5% $ 817,543 46.1%
Over one year through two years 179,392 7.1% 429,267 24.2%
Over two years through three years 606,814 24.2% - 0.0%
Over three years through five years 102,759 4.1% 401,405 22.6%
Over five years through ten years 126,776 5.0% 126,776 7.1%
------------- ------ ------------ ------
$ 2,511,079 100.0% $ 1,774,990 100.0%
============= ====== ============ ======
</TABLE>
SFAS No. 128 and SFAS No. 129
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share". This statement requires the
presentation of basic earnings per share and, if applicable, diluted earnings
per share required under Accounting Principles Board Opinion No.15. The
Financial Accounting Standards Board issued Statement of Financial Standards
No. 129. "Disclosure of Information About Capital Structure". The Company does
not anticipate that Statements 128 and 129 will have a material impact on the
financial statements.
16
<PAGE>
Recent Events
On February 19, 1997, the Board of Directors of the Company approved the
acquisition, by the Company, of the Knox Financial Services Group, Inc.
("Knox"), a registered securities broker/dealer. The Company will acquire all of
the outstanding shares of common stock of Knox for a purchase price (the
"Purchase Price") of $75,000. The Company will pay the Purchase Price by
delivering to the sellers 7,500 restricted shares of the Company's common stock.
In the event that the cash portion of the assets of Knox (a) exceeds $40,000,
the difference between the excess amount and $40,000 will be paid to the sellers
in cash and (b) is less than $40,000, the number of shares will be reduced
proportionally. Following the acquisition, the Company will change the name of
Knox to USACapital, Inc. ("USACapital"). USACapital will continue Knox's retail
brokerage business under the direction of its current principals. USACapital
will not engage in underwriting activities. On February 24, 1997, the Company
applied to the Federal Reserve Bank of Philadelphia for the approval for the
acquisition of Knox.
Inflation and Changing Prices
Management is aware of the impact inflation has on interest rates and therefore
the impact it can have on a banks performance. The ability of a financial
institution to cope with inflation can only be determined by analysis and
monitoring of its asset and liability structure. The Company monitors its asset
and liability position with particular emphasis on the mix of interest-sensitive
assets and liabilities in order to reduce the effect of inflation upon its
performance. However, it must be remembered that the asset and liability
structure of a financial institution is substantially different from an
industrial corporation in that virtually all assets and liabilities are monetary
in nature, meaning that they have been or will be converted into a fixed number
of dollars regardless of changes in general price levels. Examples of monetary
items include cash, loans and deposits. Nonmonetary items are those assets and
liabilities which do not gain or lose purchasing power solely as a result of
general price level changes. Examples of nonmonetary items are premises and
equipment.
Inflation can have a more direct impact on categories of noninterest 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
increases relating to such items as staffing levels, usage of supplies and
occupancy costs.
Item 7: Financial Statements
The financial statements of the Company are attached herewith and begin on page
F-1.
Item 8: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On February 26, 1996, the Company had elected not to reappoint Elko, Fischer,
McCabe & Rudman, Ltd. as its independent accountants and to appoint Grant
Thornton, LLP as its independent accountants. During the period from March 14,
1995 (inception) through March 31, 1995, Elko, Fischer, McCabe & Rudman, Ltd.'s
reports on the financial statements for the company were unqualified and did not
contain an adverse opinion, any disclaimers, qualification or modification as to
uncertainty, audit scope, or accounting principles. The decision to change firms
was recommended by the Board of Directors because Elko, Fischer, McCabe &
Rudman, Ltd. does not perform audits of public companies.
17
<PAGE>
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 the Company to be filed with the Securities and
Exchange Commission (the "Commission") in connection with the Company's annual
meeting of shareholders scheduled for June 1997.
Item 10: Executive Compensation
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's annual meeting of shareholders scheduled for June
1997.
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 the Company to be filed with the Commission in
connection with the Company's annual meeting of shareholders scheduled for June
1997.
Item 12: Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's annual meeting of shareholders scheduled for June
1997.
Item 13: Exhibits 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 for an annual
report on Form 10-KSB)
<TABLE>
<CAPTION>
Page No. in Sequential
Exhibit No. Numbering System
----------- ----------------------
<S> <C> <C>
3(a) Amended and Restated Articles of Incorporation N/A
of the Company, as amended.*
3(b) Bylaws of the Company.* N/A
4(a) Specimen Stock Certificate of the Company.* N/A
10.1 Stock Option Plan (incorporated by reference to Exhibit 10.1 of
the Form SB-2)
10.2 Employment agreement by and between the Registrant and Kenneth
L. Tepper (incorporated by reference to Exhibit 10.2 of the
Form SB-2)
10.3 Employment agreement by and between the Registrant and Bruce W.
Kauffman (incorporated by reference to Exhibit 10.3 of the
Form SB-2)
21 Subsidiaries of the Company.* N/A
27 Financial Data Schedule
</TABLE>
18
<PAGE>
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter of 1996.
- ------------
*Incorporated by reference from the Registration Statement on Form SB-2 of the
Company, as amended, Registration No. 33-92506.
19
<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 PA.
USABancShares, Inc.
By: /s/ Kenneth L. Tepper
------------------------------------
Kenneth L. Tepper,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ David J. Torpey
--------------------------------------
David J. Torpey, Vice-President, Chief Financial Officer
(Principal Accounting and Financial Officer)
20
<PAGE>
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 31, 1997 /s/ Bruce W. Kauffman
---------------------------
Bruce W. Kauffman
Chairman of the Board
March 31, 1997 /s/ Leonard A. Sylk
---------------------------
Leonard A. Sylk
Vice Chairman of the Board
March 31, 1997 /s/ Carmen J. Cocca, Jr.
---------------------------
Carmen J. Cocca, Jr.
Director
March 31, 1997 /s/ Jeffrey A. D'Ambrosio
---------------------------
Jeffrey A. D'Ambrosio
Director
March 31, 1997 /s/ George C. Fogwell, III
---------------------------
George C. Fogwell, III
Director
March 31, 1997 /s/ John A. Gambone
---------------------------
John A. Gambone
Director
March 31, 1997 /s/ George M. Laughlin
---------------------------
George M. Laughlin
Director
March 31, 1997 /s/ Wayne O. Leevy
---------------------------
Wayne O. Leevy
Director
March 31, 1997 /s/ Clarence L. Rader
---------------------------
Clarence L. Rader
Director of Company
Vice Chairman of Bank
21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
USABancShares, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of USABancShares,
Inc. and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the year ended December 31, 1996, and the period from March 14, 1995
(inception) through December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 our 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 consolidated 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 our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
USABancShares, Inc. and Subsidiary at December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
the year ended December 31, 1996, and the period from March 14, 1995 (inception)
to December 31, 1995, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 18, 1997
<PAGE>
USABancShares, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEET
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and Due from banks $ 198,154 $ 557,625
Interest-bearing deposits with banks 4,016,032 7,536,508
--------------- ---------------
Cash and cash equivalents 4,214,186 8,094,133
Securities available-for-sale 6,097,627 2,505,732
Securities held-to-maturity (fair value: 1996 - $10,230,574;
1995 - $7,534,157) 10,227,119 7,478,613
FHLB Stock 250,000 83,800
Loans receivable, net 16,529,483 6,997,197
Premises and Equipment, net 145,421 123,036
Goodwill 128,285 185,492
Other assets (including accrued interest: 1996 - $307,407;
1995 - $174,369) 553,378 317,520
--------------- ---------------
Total assets $ 38,145,499 $ 25,785,523
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 27,973,147 $ 20,798,909
Borrowed funds 5,050,000 -
Accrued expenses and other liabilities 227,505 327,772
--------------- ---------------
Total liabilities 33,250,652 21,126,681
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; authorized 5,000,000 shares;
no shares issued and outstanding - -
Common stock, $1.00 par value; authorized 10,000,000 shares;
542,802 shares issued and outstanding and 54,280 shares of
converted and unissued Class B common stock 597,082 597,082
Additional paid-in capital 4,877,701 4,877,701
Accumulated deficit (152,574) (278,843)
Unearned compensation, Class B common stock (425,195) (533,755)
Stock subscription receivable 0 (20,000)
Unrealized gain (loss) on securities available for sale (2,167) 16,657
--------------- ---------------
Total stockholders' equity 4,894,847 4,658,842
--------------- ---------------
Total liabilities and stockholders' equity $ 38,145,499 $ 25,785,523
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-1
<PAGE>
USABancShares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1996 and the Period from March 14, 1995 (inception)
through December 31, 1995
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Interest income:
Loans $ 1,923,831 $ 67,453
Investment securities 806,615 64,204
Interest-bearing deposits and other 211,698 39,617
--------------- -----------
Total interest income 2,942,144 171,274
Interest expense:
Deposits 1,182,452 90,525
Borrowed funds 42,664 5,967
--------------- -----------
Total interest expense 1,225,116 96,492
Net interest income 1,717,028 74,782
Provision for loan losses 125,000 50,000
--------------- -----------
Net interest income after provision for loan losses 1,592,028 24,782
Noninterest income:
Gain on sales of investment securities 16,063 -
Other 87,169 1,596
--------------- -----------
Total noninterest income 103,232 1,596
Non-interest expense:
Compensation and benefits 835,217 173,607
Occupancy 119,636 29,038
Other 546,143 102,576
--------------- -----------
Total noninterest expense 1,500,996 305,221
--------------- -----------
Income (loss) before income taxes 194,264 (278,843)
Income tax expense 67,995 -
--------------- ----------------
Net income (loss) $ 126,269 $ (278,843)
=============== ================
Per Share data:
Net income (loss) per common share - primary and fully diluted $ 0.21 $ (0.47)
Weighted average shares outstanding 597,082 597,082
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-2
<PAGE>
USABancShares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Year ended December 31, 1996 and the Period from March 14, 1995 (inception)
through December 31, 1995
<TABLE>
<CAPTION>
Net
Unearned unrealized
Common Additional compensation Stock gain (loss)
----------------- paid-in Accumulated Class B subscription on AFS
Common Class B capital deficit Stock receivable securities Total
-------- ------- ---------- ----------- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, March 14, 1995 $0 $0 $0 $0 $0 $0 $0 $0
Class B common stock issued - 100 400 - - - 500
Public offering of common stock 542,802 - 4,388,679 - - (20,000) - 4,911,481
Conversion of Class B common stock 54,280 (100) 488,622 - (542,802) - - -
Net unrealized gain on securities
available-for-sale - - - - - - 16,657 16,657
Amortization of unearned
compensation Class B common stock - - - - 9,047 - - 9,047
Net income - - - (278,843) - - - (278,843)
-------- -------- ---------- ----------- ------------- ------------- ---------- ----------
Balances, December 31, 1995 $597,082 $0 $4,877,701 $(278,843) $(533,755) $(20,000) $16,657 $4,658,842
======== ======== ========== =========== ============= ============= ========== ==========
Net unrealized loss on securities
available-for-sale - - - - - - (18,824) (18,824)
Amortization of unearned
compensation Class B common stock - - - - 108,560 - - 108,560
Receipt of stock subscription
receivable - - - - - 20,000 - 20,000
Net income - - - 126,269 - - - 126,269
-------- -------- ---------- ----------- ------------- ------------- ---------- ----------
Balances, December 31, 1996 $597,082 $0 $4,877,701 $(152,574) $(425,195) $0 $(2,167) $4,894,847
======== ======== ========== =========== ============= ============= ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
USABancShares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1996 and the Period from March 14, 1995 (inception)
through December 31, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Net Income $ 126,269 $ (278,843)
Adjustments to reconcile net income to cash used in
operating activities
Depreciation and amortization 58,921 15,293
Net accretion of discounts on purchased loan portfolios (674,101) -
Provision for loan losses 125,000 50,000
Net (accretion) amortization of investment securities premiums/discounts (44,389) 26,329
Amortization of Class B stock 108,560 -
Gain on sale of investments available for sale (16,063) -
Increase in other assets (235,858) (75,282)
Increase (decrease) in other liabilities (100,267) 90,036
------------ -------------
Net cash used in operating activities (651,928) (172,467)
------------ -------------
Cash flows from investing activities
Proceeds from sale of investment securities available-for-sale 1,515,938 3,643,000
Proceeds from maturity or calls of investment securities available-for-sale 500,000 -
Purchase of investment securities available-for-sale (5,709,176) -
Purchase of investment securities held-to-maturity (3,407,529) -
Repayments of principal on investment securities held-to-maturity 676,950 98,150
Repayments of principal on investment securities available-for-sale 114,674 -
Purchase of FHLB Stock (166,200) -
Net increase in loans (8,983,185) (2,979,269)
Payment to purchase common stock of subsidiary - (1,339,689)
Cash of entity acquired - 4,250,915
Decrease (increase) in goodwill 44,841 (185,492)
Purchases of premises and equipment (58,570) (79,196)
------------ -------------
Net cash provided by (used in) investing activities (15,472,257) 3,408,419
------------ -------------
Cash flows from financing activities
Net proceeds from common stock issued - 4,534,230
Net increase in deposits 7,174,238 272,621
Net increase in other borrowed funds 5,050,000 51,330
Decrease in stock subscription receivable 20,000 -
----------- ------------
Net cash provided by financing activities 12,224,238 4,858,181
----------- ------------
Net increase (decrease) in cash and cash equivalents (3,879,947) 8,094,133
Cash and cash equivalents, beginning of period 8,094,133 -
----------- ------------
Cash and cash equivalents, end of period $ 4,214,186 $ 8,094,133
=========== ============
Cash paid during the period for:
Interest $ 1,181,284 $ 84,363
Taxes 43,800 -
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
USABancShares, Inc., (the "Company") is a bank holding company and the parent
company of Peoples Thrift Savings Bank (the "Bank"). The Bank is a
state-chartered stock savings institution providing retail and commercial
banking services from its single office in Norristown, Pennsylvania. The Bank is
subject to competition from other financial institutions and other companies
which provide financial services. The Bank and the Company are subject to the
regulations of certain state and federal agencies and, accordingly, undergo
periodic examinations by those regulatory authorities. As a consequence of the
extensive regulation of commercial banking activities, the Bank's business is
particularly susceptible to being affected by state and federal legislation and
regulation.
Basis of Financial Statement Presentation
The accounting and reporting policies of the Company and the Bank conform with
generally accepted accounting principles and predominant practices within the
banking industry. All intercompany balances and transactions have been
eliminated in consolidation.
In preparing the consolidated financial statements, management is required 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 balance sheets and the reported amounts of revenues and expenses during the
reporting periods. Therefore, actual results could differ from those estimates.
The principle estimate that is particularly susceptible to significantly change
in the near term relates to the allowance for loan losses and certain intangible
assets, such as goodwill. The evaluation of the adequacy of the allowance for
loan losses includes a review of the individual loans and overall risk
charecteristics 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 as well as current loan collateral
values. However, actual losses on specific loans, which also are encompassed
in the analysis, may vary from estimated losses. All goodwill resulted from the
acquisition of the Bank.
Cash and cash Equivalents
Cash and cash equivalents include cash and due from banks and interest bearing
deposits with banks. Interest bearing deposits with banks consist of short term
investments having maturities of three months or less.
Investments and Mortgage-Backed Securities
Investment securities are classified in one of three categories:
held-to-maturity, trading or available-for-sale. Debt securities that the Bank
has the positive intent and ability to hold to maturity are classified as
held-to-maturity and are reported at amortized cost. As the Bank does not engage
in security trading, the balance of its debt securities and any equity
securities are classified as available-for-sale. Net unrealized gains and losses
for such securities, net of tax, are required to be recognized as a separate
component of stockholders' equity and excluded from the determination of net
income. Gains and losses on sales of investments are determined primarily by use
of the specific identification method.
F-5
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal and are reduced by unearned
loan fees and an allowance for loan losses. Interest on loans is accrued and
credited to operations based on the principal amounts outstanding. The allowance
for loan losses is established through a provision for possible loan losses
charged to expenses. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible loan losses on existing loans that may become uncollectible based on
evaluations of the collectibility of the loans and prior loan loss experience.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrower's
ability to pay.
Accrual of interest is discontinued on a loan when principal and interest become
90 days or more past due and when management believes, after considering
economic and business conditions and collection efforts, that the borrower's
financial condition is such that collection is doubtful. Once a loan is placed
on non-accrual status, interest previously accrued and uncollected is charged to
operations and interest is included in income thereafter only to the extent
actually received in cash.
The Bank adopted 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," on November 30, 1995. This new
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. The adoption of SFAS No. 114,
as amended by SFAS No. 118, did not have a material impact on the Bank's
financial condition or its results of operations.
Depreciation and Amortization
Depreciation of equipment is provided for by the straight-line method and
accelerated methods over estimated useful lives. Amortization of leasehold
improvements is provided for by the straight-line method over the term of the
lease or the estimated useful life, whichever is shorter. Goodwill arising from
the acquisition of the Bank on November 30, 1995 is being amortized by the
straight-line method over 15 years. On an ongoing basis management reviews the
valuation and amortization of goodwill. As part of this review, the Company
estimates the value of and the estimated undiscounted future net income expected
to be generated by the related subsidiary to determine that no impairment has
occurred.
F-6
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
SFAS No. 121
The Financial Accounting Standards Board issued a new standard, SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to be disposed of," which
provides guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The adoption of SFAS No. 121, on January 1,
1996, did not have a material impact on the Company's financial position and
results of operations for the year ended December 31, 1996.
SFAS No. 122
In January 1, 1996, the Company adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which requires that a mortgage banking enterprise recognize,
as a separate asset, rights to service mortgage loans for others, however those
servicing rights are acquired. In circumstances where mortgage loans are
originated, separate asset rights to service mortgage loans are only recorded
when the enterprise intends to sell such loans. The adoption of SFAS No. 122, on
January 1, 1996, did not have a material impact on the Company's financial
position or results of operations for the year ended December 31, 1996.
Income Taxes
The Bank accounts for its income taxes under the liability method specified by
SFAS No. 109. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities. The Company files a consolidated federal
income tax return and the amount of income tax expense or benefit is computed
and allocated on a separate return basis.
Earnings Per Share
Earnings per share is computed based on the weighted average number of shares of
common stock outstanding. Stock options are considered common stock equivalents
and are included in the computation of the number of shares outstanding using
the treasury stock method, unless antidilutive. The weighted average number of
shares used in the computation of primary and fully diluted earnings per share
was 597,082 for 1996. Included in the weighted average number of shares at
December 31, 1996 are 54,802 shares associated with the deemed conversion of
Class B Common Stock.
NOTE 2 - ACQUISITION OF PEOPLES THRIFT SAVINGS BANK
On November 30, 1995, the Company completed a merger with the Bank. Under the
terms of the merger, all of the outstanding stock of the Bank was purchased for
cash in the amount of $16.80 per share, or $1,339,689. Additionally, holders of
employee stock options of this Bank received cash equal to the difference
between the per share exercise price and the purchase price per share. The
F-7
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITION OF PEOPLES THRIFT SAVINGS BANK - (Continued)
transaction was accounted for under the purchase method of accounting, and as
such, any difference between the fair value of net assets acquired and the
purchase price will be amortized over an estimated 15 years. A total of $185,492
of Goodwill was recorded as a result of the merger.
Pro forma income statement for the year ended December 31, 1995, assuming the
acquisition of the Bank at January 1, 1995 is as follows. (Dollars in Thousands)
Interest income $1,450
Interest expense 1,017
------
Net interest income 433
Provision for loan losses 50
------
Net income after provision for loan losses 383
Noninterest income 6
Noninterest expense 761
------
Loss before income tax (372)
Income taxes -
------
Net loss $ (372)
======
Net loss per share $(0.62)
======
F-8
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and approximate fair
market value of the Bank's available-for-sale and held-to-maturity securities
are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Available for Sale
U.S. Government agency securities $ 3,614,740 $ 28,850 $ - $ 3,643,590
Mortgage-backed securities 1,863,115 6,037 - 1,869,152
Corporate securities 461,429 3,044 458,385
Equity securities 161,626 - 35,126 126,500
----------- -------- -------- -----------
Total available for sale $ 6,100,910 $ 34,887 $ 38,170 $ 6,097,627
=========== ======== ======== ===========
Held to Maturity
U.S. Government agency securities $ 1,498,179 $ - $ 1,884 $ 1,496,295
Mortgage-backed securities 6,820,038 3,602 - 6,823,640
Corporate securities 1,908,902 1,737 - 1,910,639
----------- -------- -------- -----------
Total held to maturity $10,227,119 $ 5,339 $ 1,884 $10,230,574
=========== ======== ======== ===========
December 31, 1995
-----------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ----------- -------------
Available for Sale
Mortgage-backed securities $ 2,480,495 $ 25,237 $ - $ 2,505,732
----------- --------- -------- -----------
Total available for sale $ 2,480,495 $ 25,237 $ - $ 2,505,732
=========== ========= ======== ===========
Held to Maturity
Mortgage-backed securities $ 7,478,613 $ 67,894 $ 12,350 $ 7,534,157
----------- --------- -------- -----------
Total held to maturity $ 7,478,613 $ 67,894 $ 12,350 $ 7,534,157
=========== ========= ======== ===========
</TABLE>
F-9
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES - (Continued)
The following table lists the maturities of debt and equity securities at
December 31, 1996 classified as available for sale and held to maturity:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------------- --------------------------------
Approximate Approximate
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Due after one year through five years $ 750,000 $ 752,265 $ 1,106,290 $ 1,098,786
Due after five years through ten years 992,552 1,006,083 2,407,556 2,416,064
Due after ten years 4,196,732 4,212,779 6,713,273 6,715,724
----------- ---------- ------------ -----------
Equity Securities 161,626 126,500 - -
----------- ---------- ------------ -----------
$ 6,100,910 $6,097,627 $ 10,227,119 $10,230,574
=========== ========== ============ ===========
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. There were no sales of investment securities classified as
held-to-maturity during 1996. Proceeds on the sales of investment securities
classified as available-for-sale were $1,515,938 in 1996. Gross gains of $22,063
and gross losses of $6,000 were realized on these sales. Proceeds on the sales
of investment securities classified as available for sale during 1995 were
$3,643,000. There were no related gains or losses for the period from March 14,
1995 (inception) through December 31, 1995.
NOTE 4 - LOANS
Major classifications of loans are summarized as follows:
December 31,
-------------------------
1996 1995
----------- -----------
Real estate $14,648,419 $ 6,849,692
Commercial and industrial 1,138,000 250,000
Other 1,226,000 83,861
----------- -----------
Total loans 17,012,419 7,183,553
Less:
Loans in process 215,000 88,070
Unearned income 85,857 38,286
Allowance for loan losses 182,079 60,000
----------- -----------
Net loans 16,529,483 6,997,197
=========== ===========
F-10
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS - (Continued)
Changes in the allowance for loan losses are summarized as follows:
December 31,
-----------------------------
1996 1995
------------ --------------
Balance, January 1, $ 60,000 $ -
---------- ----------
Additions:
Allowance of acquired banks - 10,000
Provision for loan losses 125,000 50,000
---------- ----------
Total additions 125,000 60,000
---------- ----------
Deductions:
Loan losses $ (2,921) 0
Less recoveries on loans 0 0
Net loan losses $ (2,921) 0
---------- ----------
Balance, December 31, $ 182,079 $ 60,000
---------- ----------
On December 31, 1996, nonaccrual loans were $120,985, loans 90 days or more past
due and still accruing interest were $190,879. There were no troubled debt
restructured loans as of December 31, 1996. On December 31, 1995, there were no
nonaccrual loans or loans 90 days or more past due. There were no troubled debt
restructured loans as of December 31, 1995. The aggregate amount of loans by the
Bank to its directors and executive officers, including loans to related persons
and entities, was $898,817 at December 31, 1996 and $12,391 at December 31,
1995. All loan transactions entered into between the Bank and such related
parties were made on the same terms and conditions as transactions with all
other parties. In management's opinion, such loans are consistent with sound
banking practices and are within applicable regulatory lending limitations.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and Equipment are summarized as follows:
<TABLE>
<CAPTION>
Estimated December 31,
useful lives 1996 1995
----------------- ---------- ------------
<S> <C> <C> <C>
Furniture and Fixtures 5-7 Years $ 128,474 $ 82,403
Leasehold improvements 5-20 Years 60,493 47,994
---------- ----------
188,967 130,397
Accumulated depreciation (43,546) (7,361)
---------- ----------
Premises and Equipment, net $ 145,421 $123,036
========== ==========
</TABLE>
Depreciation and amortization charged to operations amounted to $36,185 during
1996 and $7,361 for the period from March 14, 1995 (inception) to December 31,
1995.
F-11
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LEASE COMMITMENTS
The Bank and the Company have entered into non-cancelable operating lease
agreements for their primary facilities. Both the Bank and Company are
responsible for pro-rata operating expense escalation's. The approximate minimum
annual rental payments at December 31, 1996 under these leases are summarized as
follows:
Year ending December 31,
---------------------------
1997 $ 112,000
1998 91,000
1999 43,000
2000 14,000
2001 -
----------
$ 260,000
==========
Rent expense for the year ended December 31, 1996, and the period ended
December 31, 1995, amounted to $91,000 and $24,393, respectively.
NOTE 7 - FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of their customers and to
reduce their own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
Such financial instruments are recorded in the financial statements when they
become payable. Those instruments involve, to varying degrees, elements of
credit and interest rate risks in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments. The Bank's exposure to credit loss in the event of
non-performance by the other party to the financial instrument for commitments
to extend credit is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments.
On December 31 1996, the Bank had the following off-balance-sheet financial
instruments whose contract amount represent credit risk:
Commitments to extend credit $332,070
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition set forth in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis.
F-12
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
Weighted 1996 1995
Interest ---- ----
Rate
1996 Amount Percent Amount Percent
---------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Demand $ 58,659 0.21% $ 4,186 0.02%
NOW Accounts 1.67% 891,640 3.19% 401,664 1.93%
Passbook 2.51% 2,029,694 7.26% 2,591,172 12.46%
Certificates of deposit 5.83% 24,993,154 89.35% 17,801,887 85.59%
------------ ------- ------------ ------
$ 27,973,147 100.00% $ 20,798,909 100.00%
============ ======= ============ =======
</TABLE>
The following table summarizes the maturity composition of
certificates of deposit at December 31, 1996, compared to
December 31, 1995:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1996 % 1995 %
------------- ------ ------------ ------
<S> <C> <C> <C> <C>
Within one year $13,968,430 55.9% $ 8,252,026 46.4%
Over one year through two years 4,199,501 16.8% 5,004,994 28.1%
Over two years through three years 4,289,518 17.2% 681,694 3.8%
Over three years through five years 1,322,451 5.3% 3,863,173 21.7%
Over five years through ten years 1,213,254 4.9% 0.0%
------------- ------ ------------ ------
$24,993,154 100.0% $17,801,887 100.0%
============= ====== ============ ======
</TABLE>
The following table summarizes the maturity composition of certificates of
deposit with balances of $100,000 or more at December 31, 1996, compared to
December 31, 1995:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1996 % 1995 %
------------- ------ ------------ ------
<S> <C> <C> <C> <C>
Within one year $ 1,495,338 59.5% $ 817,543 46.1%
Over one year through two years 179,392 7.1% 429,267 24.2%
Over two years through three years 606,814 24.2% - 0.0%
Over three years through five years 102,759 4.1% 401,405 22.6%
Over five years through ten years 126,776 5.0% 126,776 7.1%
------------- ------ ------------ ------
$ 2,511,079 100.0% $ 1,774,990 100.0%
============= ====== ============ ======
</TABLE>
The aggregate amount of deposits with a minimum denomination of $100,000 was
approximately $1,811,079 at December 31, 1996 and $1,775,000 at December 31,
1995. Depositors have their accounts insured up to applicable limits ($100,000
per depositor) as defined by the Federal Deposit Insurance Corporation.
F-13
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEPOSITS - (Continued)
Interest expense on deposits for the years ended December 31 is summarized as
follows:
December 31,
--------------------------
1996 1995
---------- --------
NOW Accounts $ 11,916 $ 801
Passbook 60,533 5,365
Certificates of deposit 1,110,003 84,359
---------- --------
$1,182,452 $90,525
========== ========
NOTE 9 - BORROWED FUNDS
FHLB Advances
At December 31, 1996, the Bank had $5,000,000 in Federal Home Loan Bank advances
outstanding. Of that total, $3,500,000 was in a fixed rate advance that carried
an interest rate of 5.80%. The balance of $1,500,000 was in a variable rate
advance that carried an average rate of 5.69 %. Both of these advances will
mature during 1997. There were no outstanding Federal Home Loan Bank advances at
December 31, 1995.
At December 31, 1996, collateral consisting primarily of qualifying first
mortgage loans and investment securities totaling approximately $18.7 million
is pledged to the Federal Home Loan Bank of Pittsburgh to secure advances
outstanding. Also, the Bank may borrow up to an aggregate of $16.7 million from
the Federal Home Loan Bank.
Lines of Credit
The Bank has a $2,000,000 revolving line of credit with the FHLB of Pittsburgh
which bears interest at 25 basis points above the Federal Funds rate. The line
is subject to renewal at six-month intervals, occurring next on June 30, 1997.
There were no borrowings under this facility as of or during December 31, 1996
or for the period from March 14, 1995 (inception) through December 31, 1995.
During October, 1996 the Company entered into a one year $350,000 revolving line
of credit with a financial institution. Interest on the revolving line is
charged at prime plus one percent and carried a finance charge of $3,500. Total
interest paid during the year ended December 31, 1996 amounted to $2,658. The
finance charge is being amortized over the term of the credit facility . $50,000
was due and outstanding as of December 31, 1996.
NOTE 10 - DUE TO AFFILIATED COMPANY
During the period from March 14, 1995 (inception), through December 31, 1995,
the Company incurred operating expenses and purchased assets (primarily
furniture, fixtures, computers and equipment). These purchases and expenses
totaled $206,622, the payment for which was made by an affiliated company of
which the Company's President and CEO was a principal officer. At December 31,
1995, $56,087 was due this affiliate and is included in accrued expenses and
other liabilities on the consolidated balance sheet. During 1996, the Company
paid the remaining balance and there are no amounts outstanding as of December
31, 1996.
F-14
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for the
years ended December 31:
1996 1995
---------- ----------
Other noninterest income:
Service charges an fees $ 2,452 $ 1,596
Loan late charges 42,777 -
Other 41,940 -
--------- ---------
$ 87,169 $ 1,596
========= =========
Other noninterest expense:
Data processing $ 80,271 $ 4,165
Professional fees 60,909 39,682
Advertising 21,995 1,836
Insurance 66,971 14,671
Office 71,226 23,612
Travel & Entertainment 74,103 5,423
Depreciation and Amortization 46,555 11,327
Other 124,113 1,860
--------- ---------
$ 546,143 $ 102,576
========== ==========
NOTE 12 - STOCK OPTION PLAN
The Company has a Stock Option Plan (the Plan) for the benefit of key officers
and employees of the Company and the Bank. The Plan was designed to attract and
retain qualified personnel in key positions, provide officers and key employees
with a proprietary interest in the Company as an incentive to contribute to the
success of the Company, and reward key employees for outstanding performance and
the attainment of targeted goals. The Plan was also designed to retain qualified
directors for the Company, and will provide for the grant of non-qualified stock
options and incentive stock options intended to comply with the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended. Initial options to
acquire shares of Common stock that have been awarded to officers and key
employees of the Company and the Bank and directors of the Company with an
exercise price equal to $10.00 per share. The Plan is administered and
interpreted by a Committee of the Board of Directors, and unless sooner
terminated, will be in effect for a period of ten years from the Effective Date.
A total of 300,000 shares has been reserved for issuance under the Plan. An
aggregate of 188,500 shares have been granted to the Bank's executive officers,
non-employee directors, and other key employees as of December 31, 1996 at an
exercise price of $10.00, subject to vesting and other provisions of the Plan.
Such options were not dilutive at December 31, 1996. During the period ended
December 31, 1996, no options were exercised or expired.
F-15
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCK OPTION PLAN - (Continued)
The Company has fixed stock option plans accounted for under APB Opinion No. 25
and related interpretations. The plans allow the Company to grant options to
employees and directors for up to 300,000 shares of common stock. The options,
which have a term of 10 years when issued, vest either immediately or over a
period specified by the Company's compensation committee. The excercise price of
each option equals the market price of the Company's on the date of the grant.
Accordingly, no compensation cost has been recognized for the plans. Had
compensation cost for the plans been determined based on the fair value of the
options at the grant dates consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below.
1996 1995
---------- ---------
Net income as reported $ 126,269 $(278,843)
Pro forma net income (208,695) (433,114)
Earnings per share as reported $ 0.21 $ (0.47)
Pro forma earnings per share (0.35) (0.73)
<TABLE>
<CAPTION>
1996 1995
--------------------------- ----------------------------
Weighted Average Weighted Average
Number of Per Share Number of Per Share
Options Exercise Price Options Exercise Price
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 176,000 $10.00 - -
Granted 12,500 $10.00 176,000 $10.00
Exercised
Forfeited
Expired
---------- --------------- --------- ---------------
Outstanding, end of year 188,500 $10.00 176,000 $10.00
Options excercisable at year-end 188,500 $10.00 176,000 $10.00
Weighted-average fair value of
options granted during the year $ 2.90 $ 4.45
</TABLE>
The fair value of options granted during 1996 is estimated using the following
weighted-average information: risk-free rate of 6.12%, expected life of 4.7
years, expected volatility of stock price of 18.5% and expected dividends of $0
per year.
At December 31, 1996, options outstanding were as follows:
Number outstanding 188,500
Range of excercise prices $10.00
Weighted-average excercise price $10.00
Weighted-average remaining option life 7.45 years
F-16
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SHAREHOLDERS'EQUITY
On November 30, 1995, the company sold 542,802 shares of its common stock at
$10.00 per share through a public offering. Cost incurred in the offering,
including underwriters' discounts, approximated $497,000 and were netted against
the gross proceeds received.
In connection with the formation of the Company, the President & CEO purchased
10,000 shares, par value $ .01, of Class B Common Stock for $500. These shares
mandatorily convert into ten percent of the then issued shares of Class A Common
Stock on January 1, 2001.
Unearned compensation of $542,802 was recorded at the close of the offering on
November 30, 1995, based on the offering price of the $10.00 per share. As a
result of the mandatory conversion provision, the Class B Common Stock was
deemed converted on November 30, 1995 for financial statement purposes. Unearned
compensation, which is shown as a separate component of Shareholders' Equity is
being amortized to expense over the stipulated period, five years.
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Bank has a defined contribution plan 401(k) covering eligible employees, as
defined under the plan document. Employees may contribute up to 10% of
compensation, as defined under the plan document. The Bank can make
discretionary contributions. The Bank did not make any contributions into the
plan during the period ended December 31, 1996 or from March 14, 1995
(inception) through December 31, 1995.
NOTE 15 - REGULATORY MATTERS
State banking statutes restrict the amount of dividends paid on capital stock.
Accordingly, no dividends shall be paid by the Bank on its capital stock unless,
following the payment of such dividends, the capital stock of the Bank will be
unimpaired, and (1) the Bank will have a 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.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory- and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory- and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital ( as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
F-17
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - REGULATORY MATTERS - (Continued)
As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank 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
institutions category.
The Bank and the Company's actual capital amounts and ratios are presented in
the following table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
For the Bank: Actual: Adequacy Purposes: Action Provisions:
- -------------- ----------------------- --------------------- ----------------------
As of December 31, 1996: Amount Ratio Amount Ratio Amount Ratio
------- ------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 4,657 25.6% $ 1,458 8.0% 1,822 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 4,475 24.6% $ 729 4.0% 1,093 6.0%
Tier I Capital
(Average Assets) $ 4,475 12.9% $ 1,387 4.0% 1,734 5.0%
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) $ 4,457 40.1% $ 888 8.0% 1,110 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 4,517 17.1% $ 444 4.0% 666 6.0%
Tier I Capital
(Average Assets) $ 4,517 14.9% $ 1,210 4.0% 1,513 5.0%
</TABLE>
F-18
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - INCOME TAXES
The Company did not record an income tax provision for the period March 14, 1995
(inception) through December 31, 1995 because of its net operating loss and the
absence of any taxes paid in the carryback period.
Income tax expense from current operations is composed of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
Federal
<S> <C> <C>
Current $ 23,155 $ -
Deferred - -
Benefit applied to reduce goodwill 30,042
--------- ----------
53,197 -
State
Current - -
Deferred
Benefit applied to reduce goodwill 14,798 -
--------- ----------
14,798 -
--------- ----------
Income tax expense $ 67,995 $ -
========= ==========
</TABLE>
A reconciliation of income tax expense computed at the
statutory federal corporation income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Income taxes at statutory rate $ 66,050 $(94,807)
Adjustments resulting from: - -
Nondeductible expenses 40,251 340
Limitations on net operating loss carryover - 94,467
Net operating loss carryover utilized (76,708) -
Increase in valuation allowance 36,418 -
State taxes 9,767 -
Low rate bracket income (7,783) -
--------- --------
Actual income tax expense $ 67,995 $ -
========= ========
</TABLE>
F-19
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - INCOME TAXES - (Continued)
Deferred taxes are included in the accompanying financial statements at December
31, 1996 and 1995 for the effects of differences between the financial statement
and federal income tax bases of assets and liabilities under the provisions of
enacted tax laws. Deferred tax assets and liabilities at December 31, 1996 and
1995 were comprised as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $ 48,657 $ 20,097
Deferred loan fees 11,244 13,142
Deferred compensation 23,525 20,189
Charitable contribution 1,391 -
Unrealized loss on securities available-for-sale 1,116 -
Net operating loss carryforwards 21,701 152,918
----------- -----------
107,634 206,346
Valuation Allowance (103,850) (190,966)
----------- -----------
3,784 15,380
----------- -----------
Deferred tax liabilities:
Fixed assets 3,784 6,800
Unrealized gains on securities available-for-sale - 8,580
----------- -----------
3,784 15,380
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
</TABLE>
At December 31, 1996, the Company had a federal net operating loss carryover of
$63,827 which will expire in 2007. During 1996, the Company realized a tax
benefit related to the net operating loss carryovers from the acquisition of the
Bank. The deferred tax asset associated with those loss carryovers is fully
offset by a valuation allowance. Accordingly, the realized tax benefit is
reflected as a reduction of the goodwill associated with the acquisition and a
corresponding reduction of deferred income tax benefit for the year.
F-20
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 prescribes that the
Company disclose the estimated fair value of its financial instruments. The
following table shows those values and the related carrying amounts at
December 31, 1996. Items which are not financial instruments are not
included.
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash and interest-earning deposits in financial institutions $ 4,214,186 $ 4,214,186
Securities held-to-maturity 10,227,119 10,230,574
Securities available-for-sale 6,097,627 6,097,627
Federal Home Loan Bank Stock 250,000 250,000
Loans receivable, net 16,529,483 16,827,739
Demand and savings deposits 2,979,993 2,979,993
Certificates of deposit 24,993,154 25,050,624
Advances from the Federal Home Loan Bank 5,000,000 5,000,000
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of December 31, 1996. The estimated fair value for cash
and interest-earning deposits in financial institutions is considered to
approximate cost. The estimated fair value for securities is based on quoted
market values for the individual securities or equivalent securities. The
estimated fair value for loans is based on estimates of the rate the Company
would charge for similar such loans at December 31, 1996, applied for the time
period until estimated repayment. The estimated fair value for demand and
savings deposits is based on their carrying value. The estimated fair value for
certificates of deposit and advances from the Federal Home Loan Bank are based
on estimates of the rate the Company would pay on such deposits or for such
advances at December 31, 1996, applied for the time period until maturity. The
estimated fair value of other financial instruments and off-balance sheet loan
commitments approximate cost and are not considered significant for this
presentation.
While these estimates of fair value are based on Managements judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at December, 31, 1996, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
1996, should not necessarily be considered to apply at subsequent dates.
F-21
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for USABancShares, Inc. (parent company only)
follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and Due from banks $ 13,047 $ 459,843
Securities available-for-sale 126,500
Investment in Bank 4,624,230 4,024,745
Premises and Equipment, net - 63,616
Other assets 218,580 250,193
------------ ------------
Total assets $ 4,982,357 $ 4,798,397
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities 87,510 139,555
Stockholders' Equity
Preferred Stock $ - $ -
Common Stock 597,082 597,082
Additional paid-in-capital 4,877,701 4,877,701
Accumulated deficit (152,574) (278,843)
Unearned compensation, Class B stock (425,195) (533,755)
Stock subscription receivable - (20,000)
Unrealized gain (loss) on securities available for sale (2,167) 16,657
------------ ------------
Total stockholders'equity $ 4,894,847 $ 4,658,842
Total liabilities and stockholders'equity $ 4,982,357 $ 4,798,397
============ ============
</TABLE>
F-22
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - (Continued)
CONDENSED STATEMENT OF OPERATIONS
Condensed financial information for USABancShares, Inc. (parent company only)
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Income:
Other income $ 30,719 $ -
----------- -----------
Total income 30,719 -
----------- -----------
Expenses:
Compensation 108,560 106,500
Occupancy - 25,469
Professional fees (28,728) 20,746
Insurance - 13,670
Office (4,252) 22,722
Travel & Entertainment - 5,025
Depreciation and Amortization 29,208 9,545
Interest Expense 2,658 5,967
Loss on sale of investment securities 6,000 -
Other 2,023 954
----------- -----------
Total expenses 115,469 210,598
----------- -----------
Loss before income taxes and equity in
undistributed income (loss) of subsidiary (84,750) (210,598)
Provision for income taxes (75,299) -
----------- -----------
Loss before equity in undistributed earnings of subsidiary (9,451) (210,598)
Equity in undistributed income (loss) of subsidiary 135,720 (68,245)
----------- -----------
Net income (loss) $126,269 $ (278,843)
=========== ==========
</TABLE>
F-23
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - (Continued)
CONDENSED STATEMENT OF CASH FLOWS
Condensed financial information for USABancShares, Inc. (parent company only)
follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net Income $ 126,269 $ (278,843)
Adjustments to reconcile net income to cash provided
by operating activities
Depreciation and amortization 29,208 9,545
Amortization of Class B stock 108,560 -
Equity in undistributed (income) loss of subsidiary (135,720) 68,245
Loss on sale of investments available for sale 6,000 -
Decrease (increase) in other assets 31,613 (274,158)
Increase (decrease) in capital contributions due bank (409,251) 409,251
Increase (decrease) in other liabilities (45,958) 85,771
------------- -------------
Net cash provided by (used in) operating activities (289,279) 19,811
------------- -------------
Cash flows from investing activities
Purchase of investment securities available-for-sale (201,375) -
Proceeds from sale of investment securities available-for-sale 33,750 -
Capital contributions made to bank (393,056) (2,736,645)
Payment to purchase common stock of subsidiary - (1,339,688)
Purchases of premises and equipment - (69,196)
------------- -------------
Net cash provided by (used in) investing activities (560,681) (4,145,529)
------------- -------------
Cash flows from financing activities
Net proceeds from common stock issued 409,251 4,534,230
Net increase (decrease) in other borrowed funds (6,087) 51,331
------------- -------------
Net cash provided by financing activities 403,164 4,585,561
------------- -------------
Net increase (decrease) in cash and cash equivalents (446,796) 459,843
Cash and cash equivalents, beginning of year 459,843 -
------------- -------------
Cash and cash equivalents, end of year $ 13,047 $ 459,843
============= ==============
</TABLE>
F-24
<PAGE>
USABancShares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SUBSEQUENT EVENT
On February 19, 1997, the Board of Directors of the Company approved the
acquisition, by the Company, of the Knox Financial Services Group, Inc.
("Knox"), a registered securities broker/dealer. The Company will acquire all of
the outstanding shares of common stock of Knox for a purchase price (the
"Purchase Price") of $75,000. The Company will pay the Purchase Price by
delivering to the sellers 7,500 restricted shares of the Company's common stock.
In the event that the cash portion of the assets of Knox (a) exceeds $40,000,
the difference between the excess amount and $40,000 will be paid to the sellers
in cash and (b) is less than $40,000, the number of shares will be reduced
proportionally. Following the acquisition, the Company will change the name of
Knox to USACapital, Inc. ("USACapital"). USACapital will continue Knox's retail
brokerage business under the direction of its current principals. USACapital
will not engage in underwriting activities. On February 24, 1997, the Company
applied to the Federal Reserve Bank of Philadelphia for the approval for the
acquisition of Knox.
F-25
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 198,154
<INT-BEARING-DEPOSITS> 4,016,032
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,097,627
<INVESTMENTS-CARRYING> 10,227,119
<INVESTMENTS-MARKET> 10,230,574
<LOANS> 16,711,562
<ALLOWANCE> 182,079
<TOTAL-ASSETS> 38,145,499
<DEPOSITS> 27,973,147
<SHORT-TERM> 5,050,000
<LIABILITIES-OTHER> 227,505
<LONG-TERM> 0
0
0
<COMMON> 597,082
<OTHER-SE> 4,297,765
<TOTAL-LIABILITIES-AND-EQUITY> 38,145,499
<INTEREST-LOAN> 1,923,831
<INTEREST-INVEST> 806,615
<INTEREST-OTHER> 211,698
<INTEREST-TOTAL> 2,942,144
<INTEREST-DEPOSIT> 1,182,452
<INTEREST-EXPENSE> 1,225,116
<INTEREST-INCOME-NET> 1,717,028
<LOAN-LOSSES> 125,000
<SECURITIES-GAINS> 16,063
<EXPENSE-OTHER> 1,500,996
<INCOME-PRETAX> 194,264
<INCOME-PRE-EXTRAORDINARY> 194,264
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126,269
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
<YIELD-ACTUAL> 6.11
<LOANS-NON> 120,985
<LOANS-PAST> 190,879
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 60,000
<CHARGE-OFFS> 2,921
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 182,079
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 182,079
</TABLE>
