UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 1994
Transaction Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transaction period from to
Commission File Number 0-11204
USBANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1424278
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Main & Franklin Streets, P.O. Box 430, Johnstown, PA 15907-0430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 533-5300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
X Yes No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 31,1994
Common Stock, par value $2.50 5,703,104
per share
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
June 30, 1994, December 31, 1993,
and June 30, 1993 3
Consolidated Statement of Income -
Three Months and Six Months
Ended June 30, 1994, and 1993 4
Consolidated Statement of Changes
in Stockholders' Equity -
Six Months Ended
June 30, 1994, and 1993 6
Consolidated Statement of Cash Flows -
Six Months Ended
June 30, 1994, and 1993 7
Notes to Consolidated Financial
Statements 9
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations 21
Part II. Other Information 47
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
June 30 December 31 June 30
1994 <F1> 1993 1993
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 45,805 $ 38,606 $ 37,265
Interest bearing deposits with
banks 4,860 4,809 3,853
Federal funds sold and securities
purchased under agreements to
resell 24,700 7,000 -
Investment securities:
Available for sale (market value
$432,315 on December 31, 1993;
$452,459 on June 30, 1993) 348,873 428,712 446,885
Held to maturity (market value
$336,376 on June 30, 1994) 343,435 - -
Assets held in trust for collateralized
mortgage obligation 10,720 13,815 16,434
Fixed-rate mortgage loans held for sale 6,216 1,054 2,338
Loans 840,720 732,026 705,909
Less: Unearned income 4,729 5,894 7,864
Allowance for loan losses 19,247 15,260 14,007
Net Loans 816,744 710,872 684,038
Premises and equipment 19,062 16,960 16,654
Accrued income receivable 12,118 8,892 10,597
Purchased mortgage servicing rights 10,360 - -
Goodwill and core deposit intangibles 27,730 2,897 3,343
Other assets 20,518 7,904 11,209
TOTAL ASSETS $ 1,691,141 $ 1,241,521 $ 1,232,616
LIABILITIES
Non-interest bearing deposits $ 148,053 $ 137,411 $ 129,316
Interest bearing deposits 1,085,112 911,455 925,582
Total deposits 1,233,165 1,048,866 1,054,898
Federal funds purchased and
securities sold under agreements
to repurchase 46,721 12,648 7,459
Other short-term borrowings 76,920 270 394
Advances from Federal Home Loan Bank 141,501 31,285 21,312
Collateralized mortgage obligation 9,787 12,674 14,353
Long-term debt 2,787 3,445 8,789
Due to JSB shareholders 19,701 - -
Other liabilities 23,458 15,718 12,852
TOTAL LIABILITIES 1,554,040 1,124,906 1,120,057
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;
5,703,104 shares issued and outstand-
ing on June 30 1994; 4,726,181 shares
issued and outstanding on December 31,
1993; 4,709,795 shares issued and
outstanding on June 30, 1993 14,258 11,815 11,774
Surplus 92,779 70,720 70,395
Retained earnings 35,794 34,080 30,390
Net unrealized holding gains (losses) on
investment securities (5,730) - -
TOTAL STOCKHOLDERS' EQUITY 137,101 116,615 112,559
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,691,141 $ 1,241,521 $ 1,232,616
See accompanying notes to consolidated financial statements.
<FN>
<F1> Reflects the acquisition of Johnstown Savings Bank ("JSB") accounted
for as of the close of business June 30, 1994. See further
discussion in footnote #3.
3
USBANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
Three Months Ended Six Months Ended
June 30 June 30
1994<F1> 1993 1994<F1> 1993
INTEREST INCOME
Interest fees on loans and loans held
for sale:
Taxable $ 14,313 $ 15,249 $ 28,993 $ 29,601
Tax exempt 451 255 826 514
Deposits with banks 6 46 17 76
Federal funds sold and securities
purchased under agreements to
resell 18 213 38 345
Investment securities:
Available for sale 2,754 5,965 7,937 11,526
Held to maturity 3,393 - 3,918 -
Assets held in trust for collateralized
mortgage obligation 249 348 521 688
Total Interest Income 21,184 22,076 42,250 42,750
INTEREST EXPENSE
Deposits 7,342 8,506 14,685 16,410
Federal funds purchased and securities
sold under agreements to repurchase 228 48 341 108
Other short-term borrowings 332 2 341 4
Advances from Federal Home Loan Bank 415 281 767 503
Collateralized mortgage obligation 257 400 544 805
Long-term debt 65 177 126 357
Total Interest Expense 8,639 9,414 16,804 18,187
NET INTEREST INCOME 12,545 12,662 25,446 24,563
Provision for loan losses 405 600 810 1,200
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 12,140 12,062 24,636 23,363
NON-INTEREST INCOME
Trust fees 712 609 1,430 1,342
Net realizedand unrealized gains
(losses) on investment securities (482) 221 (211) 473
Net realized gains on loans and loans
held for sale 448 269 541 269
Wholesale cash processing fees 306 319 624 624
Service charges on deposit accounts 684 753 1,276 1,349
Other income 811 558 1,475 1,137
Total Non-Interest Income 2,479 2,729 5,135 5,194
NON-INTEREST EXPENSE
Salaries and employee benefits 5,225 5,046 10,568 9.909
Net occupancy expense 965 854 1,953 1,671
Equipment expense 679 674 1,482 1,262
Professional fees 533 565 981 1,054
Supplies, postage, and freight 546 570 1,093 1,083
Miscellaneous taxes and insurance 291 286 587 574
FDIC deposit insurance expense 585 512 1,172 1,024
Acquisition charge 2,437 - 2,437 -
Other expense 1,591 2,149 3,219 3,904
Total Non-Interest Expense 12,852 10,656 23,492 20,481
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,767 4,135 6,279 8,076
Provision for income taxes 863 1,400 2,336 2,805
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 904 2,735 3,943 5,271
Cumulative effect of change in
accounting principle--adoption
of SFAS #109 - - - 1,452
NET INCOME $ 904 $ 2,735 $ 3,943 $ 6,723
PER COMMON SHARE DATA:
Primary:
Net income $ 0.19 $ 0.58 $ 0.83 $ 1.58
Average shares outstanding 4,751,396 4,714,335 4,745,929 4,184,389
Fully Diluted:
Net income (before SFAS #109
benefit and acquisition
charge) $ 0.59 $ 0.58 $ 1.23 $ 1.19
Net income 0.19 0.58 0.83 1.51
Average shares outstanding 4,751,396 4,720,596 4,745,929 4,447,994
Cash Dividend Declared $ 0.25 $ 0.22 $ 0.47 $ 0.42
See accompanying notes to consolidated financial statements.
<FN>
<F1> The second quarter 1994 financial data includes a non-recurring after-tax
acquisition charge of $1,882,000 or $0.40 per share as a result of
the acquisition of JSB.
4
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Unaudited
Net
Unrealized
Holding
Preferred Common Retained Gains
Stock Stock Surplus Earnings (Losses) Total
Balance December 31, 1992 $ 13,800 $ 7,456 $ 36,022 $ 25,693 $ - $ 82,971
Net Income - - - 6,723 - 6,723
Dividend reinvestment and
stock repurchase plan - 28 243 - - 271
Preferred stock converted
to common stock (12,468) 1,415 11,053 - - -
Preferred stock redeemed (1,332) - (36) - - (1,368)
Secondary common stock
issuance of 1,150,000
shares net of issuance
costs - 2,875 23,113 - - 25,988
Cash dividends declared:
Preferred stock dividends
paid on conversion - - - (103) - (103)
Common stock ($.20 per
share on 4,436,257
shares and $0.22 per
share on 4,708,461
shares) - - - (1,923) - (1,923
Balance June 30, 1993 $ - $ 11,774 $ 70,395 $ 30,390 - $112,559
Balance December 31, 1993 $ - $ 11,815 $ 70,720 $ 34,080 $ - $116,615
Net Income - - - 3,943 - 3,943
Dividend reinvestment and
stock repurchase plan - 48 387 - - 435
Common shares issued to
acquire Johnstown Savings
Bank (957,857 shares @
$25.125 per share) - 2,395 21,672 - - 24,067
Net unrealized holding gains
(losses) on investment
securities - - - - (5,730) (5,730)
Cash dividends declared:
Common stock ($0.22 per
share on 4,737,321
shares and $0.25 per
share on 4,745,247
shares) - - - (2,229) - (2,229)
Balance June 30, 1994 $ - $ 14,258 $ 92,779 $ 35,794 $ (5,730) $137,101
See accompanying notes to consolidated financial statements.
5
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
Six Months Ended
June 30
1994 1993
OPERATING ACTIVITIES
Net income $ 3,943 $ 6,723
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 810 1,200
Depreciation and amortization expense 1,532 1,376
Net amortization of investment securities 843 376
Net realized and unrealized losses (gains) on
investment securities 211 (473)
Net realized gains on loans and loans held for sale (541) (269)
Increase in accrued income receivable (1,370) (1,234)
Increase (decrease) in accrued expense payable (685) 1,437
Net cash provided by operating activities 4,743 9,136
INVESTING ACTIVITIES
Purchases of investment securities and other
short-term investments (225,108) (216,913)
Proceeds from maturities of investment securities and
other short-term investments 96,309 110,429
Proceeds from sales of investment securities and
other short-term investments 45,433 29,535
Long-term loans originated (169,691) (172,526)
Fixed-rate mortgage loans held for sale (2,153) (2,338)
Principal collected on long-term loans 148,831 117,201
Loans purchased or participated - (1,058)
Loans sold or participated 32,789 7,350
Net decrease (increase) in credit card receivables
and other short-term loans 1,134 (773)
Purchases of premises and equipment (768) (1,081)
Sale/retirement of premises and equipment 17 -
Net decrease in assets held in trust for
collateralized mortgage obligation 3,095 2,148
Increase due to JSB acquisition:
Investment securities (190,092) -
Loans (118,150) -
Loans held for sale (4,063) -
Premises and equipment (2,422) -
Accrued income received (1,857) -
Purchased mortgage service rights (10,360) -
Intangible assets (25,275) -
Other assets (8,078) -
Net decrease in other assets (1,475) (4,062)
Net cash used by investing activities (431,884) (132,088)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit 167,653 87,767
Payments for maturing certificates of deposits (183,363) (136,499)
Net (decrease) increase in demand and savings deposits (8,891) 29,502
Net cash received through Integra Branches Acquisition - 76,537
Net increase (decrease) in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings 69,284 (3,313)
Net principal borrowings of advances from Federal
Home Loan Bank and long-term debt 41,428 7,159
Preferred stock cash dividends paid - (397)
Redemption of preferred stock - (1,368)
Common stock cash dividends paid (2,081) (1,483)
Proceeds from dividend reinvestment and stock
purchase plan 435 271
Secondary common stock offering (net of expenses) - 25,988
Increase due to JSB acquisition:
Certificates of deposit 102,959 -
Demand and savings deposits 105,941 -
Other short term borrowings 41,439 -
Advances from Federal Home Loan Bank 65,243 -
Due to JSB shareholders 19,701 -
Capital 24,067 -
Other liabilities 7,512 -
Net increase (decrease) in other liabilities 764 (2,516)
Net cash provided by financing activities 452,091 81,648
NET INCREASE (DECREASE) IN CASH EQUIVALENTS 24,950 (41,304)
CASH EQUIVALENTS AT JANUARY 1 50,415 82,422
CASH EQUIVALENTS AT JUNE 30 $ 75,365 $ 41,118
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The consolidated financial statements include the accounts of USBANCORP,
Inc. (the "Company") and its wholly-owned subsidiaries, United States
National Bank in Johnstown ("U.S. Bank"), Three Rivers Bank and Trust Company
("Three Rivers Bank"), Community Bancorp, Inc. ("Community"), USBANCORP Trust
Company ("Trust Company"), and United Bancorp Life Insurance Company
("UBLIC"). In addition, the Parent Company is an administrative group that
provides support in such areas as audit, finance, investments, loan review,
general services, loan policy, and marketing. Intercompany accounts and
transactions have been eliminated in preparing the consolidated financial
statements.
2. Basis of Preparation
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments that
are of a normal recurring nature and are considered necessary for a fair
presentation have been included. They are not, however, necessarily
indicative of the results of consolidated operations for a full year.
With respect to the unaudited consolidated financial information of the
Company for the three and six month periods ended June 30, 1994, and 1993,
Arthur Andersen & Co., independent public accountants, conducted reviews
(based upon procedures established by the American Institute of Certified
Public Accountants) and not audits, as set forth in their separate report
dated July 20, 1994, appearing herein. This report does not express an
opinion on the interim unaudited consolidated financial information. Arthur
Andersen & Company has not carried out any significant or additional audit
tests beyond those which would have been necessary if its report had not been
included. The December 31, 1993, numbers are derived from audited financial
statements.
For further information, refer to the consolidated financial statements
and accompanying notes included in the Company's "Annual Report and Form 10-
K" for the year ended December 31, 1993.
3. Johnstown Savings Bank ("JSB") Acquisition
For financial reporting purposes, the Merger ("Merger") with JSB was
consummated and control was passed to USBANCORP on June 30, 1994. USBANCORP
merged JSB with and into U.S. Bank, a wholly-owned subsidiary of USBANCORP,
with U.S. Bank surviving the Merger. The separate existence of JSB ceased, and
all property, rights, powers, duties, obligations and liabilities of JSB were
automatically transferred to U.S. Bank, in accordance with Federal and
Pennsylvania law. Immediately following the Merger, U.S. Bank sold intra-
company Standard Mortgage Corporation ("SMC") of Georgia, a wholly-owned
subsidiary of JSB, to Community, a wholly-owned subsidiary of USBANCORP.
SMC is a mortgage banking company organized under the laws of the State of
Georgia and originates, sells, and services mortgage loans.
9
The Merger was treated as a purchase for financial accounting purposes.
The recorded purchase price was based on the average of the closing price of
USBANCORP Common Stock ("UBAN") on the NASDAQ/NMS for the ten trading days
immediately preceding July 11, 1994, the final closing date of the transaction.
The ten day average of USBANCORP's
Common Stock was $25.125, which resulted in a final cost of the acquisition
being $43.8 million, to be paid by the issuance of 957,857 common shares and
$19.7 million in cash. Accounting for the acquisition as a purchase,
USBANCORP has recognized newly created core deposit intangibles of $5.7
million and goodwill of $19.2 million and will begin realizing net income
immediately from July 1, 1994. The core deposit intangible will be amortized
over a ten-year period while the goodwill intangible will be amortized over a
15-year period. Additionally, a $1,882,000 or $0.40 per
share after-tax non-recurring acquisition restructuring charge, including
such items as employee severance, data processing conversion, and legal and
professional fees, was recognized in the 1994 second quarter.
For the year ended December 31, 1993, JSB reported net income of
$3,361,000. On a pro forma basis for the year ended December 31, 1993, the
combined consolidated statement of income for USBANCORP and JSB would have
reflected the following key performance items: net interest income of
$58.0 million, income before cumulative effect of change in accounting
principle of $12.2 million and fully diluted earning per share before
cumulative effect of change in accounting principle of $2.19. These
pro forma amounts were based upon the 1993 historical consolidated statements
of income of USBANCORP and JSB after giving effect to the purchase accounting
adjustments as of the beginning of the period.
4. Earnings Per Common Share
Primary earnings per share amounts are computed by dividing net income,
after deducting preferred stock dividend requirements, by the weighted
average number of Common Stock and Common Stock equivalent shares
outstanding. Fully diluted earnings per share amounts are calculated
assuming that the Series A $2.125 Cumulative Convertible Non-Voting Preferred
Stock was converted at the beginning of the year into 1.136 shares of the
Company's Common Stock and that no preferred dividends were paid. By April
7, 1993, all Preferred Stock was either redeemed or converted to the
Company's Common Stock.
5. Consolidated Statement of Cash Flows
On a consolidated basis, cash equivalents include cash and due from
banks, interest bearing deposits with banks, and federal funds sold and
securities purchased under agreements to resell. The Company made $3,210,000
in federal income tax payments for the six months of 1994 as compared to
$3,090,000 for the same 1993 interim period.
Total interest expense paid amounted to $15,541,000 in 1994's first six
months compared to $16,750,000 in the same 1993 period.
10
6. Investment Securities
In the first quarter of 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") #115, "Accounting for Certain Investments in
Debt and Equity Securities." This statement addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. This adoption
requires that the investment securities available for sale be carried at
market value while investment securities held to maturity are carried at
amortized cost. The book and market values of investment securities are
summarized as follows (in thousands):
Investment securities available for sale:
June 30, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 27,398 $ 25 $ (430) $ 26,993
U.S. Agency 65,692 100 (2,137) 63,655
State and municipal 17,965 132 (168) 17,929
Mortgage-backed
securities<F1> 173,091 300 (1,489) 171,902
Other securities<F2> 68,828 27 (461) 68,394
Total $352,974 $ 584 $ (4,685) $348,873
<FN>
<F1> Approximately 98% of these obligations represent
U.S. Agency issued securities.
<F2> Other investment securities include corporate notes
and bonds, asset-backed securities, and equity
securities.
11
Investment securities held to maturity:
June 30, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ - $ - $ - $ -
U.S. Agency 35,813 - (1,444) 34,369
State and municipal 91,383 252 (2,258) 89,377
Mortgage-backed securities<F1> 215,740 1,018 (4,629) 212,129
Other securities<F2> 499 2 - 501
Total $343,435 $ 1,272 $ (8,331) $336,376
<FN>
<F1> Approximately 98% of these obligations represent
U.S. Agency issued securities.
<F2> Other investment securities include corporate notes
and bonds, asset-backed securities, and equity
securities.
Prior to the first quarter 1994 adoption of SFAS #115, the entire
investment security portfolio, as described in the table below, was
classified as "available for sale." The investment security portfolio was
carried at the lower of aggregate amortized cost or market value; any
necessary valuation adjustments were recorded in the Consolidated Statement
of Income as a "Net unrealized gain or loss on investment securities
available for sale" (in thousands):
December 31, 1993
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 13,333 $ 186 $ (16) $ 13,503
U.S. Agency 72,648 890 (116) 73,422
State and municipal 44,547 1,129 (90) 45,586
Mortgage-backed
securities<F1> 251,631 2,379 (1,402) 252,608
Other securities<F2> 46,553 680 (37) 47,196
Total $428,712 $ 5,264 $ (1,661) $432,315
<FN>
<F1> Approximately 95% of these obligations represent
U.S. Agency issued securities.
<F2> Other investment securities include corporate notes
and bonds, asset-backed securities, and equity
securities.
June 30, 1993
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 13,491 $ 274 $ (1) $ 13,764
U.S. Agency 75,043 1,169 (51) 76,161
State and municipal 35,561 847 (12) 36,396
Mortgage-backed
securities<F1> 265,702 3,065 (202) 268,565
Other securities<F2> 57,088 659 (174) 57,573
Total $446,885 $ 6,014 $ (440) $452,459
<FN>
<F1> Approximately 94% of these obligations represent
U.S. Agency issued securities.
<F2> Other investment securities include corporate notes
and bonds, asset-backed securities, and equity securities.
12
All purchased investment securities are recorded on settlement date
which is not materially different from the trade date. Realized gains and
losses are calculated by the specific identification method and are included
in "Net realized and unrealized gain or loss on investment securities."
Maintaining investment quality is a primary objective of the Company's
investment policy which, subject to certain limited exceptions, prohibits the
purchase of any investment security below a Moody's Investor's Service or
Standard & Poor's rating of "A." At June 30, 1994, 94.4% of the portfolio
was rated "AAA" and 95.5% "AA" or higher as compared to 90.2% and 91.2%,
respectively, at June 30, 1993. Only 1.4% of the portfolio was rated below
"A" or unrated on June 30, 1994.
7. Fixed-Rate Mortgage Loans Held for Sale
At June 30, 1994, $6,216,000 of fixed-rate 30-year residential mortgage
loans originated during the first half of 1994 were classified as "held for
sale." The JSB acquisition contributed $4,063,000 which represents the loans
held for sale at Standard Mortgage Corporation of Georgia. (For more
information on JSB acquisition, refer to Note #3). 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 aggregate
amortized cost or market value. Realized gains and losses are calculated by
the specific identification method and will be included in "Net realized gain
or loss on loans held for sale;" unrealized net valuation adjustments (if
any) will be recorded in "Net unrealized gain or loss on loans held for sale"
on the Consolidated Statement of Income.
8. Loans
The loan portfolio of the Company consists of the following (in
thousands):
June 30 December 31 June 30
1994 1993 1993
Commercial $109,029 $ 99,321 $ 86,169
Commercial loans secured
by real estate 163,872 126,044 128,058
Real estate - mortgage 405,814 338,778 325,929
Consumer 162,005 167,883 165,753
Loans 840,720 732,026 705,909
Less: Unearned income 4,729 5,894 7,864
Loans, net of unearned
income $835,991 $726,132 $698,045
13
Real estate-construction loans were not material at these presented
dates and comprised 1.6% of total loans net of unearned income at June 30,
1994. The Company has no credit exposure to foreign countries and borrowers
or highly leveraged transactions. Additionally, the Company has no
significant industry lending concentrations.
9. Allowance for Loan Losses and Charge-Off Procedures
As a financial institution which assumes lending and credit risks as a
principal element of its business, the Company anticipates that credit losses
will be experienced in the normal course of business. Accordingly,
management makes a quarterly determination as to an appropriate provision
from earnings necessary to maintain an allowance for loan losses that is
adequate for potential yet undetermined losses. The amount charged against
earnings is based upon several factors including, at a minimum, each of the
following:
a continuing review of delinquent, classified and non-accrual
loans, large loans, and overall portfolio quality. This continuous
review assesses the risk characteristics of both individual loans and the
total loan portfolio.
regular examinations and reviews of the loan portfolio by
representatives of the regulatory authorities.
analytical review of loan charge-off experience, delinquency
rates, and other relevant historical and peer statistical ratios.
management's judgement with respect to local and general
economic conditions and their impact on the existing loan portfolio.
When it is determined that the prospects for recovery of the principal
of a loan have significantly diminished, the loan is immediately charged
against the allowance account; subsequent recoveries, if any, are credited
to the allowance account. In addition, non-accrual and large delinquent
loans are reviewed monthly to determine potential losses. Consumer loans are
considered losses when they are 90 days past due, except loans that are
insured for credit loss.
14
An analysis of the changes in the allowance for loan losses follows (in
thousands, except ratios):
Three Months Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
Balance at beginning of period $15,553 $13,791 $15,260 $13,752
Addition due to acquisition 3,422 - 3,422 -
Charge-offs:
Commercial 158 187 213 305
Real estate-mortgage 41 241 128 604
Consumer 148 153 280 414
Total charge-offs 347 581 621 1,323
Recoveries:
Commercial 60 55 104 91
Real estate-mortgage 35 2 44 12
Consumer 119 140 228 275
Total recoveries 214 197 376 378
Net charge-offs 133 384 245 945
Provision for loan losses 405 600 810 1,200
Balance at end of period $19,247 $14,007 $19,247 $14,007
As a percent of average loans
and average loans held for
sale, net of unearned
income:
Net charge-offs (annualized) 0.07% 0.22% 0.07% 0.28%
Provision for loan losses
(annualized) 0.22 0.35 0.22 0.35
Allowance as a percent of loans
and loans held for sale,
net of unearned income at
period end 2.29 2.00 2.29 2.00
Allowance as a multiple of net
charge-offs (annualized),
at period end 36.11x 9.12x 38.96x 7.41x
(For additional information, refer to the "Provision for Loan Losses" and
"Loan Quality" sections in the Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations on page 28 and 39,
respectively.)
15
10. Components of Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan
losses among various categories. This allocation is based upon historical
experience and management's review of the loan portfolio. This allocation,
however, is not necessarily indicative of the specific amount or specific
loan category in which future losses may ultimately occur (in thousands,
except percentages):
June 30, 1994 December 31, 1993 June 30, 1993
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
Amount to Loans<F1> Amount to Loans<F1> Amount to Loans<F1>
Commercial $ 1,694 12.9% $ 1,637 13.6% $ 1,861 12.3%
Commercial
loans secured
by real
estate 6,809 19.3 4,073 17.2 4,655 18.3
Real Estate -
mortgage 440 48.6 279 46.3 259 45.7
Consumer 1,675 19.2 1,636 22.9 1,767 23.7
Allocation to
general risk 8,629 - 7,635 - 5,465 -
Total $19,247 100.0% $15,260 100.0% $14,007 100.0%
<FN>
<F1> Includes loans "held for sale."
At June 30, 1994, the allowance for loan losses was adequate to cover
potential yet undetermined losses within the Company's loan portfolio. The
Company's management is unable to determine in what loan category future
charge-offs and recoveries may occur. (For a complete discussion concerning
the operations of the "Allowance for Loan Losses" refer to Note 9.)
11. Non-performing Assets
Non-performing assets are comprised of (i) loans which are on a non-
accrual basis, (ii) consumer loans which are contractually past due 90 days
or more as to interest or principal payments and which are insured for credit
loss, and (iii) other real estate owned (real estate acquired through
foreclosure and in-substance foreclosures). All loans, except for loans that
are insured for credit loss, are placed on non-accrual status immediately
upon becoming 90 days past due in either principal or interest. In addition,
if circumstances warrant, the accrual of interest may be discounted prior to
90 days. In all cases, payments received on non-accrual loans are credited
to principal until full recovery of principal has been recognized; it is only
after full recovery of principal that any additional payments received are
recognized as interest income. Restoration of a non-accrual loan to accrual
status requires the approval of the Credit Committee and/or Board
Discount/Loan Committee with final authority for the decision resting with
USBANCORP's Chief Financial Officer.
16
The following table presents information concerning non-performing
assets (in thousands, except percentages):
June 30 December 31 June 30
1994 1993 1993
Non-accrual loans $4,416 $5,304 $4,335
Loans past due 90
days or more 1,308 203 324
Other real estate owned 925 991 2,150
Total non-performing
assets $6,649 $6,498 $6,809
Total non-performing
assets as a percent
of loans and loans
held for sale, net
of unearned income,
and other real estate
owned 0.79% 0.89% 0.97%
The Company is unaware of any additional loans which are required to
either be charged-off or added to the non-performing asset totals disclosed
above. Other real estate owned is recorded at the lower of fair value or
carrying cost based upon appraisals.
The following table sets forth, for the periods indicated, (i) the gross
interest income that would have been recorded if non-accrual loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if held for part of the period,
(ii) the amount of interest income actually recorded on such loans, and (iii)
the net reduction in interest income attributable to such loans (in
thousands):
Three Months Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
Interest income due in accordance
with original terms $ 85 $ 167 $ 248 $ 411
Interest income recorded (76) (137) (368) (184)
Net reduction (increase) in
interest income $ 9 $ 30 $(120) $ 227
12. Income Taxes
During the first quarter of 1993 the Company adopted Statement of
Financial Accounting Standards ("SFAS") #109, "Accounting for Income Taxes."
SFAS #109 utilizes the liability method, and deferred taxes are determined
based on the estimated future tax effects of differences between the
financial statement and income tax bases of assets and liabilities given the
provisions of the enacted tax laws. This adoption resulted in the
recognition of a non-recurring benefit of $1,452,000 (net of a valuation
allowance of $325,000) or $0.35 per share on a fully diluted basis. Net
deferred income taxes of $7,213,000 have been provided as of June 30, 1994,
on the differences between taxable income for financial and tax reporting
purposes.
17
13. Incentive Stock Option Plan
Under the Company's Incentive Stock Option Plan (the "Plan") options can
be granted (the "Grant Date") to employees with executive, managerial,
technical, or professional responsibility as selected by a committee of the
board of directors. The option price at which a stock option may be
exercised shall be a price as determined by the board committee but shall not
be less than 100% of the fair market value per share of common stock on the
Grant Date. The maximum term of any option granted under the Plan cannot
exceed 10 years. The following stock options were granted:
Shares Shares Opiton
Under Available Price
Option For Option Per Share
Balance at December 31, 1992 27,334 99,000
Options granted 27,500 (27,500) 22.56
Options exercised (5,000) - 17.25
Options cancelled or
expired - -
Balance at December 31, 1993 49,834 71,500
Options granted 25,500 (25,500) 23.88
Options exercised (2,167) - 17.25
Options exercised (4,000) - 22.56
Options cancelled or
expired - -
Balance at June 30, 1994 69,167 46,000
On or after the first anniversary of the Grant Date, one-third of such
options may be exercised. On or after the second anniversary of the Grant
Date, two-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.
18
14. Preferred Stock
As discussed in the Company's "1993 Annual Report and Form 10K," the
Board of Directors authorized the redemption of all the Company's Series A
$2.125 Cumulative Convertible Non-Voting Preferred Stock. The redemption
date was established on April 7, 1993. The Preferred Stock redemption
presented shareholders with the choice of either redeeming their shares at
the redemption price of $25.638 per share or converting their shares into
1.136 shares of the Company's Common Stock. Shareholders of only 53,283
shares opted to redeem their shares resulting in a redemption payout of
approximately $1.4 million, shareholders of 498,717 shares (approximately
90%) elected to convert their shares. This conversion resulted in the
issuance of 566,543 new common shares.
15. Common Stock Issuance
On February 10, 1993, USBANCORP completed the sale of 1,150,000 shares
of Common Stock at an offering price of $24.50 per share. This provided the
Company with $26 million in net proceeds after payment of related issuance
expenses. Approximately $1.4 million of the offering proceeds were used to
redeem the remaining unconverted Series A Preferred Stock as April 7, 1993.
Of the offering proceeds, $2,000,000 was downstreamed as a capital infusion
into Three Rivers Bank on April 5, 1993, in connection with the Integra
Branches Acquisition to adequately capitalize the $88 million of deposits
acquired. The remaining offering proceeds of $22.6 million will be used by
USBANCORP to pay the $19.7 million liability to JSB shareholders and for
general corporate purposes including the stock repurchase program which will
commence in July 1994.
16. Integra Branches Acquisition
On April 2, 1993, the Company's Three Rivers Bank subsidiary and Integra
National Bank/Pittsburgh completed a Purchase and Assumption Agreement (the
"Agreement") for four Integra branch offices located in the suburban
Pittsburgh market area. Pursuant to the Agreement, Three Rivers Bank assumed
$88.6 million in deposit liabilities and purchased $12.1 million of assets;
these assets consisted of: home equity and other consumer loans; vault cash;
furniture, fixtures, and equipment; real estate together with improvements;
and safe deposit box business. In addition, Three Rivers Bank assumed
certain other liabilities including contracts that relate to the operation
of the branches and real estate leases relating to one branch and one ATM.
In consideration for the assumption of the deposit liabilities, Three Rivers
Bank paid Integra a deposit premium of 1.4% or $1.2 million.
19
17. Interest Rate Swap
During the first quarter of 1994, the Company entered into an interest
rate swap agreement with a notional amount of $10 million and a termination
date of February 11, 1997. Under the terms of the swap agreement, the
Company will receive a fixed interest rate of 5% and pay a floating interest
rate defined as the 90-day USD-Libor which resets quarterly. The counter-
party in this unsecured transaction is PNC Bank which has a Standard & Poor's
rating of "A+."
The swap agreement was initiated to hedge interest rate risk in a
declining, stable, or modestly rising rate environment. Specifically, this
transaction hedges the CMO liability on the Company's Balance Sheet by
effectively converting the fixed percentage cost to a variable rate cost.
This hedge also offsets market valuation risk since any change in the market
value of the swap agreement correlates in the opposite direction with a
change in the market value of the CMO liability.
The interest differential to be paid or received is accrued by the
Company on a monthly basis. Since only interest payments are exchanged, the
cash requirements and exposure to credit risk are significantly less than the
notional amount. The Company believes that its exposure to credit loss in
the event of non-performance by the counter-party is minimal. Overall, this
swap agreement favorably reduced interest expense by $40,000 in the first
half of 1994.
The Company monitors and controls all off-balance sheet derivative
products with a comprehensive Board of Director approved hedging policy. In
addition to interest rate swaps, the policy also allows for the use of
interest rate caps and floors. The Company has not instituted the use of
interest rate caps or floors as of June 30, 1994.
18. Labor Agreement
Approximately 225 of U.S. Bank's clerical and teller personnel are
represented by the United Steelworkers of America AFL-CIO-CLC Local Union
8204 (the "Union"). Management successfully negotiated a one-year extension
of its current labor agreement with the Union; the new agreement expires on
October 15, 1995. The Company considers its relations with all employees to
be satisfactory.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ("M.D.& A.")
SECOND QUARTER 1994 vs. SECOND QUARTER 1993
.....PERFORMANCE OVERVIEW.....The Company's net income for the second quarter
of 1994 totalled $2,786,000 or $0.59 per share on a fully diluted basis,
exclusive of the impact of a $1,882,000 after-tax non-recurring acquisition
charge. This previously disclosed acquisition charge relates to the June 30,
1994, completed purchase of the intra-market $344 million Johnstown Savings
Bank and includes expense recognition for one-time integration costs such as
employee severance, data processing conversion, and legal and professional
fees. The Company's reported second quarter 1994 net income, before the
acquisition charge, compares favorably to the $2,735,000 or $0.58 per share
on a fully diluted basis for the same 1993 quarter.
Before the JSB acquisition charge, the Company's net income between
periods increased by $51,000 or 1.9% while fully diluted earnings per share
displayed a similar increase of $0.01 or 1.7%. The Company's return on
assets and return on equity each experienced modest declines of one basis
point and 20 basis points, respectively. This relatively consistent
financial performance occurred even after the realization of a $482,000
investment security loss in the second quarter of 1994 as the portfolio was
restructured to reduce the amount of collateralized mortgage obligations in
an effort to reposition the portfolio to benefit to a greater extent from
future upward rate movements. Reductions in both the loan loss provision and
total non-interest expense (before the JSB acquisition charge) were the
favorable factors which offset the lower level of non-interest income due to
the investment security loss. The following table summarizes some of the
Company's key performance indicators (in thousands, except ratios):
21
Three Months Ended Three Months Ended
June 30, 1994 June 30, 1993
Net income $ 904 $ 2,735
Net income (before acquisition
charge) 2,786 2,735
Fully diluted earnings per share 0.19 0.58
Fully diluted earnings per share
(before acquisition charge) 0.59 0.58
Return on average assets 0.28% 0.89%
Return on average assets (before
acquisition charge) 0.88 0.89
Return on average equity 3.13 9.85
Return on average equity (before
acquisition charge) 9.65 9.85
Average fully diluted common
shares outstanding 4,751 4,721
.....NET INTEREST INCOME AND MARGIN.....The Company's net interest income
represents the amount by which interest income on earning assets exceeds
interest paid on interest bearing liabilities. Net interest income is a
primary source of the Company's earnings; it is impacted by interest rate
fluctuations, as well as, changes in the amount and mix of earning assets and
interest bearing liabilities. It is the Company's philosophy to strive to
maintain a stable net interest margin percentage during periods of
fluctuating interest rates. The following table compares the Company's net
interest income performance for the second quarter of 1994 to the second
quarter of 1993 (in thousands, except percentages):
Three Months Ended Three Months Ended
June 30, 1994 June 30, 1993 $Change %Change
Interest income $ 21,184 $ 22,076 $ (892) (4.0)
Interest expense 8,639 9,414 (775) (8.2)
Net interest income 12,545 12,662 (117) (0.9)
Tax-equivalent
adjustment 330 172 158 91.9
Net tax-equivalent
interest income $ 12,875 $ 12,834 $ 41 0.3
Net interest margin 4.24% 4.38% (0.14)% NA
22
USBANCORP's net interest income on a tax-equivalent basis increased by
$41,000 or 0.3% while the net interest margin percentage declined by 14 basis
points to 4.24%. The increased net interest income was due primarily to a
higher volume of earning assets resulting from the initial phases of a
program designed to better leverage the Company's balance sheet. For the
second quarter of 1994, total average earning assets were $41 million higher
than the comparable 1993 period. 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 250 basis points compared to
the Company's more typical net interest spread of approximately 380 basis
points. The following table isolates the impact that the leverage program
had on some of the Company's key net interest performance items in the second
quarter of 1994 (in thousands, except percentages):
Change or
Second Quarter Net Impact
Actual Second 1994 Excluding of Leverage
Quarter 1994 Leverage Program Program
Net tax-equivalent
interest income $ 12,875 $ 12,623 $ 252
Net interest margin 4.24% 4.31% (0.07%)
Average earning assets $ 1,215,842 $ 1,174,842 $ 41,000
Return on average
equity (before
acquisition
charge) 9.65% 9.08% .57
When fully implemented in the third quarter of 1994, this leverage
program will consist of the purchase of a pool of $120 million of Federal
Agency mortgage-backed securities, inclusive of the $41 million average
balance outstanding during the second quarter of 1994. The composition of
the pool will consist of
15-year fixed-rate mortgage-backed securities, seven-year balloons and
adjustable-rate mortgage securities. Approximately 60% of the pool is
adjustable-rate and 40% fixed-rate with a duration of approximately 3.6
years. This project will be 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. It is recognized that manageable
interest rate risk does exist; particularly in a rising interest rate
environment. Management, however, has the necessary hedging measurement
methods, policies, and Board approvals available
to reduce this risk to a neutral position, as well as, the necessary cash
flow from the total investment portfolio to de-lever this program if desired.
The trend for the Company's core net interest margin performance over the
past four quarters has been stable varying by a maximum total of only five
basis points. Specifically, the core net interest margin averaged 4.28% for
both the third and fourth quarters of 1993, increased to 4.33% in the first
quarter of 1994 and decreased slightly to 4.31% in the second quarter of
1994. This consistent performance occurred during a period in which the
rates across the U.S. Treasury yield curve increased by more than 200 basis
points with the vast majority of the increase happening during the first half
of 1994. This performance trend demonstrates the Company's ability to manage
the net interest margin in accordance with its previously disclosed goal of
maintaining a stable net interest margin during periods of fluctuating
interest rates.
23
Regarding the separate components of net interest income, the Company's
total tax-equivalent interest income for the second quarter of 1994 decreased
by $734,000 or 3.3% when compared to the same 1993 period. This decline was
due to an unfavorable rate variance as the yield on the loan portfolio has
decreased 81 basis points to 8.06% while the yield on the total investment
securities portfolio has dropped 35 basis points to 5.51%. The national and
local market trend of accelerated customer refinancing of mortgage loans
during the second half of 1993 has contributed materially to the declining
yields experienced in both of these portfolios. Also, the earning asset
yield continues to be negatively impacted by regularly scheduled maturities
of higher yielding consumer loans originated several years ago. These
negative factors were partially offset by a $695,000 increase in interest
income due to the previously mentioned $41 million increase in total average
earning assets. Additionally, a favorable asset mix shift increased interest
income by $287,000 as the Company's loan to deposit ratio averaged 71.6% in
the second quarter of 1994 compared to 67.2% in the second quarter of 1993.
Even with an additional $23 million of average interest bearing
liabilities, the Company's total interest expense still decreased by $775,000
or 8.2% in the second quarter of 1994. This decline is primarily a result
of management repricing all deposit categories downward in the declining
interest rate environment experienced during 1993 and generally maintaining
those low rates for non-certificate of deposit products during the rising
rate environment experienced in the first half of 1994. 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.
24
The liability mix was negatively impacted by a $46 million increase in
short-term borrowings, the majority of which were used to fund the previously
mentioned balance sheet leverage program. The cost of these short-term
borrowings averaged 3.91% for the second quarter of 1994 compared to the
Company's core cost of deposits of 3.27%. A reduced dependence on long-term
debt as a funding source favorably impacted the liability mix. The balance
in long-term debt declined on average by $5.9 million due to the successful
restructuring of several debt funding sources in the third and fourth
quarters of 1993. Additionally, the use of an interest rate swap during the
second quarter of 1994 permitted the Company to reduce the cost of the CMO
liability by 65 basis points to 10.07%. (See detailed discussion on
Investment Rate Swap Note 17.) The combination of all these price and
liability composition movements allowed USBANCORP to lower the average cost
of interest bearing liabilities by 40 basis points from 3.84% during the
second quarter of 1993 to 3.44% during the second quarter of 1994.
The table that follows provides an analysis of net interest income on a
tax-equivalent basis setting forth (i) average assets, liabilities, and
stockholders' equity, (ii) interest income earned on interest earning assets
and interest expense paid on interest bearing liabilities, (iii) average
yields earned on interest earning assets and average rates paid on interest
bearing liabilities, (iv) USBANCORP's interest rate spread (the difference
between the average yield earned on interest earning assets and the average
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.
25
Three Months Ended June 30 (In thousands, except percentages)
1994 1993
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Interest earning assets:
Loans and loans held
for sale, net of
unearned income $ 740,486 $ 14,887 8.06% $ 704,582 $ 15,573 8.87%
Deposits with banks 802 6 2.70 8,504 46 2.17
Federal funds sold
and securities
purchased under
agreement to resell 1,758 18 4.22 29,982 213 2.85
Investment securities:
Available for sale 216,256 2,754 5.09 415,270 6,068 5.86
Held to maturity 245,238 3,600 5.87 - - -
Total investment
securities 461,494 6,354 5.51 415,270 6,068 5.86
Assets held in trust for
collateralized
mortgage obligation 11,302 249 8.83 16,880 348 8.27
Total interest earning
assets/interest income 1,215,842 21,514 7.09 1,175,218 22,248 7.59
Non-interest earning assets:
Cash and due from banks 37,985 31,588
Premises and equipment 16,732 16,533
Other assets 16,868 27,394
Allowance for loan
losses (15,724) (13,981)
TOTAL ASSETS $1,271,703 $1,236,752
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand 101,688 375 1.48 $ 100,549 539 2.15
Savings 230,322 1,085 1.89 234,997 1,455 2.48
Other time 568,914 5,882 4.15 590,741 6,512 4.42
Total interest bearing
deposits 900,924 7,342 3.27 926,287 8,506 3.68
Short term borrowings:
Federal funds
purchased, secur-
ities sold under
agreements to
repurchase and other
short-term
borrowings 57,915 560 3.91 11,567 50 1.73
Advances from Federal
Home Loan Bank 33,955 415 4.83 21,319 281 5.29
Collateralized mortgage
obligation 10,246 257 10.07 14,964 400 10.72
Long-term debt 2,955 65 8.82 8,861 177 8.01
Total interest bearing
liabilities/interest
expense 1,005,995 8,639 3.44 982,998 9,414 3.84
Non-interest bearing
liabilities:
Demand deposits 133,857 121,711
Other Liabilities 16,091 20,710
Stockholders' equity 115,760 111,333
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $1,271,703 $1,236,752
Interest rate spread 3.64 3.75
Net interest income/
net interest margin 12,875 4.24% 12,834 4.38%
Tax-equivalent adjustment (330) (172)
Net Interest Income $ 12,545 $ 12,662
27
.....PROVISION FOR LOAN LOSSES.....The Company's asset quality permitted
a $195,000 reduction in the loan loss provision to $405,000 or 0.22% of
total loans in the second quarter of 1994 compared to a provision of
$600,000 or 0.35% of total loans in the second quarter of 1993. Net
charge-offs for the second quarter of 1994 totalled $133,000 or only 0.07%
of average loans compared to net charge-offs of $384,000 or 0.22% of
average loans in the second quarter of 1993. At June 30, 1994, the balance
in the allowance for loan losses totalled $19.2 million or 289.5% of total
non-performing assets.
At June 30, 1994, management believed the allowance for loan losses was
adequate at each subsidiary bank for potential losses inherent in the
portfolio at that date. Furthermore, the allowance for loan losses at each
of the Company's banking subsidiaries was well within compliance with the
Company's policy of maintaining a general unallocated reserve of at least
20% of the estimated reserve requirement. At June 30, 1994, the Company's
aggregate unallocated reserve was $8.6 million or 81% of the reserve
needed. (See Allowance for Loan Losses Note 9.)
.....NON-INTEREST INCOME.....Non-interest income for the second quarter
1994 totalled $2.5 million which represented a $250,000 or 9.2% decrease
when compared to the same 1993 period. This decrease was primarily due to
the following items:
the realization of a $482,000 loss on investment securities
available for sale in the second quarter of 1994 compared to a $221,000
gain for the comparable 1993 period (a net unfavorable shift of
$703,000). The second quarter 1994 loss resulted from a portfolio
restructuring designed to significantly reduce the market valuation
risk of the available for sale portfolio, enhance yield performance and
reduce cash flow volatility. Collateralized mortgage obligations
originally purchased at a premium were the primary targets of the sale
which amounted to approximately 4$45 million. The reinvestment
consisted of seasoned 15-year agency mortgage-backed securities and
seasoned seven-year balloons with a duration of approximately 2.8
years. Yield improvements generated from this strategy will result in
the payback of the loss within a 12 month period.
the realization of a $448,000 gain on loan sales in the second
quarter of 1994 compared to a $269,000 gain for the second quarter of
1993. The $179,000 increase between periods was due entirely to a
$200,000 gain recognized on the sale of the Company's $17 million
student loan portfolio. Management elected to divest of this line of
business since future profitability will be negatively impacted by
scheduled changes in regulations and servicing requirements. The
remainder of the 1994 loan sale gain related to a $108,000 gain
generated on the sale of FNMA mortgage loan servicing and $140,000 in
profits generated from fixed-rate residential mortgage loan sales.
28
a $103,000 or 16.9% increase in trust fees to $712,000 in the second
quarter of 1994. This core trust fee growth is prompted by the
profitable expansion of the Company's business throughout western
Pennsylvania including the Greater Pittsburgh marketplace. The Trust
staff's marketing skills combined with their proven ability to deliver
quality service has been the key to the Company's growth rate, which
has approximated 20% annually for each of the past four years. While
there can be no assurances of continuation of this trend, these factors
provide a foundation for future growth of this important source of fee
income.
a $253,000 increase in other income due in part to an $88,000 gain
realized on the liquidation of a real estate joint venture and a
$40,000 increase in premium income on credit life and disability
insurance sales to consumer loan customers; Despite depressed consumer
loan originations, the Company is generating better sales penetration
for these products due to enhanced sales training and improved emphasis
on incentive payments to customer service employees. The remainder of
the increase was caused by modest increases in several core non-
interest income sources.
.....NON-INTEREST EXPENSE.....Total non-interest expense of $12.9 million
increased by $2.2 million or 20.6% when compared to the second quarter of
1993 due entirely to the recognition of a $2.4 million pre-tax non-
recurring acquisition charge associated with the Company's acquisition of
Johnstown Savings Bank. This acquisition charge includes expense
recognition for one-time integration costs such as employee severance, data
processing conversion, and legal and professional fees. Excluding this
charge, total non-interest expense actually declined by $241,000 or 2.3%
when the second quarter of 1994 is compared to the second quarter of 1993
due to the following items:
a $558,000 decrease in other expense to $1.6 million due largely to
a $350,000 decline in other real estate owned expense. Economy of
scale benefits derived from the elimination of outside data processing
fees, as Community's data processing is now performed internally by
Three Rivers Bank, also contributed to the reduction.
a $179,000 or 3.5% increase in salaries and employee benefits
expense due entirely to planned wage increases as the Company's level
of total full-time employees was relatively constant between periods.
a $111,000 or 13% increase in net occupancy expense as a result of
numerous repair/maintenance expenses incurred during the second quarter
of 1994.
29
.....NET OVERHEAD BURDEN.....Excluding the JSB acquisition charge, the net
overhead to average assets ratio showed improvement as it dropped from
2.57% in the second quarter of 1993 to 2.50% in the second quarter of 1994.
The Company's net overhead to tax equivalent net interest income ratio was
relatively stable at 61.6% for that same time frame. Management has
targeted a goal of reducing the Company's net overhead expense to net
interest income ratio to 55% over the five-year strategic planning forecast
through productivity enhancements, operational efficiencies, and economy
of scale benefits. The successful integration of JSB should allow the
Company to reach this goal even sooner than originally planned.
.....INCOME TAX EXPENSE.....The Company's provision for income taxes for
the second quarter of 1994 was $863,000 reflecting an effective tax rate
of 48.8%. The Company's 1993 second quarter income tax provision was $1.4
million or an effective tax rate of 33.8%. The $537,000 decrease in income
tax expense was due to the reduced level of pre-tax earnings in the second
quarter of 1994 resulting from the JSB acquisition charge. This
acquisition charge was also responsible for the sharp increase in the
Company's effective tax rate since there was no tax benefit recorded on
approximately $800,000 of the total $2.4 million pre-tax acquisition
charge. This $800,000 amount related to professional fees incurred for the
acquisition which must be capitalized and not expensed for tax purposes.
SIX MONTHS ENDED JUNE 30, 1994 vs. SIX MONTHS ENDED JUNE 30, 1993
.....PERFORMANCE OVERVIEW.....The Company's net income for the first half
of 1994 totalled $5,825,000 or $1.23 per share on a fully diluted basis,
exclusive of the impact of a $1,882,000 after-tax non-recurring JSB
acquisition charge. This compared favorably to net income before a
cumulative effect of change in accounting principle of $5,271,000 or $1.19
per fully diluted share reported for the same period of 1993. The
Company's 1993 net income results also included a $1,452,000 or $0.35 per
share non-recurring benefit due to the adoption of SFAS #109; no such
change in accounting principle was recognized in the first half of 1994.
Before the acquisition charge and SFAS #109 benefit, net income between
periods increased by $554,000 or 10.5% while fully diluted earnings per
share increased by a lesser amount of $0.04 or 3.4%. Similar trends were
noted for two other key performance ratios as the Company's return on
assets increased by three basis points to 0.93% while return on equity
actually decreased by 18 basis points to 10.08%. The increase in net
income resulted from the accretive impact of the purchase of four Integra
branch offices in April 1993, growth in net interest income, and a reduced
loan loss provision. The growth of net income, however, was exceeded on a
relative basis by the growth in average equity and shares outstanding due
largely to the Company's successful February 1993 secondary Common Stock
offering which resulted in the
issuance of 1,150,000 new shares of the Company's Common Stock. The full
impact of this offering was not reflected in the first half of 1993 results
as evidenced by the 298,000 or 6.7% increase in fully diluted weighted
average common shares outstanding when compared to the first half of 1994.
The following table summarizes some of the Company's key performance
indicators (in thousands, except per share data and ratios):
30
Six Months Ended Six Months Ended
June 30, 1994 June 30, 1993
Net income $ 3,943 $ 6,723
Net income
(before acquisition
charge and SFAS #109
benefit) 5,825 5,271
Fully diluted earnings
per share 0.83 1.51
Fully diluted earnings
per share
(before acquisition
charge and SFAS #109
benefit) 1.23 1.19
Return on average assets 0.63% 1.15%
Return on average assets
(before acquisition
charge and SFAS #109
benefit) 0.93 0.90
Return on average equity 6.82 13.09
Return on average equity
(before acquisition
charge and SFAS #109
benefit) 10.08 10.26
Average fully diluted
common shares
outstanding 4,746 4,448
31
.....NET INTEREST INCOME AND MARGIN.....The following table compares the
Company's net interest income performance for the first six months of 1994
to the first six months of 1993 (in thousands, except percentages):
Six Months Ended Six Months Ended
June 30, 1994 June 30, 1993 $ Change %Change
Interest income $ 42,250 $ 42,750 $ (500) (1.2)
Interest expense 16,804 18,187 (1,383) (7.6)
Net interest income 25,446 24,563 883 3.6
Tax-equivalent
adjustment 562 344 218 63.4
Net tax-equivalent
interest income $ 26,008 $ 24,907 $ 1,101 4.4
Net interest margin 4.33% 4.45% (0.12)% NA
USBANCORP's net interest income on a tax-equivalent basis increased by
$1.1 million or 4.4% while the net interest margin percentage declined by
12 basis points to 4.33%. The increased net interest income was due
primarily to a higher volume of earning assets resulting from the
previously mentioned Integra Branches Acquisition and the initial phases
of the balance sheet leveraging strategy. For the first half of 1994,
total average earning assets were $74 million higher than the comparable
1993 period. The 1994 net interest income was also enhanced by
approximately $200,000 of additional non-accrual loan interest recoveries.
The contraction in the net interest margin percentage between the first
half of 1994 and the comparable 1993 period can best be explained by the
following:
the majority of the $88 million of acquired Integra deposits
were redeployed into short duration investment securities since only
$10 million of loans were acquired with the Integra branch offices.
This initial dependence on the investment portfolio as the primary
source of return on these acquired deposits was a major factor
contributing to the contraction in the net interest margin percentage.
the leveraging of the investment portfolio by using short-term
Federal Home Loan Bank borrowings also contributed to the contraction
in the net interest margin percentage since the average spread earned
on funds deployed in the leverage program approximated 250 basis points
compared to the Company's more typical net interest spread of 380 basis
points. While the impact of this leveraging program was much more
significant on the second quarter only 1994 performance (see table on
page 16), it was responsible for a three basis point decline in the
year-to-date 1994 net interest margin performance.
Regarding the separate components of net interest income, the Company's
total tax equivalent interest income for the first half of 1994 decreased
by $282,000 or 0.7% when compared to the same 1993 period. This decline
was due to an unfavorable rate variance as the yield on the loan portfolio
had decreased 69 basis points to 8.19% while the yield on the total
investment securities portfolio had dropped 58 basis points to 5.44%. The
national and local market trend of accelerated customer refinancing of
mortgage loans during the second half of 1993 has contributed materially
to the declining yields experienced in both of these portfolios. Also, the
earning asset yield continues to be negatively impacted by regularly
scheduled maturities of higher yielding consumer loans originated several
years ago. These negative factors were partially offset by a $2.2 million
increase in interest income due to the previously mentioned $74 million
increase in total average earning assets.
32
Even with an additional $47 million of average interest bearing
liabilities, the Company's total interest expense still decreased by $1.4
million or 7.6% in the first half of 1994. This decline is primarily a
result of management repricing all deposit categories downward in the
declining interest rate environment experienced during 1993 and generally
maintaining those low rates for non-certificate of deposit products during
the rising rate environment experienced in the first half of 1994. A
reduced dependence on long-term debt as a funding source also favorably
impacted the liability mix. The balance in long-term debt declined on
average by $5.9 million due to the successful restructuring of several debt
funding sources in the third and fourth quarters of 1993. Additionally,
the use of an interest rate swap during the first half of 1994 permitted
the Company to reduce the cost of the CMO liability by 59 basis points to
9.95%. (See detailed discussion on Investment Rate Swap Note 17.) The
combination of all these price and liability composition movements allowed
USBANCORP to lower the average cost of interest bearing liabilities by 47
basis points from 3.88% during the first half of 1993 to 3.41% during the
first half of 1994.
The table that follows provides an analysis of net interest income on
a tax-equivalent basis setting forth (i) average assets, liabilities, and
stockholders' equity, (ii) interest income earned on interest earning
assets and interest expense paid on interest bearing liabilities, (iii)
average yields earned on interest earning assets and average rates paid on
interest bearing liabilities, (iv) USBANCORP's interest rate spread (the
difference between the average yield earned on interest earning assets and
the average 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.
33
Six Months Ended June 30 (In thousands, except percentages)
1994 1993
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Interest earning assets:
Loans and loans held
for sale, net of
unearned income $ 737,767 $ 30,040 8.19% $ 686,744 $ 30,253 8.88%
Deposits with banks 1,185 17 2.72 6,053 76 2.53
Federal funds sold
and securities
purchased under
agreement to
resell 2,186 38 3.54 23,460 345 2.97
Investment securities:
Available for sale 300,755 7,937 5.27 393,088 11,732 6.02
Held to maturity 146,355 4,259 5.84 - - -
Total investment
securities 447,110 12,196 5.44 393,088 11,732 6.02
Assets held in trust for
collateralized
mortgage obligation 12,089 521 8.69 17,417 688 7.86
Total interest earning
assets/interest
income 1,200,337 42,812 7.15 1,126,762 43,094 7.71
Non-interest earning assets:
Cash and due from banks 38,262 30,345
Premises and equipment 16,820 15,891
Other assets 18,517 24,624
Allowance for loan
losses (15,562) (13,891)
TOTAL ASSETS $1,258,374 $1,183,731
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing demand 102,435 751 1.48 $ 96,326 1,046 2.19
Savings 231,597 2,171 1.89 228,791 2,846 2.51
Other time 573,070 11,763 4.13 564,715 12,518 4.47
Total interest bearing
deposits 907,102 14,685 3.26 889,832 16,410 3.72
Short term borrowings:
Federal funds
purchased, securities
sold under agreements
to repurchase and
other short-term
borrowings 39,082 682 3.54 11,887 112 1.90
Advances from Federal
Home Loan Bank 32,540 767 4.69 19,219 503 5.28
Collateralized mortgage
obligation 11,027 544 9.95 15,481 805 10.54
Long-term debt 3,107 126 8.21 9,015 357 8.03
Total interest bearing
liabilities/interest
expense 992,858 16,804 3.41 945,434 18,187 3.88
Non-interest bearing
liabilities:
Demand deposits 133,113 115,112
Other liabilities 15,884 19,577
Stockholders' equity 116,519 103,608
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,258,374 $1,183,731
Interest rate spread 3.74 3.83
Net interest income/net
interest margin 26,008 4.33% 24,907 4.45%
Tax-equivalent adjustment (562) (344)
Net Interest Income $ 25,446 $ 24,563
35
.....PROVISION FOR LOAN LOSSES.....The Company's asset quality permitted
a $390,000 reduction in the loan loss provision to $810,000 or 0.22% of
total loans in the first half of 1994 compared to a provision of $1.2
million or 0.35% of total loans in the first half of 1993. Net charge-offs
for the first half of 1994 totalled $245,000 or only 0.07% of average loans
compared to net charge-offs of $945,000 or 0.28% of average loans in the
first half of 1993. At June 30, 1994, the balance in the allowance for
loan losses totalled $19.2 million or 289.5% of total non-performing
assets.
.....NON-INTEREST INCOME.....Non-interest income for the first half of 1994
totalled $5.1 million which represented a $59,000 or 1.1% decrease over the
same 1993 period. The decrease in non-interest income between the first
half of 1994 and the comparable 1993 period can best be explained by the
following:
the realization of a $211,000 loss on investment securities
available for sale in the first half of 1994 compared to a $473,000
gain for the comparable 1993 period (a net unfavorable shift of
$684,000). The first half 1994 loss resulted from a portfolio
restructuring designed to reduce the amount of collateralized
mortgage obligations in an effort to reposition the portfolio to
benefit to a greater extent from future upward rate movements. A
$482,000 loss due to this repositioning strategy was realized in the
second quarter of 1994 which more than offset a $271,000 first
quarter gain generated from a sales strategy executed to capture
available market premiums on securities with a remaining maturity of
generally less than one year.
the realization of a $541,000 gain on loan sales in the first half
of 1994 compared to a $269,000 gain for the comparable 1993 period.
The $272,000 increase between periods was due entirely to a $200,000
gain recognized on the sale of the Company's $17 million student loan
portfolio and a $108,000 gain generated on the sale of FNMA mortgage
loan servicing.
an $88,000 or 6.6% increase in trust fees due to the profitable
expansion of the Company's business throughout western Pennsylvania
including the Greater Pittsburgh marketplace.
a $338,000 increase in other income due in part to an $88,000 gain
realized on the liquidation of a real estate joint venture and a
$60,000 increase in premium income on credit life and disability
insurance sales to consumer loan customers. The remainder of the
increase was caused by modest increases in several core non-interest
income sources such as letter of credit fees and data processing
income.
36
.....NON-INTEREST EXPENSE.....Total non-interest expense of $23.5 million
increased by $3.0 million or 14.7% when compared to the first half of 1993
due largely to the recognition of a $2.4 million pre-tax non-recurring
acquisition charge associated with the Company's acquisition of Johnstown
Savings Bank. Excluding this charge, total non-interest expense actually
increased by only $574,000 or 2.8% when the first half of 1994 is compared
to the first half of 1993 due to the following items:
a $685,000 decrease in other expense to $3.2 million due largely
to a $500,000 decline in other real estate owned expense. Economy of
scale benefits derived from the elimination of outside data
processing fees, as Community's data processing is now performed
internally by Three Rivers Bank, also contributed to the reduction.
a $659,000 or 6.6% increase in salaries and employee benefits
expense due entirely to planned wage increases approximating 4%, a
net 11 additional average full time-equivalent employees (18 FTE from
the acquired Integra branches less a seven FTE reduction caused by
ongoing productivity enhancements) and increased group
hospitalization expense.
a $502,000 increase in net occupancy and equipment expense as a
result of the additional branch facilities and equipment acquired
with the Integra branches, increased small equipment purchases, and
higher utilities and repair/maintenance expenses due in part to the
harsh winter.
.....NET OVERHEAD BURDEN.....Excluding the JSB acquisition charge, the net
overhead to average assets ratio showed improvement as it dropped from
2.59% in the first half of 1993 to 2.55% in the first half of 1994. The
Company's net overhead to tax equivalent net interest income ratio was
relatively stable at 61.3% for that same time frame. Management has
targeted a goal of reducing the Company's net overhead expense to net
interest income ratio to 55% over the five-year strategic planning forecast
through productivity enhancements, operational efficiencies, and economy
of scale benefits. The successful integration of JSB should allow the
Company to reach this goal even sooner than originally planned.
.....INCOME TAX EXPENSE.....The Company's provision for income taxes for
the first half of 1994 was $2.3 million reflecting an effective tax rate
of 37.2%. The Company's 1993 first six months income tax provision was
$2.8 million or an effective tax rate of 34.7%. The $469,000 decrease in
income tax expense was due to the reduced level of pre-tax earnings in the
first six months of 1994 resulting from the JSB acquisition charge. This
acquisition charge was also responsible for the increase in the Company's
effective tax rate since there was no tax benefit recorded on approximately
$800,000 of the total $2.4 million pre-tax acquisition charge. This $800,000
amount related to professional fees incurred for the acquisition which must be
capitalized and not expensed for tax purposes. The Company's effective tax
rate did benefit by approximately 2% over that same time period due to increased
tax-free asset holdings. The tax free asset holdings consist of municipal
investment securities with a duration of approximately four years and commercial
loan tax anticipation notes which generally have a maturity of one year. For
the first half of 1994, total fax-free asset holdings were $37 milion
higher on average than the comparable 1993 period.
37
.....BALANCE SHEET.....The Company's total consolidated assets were $1.691
billion at June 30, 1994, compared with $1.242 billion at December 31,
1993, which represents an increase of $449 million or 36.2%. The June 30,
1994, acquisition of Johnstown Savings Bank accounted for $367 million or
81.7% of the growth between periods. The final cost of the JSB acquisition
was $43.8 million. This cost is reflected in the June 30, 1994, balance
sheet by the issuance of 957,857 new shares of UBAN common stock at a per
share price of $25.125 which caused a $24.1 million increase in total
equity. A $19.7 million liability for the cash portion of the acquisition
price due to JSB shareholders is also included as a separate liability.
Since the acquisition has been accounted for under the purchase method of
accounting, the Company has also recognized newly created core deposit
intangibles of $5.7 million and goodwill of $19.2 million.
Excluding JSB, the remaining growth in assets of $82 million was due
primarily to the execution of a strategy designed to enhance the Company's
return on equity by leveraging the investment securities portfolio through
the use of funding sources available from the Federal Home Loan Bank.
Specifically, total securities have increased by $82.3 million while
federal funds purchased, other short term borrowings, and FHLB advances
have grown by a total of $114 million. The growth in borrowings exceeded
the securities portfolio growth because borrowings were also needed to
maintain the funding of the loan portfolio since total deposits declined
by $24.6 million or 2.3% since December 31, 1993. The decline in deposits
can be attributed to management's consistent application of the previously
discussed pricing philosophy which emphasizes profitable net interest
margin management rather than increased deposit size for the retail core
deposit base. This core deposit pricing strategy was maintained during a
period of aggressively increasing competitive deposit rates.
38
Excluding the $125.6 million of loans acquired with the JSB
acquisition, total loans and loans held for sale declined by $12 million
or 1.6% since year-end 1993. This decline is attributed to the sale of the
Company's $17 million student loan portfolio late in the second quarter of
1994 and a total of $10.5 million of fixed-rate mortgage loan sales
executed during the first half of 1994. Excluding these loan sales, the
Company's total loan portfolio has grown by $15.5 million or a modest 2.1%.
The majority of this growth has occurred in commercial loans and home
equity loans in both regions of the Company's marketplace which includes
Greater Johnstown and suburban Pittsburgh. This slowed loan growth (since
the 12% growth rate experienced during 1993) and lending mix shift towards
commercial lending, while improving the Company's future asset interest
rate sensitivity is beginning to modestly depress the net interest margin
percentage performance.
.....LOAN QUALITY.....USBANCORP's written lending policies require
underwriting, loan documentation, and credit analysis standards to be met
prior to funding any loan. After the loan has been approved and funded,
continued periodic credit review is required. Annual credit reviews are
mandatory for all commercial loans in excess of $100,000 and for all
commercial mortgages in excess of $250,000. In addition, due to the
secured nature of residential mortgages and the smaller balances of
individual installment loans, sampling techniques are used on a continuing
basis for credit reviews in these loan areas.
39
The following table sets forth information concerning USBANCORP's loan
delinquency and other non-performing assets (in thousands, except
percentages):
June 30 December 31 June 30
1994 1993 1993
Total loan delinquency (past due 30
to 89 days) $ 11,852 $ 10,428 $ 7,301
Total non-accrual loans 4,416 5,304 4,335
Total non-performing assets<F1> 6,649 6,498 6,809
Loan delinquency, as a percentage of
total loans and loans held for
sale, net of unearned income 1.41% 1.43% 1.04%
Non-accrual loans, as a percentage of
total loans and loans held for
sale, net of unearned income 0.52 0.73 0.62
Non-performing assets, as a percentage
of total loans and loans held for
sale, net of unearned income, and
other real estate owned 0.79 0.89 0.97
<FN>
<F1> Non-performing assets are comprised of (i) loans that are on a non-accrual
basis, (ii) consumer loans that are contractually past due 90 days or more
as to interest and principal payments and which are insured for credit
loss, and (iii) other real estate owned including in-substance
foreclosures. All loans, except for loans that are insured for credit
loss, are placed on non-accrual status immediately upon becoming 90 days
past due in either principal or interest.
As evidenced in the above table, the acquisition of JSB has had
minimal impact on the Company's loan delinquency and non-performing assets.
Specifically when compared to December 31, 1993, the gross dollars of total
non-performing assets have increased by a minor $151,000. On a percentage
of total loans basis, each of these ratios has in fact shown improvement
since year-end 1993, as the delinquent loans ratio has dropped two basis
points to 1.41%, the non-accrual loans ratio has declined 21 basis points
to 0.52% and the total non-performing assets ratio has decreased 10 basis
points to 0.79%. These declines further demonstrate the success of the
Company's ongoing loan work-out program which has been implemented at each
banking subsidiary.
.....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):
June 30 December 31 June 30
1994 1993 1993
Allowance for loan losses $ 19,247 $ 15,260 $ 14,007
Amount in the allowance for loan
losses allocated to "general risk" 8,629 7,635 5,465
Allowance for loan losses as a
percentage of each of the following:
total loans and loans held for sale,
net of unearned income 2.29% 2.10% 2.00%
total delinquent loans (past
due 30 to 89 days) 162.39 146.34 191.85
total non-accrual loans 435.85 287.71 323.11
total non-performing assets 289.47 234.84 205.71
40
Consistent with the favorable loan quality impact, the acquisition of
JSB added $3.4 million to the allowance for loan losses and further
improved each of the Company's allowance coverage ratios. When compared
to December 31, 1993, the allowance to total loans ratio increased 19 basis
points to 2.29% while the allowance to total non-performing assets ratio
improved from 235% to 289%.
The portion of the Company's allowance which is allocated to "general
risk" and not to any particular loan or loan category has increased by
approximately $3.2 million since June 30, 1993, to $8.6 million at June 30,
1994. The amount of the reserve allocated to general risk now represents
44.8% of the total allowance for loan losses.
.....INTEREST RATE SENSITIVITY.....Asset/liability management involves
managing the risks associated with changing interest rates and the
resulting impact on the Company's net interest income and capital. The
management and measurement of interest rate risk at USBANCORP is performed
by using the following tools: 1) static "GAP" analysis which analyzes the
extent to which interest rate sensitive assets and interest rate sensitive
liabilities are matched at specific points in time; 2) simulation modeling
which analyzes the impact of interest rate changes on net interest income
and capital levels over specific future time periods by projecting the
yield performance of assets and liabilities in numerous varied interest
rate environments.
For static GAP analysis, USBANCORP typically defines interest rate
sensitive assets and liabilities as those that reprice within one year.
Maintaining an appropriate match is one method of avoiding wide
fluctuations in net interest margin during periods of changing interest
rates. The difference between rate sensitive assets and rate sensitive
liabilities is known as the "interest sensitivity GAP." A positive GAP
occurs when rate sensitive assets exceed rate sensitive liabilities
repricing in the same time period and a negative GAP occurs when rate
sensitive liabilities exceed rate sensitive assets repricing in the same
time period. A GAP ratio (rate sensitive assets divided by rate sensitive
liabilities) of one indicates a statistically perfect match. A GAP ratio
of less than one suggests that a financial institution may be better
positioned to take advantage of declining interest rates rather than
increasing interest rates, and a GAP ratio of more than one suggests the
converse. Since 1987, USBANCORP has generally endeavored to maintain a
neutral one-year GAP position thereby minimizing the impact (either
positive or negative) of changing interest rates on both net interest
income and capital levels.
41
The following table presents a summary of the Company's static GAP
positions at June 30, 1994 (in thousands, except for the GAP ratios):
June 30 December 31 June 30
1994 1993 1993
Six month cumulative GAP
RSA.................. $ 403,474 $ 328,530 $ 355,425
RSL.................. 536,740 355,613 358,638
GAP.................. $ (133,266) $ (27,083) $ (3,213)
GAP ratio............ 0.75x 0.92x 0.99x
GAP as a % of total
assets............ (7.88%) (2.18%) (0.26%)
GAP as a % of total
capital........... (97.20) (23.22) (2.85)
One year cumulative GAP
RSA.................. $ 597,293 $ 482,229 $ 491,384
RSL.................. 693,816 437,261 453,789
GAP.................. $ (96,523) $ 44,968 $ 37,595
GAP ratio............ 0.86x 1.10x 1.08x
GAP as a % of total
assets............ (5.71%) 3.62% 3.05%
GAP as a % of total
capital.......... (70.40%) 38.56 33.40
There are some inherent limitations in using static GAP analysis to
measure and manage interest rate risk. For instance, certain assets and
liabilities may have similar maturities or periods to repricing but the
magnitude or degree of the repricing may vary significantly with changes
in market interest rates. As a result of these GAP limitations, management
places considerable emphasis on simulation modeling to manage and measure
interest rate risk. At June 30, 1994, these varied economic interest rate
simulations indicated that the variability of USBANCORP's net interest
income over the next twelve month period was within the Company's +/-5%
policy limit given upward or downward interest rate changes of a maximum
of 250 basis points. Capital is estimated to be effected under these
simulations by no more than +/- one percent.
With the adoption of SFAS #115 in the first quarter of 1994, 50.4% of
the investment portfolio is currently classified as available for sale and
49.6% as held to maturity. The available for sale classification provides
management with greater flexibility to more actively manage the securities
portfolio to better achieve overall balance sheet rate sensitivity goals.
Indeed, it is the Company's
intent to sell a significant portion of the acquired JSB security portfolio
during the third quarter of 1994. Once this sale is completed, the Company
will target a 35% available for sale/65% held to maturity securities mix.
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 fixed-rate mortgage loans. The Company will retain all
servicing rights at its newly acquired mortgage banking subsidiary
(Standard Mortgage Company of Georgia) and recognizes fee income over the
remaining lives of the loans sold at an average rate of approximately 30
basis points on the loan balances outstanding. Finally, as previously
mentioned in the net interest income discussion, the investment portfolio
leveraging stragegy contributed to the increase in the Company's negative
static gap position. Management is cognizant of the interest rate risk
that exists with the leveraging program but is confident that it can be
effectively managed with available hedging tools and cash flow from the
investment portfolio.
42
.....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 $188
million at June 30, 1994, $151 million at December 31, 1993, and $148
million at June 30, 1993. Maturing and repaying loans, as well as, the
monthly cash flow associated with certain asset- and mortgage-backed
securities are other sources of asset liquidity.
Liability liquidity can be met by attracting deposits with competitive
rates, using repurchase agreements, buying federal funds, or utilizing the
facilities of the Federal Reserve or the Federal Home Loan Bank systems.
USBANCORP's subsidiaries utilize a variety of these methods of liability
liquidity. At June 30, 1994, USBANCORP's subsidiaries had approximately
$137.6 million of unused lines of credit available under informal
arrangements with correspondent banks compared to $98.6 million at June 30,
1993. These lines of credit enable USBANCORP's subsidiaries to purchase
funds for short-term needs at current market rates. Additionally, each of
the Company's subsidiary banks are members of the Federal Home Loan Bank
which provides the opportunity to obtain intermediate to longer-term
advances up to approximately 80% of their investment in assets secured by
one-to-four family residential real estate; based upon March 31, 1994,
balances, this would suggest a total available Federal Home Loan Bank
borrowing capacity of approximately $455 million. Furthermore, USBANCORP
had available at June 30, 1994, an unused $1 million unsecured line of
credit.
.....EFFECTS OF INFLATION.....USBANCORP's asset and liability structure is
primarily monetary in nature. As such, USBANCORP's assets and liabilities
tend to move in concert with inflation. While changes in interest rates
may have an impact on the financial performance of the banking industry,
interest rates do not necessarily move in the same direction or in the same
magnitude as prices of other goods and services and may frequently reflect
government policy initiatives or economic factors not measured by a price
index.
43
.....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):
June 30, 1994 December 31, 1993 June 30, 1993
Amount Ratio Amount Ratio Amount Ratio
RISK-ADJUSTED CAPITAL RATIOS
Tier 1 capital $ 109,371 9.67% $ 113,718 14.72% $ 109,216 14.29%
Tier 1 capital minimum
requirements 45,242 4.00% 30,893 4.00 30,576 4.00
Excess $ 64,129 5.67% $ 82,825 10.72% $ 78,640 10.29%
Total capital $ 123,509 10.92% $ 123,372 15.97% $ 118,771 15.54%
Total capital minimum
requirements 90,485 8.00% 61,787 8.00 61,153 8.00%
Excess $ 33,024 2.92% $ 61,585 7.97% $ 57,618 7.54%
Total risk-adjusted
assets $1,131,057 $ 772,333 $ 764,407
ASSET LEVERAGE RATIO
Tier 1 capital $ 109,371 6.58% $ 113,718 9.18% $ 109,216 8.88%
Minimum requirement 83,171 5.00% 61,931 5.00 61,464 5.00%
Excess $ 26,200 1.58% $ 51,787 4.18% $ 47,752 3.88%
Total adjusted assets $1,663,411 $1,238,624 $1,229,273
The decline in each of the regulatory capital ratios between
December 31, 1993, and June 30, 1994, was due primarily to the JSB
acquisition which allowed the Company to better leverage its
capital strength in an effort to enhance total shareholder return.
Specifically, the $25 million intangible asset created from the
acquisition offset the $24.1 million increase in capital resulting
from the new UBAN shares issued. The regulatory capital ratios
were also negatively impacted by the $5.7 million equity valuation
allowance established for net unrealized holding losses on
available for sale securities in accordance with SFAS #115 and an
increase in total assets resulting from the leveraging program.
Even after this decline, the Company exceeds all regulatory capital
ratios for each of the periods presented. Furthermore, each of the
Company's subsidiary banks are considered "well capitalized" under
all applicable FDIC regulations. It is the Company's ongoing
intent to prudently leverage the capital base in an effort to
increase return on equity performance while maintaining necessary
capital requirements. Management plans to execute the initial
phases of a treasury stock buyback program in the third quarter of
1994 to continue to move toward an optimal leveraging of the
capital base. It is, however, the Company's intent to maintain the FDIC
"well capitalized" classification for each of its subsidiaries to insure the
lowest deposit insurance premium.
44
The Company's declared Common Stock cash dividend per share
was $0.47 for the first half of 1994 which was a 11.9% increase
over the $0.42 per share dividend for the same 1993 interim period.
The dividend yield on the Company's Common Stock now approximates
4.0% compared to an average Pennsylvania bank holding company yield
of approximately 2.5%. The Company remains committed to a
progressive total shareholder return which includes a competitive
common dividend yield.
45
Part II
Submission of Matters to a Vote of Security Holders
The Annual Meeting of shareholders of USBANCORP, Inc. was held
on June 8, 1994. The results of the items submitted for a vote
are as follows:
The proposed acquisition of Johnstown Savings Bank:
Number of Votes % of total
Cast outstanding
shares
For 3,509,217 73.987%
Against 132,535 2.794%
Abstain 52,417 1.084%
The proposed amending of the Articles of Incorporation to
authorize 6,000,000 new shares of common stock:
Number of Votes % of total
Cast outstanding
shares
For 3,621,778 76.360%
Against 280,337 5.911%
Abstain 197,532 4.165%
The following five Directors, whose term will expire in 1997,
were re-elected:
Number of Votes % of total
Cast for Class II outstanding
Director shares
Clifford A. Barton 3,905,968 82.352%
James F. O'Malley 3,903,808 82.306%
Frank J. Pasquerilla 3,902,696 82.283%
Thomas C. Slater 3,912,176 82.483%
W. Harrison Vail 3,905,501 82.342%
46
The following Directors' terms will continue after this
meeting:
Directors whose term will Directors whose term will
expire in 1995: expire in 1996:
Michael F. Butler Jerome M. Adams
Terry K. Dunkle Robert A. Allen
John H. Kunkle, Jr. Louis Cynkar
Jack Sevy James C. Spangler
Robert L. Wise
Votes received for the Adjournment of the USBANCORP Annual
Meeting:
Number of Votes % of total
Cast outstanding
shares
For 3,855,453 81.287%
Against 170,549 3.596%
Abstain 87,984 1.855%
There were 414,116 votes returned and 11,470 votes
disqualified in all matters voted upon at the 1993 USBANCORP Annual
Meeting.
47
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
15.1 Letter re: unaudited interim financial
information
(b) Reports on Form 8-K
USBANCORP, Inc.'s Common Stock Repurchase
Program
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USBANCORP, Inc.
Registrant
Date: August 15, 1994 \s\Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: August 15, 1994 \s\Orlando B. Hanselman
Orlando B. Hanselman
Executive Vice President,
Chief Financial Officer and
Manager of Corporate Services
48
STATEMENT OF MANAGEMENT RESPONSIBILITY
July 20, 1994
To the Stockholders and
Board of Directors of
USBANCORP, Inc.
Management of USBANCORP, Inc. and its subsidiaries have prepared
the consolidated financial statements and other information in the
Form 10-Q in accordance with generally accepted accounting
principles and are responsible for its accuracy.
In meeting its responsibility, management relies on internal
accounting and related control systems, which include selection and
training of qualified personnel, establishment and communication of
accounting and administrative policies and procedures, appropriate
segregation of responsibilities, and programs of internal audit.
These systems are designed to provide reasonable assurance that
financial records are reliable for preparing financial statements
and maintaining accountability for assets, and that assets are
safeguarded against unauthorized use or disposition. Such
assurance cannot be absolute because of inherent limitations in any
internal control system.
Management also recognizes its responsibility to foster a climate
in which Company affairs are conducted with the highest ethical
standards. The Company's Code of Conduct, furnished to each
employee and director, addresses the importance of open internal
communications, potential conflicts of interest, compliance with
applicable laws, including those related to financial disclosure,
the confidentiality of proprietary information, and other items.
There is an ongoing program to assess compliance with these
policies.
The Audit Committee of the Company's Board of Directors consists
solely of outside directors. The Audit Committee meets
periodically with management and the independent accountants to
discuss audit, financial reporting, and related matters. Arthur
Andersen & Co. and the Company's internal auditors have direct
access to the Audit Committee.
\s\Terry K. Dunkle \s\Orlando B. Hanselman
Chairman, Executive Vice President, CFO &
President & CEO Manager of Corporate Services
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
USBANCORP, Inc.:
We have reviewed the accompanying consolidated balance sheet of
USBANCORP, Inc. (a Pennsylvania corporation) and Subsidiaries as of
June 30, 1994, and the related consolidated statements of income,
consolidated statements of changes in stockholders' equity and
cash flows for the three-month and six-month periods ended June 30,
1994 and 1993. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review
of interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the financial statements referred to above
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of USBANCORP,
Inc. as of December 31, 1993, and in our report dated January 28,
1994, we expressed an unqualified opinion on that statement. In
our opinion, the information set forth in the consolidated balance
sheet as of December 31, 1993, is fairly stated, in all material
respects, in relation to the balance sheet from which it has been
derived.
\s\ARTHUR ANDERSEN & Co.
Pittsburgh, Pennsylvania
July 20, 1994