<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended September 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-27244
---------
USABANCSHARES, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2806495
- ------------------------------ ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
One Lincoln Plaza, 1535 Locust Street, Philadelphia, PA 19102
-------------------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(215) 569-4200
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Transitional Small Business Format: YES [ ] NO [X ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, $1.00 par value, outstanding on November 13, 1998: 2,105,441
shares Class B Common Stock, $.01 par value, outstanding on November 13, 1998:
10,000 shares
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Changes in Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Change in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
2
<PAGE>
USABancShares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
September December 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,107,250 $ 833,176
Interest-bearing deposits with banks 7,681,760 3,975,261
------------- -------------
Cash and cash equivalents 8,789,010 4,808,437
Securities available-for-sale 25,469,075 9,034,725
Securities held-to-maturity (fair value: 1998 - $16,857,236;
1997 - $15,643,630) 16,640,110 15,418,904
FHLB Stock 3,522,800 900,000
Loans receivable, net 88,598,565 56,002,164
Premises and equipment, net 1,856,109 1,152,789
Goodwill, net 70,703 79,648
Other assets 6,045,460 1,929,309
------------- -------------
Total assets $ 150,991,832 $ 89,325,976
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 98,563,661 $ 70,473,521
Borrowed funds 32,854,368 9,340,000
Collateralized borrowings 4,198,808 3,297,942
Accrued expenses and other liabilities 2,023,166 848,730
------------- -------------
Total liabilities 137,640,003 83,960,193
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;
1,997,204 shares issued and outstanding and 108,237 shares of
converted and unissued Class B common stock 2,105,441 813,807
Additional paid-in capital 10,634,308 4,827,866
Accumulated earnings (deficit) 798,614 (378,182)
Accumulated other comprehensive (loss) income - unrealized
appreciation (depreciation) on securities available-for-sale (186,534) 102,292
------------- -------------
Total stockholders' equity 13,351,829 5,365,783
------------- -------------
Total liabilities and stockholders' equity
$ 150,991,832 $ 89,325,976
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
USABancShares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Loans $6,520,236 $1,880,149 $2,396,346 $ 673,628
Investment securities 2,083,851 1,179,790 845,656 483,361
Interest-bearing deposits and other 266,672 121,882 96,694 69,384
---------- ---------- ---------- ----------
Total interest income 8,870,759 3,181,821 3,338,696 1,226,373
Interest expense:
Deposits 3,784,196 1,388,487 1,462,919 556,343
Borrowed funds 774,618 183,928 391,405 49,208
---------- ---------- ---------- ----------
Total interest expense 4,558,814 1,572,415 1,854,324 605,551
Net interest income 4,311,945 1,609,406 1,484,372 620,822
Provision for loan losses 310,000 75,000 150,000 50,000
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 4,001,945 1,534,406 1,334,372 570,822
Non-interest income:
Gain on sales of investment securities 126,518 45,162 77,994 9,123
Brokerage operations 610,297 -- 289,808 --
Other 93,612 234,199 32,752 141,940
---------- ---------- ---------- ----------
Total non-interest income 830,427 279,361 400,554 151,063
Non-interest expense:
Compensation and benefits 1,226,492 616,713 625,498 200,813
Occupancy 268,340 134,626 82,768 51,350
Other 1,413,488 571,274 561,843 228,165
---------- ---------- ---------- ----------
Total non-interest expense 2,908,320 1,322,613 1,270,109 480,328
---------- ---------- ---------- ----------
Earnings before income taxes 1,924,052 491,154 464,817 241,557
Taxes on income 747,256 203,301 195,500 113,697
---------- ---------- ---------- ----------
Net earnings $1,176,796 $ 287,853 $ 269,317 $ 127,860
========== ========== ========== ==========
Earnings per share - basic $ 0.60 $ 0.27 $ 0.13 $ 0.12
========== ========== ========== ==========
Earnings per share - diluted $ 0.60 $ 0.27 $ 0.12 $ 0.12
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
USABancShares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net earnings $ 1,176,796 $ 287,853
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period,
net of taxes (288,826) 80,746
----------- -----------
Comprehensive income $ 887,970 $ 368,599
=========== ===========
Three Months Ended
September 30,
-----------------------------------------
1998 1997
----------- -----------
Net earnings $ 269,317 $ 127,860
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period,
net of taxes (30,244) 68,838
----------- -----------
Comprehensive income $ 239,073 $ 196,698
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
USABancShares, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the nine months ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Net
Additional Accumulated unrealized
Common paid-in earnings gain (loss) on
Stock capital (deficit) AFS securities Total
------------ ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1997 813,807 $ 4,827,866 $ (378,182) $ 102,292 $ 5,365,783
Issuance of common stock, net of offering
expenses of $363,579 769,231 6,367,190 -- -- 7,136,421
Net unrealized loss on
securities available-for-sale -- -- -- (103,465) (103,465)
Net income -- -- 412,575 -- 412,575
------------ ------------ ------------ ------------ ------------
Balances, March 31, 1998 1,583,038 $ 11,195,056 $ 34,393 $ (1,173) $ 12,811,314
============ ============ ============ ============ ============
Offering expenses related to February 13,
1998 private placement -- (38,345) -- -- (38,345)
Net unrealized loss on
securities available-for-sale -- -- -- (155,117) (155,117)
Net income -- -- 494,904 -- 494,904
------------ ------------ ------------ ------------ ------------
Balances, June 30, 1998 1,583,038 $ 11,156,711 $ 529,297 $ (156,290) $ 13,112,756
============ ============ ============ ============ ============
Effect of 33% Common Stock Dividend 522,403 (522,403) -- -- --
Net unrealized loss on
securities available-for-sale -- -- -- (30,244) (30,244)
Net income -- -- 269,317 -- 269,317
------------ ------------ ------------ ------------ ------------
Balances, September 30, 1998 2,105,441 $ 10,634,308 $ 798,614 $ (186,534) $ 13,351,829
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
6
<PAGE>
USABancShares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,176,796 $ 287,853
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation and amortization 155,884 40,351
Net accretion of discounts on purchased loan portfolios (871,524) (340,229)
Provision for loan losses 310,000 75,000
Net amortization of investment securities premiums/discounts 44,798 30,902
Amortization of Class B common stock -- 81,420
Net gains on sale of investment securities (137,761) (45,162)
Increase in other assets (4,116,151) (1,563,972)
Increase in other liabilities 1,174,436 220,969
------------ ------------
Net cash used in operating activities (2,263,522) (1,212,868)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of investment securities available-for-sale 4,497,844 2,963,248
Proceeds from sale of investment securities held-to-maturity 450,000 1,001,250
Proceeds from maturity or calls of investment securities available-for-sale 1,250,000 2,875,000
Proceeds from maturity or calls of investment securities held-to-maturity 4,468,790 1,450,000
Purchase of investment securities available-for-sale (22,359,110) (9,060,852)
Purchase of investment securities held-to-maturity (6,469,380) (9,130,922)
Repayments of principal on investment securities held-to-maturity 310,437 444,581
Repayments of principal on investment securities available-for-sale -- 93,041
Purchase of FHLB Stock (2,622,800) (350,000)
Cash of acquired entity -- 44,810
Net increase in loans (32,034,887) (17,029,648)
Decrease in goodwill 8,945 45,823
Purchases of premises and equipment (859,204) (83,004)
------------ ------------
Net cash used in investing activities (53,359,365) (26,736,673)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 28,090,140 18,222,153
Net increase in other borrowed funds 23,514,368 7,155,000
Proceeds from private placement 7,098,076 --
Increase in collateralized borrowings 900,876 --
------------ ------------
Net cash provided by financing activities 59,603,460 25,377,153
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,980,573 (2,572,388)
Cash and cash equivalents, beginning of period 4,808,437 4,214,186
------------ ------------
Cash and cash equivalents, end of period $ 8,789,010 $ 1,641,798
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
7
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements as of September 30, 1998, and
for the three and nine month periods ended September 30, 1998 and 1997 include
the accounts of USABancShares, Inc. (the "Company") and its wholly-owned
subsidiaries BankPhiladelphia (the "Bank") and USACapital, Inc. ("USACapital").
All significant intercompany accounts and transactions have been eliminated.
The interim financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments including normal recurring accruals necessary for
fair presentation of results of operations for the interim periods included
herein have been made. The results of operations for the three and nine month
periods ended September 30, 1998, are not necessarily indicative of results to
be anticipated for the full year.
2. PRIVATE PLACEMENT
On February 13, 1998, the Company issued 769,231 shares of its Class A common
stock in conjunction with a private placement offering (the "Offering"). Total
cash received was $7,136,421, net of related Offering costs of $363,579. In
connection with the Offering, the Company granted, to the placement agent,
warrants convertible for a period of five years into 3.25% of the Company's
common stock. The number of warrants will be adjusted for stock splits, stock
dividends, and the issuance of additional shares so as to maintain the
underwriter's ownership of the fully diluted common stock at 3.25% for a period
of three years from the close of the offering. In addition, in connection with
the offering, the Company and the President and CEO have entered into an
agreement by which the Company has an option to pay $150,000 per year for each
of the three years beginning in 1998 in exchange for the President agreeing to
waive any future exercise of the non-dilutive feature of the Class B common
stock. If the Company does not make the optional payment on January 2nd of each
year, the President will be entitled to implement the anti-dilutive feature for
10% of any Class A common stock issued during the year of non-payment. The
Company exercised its option for 1998 upon the close of the offering.
3. COMPUTATION OF PER SHARE EARNINGS
Basic earnings per share amounts are computed by dividing net earnings by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share amounts are computed by dividing net earnings by the weighted
average number of shares and all dilutive potential shares outstanding during
the period. As discussed in note 2 above, the Company completed a private
placement on February 13, 1998 issuing 769,231 shares of its Class A common
stock. The average number of shares and dilutive potential shares have been
restated to reflect the issuance of these shares.
8
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
3. COMPUTATION OF PER SHARE EARNINGS - (Continued)
The following information was used in the computation of earnings per share on
both a basic and diluted basis for the nine and three month periods ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Basic EPS Computation:
Numerator - Net earnings $1,176,796 $ 287,853
Denominator - Weighted average shares outstanding 1,948,261 1,065,027
---------- ----------
Basic EPS $ 0.60 $ 0.27
========== ==========
Diluted EPS Computation:
Numerator - Net earnings $1,176,796 $ 287,853
Denominator - Weighted average shares outstanding 1,948,261 1,065,027
Effect of dilutive securities 5,693 --
---------- ----------
Diluted EPS $ 0.60 $ 0.27
========== ==========
Three Months Ended
September 30,
---------------------------
1998 1997
---------- ----------
Basic EPS Computation:
Numerator - Net earnings $ 269,317 $ 127,860
Denominator - Weighted average shares outstanding 2,105,441 1,070,142
---------- ----------
Basic EPS $ 0.13 $ 0.12
========== ==========
Diluted EPS Computation:
Numerator - Net earnings $ 269,317 $ 127,860
Denominator - Weighted average shares outstanding 2,105,441 1,070,142
Effect of dilutive securities 159,826 --
---------- ----------
Diluted EPS $ 0.12 $ 0.12
========== ==========
</TABLE>
9
<PAGE>
USABancShares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
4. NEW PRONOUNCEMENTS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 129, "Disclosure Information about Capital Structure". SFAS
No.129 summarizes previously issued disclosure guidance contained within APB
Opinion No. 10 and No. 15, as well as SFAS No. 47. The Company's current
disclosures were not affected by the adoption of SFAS No. 129.
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards to provide prominent disclosure of
comprehensive income items. Comprehensive income is the change in equity of a
business enterprise during a period from transactions and other circumstances
from non-owner sources. Prior period amounts have been restated to conform to
the provisions of SFAS No. 130. The adoption of SFAS No. 130 did not have a
material impact on the Company's financial position or results of operations.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires that
public business enterprises report certain information about operating segments
in a complete set of financial statements of the enterprise and in condensed
financial statements of interim periods issued to stockholders. It also requires
the reporting of certain information about their products and services, the
geographic area in which they operate, and their major customers. The adoption
of SFAS No. 131 did not have an impact on the Company's financial position or
results of operations.
The American Institute of Certified Public Accountants (AICPA) executive
committee has issued Statement of Position (SOP) 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. The SOP was issued
to provide authoritative guidance on the subject of accounting for the cost
associated with the purchase or development of computer software. The statement
is effective for fiscal years beginning after December 15, 1998 for costs
incurred in those fiscal years for all projects, including projects in progress
when the SOP is adopted. The adoption of SOP 98-1 is not expected to have a
material impact on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) Issued Statement
of Financial Accounting Standards (SFAS) No. 133 ,"Accounting for Derivative
Instruments and Hedging Activity." SFAS No.133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative (gains and
losses) depends on the intended use of the derivative and resulting designation.
SFAS No.133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Earlier application is permitted only as of the beginning of any
fiscal quarter. The Company is currently reviewing the provisions of SFAS
No.133.
10
<PAGE>
USABancShares, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1998
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-QSB contains forward-looking
information. The forward-looking information contained herein is subject to
certain risk and uncertainties that could cause actual results to differ
materially from those projected. For example, risk and uncertainties can arise
with changes in: general economic conditions, including their impact on capital
expenditures; business conditions in the financial services industry; the
regulatory environment; rapidly changing technology and evolving banking
industry standards; competitive factors, including increased competition with
community, regional, and national financial institutions, new services and
products offered by competitors; and price pressures. Readers are cautioned not
to place undue reliance on the forward-looking information included within,
which reflects management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly revise or update this forward-looking
information to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the risk factors described in other documents
the Company files from time to time with the Securities and Exchange Commission.
YEAR 2000 ("Y2K") COMPLIANCE
Changing from the year 1999 to 2000 has the potential to cause problems in data
processing and other date-sensitive systems. The Year 2000 date change can
affect any system that uses computer software programs or computer chips,
including automated equipment and machinery. The Company has conducted a
comprehensive review of its computer systems to identify the systems that could
be affected by the "Year 2000" problem. The Year 2000 problem is the result of
computer programs using two digits rather than four to define the year. Any of
the Company's programs that are time sensitive may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. Management anticipates that the enhancements
necessary to prepare its mission critical systems for the year 2000 will be
completed in early 1999.
Regarding the Company, computer systems are used to perform financial
calculations, track deposits and loan payments, transfer funds and make direct
deposits. The primary processing of the Company's loan and deposit transactions
is performed by Intrieve Incorporated, a third-party data processing vendor.
Computer software and computer chips also are used to run security systems,
communications networks and other essential bank equipment. Because of its
reliance on these systems (including those used by its third-party data
processing vendor), the Company is following a comprehensive process to assure
that such systems are ready for the Year 2000 date change. To become Y2K
compliant the Company is following guidelines suggested by federal bank
regulatory agencies. A description of each of the steps and the status of the
Company's efforts in completing the steps is as follows:
o The Company has formed a Year 2000 committee that has investigated the
problem and its potential impact on the Company's systems.
o An independent consulting firm has been engaged to assist the Company
in development of its approach to becoming Y2K compliant. This phase
also includes education of the Company's employees and customers about
Y2K issues. The awareness and understanding phase of this step has been
completed.
11
<PAGE>
o The bank has identified all potentially affected systems. This step has
included a review of all-major information technology and
non-information technology systems to determine how Y2K issues affect
them. An inventory has been prepared of all vendors who render services
to the Company.
o The Company has completed its assessment of which systems and equipment
are most prone to placing the Company at risk if they are not Y2K
compliant.
o A Y2K project team has developed an inventory of its vendors, an
inventory of actions to be taken identification of the team members
responsible for completion of each action, a completion timetable and a
project tracking methodology. Significant vendors have been requested
to advise the Company in writing of their Y2K readiness, including
actions to become compliant if they are not already compliant. A plan
has been developed to repair or replace systems and equipment not
currently Y2K compliant. This step is substantially complete. Responses
from certain vendors have not yet been received.
o The Company's third party data processing servicer as well as vendors
who provide significant technology-related services has modified their
systems to become Y2K compliant. The Company has developed scripts
involving typical transactions to test the proper functioning of the
modified systems. It has also arranged for repair or replacement of
equipment programs affected by Y2K issues. Most of the testing and
corrections has taken place. This step is expected to be completed by
the end of 1998. The monitoring of certain vendors will continue into
1999.
o The Bank is preparing a bank wide contingency plan for how the Company
would resume business if unanticipated problems arise from
non-performance by vendors. Such plans are expected to be completed in
the first quarter of 1999.
The Company's efforts to become Y2K compliant are being monitored by its federal
banking regulators. Failure to be Y2K compliant could subject the Company to
formal supervisory or enforcement actions. The company plans to expense
$20,000.00 for the year ending December 31, 1998, and expects to incur
additional costs through 1998 and 1999 to become Y2K compliant. It does not
expect such costs to be material to the operating expenses of the Company. Some
of the costs are not expected to be incremental to the Company, but rather
represent new equipment and software that would otherwise be purchased in the
normal course of the Company's business. The Company presently believes the Y2K
issue will not pose significant operating problems for the Company. However, if
implementation and testing plans are not completed in a satisfactory and timely
manner by third parties on which the Company is dependent, or other unforeseen
problems arise, the Y2K issue could potentially have an adverse effect on the
operations of the Company.
NET INCOME
The Company reported net earnings of $1.2 million, or $.60 per share, diluted,
for the nine months ended September 30, 1998, compared to $287,853, or $.27 per
share for the nine months ended September 30, 1997. The increase in net income
was primarily the result of an increase in net interest income of $2.7 million,
and an increase in non-interest income of $551,066. This was partially offset by
an increase in the provision for loan losses of $235,000, an increase in
non-interest expense of $1.6 million, and an increase in income tax expense of
$543,955.
12
<PAGE>
The Company reported net earnings of $269,317, or $.13 per share, diluted, for
the three months ended September 30, 1998, compared to $127,860, or $.12 per
share, diluted, for the three months ended September 30, 1997. The increase in
net income was primarily the result of an increase in net interest income of
$863,550, and an increase in non-interest income of $249,491. This was partially
offset by an increase in the provision for loan losses of $100,000, an increase
in non-interest expense of $789,781, and an increase in income tax expense of
$81,803.
INTEREST INCOME
Interest income increased 178.8% or $5.7 million to $8.9 million, for the nine
months ended September 30, 1998, compared to the same period in 1997. The
increase in interest income was the result of an increase in interest income on
loans, investment securities, and interest-bearing deposits of $4.6 million,
$904,061, and $144,790, 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 loan pools purchased by the Bank since
1995. The discount associated with such discounted loan pools is recognized as a
yield adjustment and is 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). Any changes from these estimates could
result in either an increase or decrease in accretion income. During the nine
months ended September 30, 1998, the Bank recognized $871,524 in accretion
income associated with these discounted loan pools.
Interest income increased 172.2% or $2.1 million to $3.3 million, for the three
months ended September 30, 1998, compared to the same period in 1997. The
increase in interest income was the result of an increase in interest income on
loans, investment securities, and interest-bearing deposits of $1.7 million,
$362,295, and $27,310, 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 loan pools purchased by the Bank since
1995. The discount associated with such discounted loan pools is recognized as a
yield adjustment and is 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). Any changes from these estimates could
result in either an increase or decrease in accretion income. During the three
months ended September 30, 1998, the Bank recognized $416,122 in accretion
income associated with these discounted loan pools.
INTEREST EXPENSE
Interest expense increased 189.9% or $3.0 million to $4.6 million, for the nine
months ended September 30, 1998, compared to the same period in 1997, due to
higher volumes of new certificates of deposit, money market accounts, and FHLB
Advances. The average cost of funds, including other borrowings, increased 0.10%
to 5.58% for the nine months ended September 30, 1998 compared to the same
period in 1997. Interest expense increased 206.2% or $1.2 million to $1.8
million, for the three months ended September 30, 1998, compared to the same
period in 1997, due to higher volumes of new certificates of deposit, Money
market accounts, and FHLB Advances.
13
<PAGE>
NET INTEREST INCOME
The Company's profitability, like that of many financial institutions, is
dependent to a large extent upon net interest income. Net interest income is the
difference between interest income (principally from loans and investment
securities) and interest expense (principally on customer deposits and
borrowings). Changes in net interest income result from changes in the mix of
rates and volumes of interest-earning assets and interest-bearing liabilities
that occur over time. Volume refers to the average dollar level of
interest-earning assets and interest bearing liabilities. Net interest spread
refers to the differences between the average yield on interest-earning assets
and the average cost of interest-bearing liabilities. Net interest margin refers
to net interest income divided by average interest-earning assets.
Net interest income for the nine months ended September 30, 1998, increased $2.7
million, or 167.9%, to $4.3 million from $1.6 million for the same period in
1997. Average interest-earning assets increased by $71.1million, or 166.6%, to
$113.7 million, for the nine months ended September 30, 1998 compared to the
same period in 1997. Average interest-bearing liabilities increased $70.7
million or 184.6% over the same period. The average net interest margin
increased from 5.03% to 5.06%, during the period, due to the average rate on
interest-earning assets increasing at a faster rate than the average rate on
interest-bearing liabilities. Net interest income for the three months ended
September 30, 1998, increased $863,550, or 139.1%, to $1.5 million from $620,822
for the same period in 1997.
14
<PAGE>
ANALYSIS OF NET INTEREST INCOME
The following table presents information regarding yields on interest-earning
assets, expense on interest-bearing liabilities, and net yields on
interest-earning assets for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------------------------------
1998 1997
------------------------------------------ --------------------------------------
Average Average Average Average
Assets: Balance (1) Interest Rate Balance (1) Interest Rate
----------- -------- ---- ----------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans $ 72,300,365 $ 6,520,236 12.02% $ 19,896,501 $ 1,880,149 12.60%
Investment securities 35,565,744 2,083,851 7.81% 19,661,783 1,179,790 8.00%
Interest-bearing deposits and other 5,828,511 266,672 6.10% 3,079,363 121,882 5.28%
------------ ------------ ----- ------------ ------------ -----
Total earning assets $113,694,620 $ 8,870,759 10.40% $ 42,637,647 $ 3,181,821 9.95%
Liabilities:
Deposits:
Passbook $ 1,704,812 $ 33,302 2.60% $ 1,938,644 $ 35,643 2.45%
NOW accounts 1,043,412 17,901 2.29% 2,103,059 37,403 2.37%
Money Market accounts 2,517,020 33,772 1.79% -- -- 0.00%
Certificates of deposit 84,595,494 3,699,221 5.83% 30,475,981 1,315,441 5.76%
Other borrowings 19,097,184 774,618 5.41% 3,770,000 183,928 6.50%
------------ ------------ ----- ------------ ------------ -----
Total interest-bearing liabilities $108,957,922 $ 4,558,814 5.58% $ 38,287,684 $ 1,572,415 5.48%
Excess of interest earning assets over ------------ ------------
interest-bearing liabilities $ 4,736,697 $ 4,349,963
============ ------------ ============ ------------
Net interest income $ 4,311,945 $ 1,609,406
============ ============
Effective interest differential (spread) 4.82% 4.47%
----- -----
Net yield on average interest earning assets 5.06% 5.03%
===== =====
</TABLE>
(1) Average balances are calculated on a quarterly basis.
15
<PAGE>
RATE VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between changes (a) related to
outstanding balances and (b) due to the changes in interest rates. Information
is provided in each category with respect to: (i) changes attributable to
changes in volume (changes in volume multiplied by prior rate); (ii) changes
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) the net change in rate/volume (change in rate multiplied by change in
volume). The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 vs September 30, 1997
----------------------------------------------------------
Increase or Decrease
Due to Change in
---------------------------------- Total
Average Average Increase
Rate/Volume Analysis Volume Rate (Decrease)
- ------------------------------------------ ------------ ---------- ---------------
<S> <C> <C> <C>
Variance in interest income on:
Interest-earning assets:
Loans $ 4,721,930 $ (81,843) $ 4,640,087
Investment securities 931,164 (27,103) 904,061
Interest-bearing deposits and other 123,258 21,532 144,790
----------- --------- -----------
Total interest-earning assets $ 5,776,352 $ (87,414) $ 5,688,938
Interest-bearing deposits:
Deposits:
Passbook $ (4,856) $ 2,515 $ (2,341)
NOW accounts (18,223) (1,279) (19,502)
Money Market accounts 33,772 - 33,772
Certificates of deposit 2,366,333 17,447 2,383,780
Other borrowings 616,245 (25,554) 590,691
----------- --------- -----------
Total interest-bearing liabilities $ 2,993,270 $ (6,871) $ 2,986,400
----------- --------- -----------
Change in net interest income $ 2,783,082 $ (80,543) $ 2,702,539
=========== ========= ===========
</TABLE>
16
<PAGE>
PROVISION FOR LOAN LOSSES
Management records the provision for loan losses in amounts that result in an
allowance for loan losses sufficient to cover all potential net charge-offs and
risks believed to be inherent in the loan portfolio. Management's evaluation
includes such factors as past loan loss experience as related to current loan
portfolio mix, evaluation of actual and potential losses in the loan portfolio,
prevailing regional and national economic conditions that might have an impact
on the portfolio, regular reviews and examinations of the loan portfolio
conducted by bank regulatory authorities, and other factors that management
believes deserve current recognition. As a result of management's evaluation of
these factors, the provision for loan losses increased $310,000 during the nine
months ended September 30, 1998. The allowance for loan losses as a percentage
of loans and leases outstanding was .93% at September 30, 1998, compared to
1.01% at December 31, 1997 and .74% at September 30, 1997. Management believes
that the allowance for loan losses, which is a general reserve, is adequate to
cover actual and potential losses in the loan portfolio under current
conditions. Management is not aware of any significant risks in the current loan
portfolio due to concentrations of loans within any particular industry, nor of
any separate types of loans within a particular category of non-performing loans
that are unusually significant with respect to possible loan losses when
compared to the entire loan portfolio. During the three months ended September
30, 1998 provision for loan losses increased $100,000 compared to the same
period in 1997.
NON-INTEREST INCOME
Non-interest income increased $551,066 to $830,427, for the nine months ended
September 30, 1998, compared to the same period in 1997. The increase was
primarily the result of commission income of $610,297 generated by the Company's
brokerage subsidiary, USACapital, and an increase in the gain on sales of
investment securities of $81,356. This was partially offset by a decrease in
other non-interest income of $140,587.
Non-interest income increased $249,491 to $400,554, for the three months ended
September 30, 1998, compared to the same period in 1997. The increase was
primarily the result of commission income of $289,808 generated by the Company's
brokerage subsidiary, USACapital, and an increase in the gain on sales of
investment securities of $68,871. This was partially offset by a decrease in
other non-interest income of $109,188.
NON-INTEREST EXPENSE
Non-interest expense increased 119.9%, or $1.6 million to $2.9 million, for the
nine months ended September 30, 1998, compared to the same period in 1997.
Compensation and benefits expense increased $609,779 due to the hiring of
additional personnel. Occupancy expense increased $133,714 due to the costs
associated with the opening of the Bank's headquarters branch in Center City,
Philadelphia. Other expenses increased $842,214 as a result of the Bank's
increased promotional efforts to attract new customers.
Non-interest expense increased 164.4%, or $789,781 to $1.3 million, for the
three months ended September 30, 1998, compared to the same period in 1997.
Compensation and benefits expense increased $424,685 due to the hiring of
additional personnel. Occupancy expense increased 31,418 due to costs associated
with the opening of the Bank's headquarters branch in Center City, Philadelphia.
Other expenses increased $333,678 as a result of the Bank's increased
promotional efforts to attract new customers.
INCOME TAX EXPENSE
Income tax expense increased $543,955 to $747,256, for the nine months ended
September 30, 1998, compared to the same period in 1997. Income tax expense
increased $81,803 to $195,500, for the three months ended September 30, 1998,
compared to the same period in 1997.
17
<PAGE>
LOAN PORTFOLIO
Loans receivable, (net of the allowance for loan losses, unearned fees and
origination costs and loans in process) were $88.6 million at September 30, 1998
compared to $56.0 million at December 31, 1997. Loans receivable represented
58.7% of total assets and 89.8% of total deposits as of September 30, 1998
compared to 62.7% and 79.5%, respectively, at December 31, 1997. The following
table summarizes the loan portfolio of the Bank by loan category and amount at
September 30, 1998, compared to December 31, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, December 31,
---------------------------- -----------------------------
1998 % 1997 %
------ ----- ------ -----
<S> <C> <C> <C> <C>
Real estate $84,961 95.9% $54,262 96.9%
Commercial and industrial 832 0.9% 1,091 1.9%
Other 3,878 4.4% 1,694 3.0%
------- ----- ------- -----
Total loans 89,671 101.2% 57,047 101.9%
Less:
Loans in process -- 0.0% 260 0.5%
Unearned income 238 0.3% 217 0.4%
Allowance for loan losses 835 0.9% 568 1.0%
------- ----- ------- -----
Net loans $88,598 100.0% $56,002 100.0%
======= ===== ======= =====
</TABLE>
On September 30, 1998, the net book value of nonaccrual loans was approximately
$2.0 million compared to $286,987 at December 31, 1997. These amounts
represented nonaccrual balances on discounted commercial and residential real
estate loans acquired by the Bank and not on balances originated directly by the
Bank. There were no troubled debt restructured loans as of September 30, 1998.
The Bank will recognize income on nonaccrual loans, on a 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.
The following table summarizes the changes in the Bank's allowance for loan
losses for the period ended September 30, 1998, compared to December 31, 1997:
1998 1997
-------- --------
Balance at beginning of year
Provision for loan losses $567,940 $182,079
Loans losses 310,000 415,000
$(43,263) $(29,139)
-------- --------
Balance at September 30, 1998 $834,677 $567,940
======== ========
18
<PAGE>
INVESTMENT PORTFOLIO
The following table presents the book values and estimated market values at
September 30, 1998, and December 31, 1997, respectively, for each major category
of the Bank's investment securities:
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Available-for-Sale
Equity and other securities 25,769,936 - 300,861 25,469,075
------------ --------- --------- ------------
Total available-for-sale $ 25,769,936 $ - $ 300,861 $ 25,469,075
============ ========= ========= ============
Held-to-Maturity
U.S. Government agency securities $ 1,203,659 $ 3,841 $ 1,207,500
Mortgage-backed securities 6,052,993 42,795 - 6,095,788
Municipal securities 3,164,933 91,499 - 3,256,432
Equity and other securities 6,218,525 78,991 - 6,297,516
------------ --------- --------- ------------
Total held-to-maturity $ 16,640,110 $ 217,126 $ - $ 16,857,236
============ ========= ========= ============
December 31, 1997
---------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ----------------- ----------------
Available-for-Sale
U.S. Government agency securities $ 1,243,139 $ 15,824 $ - $ 1,258,963
Equity and other securities 7,636,598 150,461 11,297 7,775,762
------------ --------- --------- ------------
Total available-for-sale $ 8,879,737 $ 166,285 $ 11,297 $ 9,034,725
============ ========= ========= ============
Held-to-Maturity
U.S. Government agency securities $ 3,557,087 $ - $ 10,202 $ 3,546,885
Mortgage-backed securities 6,306,384 50,074 - 6,356,458
Municipal securities 3,162,576 100,831 - 3,263,407
Equity and other securities 2,392,857 84,023 - 2,476,880
------------ --------- --------- ------------
Total held-to-maturity $ 15,418,904 $ 234,928 $ 10,202 $ 15,643,630
============ ========= ========= ============
</TABLE>
19
<PAGE>
LIQUIDITY
The Company's primary sources of funds are customer deposits, maturities of
investment securities, sales of "Available for Sale" securities, loan sales,
loan repayments, net income, advances from the FHLB, and the use of Federal
Funds markets. Scheduled loan repayments are relatively stable sources of funds
while deposit inflows and unscheduled loan prepayments may fluctuate. Deposit
inflows and unscheduled loan prepayments are influenced by general interest rate
levels, interest rates available on other investments, competition, economic
conditions, and other factors. Deposits are the Company's primary source of new
funds. Total deposits increased 39.9% to $98.6 million at September 30, 1998,
compared to $70.5 million as of December 31, 1997. The Bank has made a concerted
effort to attract deposits in the market area served by the Bank through
competitive pricing of its retail deposit products. Increases over the period
were due to marketing efforts, and new business development programs initiated
by the Company. Management anticipates that the Company will continue relying on
customer deposits, maturity of investment securities, sales of "Available for
Sale" securities, loan sales, loan repayments, net income, Federal Funds
markets, and FHLB borrowings to provide liquidity. Although deposit balances
have shown historical growth, such balances may be influenced by changes in the
banking industry in general, interest rates available on other investments,
general economic conditions, competition and other factors.
The following table summarizes the composition of the Bank's deposit portfolio.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------------- ---------------------------
Amount Percent Amount Percent
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Demand $ 1,432,987 1.45% $ 257,325 0.37%
NOW Accounts 1,126,903 1.14% 688,177 0.98%
Money Market Accounts 2,159,421 2.19% 4,801,606 6.81%
Passbook 1,743,975 1.77% 2,018,768 2.86%
Certificates of deposit 92,100,375 93.45% 62,707,645 88.97%
----------- ------ ----------- ------
$98,563,661 100.00% $70,473,521 100.00%
=========== ====== =========== ======
</TABLE>
The following table summarizes the maturity composition of certificates of
deposit at September 30, 1998, compared to December 31, 1997:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------------- ---------------------------
1998 % 1997 %
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Within one year $37,814,454 41.05% $26,499,563 42.26%
Over one year through two years 20,968,120 22.77% 21,383,648 34.10%
Over two years through three years 18,623,767 20.22% 8,414,801 13.42%
Over three years through five years 13,628,986 14.80% 4,733,566 7.55%
Over five years 1,065,048 1.16% 1,676,067 2.67%
----------- ------ ----------- -------
$92,100,375 100.00% $62,707,645 100.00%
=========== ====== =========== ======
</TABLE>
20
<PAGE>
Borrowed funds increased $23.5 million to $32.8 million at September 30, 1998,
compared to $9.3 million as of December 31, 1997. This increase was primarily
the result of the utilization of FHLB advances to fund earning-asset growth
during the period. Borrowings may be used on a short-term basis to compensate
for reductions in other sources of funds. Borrowings may also be used on a
long-term basis to support expanded lending activities and to match maturities
or repricing intervals of assets. The sources of such funds will be Federal
Funds purchased and borrowings from the FHLB.
CAPITAL RESOURCES
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 September 30, 1998, that the
Bank meets all capital adequacy requirements to which it is subject.
At September 30, 1998, the Bank's actual and required minimum capital ratios
were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
To Be Well
Capitalized Under
For Capital Prompt Corrective
For the Bank: Actual: Adequacy Purposes: Action Provisons:
- ------------- ---------------------- ------------------- -----------------
As of September 30, 1998: Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $13,230 11.5% $9,210 8.0% 11,512 10.0%
Tier I Capital
(to Risk Weighted Assets) $12,395 10.8% $4,605 4.0% 6,907 6.0%
Leverage $12,395 8.6% $5,775 4.0% 7,219 5.0%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $ 5,315 7.9% $5,400 8.0% 6,750 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 4,747 7.0% $2,700 4.0% 4,050 6.0%
Leverage $ 4,747 5.4% $3,548 4.0% 4,435 5.0%
</TABLE>
21
<PAGE>
At September 30, 1998, the Company's actual and required minimum capital ratios
were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) For Capital
For the Company: Actual: Adequacy Purposes:
- ---------------- ---------------------- ----------------------
As of September 30, 1998: Amount Ratio Amount Ratio
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 14,117 11.6% $ 9,747 8.0%
Tier I Capital
(to Risk Weighted Assets) $ 13,282 10.9% $ 4,873 4.0%
Leverage $ 13,282 8.8% $ 6,040 4.0%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $ 5,752 8.5% $ 5,431 8.0%
Tier I Capital
(to Risk Weighted Assets) $ 5,184 7.6% $ 2,715 4.0%
Leverage $ 5,184 5.8% $ 3,570 4.0%
</TABLE>
RECENT EVENTS
As previously reported in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and in the Company's Current Report on Form 8-K
dated July 28, 1998, the Company's Board of Directors declared a 33% stock
dividend on July 23, 1998 payable to stockholders of record as of August 3,
1998. The dividend was paid on August 17, 1998.
22
<PAGE>
PART II
Item 1. Legal Proceedings
Neither the Corporation nor the Bank was engaged in any legal
proceeding of a material nature at September 30, 1998. From
time to time, the Company is party to legal proceedings in the
ordinary course of business wherein it enforces its security
interest in loans.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Notice Relating to Shareholder Proposals under Rule 14a-4
A shareholder of the Company may wish to have a proposal
presented at the 1999 Annual Meeting of Shareholders, but not
have such proposal included in the Company's proxy statement
and form of proxy relating to that meeting. If notice of any
such proposal is not received by the Company at the address
appearing on the first page of this Report by May 26, 1999
then such proposal shall be deemed "untimely" for purposes of
Rule 14a-4(c) promulgated under the Exchange Act and,
Therefore, the Company will have the right to exercise
discretionary voting authority with respect to such proposal.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
Page No. in Sequential
Exhibit No. Numbering System
----------- ----------------
3. Articles and Bylaws *
27. Financial Data Schedule
(B) On July 28, 1998 the Company filed an 8-K reporting the
declaration of a 33% stock dividend, by the Company's Board
of Directors, payable August 17, 1998 to stockholders of
record as of August 3, 1998.
- -------------------------------
* Incorporated by reference from the Registration Statement on Form SB-2 of
the Company, as amended, Registration No. 00027244
23
<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, hereunto duly authorized, in the City of Philadelphia, Commonwealth
of Pennsylvania.
USABANCSHARES, INC.
Date: February 2, 1999 By:/s/ Kenneth L. Tepper
-------------------------------
Kenneth L. Tepper,
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 2, 1999 By:/s/ Brian M. Hartline
---------------------------------
Brian M. Hartline,
Chief Financial Officer
24
