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 March 31, 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 April 28, 1995
Common Stock, par value $2.50 5,585,222
per share
<PAGE>1
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
March 31, 1995, December 31, 1994,
and March 31, 1994 3
Consolidated Statement of Income -
Three Months Ended March 31, 1995,
and 1994 4
Consolidated Statement of Changes
in Stockholders' Equity -
Three Months Ended
March 31, 1995, and 1994 6
Consolidated Statement of Cash Flows -
Three Months Ended
March 31, 1995, and 1994 7
Notes to Consolidated Financial
Statements 8
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations 23
Part II. Other Information 43
<PAGE>2
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
March 31 December 31 March 31
1995 1994 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 38,665 $ 48,841 $ 40,741
Interest bearing deposits with banks 6,707 5,050 342
Federal funds sold and securities
purchased under agreements to
resell 15,000 - 4,000
Investment securities:
Available for sale 320,624 259,462 370,315
Held to maturity (market value
$521,288 on March 31,1995,
$501,485 on December 31, 1994,
and $52,148 on March 31, 1994) 526,613 524,638 53,576
Assets held in trust for collateralized
mortgage obligation 8,688 9,104 12,409
Loans held for sale 2,346 18,077 7,780
Loans 823,458 853,759 734,244
Less: Unearned income 2,874 3,832 4,982
Allowance for loan losses 15,258 15,590 15,553
Net Loans 805,326 834,337 713,709
Premises and equipment 18,780 19,100 16,771
Accrued income receivable 17,425 16,894 9,238
Purchased mortgage servicing rights 11,609 11,452 -
Goodwill and core deposit intangibles 26,407 27,009 2,676
Other assets 14,104 14,926 13,896
TOTAL ASSETS $ 1,812,294 $ 1,788,890 $ 1,245,453
LIABILITIES
Non-interest bearing deposits $ 132,334 $ 144,013 $ 129,167
Interest bearing deposits 1,084,014 1,052,233 911,521
Total deposits 1,216,348 1,196,246 1,040,688
Federal funds purchased and
securities sold under agreements
to repurchase 125,334 143,289 24,194
Other short-term borrowings 68,126 75,295 10,898
Advances from Federal Home Loan Bank 222,696 200,094 26,271
Collateralized mortgage obligation 7,836 8,251 11,365
Long-term debt 5,550 5,806 3,105
Other liabilities 23,382 22,773 14,008
TOTAL LIABILITIES 1,669,272 1,651,754 1,130,529
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;
5,585,222 shares issued and outstand-
ing on March 31, 1995; 5,582,155 shares
issued and outstanding on December 31,
1994; 4,738,064 shares issued and
outstanding on March 31, 1994 14,282 14,275 11,845
Treasury stock, 127,700 shares at cost (3,064) (3,064) -
Surplus 92,970 92,923 70,955
Retained earnings 42,858 40,355 36,076
Net unrealized holding losses on
available for sale securities (4,024) (7,353) (3,952)
TOTAL STOCKHOLDERS' EQUITY 143,022 137,136 114,924
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,812,294 $ 1,788,890 $ 1,245,453
</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
March 31
1995 1994
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans and loans held
for sale:
Taxable $ 17,610 $ 14,680
Tax exempt 617 375
Deposits with banks 73 11
Federal funds sold and securities
purchased under agreements to
resell 38 20
Investment securities:
Available for sale 4,466 5,182
Held to maturity 9,245 526
Assets held in trust for collateralized
mortgage obligation 174 272
Total Interest Income 32,223 21,066
INTEREST EXPENSE
Deposits 10,862 7,343
Federal funds purchased and securities
sold under agreements to repurchase 2,111 113
Other short-term borrowings 553 9
Advances from Federal Home Loan Bank 3,643 352
Collateralized mortgage obligation 243 287
Long-term debt 78 61
Total Interest Expense 17,490 8,165
NET INTEREST INCOME 14,733 12,901
Provision for loan losses 120 405
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 14,613 12,496
NON-INTEREST INCOME
Trust fees 845 718
Net realized gains (losses) on
investment securities (1) 271
Net realized gains (losses) on loans
and loans held for sale (866) 93
Gain on disposition of business line 905 -
Wholesale cash processing fees 289 318
Service charges on deposit accounts 708 592
Net mortgage servicing fees 682 -
Other income 926 664
Total Non-Interest Income 3,488 2,656
NON-INTEREST EXPENSE
Salaries and employee benefits 6,424 5,343
Net occupancy expense 1,096 988
Equipment expense 887 803
Professional fees 573 448
Supplies, postage, and freight 651 547
Miscellaneous taxes and insurance 327 296
FDIC deposit insurance expense 682 587
Amortization of goodwill and
core deposit intangibles 602 221
Other expense 1,276 1,407
Total Non-Interest Expense $ 12,518 $ 10,640
INCOME BEFORE INCOME TAXES 5,583 4,512
Provision for income taxes 1,684 1,473
NET INCOME $ 3,899 $ 3,039
PER COMMON SHARE DATA:
Primary:
Net income $ 0.70 $ 0.64
Average shares outstanding 5,583,227 4,740,461
Fully Diluted:
Net income $ 0.70 $ 0.64
Average shares outstanding 5,583,227 4,740,461
Cash Dividend Declared $ 0.25 $ 0.22
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>4
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 - - - - 3,039 - 3,039
Dividend reinvestment
and stock
purchase plan - 30 - 235 - - 265
Net unrealized holding
gains (losses) on
investment
securities - - - - - (3,952) (3,952)
Cash dividends
declared:
Common stock
($0.22 per share
on 4,737,321
shares) - - - - (1,043) - (1,043)
Balance March 31,
1994 $ - $ 11,845 $ - $ 70,955 $ 36,076 $ (3,952) $ 114,924
Balance December 31, 1994 $ - $ 14,275 $ (3,064) $ 92,923 $ 40,355 $ (7,353) $ 137,136
Net Income - - - - 3,899 - 3,899
Dividend reinvest-
ment and stock
purchase plan - 7 - 47 - - 54
Net unrealized
holding gains
(losses) on
investment
securities - - - - - 3,329 3,329
Cash dividends
declared:
Common stock
($0.25 per share
on 5,584,722
shares) - - - - (1,396) - (1,396)
Balance March 31,
1995 $ - $ 14,282 $(3,064) $92,970 $ 42,858 $(4,024) $ 143,022
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>6
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
March 31
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,899 $ 3,039
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 120 405
Depreciation and amortization expense 591 763
Amortization expense of goodwill and core
deposit intangibles 602 221
Amortization expense of purchased mortgage
servicing rights 285 -
Net amortization (accretion) of investment securities (1,217) 574
Net realized losses (gains) on investment securities 1 (271)
Net realized losses (gains) on loans and loans
held for sale 866 (93)
Increase in accrued income receivable (531) (346)
Increase (decrease) in accrued expense payable 1,136 (1,966)
Net cash provided by operating activities 5,752 2,326
INVESTING ACTIVITIES
Purchases of investment securities and other
short-term investments (70,460) (76,232)
Proceeds from maturities of investment securities and
other short-term investments 13,304 36,689
Proceeds from sales of investment securities and
other short-term investments 348 37,981
Long-term loans originated (97,702) (88,305)
Mortgage loans held for sale (2,346) (7,780)
Principal collected on long-term loans 109,860 79,187
Loans purchased or participated (587) -
Loans sold or participated 34,335 6,021
Net increase in credit card receivable
and other short-term loans 196 1,002
Purchases of premises and equipment (405) (337)
Sale/retirement of premises and equipment 134 -
Net decrease in assets held in trust for
collateralized mortgage obligation 416 1,406
Net increase purchased mortgage servicing rights (442) -
Net increase in other assets (962) (4,100)
Net cash used by investing activities (14,311) (14,468)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit 168,289 84,279
Payments for maturing certificates of deposits (120,716) (92,343)
Net decrease in demand and savings deposits (27,471) (114)
Net (decrease) increase in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings (25,124) 22,174
Net principal borrowings (repayments) of advances
from Federal Home Loan Bank and long-term debt 21,931 (6,663)
Common stock cash dividends paid (1,404) (1,039)
Proceeds from dividend reinvestment, stock
purchase plan, and stock options exercised 54 265
Net (decrease) increase in other liabilities (519) 251
Net cash provided by financing activities 15,040 6,810
NET INCREASE (DECREASE) IN CASH EQUIVALENTS 6,481 (5,332)
CASH EQUIVALENTS AT JANUARY 1 53,891 50,415
CASH EQUIVALENTS AT MARCH 31 $ 60,372 $ 45,083
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The consolidated financial statements include the accounts
of USBANCORP, Inc. (the
"Company") and its wholly-owned subsidiaries, United States
National Bank in Johnstown
("U.S. Bank"), Three Rivers Bank and Trust Company ("Three Rivers
Bank"), Community
Bancorp, Inc. ("Community"), USBANCORP Trust Company ("Trust
Company"), and United Bancorp
Life Insurance Company ("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 periods ended March 31, 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 April 20, 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.
<PAGE>8
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.
Immediately following the Merger, U.S. Bank caused the
intracompany sale by Standard
Mortgage Corporation of Georgia, a wholly-owned subsidiary of
JSB, of all its assets,
subject to all of its liabilities, to SMC Acquisition
Corporation, an indirect subsidiary
of Community. SMC Acquisition Corporation was renamed Standard
Mortgage Corporation of
Georgia ("SMC") and is a mortgage banking company organized under
the laws of the State
of Georgia that originates, sells, and services residential
mortgage loans.
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 first
quarter 1995 performance to
the financial performance calculated on a pro forma basis for the
period ended March 31,
1994, for USBANCORP and JSB as if the merger had been consummated
on January 1, 1994:
<TABLE>
<CAPTION>
Actual Pro forma
March 31, 1995 March 31, 1994
(In thousands, except per share data)
<S> <C> <C>
Net interest income $14,733 $15,608
Provision for loan losses 120 405
Non-interest income 3,488 3,756
Non-interest expense 12,518 13,693
Provision for income taxes 1,684 1,788
Net income $ 3,899 $ 3,478
Net income per fully diluted
common share $ 0.70 $ 0.61
</TABLE>
<PAGE>9
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
no federal income tax payments for the first three months of 1995
as compared to $500,000
for the same 1994 interim period. Total interest expense paid
amounted to $15,314,000
in 1995's first three months compared to $8,183,000 in the same
1994 period.
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:
March 31, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 23,413 $ 177 $ (242) $ 23,348
U.S. Agency 31,245 22 (1,157) 30,110
State and municipal 1,437 - (89) 1,348
U.S. Agency mortgage-backed
securities 231,464 1,656 (3,775) 229,345
Other securities<F1> 37,083 2 (612) 36,473
Total $324,642 $ 1,857 $ (5,875) $320,624
<F1> Other investment securities include corporate
notes and bonds, asset-backed securities,and
equity securities.
</TABLE>
<PAGE>10
<TABLE>
<CAPTION>
Investment securities held to maturity:
March 31, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 596 $ - $ (1) $ 595
U.S. Agency 35,912 127 (1,623) 34,416
State and municipal 131,257 1,756 (2,314) 130,699
U.S. Agency mortgage-backed
securities 355,149 3,963 (7,217) 351,895
Other securities<F1> 3,699 14 (30) 3,683
Total $526,613 $ 5,860 $ (11,185) $521,288
<F1> Other investment securitiesinclude corporate
notes and bonds, asset-backed securities,and
equity securities.
</TABLE>
<TABLE>
<CAPTION>
Investment securities available for sale:
December 31, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
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>
<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
<F1> Other investment securities include corporate
notes and bonds, asset-backed securities, and
equity securities.
</TABLE>
<PAGE>11
<TABLE>
<CAPTION>
Investment securities available for sale:
March 31, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 22,269 $ 65 $ (176) $ 22,158
U.S. Agency 90,742 170 (1,898) 89,014
State and municipal 2,121 28 (71) 2,078
Mortgage-backed securities<F1> 222,590 775 (4,977) 218,388
Other securities<F2> 38,671 430 (424) 38,677
Total $376,393 $ 1,468 $ (7,546) $370,315
<F1> Approximately 96% of these obligations
represent U.S. Agency issued securities.
<F2> Other investment securities include corporate
notes and bonds, asset-backed securities, and
equity securities.
</TABLE>
<TABLE>
<CAPTION>
Investment securities held to maturity:
March 31, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
State and municipal
tax free securities $ 53,576 $ 291 $ (1,719) $ 52,148
</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."
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 March 31, 1995, 96.2% of the portfolio was rated "AAA" and
96.9% "AA" or higher as
compared to 91.0% and 92.7%, respectively, at March 31, 1994.
Less than 1.0% of the
portfolio was rated below "A" or unrated on March 31, 1995.
7. Loans Held for Sale
At March 31, 1995, $2,346,000 of 30 year 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.
<PAGE>12
8. Loans
The loan portfolio of the Company consists of the following
(in thousands):
<TABLE>
<CAPTION>
March 31 December 31 March 31
1995 1994 1994
<S> <C> <C> <C>
Commercial $111,444 $116,702 $105,055
Commercial loans secured
by real estate 179,384 168,238 123,615
Real estate - mortgage 385,376 407,177 345,400
Consumer 147,254 161,642 160,174
Loans 823,458 853,759 734,244
Less: Unearned income 2,874 3,832 4,982
Loans, net of unearned
income $820,584 $849,927 $729,262
</TABLE>
Real estate-construction loans were not material at these
presented dates and
comprised 2.5% of total loans net of unearned income at March 31,
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 overall portfolio quality. This
continuous review assesses the risk characteristics of both
individual loans and the total loan portfolio.
regular examinations and reviews of the loan portfolio by
representatives of the regulatory authorities.
analytical review of loan charge-off experience, delinquency
rates, and other relevant historical and peer statistical
ratios.
management's judgement with respect to local and general
economic conditions and their impact on the existing
loan portfolio.
<PAGE>13
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 Year Ended
March 31 December 31
1995 1994 1994
<S> <C> <C> <C>
Balance at beginning of period $ 15,590 $ 15,260 $ 15,260
Addition due to JSB acquisition - - 3,422
Reduction due to disposition of
business line (342) - -
Charge-offs:
Commercial 95 55 352
Real estate-mortgage 40 87 155
Consumer 164 132 591
Total charge-offs 299 274 1,098
Recoveries:
Commercial 64 44 199
Real estate-mortgage 8 9 100
Consumer 117 109 472
Total recoveries 189 162 771
Net charge-offs 110 112 327
Provision for loan losses 120 405 (2,765)
Balance at end of period $ 15,258 $ 15,553 $ 15,590
As a percent of average loans
and loans held for
sale, net of unearned
income:
Annualized net charge-offs 0.05% 0.06% 0.04%
Annualized provision for
loan losses 0.06 0.22 (0.34)
Allowance as a percent of loans
and loans held for sale, net
of unearned income at period
end 1.85 2.11 1.80
Allowance as a multiple of
annualized net charge-offs,
at period end 34.68X 34.72X 47.68X
(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 34, respectively.)
</TABLE>
<PAGE>14
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 five loans totalling
$602,000 being
specifically identified as impaired and a corresponding
allocation reserve of $466,000
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>
March 31,1995 December 31, 1994 March 31, 1994
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
Amount to Loans Amount to Loans Amount to Loans
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 1,390 13.5% $ 1,894 13.4% $ 1,696 14.1%
Commercial
loans secured
by real
estate 5,381 21.7 5,278 19.3 3,959 16.7
Real Estate -
mortgage 308 47.0 339 48.8 284 47.6
Consumer 947 17.8 1,436 18.5 1,330 21.6
Allocation to
general ris k 6,766 - 6,643 - 8,284 -
Allocation for
impaired
loans 466 - - - - -
Total $15,258 100.0% $15,590 100.0% $15,553 100.0%
Includes loans "held for sale."
</TABLE>
At March 31, 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.)
<PAGE>15
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 and in-substance
foreclosures). All loans,
except for loans that are insured for credit loss, are placed on
non-accrual status
immediately upon becoming 90 days past due in either principal or
interest. In addition,
if circumstances warrant, the accrual of interest may be
discontinued prior to 90 days.
In all cases, payments received on non-accrual loans are credited
to principal until full
recovery of principal has been recognized; it is only after full
recovery of principal
that any additional payments received are recognized as interest
income. 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 Financial
Officer.
The following table presents information concerning
non-performing assets (in
thousands, except percentages):
<TABLE>
<CAPTION>
March 31 December 31 March 31
1995 1994 1994
<S> <C> <C> <C>
Non-accrual loans $5,401 $5,446 $4,006
Loans past due 90
days or more 2,731 1,357 262
Other real estate owned 767 1,098 770
Total non-performing
assets $8,899 $7,901 $5,038
Total non-performing
assets as a percent
of loans and loans
held for sale, net
of unearned income,
and other real estate
owned 1.08% 0.91% 0.68%
</TABLE>
The Company is unaware of any additional loans which are
required to either be
charged-off or added to the non-performing asset totals disclosed
above. Other real
estate owned is recorded at the lower of fair value or carrying
cost based upon
appraisals.
The following table sets forth, for the periods indicated,
(i) the gross interest
income that would have been recorded if non-accrual loans had
been current in accordance
with their original terms and had been outstanding throughout the
period or since
origination if held for part of the period, (ii) the amount of
interest income actually
recorded on such loans, and (iii) the net reduction in interest
income attributable to
such loans (in thousands). There was no interest income
recognized on impaired loans
during the first quarter of 1995.
<PAGE>16
<TABLE>
<CAPTION>
Three Months Ended
March 31
1995 1994
<S> <C> <C>
Interest income due in accordance
with original terms $ 145 $ 163
Interest income recorded (42) (292)
Net reduction (increase) in
interest income $ 103 $(129)
</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:
<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) - 22.5600
Options cancelled or
expired - -
Balance at December 31, 1994 75,867 38,500
Options granted 20,500 (20,500) 21.4375
Options exercised (3,067) - 17.2500
Options cancelled or
expired - -
Balance at March 31, 1995 93,300 18,000
</TABLE>
On or after the first anniversary of the Grant Date, one-third of
such options may be
exercised. On or after the second anniversary of the Grant Date,
two-thirds of such
options may be exercised minus the aggregate number of such
options previously exercised.
On or after the third anniversary of the Grant Date, the
remainder of the options may be
exercised.
<PAGE>17
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.
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
and floors are included
in other assets on the Consolidated Balance Sheet. A summary of
the off-balance sheet
derivative transactions completed to date are as follows:
CMO Liability Hedge
During the first quarter of 1994, the Company entered into
an interest rate swap
agreement with a notional amount of $10 million and a termination
date of February 11,
1997. Under the terms of the swap agreement, the Company will
receive a fixed interest
rate of 5% and pay a floating interest rate defined as the 90 day
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 $26,000 in the first quarter of 1995.
<PAGE>18
Leverage Program Hedge
On September 28, 1994, the Company completed hedging
transactions with a notional
amount of $100 million. The counter-party in these unsecured
transactions is Mellon Bank.
The $100 million notional amount was comprised of the following:
a $50 million interest rate swap agreement whereby the
Company pays a one year
fixed interest rate of 6.08% and receives 90 day Libor which
resets quarterly.
The termination date of this swap agreement is September 28,
1995.
a $50 million interest rate cap on 90 day Libor whereby the
cap amounts to 5.25%
for the period covering September 28, 1994, through March
28, 1995, and then 5.75%
for the period from March 29, 1995, through September 28,
1995. The cost of this
cap was 63 basis points or $315,000 and is being amortized
as an interest expense
over the life of the cap. At March 31, 1995, the
unamortized premium amounted to $158,000.
The Company purchased these derivative products to hedge an
interest rate mismatch
that existed between the investment securities portfolio and
short-term Federal Home Loan
Bank borrowings. This mismatch was created upon consummation of
the balance sheet
leverage program (see further discussion in M.D.& A. on page 24)
which increased the
negativity of the Company's static GAP ratios and the variability
of the net interest
income under alternative rate scenarios. This hedge reduced
interest rate risk since
after the hedge was put in place, the Company's negative
six-month static GAP was reduced
by $100 million and presently totals negative $104 million or
5.8% of total assets. The
interest rate swap portion of this hedge also offsets market
valuation risk since any
change in the market value of the swap agreement correlates in
the opposite direction with
any change in the market value of the securities portfolio.
These off-balance sheet
derivative hedge transactions reduced interest expense by
approximately $80,000 in the
first quarter of 1995.
JSB Borrowed Funds Hedge:
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 initial rate
for 90 day Libor was set
at 6.25%. The counter-party in this unsecured transaction is PNC
Bank.
<PAGE>19
This swap agreement was executed to hedge an interest rate
mismatch that existed on
the acquired JSB balance sheet. Specifically, FHLB term
advances tied to 90 day Libor
were being used to fund fixed-rate investment securities with
durations approximating
three years. This hedge also helped reduce the variability of
forecasted net interest
income in a rising interest rate environment and lessened the
negativity of the Company's
static GAP positions. Furthermore, this hedge also offsets
market valuation risk since
any change in the market value of the swap correlates in the
opposite direction with any
change in the market value of the investment securities
portfolio. This hedge transaction
had minimal impact on interest expense for the first quarter of
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. The Company
has not instituted the use of interest rate floors as of March
31, 1995.
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 $20.4
million of goodwill and $6.0 million of core deposit intangible
assets on its balance
sheet. The majority of these intangible assets came from the
1994 Johnstown Savings Bank
acquisition ($25.9 million) and the 1993 Integra Branches
acquisition ($1.2 million).
Intangible assets are typically created when companies pay
a premium over book value
to make acquisitions of businesses and use the "purchase" method
of accounting. There
are two types of intangibles. Identifiable intangibles are those
that relate to the fair
market value of specific customer relationships. Acquisitions of
items such as core
deposit liabilities and mortgage servicing rights create this
type of intangible. The
current value of future revenues attributable to such
relationships is used in order to
establish the amount of identifiable intangibles. A second
category of intangibles is
goodwill. Goodwill represents the excess of the purchase price
(premium) over the fair
market value of the assets (including identifiable intangibles)
and liabilities acquired.
<PAGE>20
USBANCORP believes these intangible assets represent real
value to the Company.
For example, the total intangible assets created with the JSB
acquisition amounted to
$20.2 million in goodwill and $5.7 million in core deposit
intangibles. The Company paid
this premium for JSB and believes its franchise value has been
strengthened by the
acquisition for several reasons:
JSB's customer base, branch locations, and approximately $200
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 expected to
provide for significant
future ongoing earnings enhancements.
Under accounting rules, intangibles are amortized over a
period of time and
eventually disappear as an asset on the balance sheet. The
Company is amortizing core
deposit intangibles over periods ranging from five to ten years
while goodwill is being
amortized over a 15 year life. The straight line method of
amortization is being used
for both of these categories of intangibles. It is important to
note that this intangible
amortization expense is not a future cash flow item. The
following table reflects the
future amortization expense of the intangible assets (in
thousands):
Remaining 1995 $ 1,891
1996 2,408
1997 2,408
1998 2,222
1999 2,066
2000 and after 15,412
A reconciliation of the Company's intangible asset balances
for the first three
months of 1995 is as follows (in thousands):
Total goodwill & core deposit
intangible assets at 12/31/94 $27,009
Intangible amortization expense
through 3/31/95 (602)
Total goodwill & core deposit
intangible assets at 3/31/95 $26,407
The value of these intangibles is reassessed regularly by
the Company. If it is
determined that the value of any asset is permanently impaired,
appropriate adjustments
to the book value of that asset are made.
<PAGE>21
15. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following (in thousands,
except percentages):
<TABLE>
<CAPTION>
Type Maturing Amount Weighted
Average
Rate
<S> <C> <C> <C>
Flexline Overnight $ 50,500 6.81%
Advances and 1995 239,805 6.37
wholesale 1996 71,000 6.02
repurchase 1997 2,029 5.57
agreements 1998 6,964 5.87
1999 1,250 6.09
2000 and
after 19,950 7.34
Total Advances and 340,998 6.34
wholesale repurchase
agreements
Total FHLB Borrowings $391,498 6.40%
</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 $50 million of
advances 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>22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS ("M.D.& A.")
.....PERFORMANCE OVERVIEW.....The Company's net income for the
first quarter of 1995
totalled $3,899,000 or $0.70 per share on a fully diluted basis.
When compared to the
$3,039,000 or $0.64 per share on a fully diluted basis reported
for the same 1994 quarter,
the 1995 results reflect an $860,000 or 28.3% earnings increase
and a $0.06 or 9.4%
improvement in fully diluted earnings per share. A similar
comparison of first quarter
1995 results with the fourth quarter 1994 performance reflects a
6.2% earnings growth and
a 7.7% per share increase. For the first quarter of 1995, the
Company's return on average
equity increased by 93 basis points to 11.44% while the return on
average assets declined
by 11 basis points to 0.88%.
The Company's improved financial performance was due to a
reduced loan loss provision,
increased non-interest income, and increased net interest income
resulting from the JSB
acquisition and the implementation of a balance sheet leveraging
program. These positive
items were partially offset by increased non-interest expense
caused largely by the JSB
acquisition. Note, however, that when total non-interest expense
for the first quarter
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 $749,000
or 5.6% reduction in non-interest expense due to the Company
achieving economy of scale
benefits from this intra-market merger. In conjunction with this
acquisition, the Company
also issued 957,857 new shares of common stock which contributed
to the 18% increase in
weighted average fully diluted shares outstanding to 5,583,000.
The impact of these
additional shares was the primary reason that the fully diluted
EPS growth rate was lower
than the net income growth rate experienced in the first quarter
of 1995. The following
table summarizes some of the Company's key performance indicators
(in thousands, except
ratios):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
<S> <C> <C>
Net income $ 3,899 $ 3,039
Fully diluted earnings
per share 0.70 0.64
Return on average assets 0.88% 0.99%
Return on average equity 11.44 10.51
Average fully diluted common
shares outstanding 5,583 4,740
</TABLE>
<PAGE>23
.....NET INTEREST INCOME AND MARGIN.....The Company's net
interest income represents the
amount by which interest income on earning assets exceeds
interest paid on interest
bearing liabilities. Net interest income is a primary source of
the Company's earnings;
it is impacted by interest rate fluctuations as well as changes
in the amount and mix of
earning assets and interest bearing liabilities. It is the
Company's philosophy to strive
to optimize net interest margin performance in varying interest
rate environments. The
following table compares the Company's net interest income
performance for the first
quarter of 1995 to the first quarter of 1994 (in thousands,
except percentages):
<TABLE>
<CAPTION>
Three Months Ended
March 31
1995 1994 $ Change % Change
<S> <C> <C> <C> <C>
Interest income $ 32,223 $ 21,066 11,157 53.0
Interest expense 17,490 8,165 9,325 114.2
Net interest income 14,733 12,901 1,832 14.2
Tax-equivalent
adjustment 694 232 462 199.1
Net tax-equivalent
interest income $ 15,427 $ 13,133 2,294 17.5
Net interest margin 3.64% 4.43% (0.79)%
</TABLE>
USBANCORP's net interest income on a tax-equivalent basis
increased by $2,294,000
or 17.5% while the net interest margin percentage declined by 79
basis points to 3.64%.
The increased net interest income was due primarily to a higher
volume of earning assets
resulting from the JSB acquisition and a balance sheet leverage
program. For the first
quarter of 1995, total average earning assets were $508 million
higher than the comparable
1994 period. While the leverage program and the JSB acquisition
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 which is
explained in the following discussion.
.....DYNAMIC LEVERAGE PROGRAM.....Beginning in the second half of
1994, management fully
implemented a program designed to better leverage the Company's
balance sheet and equity.
This dynamic leverage program consists of the ongoing purchase
and replacement of an
aggregate $120 million pool of AAA credit quality investment
securities. The pool is
presently composed of 15 year fixed and adjustable rate
mortgage-backed securities, seven
year balloons, U.S. Treasury Securities and municipal bonds.
Approximately 38% of the
pool is adjustable-rate and 62% fixed-rate with a duration of
approximately 3.6 years.
This project is funded through the Federal Home Loan Bank using
one year term funds tied
to 90 day Libor, 30 and 90 day wholesale reverse repurchase
agreements and overnight
funds. The dynamic leverage pool will remain in existence as
long as the incremental
spread between new investments purchased into the pool and the
latest funding cost, net
of hedging results, exceeds 150 basis points.
<PAGE>24
While this leverage program favorably increased net interest
income dollars it did,
however, contribute to a lower net interest margin percentage
since the average spread
earned on the funds deployed in the leverage program approximated
174 basis points
compared to the Company's more typical net interest spread of
approximately 350 basis
points. The following table isolates the impact that the
leverage program had on some
of the Company's key performance items in the first quarter of
1995 (in thousands, except
percentages):
<TABLE>
<CAPTION>
First Quarter Net Impact
Actual First 1995 Excluding of Leverage
Quarter 1995 Leverage Program Program
<S> <C> <C> <C>
Net tax-equivalent
interest income $ 15,427 $ 14,905 $ 522
Net interest margin 3.64% 3.78% (0.14%)
Average earning assets $ 1,692,739 $ 1,572,739 $120,000
Return on average
equity 11.44% 10.37% 1.07%
</TABLE>
It is recognized that interest rate risk does exist,
particularly in the recently
rising interest rate environment, from this dynamic leverage
program. To neutralize this
risk, management executed $100 million of balance sheet hedging
transactions late in the
third quarter of 1994 which helped fix the variable funding costs
associated with this
program through September 28, 1995 (see further discussion under
Note 13).
.....JSB ACQUISITION.....The Company's core net interest
margin performance was also
negatively impacted by the JSB acquisition and its lower net
interest margin performance
(i.e., During the first half of 1994 prior to the acquisition,
JSB's net interest margin
approximated 3.20% compared to the Company's 4.33% NIM
performance for that same period).
This lower margin performance at JSB can be attributed to its
more typical savings bank
balance sheet mix; this mix includes a greater proportion of
fixed-rate residential and
commercial mortgage loans and more reliance on certificates of
deposit, rather than non-
interest bearing demand deposits, as a funding source. The
Company was able to improve
JSB's net interest margin performance by approximately 70 basis
points and its annual pre-
tax net interest margin dollars by approximately $2.9 million as
a result of an investment
portfolio repositioning strategy executed in the months
immediately following the
acquisition.
<PAGE>25
Graphically presented on this page was the investment portfolio performance
for the past five quarters. The double graph reflected the investment
portfolio income as well as the portfolio yield. The data points
presented were: $6,011 and 5.52% for the 1st quarter 1994, $6,420 and
5.62% for the 2nd quarter 1994, $11,321 and 6.29% for the 3rd quarter 1994,
$12,559 and 6.51% for the 4th quarter 1994, and $13,996 and 7.03% for
the 1st quarter 1995.
When comparing the net interest
margin performance for the first quarter
of 1995 to the fourth quarter of 1994, the
Company's net interest margin declined by
2 basis points from 3.66% to 3.64%. As
expected and previously disclosed in the
1994 Annual Report, the earning asset
yield increased between quarters by 29
basis points due largely to the benefits
of an investment portfolio repositioning
strategy which was executed late in the
fourth quarter of 1994. The favorable
impact of this strategy, however, was
offset by a 32 basis point increase in the
cost of funds due to an unfavorable
deposit mix shift and an increase in the
cost of borrowed funds. A continued
customer preference for certificates of
deposit in the higher interest rate
environment was reflected in the migration
of approximately $27 million of funds from
lower cost savings and NOW accounts into
higher fixed-rate certificates of deposit
with maturities exceeding one year. This
extension of the deposit base reduced
quarterly net interest income by
approximately $300,000, but does provide
the Company with certain additional margin
protection from any near term rate
increases. The increase in the cost of
borrowed funds was caused by the Federal
Reserve action to increase interest rates
by 50 basis points on February 1, 1995.
The negative impact of this rate increase
on the borrowed funds cost was partially
offset by a $266,000 benefit provided by
the $100 million of off-balance sheet hedges.
Regarding the separate components of net interest income, the
Company's total tax-
equivalent interest income for the first quarter of 1995
increased by $11.6 million or
54.6% when compared to the same 1994 period. This increase was
due to the previously
mentioned $508 million increase in total average earning assets
which caused interest
income to rise by $7.6 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 58 basis points to 7.81%. Within the earning asset base, the
yield on total investment
securities increased by 162 basis points to 7.02% while the yield
on the total loan
portfolio increased by 26 basis points to 8.56%. The more
significant yield increase in
the investment securities portfolio reflects the full quarter
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 300 basis points higher in
the first quarter of
1995 as compared to the first 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.
<PAGE>26
The Company's total interest expense for the first quarter of
1995 increased by $9.3
million or 114.2% 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. The volume variance reflects a
$522 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
previously discussed
$27 million deposit mix shift from lower cost savings accounts
into certificates of
deposit. The increased FHLB borrowings also negatively impacted
the liability mix and
overall cost of funds since the cost of these borrowings averaged
6.05% for the first
quarter of 1995 compared to the Company's cost of deposits of
4.12%. This 4.12% cost of
deposits represented an 86 basis point increase from the prior
year quarter and
unfavorably increased interest expense by $1.8 million.
It is important to note that the increased deposit cost was
attributable entirely
to higher certificate of deposit rates and the mix shift caused
by the customer preference
for certificates of deposit in the higher rate environment. The
Company was again able
to maintain the pricing on its $469 million of low cost core
savings and NOW accounts
during the first quarter of 1995 despite another Federal Reserve
50 basis point increase
in interest rates.
It has been management's ongoing pricing strategy to position
USBANCORP's deposit rates
within the lowest quartile of deposit rates offered by commercial
banks in its market
area. Management believes that a constant level of high
service quality mitigates the
impact this rate positioning strategy has on the deposit base
size and funds availability
provided that the rates offered are not appreciably below
competition. The combination
of all these price and liability composition movements caused
USBANCORP's average cost
of interest bearing liabilities to increase by 133 basis points
from 3.38% during the
first quarter of 1994 to 4.71% during the first quarter of 1995.
<PAGE>27
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.
<TABLE>
<CAPTION>
Three Months Ended March 31 (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 $ 867,456 $ 18,427 8.56% $ 735,016 $ 15,153 8.30%
Deposits with banks 3,526 73 8.23 1,573 11 2.74
Federal funds sold
and securities
purchased under
agreement to resell 2,092 38 7.18 2,619 20 3.09
Investment securities:
Available for sale 242,379 4,466 7.38 386,193 5,182 5.37
Held to maturity 568,452 9,739 6.86 46,373 660 5.69
Total investment
securities 810,831 14,205 7.02 432,566 5,842 5.40
Assets held in trust for
collateralized
mortgage obligation 8,834 174 7.98 12,885 272 8.56
Total interest earning
assets/interest income 1,692,739 32,917 7.81 1,184,659 21,298 7.23
Non-interest earning assets:
Cash and due from banks 39,601 38,543
Premises and equipment 19,051 16,910
Other assets 61,312 20,182
Allowance for loan
losses (15,591) (15,398)
TOTAL ASSETS $1,797,112 $1,244,896
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand $ 99,427 $ 358 1.46% $ 103,190 $ 376 1.48%
Savings 239,003 1,150 1.95 232,887 1,086 1.89
Other time 730,420 9,354 5.19 577,270 5,881 4.13
Total interest bearing
deposits 1,068,850 10,862 4.12 913,347 7,343 3.26
Short term borrowings:
Federal funds
purchased, secur-
ities sold under
agreements to
repurchase and other
short-term
borrowings 191,585 2,664 5.64 20,039 122 2.49
Advances from Federal
Home Loan Bank 227,665 3,643 6.40 31,110 352 4.53
Collateralized mortgage
obligation 7,978 243 12.34 11,818 287 9.85
Long-term debt 5,864 78 5.42 3,262 61 7.65
Total interest bearing
liabilities/interest
expense 1,501,942 17,490 4.71 979,576 8,165 3.38
Non-interest bearing
liabilities:
Demand deposits 133,532 132,362
Other liabilities 23,377 15,673
Stockholders' equity 138,261 117,285
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $1,797,112 $1,244,896
Interest rate spread 3.10 3.85
Net interest income/
net interest margin 15,427 3.64% 13,133 4.43%
Tax-equivalent adjustment (694) (232)
Net Interest Income $14,733 $12,901
</TABLE>
<PAGE>29
....PROVISION FOR LOAN LOSSES.....The Company's asset quality
permitted a $285,000 reduction
in the loan loss provision to $120,000 or .06% of total loans in
the first quarter of 1995
compared to a provision of $405,000 or 0.22% of total loans in
the first quarter of 1994.
This reduced 1995 provision level approximated net charge-offs
for the quarter which amounted
to .05% of total loans. At March 31, 1995, the balance in the
allowance for loan losses
totalled $15.3 million or 171.5% of total non-performing assets.
At March 31, 1995, management believed the
allowance for loan losses was adequate at
each subsidiary bank for potential losses inherent in the
portfolio at that date.
Furthermore, the allowance for loan losses at each of the
Company's banking subsidiaries was
well within compliance with the Company's policy of maintaining a
general unallocated reserve
of at least 20% of the estimated reserve requirement. At March
31, 1995, the Company's
aggregate unallocated reserve was $6.8 million or 79.7% of the
reserve needed. (See
Allowance for Loan Losses Note #9.)
.....NON-INTEREST INCOME.....Non-interest income for the first
quarter 1995 totalled $3.5
million which represented a $832,000 or 31.3% 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.
an $866,000 loss realized on the sale of loans and
loans held for sale in the first
quarter of 1995 compared to a $93,000 gain realized
on this same type of activity in
the first quarter of 1994 (a net unfavorable shift
of $959,000). The 1995 first
quarter loss resulted from the 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 will be reinvested in
adjustable rate agency securities at a
comparable yield such that the future impact on
interest earnings will be minimal for
the remainder of 1995. This sale also increases
the repricing sensitivity of the
bank's earning assets which provides the Company
with greater flexibility for interest
rate risk management.
<PAGE>30
the inclusion of $682,000 of net
mortgage servicing income generated from
a mortgage banking subsidiary ("SMC")
acquired with the JSB acquisition. This
amount resulted from $967,000 of
mortgage servicing fees net of $285,000
of amortization expense of the cost of
purchased mortgage servicing rights. As
of March 31, 1995, this mortgage banking
subsidiary was servicing $1.4 billion of
mortgage loans. SMC's servicing
portfolio has benefited from recent
increases in interest rates 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 a $50,000 reduction in
amortization expense when the first
quarter of 1995 is compared to the
fourth quarter of 1994.
Graphically presented on this page was trust income for the past five
quarters. The data points presented were: $718 for the 1st quarter 1994,
$712 for the 2nd quarter 1994, $748 for the 3rd quarter 1994, $845 for
the 4th quarter 1994, and $845 for the 1st quarter 1995.
a $127,000 or 17.7% increase in trust fees to $845,000
in
the first 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.
a $262,000 increase in other income due primarily to
additional fee income resulting
from the JSB acquisition. Examples of fee income sources
demonstrating increases are:
credit card charges, insurance commissions, other mortgage
banking processing fees, ATM
transaction charges, and bond handling fees.
.....NON-INTEREST EXPENSE.....Non-interest expense for the first
quarter of 1995 totalled
$12.5 million which represented a $1.9 million or 17.7% increase
when compared to the same
1994 period. The acquisition of JSB has been the primary reason
for the increase experienced
in the various expense line items and is evidenced by the
following more significant changes:
a $1.1 million increase in salaries and employee benefits
due to the addition of 86
full time equivalent employees ("FTE") associated with the
JSB acquisition, planned
wage increases approximating 4.0%, and generally higher
group medical insurance and
pension costs. Since the initial quarter of the JSB
acquisition, the Company has
reduced FTE by 60 as a result of economy of scale benefits
derived from this intra-market merger.
<PAGE>31
a $381,000 increase in amortization expense due entirely
to the amortization of the
goodwill and core deposit intangibles resulting from the
JSB acquisition. (See further
discussion in Note #14.)
a $108,000 increase in net occupancy expense due to the
costs associated with operating
four additional JSB branches and the occupancy costs
related to the mortgage banking
subsidiary.
a $104,000 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 $95,000 increase in FDIC deposit insurance expense
caused by the addition of
approximately $190 million of deposits associated with the
JSB acquisition.
Graphically presented on this page was the ratio of net overhead
expense as a percentage of tax equivalent net interest income for the
past five quarters. The data points presented were: 60.79% for the 1st
quarter 1994, 61.64% for the 2nd quarter 1994, 60.78% for the 3rd quarter
1994, 60.84% for the 4th quarter 1994, and 58.53% for the 1st quarter 1995.
.....NET OVERHEAD BURDEN.....The Company's net
overhead to average assets ratio showed
improvement as it dropped from 2.60% in the
first quarter of 1994 to 2.04% in the first
quarter of 1995. The Company's net overhead
to tax equivalent net interest income ratio
demonstrated similar improvement as it
declined from 60.8% to 58.5%. The successful
integration of JSB and the cost savings from
intra-market consolidation related
opportunities contributed to the improvement
noted in the first quarter 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 economy of scale benefits.
<PAGE>32
.....JSB INTEGRATION BENEFITS.....During the
first quarter of 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 the
newly acquired 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 deposit products. The favorable pre-tax benefits
recognized during the first quarter
of 1995 due to these initiatives amounted to approximately $1.3
million and will approximate
$5.0 million for the full year 1995. The improved total pre-tax
benefits from the
integration reflect better than expected net interest margin
enhancements at JSB, as the
Company fully expects to garner each dollar of its initial
estimated annual cost savings.
Overall, the Company has retained approximately 60 employees or
just 50% of the original JSB
total (excluding Standard Mortgage Corporation) of 120 full-time
equivalent employees.
.....INCOME TAX EXPENSE.....The Company's provision for income
taxes for the first quarter
of 1995 was $1.7 million reflecting an effective tax rate of
30.2%. The Company's 1994 first
quarter income tax provision was $1.5 million or an effective tax
rate of 32.6%. The
$211,000 increase in income tax expense was due entirely to the
higher level of pre-tax
earnings in the first quarter of 1995 as the Company benefitted
from a 2.4% reduction in its
effective tax rate. This lower effective tax rate was caused by
increased total tax-free
asset holdings which were $97 million higher on average in the
first quarter of 1995 as
compared to the first quarter of 1994. The tax-free asset
holdings consist of municipal
investment securities with a duration of approximately four years
and commercial loan tax
anticipation notes which generally have a maturity of one year.
Net deferred income taxes
of $4,245,000 have been provided as of March 31, 1995, on the
differences between taxable
income for financial and tax reporting purposes.
.....BALANCE SHEET.....The Company's total consolidated assets
were $1.812 billion at March
31, 1995, compared with $1.789 billion at December 31, 1994,
which represents an increase of
$23.4 million or 1.3%. When compared to March 31, 1994, total
assets increased by $567
million or 45.5% due to the June 30, 1994, acquisition of the
$367 million JSB and increased
leveraging of the balance sheet through the use of funding
sources available from the Federal
Home Loan Bank.
During the first quarter of 1995, total loans and loans
held for sale declined by
approximately $45 million or 5.2% due primarily to the sale of
$34 million of fixed rate
residential mortgage loans and a $5 million reduction in consumer
loans due to the
disposition of a business line. Excluding these two items, total
loans and loans held for
sale declined by $6 million or 0.7% from the year end 1994 total
as net loan run-off
experienced in the indirect auto loan portfolio more than offset
growth in the commercial
mortgage loan portfolio.
<PAGE>33
Total investment securities increased
by $63 million as purchases
of primarily adjustable rate mortgage backed securities were made
to replace the sold loans
and to profitably use funds provided by $20 million of deposit
growth experienced during the
first quarter. This deposit growth occurred entirely in
certificates of deposit as customers
have demonstrated a preference for this product in the higher
interest rate environment. The
Company's borrowed funds position declined modestly by $2.5
million since year end 1994.
Overall, their was little change in the Company's asset leverage
ratio which totalled 6.74%
at March 31, 1995.
.....MARKET AREA ECONOMY.....The economy has slowed somewhat due
to the Federal Reserve's
tightening of rates, which resulted in a sluggish consumer loan
growth. Both regions of the
Company's market- place, which includes Greater Johnstown and
suburban Pittsburgh,
experienced a soft loan demand in both the consumer and
commercial sectors. Deposit trends,
however, have had an upward shift in both market areas, due to a
tendency to save typical in
a higher or rising rate environment. In both regions, economic
growth can best be described
as stable.
The confidence in the local economy is evidenced by the
recent sale of the Johnstown
Chiefs, a minor league small market hockey franchise to local
investors. This sale ensures
the franchise will remain in Johnstown. Additionally, Premier, a
Pittsburgh-based real
estate developer, has announced it will build a double ice-rink
complex seating 700 and a 75-
room hotel near the Johnstown Galleria, a local retail shopping
mall.
Continuous improvement and economies of scale in the
health care sector are evidenced
by recent affiliation agreements of Lee Hospital of Johnstown
with the University of
Pittsburgh Medical Center and Good Samaritan Medical Center with
Conemaugh Hospital. Both
affiliations will promote better patient care, medical resources
and access to skilled
specialists for the Johnstown community.
The resurgence of the economy in the U.S. Bank service
region continues to be fueled
by the Johnstown Area Regional Industries ("JARI"). This local
business development
organization has joined with the Cambria County Industrial
Development Authority, Northern
Cambria Community Development Corporation and the Somerset County
Development Council to
promote a first-time marketing effort to attract jobs to the
Cambria and Somerset County
Region.
.....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.
<PAGE>34
The following table sets forth information concerning
USBANCORP's loan delinquency and
other non-performing assets (in thousands, except percentages):
<TABLE>
<CAPTION>
March 31 December 31 March 31
1995 1994 1994
<S> <C> <C> <C>
Total loan delinquency (past due
30 to 89 days) $16,408 $12,832 $12,268
Total non-accrual loans 5,401 5,446 4,006
Total non-performing assets<F1> 8,899 7,901 5,038
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 1.99% 1.48% 1.66%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned
income 0.66 0.63 0.54
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 1.08 0.91 0.68
<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
including in-substance foreclosures.
</TABLE>
At March 31, 1995, non-accrual loans as a percentage of
total loans and loans held
for sale, net of unearned income, were 0.66%. Total
non-performing assets as a percentage
of total loans and loans held for sale, net of unearned income,
and other real estate
owned were 1.08% at this same date. Both of these amounts
increased modestly from
December 31, 1994, due to a higher amount of non-performing
mortgage loans and a reduced
level of total loans outstanding.
Total loan delinquency (past due 30 to 89 days) increased by
$3.6 million, when
compared to December 31, 1994, causing the ratio to total loans
to increase to 1.99%.
This increase related to the transfer of mortgage servicing from
the Company's subsidiary
banks to its mortgage banking subsidiary. Collection activity on
delinquent loans was
curtailed during the first 90 days of this transfer due to
servicing standards. It is
anticipated that delinquency will decline to more representative
historical levels in
future quarters.
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
March 31, 1995, all identified potential problem loans were
included in the preceding
table.
<PAGE>35
.....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>
March 31 December 31 March 31
1995 1994 1994
<S> <C> <C> <C>
Allowance for loan losses $ 15,258 $ 15,590 $ 15,553
Amount in the allowance
for loan losses
allocated to "general risk" 6,766 6,643 8,284
Allowance for loan losses as
a percentage of each of
the following:
total loans and loans
held for sale,
net of unearned income 1.85% 1.80% 2.11%
total delinquent loans
(past due 30 to 89 days) 92.99 121.49 126.78
total non-accrual loans 282.50 286.27 388.24
total non-performing assets 171.46 197.32 308.71
</TABLE>
The decline in the total balance of the allowance for loan
losses during the first
quarter of 1995 was due entirely to the disposition of a business
line which reduced the
allowance by $342,000. Excluding this disposition, both the
provision and net charge-offs
were comparable for the 1995 first quarter. The overall reduced
total allowance for loan
losses combined with a higher level of delinquent loans and
non-performing assets caused
the decrease in each of the allowance coverage ratios presented
in the above table.
The portion of the Company's allowance which is allocated to
"general risk" and not
to any particular loan or loan category remained relatively
constant at $6.8 million at
March 31, 1995. The amount of the reserve allocated to general
risk now represents 44.3%
of the total allowance for loan losses.
.....INTEREST RATE SENSITIVITY.....Asset/liability management
involves managing the risks
associated with changing interest rates and the resulting impact
on the Company's net
interest income and capital. The management and measurement of
interest rate risk at
USBANCORP is performed by using the following tools: 1) static
"GAP" analysis which
analyzes the extent to which interest rate sensitive assets and
interest rate sensitive
liabilities are matched at specific points in time; 2)
simulation modeling which analyzes
the impact of interest rate changes on net interest income and
capital levels over
specific future time periods by projecting the yield performance
of assets and liabilities
in numerous varied interest rate environments.
<PAGE>36
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>
March 31 December 31 March 31
1995 1994 1994
<S> <C> <C> <C>
Six month cumulative GAP
RSA................ $ 592,876 $ 487,450 $ 319,304
RSL................ (747,061) (673,196) (384,338)
Off-balance sheet
hedges.......... 50,000 90,000 -
GAP................ $(104,185) $ (95,746) $(65,034)
GAP ratio.......... 0.85X 0.84X 0.83X
GAP as a % of total
assets.......... (5.75)% (5.35)% (5.22)%
GAP as a % of total
capital......... (72.85) (69.82) (56.59)
One year cumulative GAP
RSA................ $ 774,135 $ 675,875 $ 472,791
RSL................ (877,857) (849,153) (462,414)
Off-balance sheet
hedges.......... 50,000 (10,000) -
GAP................ $ (53,722) $(183,278) $ 10,377
GAP ratio.......... 0.94X 0.79X 1.02X
GAP as a % of total
assets.......... (2.96)% (10.25)% 0.83%
GAP as a % of total
capital......... (37.56) (133.65) 9.03
</TABLE>
The acquisition of JSB and the implementation of the
investment securities
portfolio leverage program caused the shift to more negative
static GAP ratios when March
31, 1995, is compared to March 31, 1994. When March 31, 1995, is
compared to December
31, 1994, the Company's six month cumulative GAP ratio was
relatively constant 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 $50 million. The
purchase of adjustable rate
mortgage backed securities throughout the first quarter 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>37
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 March 31,
1995, the balance in these
accounts totalled $469 million or 25.9% of total assets. Within
the above static GAP
table, approximately $139 million or 30% of the total $469
million of low cost core
deposits are assumed to be rate sensitive liabilities which
reprice in one year or less;
this 30% 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
the first quarter of 1995, the Company has been able to hold
steady the pricing of these
accounts despite seven Federal Reserve rate movements which
caused a total 300 basis point
increase in both the fed funds and prime rate. Given
intensifying competitive pressures
and the wide gap between the rates paid on these core accounts
and certificates of
deposit, the Company may have to increase the rate paid on the
majority of these accounts
by a minimum of 25-50 basis points if there are any additional
upward rate movements.
Such potential rate increases would add pre-tax annual interest
expense for the Company
of $1.2 million to $2.4 million. The Company will continue to
explore strategies, such
as off-balance sheet hedging transactions and on-balance sheet
extension of the liability
base, to further mitigate the impact of any future rate increases
on these accounts and
unfavorable mix shifts in a rising rate environment.
There are some inherent limitations in using static GAP
analysis to measure and
manage interest rate risk. For instance, certain assets and
liabilities may have similar
maturities or periods to repricing but the magnitude or degree of
the repricing may vary
significantly with changes in market interest rates. As a result
of these GAP
limitations, management places considerable emphasis on
simulation modeling to manage and
measure interest rate risk. At March 31, 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 -3.1% under an
upward rate shock forecast
reflecting an immediate 275 basis point increase in interest
rates. The impact on capital
under this simulation was estimated to be less than -2.0%. A
more moderate near-term
forecast simulation reflecting a 125 basis point increase in
rates indicates net interest
income variability of -2.4% and capital impairment of less than
1.0%. The Company's asset
liability management policy seeks to limit net interest income
variability to + or - 5%.
<PAGE>38
Within the investment portfolio, 37.8% of the portfolio is
currently classified as
available for sale and 62.2% as held to maturity. The available
for sale classification
provides management with greater flexibility to more actively
manage the securities
portfolio to better achieve overall balance sheet rate
sensitivity goals. Furthermore,
it is the Company's intent to continue to diversify its loan
portfolio to increase
liquidity and rate sensitivity and to better manage USBANCORP's
long-term interest rate
risk by continuing to sell newly originated 30 year mortgage
loans. The Company will
retain all servicing rights at its 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.
.....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 $169
million at March 31, 1995,
$146 million at December 31, 1994, and $167 million at March 31,
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 March 31, 1995,
USBANCORP's subsidiaries had
approximately $167.7 million of unused lines of credit available
under informal
arrangements with correspondent banks compared to $90.5 million
at March 31, 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 $331
million. Furthermore,
USBANCORP had available at March 31, 1995, $1.7 million of a
total $2.5 million unsecured
line of credit.
Liquidity can be further analyzed by utilizing the
Consolidated Statement of Cash
Flows. Cash equivalents increased by $6.5 million from December
31, 1994, to March 31,
1995, due primarily to $5.7 million of net cash provided by
operating activities.
Investing activities used net cash of $14.3 million during the
first quarter of 1995 while
financing activities provided $15 million of net cash during that
same period. Within
investing activities, purchases of investment securities exceeded
the cash proceeds from
investment security maturities and sales by approximately $57
million. Cash advanced for
new loan fundings totalled $98 million and was approximately $46
million less than the
cash received from loan principal payments and sales. Within
financing activities, cash
generated from the sale of new certificates of deposit exceeded
cash payments for maturing
certificates of deposit by $48 million.
<PAGE>39
.....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>
March 31, 1995 December 31, 1994 March 31, 1994
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
RISK-ADJUSTED
CAPITAL RATIOS
Tier 1 capital $ 120,639 12.89% $ 117,480 12.45% $ 112,248 13.76%
Tier 1 capital
minimum
requirements 37,438 4.00 37,745 4.00 32,630 4.00
Excess $ 83,201 8.89% $ 79,735 8.45% $ 79,618 9.76%
Total capital $ 132,338 14.14% $ 129,275 13.70% $ 122,443 15.01%
Total capital
minimum
requirements 74,876 8.00 75,489 8.00 65,259 8.00
Excess $ 57,462 6.14% $ 53,786 5.70% $ 57,184 7.01%
Total risk-
adjusted
assets $ 935,946 $ 943,614 $ 815,739
ASSET LEVERAGE
RATIO
Tier 1 capital $ 120,639 6.74% $ 117,480 6.64% $ 112,248 9.03%
Minimum
requirements 89,496 5.00 88,462 5.00 62,139 5.00
Excess $ 31,143 1.74% $ 29,018 1.64% $ 50,109 4.03%
Total adjusted
assets $1,789,911 $1,769,234 $1,242,777
</TABLE>
Between December 31, 1994, and March 31, 1995, there was a
modest increase in each
of the regulatory capital ratios. The decline in each of the
regulatory capital ratios
between March 31, 1994, and March 31, 1995, was due to the
execution of several strategic
initiatives which allowed the Company to better leverage its
capital strength in an effort
to enhance total shareholder return. The JSB acquisition had the
most significant impact
since the $24.1 million increase in capital resulting from the
new common shares issued
was basically offset by the $25.9 million intangible asset
created from the acquisition.
The implementation of the board-approved treasury stock buyback
program during the second
half of 1994 resulted in the purchase of 127,700 shares at a
total cost of $3.1 million.
The Company expects to purchase approximately 50,000 additional
treasury shares during
the second quarter of 1995. Furthermore, the execution of the
previously discussed
leverage program increased total assets without any increase in
equity. Each of these
strategic initiatives including an increased common stock
dividend, contributed to
enhanced leverage of the Company's capital base.
<PAGE>40
Even with the increased leverage of capital, 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 maintain an asset leverage ratio of no less
than 6.0%.
The Company's declared Common Stock cash dividend per share
was $0.25 for the first
three months of 1995 which was a 14.0% increase over the $0.22
per share dividend for the
same 1994 interim period. Additionally, in consideration of both
the improving net income
and the Company's annually updated five year "Strategic and
Capital Plan", the Board of
Directors increased the quarterly cash dividend from $0.25 to
$0.27 commencing with the
next scheduled dividend declaration on May 26, 1995. This is the
seventh dividend
increase since 1990, raising the annual payout per common share
to $1.08 or an approximate
yield of 5.2%. The average common dividend yield for
Pennsylvania bank holding companies
is 3.0%. This Board action further demonstrates the Company's
commitment to a progressive
total shareholder return which includes maintaining the common
dividend at a slightly
higher level than peer.
<PAGE>41
Presented on this page is the service area map depicting the six
counties serviced by USBANCORP, Inc.. The counties serviced are
Cambria, Somerset, Washington, Somerset, Westmoreland, and Clearfield.
<PAGE>42
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
15.1 Letter re: unaudited interim financial
information
(b) Reports on Form 8-K: There were no reports filed on
Form 8-K during the first quarter of 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: May 12, 1995
/s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: May 12, 1995
/s/Orlando B. Hanselman
Orlando B. Hanselman
Executive Vice President &
Chief Financial Officer
<PAGE>43
STATEMENT OF MANAGEMENT RESPONSIBILITY
April 20, 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. Hanselman
Terry K. Dunkle Orlando B. Hanselman
Chairman, President & Executive Vice President &
Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
USBANCORP, Inc.:
We have reviewed the accompanying consolidated balance sheets of
USBANCORP, Inc. (a Pennsylvania
corporation) and Subsidiaries as of March 31, 1995 and 1994, and
the related consolidated statements
of income, changes in stockholders' equity and cash flows for the
three-month periods ended March
31, 1995 and 1994. These financial statements are the
responsibility of the Company's management.
We conducted our reviews 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 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,
April 20, 1995
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 38,665
<INT-BEARING-DEPOSITS> 6,707
<FED-FUNDS-SOLD> 15,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 320,624
<INVESTMENTS-CARRYING> 526,613
<INVESTMENTS-MARKET> 521,288
<LOANS> 822,930
<ALLOWANCE> 15,258
<TOTAL-ASSETS> 1,812,294
<DEPOSITS> 1,216,348
<SHORT-TERM> 193,460
<LIABILITIES-OTHER> 253,914
<LONG-TERM> 5,550
<COMMON> 14,282
0
0
<OTHER-SE> 128,740
<TOTAL-LIABILITIES-AND-EQUITY> 1,812,294
<INTEREST-LOAN> 18,227
<INTEREST-INVEST> 13,885
<INTEREST-OTHER> 111
<INTEREST-TOTAL> 32,223
<INTEREST-DEPOSIT> 10,862
<INTEREST-EXPENSE> 6,628
<INTEREST-INCOME-NET> 14,733
<LOAN-LOSSES> 120
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 12,518
<INCOME-PRETAX> 5,583
<INCOME-PRE-EXTRAORDINARY> 5,583
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,899
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.70
<YIELD-ACTUAL> 7.81
<LOANS-NON> 5,401
<LOANS-PAST> 2,731
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,590
<CHARGE-OFFS> 299
<RECOVERIES> 189
<ALLOWANCE-CLOSE> 15,258
<ALLOWANCE-DOMESTIC> 15,258
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,766
</TABLE>
