UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
X For the period ended September 30, 1994
Transaction Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transaction period from to
Commission File Number 0-11204
USBANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1424278
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Main & Franklin Streets, P.O. Box 430, Johnstown, PA 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 October 31, 1994
Common Stock, par value $2.50 5,623,055
per share
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
September 30, 1994, December 31, 1993,
and September 30, 1993 3
Consolidated Financial Statement of Income -
Three Months and Nine Months
Ended September 30, 1994, and 1993 4
Consolidated Statement of Changes
in Stockholders' Equity -
Nine Months Ended
September 30, 1994, and 1993 5
Consolidated Statement of Cash Flows -
Nine Months Ended
September 30, 1994, and 1993 6
Notes to Consolidated Financial
Statements 9
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations 25
Part II. Other Information 54
<PAGE>2
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
September 30 December 31 September 30
1994 (1) 1993 1993
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 44,474 $ 38,606 $ 35,733
Interest bearing deposits with
banks 2,911 4,809 9,158
Federal funds sold and securities
purchased under agreements to
resell - 7,000 -
Investment securities:
Available for sale (market value
$432,315 on December 31, 1993;
$438,303 on September 30, 1993) 256,757 428,712 432,339
Held to maturity (market value
$501,222 on September 30, 1994) 513,014 - -
Assets held in trust for collateralized
mortgage obligation 9,530 13,815 15,442
Mortgage loans held for sale 12,844 1,054 1,036
Loans 877,571 732,026 734,645
Less: Unearned income 4,157 5,894 6,840
Allowance for loan losses 19,495 15,260 14,676
Net Loans 853,919 710,872 713,129
Premises and equipment 19,148 16,960 16,795
Accrued income receivable 14,098 8,892 10,762
Purchased mortgage servicing rights 11,530 - -
Goodwill and core deposit intangibles 27,708 2,897 3,120
Other assets 19,585 7,904 11,831
TOTAL ASSETS $ 1,785,518 $ 1,241,521 $ 1,249,345
LIABILITIES
Non-interest bearing deposits $ 146,686 $ 137,411 $ 121,445
Interest bearing deposits 1,058,322 911,455 919,622
Total deposits 1,205,008 1,048,866 1,041,067
Federal funds purchased and
securities sold under agreements
to repurchase 128,818 12,648 25,446
Other short-term borrowings 68,237 270 564
Advances from Federal Home Loan Bank 207,790 31,285 31,299
Collateralized mortgage obligation 8,682 12,674 13,060
Long-term debt 6,563 3,445 8,838
Other liabilities 23,501 15,718 14,564
TOTAL LIABILITIES 1,648,599 1,124,906 1,134,838
STOCKHOLDERS' EQUITY
Preferred stock, no par value;
2,000,000 shares authorized;
There were no shares issued and
outstanding for the periods
presented. - - -
Common stock, par value $2.50 per share;
12,000,000 shares authorized;
5,623,055 shares issued and outstand-
ing on September 30 1994; 4,726,181 shares
issued and outstanding on December 31,
1993; 4,715,686 shares issued and
outstanding on September 30, 1993 14,273 11,815 11,789
Surplus 92,913 70,720 70,518
Retained earnings 38,086 34,080 32,200
Treasury stock, 86,000 shares at cost (2,136) - -
Net unrealized holding gains (losses) on
investment securities (6,217) - -
TOTAL STOCKHOLDERS' EQUITY 136,919 116,615 114,507
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,785,518 $ 1,241,521 $ 1,249,345
See accompanying notes to consolidated financial statements.
<F1>
Reflects the acquisition of Johnstown Savings Bank ("JSB") accounted for
as of the close of business June 30, 1994. See further discussion in
Note #3.
</TABLE>
<PAGE>3
USBANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 (1) 1993
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest fees on loans and loans held
for sale:
Taxable $ 17,538 $ 15,095 $ 46,531 $ 44,696
Tax exempt 603 314 1,429 828
Deposits with banks 95 27 112 103
Federal funds sold and securities
purchased under agreements to
resell 44 14 82 359
Investment securities:
Available for sale 4,140 6,075 12,077 17,601
Held to maturity 6,835 - 10,753 -
Assets held in trust for collateralized
mortgage obligation 207 322 728 1,010
Total Interest Income 29,462 21,847 71,712 64,597
INTEREST EXPENSE
Deposits 9,606 8,330 24,291 24,740
Federal funds purchased and securities
sold under agreements to repurchase 1,272 84 1,613 192
Other short-term borrowings 471 64 812 68
Advances from Federal Home Loan Bank 2,094 304 2,861 807
Collateralized mortgage obligation 241 373 785 1,178
Long-term debt 97 174 223 531
Total Interest Expense 13,781 9,329 30,585 27,516
NET INTEREST INCOME 15,681 12,518 41,127 37,081
Provision for loan losses 225 600 1,035 1,800
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 15,456 11,918 40,092 35,281
NON-INTEREST INCOME
Trust fees 748 639 2,178 1,981
Net realized and unrealized gains
(losses) on investment securities 25 29 (186) 502
Net realized gains on loans and loans
held for sale 181 285 722 554
Wholesale cash processing fees 306 333 930 957
Service charges on deposit accounts 741 732 2,017 2,081
Net mortgage servicing fees 468 - 468 -
Other income 933 585 2,408 1,722
Total Non-Interest Income 3,402 2,603 8,537 7,797
NON-INTEREST EXPENSE
Salaries and employee benefits 6,495 4,958 17,063 14,867
Net occupancy expense 1,112 855 3,065 2,526
Equipment expense 793 687 2,275 1,949
Professional fees 706 601 1,687 1,655
Supplies, postage, and freight 625 548 1,718 1,631
Miscellaneous taxes and insurance 316 294 903 868
FDIC deposit insurance expense 702 567 1,874 1,591
Acquisition charge - - 2,437 -
Amortization of goodwill and
core deposit intangibles 700 224 1,143 609
Other expense 1,818 1,606 4,594 5,125
Total Non-Interest Expense $ 13,267 $ 10,340 $ 36,759 $ 30,821
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ 5,591 $ 4,181 $ 11,870 $ 12,257
Provision for income taxes 1,887 1,333 4,223 4,138
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 3,704 2,848 7,647 8,119
Cumulative effect of change in
accounting principle--adoption
of SFAS #109 - - - 1,452
NET INCOME $ 3,704 $ 2,848 $ 7,647 $ 9,571
PER COMMON SHARE DATA:
Primary:
Net income $ 0.65 $ 0.60 $ 1.51 $ 2.17
Average shares outstanding 5,673,464 4,727,866 5,055,107 4,365,548
Fully Diluted:
Net income (before SFAS #109
benefit) $ 0.65 $ 0.60 $ 1.51 $ 1.79
Net income 0.65 0.60 1.51 2.11
Average shares outstanding 5,673,764 4,727,866 5,055,207 4,541,284
Cash Dividend Declared $ 0.25 $ 0.22 $ 0.72 $ 0.64
See accompanying notes to consolidated financial statements.
<F1>
The financial data includes a non-recurring after-tax acquisition charge
of $1,882,000 or $0.40 per share as a result of the acquisition of JSB.
</TABLE>
<PAGE>4
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Net
Unrealized
Holding
Preferred Common Retained Gains
Stock Stock Surplus Earnings (Losses) Total
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 $ 13,800 $ 7,456 $ 36,022 $ 25,693 $ - $ 82,971
Net Income - - - 9,571 - 9,571
Dividend reinvestment and
stock purchase plan - 43 366 - - 409
Preferred stock converted
to common stock (12,468) 1,415 11,053 - - -
Preferred stock redeemed (1,332) - (36) - - (1,368)
Secondary common stock
issuance of 1,150,000
shares net of issuance
costs - 2,875 23,113 - - 25,988
Cash dividends declared:
Preferred stock dividends
paid on conversion - - - (103) - (103)
Common stock ($.20 per
share on 4,436,257
shares, $0.22 per
share on 4,708,461
shares, and $0.22 per
share on 4,715,686
shares) - - - (2,961) - (2,961)
Balance September 30, 1993 $ - $ 11,789 $ 70,518 $ 32,200 - $114,507
Balance December 31, 1993 $ - $ 11,815 $ 70,720 $ 34,080 $ - $116,615
Net Income - - - 7,647 - 7,647
Dividend reinvestment and
stock purchase plan - 63 521 - - 584
Common shares issued to
acquire Johnstown Savings
Bank (957,857 shares @
$25.125 per share) - 2,395 21,672 - - 24,067
Net unrealized holding gains
(losses) on investment
securities - - - - (6,217) (6,217)
Cash dividends declared:
Common stock ($0.22 per
share on 4,737,321
shares, $0.25 per
share on 4,745,247
shares, and $0.25 per
share on 5,648,550
shares) - - - (3,641) - (3,641)
Treasury stock, 86,000 shares
at cost - (2,136) - - - (2,136)
Balance September 30, 1994 $ - $ 12,137 $ 92,913 $ 38,086 $ (6,217) $136,919
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>5
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1994 1993
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,647 $ 9,571
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,035 1,800
Depreciation expense 1,730 1,528
Amortization expense of goodwill and core
deposit intangibles 1,143 609
Amortization expense of purchased mortgage
servicing rights 411 -
Net amortization of investment securities 459 689
Net realized and unrealized losses (gains) on
investment securities 186 (502)
Net realized gains on loans and loans held for sale (722) (554)
Increase in accrued income receivable (3,350) (1,399)
Increase (decrease) in accrued expense payable (353) 1,513
Net cash provided by operating activities 8,186 13,255
INVESTING ACTIVITIES
Purchases of investment securities and other
short-term investments (494,745) (247,519)
Proceeds from maturities of investment securities and
other short-term investments 95,124 152,240
Proceeds from sales of investment securities and
other short-term investments 238,454 29,641
Long-term loans originated (276,584) (278,302)
Mortgage loans held for sale (8,781) (1,036)
Principal collected on long-term loans 223,743 184,304
Loans purchased or participated - (1,058)
Loans sold or participated 33,331 17,150
Net increase in credit card receivables
and other short-term loans (4,646) (1,306)
Purchases of premises and equipment (1,502) (1,743)
Sale/retirement of premises and equipment 17 -
Net decrease in assets held in trust for
collateralized mortgage obligation 4,285 3,140
Increase due to JSB acquisition:
Investment securities (190,092) -
Loans (118,150) -
Loans held for sale (4,063) -
Premises and equipment (2,422) -
Accrued income received (1,857) -
Purchased mortgage service rights (10,360) -
Goodwill and core deposit intangibles (25,954) -
Other assets (8,078) -
Net increase in other assets (1,858) (1,713)
Net cash used by investing activities $ (554,138) $ (146,202)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit $ 262,756 $ 172,634
Payments for maturing certificates of deposits (277,768) (227,489)
Net (decrease) increase in demand and savings deposits (37,746) 21,794
Net cash received through Integra Branches Acquisition - 76,537
Net increase in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings 142,698 14,844
Net principal borrowings of advances from Federal
Home Loan Bank and long-term debt 110,388 15,902
Preferred stock cash dividends paid - (397)
Redemption of preferred stock - (1,368)
Common stock cash dividends paid (3,267) (2,519)
Proceeds from dividend reinvestment and stock
purchase plan 584 409
Purchases of treasury stock (2,136) -
Secondary common stock offering (net of expenses) - 25,988
Capital investment in subsidiaries - (2,100)
Increase due to JSB acquisition:
Certificates of deposit 102,959 -
Demand and savings deposits 105,941 -
Other short term borrowings 41,439 -
Advances from Federal Home Loan Bank 65,243 -
Due to JSB shareholders 19,701 -
Capital 24,067 -
Other liabilities 7,512 -
Cash cost of JSB acquisition (18,898) -
Net (decrease) increase in other liabilities (551) 1,181
Net cash provided by financing activities 542,922 95,416
NET DECREASE IN CASH EQUIVALENTS (3,030) (37,531)
CASH EQUIVALENTS AT JANUARY 1 50,415 82,422
CASH EQUIVALENTS AT SEPTEMBER 30 $ 47,385 $ 44,891
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>6
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.
<PAGE>7
2. Basis of Preparation
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 and nine month periods
ended September 30, 1994, and 1993, Arthur Andersen LLP,
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 October 24, 1994, appearing herein. This report does
not express an opinion on the interim unaudited consolidated
financial information. Arthur Andersen LLP 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.
<PAGE>8
3. Johnstown Savings Bank ("JSB") Acquisition
For financial reporting purposes, the Merger ("Merger") with
JSB was consummated and control was passed to USBANCORP on June 30,
1994. USBANCORP merged JSB with and into U.S. Bank, a wholly-owned
subsidiary of USBANCORP, with U.S. Bank surviving the Merger. The
separate existence of JSB ceased, and all property, rights, powers,
duties, obligations and liabilities of JSB were automatically
transferred to U.S. Bank, in accordance with Federal and
Pennsylvania law. Immediately following the Merger, U.S. Bank
caused the intracompany sale by Standard Mortgage Corporation of
Georgia, a wholly-owned subsidiary of JSB, of all its assets,
subject to all of its liabilities to SMC Acquisition Corporation,
an indirect subsidiary of Community. SMC Acquisition Corporation
was renamed Standard Mortgage Corporation of Georgia and is a
mortgage banking company organized under the laws of the State of
Georgia and originates, sells, and services residential mortgage
loans.
<PAGE>9
The Merger was treated as a purchase for financial accounting
purposes. The recorded purchase price was based on the average of
the closing price of USBANCORP Common Stock ("UBAN") on the
NASDAQ/NMS for the ten trading days immediately preceding July 11,
1994, the final closing date of the transaction. The ten day
average of USBANCORP's Common Stock was $25.125, which resulted in
a final cost of the acquisition being $43.8 million, which was paid
by the issuance of 957,857 common shares and $19.7 million in cash.
Accounting for the acquisition as a purchase, USBANCORP has
recognized newly created core deposit intangibles of $5.7 million
and goodwill of $20.2 million and began realizing net income
immediately from July 1, 1994. The core deposit intangible is
being amortized over a ten-year period while the goodwill
intangible is being amortized over a fifteen-year period.
Additionally, a $1,882,000 or $0.40 per share after-tax non-
recurring acquisition restructuring charge, including such items as
employee severance, data processing conversion, and legal and
professional fees, was recognized by the Company in the 1994 second
quarter.
For the year ended December 31, 1993, JSB reported net income
of $3,361,000. On a pro forma basis for the year ended December
31, 1993, and the nine months ended September 30, 1994, the
combined consolidated statements of income for USBANCORP and JSB
would have reflected the following key performance items: net
interest income of $58.0 million in 1993 and $46.7 million in 1994,
income before cumulative effect of change in accounting principle
and acquisition charge of $12.2 million in 1993 and $9.6 million in
1994, and fully diluted earnings per share before cumulative effect
of change in accounting principle and acquisition charge of $2.19
in 1993 and $1.69 in 1994. These pro forma amounts were based upon
the historical consolidated statements of income of USBANCORP and
JSB after giving effect to the purchase accounting adjustments as
of the beginning of the periods presented.
<PAGE>10
4. 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.
5. 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 $3,210,000 in federal income tax payments for the
first nine months of 1994 as compared to $3,990,000 for the same
1993 interim period. Total interest expense paid amounted to
$28,990,000 in 1994's first nine months compared to $26,003,000 in
the same 1993 period.
6. 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. The book and market values of investment securities
are summarized as follows (in thousands):
Investment securities available for sale:
<TABLE>
<CAPTION>
September 30, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 24,775 $ -- $ (452) $ 24,323
U.S. Agency 46,596 64 (2,375) 44,285
State and municipal 1,480 1 (97) 1,384
Mortgage-backed
securities(1) 151,079 116 (3,781) 147,414
Other securities(2) 39,945 227 (821) 39,351
Total $263,875 $ 408 $ (7,526) $256,757
<F1>Approximately 98% of these obligations represent
U.S. Agency issued securities.
<F2>Other investment securities include corporate
notes and bonds, asset-backed securities, and
equity securities.
</TABLE>
<PAGE>11
Investment securities held to maturity:
<TABLE>
<CAPTION>
September 30, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 5,408 $ -- $ (1) $ 5,407
U.S. Agency 35,847 -- (2,012) 33,835
State and municipal 112,078 996 (3,733) 109,341
Mortgage-backed securities(1) 356,818 1,610 (8,613) 349,815
Other securities(2) 2,863 17 (56) 2,824
Total $513,014 $ 2,623 $(14,415) $501,222
<F1>Approximately 98% of these obligations represent
U.S. Agency issued securities.
<F2>Other investment securities include corporate
notes and bonds, asset-backed securities, and
equity securities.
</TABLE>
Prior to the first quarter 1994 adoption of SFAS #115, the
entire investment security portfolio, as described in the tables
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 Financial Statement of Income as a
"Net unrealized gain or loss on investment securities available for
sale" (in thousands):
<TABLE>
<CAPTION>
December 31, 1993
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
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(1) 251,631 2,379 (1,402) 252,608
Other securities(2) 46,553 680 (37) 47,196
Total $428,712 $ 5,264 $ (1,661) $432,315
<F1>Approximately 95% of these obligations represent
U.S. Agency issued securities.
<F2>Other investment securities include corporate
notes and bonds, asset-backed securities, and
equity securities.
</TABLE>
<TABLE>
<CAPTION>
September 30, 1993
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 12,448 $ 274 $ (10) $ 12,712
U.S. Agency 75,191 1,290 (999) 75,482
State and municipal 40,880 1,116 (20) 41,976
Mortgage-backed
securities(1) 253,861 4,251 (715) 257,397
Other securities(2) 49,959 903 (126) 50,736
Total $432,339 $ 7,834 $ (1,870) $438,303
<F1>Approximately 95% of these obligations
represent U.S. Agency issued securities.
<F2>Other investment securities include corporate
notes and bonds, asset-backed securities, and
equity securities.
</TABLE>
<PAGE>12
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 and
unrealized gain or loss on investment securities."
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 Investor's Service or Standard & Poor's rating of "A."
At September 30, 1994, 95.1% of the portfolio was rated "AAA" and
96.0% "AA" or higher as compared to 88.9% and 90.6%, respectively,
at September 30, 1993. Only 1.0% of the portfolio was rated below
"A" or unrated on September 30, 1994.
7. Mortgage Loans Held for Sale
At September 30, 1994, $12,844,000 of 30-year residential
mortgage loans originated during 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 their 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. Realized gains and
losses are calculated by the specific identification method and are
included in "Net realized gain or loss on loans held for sale;"
unrealized net valuation adjustments (if any) are recorded in "Net
unrealized gain or loss on loans held for sale" on the Consolidated
Financial Statement of Income.
8. Loans
The loan portfolio of the Company consists of the following
(in thousands):
<TABLE>
<CAPTION>
September 30 December 31 September 30
1994 1993 1993
<S> <C> <C> <C>
Commercial $137,726 $ 99,321 $102,699
Commercial loans secured
by real estate 166,623 126,044 126,732
Real estate - mortgage 411,482 338,778 334,261
Consumer 161,740 167,883 170,953
Loans 877,571 732,026 734,645
Less: Unearned income 4,157 5,894 6,840
Loans, net of unearned
income $873,414 $726,132 $727,805
</TABLE>
<PAGE>13
Real estate-construction loans were not material at these
presented dates and comprised 1.9% of total loans net of unearned
income at September 30, 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.
9. 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 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.
management's judgement 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.
<PAGE>14
An analysis of the changes in the allowance for loan losses
follows (in thousands, except ratios):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Balance at beginning of period $19,247 $14,007 $15,260 $13,752
Addition due to JSB acquisition - - 3,422 -
Charge-offs:
Commercial 38 21 251 326
Real estate-mortgage 27 24 155 628
Consumer 140 145 420 559
Total charge-offs 205 190 826 1,513
Recoveries:
Commercial 83 146 187 237
Real estate-mortgage 43 - 87 12
Consumer 102 113 330 388
Total recoveries 228 259 604 637
Net charge-offs (recoveries) (23) (69) 222 876
Provision for loan losses 225 600 1,035 1,800
Balance at end of period $19,495 $14,676 $19,495 $14,676
As a percent of average loans
and average loans held for
sale, net of unearned
income:
Annualized net charge-offs
(recoveries) (0.01)% (0.04)% 0.04% 0.17%
Provision for loan losses
(annualized) 0.10 0.33 0.18 0.34
Allowance as a percent of loans
and loans held for sale,
net of unearned income at
period end 2.20 2.01 2.20 2.01
Allowance as a multiple of
annualized net charge-offs,
at period end * * 65.68x 12.57x
*Not meaningful.
(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 pages 33 and 46, respectively.)
</TABLE>
10. 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>15
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993 September 30, 1993
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
Amount to Loans(1) Amount to Loans(1) Amount to Loans(1)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 1,761 15.5% $ 1,637 13.6% $ 2,222 13.9%
Commercial
loans secured
by real
estate 5,448 18.7 4,073 17.2 4,312 17.2
Real Estate -
mortgage 339 47.6 279 46.3 274 45.7
Consumer 1,432 18.2 1,636 22.9 1,849 23.2
Allocation to
general risk 10,515 - 7,635 - 6,019 -
Total $19,495 100.0% $15,260 100.0% $14,676 100.0%
<F1>Includes loans "held for sale."
</TABLE>
At September 30, 1994, management of the Company believes 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 #9.)
11. 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.
<PAGE>16
The following table presents information concerning non-
performing assets (in thousands, except percentages):
<TABLE>
<CAPTION>
September 30 December 31 September 30
1994 1993 1993
<S> <C> <C> <C>
Non-accrual loans $6,058 $5,304 $4,270
Insured loans past due 90
days or more 414 203 381
Other real estate owned 660 991 4,002
Total non-performing
assets $7,132 $6,498 $8,653
Total non-performing
assets as a percent
of loans and loans
held for sale, net
of unearned income,
and other real estate
owned 0.80% 0.89% 1.18%
</TABLE>
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):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Interest income due in accordance
with original terms $ 133 $ 81 $ 381 $ 492
Interest income recorded (175) ( 25) (543) (209)
Net reduction (increase) in
interest income $ (42) $ 56 $(162) $ 283
</TABLE>
12. 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 $10,159,000 have been provided as of
September 30, 1994, on the differences between taxable income for
financial and tax reporting purposes.
<PAGE>17
13. 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:
<TABLE>
<CAPTION>
Shares Shares Option
Under Available Price
Option For Option Per Share
<S> <C> <C> <C>
Balance at December 31, 1992 27,334 99,000
Options granted 27,500 (27,500) 22.56
Options exercised (5,000) - 17.25
Options cancelled 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 cancelled or
expired - -
Balance at September 30, 1994 69,167 46,000
</TABLE>
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-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.
<PAGE>18
14. Preferred Stock
As discussed in the Company's "1993 Annual Report and Form
10K," 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.
15. 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, $2,000,000 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 were used by USBANCORP to pay the $19.7 million
cash liability to JSB shareholders and for general corporate
purposes.
16. 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.
<PAGE>19
17. Off-Balance Sheet Derivative Products
Policies
The Company enters into interest rate swap agreements to help
manage interest rate and market valuation risk exposure which is
incurred in normal recurrent banking activities. The interest
differential to be paid or received is accrued by the Company and
recognized as interest expense in the current period. Since only
interest payments are exchanged, the cash requirements and exposure
to credit risk are significantly less than the notional amount.
The Company also utilizes interest rate caps. These instruments
are designated as hedges and gains or losses related to changes in
their value are deferred and recognized as interest expense during
the hedge period. A summary of the off-balance sheet derivative
transactions completed to date are as follows:
CMO Liability Hedge
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 which resets quarterly. The counter-party in this unsecured
transaction is PNC Bank.
This 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. Overall, this swap
agreement favorably reduced interest expense by $41,000 in the
first nine months of 1994.
<PAGE>20
Leverage Program Hedge
On September 28, 1994, the Company completed hedging
transactions with a notional amount of $100 million. The counter-
party in these unsecured transactions is Mellon Bank. The $100
million notional amount was comprised of the following:
a $50 million interest rate swap agreement whereby the
Company pays a one year fixed interest rate of 6.08% and
receives 90 day Libor which resets quarterly. The
termination date of this swap agreement is September 28,
1995.
a $50 million interest rate cap on 90 day Libor whereby the
cap amounts to 5.25% for the period covering September 28,
1994, through March 28, 1995, and then 5.75% for the period
from March 29, 1995, through September 28, 1995. The cost of
this cap was 63 basis points or $315,000 and is being
amortized as an interest expense over the life of the cap.
The Company purchased these derivative products to hedge an
interest rate mismatch that existed between the investment
securities portfolio and short-term Federal Home Loan Bank
borrowings. This mismatch was created upon consummation of the
balance sheet leverage program (see further discussion in M.D.& A.
on page 27.) which increased the Company's six month GAP to
negative $277 million or -15.5% of total assets in September 1994
prior to the execution of any hedge transactions. This hedge
reduced interest rate risk since after the hedge was put in place,
the Company's negative six month static GAP was reduced by $100
million to negative $177 million or -9.9% of total assets. The
interest rate swap portion of this hedge also offsets market
valuation risk since any change in the market value of the swap
agreement correlates in the opposite direction with any change in
the market value of the securities portfolio. These derivative
transactions had no material impact on the financial statements for
either the quarter or nine months ended September 30, 1994. For
the fourth quarter 1994, however, these hedge transactions are
expected to increase interest expense by approximately $190,000.
The Company believes that its exposure to credit loss in the
event of non-performance by any of the counter-parties is remote.
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 and caps, the
policy also allows for the use of interest rate floors. The
Company has not instituted the use of interest rate floors as of
September 30, 1994.
<PAGE>21
18. Labor Agreement
Approximately 225 of U.S. Bank's clerical and teller personnel
are represented by the United Steelworkers of America AFL-CIO-CLC
Local Union 8204 (the "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.
19. Goodwill and Core Deposit Intangible Assets
USBANCORP's balance sheet shows both tangible assets (such as
loans, buildings, and investments) and intangible assets (such as
goodwill). The Company now carries $21.2 million of goodwill and
$6.5 million of core deposit intangible assets on its balance
sheet. The majority of these intangible assets came from the 1994
Johnstown Savings Bank acquisition ($25.9 million) and the 1993
Integra Branches acquisition ($1.2 million).
Intangible assets are typically created when companies pay a
premium over book value to make acquisitions of businesses and use
the "purchase" method of accounting. There are two types of
intangibles. Identifiable intangibles are those that relate to the
fair market value of specific customer relationships. Acquisitions
of items such as core deposit liabilities and mortgage servicing
rights create this type of intangible. The current value of future
revenues attributable to such relationships is used in order to
establish the amount of identifiable intangibles. A second
category of intangibles is goodwill. Goodwill represents the
excess of the purchase price (premium) over the fair market value
of the assets (including identifiable intangibles) and liabilities
acquired.
USBANCORP believes these intangible assets represent real
value to the Company. For example, the total intangible assets
created with the JSB acquisition amounted to $20.2 million in
goodwill and $5.7 million in core deposit intangibles. The Company
paid this premium for JSB and believes its franchise value has been
strengthened by the acquisition for several reasons:
JSB's strong customer base, excellent branch locations, and
approximately $200 million of stable low cost core deposits
allowed the Company to obtain a 26% market share leadership
position in Cambria County - one of its primary markets.
the intra-market consolidation opportunities will provide for
significant future ongoing cost savings which will approximate
$3.8 million annually on a pre-tax basis when fully implemented
by the end of 1995.
<PAGE>22
Under accounting rules, intangibles are amortized over a
period of time and eventually disappear as an asset on the balance
sheet. The Company is amortizing core deposit intangibles over
periods ranging from five to ten years while goodwill is being
amortized over a 15 year life. The straight line method of
amortization is being used for both of these categories of
intangibles. It is important to note that this intangible
amortization expense is not a cash flow item. The following table
reflects the future amortization expense of the intangible assets
(in thousands):
Remaining 1994 $ 661
1995 2,493
1996 2,408
1997 2,408
1998 2,222
1999 2,066
2000 and after 15,450
A reconciliation of the Company's intangible asset balances
for the first nine months of 1994 is as follows (in thousands):
Total goodwill & core deposit
intangible assets at 12/31/93 $ 2,897
Goodwill & core deposit intangibles
resulting from JSB acquisition 25,954
Intangible amortization expense
through 9/30/94 (1,143)
Total goodwill & core deposit
intangible assets at 9/30/94 $27,708
The value of these intangibles is reassessed regularly by the
Company. If it is determined that the value of any asset is
permanently impaired, appropriate adjustments to the book value of
that asset are made.
<PAGE>23
20. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following (in thousands,
except percentages):
<TABLE>
<CAPTION>
Type Maturing Amount Weighted
Average
Rate
<S> <C> <C> <C>
Flexline Overnight $ 32,500 5.00%
Advances and 1994 157,826 4.86
wholesale re- 1995 119,000 5.65
purchase agree- 1996 21,244 5.56
ments 1997 2,750 5.61
1998 6,750 5.86
1999 296 6.09
2000 3,750 6.15
2001 6,750 8.15
2002 2,500 6.59
2003 3,750 6.63
Total Advances and 324,616 5.34
wholesale repurchase
agreements
Total FHLB Borrowings $357,116 5.31%
</TABLE>
All of the above borrowings bear a fixed rate of interest,
except for the Flexline rate, which can change daily. All FHLB
stock and an interest in unspecified mortgage loans, with an
aggregate statutory value equal to the amount of the advances, have
been pledged as collateral with the Federal Home Loan Bank of
Pittsburgh to support these borrowings.
<PAGE>24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
("M.D.& A.")
THIRD QUARTER 1994 vs. THIRD QUARTER 1993
.....PERFORMANCE OVERVIEW.....The Company's net income for the
third quarter of 1994 totalled $3,704,000 or $0.65 per share on a
fully diluted basis. When compared to the $2,848,000 or $0.60 per
share on a fully diluted basis reported for the same 1993 quarter,
the 1994 results reflect an $856,000 or 30.1% earnings increase and
a $0.05 or 8.3% improvement in fully diluted earnings per share.
For the third quarter of 1994, the Company's return on average
equity increased by 76 basis points to 10.74% while the return on
average assets declined by five basis points to 0.85%.
The Company's 1994 third quarter results reflect the impact of
the Johnstown Savings Bank acquisition which was included in the
Company's operating results for the entire quarter. The Company's
improved financial performance was due to a reduced loan loss
provision, increased non-interest income, and increased net
interest income resulting from the JSB acquisition and the
implementation of a balance sheet leveraging program. These
positive items were partially offset by increased non-interest
expense caused largely by the JSB acquisition. In conjunction with
this acquisition, the Company also issued 957,857 new shares of
common stock which contributed to the 20% increase in weighted
average fully diluted shares outstanding to 5,674,000. The impact
of these additional shares was the primary reason that the fully
diluted EPS growth rate was lower than the net income growth rate
in the third quarter of 1994. The following table summarizes some
of the Company's key performance indicators (in thousands, except
ratios):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1994 September 30, 1993
<S> <C> <C>
Net income $ 3,704 $ 2,848
Fully diluted earnings
per share 0.65 0.60
Return on average assets 0.85% 0.90%
Return on average equity 10.74 9.98
Average fully diluted common
shares outstanding 5,674 4,728
</TABLE>
<PAGE>25
.....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 percentage during periods of
fluctuating interest rates. The following table compares the
Company's net interest income performance for the third quarter of
1994 to the third quarter of 1993 (in thousands, except
percentages):
<TABLE>
<CAPTION>
Three Months Ended
September 30
1994 1993 $ Change % Change
<S> <C> <C> <C> <C>
Interest income $ 29,462 $ 21,847 7,615 34.9
Interest expense 13,781 9,329 4,452 47.7
Net interest income 15,681 12,518 3,163 25.3
Tax-equivalent
adjustment 549 192 357 185.9
Net tax-equivalent
interest income $ 16,230 $ 12,710 3,520 27.7
Net interest margin 4.00% 4.28% (0.28)% *
*Not meaningful.
</TABLE>
USBANCORP's net interest income on a tax-equivalent basis
increased by $3,520,000 or 27.7% while the net interest margin
percentage declined by 28 basis points to 4.00%. The increased net
interest income was due primarily to a higher volume of earning
assets resulting from the JSB acquisition ($313 million) and a
balance sheet leverage program ($120 million). For the third
quarter of 1994, total average earning assets were $439 million
higher than the comparable 1993 period. Net interest income was
also enhanced by approximately $100,000 of non-accrual loan
interest recoveries. While the leverage program and the JSB
acquisition did cause an increase in net interest income, these
same two factors also caused a compression in the Company's net
interest margin percentage which is fully explained in the
following discussion.
.....LEVERAGE PROGRAM.....In the third quarter of 1994, management
fully implemented a previously disclosed program designed to better
leverage the Company's balance sheet and equity. This leverage
program consisted of the purchase of an aggregate $120 million pool
of Federal Agency mortgage-backed securities. The pool is composed
of 15-year fixed-rate mortgage-backed securities, seven-year
balloons and adjustable-rate mortgage securities. Approximately
60% of the pool is adjustable-rate and 40% fixed-rate with a
duration of approximately 3.6 years. This project is funded
through the Federal Home Loan Bank using one-year term funds tied
to 90 day Libor, 30 and 90 day wholesale reverse repurchase
agreements and overnight funds.
<PAGE>26
While this leverage program favorably increased net interest
income dollars it did, however, contribute to a lower net interest
margin percentage since the average spread earned on the funds
deployed in the leverage program approximated 235 basis points
compared to the Company's more typical net interest spread of
approximately 365 basis points. The following table isolates the
impact that the leverage program had on some of the Company's key
performance items in the third quarter of 1994 (in thousands,
except percentages):
<TABLE>
<CAPTION>
Third Quarter Net Impact
Actual Third 1994 Excluding of Leverage
Quarter 1994 Leverage Program Program
<S> <C> <C> <C>
Net tax-equivalent
interest income $ 16,230 $ 15,519 $ 711
Net interest margin 4.00% 4.12% (0.12%)
Average earning assets $ 1,628,470 $ 1,508,470 $120,000
Return on average
equity 10.74% 9.40% 1.34%
</TABLE>
It is recognized that interest rate risk does exist,
particularly in a rising interest rate environment, from this
leverage program. Management, however, has the necessary hedging
measurement methods, policies, and Board approvals available to
reduce this risk to a neutral position, as well as, the necessary
cash flow from the total investment portfolio to de-lever this
program if desired. (See further discussion under Note #17).
The Company's core net interest margin performance (excluding
the leverage program) did decline to 4.12% in the third quarter of
1994 after being relatively stable in the 4.30% range for the prior
four quarters. This decline was due almost entirely to the JSB
acquisition and their lower net interest margin performance (i.e.
During the first half of 1994, JSB's net interest margin
approximated 3.10%). The Company was able to improve JSB's net
interest margin performance by approximately 70 basis points as a
result of an investment portfolio repositioning strategy executed
in the month immediately following acquisition. The Company
elected to sell 90% of JSB's securities portfolio, which was
comprised primarily of collateralized mortgage obligations yielding
approximately 5.50%, and replace it with Federal Agency mortgage
pass through securities yielding approximately 7.0% with a similar
average life of approximately 3.5 years. The Company prefers
mortgage pass through securities because these instruments have
more predictable cash flows and less market valuation risk than
collateralized mortgage obligations. No gain or loss was
recognized on the sale of these securities for book purposes since
they had already been marked to market through purchase accounting
at the acquisition date.
<PAGE>27
Regarding the separate components of net interest income, the
Company's total tax-equivalent interest income for the third
quarter of 1994 increased by $8 million or 36.2% when compared to
the same 1993 period. This increase was due to the previously
mentioned $439 million increase in total average earning assets
which caused interest income to rise by $7.1 million. A favorable
asset mix redeployment impacted interest income as the Company's
loan to deposit ratio averaged 71.7% in the third quarter of 1994
compared to 69.2% in the third quarter of 1993. These positive
factors were partially offset by an overall eight basis point
decline in the total earning asset yield to 7.35%. This decrease
was due to an unfavorable rate variance in the loan portfolio as
the Company's total loan yield dropped by 23 basis points to 8.33%.
The national and local market trend of accelerated customer
refinancing of mortgage loans during the second half of 1993
contributed materially to the declining yield experienced in the
loan portfolio. This more than offset the repricing benefit
received in the commercial loan portfolio during 1994 as the prime
rate has increased by 175 basis points so far this year.
The Company's total interest expense for the third quarter of
1994 increased by $4.5 million or 47.7% when compared to the same
1993 period. This increase was also caused by a $426 million
increase in average interest bearing liabilities resulting from the
previously mentioned JSB acquisition and FHLB borrowings used to
fund the leverage program. These increased FHLB borrowings also
negatively impacted the liability mix and overall cost of funds
since the cost of these borrowings averaged 4.73% for the third
quarter of 1994 compared to the Company's core cost of deposits of
3.54%. This 3.54% cost of core deposits represented an eight basis
point decline from the prior year quarter and favorably reduced
interest expense by $279,000.
This decline is primarily a result of management repricing all
deposit categories downward in the declining interest rate
environment experienced during 1993 and generally maintaining those
low rates for non-certificate of deposit products during the rising
rate environment experienced in the first nine months of 1994. (See
further discussion under Interest Rate Sensitivity on page 47
regarding future limitations on the Company's ability to continue
to maintain these low core deposit rates). It has been
management's ongoing pricing strategy to position USBANCORP's
deposit rates within the lower quartile of deposit rates offered by
commercial banks in its market area. During the third quarter of
1994, the Company positioned its deposit pricing within the lower
half of deposit rates offered by commercial banks in its market
area. This temporary increase in deposit pricing was done for
several reasons: to help retain customers immediately after the
JSB acquisition during a critical period which included a computer
system conversion, to try to encourage customer deposit extension
in a rising interest rate environment, and to use lower cost
deposits as a source of funds to replace higher cost and more rate
sensitive FHLB borrowings which were being used to fund a portion
of JSB's acquired balance sheet. 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. Additionally, the use of an interest rate swap
during the third quarter of 1994 as a hedge against the CMO
liability permitted the Company to effectively reduce the cost of
the CMO liability by 36 basis points to 10.55%. (See detailed
discussion in Note #17.) The combination of all these price and
liability composition movements caused USBANCORP's average cost of
interest bearing liabilities to increase by eight basis points from
3.78% during the third quarter of 1993 to 3.86% during the third
quarter of 1994.
<PAGE>28
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>29
Three Months Ended September 30 (In thousands, except percentages)
<TABLE>
<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 $ 877,615 $ 18,333 8.33% $ 726,464 $ 15,498 8.56%
Deposits with banks 8,434 95 4.43 4,057 27 2.67
Federal funds sold
and securities
purchased under
agreement to resell 4,041 44 4.19 1,711 14 3.28
Investment securities:
Available for sale 281,169 4,141 5.88 441,537 6,178 5.61
Held to maturity 447,298 7,191 6.42 - - -
Total investment
securities 728,467 11,332 6.21 441,537 6,178 5.61
Assets held in trust for
collateralized
mortgage obligation 9,913 207 8.28 15,943 322 7.99
Total interest earning
assets/interest income 1,628,470 30,011 7.35 1,189,712 22,039 7.43
Non-interest earning assets:
Cash and due from banks 47,773 32,556
Premises and equipment 19,142 16,656
Other assets 58,053 28,227
Allowance for loan
losses (19,359) (14,362)
TOTAL ASSETS $1,734,079 $1,252,789
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand $ 117,741 $ 517 1.74% $ 102,162 $ 529 2.08%
Savings 275,142 1,379 1.99 234,627 1,434 2.45
Other time 684,741 7,710 4.47 584,952 6,367 4.37
Total interest bearing
deposits 1,077,624 9,606 3.54 921,741 8,330 3.62
Short term borrowings:
Federal funds
purchased, secur-
ities sold under
agreements to
repurchase and other
short-term
borrowings 161,450 1,743 4.35 21,131 148 2.81
Advances from Federal
Home Loan Bank 160,263 2,094 5.11 24,593 304 4.96
Collateralized mortgage
obligation 9,032 241 10.55 13,713 373 10.91
Long-term debt 7,694 97 5.00 8,678 174 8.04
Total interest bearing
liabilities/interest
expense 1,416,063 13,781 3.86 989,856 9,329 3.78
Non-interest bearing
liabilities:
Demand deposits 146,221 128,026
Other liabilities 35,004 21,691
Stockholders' equity 136,791 113,216
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $1,734,079 $1,252,789
Interest rate spread 3.49 3.65
Net interest income/
net interest margin 16,230 4.00% 12,710 4.28%
Tax-equivalent adjustment (549) (192)
Net Interest Income $ 15,681 $ 12,518
</TABLE>
<PAGE>30
....PROVISION FOR LOAN LOSSES.....The Company's asset quality
permitted a $375,000 reduction in the loan loss provision to $225,000
or 0.10% of total loans in the third quarter of 1994 compared to a
provision of $600,000 or 0.33% of total loans in the third quarter of
1993. This reduced provision level combined with net recoveries of
0.01% of total loans caused the allowance for loan losses to increase
during the quarter. At September 30, 1994, the balance in the
allowance for loan losses totalled $19.5 million or 273.4% of total
non-performing assets.
<PAGE>31
At September 30, 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. At September 30, 1994, the Company's aggregate
unallocated reserve was $10.5 million or 117% of the reserve needed.
(See Allowance for Loan Losses Note #9.)
.....NON-INTEREST INCOME.....Non-interest income for the third quarter
1994 totalled $3.4 million which represented a $799,000 or 30.7%
increase when compared to the same 1993 period. This increase was
primarily due to the following items:
the inclusion of $468,000 of net mortgage servicing income
generated from a mortgage banking subsidiary acquired with the
JSB acquisition. This amount resulted from $879,000 of mortgage
servicing fees net of $411,000 of amortization expense of the
cost of purchased mortgage servicing rights. As of September 30,
1994, this mortgage banking subsidiary was servicing $1.2 billion
of mortgage loans.
a $109,000 or 17.1% increase in trust fees to $748,000 in the
third quarter of 1994. 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.
a $348,000 increase in other income due primarily to additional
fee income resulting from the JSB acquisition. Examples of fee
income sources demonstrating increases are: credit card charges,
insurance commissions, other mortgage banking processing fees,
ATM transaction charges, and bond handling fees.
<PAGE>32
.....NON-INTEREST EXPENSE.....Non-interest expense for the third
quarter of 1994 totalled $13.3 million which represented a $2.9
million or 28.3% increase when compared to the same 1993 period. The
acquisition of JSB has been the primary reason for the increase
experienced in each of the expense line items and is evidenced by the
following more significant changes:
a $1,537,000 increase in salaries and employee benefits due to
the addition of 133 full time equivalent employees ("FTE")
associated with the JSB acquisition, planned wage increases
approximating 4.0%, and generally higher group medical insurance
costs. The Company also incurred higher overtime costs during
the third quarter of 1994 due to a computer system conversion
related to this same acquisition. Excluding the JSB acquisition,
total FTE were relatively constant between periods.
a $476,000 increase in amortization expense due entirely to the
amortization of the goodwill and core deposit intangibles
resulting from the JSB acquisition. (See further discussion in
Note #19.)
a $257,000 increase in net occupancy expense due to the costs
associated with operating six additional JSB branches during the
third quarter and the occupancy costs related to the mortgage
banking subsidiary. The Company expects these costs to decline
in the future because by the end of the third quarter two of
these branches were consolidated into existing branches in the
Company's retail delivery system.
a $135,000 increase in FDIC deposit insurance expense caused by
the addition of approximately $200 million of deposits associated
with the JSB acquisition.
.....NET OVERHEAD BURDEN.....The Company's net overhead to average
assets ratio showed improvement as it dropped from 2.45% in the third
quarter of 1993 to 2.26% in the third quarter of 1994. The Company's
net overhead to tax equivalent net interest income ratio was
relatively stable at 60.8% 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 next three years through
productivity enhancements, operational efficiencies, and economy of
scale benefits. The successful integration of JSB and the cost
savings from intra-market consolidation related opportunities are
essential to achieving this goal.
<PAGE>33
.....JSB INTEGRATION BENEFITS.....During the third quarter of 1994,
the Company began the process of integrating JSB into its U.S. Bank
subsidiary in order to begin realizing as soon as possible the
previously disclosed $3.8 million of annual pre-tax savings
opportunities resulting from this intra-market consolidation.
Specific cost savings/revenue generating actions completed during the
third quarter of 1994 included: a computer conversion from JSB's
outside data processing service bureau to U.S. Bank's internal data
processing system, the consolidation of two JSB branches into the
Company's existing retail delivery system, the consolidation of
several administrative functions such as executive administration,
accounting and internal audit, the transfer of U.S. Bank's mortgage
servicing to Standard Mortgage Corporation, an investment portfolio
repositioning strategy that resulted in the sale of approximately 90%
of JSB's securities portfolio (see complete discussion under net
interest income on page 26), and the repricing of several deposit
products. With the exception of the investment portfolio
repositioning and the consolidation of administrative functions, the
majority of these initiatives were not completed until mid-September
so there was minimal cost savings benefit in the third quarter. The
favorable pre-tax benefits recognized during the third quarter due to
the investment portfolio repositioning and administrative function
consolidation amounted to approximately $550,000.
.....INCOME TAX EXPENSE.....The Company's provision for income taxes
for the third quarter of 1994 was $1.9 million reflecting an effective
tax rate of 33.8%. The Company's 1993 third quarter income tax
provision was $1.3 million or an effective tax rate of 31.9%. The
$554,000 increase in income tax expense was due to the higher level
of pre-tax earnings in the third quarter of 1994 combined with a
modest increase in the effective tax rate due to the JSB acquisition
(i.e. JSB has less tax-free assets on a relative percentage basis in
comparison to the Company's other subsidiaries. Additionally, the
non-deductibility of certain purchase accounting adjustments for tax
purposes also contributed to the higher effective tax rate).
<PAGE>34
NINE MONTHS ENDED SEPTEMBER 30, 1994
vs.
NINE MONTHS ENDED SEPTEMBER 30, 1993
.....PERFORMANCE OVERVIEW.....The Company's net income for the first
nine months of 1994 totalled $9,529,000 or $1.88 per share on a fully
diluted basis, exclusive of the impact of a $1,882,000 after-tax non-
recurring acquisition charge. This previously disclosed acquisition
charge related to the June 30, 1994, completed intra-market purchase
of $344 million Johnstown Savings Bank and included expense
recognition for one-time integration costs such as employee severance,
data processing conversion, and legal and professional fees. The
Company's reported results, before the acquisition charge, compared
favorably to net income before a cumulative effect of change in
accounting principle of $8,119,000 or $1.79 per fully diluted share
reported for the same period of 1993. The Company's 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 nine months of 1994.
Before the acquisition charge and SFAS #109 benefit, net income
between periods increased by $1,410,000 or 17.4% while fully diluted
earnings per share increased by a lesser amount of $0.09 or 5.0%. The
Company's return on average assets was constant at 0.90% while the
return on average equity increased by 17 basis points to 10.33%. The
Company's improved net income was due to a reduced loan loss
provision, increased non-interest income, and increased net interest
income resulting from the JSB acquisition and the implementation of
a balance sheet leveraging program. These positive items were
partially offset by increased non-interest expense caused largely by
the JSB acquisition. The growth of net income, however, was exceeded
on a relative basis by the growth in common shares outstanding due 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 and the issuance of 957,857 new shares in
conjunction with the JSB acquisition. These two efforts caused a
513,923 or 11.3% increase in fully diluted weighted average common
shares outstanding to 5,055,207 for the first nine months of 1994.
The following table summarizes some of the Company's key performance
indicators (in thousands, except per share data and ratios):
<PAGE>35
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1994 September 30, 1993
<S> <C> <C>
Net income $ 7,647 $ 9,571
Net income
(before acquisition 9,529 8,119
charge and SFAS #109
benefit)
Fully diluted earnings
per share 1.51 2.11
Fully diluted earnings
per share 1.88 1.79
(before acquisition
charge and SFAS #109
benefit)
Return on average assets 0.72% 1.06%
Return on average assets
(before acquisition 0.90 0.90
charge and SFAS #109
benefit)
Return on average equity 8.29 11.98
Return on average equity
(before acquisition 10.33 10.16
charge and SFAS #109
benefit)
Average fully diluted
common shares
outstanding 5,055 4,541
</TABLE>
.....NET INTEREST INCOME AND MARGIN.....The following table compares
the Company's net interest income performance for the first nine
months of 1994 to the first nine months of 1993 (in thousands, except
percentages):
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1994 1993 $ Change % Change
<S> <C> <C> <C> <C>
Interest income $ 71,712 $ 64,597 7,115 11.0
Interest expense 30,585 27,516 3,069 11.2
Net interest income 41,127 37,081 4,046 10.9
Tax-equivalent
adjustment 1,111 536 575 107.3
Net tax-equivalent
interest income $ 42,238 $ 37,617 4,621 12.3
Net interest margin 4.19% 4.38% (0.19)% *
*Not meaningful.
</TABLE>
<PAGE>36
USBANCORP's net interest income on a tax-equivalent basis
increased by $4.6 million or 12.3% while the net interest margin
percentage declined by 19 basis points to 4.19%. The increased net
interest income was due primarily to a higher volume of earning assets
resulting from the Integra Branches Acquisition, JSB acquisition and
the balance sheet leveraging program. For the first nine months of
1994, total average earning assets were $197 million higher than the
comparable 1993 period. The 1994 net interest income was also
enhanced by approximately $212,000 of additional non-accrual loan
interest recoveries. The contraction in the net interest margin
percentage between the first nine months of 1994 and the comparable
1993 period can best be explained by the following:
the previously discussed leveraging of the investment portfolio
by using short-term Federal Home Loan Bank borrowings also
contributed to the contraction in the net interest margin
percentage since the average spread earned on funds deployed in
the leverage program approximated 235 basis points compared to
the Company's more typical net interest spread of 365 basis
points. While the impact of this leveraging program was much
more significant on the third quarter 1994 performance (see
leverage table on page 27), it was responsible for a seven basis
point decline in the year-to-date 1994 net interest margin
performance.
the negative impact of JSB's lower net interest margin on the
Company's total net interest margin performance. Even after the
benefits of repositioning JSB's investment securities portfolio
immediately after acquisition, JSB's adjusted net interest margin
of approximately 3.80% was still below the Company's core net
interest margin which approximated 4.30% prior to the JSB
acquisition and implementation of the leverage program.
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 also
contributed to the contraction in the net interest margin
percentage.
Regarding the separate components of net interest income, the
Company's total tax equivalent interest income for the first nine
months of 1994 increased by $7.7 million or 11.8% when compared to the
same 1993 period. This increase was due to the previously mentioned
$197 million increase in total average earning assets which caused
interest income to rise by $10.1 million. This positive item was
partially offset by an unfavorable rate variance which reduced
interest income by $2.4 million. Specifically, the yield on the loan
portfolio decreased 51 basis points to 8.23% while the yield on the
total investment securities portfolio dropped six basis points to
5.79%. The national and local market trend of accelerated customer
refinancing of mortgage loans during 1993 has contributed materially
to the declining yields experienced in both of these portfolios.
Also, the earning asset yield was negatively impacted by regularly
scheduled maturities of higher yielding consumer loans originated
several years ago.
<PAGE>37
The Company's total interest expense increased by $3.1 million or
11.2% in the first nine months of 1994 when compared to the same 1993
period. This increase was due entirely to a $175 million increase in
total average interest bearing liabilities resulting from the
previously mentioned acquisitions and borrowings used to fund the
leverage program. These additional liabilities caused interest
expense to increase by $4.5 million. This negative item was partially
offset by an overall favorable rate variance which reduced interest
expense by $1.2 million. Management's ability to reprice all
deposit categories downward in the declining interest rate environment
experienced during 1993 and generally maintain those low rates for
non-certificate of deposit products during the rising rate environment
experienced in the first nine months of 1994 favorably reduced the
cost of interest bearing deposits by 30 basis points to 3.37%. (See
further discussion under Interest Rate Sensitivity on page 49
regarding future limitations on the Company's ability to continue to
maintain these low core deposit rates).
The increased FHLB borrowings (including wholesale repurchase
agreements) negatively impacted the liability mix since the cost of
these borrowings approximated 4.50% for the first nine months of 1994
compared to the Company's cost of core deposits of 3.37%. A reduced
dependence on long-term debt as a funding source also favorably
impacted the liability mix. The balance in long-term debt declined
on average by $4.3 million due to the successful restructuring of
several debt funding sources in the third and fourth quarters of 1993.
Additionally, the use of an interest rate swap during the first nine
months of 1994 as a hedge against the CMO liability permitted the
Company to effectively reduce the cost of the CMO liability by 45
basis points to 10.13%. (See detailed discussion in Note #17.) The
combination of all these price and liability composition movements
allowed USBANCORP to lower the average cost of interest bearing
liabilities by 23 basis points from 3.83% during the first nine months
of 1993 to 3.60% during the first nine months 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>38
Nine Months Ended September 30 (In thousands, except percentages):
<TABLE>
<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 $ 784,895 $ 48,372 8.23% $ 700,130 $ 45,751 8.74%
Deposits with banks 3,628 112 4.06 5,410 103 2.55
Federal funds sold
and securities
purchased under
agreement to
resell 2,811 82 3.86 16,101 359 2.98
Investment securities:
Available for sale 294,155 12,076 5.46 409,414 17,910 5.85
Held to maturity 247,771 11,453 6.16 - - -
Total investment
securities 541,926 23,529 5.79 409,414 17,910 5.85
Assets held in trust for
collateralized
mortgage obligation 11,356 728 8.57 16,921 1,010 7.87
Total interest earning
assets/interest
income 1,344,616 72,823 7.23 1,147,976 65,133 7.58
Non-interest earning assets:
Cash and due from banks 41,467 31,090
Premises and equipment 17,603 16,149
Other assets 31,841 25,838
Allowance for loan
losses (16,842) (14,050)
TOTAL ASSETS $ 1,418,685 $1,207,003
Interest bearing
liabilities
Interest bearing
deposits:
Interest bearing demand $ 107,593 $ 1,268 1.58% $ 98,292 $ 1,575 2.14%
Savings 246,272 3,550 1.93 230,759 4,280 2.48
Other time 610,702 19,473 4.26 571,534 18,885 4.42
Total interest bearing
deposits 964,567 24,291 3.37 900,585 24,740 3.67
Short term borrowings:
Federal funds
purchased, securities
sold under agreements
to repurchase and
other short-term
borrowings 80,319 2,425 4.08 15,001 260 2.32
Advances from Federal
Home Loan Bank 75,582 2,861 4.99 21,030 807 5.13
Collateralized mortgage
obligation 10,355 785 10.13 14,886 1,178 10.58
Long-term debt 4,653 223 6.42 8,902 531 8.03
Total interest bearing
liabilities/interest
expense 1,135,476 30,585 3.60 960,404 27,516 3.83
Non-interest bearing
liabilities:
Demand deposits 137,530 119,464
Other liabilities 22,329 20,289
Stockholders' equity 123,350 106,846
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,418,685 $1,207,003
Interest rate spread 3.63 3.75
Net interest income/net
interest margin 42,238 4.19% 37,617 4.38%
Tax-equivalent adjustment (1,111) (536)
Net Interest Income $ 41,127 $ 37,081
</TABLE>
<PAGE>39
.....PROVISION FOR LOAN LOSSES.....The Company's asset quality
permitted a $765,000 reduction in the loan loss provision to $1
million or 0.18% of total loans in the first nine months of 1994
compared to a provision of $1.8 million or 0.34% of total loans in
the first nine months of 1993. Net charge-offs for the first nine
months of 1994 totalled $222,000 or only 0.04% of average loans
compared to net charge-offs of $876,000 or 0.17% of average loans
in the first nine months of 1993. At September 30, 1994, the
balance in the allowance for loan losses totalled $19.5 million or
273.4% of total non-performing assets.
<PAGE>40
.....NON-INTEREST INCOME.....Non-interest income for the first nine
months of 1994 totalled $8.5 million which represented a $740,000
or 9.5% increase over the same 1993 period. The increase in non-
interest income between the first nine months of 1994 and the
comparable 1993 period can best be explained by the following:
a $197,000 or 10.0% increase in trust fees due to the
profitable expansion of the Company's trust business
throughout western Pennsylvania including the Greater
Pittsburgh marketplace.
the realization of a $186,000 loss on investment securities
available for sale in the first nine months of 1994 compared
to a $502,000 gain for the comparable 1993 period (a net
unfavorable shift of $688,000). The 1994 loss resulted from
a portfolio restructuring designed to reduce the amount of
collateralized mortgage obligations in an effort to reduce the
market valuation risk of the available for sale portfolio,
enhance yield performance and reduce cash flow volatility.
A $482,000 loss due to this repositioning strategy was
realized at the Company's U.S. Bank and Three Rivers Bank subsidiaries
in the second quarter of 1994 prior to the JSB
Acquisition (see separate JSB sales strategy discussion on
page 27). This loss more than offset $296,000 in gains
generated from a sales strategy executed to capture available
market premiums on securities with a remaining maturity of
generally less than one year.
<PAGE>41
the realization of a $722,000 gain on loan sales in the first
nine months of 1994 compared to a $554,000 gain for the
comparable 1993 period. The $168,000 increase between periods
was due entirely to a $200,000 gain recognized on the sale of
the Company's $17 million student loan portfolio which more
than offset reduced gains generated on fixed rate mortgage
loan sales in 1994.
the inclusion of $468,000 of net mortgage servicing income
generated from a mortgage banking subsidiary acquired with the
JSB acquisition. This amount resulted from $879,000 of
mortgage servicing fees net of $411,000 of amortization
expense of the cost of purchased mortgage servicing rights.
a $686,000 increase in other income due primarily to
additional fee income resulting from the JSB acquisition.
Examples of fee income sources demonstrating increases are:
credit card charges, other mortgage banking processing fees,
ATM transaction charges, and bond handling fees. Other income
was also supplemented by an $88,000 gain realized on the
liquidation of a real estate joint venture and a $53,000
increase in premium income on credit life and disability
insurance sales to consumer loan customers.
.....NON-INTEREST EXPENSE.....Total non-interest expense of $36.8
million increased by $5.9 million or 19.3% when compared to the
first nine months of 1993 due largely to the recognition of a $2.4
million pre-tax non-recurring acquisition charge associated with
the Company's acquisition of Johnstown Savings Bank. Excluding
this charge, total non-interest expense increased by $3.5 million
or 11.4% when the first nine months of 1994 is compared to the
first nine months of 1993 due to the following items:
a $2,196,000 or 14.8% increase in salaries and employee
benefits expense due entirely to planned wage increases
approximating 4%, 56 additional average full-time equivalent
employees resulting from the acquisitions and increased group
hospitalization expense.
a $539,000 increase in net occupancy expense as a result of
the additional branch facilities acquired with the JSB and
Integra branches acquisitions and higher utilities and
repair/maintenance expenses due in part to the harsh winter.
a $534,000 increase in amortization expense due entirely to
the amortization of the goodwill and core deposit intangibles
resulting from the JSB and Integra branches acquisition. (See
further discussion in Note #19.)
a $283,000 increase in FDIC deposit insurance expense caused
by the additional deposits associated with JSB and Integra
branches acquisitions.
<PAGE>42
a $531,000 or 10.4% decrease in other expense due to reduced
other real estate owned expense and 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.....Excluding the JSB acquisition charge,
the net overhead to average assets ratio showed improvement as it
dropped by 12 basis points from 2.55% in the first nine months of
1993 to 2.43% in the first nine months of 1994. The Company's net
overhead to tax equivalent net interest income ratio was relatively
stable at 61.1% for that same time frame. Employee productivity
ratios continue to demonstrate improvement as total assets per
employee have averaged approximately $2 million for the nine months
in 1994 compared to a $1.8 million average for the same 1993
period.
.....INCOME TAX EXPENSE.....The Company's provision for income
taxes for the first nine months of 1994 was $4.2 million reflecting
an effective tax rate of 35.6%. The Company's 1993 first nine
months income tax provision was $4.1 million or an effective tax
rate of 33.8%. The JSB acquisition charge was responsible for the
increase in the Company's effective tax rate since there was no tax
benefit recorded on approximately $800,000 of the total $2.4
million pre-tax acquisition charge. This $800,000 amount related
to professional fees incurred for the acquisition which must be
capitalized and not expensed for tax purposes. The Company's
effective tax rate did benefit by approximately 2% over that same
time period due to increased tax-free asset holdings. The tax-free
asset holdings consist of municipal investment securities with a
duration of approximately four years and commercial loan tax
anticipation notes which generally have a maturity of one year.
For the first nine months of 1994, total tax-free asset holdings
were $53 million higher on average than the comparable 1993 period
and amounted to $109 million.
.....BALANCE SHEET.....The Company's total consolidated assets were
$1.786 billion at September 30, 1994, compared with $1.242 billion
at December 31, 1993, which represents an increase of $544 million
or 43.8%. The June 30, 1994, acquisition of Johnstown Savings Bank
accounted for $367 million or 67.5% of the growth between periods.
The final cost of the JSB acquisition was $43.8 million. In
conjunction with the acquisition, 957,857 new shares of UBAN common
stock were issued at a per share price of $25.125 which caused a
$24.1 million increase in total equity. Since the acquisition has
been accounted for under the purchase method of accounting, the
September 30, 1994, balances for the newly created core deposit
intangibles and goodwill totalled $5.5 million and $19.9 million,
respectively.
<PAGE>43
Excluding JSB, the previously discussed $120 million leverage
program explained the majority of the remaining growth in assets.
This program was designed to enhance the Company's return on equity
by leveraging the investment securities portfolio through the use
of funding sources available from the Federal Home Loan Bank.
Specifically, total securities have increased by $151.1 million
while federal funds purchased, other short term borrowings, and
FHLB advances have grown by a total of $237 million. The growth in
borrowings exceeded the securities portfolio growth because
borrowings were also needed to maintain the funding of the loan
portfolio since total deposits (again excluding JSB) declined by
$46 million or 4.4% since December 31, 1993. The decline in
deposits can be attributed to management's consistent application
of the previously discussed pricing philosophy which emphasizes
profitable net interest margin management rather than increased
deposit size. This deposit pricing strategy was maintained during
a period of aggressively increasing competitive deposit rates
particularly in the Greater Pittsburgh suburban area. Regarding
the JSB acquisition, the Company has targeted as a goal to limit
deposit run-off from this intra-market consolidation to 10% of the
total deposits acquired. Through the first four months since
acquisition, deposit run-off has approximated 6.5%. The Company
believes deposit run-off will be contained within this 10% goal.
Excluding the $125.6 million of loans acquired with the JSB
acquisition, total loans and loans held for sale also increased by
$33.5 million or 4.6% since year-end 1993. This growth occurred
primarily in the third quarter of 1994 and reflects the economic
stability and diversification of both regions of the Company's
market place -- Greater Johnstown and suburban Pittsburgh. The
majority of the loan growth occurred in the commercial loan
portfolio as the Company experienced increased demand for both
taxable and tax-free commercial loans. This commercial loan growth
more than offset reduced consumer loan balances caused largely by
the sale of the Company's $17 million student loan portfolio late
in the second quarter of 1994. Management elected to divest of
this line of business since future profitability will be negatively
impacted by scheduled changes in regulations and servicing
requirements. Consumer loan balances have also been negatively
impacted by intense competitive pressures in the indirect auto loan
business segment. Several finance companies and credit unions have
been offering below market auto loan rates in an effort to develop
business during this period of strong consumer demand for
automobile purchases. The Company, while maintaining a commitment
to profitably price this product in this competitive environment,
has consequently struggled to maintain indirect auto loan balances.
<PAGE>44
.....MARKET AREA ECONOMY.....The recent affiliation between U.S.
Bank and Johnstown Savings Bank has occurred at a time when the
Johnstown economy is exhibiting decisive evidence of growth.
Industry giant Bethlehem Steel, whose departure from the area
caused unemployment and economic stagnation throughout the '80s and
early '90s, is being successfully replaced by several smaller, more
diversified steel production companies. Since 1990, the influx of
companies such as Johnstown America Corporation and J-Pitt Steel,
Inc., is expected to result in the hiring of nearly 2,500 high-
skilled local steel workers. As recently as September 23, Veritas
Capital, Inc., announced the purchase of an additional Johnstown
steel production facility which is expected to employ nearly 500
people.
The successful rebirth through diversification of the steel
industry in the Johnstown region is just one economic sector with
a promising future. The Johnstown Industrial Park, which
accommodates new business and manufacturing ventures, has reached
its capacity, leading to the development of a second 68-acre
industrial park. Attracting defense industry contracts, the stated
goal of a proactive community business development plan, has
resulted in $156.2 million in defense contracts and more than 650
new jobs since 1990. Large-scale defense industry contracts were
virtually nonexistent in the Johnstown area 10 years ago. Today
the production of technical hardware and systems for our defense
industry is an expanding new business segment.
The resurgence of the economy in the U.S. Bank service region
is fueled by local business development organizations, such as
Johnstown Area Regional Industries, who have mapped a strategic
economic correction course. The success achieved to date adds
credibility to the long range plans and sustained growth of the
region. Outside investors have begun to recognize Johnstown's
potential as evidenced by an agreement signed in September that
will bring a minor league baseball franchise to Johnstown in 1995.
This baseball franchise, along with the existing minor league
hockey team, will enhance the quality of life in the area and will
combine with a brighter economic climate to attract new investment
in the future.
<PAGE>45
.....LOAN QUALITY.....USBANCORP's written lending policies require
underwriting, credit analysis, and loan documentation standards 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):
<TABLE>
<CAPTION>
September 30 December 31 September 30
1994 1993 1993
<S> <C> <C> <C>
Total loan delinquency (past due
30 to 89 days) $ 13,285 $10,428 $ 7,037
Total non-accrual loans 6,058 5,304 4,270
Total non-performing assets(1) 7,132 6,498 8,653
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 1.50% 1.43% 0.97%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned
income 0.68 0.73 0.59
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 0.80 0.89 1.18
<F1> 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.
</TABLE>
As evidenced in the above table, the acquisition of JSB has
had minimal impact on the Company's loan delinquency and non-
performing asset ratios. Specifically when compared to December
31, 1993, the delinquent loans ratio has increased seven basis
points to 1.50% while the non-accrual loans ratio has declined five
basis points to 0.68% and the total non-performing assets ratio has
decreased nine basis points to 0.80%. These declines further
demonstrate the success of the Company's ongoing loan work-out
program which has been implemented at each banking subsidiary.
<PAGE>46
.....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):
<TABLE>
<CAPTION>
September 30 December 31 September 30
1994 1993 1993
<S> <C> <C> <C>
Allowance for loan losses $ 19,495 $ 15,260 $ 14,676
Amount in the allowance
for loan losses
allocated to "general risk" 10,515 7,635 6,019
Allowance for loan losses as
a percentage of each of
the following:
total loans and loans
held for sale,
net of unearned income 2.20% 2.10% 2.01%
total delinquent loans
(past due 30 to 89 days) 146.74 146.34 208.55
total non-accrual loans 321.81 287.71 343.70
total non-performing assets 273.35 234.84 169.61
</TABLE>
Consistent with the favorable loan quality impact, the
acquisition of JSB added $3.4 million to the allowance for loan
losses and further improved each of the Company's allowance
coverage ratios. When compared to December 31, 1993, the allowance
to total loans ratio increased ten basis points to 2.20% while the
allowance to total non-performing assets ratio improved from 235%
to 273%.
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 $2.9 million since December 31, 1993, to
$10.5 million at September 30, 1994. The amount of the reserve
allocated to general risk now represents 53.9% 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.
<PAGE>47
For static GAP analysis, USBANCORP typically defines interest
rate sensitive assets and liabilities as those that reprice within
six months or 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.
The following table presents a summary of the Company's static
GAP positions at September 30, 1994 (in thousands, except for the
GAP ratios):
<TABLE>
<CAPTION>
September 30 December 31 September 30
1994 1993 1993
<S> <C> <C> <C>
Six month cumulative GAP
RSA................ $ 401,020 $ 328,530 $ 345,908
RSL................ (667,695) (355,613) (382,560)
Off-balance sheet
hedges.......... 90,000 - -
GAP................ $(176,675) $ (27,083) $ (36,652)
GAP ratio.......... 0.69x 0.92x 0.90x
GAP as a % of total
assets.......... (9.89)% (2.18)% (2.93)%
GAP as a % of total
capital......... (129.04) (23.22) (32.01)
One year cumulative GAP
RSA................ $ 682,181 $ 482,229 $ 508,831
RSL................ (838,775) (437,261) (470,921)
Off-balance sheet
hedges.......... (10,000) - -
GAP................ $(166,594) $ 44,968 $ 37,910
GAP ratio.......... 0.80x 1.10x 1.08x
GAP as a % of total
assets.......... (9.33)% 3.62% 3.03%
GAP as a % of total
capital......... (121.67) 38.56 33.11
</TABLE>
The acquisition of JSB and the implementation of the
investment securities portfolio leverage program caused the shift
to more negative static GAP ratios at September 30, 1994. As
separately disclosed in the above table, the hedge transactions
(described in detail in Note #17) reduced the negativity of the six
month static GAP by $90 million or 33.7% and increased the one year
static GAP by $10 million or 6.4%. Management is cognizant of the
interest rate risk that exists with the leverage program but is
confident that it is being effectively managed with available
board-approved hedging measurement methods, policies, and cash flow
from the investment portfolio.
<PAGE>48
A portion of the Company's funding base is low cost core
deposit accounts which do not have a specific maturity date. The
accounts which comprise these low cost core deposits include
passbook savings accounts, money market accounts, NOW accounts,
daily interest savings accounts, purpose clubs, etc. At September
30, 1994, the balance in these accounts totalled $510 million or
28.6% of total assets. Within the above static GAP table,
approximately $148 million or 29% of the total $510 million of low
cost core deposits are included in rate sensitive liabilities which
reprice in one year or less. The Company recognizes that the
pricing of these accounts is somewhat inelastic when compared to
normal rate movements and generally assumes that a 200 basis point
upward movement in rates will cause a 25 to 50 basis point increase
in the cost of these accounts. Through the first nine months of
1994, the Company has been able to maintain the pricing of these
accounts despite a 175 basis point increase in both the fed funds
and prime rate. Given intensifying competitive pressures and the
widening of the gap between the rates paid on these core accounts
and certificates of deposit, the Company expects that it will have
to increase the rate paid on the majority of these accounts by a
minimum of 25 basis points with the next upward movement in
national interest rates. The Company will continue to explore
strategies, such as off-balance sheet hedging transactions and on
balance sheet extension of the liability base, to mitigate the
impact of future increases to these accounts in a rising rate
environment.
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 June 30, 1994, 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 upward or downward interest
rate changes of a maximum of 250 basis points. Capital is
estimated to be effected under these simulations by no more than
+/- two percent.
With the adoption of SFAS #115 in the first quarter of 1994,
33.4% of the investment portfolio is currently classified as
available for sale and 66.6% as held to maturity. The available
for sale classification provides management with greater
flexibility to more actively manage the securities portfolio to
better achieve overall balance sheet rate sensitivity goals.
Furthermore, it is the Company's intent to continue to diversify
its 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 mortgage loans. The
Company will retain all servicing rights at its newly acquired
mortgage banking subsidiary (Standard Mortgage Company of Georgia)
and recognize fee income over the remaining lives of the loans sold
at an average rate of approximately 30 basis points on the loan
balances outstanding.
<PAGE>49
.....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 totalled $222 million at September
30, 1994, $151 million at December 31, 1993, and $154 million at
September 30, 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 September
30, 1994, USBANCORP's subsidiaries had approximately $160.3 million
of unused lines of credit available under informal arrangements
with correspondent banks compared to $89.6 million at September 30,
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. This would suggest a current total
available Federal Home Loan Bank borrowing capacity of
approximately $663 million. Furthermore, USBANCORP had available
at September 30, 1994, an unused $2.5 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>50
.....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>
September 30, 1994 December 31, 1993 September 30, 1993
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
RISK-ADJUSTED
CAPITAL RATIOS
Tier 1 capital $ 115,428 11.95% $ 113,718 14.72% $ 111,387 14.24%
Tier 1 capital
minimum
requirements 38,622 4.00 30,893 4.00 31,295 4.00
Excess $ 76,806 7.95% $ 82,825 10.72% $ 80,092 10.24%
Total capital $ 127,497 13.20% $ 123,372 15.97% $ 121,167 15.49%
Total capital
minimum
requirements 77,244 8.00 61,787 8.00 62,590 8.00
Excess $ 50,253 5.20% $ 61,585 7.97% $ 58,577 7.49%
Total risk-
adjusted
assets $ 965,544 $ 772,333 $ 782,381
ASSET LEVERAGE
RATIO
Tier 1 capital $ 115,428 6.54% $ 113,718 9.18% $ 111,387 8.94%
Minimum
requirements 88,201 5.00 61,931 5.00 62,311 5.00
Excess $ 27,227 1.54% $ 51,787 4.18% $ 49,076 3.94%
Total adjusted
assets $1,764,027 $1,238,624 $1,246,225
The decline in each of the regulatory capital ratios between
December 31, 1993, and September 30, 1994, was due to the execution
of several strategic initiatives which allowed the Company to
better leverage its capital strength in an effort to enhance total
shareholder return. The JSB acquisition had the most significant
impact since the $24.1 million increase in capital resulting from
the new common shares issued was basically offset by the $25.9
million intangible asset created from the acquisition. The
implementation of the board-approved treasury stock buyback program
during the third quarter of 1994 resulted in the purchase of 86,000
shares at a total cost of $2.1 million. Additionally, the
execution of the previously discussed $120 million leverage program
increased total assets without any increase in equity. Each of
these strategic initiatives contributed to enhanced leverage of the
Company's capital base.
Even with the increased leverage of capital in 1994, 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. It is the Company's ongoing intent to prudently
leverage the capital base in an effort to increase return on equity
performance while maintaining necessary capital requirements. It
is, however, the Company's intent to maintain the FDIC "well
capitalized" classification for each of its subsidiaries to ensure
the lowest deposit insurance premium.
<PAGE>51
The Company's declared Common Stock cash dividend per share
was $0.72 for the first nine months of 1994 which was a 12.5%
increase over the $0.64 per share dividend for the same 1993
interim period. The dividend yield on the Company's Common Stock
now approximates 4.0% compared to an average Pennsylvania bank
holding company yield of approximately 2.7%. The Company remains
committed to a progressive total shareholder return which includes
a competitive common dividend yield.
<PAGE>52
Part II Other Information
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
Report dated June 1, 1994, regarding
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: November 14,1994
\s\Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: November 14,1994
\s\Orlando B. Hanselman
Executive Vice President,
Chief Financial Officer and
Manager of Corporate Services
<PAGE>54
STATEMENT OF MANAGEMENT RESPONSIBILITY
October 24, 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 responsibilities, 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 propriety 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 & Company and the Company's internal auditors have
direct access to the Audit Committee.
\s\Terry K. Dunkle \s\Orlando B. Hanselman
Chairman, President & Executive Vice President,
Chief Executive Officer Chief Financial Officer &
Manager of Corporate Services
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
2100 One PPG Place
Pittsburgh, PA 15222-5498
412-232-0600
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 September 30, 1994 and 1993,
and the related consolidated statements of income for the three-month and nine-
month periods ended September 30, 1994 and 1993, and the consolidated statement
of changes in stockholders' equity and cash flows for the nine-month periods
ended September 30, 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
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.
As discussed in note 12 to the consolidated financial statements, effective
January 1, 1993, USBANCORP, Inc. changed its method of accounting for income
taxes.
\s\Arthur Andersen LLP
Pittsburgh, Pennsylvania
October 24, 1994
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000707605
<NAME> USBANCORP, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 44,474
<INT-BEARING-DEPOSITS> 2,911
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 256,757
<INVESTMENTS-CARRYING> 513,014
<INVESTMENTS-MARKET> 501,222
<LOANS> 886,258
<ALLOWANCE> 19,495
<TOTAL-ASSETS> 1,785,518
<DEPOSITS> 1,205,008
<SHORT-TERM> 197,055
<LIABILITIES-OTHER> 23,501
<LONG-TERM> 223,035
<COMMON> 14,273
0
0
<OTHER-SE> 122,646
<TOTAL-LIABILITIES-AND-EQUITY> 1,785,518
<INTEREST-LOAN> 47,960
<INTEREST-INVEST> 23,558
<INTEREST-OTHER> 194
<INTEREST-TOTAL> 71,712
<INTEREST-DEPOSIT> 24,291
<INTEREST-EXPENSE> 30,585
<INTEREST-INCOME-NET> 41,127
<LOAN-LOSSES> 1,035
<SECURITIES-GAINS> (186)
<EXPENSE-OTHER> 36,759
<INCOME-PRETAX> 11,870
<INCOME-PRE-EXTRAORDINARY> 11,870
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,647
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.51
<YIELD-ACTUAL> 7.23
<LOANS-NON> 6,058
<LOANS-PAST> 414
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,260
<CHARGE-OFFS> 826
<RECOVERIES> 604
<ALLOWANCE-CLOSE> 19,495
<ALLOWANCE-DOMESTIC> 8,980
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 10,515
</TABLE>
