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
X Securities Exchange Act of 1934
For the period ended September 30, 1995
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, 1995
Common Stock, par value $2.50 5,306,957
per share
<PAGE>1
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
September 30, 1995, December 31, 1994,
and September 30, 1994 3
Consolidated Statement of Income -
Three Months and Nine Months Ended
September 30, 1995, and 1994 4
Consolidated Statement of Changes
in Stockholders' Equity -
Nine Months Ended
September 30, 1995, and 1994 6
Consolidated Statement of Cash Flows -
Nine Months Ended
September 30, 1995, and 1994 7
Notes to Consolidated Financial
Statements 9
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations 23
Part II. Other Information 50
<PAGE>2
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
September 30 December 31 September 30
1995 1994 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 36,575 $ 48,841 $ 44,474
Interest bearing deposits with
banks 1,513 5,050 2,911
Investment securities:
Available for sale 351,259 259,462 256,757
Held to maturity (market value
$523,525 on September 30, 1995,
$501,485 on December 31, 1994,
and $501,222 on September 30, 1994) 519,411 524,638 513,014
Assets held in trust for collateralized
mortgage obligation 7,430 9,104 9,530
Loans held for sale 2,763 18,077 12,844
Loans 814,526 853,759 877,571
Less: Unearned income 2,676 3,832 4,157
Allowance for loan losses 14,899 15,590 19,495
Net Loans 796,951 834,337 853,919
Premises and equipment 18,992 19,100 19,148
Accrued income receivable 16,218 16,894 14,098
Purchased mortgage servicing rights 11,440 11,452 11,530
Goodwill and core deposit intangibles 25,160 27,009 27,708
Other assets 43,826 14,926 19,585
TOTAL ASSETS $ 1,831,538 $ 1,788,890 $ 1,785,518
LIABILITIES
Non-interest bearing deposits $ 140,567 $ 144,013 $ 146,686
Interest bearing deposits 1,050,376 1,052,233 1,058,322
Total deposits 1,190,943 1,196,246 1,205,008
Federal funds purchased and
securities sold under agreements
to repurchase 21,761 143,289 128,818
Other short-term borrowings 26,344 75,295 68,237
Advances from Federal Home Loan Bank 412,108 200,094 207,790
Collateralized mortgage obligation 6,891 8,251 8,682
Long-term debt 3,749 5,806 6,563
Other liabilities 26,406 22,773 23,501
TOTAL LIABILITIES 1,688,202 1,651,754 1,648,599
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;
5,299,457 shares issued and outstand-
ing on September 30, 1995; 5,582,155 shares
issued and outstanding on December 31,
1994; 5,623,055 shares issued and
outstanding on September 30, 1994 14,307 14,275 14,273
Treasury stock, 423,212 shares at cost (11,007) (3,064) (2,136)
Surplus 93,153 92,923 92,913
Retained earnings 47,720 40,355 38,086
Net unrealized holding losses on
available for sale securities (837) (7,353) (6,217)
TOTAL STOCKHOLDERS' EQUITY 143,336 137,136 136,919
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,831,538 $ 1,788,890 $ 1,785,518
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>3
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and loans held
for sale:
Taxable $ 17,412 $ 17,538 $ 51,425 $ 46,531
Tax exempt 445 603 1,694 1,429
Deposits with banks 51 95 244 112
Federal funds sold and securities
purchased under agreements to resell 41 44 139 82
Investment securities:
Available for sale 6,256 4,140 16,609 12,077
Held to maturity 8,468 6,835 26,203 10,753
Assets held in trust for collateralized
mortgage obligation 60 207 407 728
Total Interest Income 32,733 29,462 96,721 71,712
INTEREST EXPENSE
Deposits 11,641 9,606 34,210 24,291
Federal funds purchased and securities
sold under agreements to repurchase 685 1,272 4,694 1,613
Other short-term borrowings 57 471 1,262 812
Advances from Federal Home Loan Bank 6,138 2,094 13,467 2,861
Collateralized mortgage obligation 189 241 671 785
Long-term debt 55 97 180 223
Total Interest Expense 18,765 13,781 54,484 30,585
NET INTEREST INCOME 13,968 15,681 42,237 41,127
Provision for loan losses 45 225 240 1,035
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 13,923 15,456 41,997 40,092
NON-INTEREST INCOME
Trust fees 852 748 2,546 2,178
Net realized gains (losses)
on investment securities (125) 25 599 (186)
Net realized gains (losses) on loans and
loans held for sale 284 181 (474) 722
Gain on disposition of business line - - 905 -
Wholesale cash processing fees 293 306 880 930
Service charges on deposit accounts 736 741 2,150 2,017
Net mortgage servicing fees 617 468 1,950 468
Other income 1,327 933 3,454 2,408
Total Non-Interest Income 3,984 3,402 12,010 8,537
NON-INTEREST EXPENSE
Salaries and employee benefits 6,362 6,495 19,000 17,063
Net occupancy expense 1,021 1,112 3,162 3,065
Equipment expense 801 793 2,539 2,275
Professional fees 564 706 1,677 1,687
Supplies, postage, and freight 661 625 1,957 1,718
Miscellaneous taxes and insurance 355 316 1,048 903
FDIC deposit insurance expense 113 702 1,470 1,874
Amortization of goodwill and
core deposit intangibles 624 700 1,849 1,143
Acquisition charge - - - 2,437
Other expense 2,105 1,818 5,017 4,594
Total Non-Interest Expense $ 12,606 $ 13,267 $ 37,719 $ 36,759
CONTINUED ON NEXT PAGE
</TABLE>
<PAGE>4
CONSOLIDATED STATEMENT OF INCOME
CONTINUED FROM PREVIOUS PAGE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAXES $ 5,301 $ 5,591 $ 16,288 $ 11,870
Provision for income taxes 1,393 1,887 4,600 4,223
NET INCOME $ 3,908 $ 3,704 $ 11,688 $ 7,647
PER COMMON SHARE DATA:
Primary:
Net income $ 0.72 $ 0.65 $ 2.11 $ 1.51
Average shares outstanding 5,447,598 5,673,464 5,529,706 5,055,107
Fully Diluted:
Net income $ 0.72 $ 0.65 $ 2.11 $ 1.51
Average shares outstanding 5,456,042 5,673,764 5,548,170 5,055,207
Cash Dividends Declared $ 0.27 $ 0.25 $ 0.79 $ 0.72
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>5
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Net
Unrealized
Holding
Preferred Common Treasury Retained Gains
Stock Stock Stock Surplus Earnings (Losses) Total
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net unrealized holding
gains (losses) on
investment
securities - - - - - (6,217) (6,217)
Common shares issued to
acquire Johnstown Savings
Bank (957,857 shares @
$25.125 per share) - 2,395 - 21,672 - - 24,067
Treasury stock, 86,000 shares
at cost - - (2,136) - - - (2,136)
Cash dividends
declared:
Common stock($0.22
per share on 4,737,321
shares and $0.25 per
share on 4,745,247
shares, and $0.25 per
share on 5,648,550
shares) - - - - (3,641) - (3,641)
Balance September 30,
1994 $ - $ 14,273 $(2,136) $ 92,913 $ 38,086 $ (6,217) $136,919
Balance December 31,
1994 $ - $ 14,275 $ (3,064)$ 92,923 $ 40,355 $ (7,353) $137,136
Net income - - - - 11,688 - 11,688
Dividend reinvest-
ment and stock
purchase plan - 32 - 230 - - 262
Net unrealized
holding gains
(losses) on
investment
securities - - - - - 6,516 6,516
Cash dividends
declared:
Common stock
($0.25 per share
on 5,584,722
shares, $0.27 per
share on 5,531,966
shares, and $0.27
per share on
5,304,457 shares) - - - - (4,323) - (4,323)
Treasury stock
purchase of
295,512 shares
at cost - - (7,943) - - - (7,943)
Balance September 30,
1995 $ - $ 14,307 $(11,007)$ 93,153 $ 47,720 $ (837) $143,336
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>6
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 11,688 $ 7,647
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 240 1,035
Depreciation and amortization expense 1,833 1,730
Amortization expense of goodwill and core deposit
intangibles 1,849 1,143
Amortization expense of purchased mortgage servicing
rights 870 411
Net (accretion) amortization of investment securities (1,896) 459
Net realized (gains) losses on investment securities (599) 186
Net realized losses (gains) on loans and loans held
for sale 474 (722)
Decrease (increase) in accrued income receivable 676 (3,350)
Increase (decrease) in accrued expense payable 3,852 (353)
Net cash provided by operating activities 18,987 8,186
INVESTING ACTIVITIES
Purchases of investment securities and other short-term
investments (307,922) (494,745)
Proceeds from maturities of investment securities and
other short-term investments 69,733 95,124
Proceeds from sales of investment securities and other
short-term investments 164,099 238,454
Long-term loans originated (238,471) (276,584)
Mortgage loans held for sale (2,763) (8,781)
Principal collected on long-term loans 200,443 223,743
Loans purchased or participated (1,752) -
Loans sold or participated 90,693 33,331
Net decrease (increase) in credit card receivable and other
short-term loans 3,836 (4,646)
Purchases of premises and equipment (1,860) (1,502)
Sale/retirement of premises and equipment 134 17
Net decrease in assets held in trust for collateralized
mortgage obligation 1,674 4,285
Increase in purchased mortgage servicing rights (858) -
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)
Intangible assets - (25,954)
Other assets - (8,078)
Net increase in other assets (32,369) (1,858)
Net cash used by investing activities $( 55,383) $(554,138)
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>7
CONSOLIDATED STATEMENT OF CASH FLOWS
CONTINUED FROM PREVIOUS PAGE
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1995 1994
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit $ 321,146 $ 262,756
Payments for maturing certificates of deposit (289,610) (277,768)
Net decrease in demand and savings deposits (36,839) (37,746)
Net (decrease) increase in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings (170,479) 142,698
Net principal borrowings of advances from Federal Home
Loan Bank and long-term debt 208,597 110,388
Common stock cash dividends paid (4,294) (3,267)
Proceeds from dividend reinvestment, stock purchase plan,
and stock options exercised 262 584
Purchases of treasury stock (7,943) (2,136)
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 in other liabilities (247) (551)
Net cash provided by financing activities 20,593 542,922
NET DECREASE IN CASH EQUIVALENTS (15,803) (3,030)
CASH EQUIVALENTS AT JANUARY 1 53,891 50,415
CASH EQUIVALENTS AT SEPTEMBER 30 $ 38,088 $ 47,385
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>8
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 ("United Life").
In addition, the Parent Company is an administrative group that provides support
in such areas as audit, finance, investments, loan review, general services,
loan policy, and marketing. Intercompany accounts and transactions have been
eliminated in preparing the consolidated financial statements.
2. Basis of 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 month and nine month periods ended September 30, 1995, and
1994, 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
19, 1995, 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,
1994, 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, 1994.
3. Johnstown Savings Bank ("JSB") Acquisition
For financial reporting purposes, the Merger ("Merger") with JSB was
effected 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.
<PAGE>9
The Merger was treated as a purchase for financial accounting purposes.
The total cost of the acquisition was $43.8 million, which was represented by
the issuance of 957,857 common shares and $19.7 million in cash. Accounting
for the
acquisition as a purchase, USBANCORP 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. Furthermore, the Company recorded
approximately $2.4 million of additional restructuring expenses during the
second
quarter of 1994 as a result of the JSB acquisition including employee severance,
data processing conversion costs, marketing and advertising expenses, and other
costs.
The following table compares the Company's actual financial performance
for the nine months ended September 30, 1995, to the financial performance
calculated on a pro forma basis for the nine month period ended September 30,
1994, for USBANCORP and JSB as if the merger had been consummated on
January 1, 1994:
<TABLE>
<CAPTION>
Actual Pro forma
September 30, 1995 September 30, 1994
(In thousands, except per share data)
<S> <C> <C>
Net interest income $42,237 $46,775
Provision for loan losses 240 1,493
Non-interest income 12,010 10,985
Non-interest expense 37,719 43,821
Provision for income taxes 4,600 4,269
Net income $11,688 $ 8,177
Net income per fully diluted
common share $ 2.11 $ 1.44
</TABLE>
4. Earnings Per Common Share
Primary earnings per share amounts are computed by dividing net income by
the weighted average number of common stock and common stock equivalent shares
outstanding.
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; cash equivalents include short-term
investments. The Company made $1,600,000 of federal income tax payments for
the first nine months of 1995 as compared to $3,210,000 for the same 1994
interim period. Total interest expense paid amounted to $49,592,000 in 1995's
first nine months compared to $28,990,000 in the same 1994 period.
<PAGE>10
6. Investment Securities
Effective January 1, 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. Investment securities held to
maturity are carried at amortized cost while investment securities classified as
available for sale are reported at fair value. The book and market values of
investment securities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Investment securities available for sale:
September 30, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 22,423 $ 320 $ (65) $ 22,678
U.S. Agency 12,815 - (175) 12,640
State and municipal 280 3 (2) 281
U.S. Agency mortgage-backed
securities 286,428 2,602 (912) 288,118
Other securities<F1> 27,557 2 (17) 27,542
Total $349,503 $ 2,927 $ (1,171) $351,259
Investment securities held to maturity:
September 30, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 797 $ 7 $ - $ 804
U.S. Agency 35,976 25 (166) 35,835
State and municipal 139,918 2,020 (662) 141,276
U.S. Agency mortgage-backed
securities 339,310 3,804 (951) 342,163
Other securities<F1> 3,410 39 (2) 3,447
Total $519,411 $ 5,895 $ (1,781) $523,525
Investment securities available for sale:
December 31, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 23,411 $ - $ (494) $ 22,917
U.S. Agency 31,372 3 (1,971) 29,404
State and municipal 1,479 1 (123) 1,357
U.S. Agency mortgage-backed
securities 175,215 29 (5,490) 169,754
Other securities<F1> 37,087 1 (1,058) 36,030
Total $268,564 $ 34 $ (9,136) $259,462
<F1>Other investment securities include corporate notes and bonds, asset-backed
securities, and equity securities.
</TABLE>
<PAGE>11
<TABLE>
<CAPTION>
Investment securities held to maturity:
December 31, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 398 $ - $ (7) $ 391
U.S. Agency 35,879 - (2,622) 33,257
State and municipal 125,489 825 (6,410) 119,904
U.S. Agency mortgage-backed
securities 360,146 2,491 (17,378) 345,259
Other securities<F1> 2,726 10 (62) 2,674
Total $524,638 $ 3,326 $ (26,479) $501,485
Investment securities available for sale:
September 30, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
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<F2> 151,079 116 (3,781) 147,414
Other securities<F1> 39,945 227 (821) 39,351
Total $263,875$ 408 $ (7,526) $256,757
Investment securities held to maturity:
September 30, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
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<F2> 356,818 1,610 (8,613) 349,815
Other securities<F1> 2,863 17 (56) 2,824
$513,014$ 2,623 $ (14,415) $501,222
<F2>Approximately 98% of these obligations represent U.S. Agency issued
securities.
<F1>Other investment securities include corporate notes and bonds, asset-backed
securities, and equity securities.
</TABLE>
All purchased investment securities are recorded on settlement date which
is not materially different from the trade date. Realized gains and losses are
calculated by the specific identification method and are included in "Net
realized gain or loss on investment securities." The Company's Investment
Policy prohibits trading of 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, 1995, 97.2% of the portfolio
was rated "AAA" and 97.6% "AA" or higher as compared to 95.1% and 96.0%,
respectively, at September 30, 1994. At September 30, 1995, 1.5% of the
portfolio was rated below "A" or unrated.
<PAGE>12
7. Loans Held for Sale
At September 30, 1995, $2,763,000 of fixed-rate residential mortgage loans
originated during 1995 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 gains or losses
on loans and loans held for sale"; unrealized net valuation adjustments (if any)
are recorded in the same line item on the Consolidated 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
1995 1994 1994
<S> <C> <C> <C>
Commercial $101,887 $116,702 $137,726
Commercial loans secured
by real estate 175,126 168,238 166,623
Real estate - mortgage 399,928 407,177 411,482
Consumer 137,585 161,642 161,740
Loans 814,526 853,759 877,571
Less: Unearned income 2,676 3,832 4,157
Loans, net of unearned
income $811,850 $849,927 $873,414
</TABLE>
Real estate-construction loans were not material at these presented dates
and comprised 2.6% of total loans net of unearned income at September 30, 1995.
The Company has no credit exposure to foreign countries 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 over all portfolio quality. This continuous review
assesses the risk characteristics of both individual loans and the
total loan portfolio.
<page13>
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.
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
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Balance at beginning of period $14,886 $19,247 $15,590 $15,260
Addition due to JSB acquisition - - - 3,422
Reduction due to disposition of
business line - - (342) -
Charge-offs:
Commercial 57 38 562 251
Real estate-mortgage 1 27 86 155
Consumer 175 140 463 420
Total charge-offs 233 205 1,111 826
Recoveries:
Commercial 54 83 150 187
Real estate-mortgage 16 43 27 87
Consumer 131 102 345 330
Total recoveries 201 228 522 604
Net charge-offs 32 (23) 589 222
Provision for loan losses 45 225 240 1,035
Balance at end of period $14,899 $19,495 $14,899 $19,495
As a percent of average loans
and average loans held for
sale, net of unearned income:
Annualized net charge-offs 0.02% (0.01)% 0.10% 0.04%
Annualized provision for
loan losses 0.02 0.10 0.04 0.18
Allowance as a percent of loans
and loans held for sale,
net of unearned income at
period end 1.83 2.20 1.83 2.20
Allowance as a multiple of net
annualized charge-offs, at
period end 117.36x * 18.92x 65.68x
*Not meaningful.
</TABLE>
<PAGE>14
(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 30 and 41, respectively.)
10. Components of Allowance for Loan Losses
Effective January 1, 1995, the Company adopted SFAS #114, "Accounting by
Creditors for Impairment of a Loan" which was subsequently amended by SFAS #118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures". SFAS #114 addresses the treatment and disclosure of certain loans
where it is probable that the creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. This standard defines
the term "impaired loan" and indicates the method used to measure the
impairment.
The measurement of impairment may be based upon: 1) the present value of
expected future cash flows discounted at the loan's effective interest rate; 2)
the observable market price of the impaired loan; or 3) the fair value of the
collateral of a collateral dependent loan. Additionally, SFAS #118 requires the
disclosure of how the creditor recognizes interest income related to these
impaired loans. The adoption of these standards resulted in four loans
totalling $384,000 being specifically identified as impaired and a corresponding
allocation reserve of $335,000 was established.
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):
<TABLE>
<CAPTION>
September 30,1995 December 31, 1994 September 30,1994
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
Amount to Loans<F1> Amount to Loans<F1> Amount to Loans<F1>
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 2,732 12.5% $ 1,894 13.4% $ 1,761 15.5%
Commercial
loans secured
by real
estate 3,277 21.4 5,278 19.3 5,448 18.7
Real estate -
mortgage 325 49.3 339 48.8 339 47.6
Consumer 903 16.8 1,436 18.5 1,432 18.2
Allocation to
general risk 7,327 - 6,643 - 10,515 -
Allocation for
impaired
loans 335 - - - - -
Total $14,899 100.0% $15,590 100.0% $19,495 100.0%
<F1>Includes loans "held for sale."
</TABLE>
<PAGE>15
Even though real estate-mortgage loans comprise approximately 49% of the
Company's total loan portfolio, only $325,000 or 2.2% of the total allowance for
loan losses is allocated against this loan category. The real estate-mortgage
loan allocation is based upon the Company's five year historical average of
actual loan charge-offs experienced in that category. The same methodology is
used to determine the allocation for consumer loans except the allocation is
based upon an average of the most recent actual three year historical charge-off
experience for consumer loans. The disproportionately higher allocations for
commercial loans and commercial loans secured by real estate reflect the
increased credit risk associated with this type of lending. To determine the
required allocations for these categories, the Company on a quarterly basis
performs 1) a detailed review of all classified assets to determine if any
specific reserve allocations are required on an individual loan basis, and 2)
applies reserve allocation percentages to all criticized and classified assets
based upon the Company's five year historical average for actual loss experience
in the various rating categories (i.e. substandard, doubtful, etc.).
At September 30, 1995, 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) loans which are contractually past due 90 days or more as to
interest
or principal payments some of which are insured for credit loss, and (iii) other
real estate owned (real estate acquired through foreclosure). 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. The only exception to this policy is for
residential mortgage loans wherein interest income is recognized on a cash basis
as payments are received. 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
Accounting Officer.
<PAGE>16
The following table presents information concerning non-performing assets
(in thousands, except percentages):
<TABLE>
<CAPTION>
September 30 December 31 September 30
1995 1994 1994
<S> <C> <C> <C>
Non-accrual loans $5,405 $5,446 $6,058
Loans past due 90
days or more 894 1,357 414
Other real estate owned 883 1,098 660
Total non-performing
assets $7,182 $7,901 $7,132
Total non-performing
assets as a percent
of loans and loans
held for sale, net
of unearned income,
and other real estate
owned 0.88% 0.91% 0.80%
</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 1) fair value minus
estimated costs to sell or 2) carrying cost.
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). There
was no interest income recognized on impaired loans during the first nine months
of 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Interest income due in accordance
with original terms $ 152 $ 133 $ 439 $ 381
Interest income recorded (471) (175) (532) (543)
Net increase in
interest income $ (319) $ (42) $ (93) $ (162)
</TABLE>
12. Incentive Stock Option Plan
Under the Company's Incentive Stock Option Plan (the "Plan") options can
be granted (the "Grant Date") to employees with executive, managerial,
technical,
or professional responsibility as selected by a committee of the board of
directors. The Plan was amended on April 25, 1995, to authorize the grant of
options covering up to 285,000 shares of common stock. 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:
<PAGE>17
<TABLE>
<CAPTION>
Shares Shares Option
Under Available Price
Option For Option Per Share
<S> <C> <C> <C>
Balance at December 31, 1993 49,834 71,500
Options granted 25,500 (25,500) 23.8750
Options granted 5,000 (5,000) 25.0000
Options granted 2,500 (2,500) 21.2500
Options exercised (2,967) - 17.2500
Options exercised (4,000) - 22.3438
Options cancelled or
expired - -
Balance at December 31, 1994 75,867 38,500
Increased Authorized
options - 157,000
Options granted 20,500 (20,500) 21.4375
Options granted 6,500 (6,500) 28.8750
Options exercised (6,647) - 17.2500
Options exercised (2,500) - 22.3438
Options exercised (2,000) - 23.8750
Options exercised (1,667) - 25.0000
Options cancelled or
expired - -
Balance at September 30, 1995 90,053 168,500
</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.
13. Off-Balance Sheet Hedge Instruments
Policies
The Company uses various interest rate contracts, such as interest rate
swaps, caps and floors, to help manage interest rate and market valuation risk
exposure, which is incurred in normal recurrent banking activities. These
interest rate contracts function as hedges against specific assets or
liabilities
on the Company's Balance Sheet. Gains or losses on these hedge transactions are
deferred and recognized as adjustments to interest income or interest expense of
the underlying assets or liabilities over the hedge period.
For interest rate swaps, the interest differential to be paid or received
is accrued by the Company and recognized as an adjustment to interest income or
interest expense of the underlying assets or liabilities being hedged. Since
only interest payments are exchanged, the cash requirement and exposure to
credit risk are significantly less than the notional amount.
<PAGE>18
Any premium or transaction fee incurred to purchase interest rate caps or
floors are deferred and amortized to interest income or interest expense over
the
term of the contract. Unamortized premiums related to the purchase of caps or
floors are included in other assets on the Consolidated Balance Sheet. A
summary of the off-balance sheet derivative transactions outstanding as of
September 30, 1995, 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 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 increased
interest expense by $85,000 for the nine months ended September 30, 1995.
Borrowed Funds Hedges
On March 16, 1995, the Company entered into an interest rate swap agreement
with a notional amount of $60 million and a termination date of March 16, 1997.
Under the terms of the swap agreement, the Company pays a two year fixed
interest rate of 6.93% and receives 90 day Libor which resets quarterly.
The counter-party in this unsecured transaction is PNC Bank.
This swap agreement was executed to hedge short-term borrowings which were
incurred to fund investment securities as part of the increased leveraging of
the
balance sheet. Specifically, FHLB term advances tied to 90 day Libor which
reprice quarterly are being used to fund fixed-rate agency mortgage-backed
securities with durations ranging from two to three years. This hedge
transaction increased interest expense by $227,000 for the nine months ended
September 30, 1995.
<PAGE>19
On September 29, 1995, the Company entered into an interest rate swap
agreement with a notional amount of $25 million and a termination date of
September 29, 1997. Under the terms of the swap agreement, the Company pays a
two year fixed interest rate of 6.05% and receives 90 day Libor which resets
quarterly. The initial rate for 90 day Libor was set at 5.875%. The counter-
party in this unsecured transaction is Mellon Bank.
This swap agreement was executed to hedge short-term borrowings used to
leverage the balance sheet. Specifically, FHLB advances which reprice every 30
to 90 days are being used to fund fixed-rate agency mortgage-backed securities
with a two year duration. This hedge transaction had no material impact on the
financial statements for either the quarter or nine months ended September 30,
1995.
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.
14. 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 $19.6 million of goodwill and $5.6 million of core deposit
intangible assets on its balance sheet. The majority of these intangible assets
came from the 1994 JSB acquisition ($25.9 million) and the 1993 Integra Branches
acquisition ($1.2 million).
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 future cash flow item. The following table
reflects the future amortization expense of the intangible assets
(in thousands):
Remaining 1995 $ 621
1996 2,408
1997 2,408
1998 2,222
1999 2,066
2000 and after 15,435
<PAGE>20
A reconciliation of the Company's intangible asset balances for the first
nine months of 1995 is as follows (in thousands):
Total goodwill & core deposit
intangible assets at 12/31/94 $27,009
Intangible amortization expense
through 9/30/95 (1,849)
Total goodwill & core deposit
intangible assets at 9/30/95 $25,160
15. Federal Home Loan Bank ("FHLB") Borrowings
Total FHLB borrowings consist of the following at September 30, 1995, (in
thousands, except percentages):
<TABLE>
<CAPTION>
Type Maturing Amount Weighted
Average
Rate
<S> <C> <C> <C>
Flexline Overnight $ - -%
Advances and 1995 310,700 5.83
wholesale 1996 71,000 5.81
repurchase 1997 2,750 5.61
agreements 1998 6,458 5.88
1999 1,250 6.09
2000 3,750 6.15
2001 9,950 8.25
2002 2,500 6.59
2003 3,750 6.61
Total advances and 412,108 5.90
wholesale repurchase
agreements
Total FHLB Borrowings $412,108 5.90%
</TABLE>
All of the above borrowings bear a fixed rate of interest, with the only
exceptions being the Flexline whose rate can change daily and certain advances
totalling $50 million which are tied to the 90 day Libor rate and reset
quarterly. 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>21
16. Other Accounting Matters
During the second quarter of 1995, the Company's mortgage banking
subsidiary, Standard Mortgage Corporation of Georgia ("SMC"), adopted SFAS #122,
"Accounting for Mortgage Servicing Rights." Prior to the issuance of this
statement, SFAS #65, "Accounting for Certain Mortgage Banking Activities"
required capitalization of the cost of the rights to service mortgage loans for
others when those rights were acquired through a purchase transaction but
prohibited capitalization when those rights were acquired through loan
origination activities. SFAS #122 eliminates the accounting distinction between
rights to service mortgage loans for others that are acquired through loan
origination activities and those acquired through purchase transactions. When
SMC sells a loan and retains the mortgage servicing rights, the total cost of
the mortgage loan is allocated to the mortgage servicing rights and the loan
based on their relative fair value. The mortgage servicing rights are then
amortized over the period of estimated net servicing income and will be
evaluated for impairment based on their fair value. The net effect of
implementing SFAS #122 was an increase to pre-tax income of $258,000
through September 30, 1995.
<PAGE>22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ("M.D.& A.")
THIRD QUARTER 1995 vs. THIRD QUARTER 1994
.....PERFORMANCE OVERVIEW.....The Company's net income for the third quarter of
1995 totalled $3,908,000 or $0.72 per share on a fully diluted basis. 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. The 1995 results reflect a $204,000 or 5.5%
earnings increase and a $0.07 or 10.8% improvement in fully diluted earnings per
share when compared to the 1994 third quarter results. For the third quarter of
1995, the Company's return on average equity was 10.68% while the return on
average assets totalled 0.85%.
The Company's improved financial performance was due primarily to lower non-
interest expense, increased non-interest income, lower income tax expense and a
reduced loan loss provision. These positive items were partially offset by a
reduced amount of net interest income. The Company's earnings per share were
also enhanced by the repurchase of its common stock because there were 218,000
fewer average fully diluted shares outstanding in the third quarter of 1995. The
following table summarizes some of the Company's key performance indicators (in
thousands, except per share and ratios):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1995 September 30, 1994
<S> <C> <C>
Net income $ 3,908 $ 3,704
Fully diluted earnings per share 0.72 0.65
Return on average assets 0.85% 0.85%
Return on average equity 10.68 10.74
Average fully diluted common
shares outstanding 5,456 5,674
</TABLE>
.....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 affected 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 optimize net interest
margin performance in varying interest rate environments. The following table
compares the Company's net interest income performance for the third quarter of
1995 to the third quarter of 1994 (in thousands, except percentages):
<PAGE>23
<TABLE>
<CAPTION>
Three Months Ended
September 30
1995 1994 $ Change % Change
<S> <C> <C> <C> <C>
Interest income $ 32,733 $ 29,462 3,271 11.1
Interest expense 18,765 13,781 4,984 36.2
Net interest income 13,968 15,681 (1,713) (10.9)
Tax-equivalent
adjustment 672 549 123 22.4
Net tax-equivalent
interest income $ 14,640 $ 16,230 (1,590) (9.8)
Net interest margin 3.44% 4.00% (0.56)% *
*Not meaningful.
</TABLE>
USBANCORP's net interest income on a tax-equivalent basis decreased by
$1,590,000 or 9.8% while the net interest margin percentage declined by 56 basis
points to 3.44%. The reduction in both net interest income dollars and the net
interest margin percentage was due to the cost of funds increasing to a greater
extent than the earning asset yield. Specifically, the Company's cost of funds
increased by 102 basis points to 4.88% while the earning asset yield increased
by 47 basis points to 7.82%. Rising short-term interest rates during the fourth
quarter of 1994 and the first quarter of 1995 triggered the higher cost of funds
as the cost of Federal Home Loan Bank borrowings used to fund the Company's
leverage program increased sharply during the periods presented. Another factor
contributing to the higher cost of funds was a disintermediation of deposits
from lower cost savings accounts into higher cost fixed rate certificates of
deposits. The increase in the earning asset yield was limited by a greater
dependence on investment securities as an earning asset due to a reduced
volume of average loans outstanding and increased leveraging of the balance
sheet.
.....BALANCE SHEET LEVERAGING.....The Company's ongoing strategy to use borrowed
funds to purchase earning assets in order to leverage the balance sheet and
equity contributes to increased net interest income but a lower net interest
margin percentage. The source for the borrowed funds is predominately the
Federal Home Loan Bank ("FHLB") as each of the Company's subsidiary banks are
members of the FHLB. Examples of FHLB borrowings used by the Company include
one
year term funds tied to 90 day Libor, 30 and 90 day wholesale reverse repurchase
agreements, and overnight Flexline borrowings. These funds are used to purchase
available for sale and held to maturity investment securities with durations
ranging from one to three years. For the third quarter of 1995, the Company's
total level of short-term borrowed funds and FHLB advances amounted to $448
million or 24.4% of total assets compared to an average of $322 million or 18.6%
of total assets for the third quarter of 1994. These borrowed funds had an
average cost of 6.10% in the third quarter of 1995 which was 137 basis points
greater than the average cost of these borrowings in the prior year third
quarter
and 176 basis points greater than the third quarter 1995 average cost of
deposits
which amounted to 4.34%. When compared to the Company's third quarter 1995
earning asset yield, the net interest spread earned on assets funded with
deposits amounted to 3.48% compared to a net interest spread of 1.72% on assets
funded with short-term borrowed funds. Consequently, this leveraging strategy
contributes to an incremental improvement in net interest income dollars while
causing a regression in the net interest margin percentage.
<PAGE>24
The maximum amount of leveraging the Company can perform is controlled by
an internal policy requirement to maintain a minimum asset leverage ratio of no
less than 6.0%. (See further discussion under Capital Resources.) The Company
continuously evaluates the approximate $10 million of cash flow received monthly
from the investment portfolio and makes one of the following three decisions
which can impact the leveraged position of the balance sheet:
1) The Company can use the money to fund any loan demand that cannot be
funded with existing cash flow from the loan portfolio or deposits.
2) The Company can use the money to fund new investment security purchases
provided that the incremental spread over the current short-term borrowing cost
is not less than 100 basis points.
3) The Company can use the money to paydown short-term borrowings if the
incremental spread that can be earned on new investment purchases is not deemed
sufficient.
It is recognized that interest rate risk does exist, particularly in a
rising interest rate environment, from this use of borrowed funds to leverage
the
balance sheet. To neutralize a portion of this risk, the Company has executed
a total of $85 million of off-balance sheet hedging transactions which help fix
the variable funding costs associated with the leveraging of the balance sheet.
(See further discussion under Note 13.)
<PAGE>25
Regarding the separate components of net interest income, the Company's
total tax-equivalent interest income for the third quarter of 1995 increased by
$3.4 million or 11.3% when compared to the same 1994 period. This increase was
due to a $69 million increase in total average earning assets which caused
interest income to rise by $1.4 million. The remainder of the increase in
interest income was caused by a favorable rate variance as the Company's total
earning asset yield increased by 47 basis points to 7.82%. Within the earning
asset base, the yield on total investment securities increased by 70 basis
points
to 6.91% while the yield on the total loan portfolio increased by 59 basis
points
to 8.92%. A $437,000 interest recovery on the pay-off of a non-accrual
commercial loan was responsible for 20 basis points of the total loan portfolio
yield increase. The more significant yield increase in the investment
securities
portfolio reflects the benefit of several significant repositioning strategies
executed during the second half of 1994. The yields in both portfolios were
positively affected by the higher interest rate environment as the prime rate
and
fed funds rate were approximately 125 basis points higher in the third quarter
of 1995 as compared to the third quarter of 1994. Floating-rate assets such as
commercial loans tied to prime and adjustable-rate mortgage-backed securities
demonstrate the most immediate repricing benefit in a rising interest rate
environment.
Third quarter 1995 tax-equivalent interest income was negatively affected
by a $100,000 interest accrual adjustment on the CMO asset which caused the
yield
for the quarter to drop by 530 basis points to 2.98%. Also, contributing to
reduced interest income was an unfavorable asset mix shift as the Company's loan
to deposit ratio averaged 66.5% in the third quarter of 1995 compared to an
average of 71.7% in the third quarter of 1994. The funds received from the $79
million reduction in total loans outstanding combined with funds received from
additional balance sheet leveraging to cause total investment securities to
increase on average by $155 million in the third quarter of 1995.
The Company's total interest expense for the third quarter of 1995 increased
by $5.0 million or 36.2% when compared to the same 1994 period. This higher
interest expense was caused by a combination of an increased volume of interest
bearing liabilities and an unfavorable rate variance. A $1.3 million volume
variance reflects a $108 million increase in average interest bearing
liabilities
due to the previously mentioned increased use of FHLB borrowings to fund the
balance sheet leverage program. The unfavorable rate variance was due to the
negative impact that the higher interest rate environment had on short-term FHLB
borrowing costs and the disintermediation of deposits from lower cost savings
and
NOW accounts into higher cost fixed rate certificates of deposit with maturities
ranging from 18 months to three years. Total third quarter 1995 average savings
and NOW account balances were $79 million lower than the third quarter of 1994.
This disintermediation was the primary factor responsible for the 80 basis point
increase in the cost of deposits to 4.34% in the third quarter of 1995.
<PAGE>26
It is important to note that the increased deposit cost was attributed
entirely to higher certificate of deposit rates and the disintermediation caused
by the customer preference for certificates of deposit in the higher rate
environment. The Company was able to maintain and in some cases lower the
pricing on its low cost core savings and NOW accounts during the third quarter
of 1995. It has been management's ongoing pricing strategy to position
USBANCORP's deposit rates within the lowest quartile of deposit rates offered by
commercial banks in its market area. Management believes that a constant
level
of high quality service 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. The combination of all these price and
liability composition movements caused USBANCORP's average cost of interest
bearing liabilities to increase by 102 basis points from 3.86% during the third
quarter of 1994 to 4.88% during the third quarter of 1995.
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. Additionally,
a tax rate of approximately 34% is used to compute tax equivalent yields.
<PAGE>27
Three Months Ended September 30 (In thousands, except percentages)
<TABLE>
<CAPTION>
1995 1994
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 $ 798,923 $ 18,002 8.92% $ 877,615 $ 18,333 8.33%
Deposits with banks 4,753 51 4.21 8,434 95 4.43
Federal funds sold
and securities
purchased under
agreement to resell 2,949 41 5.41 4,041 44 4.19
Investment securities:
Available for sale 355,474 6,256 7.04 281,169 4,141 5.88
Held to maturity 527,744 8,995 6.82 447,298 7,191 6.42
Total investment
securities 883,218 15,251 6.91 728,467 11,332 6.21
Assets held in trust for
collateralized
mortgage obligation 8,001 60 2.98 9,913 207 8.28
Total interest earning
assets/interest income 1,697,844 33,405 7.82 1,628,470 30,011 7.35
Non-interest earning assets:
Cash and due from banks 35,318 47,773
Premises and equipment 19,038 19,142
Other assets 95,826 58,053
Allowance for loan
losses (14,951) (19,359)
TOTAL ASSETS $1,833,075 $1,734,079
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>28
THREE MONTHS ENDED September 30
CONTINUED FROM PREVIOUS PAGE
<TABLE>
<CAPTION>
1995 1994
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand $ 86,346 $ 308 1.42% $ 117,741 517 1.74%
Savings 227,467 1,030 1.80 275,142 1,379 1.99
Other time 751,176 10,303 5.44 684,741 7,710 4.47
Total interest bearing
deposits 1,064,989 11,641 4.34 1,077,624 9,606 3.54
Short term borrowings:
Federal funds
purchased, secur-
ities sold under
agreements to
repurchase and other
short-term
borrowings 67,578 742 4.33 161,450 1,743 4.35
Advances from Federal
Home Loan Bank 380,088 6,138 6.41 160,263 2,094 5.11
Collateralized mortgage
obligation 7,243 189 10.35 9,032 241 10.55
Long-term debt 3,950 55 5.52 7,694 97 5.00
Total interest bearing
liabilities/interest
expense 1,523,848 18,765 4.88 1,416,063 13,781 3.86
Non-interest bearing
liabilities:
Demand deposits 137,237 146,221
Other liabilities 26,818 35,004
Stockholders' equity 145,172 136,791
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $1,833,075 $1,734,079
Interest rate spread 2.94 3.49
Net interest income/
net interest margin 14,640 3.44% 16,230 4.00%
Tax-equivalent adjustment (672) (549)
Net Interest Income $13,968 $15,681
</TABLE>
<PAGE>29
When the Company's net interest performance for the third quarter of 1995 is
compared to the second quarter of 1995, net interest income increased by
$432,000
while the net interest margin improved by six basis points to 3.44%. A 12 basis
point improvement in the earning asset yield caused the increased net interest
income and margin as there was no change in the cost of funds between quarters.
This stabilization of the cost of the Company's funding sources represented a
change
in trend from the increased funding costs experienced over the prior four
quarters.
The increased earning asset yield reflected the benefits of the previously
mentioned
loan interest recoveries and increased commercial loan demand as total loans
increased by $12.9 million or 1.6% between June 30, 1995, and September 30,
1995.
The Company's present loan pipelines suggest that this loan growth momentum will
continue into the fourth quarter.
.....PROVISION FOR LOAN LOSSES.....The Company's provision for loan losses for
the
third quarter of 1995 totalled $45,000 or 0.02% of total loans. This
represented
a reduction of $180,000 from the third quarter 1994 provision of $225,000 or
0.10%
of total loans. The continued adequacy of the allowance for loan losses at each
of
the Company's banking subsidiaries supported the reduction in the provision
level.
The Company applies a consistent methodology and procedural discipline to
evaluate
the adequacy of the allowance for loan losses at each subsidiary bank on a
quarterly
basis. At September 30, 1995, the allowance for loan losses at each of the
Company's banking subsidiaries was in compliance with the Company's policy of
maintaining a general unallocated reserve of at least 20% of the systematically
determined minimum reserve need. In total, the Company's general unallocated
reserve
was $7.3 million at September 30, 1995. Additionally, the reduction in the
provision level was also supported by a favorable downward trend in substandard
and
doubtful classified asset categories experienced during 1995. Total
substandard and
doubtful assets dropped by $10.8 million or 27.5% from $39.3 million at
December 31, 1994, to $28.5 million at September 30, 1995.
.....NON-INTEREST INCOME.....Non-interest income for the third quarter 1995
totalled
$4.0 million which represented a $582,000 or 17.1% increase when compared to the
same 1994 period. This increase was primarily due to the following items:
a $104,000 or 13.9% increase in trust fees to $852,000 in the third quarter
of
1995. 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.
<PAGE>30
a $149,000 or 31.8% increase in net mortgage servicing fee income to
$617,000. This amount resulted from $917,000 of mortgage servicing
fees net of $300,000 of amortization expense of the cost of purchased
and originated mortgage servicing rights. The improvement in earnings
between years was primarily due to reduced amortization expense on the
purchased mortgage servicing rights as a result of a slowdown in
mortgage prepayment speeds in 1995.
a $394,000 increase in other income due in part to $335,000 increase in the
net cash surrender value of a $30 million Bank Owned Life Insurance Policy.
The remainder of the increase was due to additional fee income resulting
from ATM transaction charges, other mortgage banking processing fees, and
check supply sales.
.....NON-INTEREST EXPENSE.....Non-interest expense for the third quarter of 1995
totalled $12.6 million which represented a $661,000 or 5.0% decrease when
compared to the same 1994 period. This decrease was primarily due to the
following items:
a $133,000 decrease in salaries and employee benefits due to 63 fewer full
time equivalent employees ("FTE") as the Company has achieved economy of
scale benefits from the JSB acquisition. The expense savings from fewer
FTE has more than offset planned wage increases approximating 4% and
increased profit sharing costs.
a $91,000 decrease in occupancy expense due to fewer branch offices as two
of JSB's branches were fully consolidated into the Company's existing retail
delivery system in the fourth quarter of 1994.
a $142,000 decrease in professional fees due to reduced legal and other
professional fees in the third quarter of 1995. The lower legal fees
include the benefit of approximately $52,000 of legal fee recoveries on
previous workout loans.
a $589,000 decrease in FDIC deposit insurance expense due to the receipt of
a deposit insurance refund in the third quarter of 1995. This refund
reflected a drop in the premium assessment rate on deposits covered by the
Bank Insurance Fund ("BIF") from $0.23 per hundred dollars of deposits to
$0.04 per
hundred dollars of deposits effective June 1, 1995. Approximately $926
million or 78% of the Company's deposits are covered by the BIF while the
remaining $265 million or 22% are part of the Savings Association Insurance
Fund ("SAIF"). The proposed recapitalization of the SAIF may result in a
one-time special assessment to the Company in the fourth quarter of 1995.
<PAGE>31
a $287,000 increase in other expense due to $175,000 of additional expenses at
the Company's mortgage banking subsidiary due to costs associated with a
claims audit and the write-off of a prepaid bond commitment fee. The
remainder of the increase was caused by higher advertising expense due to
increased promotional activities in the third quarter of 1995.
.....INCOME TAX EXPENSE.....The Company's provision for income taxes for the
third
quarter of 1995 was $1.4 million reflecting an effective tax rate of 26.3%. The
Company's 1994 third quarter income tax provision was $1.9 million or an
effective
tax rate of 33.8%. The lower income tax expense and effective tax rate was
caused
by increased total tax-free asset holdings which were $35.8 million higher on
average in the third quarter of 1995 as compared to the third quarter of 1994.
The tax-free asset holdings consist of municipal investment securities,
commercial loan
tax anticipation notes, and bank owned life insurance. Net deferred income
taxes
of $2,288,000 have been provided as of September 30, 1995, on the differences
between taxable income for financial and tax reporting purposes.
NINE MONTHS ENDED September 30, 1995 vs. NINE MONTHS ENDED September 30, 1994
.....PERFORMANCE OVERVIEW.....The Company's net income for the first nine months
of
1995 totalled $11.7 million or $2.11 per share on a fully diluted basis. The
Company's net income for the first nine months of 1994 totalled $7.6 million or
$1.51 per share on a fully diluted basis. The 1994 results include a $1.9
million
after-tax acquisition charge related to the purchase of JSB. The 1995 results
reflect a $4.1 million or 53.9% earnings increase and a $0.60 or 39.7%
improvement
in fully diluted earnings per share when compared to the 1994 first nine months
results. For the first nine months of 1995, the Company's return on average
equity
was 10.99% while the return on average assets totalled 0.86%. The Company's
book value per common share has increased from $24.57 at December 31, 1994, to
$27.05 at September 30, 1995. ( Presented on this page was a graphic
presentation of the change in book value per share from 12-31-94 to 9-30-95.)
The Company's improved financial performance was due primarily to a reduced
loan
loss provision, increased non-interest income, and increased net interest income
resulting from the JSB acquisition and greater leveraging of the balance sheet.
These positive items were partially offset by increased non-interest expense
caused
largely by the JSB acquisition. Note, however, that when average quarterly non-
interest expense for the first nine months of 1995 is compared to total non-
interest
expense for the third quarter of 1994 (the first quarter that JSB was reflected
in
the Company's financial results), there was a $694,000 or 5.2% reduction in non-
interest expense due largely to the Company achieving economy of scale benefits
from
this intra-market merger. In conjunction with the JSB acquisition, the Company
also
issued 957,857 new shares of common stock which caused the 9.8% increase in
weighted
average fully diluted shares outstanding to 5,548,000. This increase is net of
the
repurchase of 423,212 shares of the Company's common stock since July 1, 1994.
The
impact of these net additional shares was the primary reason that the fully
diluted
EPS growth rate was lower than the net income growth rate experienced in the
first
nine months of 1995. The following table summarizes some of the Company's key
performance indicators (in thousands, except per share and ratios):
<PAGE>32
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1995 September 30, 1994
<S> <C> <C>
Net income $11,688 $ 7,647
Fully diluted earnings
per share 2.11 1.51
Return on average assets 0.86% 0.72%
Return on average equity 10.99 8.29
Average fully diluted common
shares outstanding 5,548 5,055
</TABLE>
.....NET INTEREST INCOME AND MARGIN.....The following table compares the
Company's net interest income and margin performance for the first nine months
of 1995 to the first nine months of 1994 (in thousands, except percentages):
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1995 1994 $ Change % Change
<S> <C> <C> <C> <C>
Interest income $ 96,721 $ 71,712 25,009 34.9
Interest expense 54,484 30,585 23,899 78.1
Net interest income 42,237 41,127 1,110 2.7
Tax-equivalent
adjustment 2,067 1,111 956 86.0
Net tax-equivalent
interest income $ 44,304 $ 42,238 2,066 4.9
Net interest margin 3.48% 4.19% (0.71)% *
*Not meaningful.
</TABLE>
USBANCORP's net interest income on a tax-equivalent basis increased by $2.1
million or 4.9% while the net interest margin percentage declined by 71 basis
points
to 3.48%. The increased net interest income was due primarily to a higher
volume
of earning assets resulting from the JSB acquisition and a greater use of
borrowed
funds to leverage the balance sheet. For the first nine months of 1995, total
average earning assets were $344 million higher than the comparable 1994 period.
While the JSB acquisition and increased leveraging of the balance sheet did
cause
an increase in net interest income, these same two factors combined with an
unfavorable deposit mix shift to cause a compression in the Company's net
interest
margin percentage. (See discussion in Net Interest Income and Margin section of
third quarter 1995 vs. third quarter 1994 comparison.)
<PAGE>33
Regarding the separate components of net interest income, the Company's
total
tax-equivalent interest income for the first nine months of 1995 increased by
$26.0
million or 35.7% when compared to the same 1994 period. This increase was due
primarily to the previously mentioned $344 million increase in total average
earning
assets which caused interest income to rise by $20.1 million. The remainder of
the
increase in interest income was caused by a favorable rate variance as the
Company's
total earning asset yield increased by 56 basis points to 7.79%. Within the
earning
asset base, the yield on total investment securities increased by 119 basis
points
to 6.98% while the yield on the total loan portfolio increased by 44 basis
points
to 8.67%. The more significant yield increase in the investment securities
portfolio reflects the benefit of several significant repositioning strategies
executed during the second half of 1994. The yields in both portfolios were
positively impacted by the higher interest rate environment as the prime rate
and
fed funds rate were approximately 200 basis points higher in the first nine
months
of 1995 as compared to the first nine months of 1994. Floating- rate assets
such
as commercial loans tied to prime and adjustable- rate mortgage-backed
securities
demonstrate the most immediate repricing benefit in a rising interest rate
environment.
The Company's total interest expense for the first nine months of 1995
increased by $23.9 million or 78.1% when compared to the same 1994 period. This
higher interest expense was caused by a combination of an increased volume of
interest bearing liabilities and an unfavorable rate variance. A $13.4 million
increase in interest expense reflects a $372 million increase in average
interest
bearing liabilities due to the previously mentioned JSB acquisition and the use
of
FHLB borrowings to fund the balance sheet leverage program. The unfavorable
rate
variance was due to the higher interest rate environment and deposit
disintermediation from lower cost savings accounts into higher cost fixed rate
certificates of deposit with maturities ranging from 18 months to three years.
This deposit mix shift is evidenced by a 6.3% decline in the ratio of low cost
deposits to total deposits from an average of 56.1% for the first nine months of
1994 to an average of 49.8% for the first nine months of 1995. This deposit
disintermediation contributed to an 89 basis point increase in the cost of
deposits
to 4.26%. The increased FHLB borrowings also negatively impacted the liability
mix
and overall cost of funds since the cost of these borrowings averaged 6.19% for
the
first nine months of 1995 compared to the Company's cost of deposits of 4.26%.
The
combination of all these price and liability composition movements caused
USBANCORP's average cost of interest bearing liabilities to increase by 123
basis
points from 3.60% during the first nine months of 1994 to 4.83% during the first
nine months of 1995.
<PAGE>34
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. Additionally, a tax rate of
approximately 34% is used to compute tax equivalent yields.
<TABLE>
<CAPTION>
Nine Months Ended September 30 (In thousands, except percentages)
1995 1994
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 $ 823,300 $ 53,669 8.67% $ 784,895 $ 48,372 8.23%
Deposits with banks 6,847 244 4.83 3,628 112 4.06
Federal funds sold
and securities.
purchased under
agreement to resell 3,024 139 6.03 2,811 82 3.86
Investment securities:
Available for sale 307,111 16,609 7.21 294,155 12,076 5.46
Held to maturity 540,124 27,720 6.84 247,771 11,453 6.16
Total investment
securities 847,235 44,329 6.98 541,926 23,529 5.79
Assets held in trust for
collateralized
mortgage obligation 8,419 407 6.46 11,356 728 8.57
Total interest earning
assets/interest income 1,688,825 98,788 7.79 1,344,616 72,823 7.23
Non-interest earning assets:
Cash and due from banks 36,644 41,467
Premises and equipment 19,097 17,603
Other assets 80,230 31,841
Allowance for loan
losses (15,226) (16,842)
TOTAL ASSETS $1,809,570 $1,418,685
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>35
<TABLE>
<CAPTION>
NINE MONTHS ENDED September 30
CONTINUED FROM PREVIOUS PAGE
1995 1994
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand $ 94,458 1,019 1.44% $ 107,593 1,268 1.58%
Savings 233,133 3,307 1.89 246,272 3,550 1.93
Other time 743,197 29,884 5.36 610,702 19,473 4.26
Total interest bearing
deposits 1,070,788 34,210 4.26 964,567 24,291 3.37
Short term borrowings:
Federal funds
purchased, secur-
ities sold under
agreements to
repurchase and other
short-term
borrowings 146,859 5,956 5.48 80,319 2,425 4.08
Advances from Federal
Home Loan Bank 277,056 13,467 6.50 75,582 2,861 4.99
Collateralized mortgage
obligation 7,595 671 11.81 10,355 785 10.13
Long-term debt 4,744 180 5.07 4,653 223 6.42
Total interest bearing
liabilities/interest
expense 1,507,042 54,484 4.83 1,135,476 30,585 3.60
Non-interest bearing
liabilities:
Demand deposits 135,252 137,530
Other liabilities 25,053 22,329
Stockholders' equity 142,223 123,350
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $1,809,570 $1,418,685
Interest rate spread 2.96 3.63
Net interest income/
net interest margin 44,304 3.48% 42,238 4.19%
Tax-equivalent adjustment (2,067) (1,111)
Net Interest Income $42,237 $41,127
</TABLE>
.....PROVISION FOR LOAN LOSSES.....The Company's provision for loan losses for
the
first nine months of 1995 totalled $240,000 or 0.04% of total loans compared
to a
provision of $1 million or 0.18% of total loans for the same 1994 period. The
reduced provision in 1995 reflects the continued adequacy of the allowance for
loan
losses at each of the Company's banking subsidiaries and a declining trend in
classified assets. At September 30, 1995, the balance in the allowance for loan
losses totalled $14.9 million or 207.5% of total non-performing assets.
<PAGE>36
.....NON-INTEREST INCOME.....Non-interest income for the first nine months of
1995 totalled $12.0 million which represented a $3.5 million or 40.7% increase
when compared to the same 1994 period. This increase was primarily due to the
following items:
a $905,000 gain realized on the disposition of Frontier Finance Company, a
subsidiary of Community Savings Bank. This business line was sold because it
did not fit into the Company's future strategic plans and was not meeting
internal return on equity performance requirements.
a $474,000 loss realized on the sale of loans and loans held for sale in the
first nine months of 1995 compared to a $722,000 gain realized in the first
nine months of 1994 (a net unfavorable shift of $1.2 million). The 1995 loss
resulted primarily from the first quarter sale of $34 million of fixed-rate
residential mortgage loans with a weighted average coupon of 7.79% and a
weighted average maturity of 168 months. This sale was executed to diversify
the Company's balance sheet mix and reduce its overall dependence on fixed-rate
residential mortgage loans. The majority of the proceeds from the sale were
reinvested in adjustable-rate agency securities to increase the repricing
sensitivity of the Company's earning assets.
a $1.5 million increase in net mortgage servicing income at SMC. This amount
resulted primarily from $2.8 million of mortgage servicing fees net of
$870,000 of amortization expense of the cost of purchased and originated
mortgage servicing rights. SMC's servicing portfolio has benefited from
higher interest rates in 1995 as the value of the servicing portfolio
typically increases in a rising interest rate environment due to slower
mortgage prepayment speeds. This consequently results in reduced amortization
expense for purchased mortgage servicing rights as evidenced by an $83,000
reduction in the quarterly average of amortization expense when the second
half of 1994 is compared to the first three quarters of 1995.
a $599,000 gain realized on the sale of investments securities available for
sale in the first nine months of 1995 compared to a $186,000 loss realized on
investment security transactions in the comparable 1994 period (a net
favorable shift of $785,000). The 1995 gain resulted primarily from the sale
of $151 million of agency mortgage-backed securities as well as a few small
portfolio clean up transactions. These sales were executed to (1) provide
liquidity for future funding needs, (2) enhance asset/liability management
positioning whereby lower lifetime cap arm product was replaced with higher
lifetime cap arm product and fixed rate mortgage pass-through securities and
(3) improve overall portfolio quality and provide ongoing earnings
enhancements.
a $368,000 or 16.9% increase in trust fees to $2.5 million in the first nine
months of 1995. This core trust fee growth is prompted by the profitable
expansion of the Company's business throughout western Pennsylvania including
the Greater Pittsburgh marketplace. For the first nine months of 1995, the
Trust Company's business development efforts have generated new trust assets
amounting to $85 million which will generate annual fees approximating
$345,000.
<PAGE>37
a $1.0 million increase in other income due in part of a $469,000 increase in
the net cash surrender value of a $30 million Bank Owned Life Insurance
Policy. The remainder of the increase was due to additional fee income
resulting from the JSB acquisition. Examples of fee income sources
demonstrating increases are: ATM transaction charges, other mortgage banking
processing fees, insurance commissions, and check supply sales.
.....NON-INTEREST EXPENSE.....Non-interest expense for the first nine months of
1995 totalled $37.7 million which represented a $960,000 or 2.6% increase when
compared to the same 1994 period. This increase was primarily due to the
following items:
the 1994 results included a $2.4 million acquisition charge related to the
Company's acquisition of JSB. There were no acquisition costs incurred in the
first nine months of 1995.
a $1.9 million increase in salaries and employee benefits due to the retention
of 41 full time equivalent employees associated with the JSB acquisition,
planned wage increases approximating 4.0%, and generally higher group medical
insurance and profit sharing costs.
a $706,000 increase in amortization expense due entirely to the amortization
of the goodwill and core deposit intangibles resulting from the JSB
acquisition for the full nine months of 1995 compared to only three months in
1994. (See further discussion in Note #14.)
a $361,000 increase in net occupancy and equipment expense due to the costs
associated with operating four additional JSB branches and the occupancy and
equipment costs related to the mortgage banking subsidiary.
a $239,000 increase in supplies, postage and freight expense due to the
increase in the size of the customer base and the additional branch offices
associated with the JSB acquisition.
a $404,000 decrease in FDIC deposit insurance expense due to a reduction in
the premium assessment rate on deposits covered by the BIF insurance fund from
$0.23 per hundred dollars of deposits to $0.04 per hundred dollars of deposits
effective June 1, 1995.
a $423,000 increase in other expense due to higher operating expenses at the
Company's mortgage banking subsidiary, increased advertising expenses, and the
inclusion of all JSB other expenses for the entire nine months in 1995.
<PAGE>38
.....NET OVERHEAD BURDEN.....The Company's net overhead to tax equivalent net
interest income ratio showed improvement as it declined from 61.1% for the first
nine months of 1994 to 58.0% for the first nine months of 1995. (The 1994
amount
is exclusive of the acquisition charge.) The successful integration of JSB and
the
cost savings from intra-market consolidation opportunities combined with higher
non-
interest income to cause the improvement noted in the first nine months of
1995.
Management has targeted a goal of reducing the Company's net overhead expense to
net
interest income ratio to 55% through additional productivity enhancements,
operational efficiencies, and growth of fee income. (Presented on this page
was a graphic presentation of the net overhead burden for the nine months of
1994 and 1995.)
.....JSB INTEGRATION BENEFITS.....During 1995, the Company continued the process
of
integrating JSB into its U.S. Bank subsidiary in order to realize the targeted
minimum of $3.8 million of pre-tax savings opportunities resulting from this
intra-
market consolidation. Specific cost savings/revenue generating actions
completed
since the acquisition 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 back room check clearing and item processing
operations, the consolidation of several administrative functions such as
executive
administration, accounting and internal audit, the transfer of all subsidiary
banks'
mortgage servicing to Standard Mortgage Corporation, an investment portfolio
repositioning strategy that resulted in the sale of approximately 90% of JSB's
securities portfolio, and the downward repricing of several low cost deposit
products. The favorable pre-tax benefits recognized during the first nine
months
of 1995 due to these initiatives amounted to approximately $3.7 million and will
approximate $5.0 million for the full year 1995. Overall, the Company has
retained
approximately 50 employees or just 42% of the original JSB total of 120 full-
time equivalent employees.
.....INCOME TAX EXPENSE.....The Company's provision for income taxes for the
first
nine months of 1995 was $4.6 million reflecting an effective tax rate of 28.2%
The
Company's income tax provision for the first nine months of 1994 was $4.2
million
or an effective tax rate of 35.6%. The $377,000 increase in income tax expense
was
due entirely to the higher level of pre-tax earnings in the first half of 1995
as
the Company benefitted from a reduction in its effective tax rate. This lower
effective tax rate was caused predominately by increased total tax-free asset
holdings which were $69.5 million higher on average in the first nine months of
1995 as compared to the first nine months of 1994.
<PAGE>39
.....BALANCE SHEET.....The Company's total consolidated assets were $1.832
billion
at September 30, 1995, compared with $1.789 billion at December 31, 1994, which
represents a modest increase of $43 million or 2.4% due to increased leveraging
of
the balance sheet. During the first nine months of 1995, total loans and loans
held
for sale declined by approximately $53.4 million or 6.2% due primarily to the
sale
of $34 million of fixed-rate residential mortgage loans, a $5 million reduction
in
consumer loans due to the disposition of a
business line, the maturity of $20 million of commercial loan tax anticipation
notes
which were not replaced, and continued net loan run-off experienced in the
indirect
auto loan portfolio. During the third quarter of 1995, however, total loans did
increase by $12.9 million due to improved commercial loan demand. Total
investment
securities increased by $86.6 million as purchases of adjustable-rate mortgage-
backed securities, municipal securities and mortgage pass-thru securities were
made
to utilize the funds provided by the overall net loan portfolio runoff and
increased
leveraging of the balance sheet. The increase in other assets reflects the
purchase
of a $30 million bank owned life insurance policy.
Total deposits decreased by $5.3 million or 0.4% since December 31, 1994, as
the Company's conservative deposit pricing structure has contributed to modest
deposit run-off in 1995. The Company's total borrowed funds position increased
by
$38.1 million since December 31, 1994, due to additional leveraging of the
balance
sheet with FHLB borrowings. Overall, the Company's asset leverage ratio was
6.59% at September 30, 1995.
The Company now carries $19.6 million of goodwill and $5.6 million of core
deposit intangible assets on its balance sheet. The majority of these
intangible
assets were originated with the JSB acquisition. The Company paid this
premium
for JSB and believes its franchise value has been strengthened by the
acquisition for several reasons:
JSB's customer base, branch locations, and approximately $190 million of stable
low cost core deposits allowed the Company to obtain a 25% market share
leadership position in Cambria County - one of its primary markets.
the intra-market consolidation opportunities are generating significant ongoing
earnings enhancements.
.....MARKET AREA ECONOMY.....The regional economy-at-large has experienced a
slowed
growth rate which parallels the national economy. The Pennsylvania unemployment
rate has remained steady at about 5.5%, according to the federal Bureau of Labor
Statistics. Current labor statistics are predicted to experience slow and
steady
growth. Retail spending has continuously declined since the fourth quarter of
1994.
Both regions in the Company's marketplace, which includes Greater
Johnstown and
suburban Pittsburgh, have experienced little growth in deposit volumes. While
lending resources have noticeably improved during the third quarter, lending
activity can best be described in both regions as stable.
The third quarter has been one of discouragement in the Johnstown
market-place.
The Miller-Picking plant announced its closing during this period and Johnstown
America Corp. will lay off up to 30 percent
of its work force due to a downturn in several market segments. Both of these
actions could result in a loss of over 500 jobs.
<PAGE>40
In the Pittsburgh marketplace, Cleveland based National City Corporation
will
acquire Integra Financial Corp. for approximately $2.1 billion. This could
result
in the loss of about 1,500 Integra "back office" jobs and the closing of some of
their 260 branches. However, this region received a lift when Kevin McClatchy,
a
California newspaper heir, made a $1 million downpayment for the Pittsburgh
Pirates
baseball team, the 109-year-old franchise many predicted would not be in
Pittsburgh
in 1996. McClatchy has promised to keep the team in Pittsburgh, and Major
League
Baseball's Ownership Committee has authorized the purchase. This sale should
ensure survival of some market factions and future growth and expansion of
others.
.....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
1995 1994 1994
<S> <C> <C> <C>
Total loan delinquency (past due
30 to 89 days) $14,287 $12,832 $13,285
Total non-accrual loans 5,405 5,446 6,058
Total non-performing assets<F1> 7,182 7,901 7,132
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 1.75% 1.48% 1.50%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned
income 0.66 0.63 0.68
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 0.88 0.91 0.80
<F1>Non-performing assets are comprised of (i) loans that are on a non-accrual basis,
(ii) loans that are contractually past due 90 days or more as to interest and principal
payments some of which are insured for credit loss, and (iii) other real estate owned.
</TABLE>
At September 30, 1995, total non-accrual loans and non-performing assets
were relatively consistent with the prior dates presented. Total loan
delinquency (past due 30 to 89 days) increased by $1.5 million, when compared
to December 31, 1994, causing the ratio to total loans to increase to 1.75%.
This increased delinquency occurred in residential mortgage loans.
<PAGE>41
Potential problem loans consist of loans which are included in performing
loans, but for which potential credit problems of the borrowers have caused
management to have concerns as to the ability of such borrowers to comply with
present repayment terms. At September 30, 1995, all identified potential
problem loans were included in the preceding table.
.....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
1995 1994 1994
<S> <C> <C> <C>
Allowance for loan losses $ 14,899 $ 15,590 $ 19,495
Amount in the allowance
for loan losses
allocated to "general risk" 7,327 6,643 10,515
Allowance for loan losses as
a percentage of each of
the following:
total loans and loans
held for sale,
net of unearned income 1.83% 1.80% 2.20%
total delinquent loans
(past due 30 to 89 days) 104.28 121.49 146.74
total non-accrual loans 275.65 286.27 321.81
total non-performing assets 207.45 197.32 273.35
</TABLE>
Since December 31, 1994, the balance in the allowance for loan losses has
declined by $691,000 to $14.9 million. The disposition of a business line
reduced
the allowance for loan losses by $342,000. The remainder of the decline was due
to
net charge-offs exceeding the loan loss provision by $349,000. During the first
nine months of 1995, net charge-offs amounted to $589,000 or 0.10% of total
average
loans compared to net charge-offs of $222,000 or 0.04% of total average loans
for
the same 1994 period. The higher 1995 amount resulted from the charge-off of
$350,000 of commercial loans for which allocations had been established within
the allowance for loan losses.
The portion of the Company's allowance which is allocated to "general risk"
and not to any particular loan or loan category increased to $7.3 million at
September 30, 1995. The amount of the reserve allocated to general risk now
represents 49.2% 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>42
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
(in thousands, except for the GAP ratios):
<TABLE>
<CAPTION>
September 30 December 31 September 30
1995 1994 1994
<S> <C> <C> <C>
Six month cumulative GAP
RSA................ $ 473,810 $ 487,450 $ 401,020
RSL................ (783,187) (673,196) (667,695)
Off-balance sheet
hedges.......... 75,000 90 000 90,000
GAP................ $ (234,377) $ (95,746) $(176,675)
GAP ratio.......... 0.67X 0.84X 0.69X
GAP as a % of total
assets.......... (12.80)% (5.35)% (9.89)%
GAP as a % of total
capital......... (163.52) (69.82) (129.04)
One year cumulative GAP
RSA................ $ 718,221 $ 675,875 $ 682,181
RSL................ (937,557) (849,153) (838,775)
Off-balance sheet
hedges.......... 75,000 (10,000) (10,000)
GAP................ $ (144,336) $(183,278) $(166,594)
GAP ratio.......... 0.83X 0.79X 0.80X
GAP as a % of total
assets.......... (7.88)% (10.25)% (9.33)%
GAP as a % of total
capital......... (100.70) (133.65) (121.67)
</TABLE>
When September 30, 1995, is compared to December 31, 1994, the Company's six
month cumulative GAP ratio became more negative while the one year cumulative
GAP ratio became less negative. As separately disclosed in the above table, the
hedge transactions (described in detail in Note #13) reduced the negativity of
both the six month and one year GAP by $75 million. The purchase of adjustable-
rate mortgage-backed securities throughout 1995 to replace maturing securities
and the $34 million of sold fixed-rate mortgage loans increased the earning
asset sensitivity and also contributed to the reduction in the negativity of
the one year static GAP position.
<PAGE>43
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, 1995, the balance in these accounts totalled $451 million or 24.6% of total
assets. Within the above static GAP table, approximately $130 million or 28.8%
of the total low cost core deposits are assumed to be rate sensitive liabilities
which reprice in one year or less; this 28.8% assumption is based upon
historical
experience in varying interest rate environments and is consistently used for
all
GAP ratios presented. The Company recognizes that the pricing of these accounts
is somewhat inelastic when compared to normal rate movements and generally
assumes that up to a 250 basis point increase in rates will not necessitate a
change in the cost of these accounts. Indeed, throughout 1994 and 1995, the
Company has been able to hold steady the pricing of these accounts despite eight
Federal Reserve rate movements which caused a total 275 basis point increase in
both the fed funds and prime rate.
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 primary emphasis on
simulation modeling to manage and measure interest rate risk. At September 30,
1995, these varied economic interest rate simulations indicated that the maximum
negative variability of USBANCORP's net interest income over the next twelve
month period was -6.2% under an upward rate shock forecast reflecting a 200
basis
point increase in interest rates. Capital impairment under this simulation
was estimated to be less than 2.0%. The off- balance sheet borrowed funds
hedge
transactions also helped reduce the variability of forecasted net interest
income
in a rising interest rate environment. The Company's asset liability management
policy seeks to limit net interest income variability to plus or minus 7.5%.
Within the investment portfolio, 40.3% of the portfolio is currently
classified as available for sale and 59.7% as held to maturity. The available
for sale classification provides management with greater flexibility to manage
the securities portfolio to better achieve overall balance sheet rate
sensitivity
goals and provide liquidity if needed. 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 servicing rights at its mortgage banking subsidiary 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>44
.....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 $187 million at September 30, 1995, $146 million at December 31,
1994, and $222 million at September 30, 1994. 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, 1995, USBANCORP's subsidiaries had approximately
$168.4 million of unused lines of credit available under informal arrangements
with correspondent banks compared to $160.3 million at September 30, 1994.
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 $339 million. Furthermore, USBANCORP had available at
September 30, 1995, $6.5 million of a total $12.5 million unsecured line of
credit.
Liquidity can be further analyzed by utilizing the Consolidated Statement
of Cash Flows. Cash equivalents decreased by $15.8 million from December 31,
1994, to September 30, 1995, due primarily to $55.4 million of net cash used by
investing activities. This more than offset $19 million of net cash provided by
operating activities and $20.6 million of net cash provided by financing
activities. Within investing activities, purchases of investment securities
exceeded the cash proceeds from investment security maturities and sales by
approximately $74.1 million. Cash advanced for new loan fundings totalled
$238.5
million and was approximately $52.6 million less than the cash received from
loan
principal payments and sales. The $32.4 million use in other assets reflects
the
purchase of $30 million of Bank Owned Life Insurance. Within financing
activities, cash generated from the sale of new certificates of deposit exceeded
cash payments for maturing certificates of deposit by $31.5 million. Demand and
savings deposits have experienced a net decrease of $36.8 million.
<PAGE>45
.....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.
.....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, 1995 December 31, 1994 September 30, 1994
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
RISK-ADJUSTED
CAPITAL RATIOS
Tier 1 capital $ 119,013 13.22% $ 117,480 12.45% $ 115,428 11.95%
Tier 1 capital
minimum
requirements 36,014 4.00 37,745 4.00 38,622 4.00
Excess $ 82,999 9.22% $ 79,735 8.45% $ 76,806 7.95%
Total capital $ 130,267 14.47% $ 129,275 13.70% $ 127,497 13.20%
Total capital
minimum
requirements 72,027 8.00 75,489 8.00 77,244 8.00
Excess $ 58,240 6.47% $ 53,786 5.70% $ 50,253 5.20%
Total risk-
adjusted
assets $ 900,339 $ 943,614 $ 965,544
ASSET LEVERAGE
RATIO
Tier 1 capital $ 119,013 6.59% $ 117,480 6.64% $ 115,428 6.54%
Minimum
requirements 90,361 5.00 88,462 5.00 88,201 5.00
Excess $ 28,652 1.59% $ 29,018 1.64% $ 27,227 1.54%
Total adjusted
assets $1,807,215 $1,769,234 $1,764,027
</TABLE>
Between December 31, 1994, and September 30, 1995, the Company's risk
adjusted
capital ratios increased due to overall net growth in equity and a reduced level
of
risk adjusted assets. The asset leverage ratio was relatively consistent as it
decreased by 5 basis points. The Company used funds provided by a new $10
million
unsecured line of credit to repurchase 242,000 shares or $6.7 million of its
common
stock during the third quarter of 1995. The rate on this unsecured line of
credit
floats at 50 basis points under the prime rate. Through September 30, 1995,
the
Company has repurchased a total of 423,000 shares of its common stock at a total
cost of $11.0 million. Treasury stock purchases in the fourth quarter of 1995
will
most likely be lower than previous quarters' activity. The recent appreciation
in
the Company's stock price to approximately $32 per share has caused the market
price
to book value ratio to approximate 120% which is higher than the current maximum
allowable ratio for repurchase authorizations contained in the Company's share
repurchase policy.
<PAGE>46
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 continue 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 and to maintain an asset leverage ratio of no less than 6.0%.
The Company's declared Common Stock cash dividend per share was $0.79 for
the
first nine months of 1995 which was a 9.7% increase over the $0.72 per share
dividend for the same 1994 interim period. The dividend yield on the Company's
common stock now approximates 3.5% compared to an average common dividend yield
for
Pennsylvania bank holding companies of approximately 3.0%. The Company remains
committed to a progressive total shareholder return which includes maintaining
the common dividend at a higher level than peer.
.....OTHER MATTERS-COLLECTIVE BARGAINING AGREEMENT.....The Company announced on
October 17, 1995, that its wholly-owned subsidiary, U.S. Bank in Johnstown
("Bank"),
has reached a new four year collective bargaining agreement with the United
Steelworkers of America, AFL-CIO-CLC, Local Union 8204, which is the bargaining
unit for 250 nonsupervisory employees of the Bank, or approximately 60% of the
Bank's workforce. The agreement, approved by a majority of the bargaining unit
members, was effective on October 16, 1995. In the view of the management of
the
Company and the Bank, the agreement is fair and reasonable to all parties and is
consistent with the concept of shared proportionate sacrifice designed to assist
the
Company in achieving its announced goal of reaching a 13% return on equity in
1996.
The Bank introduced the shared proportionate sacrifice concept in June and
subsequently in September when a "1996 salary freeze and temporary one year
salary
rollback" was announced for all officers. The 1996 temporary one year rollback
starts at 10% for executive officers and reduces to 3% for first level officers.
The principal features of the collective bargaining agreement are as follows:
The term of the agreement is four years.
The agreement calls for a wage freeze for bargaining unit employees in the
first year of the contract ending October 15,
1996. Thereafter, the agreement calls for annual raises of 2%, 4%, and 5%.
The agreement does not alter the earnings-based formula for determining
profit sharing payments under the Bank's deferred
profit sharing plan, but participants in the plan (which includes all
employees of the Bank) will receive 90% on the
formula amount with respect to the calendar year ending December 31, 1995.
In the next two years, participants will receive 25%
and 75% of the formula amount, respectively. In the final year of the
contract, profit sharing payments will be restored to 100%
of the formula.
<PAGE>47
The traditional indemnity health insurance coverage for bargaining
unit employees will be replaced by a Blue Cross point
of service managed care program.
The pay scale of hourly workers beyond the entry level will be
increased by the commensurate with the pay of full-time salaried
employees performing similar jobs in order to encourage part-time
employment and flexible scheduling.
Management/labor task forces will be established to provide joint
recommendations on certain operational issues.
<PAGE>48
Presented on this page was a service area map showing the six county area
services by USBANCORP.
<PAGE>49
Part II Other Information
Item 6.Exhibits and Reports on Form 8-K
The exhibits listed below are filed herewith or to other filings.
(a) Exhibit
3.1 Articles of Incorporation, as amended on
February 24, 1995.
3.2 Bylaws, as amended and restated on
February 24, 1995.
15.1 Letter re: unaudited interim financial information.
27 Financial Data Schedule.
(b) Reports on Form 8-K
USBANCORP, Inc. announcement of increased authorization in
common stock repurchase program dated August 2, 1995.
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, 1995 /s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: November 14, 1995 /s/Orlando B. Hanselman
Orlando B. Hanselman
Executive Vice President
and Chief Financial Officer
<PAGE>50
STATEMENT OF MANAGEMENT RESPONSIBILITY
October 19, 1995
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 LLP and the Company's internal auditors have direct
access to the Audit Committee.
/s/Terry K. Dunkle /s/Orlando B. Hansleman
Terry K. Dunkle Orlando B. Hanselman
Chairman, President & Executive Vice President &
Chief Executive Officer Chief Financial Officer
<PAGE>51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
USBANCORP, Inc.:
We have reviewed the accompanying consolidated balance sheets of USBANCORP, Inc.
(a Pennsylvania corporation) and Subsidiaries as of September 30, 1995 and
1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the three-month and nine-month periods
then ended. 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 reviews, 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,
1994, and, in our report dated January 27, 1995, we expressed an unqualified
opinion on that statement. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1994, is fairly
stated, in all material respects, in relation to the balance sheet from which
it has been derived.
\s\Arthur Andersen, LLP
Pittsburgh, Pennsylvania,
October 19, 1995
<PAGE>52
October 19, 1995
To the Stockholders and Board of Directors of
USBANCORP, INC.:
We are aware that USBANCORP, Inc. has incorporated by reference in its
Registration Statements on Form S-3 (Registration No. 33-56604; Form S-8
(Registration No. 33-53935); Form S-8 (Registration No. 33-55845); Form S-8
(registration No. 33-55207); and Form S-8 (Registration No. 33-55211) its
Form 10-Q for the quarter ended September 30, 1995, which includes our report
dated October 19, 1995, covering the unaudited interim financial statement
information contained therein. Pursuant
to Rule 436(c) of the Securities Act of 1933 (the Act), that report is not
considered a part of the Registration Statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
\s\Arthur Andersen, LLP
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
<CASH> 36575 36575
<INT-BEARING-DEPOSITS> 1513 1513
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 351259 351259
<INVESTMENTS-CARRYING> 519411 519411
<INVESTMENTS-MARKET> 523525 523525
<LOANS> 814613 814613
<ALLOWANCE> 14899 14899
<TOTAL-ASSETS> 1831538 1831538
<DEPOSITS> 1190943 1190943
<SHORT-TERM> 48105 48105
<LIABILITIES-OTHER> 445405 445405
<LONG-TERM> 3749 3749
<COMMON> 14307 14307
0 0
0 0
<OTHER-SE> 129029 129029
<TOTAL-LIABILITIES-AND-EQUITY> 1831538 1831538
<INTEREST-LOAN> 17857 53119
<INTEREST-INVEST> 14784 43219
<INTEREST-OTHER> 92 383
<INTEREST-TOTAL> 32733 96721
<INTEREST-DEPOSIT> 11641 34210
<INTEREST-EXPENSE> 7124 20274
<INTEREST-INCOME-NET> 13968 42237
<LOAN-LOSSES> 45 240
<SECURITIES-GAINS> (125) 599
<EXPENSE-OTHER> 12606 37719
<INCOME-PRETAX> 5301 16288
<INCOME-PRE-EXTRAORDINARY> 5301 16288
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3908 11688
<EPS-PRIMARY> 0.72 2.11
<EPS-DILUTED> 0.72 2.11
<YIELD-ACTUAL> 7.82 7.79
<LOANS-NON> 5405 5405
<LOANS-PAST> 894 894
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 14886 15590
<CHARGE-OFFS> 233 1111
<RECOVERIES> 201 522
<ALLOWANCE-CLOSE> 14899 14899
<ALLOWANCE-DOMESTIC> 14899 14899
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 7327 7327
</TABLE>
