<PAGE>1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 1994
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number 0-11204
USBANCORP, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
25-1424278
(I.R.S. Employer Identification No.)
Main & Franklin Streets, P.O. Box 430, Johnstown, Pennsylvania 15907-0430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 533-5300
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. X Yes No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 29, 1994
Common Stock, par value $2.50 per share 4,743,037
<PAGE>2
USBANCORP, INC.
INDEX
Page No.
Part I. Financial Information:
Consolidated Balance Sheet - March 31, 1994,
December 31, 1993, and March 31, 1993 3
Consolidated Statement of Income - Three Months
Ended March 31, 1994, and 1993 4
Consolidated Statement of Changes in Stockholders' Equity
Three Months Ended March 31, 1994, and 1993 5
Consolidated Statement of Cash Flows - Three
Months Ended March 31, 1994, and 1993 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 15
Part II. Other Information 28
<PAGE>3
<TABLE>
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<CAPTION>
March 31 December 31 March 31
1994 1993 1993
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 40,741 $ 38,606 $ 30,520
Interest bearing deposits with banks 342 4,809 5,167
Federal funds sold and securities
purchased under agreements to resell 4,000 7,000 3,000
Investment Securities:
Available for sale (market value
$432,315 on December 31, 1993,
$393,321 on March 31, 1993) 370,315 428,712 387,786
Held to maturity (market value $52,148
on March 31, 1994) 53,576 - -
Assets held in trust for collateralized
mortgage obligation 12,409 13,815 17,332
Fixed-rate mortgage loans held for sale 7,780 1,054 2,769
Loans 734,244 732,026 681,268
Less: Unearned income 4,982 5,894 9,257
Allowance for loan losses 15,553 15,260 13,791
Net loans 713,709 710,872 658,220
Premises and equipment 16,771 16,960 15,481
Accrued income receivable 9,238 8,892 9,730
Other assets 16,572 10,801 15,396
TOTAL ASSETS $1,245,453 $1,241,521 $1,145,401
LIABILITIES
Non-interest bearing deposits $ 129,167 $ 137,411 $ 107,131
Interest bearing deposits 911,521 911,455 857,060
Total deposits 1,040,688 1,048,866 964,191
Federal funds purchased and securities
sold under agreements to repurchase 24,194 12,648 8,402
Other short-term borrowings 10,898 270 469
Advances from Federal Home Loan Bank 26,271 31,285 21,326
Collateralized mortgage obligation 11,365 12,674 15,573
Long-term debt 3,105 3,445 8,949
Other liabilities 14,008 15,718 14,369
TOTAL LIABILITIES 1,130,529 1,124,906 1,033,279
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000
shares authorized; There were no shares
issued and outstanding on March 31, 1994,
and December 31, 1993; 240,102 shares
issued and outstanding on March 31, 1993 - - 6,003
Common stock, par value $2.50 per share;
6,000,000 shares authorized; 4,738,064
shares issued and outstanding on March 31,
1994; 4,726,181 shares issued and
outstanding on December 31, 1993;
4,491,963 shares issued and outstanding
on March 31, 1993 11,845 11,815 11,229
Surplus 70,955 70,720 66,200
Retained earnings 36,076 34,080 28,690
Net unrealized holding gains (losses) on
available for sale securities due to
adoption of SFAS #115 (3,952) - -
TOTAL STOCKHOLDERS' EQUITY 114,924 116,615 112,122
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,245,453 $1,241,521 $1,145,401
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>4
<TABLE>
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
<CAPTION>
Three Months Ended
March 31
1994 1993
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans and loans held for sale:
Taxable $14,680 $14,352
Tax exempt 375 259
Deposits with banks 11 30
Federal funds sold and securities purchased
under agreements to resell 20 132
Investment securities:
Taxable - available for sale 5,182 5,156
Tax exempt - held to maturity 526 405
Assets held in trust for collateralized
mortgage obligation 272 340
Total Interest Income 21,066 20,674
INTEREST EXPENSE
Deposits 7,343 7,904
Federal funds purchased and securities sold
under agreements to repurchase 113 58
Other short-term borrowings 9 4
Advances from Federal Home Loan Bank 352 222
Collateralized mortgage obligation 287 405
Long-term debt 61 180
Total Interest Expense 8,165 8,773
NET INTEREST INCOME 12,901 11,901
Provision for loan losses 405 600
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,496 11,301
NON-INTEREST INCOME
Trust fees 718 733
Net realized gains on investment securities
available for sale 271 252
Net realized gains on loans held for sale 93 -
Wholesale cash processing fees 318 305
Service charges on deposit accounts 592 596
Other income 664 579
Total Non-Interest Income 2,656 2,465
NON-INTEREST EXPENSE
Salaries and employee benefits 5,343 4,863
Net occupancy expense 988 817
Equipment expense 803 588
Professional fees 448 489
Supplies, postage, and freight 547 513
Miscellaneous taxes and insurance 296 288
FDIC deposit insurance expense 587 512
Other expense 1,628 1,755
Total Non-Interest Expense 10,640 9,825
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 4,512 3,941
Provision for income taxes 1,473 1,405
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 3,039 2,536
Cumulative effect of change in accounting
principle -- adoption of SFAS #109 - 1,452
NET INCOME $ 3,039 $3,988
PER COMMON SHARE DATA:
Primary:
Net income $ 0.64 $ 1.06
Average shares outstanding 4,740,461 3,654,442
Fully Diluted:
Income before SFAS #109 benefit $ 0.64 $ 0.61
Net income 0.64 0.96
Average shares outstanding 4,740,461 4,175,391
Cash Dividends Declared $ 0.22 $ 0.20
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>5
<TABLE>
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Unaudited
<CAPTION>
Net
Unrealized
Holding
Preferred Common Retained Gains
Stock Stock Surplus Earnings (Losses) Total
<S> <C> <C> <C> <C> <C>
Balance December 31, 1992 $13,800 $ 7,456 $36,022 $25,693 $ - $ 82,971
Net income - - - 3,988 - 3,988
Dividend reinvestment and
stock purchase plan - 12 119 - - 131
Preferred stock converted
to common stock (7,797) 886 6,911 - - -
Secondary common stock
issuance of 1,150,000
shares net of issuance costs - 2,875 23,148 - - 26,023
Cash dividends declared:
Preferred stock dividends
paid on conversion - - - (103) - (103)
Common stock ($0.20 per
share on 4,436,257 shares) - - - (888) - (888)
Balance March 31, 1993 $ 6,003 $11,229 $66,200 $28,690 $ - $112,122
Balance December 31, 1993 $ - $11,815 $70,720 $34,080 $ - $116,615
Net income - - - 3,039 - 3,039
Dividend reinvestment and
stock purchase plan - 30 235 - - 265
Net unrealized holding
gains (losses) on available
for sale securities - - - - (3,952) (3,952)
Cash dividends declared:
Common stock ($0.22 per
share on 4,737,321 shares) - - - (1,043) - (1,043)
Balance March 31, 1994 $ - $11,845 $70,955 $36,076 $(3,952) $114,924
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>6
<TABLE>
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
<CAPTION>
Three Months Ended
March 31
1994 1993
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,039 $ 3,988
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 405 600
Depreciation and amortization expense 763 638
Net amortization of investment securities 574 145
Net realized gains on investment securities (271) (252)
Net gains on loans (93) -
Increase in accrued income receivable (346) (367)
Increase (decrease) in accrued expense payable (1,966) 149
Net cash provided by operating activities 2,105 4,901
INVESTING ACTIVITIES
Purchases of investment securities available for
sale and other short-term investments (76,232) (83,419)
Proceeds from maturities of investment
securities available for sale and other
short-term investments 36,689 38,819
Proceeds from sales of investment securities
available for sale and other short-term
investments 37,981 23,809
Long-term loans originated (88,305) (78,491)
Fixed-rate mortgage loans held for sale (7,780) (2,769)
Principal collected on long-term loans 79,187 53,358
Loans sold or participated 6,021 75
Net decrease in credit card receivables
and other short-term loans 1,002 1,401
Purchases of premises and equipment (337) (801)
Net decrease in assets held in trust for
collateralized mortgage obligation 1,406 1,250
Net increase in other assets (3,879) (3,277)
Net cash used by investing activities (14,247) (50,045)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit 84,279 85,456
Payments for maturing certificates of deposit (92,343) (92,660)
Net decrease in demand and savings deposits (114) (26,196)
Net increase (decrease) in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings 22,174 (2,295)
Net principal borrowings (repayments) of advances
from Federal Home Loan Bank and long-term debt (6,663) 8,553
Preferred stock cash dividends paid - (378)
Common stock cash dividends paid (1,039) (595)
Proceeds from dividend reinvestment and stock
purchase plan 265 131
Secondary common stock offering (net of expenses) - 26,023
Net increase in other liabilities 251 3,370
Net cash provided by financing activities 6,810 1,409
NET DECREASE IN CASH EQUIVALENTS (5,332) (43,735)
CASH EQUIVALENTS AT JANUARY 1 50,415 82,422
CASH EQUIVALENTS AT MARCH 31 $ 45,083 $ 38,687
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The consolidated financial statements include the accounts of USBANCORP,
Inc. (the "Company") and its wholly-owned subsidiaries, United States National
Bank in Johnstown ("U.S. Bank"), Three Rivers Bank and Trust Company ("Three
Rivers Bank"), Community Bancorp, Inc. ("Community"), USBANCORP Trust Company
("Trust Company"), and United Bancorp Life Insurance Company ("UBLIC"). In
addition, the Parent Company is an administrative group that provides support in
such areas as audit, finance, investments, loan review, general services, loan
policy, and marketing. Intercompany accounts and transactions have been
eliminated in preparing the consolidated financial statements.
2. Basis of Presentation
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. In the opinion of management, all adjustments that are of a normal
recurring nature and are considered necessary for a fair presentation have been
included. They are not, however, necessarily indicative of the results of
consolidated operations for a full year.
With respect to the unaudited consolidated financial information of the
Company for the three month periods ended March 31, 1994, and 1993, Arthur
Andersen & Co., independent public accountants, conducted reviews (based upon
procedures established by the American Institute of Certified Public
Accountants) and not audits, as set forth in their separate report dated
April 25, 1994, appearing herein. This report does not express an opinion on
the interim unaudited consolidated financial information. Arthur Andersen &
Co. has not carried out any significant or additional audit tests beyond those
which would have been necessary if its report had not been included. The
December 31, 1993, numbers are derived from audited financial statements.
For further information, refer to the consolidated financial statements and
accompanying notes included in the Company's "Annual Report and Form 10-K" for
the year ended December 31, 1993.
3. Earnings Per Common Share
Primary earnings per share amounts are computed by dividing net income,
after deducting preferred stock dividend requirements, by the weighted average
number of Common Stock and Common Stock equivalent shares outstanding. Fully
diluted earnings per share amounts are calculated assuming that the Series A
$2.125 Cumulative Convertible Non-Voting Preferred Stock was converted at the
beginning of the year into 1.136 shares of the Company's Common Stock and that
no preferred dividends were paid. By April 7, 1993, all Preferred Stock was
either redeemed or converted to the Company's Common Stock.
4. Consolidated Statement of Cash Flows
On a consolidated basis, cash equivalents include cash and due from banks,
interest bearing deposits with banks, and federal funds sold, and securities
purchased under agreements to resell. The Company made $500,000 in federal
income tax payments in the first three months of 1994 as compared to $890,000
for the same 1993 interim period. Total interest expense paid amounted to
$8,183,000 in 1994's first three months compared to $8,624,000 in the same 1993
period.
<PAGE>8
5. Investment Securities
In the first quarter of 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") #115, "Accounting for Certain Investments in Debt
and Equity Securities." This statement addresses the accounting and reporting
for investments in equity securities that have readily determinable fair values
and for all investments in debt securities. This adoption requires that the
investment securities available for sale be carried at market value while
investment securities held to maturity are carried at amortized cost. Under
SFAS #115, securities are classified as available for sale or held to maturity
at the date of purchase. Currently, the Company has classified tax-free
municipal securities as held to maturity with the remainder of the securities
portfolio classified as available for sale. The book and market values of
investment securities are summarized as follows (in thousands):
Investment securities available for sale:
March 31, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 22,269 $ 65 $ (176) $ 22,158
U.S. Agency 90,742 170 (1,898) 89,014
State and municipal
taxable 2,121 28 (71) 2,078
Mortgage-backed
securities * 222,590 775 (4,977) 218,388
Other securities ** 38,671 430 (424) 38,677
Total $376,393 $1,468 $(7,546) $370,315
* Approximately 96% of these obligations represent U.S.
Agency issued securities.
** Other investment securities include corporate notes
and bonds, asset-backed securities, and
equity securities.
Investment securities held to maturity:
March 31, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
State and municipal
tax free securities $53,576 $291 $(1,719) $52,148
<PAGE>9
Prior to the first quarter of 1994 adoption of SFAS #115, the entire
investment security portfolio, as described in the table below, was classified
as "available for sale." The investment security portfolio was carried at the
lower of aggregate amortized cost or market value; any necessary valuation
adjustments were recorded in the Consolidated Statement of Income as a "Net
unrealized gain or loss on investment securities available for sale" (in
thousands).
December 31, 1993
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 13,333 $ 186 $ (16) $ 13,503
U.S. Agency 72,648 890 (116) 73,422
State and municipal 44,547 1,129 (90) 45,586
Mortgage-backed
securities * 251,631 2,379 (1,402) 252,608
Other securities ** 46,553 680 (37) 47,196
Total $428,712 $5,264 $(1,661) $432,315
* Approximately 95% of these obligations represent U.S.
Agency issued securities.
** Other investment securities include corporate notes and
bonds, asset-backed securities, and
equity securities.
March 31, 1993
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 13,805 $ 282 $ - $ 14,087
U.S. Agency 51,180 1,220 (1,195) 51,205
State and municipal 37,226 733 (12) 37,947
Mortgage-backed
securities * 226,754 4,153 (195) 230,712
Other securities ** 58,821 791 (242) 59,370
Total $387,786 $7,179 $(1,644) $393,321
* Approximately 93% of these obligations represent U.S.
Agency issued securities.
** Other investment securities include corporate notes and
bonds, asset-backed securities, and
equity securities.
All purchased investment securities are recorded on settlement date which is not
materially different from the trade date. Realized gains and losses are
calculated by the specific identification method and are included in "Net
realized gain or loss on investment securities available for sale."
Maintaining investment quality is a primary objective of the Company's
investment policy which, subject to certain limited exceptions, prohibits the
purchase of any investment security below a Moody's Investors Service or
Standard & Poor's rating of "A." At March 31, 1994, 91.0% of the portfolio was
rated "AAA" and 92.7% "AA" or higher as compared to 86.76% and 88.29%,
respectively, at March 31, 1993. Only 1.80% of the portfolio was rated below
"A" or unrated on March 31, 1994.
<PAGE>10
6. Fixed-Rate Mortgage Loans Held for Sale
At March 31, 1994, $7,780,000 of fixed-rate 30-year residential mortgage
loans originated during the first quarter of 1994 were classified as "held for
sale." It is management's intent to sell these residential mortgage loans
during the next several months and retain servicing rights for the remaining
lives; this strategy will be executed in an effort to help neutralize long-term
interest rate risk. The residential mortgage loans held for sale are carried at
the lower of aggregate amortized cost or market value. At March 31, 1994, the
cost of these loans approximated market value. Realized gains and losses will
be calculated by the specific identification method and will be included in "Net
realized gain or loss on loans held for sale"; unrealized net valuation
adjustments (if any) will be recorded in "Net unrealized gain or loss on loans
held for sale" on the Consolidated Statement of Income.
7. Loans
The loan portfolio of the Company consists of the following (in thousands):
March 31 December 31 March 31
1994 1993 1993
Commercial $105,055 $ 99,321 $ 81,272
Commercial loans secured
by real estate 123,615 126,044 123,718
Real estate - mortgage 345,400 338,778 315,889
Consumer 160,174 167,883 160,389
Loans 734,244 732,026 681,268
Less: Unearned income 4,982 5,894 9,257
Loans, net of unearned
income $729,262 $726,132 $672,011
Real estate construction loans were not material at these presented dates
and comprise 2.2% of total loans net of unearned income at March 31, 1994. The
Company has no credit exposure to foreign countries and borrowers or highly
leveraged transactions. Additionally, the Company has no significant industry
lending concentrations.
8. Allowance for Loan Losses and Charge-Off Procedures
As a financial institution which assumes lending and credit risks as a
principal element of its business, the Company anticipates that credit losses
will be experienced in the normal course of business. Accordingly, management
of the Company makes a quarterly determination as to an appropriate provision
from earnings necessary to maintain an allowance for loan losses that is
adequate for potential yet undetermined losses. The amount charged against
earnings is based upon several factors including, at a minimum, each of the
following:
a continuing review of delinquent, classified and non-accrual loans,
large loans, and overall portfolio quality. This continuous
review assesses the risk characteristics of both individual loans
and the total loan portfolio.
regular examinations and reviews of the loan portfolio by
representatives of the regulatory authorities.
analytical review of loan charge-off experience, delinquency rates,
and other relevant historical and peer statistical ratios.
<PAGE>11
management's judgment with respect to local and general economic
conditions and their impact on the existing loan portfolio.
When it is determined that the prospects for recovery of the principal of
a loan have significantly diminished, the loan is immediately charged against
the allowance account; subsequent recoveries, if any, are credited to the
allowance account. In addition, non-accrual and large delinquent loans are
reviewed monthly to determine potential losses. Consumer loans are considered
losses when they are 90 days past due, except loans that are insured for credit
loss.
An analysis of the changes in the allowance for loan losses follows (in
thousands, except ratios):
Three Months Ended Year Ended
March 31 December 31
1994 1993 1993
Balance at beginning of period $15,260 $13,752 $13,752
Charge-offs:
Commercial 55 118 383
Real estate - mortgage 87 363 628
Consumer 132 261 750
Total charge-offs 274 742 1,761
Recoveries:
Commercial 44 36 338
Real estate - mortgage 9 10 27
Consumer 109 135 504
Total recoveries 162 181 869
Net charge-offs 112 561 892
Provision for loan losses 405 600 2,400
Balance at end of period $15,553 $13,791 $15,260
As a percent of average loans
and average loans held for sale,
net of unearned income:
Net charge-offs (annualized) 0.06% 0.34% 0.13%
Provision for loan losses
(annualized) 0.22 0.36 0.34
Allowance as a percent of loans
and loans held for sale,
net of unearned income, at
period end 2.11 2.04 2.10
Allowance as a multiple of net
charge-offs (annualized), at
period end 34.72x 6.15x 17.11x
(For additional information, refer to the "Provision for Loan
Losses" and "Loan Quality" sections in the Management's Discussion
and Analysis of Consolidated Financial Condition and Results of
Operations on page 19 and 22, respectively.)
9. Components of Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan
losses among various categories. This allocation is based upon historical
experience and management's review of the loan portfolio. This allocation,
however, is not necessarily indicative of the specific amount or specific loan
category in which future losses may ultimately occur (in thousands, except
percentages):
<PAGE>12
<TABLE>
<CAPTION>
March 31 December 31 March 31
1994 1993 1993
Percent Percent Percent
Of Loans Of Loans Of Loans
In Each In Each In Each
Category Category Category
Amount to Loans* Amount to Loans* Amount to Loans*
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 1,696 14.1% $ 1,637 13.6% $ 1,784 11.9%
Commercial loans
secured by
real estate 3,959 16.7 4,073 17.2 4,702 18.1
Real estate -
mortgage 284 47.6 279 46.3 268 46.6
Consumer 1,330 21.6 1,636 22.9 1,711 23.4
Allocation to
general risk 8,284 - 7,635 - 5,326 -
Total $15,553 100.0% $15,260 100.0% $13,791 100.0%
* This includes loans "held for sale."
</TABLE>
At March 31, 1994, the allowance for loan losses was adequate to cover potential
yet undetermined losses within the Company's loan portfolio. The Company's
management is unable to determine in what loan category future charge-offs and
recoveries may occur. (For a complete discussion concerning the operations of
the allowance for loan losses refer to Note 8.)
10. Non-Performing Assets
Non-performing assets are comprised of (i) loans which are on a non-accrual
basis, (ii) consumer loans which are contractually past due 90 days or more as
to interest or principal payments and which are insured for credit loss, and
(iii) other real estate owned (real estate acquired through foreclosure and in-
substance foreclosures). All loans, except for loans that are insured for
credit loss, are placed on non-accrual status immediately upon becoming 90 days
past due in either principal or interest. In addition, if circumstances
warrant, the accrual of interest may be discontinued prior to 90 days. In all
cases, payments received on non-accrual loans are credited to principal until
full recovery of principal has been recognized; it is only after full recovery
of principal that any additional payments received are recognized as interest
income. Restoration of a non-accrual loan to accrual status requires the
approval of the Credit Committee and/or Board Discount/Loan Committee with final
authority for the decision resting with USBANCORP's Chief Financial Officer.
The following table presents information concerning non-performing assets
(in thousands, except percentages):
March 31 December 31 March 31
1994 1993 1993
Non-accrual loans $ 4,006 $ 5,304 $ 5,296
Insured loans past due
90 days or more 262 203 212
Other real estate owned:
Foreclosed properties 770 991 2,326
In-substance foreclosures - - 478
Total non-performing assets $ 5,038 $ 6,498 $ 8,312
Total non-performing assets as
a percent of loans and loans held
for sale, net of unearned income,
and other real estate owned 0.68% 0.89% 1.23%
<PAGE>13
The Company is unaware of any additional loans which are required to either
be charged-off or added to the non-performing asset totals disclosed above.
Other real estate owned is recorded at the lower of fair value or carrying cost
based upon appraisals.
The following table sets forth, for the periods indicated, (i) the gross
interest income that would have been recorded if non-accrual loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if held for part of the period, (ii)
the amount of interest income actually recorded on such loans, and (iii) the net
reduction in interest income attributable to such loans (in thousands):
Three Months Ended
March 31
1994 1993
Interest income due in accordance
with original terms $ 163 $ 244
Interest income recorded (292) (47)
Net reduction (increase) in
interest income $(129) $ 197
11. Income Taxes
During the first quarter of 1993 the Company adopted Statement of Financial
Accounting Standards ("SFAS") #109, "Accounting for Income Taxes." SFAS #109
utilizes the liability method, and deferred taxes are determined based on the
estimated future tax effects of differences between the financial statement and
income tax bases of assets and liabilities given the provisions of the enacted
tax laws. This adoption resulted in the recognition of a non-recurring benefit
of $1,452,000 (net of a valuation allowance of $325,000) or $0.35 per share on
a fully diluted basis. Net deferred income taxes of $5,724,000 have been
provided on the differences between taxable income for financial and tax
reporting purposes.
12. Incentive Stock Option Plan
Under the Company's Incentive Stock Option Plan (the "Plan") options can
be granted (the "Grant Date") to employees with executive, managerial, technical
, or professional responsibility as selected by a committee of the board of
directors. The option price at which a stock option may be exercised shall be
a price as determined by the board committee but shall not be less than 100% of
the fair market value per share of common stock on the Grant Date. The maximum
term of any option granted under the Plan cannot exceed 10 years. The following
stock options were granted:
Shares Shares Option
Under Available Price
Option For Option Per Share
Balance at December 31, 1992 27,334 99,000
Options granted 27,500 (27,500) 22.56
Options exercised (5,000) - 17.25
Options canceled or expired - -
Balance at December 31, 1993 49,834 71,500
Options granted 25,500 (25,500) 23.88
Options exercised (2,167) - 17.25
Options exercised (4,000) - 22.56
Options canceled or expired - -
Balance at March 31, 1994 69,167 46,000
On or after the first anniversary of the Grant Date, one-third of such options
may be exercised. On or after the second anniversary of the Grant Date, two-
<PAGE>14
thirds of such options may be exercised minus the aggregate number of such
options previously exercised. On or after the third anniversary of the Grant
Date, the remainder of the options may be exercised.
13. Preferred Stock
As discussed in the Company's "1993 Annual Report and Form 10-K," the board
of directors authorized the redemption of all the Company's Series A $2.125
Cumulative Convertible Non-Voting Preferred Stock. The redemption date was
established as April 7, 1993. The Preferred Stock redemption presented
shareholders with the choice of either redeeming their shares at the redemption
price of $25.638 per share or converting their shares into 1.136 shares of the
Company's Common Stock. Shareholders of only 53,283 shares opted to redeem
their shares resulting in a redemption payout of approximately $1.4 million;
shareholders of 498,717 shares (approximately 90%) elected to convert their
shares. This conversion resulted in the issuance of 566,543 new common shares.
14. Common Stock Issuance
On February 10, 1993, USBANCORP completed the sale of 1,150,000 shares of
Common Stock at an offering price of $24.50 per share. This provided the
Company with $26 million in net proceeds after payment of related issuance
expenses. Approximately $1.4 million of the offering proceeds were used to
redeem the remaining unconverted Series A Preferred Stock on April 7, 1993. Of
the offering proceeds, $2 million was downstreamed as a capital infusion into
Three Rivers Bank on April 5, 1993, in connection with the Integra Branches
Acquisition to adequately capitalize the $88 million of deposits acquired. The
remaining offering proceeds of $22.6 million will be used by USBANCORP for
general corporate purposes including the funding of the Johnstown Savings Bank
Acquisition which will close in June 1994 and also the previously announced
stock repurchase program which will commence in July 1994.
15. Integra Branches Acquisition
On April 2, 1993, the Company's Three Rivers Bank subsidiary and Integra
National Bank/Pittsburgh completed a Purchase and Assumption Agreement (the
"Agreement") for four Integra branch offices located in the suburban Pittsburgh
market area. Pursuant to the Agreement, Three Rivers Bank assumed $88.6 million
in deposit liabilities and purchased $12.1 million of assets; these assets
consisted of: home equity and other consumer loans; vault cash; furniture,
fixtures, and equipment; real estate together with improvements; and safe
deposit box business. In addition, Three Rivers Bank assumed certain other
liabilities including contracts that relate to the operation of the branches and
real estate leases relating to one branch and one ATM. In consideration for the
assumption of the deposit liabilities, Three Rivers Bank paid Integra a deposit
premium of 1.4% or $1.2 million.
16. Johnstown Savings Bank ("JSB") Acquisition
The Company and JSB announced January 18, 1994, that they have reached
agreement on revised terms to the definitive agreement pursuant to which JSB
would merge with U.S. Bank. USBANCORP anticipates recognizing approximately six
months of earnings in 1994 from this latest acquisition; for the year ended
December 31, 1993, JSB reported net income of $3,361,000. The Company will also
recognize monthly after-tax purchase accounting net charges of approximately
$120,000. Additionally, non-recurring acquisition restructuring charges,
including such items as severance and professional fees, will be recognized in
the second quarter and are estimated to approximate $1,700,000 after tax.
Finally, the Company will issue approximately 982,000 additional common shares
to effect the merger. Each of these items will result in significant impact to
the financial performance reported by USBANCORP during the remainder of 1994.
This planned acquisition is proceeding on schedule with an anticipated closing
of the transaction late in the second quarter of 1994. (For further
information, refer to the consolidated financial statements and accompanying
notes included in the Company's "1993 Annual Report and Form 10-K.")
<PAGE>15
17. Interest Rate Swap
During the first quarter of 1994, the Company entered into an interest rate
swap agreement with a notional amount of $10 million and a termination date of
February 11, 1997. Under the terms of the swap agreement, the Company will
receive a fixed interest rate of 5% and pay a floating interest rate defined as
the 90-day USD-Libor-BBA which resets quarterly. The counterparty in this
unsecured transaction is PNC Bank which has a Standard & Poor's rating of "A+."
The swap agreement was initiated to hedge interest rate risk in a
declining, stable, or modestly rising rate environment. Specifically, this
transaction hedges the CMO liability on the Company's Balance Sheet by
effectively converting the fixed percentage cost to a variable rate cost. This
hedge also offsets market valuation risk since any change in the market value of
the swap agreement correlates in the opposite direction with a change in the
market value of the CMO liability.
The interest differential to be paid or received is accrued by the Company
on a monthly basis. Since only interest payments are exchanged, the cash
requirements and exposure to credit risk are significantly less than the
notional amount. The Company believes that its exposure to credit loss in the
event of non-performance by the counterparty is minimal. Overall, this swap
agreement favorably reduced interest expense by $22,000 in the first quarter of
1994.
The Company monitors and controls all off-balance sheet derivative products
with a comprehensive Board of Director approved hedging policy. In addition to
interest rate swaps, the policy also allows for the use of interest rate caps
and floors. The Company has not instituted the use of interest rate caps or
floors as of March 31, 1994.
18. Labor Agreement
Approximately 225 of U.S. Bank's clerical and teller personnel are
represented by the United Steelworkers of America AFL-CI0-CLC Local Union 8204
("Union"). Management successfully negotiated a one-year extension of its
current labor agreement with the Union; the new agreement expires on October 15,
1995. The Company considers its relations with all employees to be
satisfactory.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ("M. D. & A.")
.....PERFORMANCE OVERVIEW.....The Company's net income for the first quarter of
1994 totalled $3,039,000 or $0.64 per share on a fully diluted basis. This
compared favorably to net income before a cumulative effect of change in
accounting principle of $2,536,000 or $0.61 per fully diluted share reported for
the same period of 1993. The Company's first quarter 1993 net income results
also included a $1,452,000 or $0.35 per share non-recurring benefit due to the
adoption of SFAS #109; no such change in accounting principle was recognized in
the first quarter of 1994.
Before the SFAS #109 benefit, net income between periods increased by
$503,000 or 19.8% while fully diluted earnings per share increased by a lesser
amount of $0.03 or 4.9%. Similar trends were noted for two other key
<PAGE>16
performance ratios as the Company's return on assets increased by eight basis
points to 0.99% while return on equity actually decreased by 23 basis points to
10.51%. The increase in net income resulted from the accretive impact of the
purchase of four Integra Branch Offices in April 1993, growth in both net
interest income and non-interest income, and a reduced loan loss provision.
The growth of net income, however, was exceeded on a relative basis by the
growth in average equity and shares outstanding due largely to the Company's
successful February 1993 secondary Common Stock offering which resulted in the
issuance of 1,150,000 new shares of the Company's Common Stock. The full impact
of this offering was not reflected in the first quarter 1993 results as
evidenced by the 565,000 or 13.5% increase in fully diluted weighted average
common shares outstanding when compared to the first quarter of 1994.
The following table summarizes some of the Company's key performance indicators
(in thousands, except per share data and ratios):
Three Months Ended Three Months Ended
March 31, 1994 March 31, 1993
Net income $3,039 $3,988
Net income (before SFAS #109 benefit) 3,039 2,536
Fully diluted earnings per share 0.64 0.96
Fully diluted earnings per share
(before SFAS #109 benefit) 0.64 0.61
Return on average assets 0.99% 1.43%
Return on average assets (before SFAS
#109 benefit) 0.99 0.91
Return on average equity 10.51 16.88
Return on average equity (before SFAS
#109 benefit) 10.51 10.74
Average fully diluted common shares
outstanding 4,740 4,175
.....NET INTEREST INCOME AND MARGIN.....The Company's net interest income
represents the amount by which interest income on earning assets exceeds
interest paid on interest bearing liabilities. Net interest income is a primary
source of the Company's earnings; it is impacted by interest rate fluctuations,
as well as, changes in the amount and mix of earning assets and interest bearing
liabilities. It is the Company's philosophy to strive to maintain a stable net
interest margin during periods of fluctuating interest rates. The following
table compares the Company's net interest income performance for the first
quarter of 1994 to the first quarter of 1993 (in thousands, except percentages):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1994 March 31, 1993 Change %Change
<S> <C> <C> <C> <C>
Interest income $21,066 $20,674 $ 392 1.9
Interest expense 8,165 8,773 (608) (6.9)
Net interest income 12,901 11,901 1,000 8.4
Tax-equivalent
adjustment 232 173 59 34.1
Net tax-equivalent
interest income 13,133 12,074 1,059 8.8
Net interest margin 4.43% 4.53% (0.10)% *
*Not meaningful.
</TABLE>
USBANCORP's net interest income on a tax-equivalent basis increased by $1.1
million or 8.8% while the net interest margin percentage declined by 10 basis
points to 4.43%. The increased net interest income was due primarily to a
higher volume of earning assets resulting from the previously mentioned Integra
Branches Acquisition, funds provided from the secondary common stock offering,
and increased borrowings from the Federal Home Loan Bank. For the first quarter
of 1994, total average earning assets were $104 million higher than the
comparable 1993 period. Net interest income was also enhanced by approximately
$300,000 of non-accrual loan interest recoveries which caused a ten basis
point improvement in the net interest margin percentage (i.e. the core net
<PAGE>17
interest margin percentage for the first quarter of 1994 was 4.33%). The
contraction in the actual and core net interest margin between the first
quarter 1994 and the comparable 1993 period can be best explained by the
following:
Presented on this page was a graphic representation of the net interest
margin for the past five quarters. The data points presented were;
4.43% for 1/94, 4.28% for 4/93, 4.28% for 3/93, 4.38% for 2/93, and
4.53% for 1/93.
The majority of the $88 million of acquired Integra deposits were
redeployed into short duration investment securities since only $10
million of loans were acquired with the Integra Branch Offices. This
initial dependence on the investment portfolio as the primary source of
return on these acquired deposits was a major factor contributing to the
contraction in the net interest margin percentage. It is management's
intent to use this excess investment portfolio liquidity to more
profitably fund anticipated loan growth in order to improve the net
interest margin; this can be accomplished since the yield on currently
originated loans range from 150 to 300 basis points more than the average
current quarter yield of 5.40% in the investment portfolio.
The success of this strategy has been evident over the past three quarters
as the Company's net interest margin stabilized at the 4.28% level for both the
third and fourth quarters of 1993 and improved on a core basis by five basis
points to 4.33% in the first quarter of 1994. During this same period, the
Company's loan to deposit ratio improved by 440 basis points from 66.4% at June
30, 1993, to 70.8% at March 31, 1994. Furthermore, this improved core margin
performance occurred during a rise in interest rates experienced throughout the
first quarter of 1994. This favorable margin trend further solidifies the
Company's belief that the asset liquidity contained within its balance sheet
will allow for modest net interest margin improvement in a rising interest rate
environment.
Regarding the separate components of net interest income, the Company's
total interest income for the first quarter of 1994 increased by $392,000 or
1.9% when compared to the same 1993 period. This increase was due entirely to
the previously mentioned $104 million increase in total average earning assets.
This positive factor was partially offset by an unfavorable rate variance as the
Company's earning assets have repriced downward in conjunction with the national
decline in interest rates experienced during 1993. Specifically, the yield on
the loan portfolio has decreased 62 basis points to 8.30% while the yield on the
total investment securities portfolio has dropped 76 basis points to 5.40%. The
national and local market trend of accelerated customer refinancing of mortgage
loans has contributed materially to the declining yields experienced in both of
these portfolios. Also, the earning asset yield continues to be negatively
impacted by regularly scheduled maturities and prepayments of higher yielding
loans and securities purchased or originated several years ago.
Even with an additional $70 million of average interest bearing
liabilities, the Company's total interest expense still decreased by $608,000 or
6.9% in the first quarter of 1994. This decline is primarily a result of
management repricing all deposit categories downward in the declining interest
rate environment experienced during 1993. It has been management's ongoing
pricing strategy to position USBANCORP's deposit rates within the lowest
quartile of deposit rates offered by commercial banks in its market area.
Management believes that a constant level of high service quality mitigates the
impact this rate positioning strategy has on the deposit base size and funds
availability provided that the rates offered are not appreciably below
competition. Regarding the deposit mix, the Company has experienced a shift of
funds from short-term certificates of deposit into more liquid interest bearing
demand and savings accounts due to the narrowing of the rate spread between
these products and customer preference for liquidity in the current interest
rate environment.
A reduced dependence on long-term debt as a funding source favorably
impacted the liability mix. The balance in long-term debt declined on average
by $5.9 million due to the successful restructuring of several debt funding
sources in the third and fourth quarters of 1993. The Company has also used an
additional $15.0 million of borrowings from the Federal Home Loan Bank to extend
the liability maturity base and fund the initial stages of an investment
strategy designed to better leverage the Company's equity. Finally, the use
of an interest rate swap for a portion of the first quarter of 1994 permitted
<PAGE>18
the Company to reduce the cost of the CMO liability by 42 basis points to
9.85%. (See detailed discussion on Investment Rate Swap Note 17.) These price
and liability composition movements allowed USBANCORP to lower the average cost
of interest bearing liabilities by 53 basis points from 3.91% during the first
quarter of 1993 to 3.38% during the first quarter of 1994.
The table that follows provides an analysis of net interest income on a
tax-equivalent basis setting forth (i) average assets, liabilities, and
stockholders' equity, (ii) interest income earned on interest earning assets and
interest expense paid on interest bearing liabilities, (iii) average yields
earned on interest earning assets and average rates paid on interest bearing
liabilities, (iv) USBANCORP's interest rate spread (the difference between the
average yield earned on interest earning assets and the average rate paid on
interest bearing liabilities), and (v) USBANCORP's net interest margin (net
interest income as a percentage of average total interest earning assets). For
purposes of this table, loan balances include non-accrual loans and interest
income on loans includes loan fees or amortization of such fees which have been
deferred, as well as, interest recorded on non-accrual loans as cash is
received.
<PAGE>19
<TABLE>
Three Months Ended March 31 (In thousands, except percentages)
<CAPTION>
1994 1993
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans and loans held
for sale, net of
unearned income $ 735,016 $15,153 8.30% $ 668,708 $14,681 8.92%
Deposits with banks 1,573 11 2.74 5,569 30 3.14
Federal funds sold
and securities purchased
under agreement to resell 2,619 20 3.09 17,344 132 3.04
Investment securities:
Available for sale 386,193 5,182 5.37 370,659 5,664 6.16
Held to maturity 46,373 660 5.69 - - -
Total investment securities 432,566 5,842 5.40 370,659 5,664 6.16
Assets held in trust for
collateralized mortgage
obligation 12,885 272 8.56 17,961 340 7.69
Total interest earning
assets/interest income 1,184,659 21,298 7.23 1,080,241 20,847 7.82
Non-interest earning assets:
Cash and due from banks 38,543 29,088
Premises and equipment 16,910 15,241
Other assets 20,182 21,825
Allowance for loan losses (15,398) (13,801)
TOTAL ASSETS $1,244,896 $1,132,594
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 103,190 $ 376 1.48% $ 92,055 $ 507 2.23%
Savings 232,887 1,086 1.89 222,518 1,392 2.54
Other time 577,270 5,881 4.13 538,400 6,005 4.52
Total interest bearing
deposits 913,347 7,343 3.26 852,973 7,904 3.76
Short-term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase,
and other short-term
borrowings 20,039 122 2.49 14,684 62 2.10
Advances from Federal
Home Loan Bank 31,110 352 4.53 17,095 222 5.07
Collateralized mortgage
obligation 11,818 287 9.85 16,004 405 10.27
Long-term debt 3,262 61 7.65 9,171 180 7.97
Total interest bearing
liabilities/interest expense 979,576 8,165 3.38 909,927 8,773 3.91
Non-interest bearing liabilities:
Demand deposits 132,362 108,439
Other liabilities 15,673 18,432
Stockholders' equity 117,285 95,796
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $1,244,896 $1,132,594
Interest rate spread 3.85 3.91
Net interest income/net
interest margin 13,133 4.43% 12,074 4.53%
Tax-equivalent adjustment (232) (173)
Net interest income $12,901 $11,901
</TABLE>
.....PROVISION FOR LOAN LOSSES.....The Company's asset quality permitted a
$195,000 reduction in the loan loss provision to $405,000 or 0.22% of total
loans in the first quarter of 1994 compared to a provision of $600,000 or 0.36%
of total loans in the first quarter of 1993. This lower provision was possible
because of a $1.5 million reduction in non-performing assets to $5 million or
0.68% of total loans. Additionally, net charge-offs for the first quarter of
1994 totalled $112,000 or only 0.06% of total loans compared to net charge-offs
of $561,000 or 0.34% of average loans in the first quarter of 1993. At March
31, 1994, the balance in the allowance for loan losses had grown to $15.6
million or 308.7% of total non-performing assets.
Presented on this page was a graphic representation of the loan loss
provision expense. The data points presented were; $405,000 for 1/94,
$600,000 for each of the four quarters of 1993.
<PAGE>20
At March 31, 1994, management believed the allowance for loan losses was
adequate at each subsidiary bank for potential losses inherent in the portfolio
at that date. Furthermore, the allowance for loan losses at each of the
Company's banking subsidiaries was well within compliance with the Company's
policy of maintaining a general unallocated reserve of at least 20% of the
estimated reserve requirement; the Company's aggregate unallocated reserve was
114% or $8.3 million with the subsidiaries' unallocated reserves ranging from
79% to 135% of the estimated reserve requirement. (See Allowance for Loan
Losses Note 8.)
.....NON-INTEREST INCOME.....Non-interest income for the first quarter of 1994
totalled $2.7 million which represented a $191,000 or 7.7% increase over the
same 1993 period. This increase was primarily due to a $93,000 realized gain on
the sale of fixed-rate mortgage loans classified as "held for sale," an $85,000
increase in other income, and a $19,000 increase in realized gains on investment
securities available for sale.
The $93,000 gain resulted from the sale of approximately $5.5 million of
long-term fixed-rate residential mortgage loans which were originated during the
fourth quarter of 1993 and first quarter of 1994. These loans were classified
as "held for sale" in accordance with a previously disclosed strategy by the
Company to sell new 30-year fixed-rate mortgage products in an effort to help
neutralize long-term interest rate risk. Servicing rights amounting to
approximately 35 basis points on the loan balance outstanding were retained on
these sold loans in order to provide the Company with a recurrent source of fee
income. Given the Company's ongoing loan pricing strategy of offering zero
point mortgage loans at a slight premium to current market rates, management
would expect to generate modest gains from fixed-rate mortgage loan sales each
quarter. The amount of the gain may, however, vary depending upon the volume of
new fixed-rate mortgage loan activity and market conditions at the time of
sale.
The $85,000 increase in other income was due largely to a $40,000 increase
in premium income generated from increased sales of credit life and disability
insurance on new consumer loans through the Company's UBLIC subsidiary. Also
contributing to the increased other income was a higher volume of letter of
credit fees and data processing service income. The $19,000 increase in gains
on the sale of investment securities available for sale resulted from the
realization of a total gain of $271,000 on the sale of $28 million of
securities. This sale was executed to capture available market premiums on
securities with a remaining maturity of generally less than one year.
First quarter 1994 trust income declined modestly by $15,000 or 2% from the
comparable 1993 period. On a core basis, however, trust fees actually increased
by $60,000 or 9.1% as the first quarter 1993 results included an unusually large
volume of estate fees. This core trust fee growth is prompted by the profitable
expansion of the Company's business throughout western Pennsylvania including
the Greater Pittsburgh marketplace. The Trust staff's marketing skills combined
with their proven ability to deliver quality service has been the key to the
Company's growth rate, which has approximated 20% annually for each of the past
four years. While there can be no assurances of continuation of this trend,
these factors provide a foundation for future growth of this important source of
fee income.
.....NON-INTEREST EXPENSE.....Total non-interest expense of $10.6 million
increased by $815,000 or 8.3% when compared to the first quarter of 1993. This
increase was primarily due to the following items:
a $480,000 or 9.9% increase in salaries and employee benefits due to
planned wage increases approximating 4.5%, 24 additional average
full-time equivalent employees due primarily to the acquired Integra
branches and increased pension expense.
<PAGE>21
a total $386,000 increase in net occupancy and equipment expense due
to the additional branch facilities and equipment acquired with the
Integra branches, increased small equipment purchases, and higher
utilities and snow removal costs caused by the harsh winter.
a $127,000 decrease in other expense caused by reduced other real
estate owned expense and the economy of scale benefits derived from
the elimination of outside data processing fees as Community's data
processing is now performed internally by Three Rivers Bank.
.....NET OVERHEAD BURDEN.....Although non-interest expense has increased as a
result of the above listed factors, the net overhead to average assets ratio
showed improvement as it dropped from 2.64% in the first quarter of 1993 to
2.60% in the first quarter of 1994. The Company's net overhead to net interest
income ratio was relatively stable at 61.9% for that same time frame.
Management has targeted a goal of reducing the Company's net overhead expense to
net interest income ratio to 55% over the five year strategic planning forecast
through productivity enhancements, operational efficiencies, and economy of
scale benefits. The successful acquisition of JSB should allow the Company to
reach this goal even sooner than originally planned.
.....INCOME TAX EXPENSE.....The Company's provision for income taxes for the
first quarter of 1994 was $1.5 million reflecting an effective tax rate of
32.6%. The Company's 1993 first quarter income tax provision was $1.4 million
or an effective tax rate of 35.7% (excluding the one-time favorable impact from
the adoption of SFAS #109 which resulted in the recording of a deferred tax
asset of $1,452,000 and a corresponding credit to the income statement as a
cumulative effect of change in accounting principle). The Company's first
quarter 1994 provision represented an increase of $68,000 compared to the 1993
first quarter due entirely to increased pre-tax income. The Company's effective
tax rate declined by approximately 3% over the same period due to increased
tax-free asset holdings.
.....BALANCE SHEET.....The Company's total consolidated assets were $1.245
billion at March 31, 1994, compared with $1.145 billion at March 31, 1993, which
represents an increase of $100 million or 8.7%. This asset growth was funded
primarily by $76.5 million of increased deposits, and $26 million of increased
short-term borrowings (includes a $10 million of borrowings under the Federal
Home Loan Bank Flexline Program). These funds have been primarily invested in
the investment security and loan portfolios which have increased by $36.1
million and $62.3 million, respectively, since March 31, 1993. The increase in
short-term borrowings resulted from the initial stages of a planned strategy to
enhance net interest income by better leveraging the investment securities
portfolio through the use of funding sources available from the Federal Home
Loan Bank.
As a result of the continued economic recovery and improved consumer
confidence, the Company's loans and loans held for sale again increased to a
total outstanding of $737 million at March 31, 1994. Loan originations totalled
approximately $88 million for the first quarter of 1994 which compared favorably
to approximately $78 million of loan originations generated in both the first
and fourth quarters of 1993. Within the loan portfolio since December 31, 1993,
commercial loans have grown by $5.7 million or 5.8% while residential real
estate mortgage loans have grown by $13.3 million or 3.9%. Consumer loans and
commercial loans secured by real estate have experienced declines of $6.8
million or 4.2% and $2.4 million or 1.9%, respectively, during that same time
period. The commercial loan growth resulted from successful business development
efforts in both regions of the Company's marketplace which includes suburban
Pittsburgh and Greater Johnstown. The net growth in mortgage loans (including
home equity) occurred despite the sale of approximately $5.5 million of 30-year
fixed-rate products that originated during recent months. The majority of the
mortgage growth occurred at Community with approximately 40% of this growth
related to refinancing activity with new customers. The decline in consumer
loans experienced during the first quarter of 1994 is largely attributed to the
severe winter weather and a reduced volume of indirect auto loans.
<PAGE>22
.....LOAN QUALITY.....USBANCORP's written lending policies require underwriting,
loan documentation, and credit analysis standards to be met prior to funding any
loan. After the loan has been approved and funded, continued periodic credit
review is required. Annual credit reviews are mandatory for all commercial
loans in excess of $100,000 and for all commercial mortgages in excess of
$250,000. In addition, due to the secured nature of residential mortgages and
the smaller balances of individual installment loans, sampling techniques are
used on a continuing basis for credit reviews in these loan areas.
The following table sets forth information concerning USBANCORP's loan
delinquency and other non-performing assets (in thousands, except percentages):
March 31 December 31 March 31
1994 1993 1993
Total loan delinquency (past due 30
to 89 days) $12,268 $10,428 $ 7,508
Total non-accrual loans 4,006 5,304 5,296
Total non-performing assets* 5,038 6,498 8,312
Loan delinquency, as a percentage of
total loans and loans held for
sale, net of unearned income 1.66% 1.43% 1.11%
Non-accrual loans, as a percentage of
total loans and loans held for
sale, net of unearned income 0.54 0.73 0.78
Non-performing assets, as a percentage of
total loans and loans held for
sale, net of unearned income, and
other real estate owned 0.68 0.89 1.23
*Non-performing assets are comprised of (i) loans that are on a non-accrual
basis, (ii) consumer loans that are contractually past due 90 days or more as to
interest and principal payments and which are insured for credit loss, and (iii)
other real estate owned including in-substance foreclosures. All loans, except
for loans that are insured for credit loss, are placed on non-accrual status
immediately upon becoming 90 days past due in either principal or interest.
At March 31, 1994, non-accrual loans and non-performing assets as a
percentage of total loans and loans held for sale, net of unearned income, and
other real estate owned were 0.54% and 0.68%, respectively. The decreases from
December 31, 1993, in each of these categories were due primarily to the
Company's ongoing loan work-out program which has been implemented at each
banking subsidiary. Overall, total loan delinquency (past due 30 to 89 days) as
a percentage of total loans, net of unearned income, totalled 1.66% at March 31,
1994, and increased by 23 basis points since year-end 1993 due to increased
delinquency in the 30 to 59 days category.
Presented on this page was a graphic representation of the total non-performing
assets and unallocated loan loss reserve for the first quarters of 1993 and
1994, and year end 1993. The data points presented were; total non-performing
assets $5,038,000 for 1/94, $6,498,000 for 12/93, and $8,312,000 for 1/93;
unallocated loan loss reserve $8,284,000 for 1/94, $7,635,000 for 12/93, and
$5,326,000 for 1/93.
.....ALLOWANCE FOR LOAN LOSSES.....The following table sets forth changes in the
allowance for loan losses and certain ratios for the periods ended (in
thousands, except percentages):
March 31 December 31 March 31
1994 1993 1993
Allowance for loan losses $15,553 $15,260 $13,791
Amount in the allowance for loan
losses allocated to "general risk" 8,284 7,635 5,326
Allowance for loan losses as a
percentage of each of the following:
total loans and loans held
for sale, net of unearned income 2.11% 2.10% 2.04%
total delinquent loans (past due 30
to 89 days) 126.78 146.34 183.68
total non-accrual loans 388.24 287.71 260.40
total non-performing assets 308.71 234.84 165.92
<PAGE>23
When compared to December 31, and March 31, 1993, each of the allowance
coverage ratios for non-accrual loans and non-performing assets increased due to
the previously discussed improvement in the Company's asset quality combined
with an increased balance in the allowance for loan losses. The March 31, 1994,
allowance to total loans and loans held for sale, net of unearned income, ratio
of 2.11% was consistent with the December 31, 1993, level. The portion of the
Company's allowance which is allocated to "general risk" and not to any
particular loan or loan category has increased by approximately $3 million since
March 31, 1993, to $8.3 million at March 31, 1994. The amount of the reserve
allocated to general risk now represents 53.3% of the total allowance for loan
losses.
.....INTEREST RATE SENSITIVITY.....Asset/liability management involves managing
the risks associated with changing interest rates and the resulting impact on
the Company's net interest income and capital. The management and measurement
of interest rate risk at USBANCORP is performed by using the following tools:
1) Static "GAP" analysis which analyzes the extent to which interest rate
sensitive assets and interest rate sensitive liabilities are matched at specific
points in time; 2) simulation modeling which analyzes the impact of interest
rate changes on net interest income and capital levels over specific future time
periods by projecting the yield performance of assets and liabilities in
numerous varied interest rate environments.
For static GAP analysis, USBANCORP typically defines interest rate
sensitive assets and liabilities as those that reprice within one year.
Maintaining an appropriate match is one method of avoiding wide fluctuations in
net interest margin during periods of changing interest rates. The difference
between rate sensitive assets and rate sensitive liabilities is known as the
"interest sensitivity GAP." A positive GAP occurs when rate sensitive assets
exceed rate sensitive liabilities repricing in the same time period and a
negative GAP occurs when rate sensitive liabilities exceed rate sensitive assets
repricing in the same time period. A GAP ratio (rate sensitive assets divided
by rate sensitive liabilities) of one indicates a statistically perfect match.
A GAP ratio of less than one suggests that a financial institution may be better
positioned to take advantage of declining interest rates rather than increasing
interest rates, and a GAP ratio of more than one suggests the converse. Since
1987, USBANCORP has generally endeavored to maintain a neutral one year GAP
position thereby minimizing the impact (either positive or negative) of changing
interest rates on both net interest income and capital levels.
The following table presents a summary of the Company's static GAP
positions at March 31, 1994 (in thousands, except for the GAP ratios):
March 31 December 31 March 31
1994 1993 1993
Six month cumulative GAP
RSA................. $319,304 $328,530 $351,796
RSL................. 384,338 355,613 341,538
GAP................. $(65,034) $(27,083) $ 10,258
GAP ratio........... 0.83x 0.92x 1.03x
GAP as a % of total
assets............ (5.22)% (2.18)% 0.90%
GAP as a % of total
capital........... (56.59) (23.22) 9.15
One year cumulative GAP
RSA................. $472,791 $482,229 $492,562
RSL................. 462,414 437,261 419,600
GAP................. $ 10,377 $ 44,968 $ 72,962
GAP ratio........... 1.02x 1.10x 1.17x
GAP as a % of total
assets............ 0.83% 3.62% 6.37%
GAP as a % of total
capital........... 9.03 38.56 65.07
<PAGE>24
There are some inherent limitations in using static GAP analysis to measure
and manage interest rate risk. For instance, certain assets and liabilities may
have similar maturities or periods to repricing but the magnitude or degree of
the repricing may vary significantly with changes in market interest rates. As
a result of these GAP limitations, management places considerable emphasis on
simulation modeling to manage and measure interest rate risk. At December 31,
1993, these varied economic interest rate simulations indicated that the
variability of USBANCORP's net interest income over the next twelve month period
was within the Company's (+,-)5% policy limit given positive or negative
interest rate changes of up to 250 basis points; indeed, these simulations
show the greatest variability, -3.0%, in an economic scenario of an extreme
immediate 250 basis point decline in interest rates. Capital is estimated to
be effected under these simulations by no more than (+,-)1.0%.
With the adoption of SFAS #115 in the first quarter of 1994, 87.4% of the
investment portfolio is classified as available for sale and 12.6% as held to
maturity. The available for sale classification for the majority of the
portfolio provides management with greater flexibility to more actively manage
the securities portfolio to better achieve overall balance sheet rate
sensitivity goals. Furthermore, it is USBANCORP's intent to continue to
diversify Community's loan portfolio to increase liquidity and rate sensitivity
and to better manage USBANCORP's long-term interest rate risk by continuing to
sell newly originated 30-year fixed-rate mortgage loans. Community retains all
servicing rights and recognizes fee income over the remaining lives of the loans
sold at an average rate of approximately 35 basis points on the loan balances
outstanding.
.....LIQUIDITY.....Financial institutions must maintain liquidity to meet day-
to-day requirements of depositor and borrower customers, take advantage of
market opportunities, and provide a cushion against unforeseen needs. Liquidity
needs can be met by either reducing assets or increasing liabilities. Sources
of asset liquidity are provided by short-term investment securities, time
deposits with banks, federal funds sold, banker's acceptances, and commercial
paper. These assets totaled $167 million at March 31, 1994, $151 million at
December 31, 1993, and $160 million at March 31, 1993. Maturing and repaying
loans, as well as, the monthly cash flow associated with certain asset- and
mortgage-backed securities are other sources of asset liquidity.
Liability liquidity can be met by attracting deposits with competitive
rates, using repurchase agreements, buying federal funds, or utilizing the
facilities of the Federal Reserve or the Federal Home Loan Bank systems.
USBANCORP's subsidiaries utilize a variety of these methods of liability
liquidity. At March 31, 1994, USBANCORP's subsidiaries had approximately $90.5
million of unused lines of credit available under informal arrangements with
correspondent banks compared to $98.6 million at March 31, 1993. These lines of
credit enable USBANCORP's subsidiaries to purchase funds for short-term needs at
current market rates. Additionally, each of the Company's subsidiary banks are
members of the Federal Home Loan Bank which provides the opportunity to obtain
intermediate to longer-term advances up to approximately 80% of their investment
in assets secured by one-to-four family residential real estate; based upon
December 31, 1993, balances, this would suggest a total available Federal Home
Loan Bank borrowing capacity of approximately $504 million. Furthermore,
USBANCORP had available at March 31, 1994, an unused $1 million unsecured line
of credit.
.....EFFECTS OF INFLATION.....USBANCORP's asset and liability structure is
primarily monetary in nature. As such, USBANCORP's assets and liabilities tend
to move in concert with inflation. While changes in interest rates may have an
impact on the financial performance of the banking industry, interest rates do
not necessarily move in the same direction or in the same magnitude as prices of
other goods and services and may frequently reflect government policy
initiatives or economic factors not measured by a price index.
<PAGE>25
.....CAPITAL RESOURCES.....The following table highlights the Company's
compliance with the required regulatory capital ratios for each of the periods
presented (in thousands, except ratios):
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993 March 31,1993
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Risk-Adjusted Capital Ratios
Tier 1 capital $ 112,248 13.76% $ 113,718 14.72% $ 109,794 15.24%
Tier 1 capital minimum
requirements 32,630 4.00 30,893 4.00 28,815 4.00
Excess $ 79,618 9.76% $ 82,825 10.72% $ 80,979 11.24%
Total capital $ 122,443 15.01% $ 123,372 15.97% $ 118,799 16.49%
Total capital minimum
requirement 65,259 8.00 61,787 8.00 57,630 8.00
Excess $ 57,184 7.01% $ 61,585 7.97% $ 61,169 8.49%
Total risk-adjusted
assets $ 815,739 $ 772,333 $ 720,377
Asset Leverage Ratio
Tier 1 capital $ 112,248 9.03% $ 113,718 9.18% $ 109,794 9.61%
Minimum requirement 62,139 5.00 61,931 5.00 57,154 5.00
Excess $ 50,109 4.03% $ 51,787 4.18% $ 52,640 4.61%
Total adjusted assets $1,242,777 $1,238,624 $1,143,073
</TABLE>
The decline in each of the regulatory capital ratios between December 31,
1993, and March 31, 1994, was caused by the establishment of a $4 million equity
valuation allowance for net unrealized holding losses on available for sale
investment securities due to the adoption of SFAS #115. The establishment of
this allowance negatively impacted the Company's March 31, 1994, book value per
share by $0.83. Even after this decline, the Company exceeds all regulatory
capital ratios for each of the periods presented. Furthermore, each of the
Company's subsidiary banks are considered "well capitalized" under all
applicable FDIC regulations. While remaining committed to maintaining this
"well capitalized" designation, the Company will prudently pursue throughout
1994 appropriate strategies to improve its leveraging and use of capital to
enhance total shareholder return.
The Company's declared Common Stock cash dividend per share was $0.22 for
the first three months of 1994 which was a 10% increase over the $0.20 per share
dividend for the same 1993 interim period. The dividend yield on the Company's
Common Stock now approximates 3.8% compared to an average Pennsylvania bank
holding company yield of approximately 3.0%. The Company remains committed to
a progressive total shareholder return which includes a competitive common
dividend yield.
.....FUTURE OUTLOOK.....Numerous strategies are being explored to ensure that
the Company continues to provide a progressive total shareholder return.
Paramount among the challenges faced is the Company's desire to better leverage
its capital strength. The successful acquisition of JSB, which is expected to
be consummated by the end of the second quarter of 1994, will be an element in
helping to leverage the Company's capital base. The Company will also leverage
its capital base by a more extensive use of the borrowing capabilities available
from the Federal Home Loan Bank. After the JSB Acquisition, USBANCORP will also
execute its announced treasury stock repurchase program with the intent,
dependent upon market circumstances, to buy back up to 5% of the total common
shares outstanding. Management will continue to re-evaluate its dividend
policies throughout the year in an ongoing effort to ensure a competitive
dividend yield. Each of these actions will be directed to the goal of improved
capital usage and leverage.
<PAGE>26
Overall corporate performance for the remainder of 1994 will be greatly
affected by the consummation of the JSB acquisition which is expected to occur
in June. USBANCORP anticipates recognizing approximately six months of earnings
in 1994 from this latest acquisition; for the year ended December 31, 1993, JSB
reported net income of $3,361,000. The Company will also recognize monthly
after-tax purchase accounting net charges of approximately $120,000.
Additionally, non-recurring acquisition restructuring charges, including such
items as severance and professional fees, will be recognized in the second
quarter and are estimated to approximate $1,700,000 after tax. Finally, the
Company will issue approximately 982,000 additional common shares to effect the
merger. Each of these items will result in a significant impact to the
financial performance reported by USBANCORP during the remainder of 1994.
Management continues to believe that the JSB acquisition will become accretive
to the Company's earnings by the end of 1995 once all cost reductions and
earnings enhancement opportunities have been successfully identified and
implemented; excluding the one-time second quarter $1.7 million restructuring
charges, the Company believes that the JSB Acquisition will be accretive to
earnings per share by the fourth quarter of 1994, or within just two quarters of
the deal consummation.
<PAGE>27
Service Area Map
<PAGE>28
Part II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
15.1 Letter re: unaudited interim financial information
(b) Reports on Form 8-K
USBANCORP, Inc.'s Common Stock Repurchase Program
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USBANCORP, Inc.
Registrant
Date: May 13, 1994 /s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: May 13, 1994 /s/Orlando B. Hanselman
Orlando B. Hanselman
Executive Vice President,
Chief Financial Officer and
Manager of Corporate Services
STATEMENT OF MANAGEMENT RESPONSIBILITY
April 26, 1994
To the Stockholders and
Board of Directors of
USBANCORP, Inc.
Management of USBANCORP, Inc. and its subsidiaries have prepared
the consolidated financial statements and other information in the
Form 10-Q in accordance with generally accepted accounting
principles and are responsible for its accuracy.
In meeting its responsibility, management relies on internal
accounting and related control systems, which include selection and
training of qualified personnel, establishment and communication of
accounting and administrative policies and procedures, appropriate
segregation of responsibilities, and programs of internal audit.
These systems are designed to provide reasonable assurance that
financial records are reliable for preparing financial statements
and maintaining accountability for assets, and that assets are
safeguarded against unauthorized use or disposition. Such
assurance cannot be absolute because of inherent limitations in any
internal control system.
Management also recognizes its responsibility to foster a climate
in which Company affairs are conducted with the highest ethical
standards. The Company's Code of Conduct, furnished to each
employee and director, addresses the importance of open internal
communications, potential conflicts of interest, compliance with
applicable laws, including those related to financial disclosure,
the confidentiality of proprietary information, and other items.
There is an ongoing program to assess compliance with these
policies.
The Audit Committee of the Company's Board of Directors consists
solely of outside directors. The Audit Committee meets
periodically with management and the independent accountants to
discuss audit, financial reporting, and related matters. Arthur
Andersen & Co. and the Company's internal auditors have direct
access to the Audit Committee.
/s/Terry K. Dunkle /s/Orlando B. Hanselman
Terry K. Dunkle Orlando B. Hanselman
Chairman, Executive Vice President, CFO &
President & CEO Manager of Corporate Services
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
USBANCORP, Inc.:
We have reviewed the accompanying consolidated balance sheets of USBANCORP,
Inc. (a Pennsylvania corporation) and Subsidiaries as of March 31, 1994 and
1993, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the three-month period ended March 31,
1994 and 1993. These financial statements are the responsibility of the
company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of USBANCORP, Inc. as of
December 31, 1993, and, in our report dated January 28, 1994, we expressed an
unqualified opinion on that statement. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 1993,
is fairly stated, in all material respects, in relation to the balance sheet
from which it has been derived.
ARTHUR ANDERSEN & CO.
/s/Arthur Andersen & Co.
Pittsburgh, Pennsylvania,
April 25, 1994
