UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the
X Securities Exchange Act of 1934
For the period ended June 30, 1995
Transaction Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transaction period from to
Commission File Number 0-11204
USBANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1424278
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Main & Franklin Streets, P.O. Box 430, Johnstown, PA 15907-0430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 533-5300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1995
Common Stock, par value $2.50 5,533,046
per share
1
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
June 30, 1995, December 31, 1994,
and June 30, 1994 3
Consolidated Statement of Income -
Three Months and Six Months Ended
June 30, 1995, and 1994 4
Consolidated Statement of Changes
in Stockholders' Equity -
Six Months Ended
June 30, 1995, and 1994 6
Consolidated Statement of Cash Flows -
Six Months Ended
June 30, 1995, and 1994 7
Notes to Consolidated Financial
Statements 9
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations 23
Part II. Other Information 50
2
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
June 30 December 31 June 30
1995 1994 1994
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 40,661 $ 48,841 $ 45,805
Interest bearing deposits with
banks 6,174 5,050 4,860
Federal funds sold and securities
purchased under agreements to
resell 16,850 - 24,700
Investment securities:
Available for sale 316,958 259,462 348,873
Held to maturity (market value
$527,459 on June 30, 1995,
$501,485 on December 31, 1994,
and $336,376 on June 30, 1994) 523,655 524,638 343,435
Assets held in trust for collateralized
mortgage obligation 8,298 9,104 10,720
Loans held for sale 3,822 18,077 6,216
Loans 800,885 853,759 840,720
Less: Unearned income 2,963 3,832 4,729
Allowance for loan losses 14,886 15,590 19,247
Net Loans 783,036 834,337 816,744
Premises and equipment 18,881 19,100 19,062
Accrued income receivable 16,933 16,894 12,118
Purchased mortgage servicing rights 11,457 11,452 10,360
Goodwill and core deposit intangibles 25,783 27,009 27,730
Other assets 26,440 14,926 20,518
TOTAL ASSETS $ 1,798,948 $ 1,788,890 $ 1,691,141
LIABILITIES
Non-interest bearing deposits $ 163,685 $ 144,013 $ 148,053
Interest bearing deposits 1,070,812 1,052,233 1,085,112
Total deposits 1,234,497 1,196,246 1,233,165
Federal funds purchased and
securities sold under agreements
to repurchase 59,916 143,289 46,721
Other short-term borrowings 75,469 75,295 76,920
Advances from Federal Home Loan Bank 246,200 200,094 141,501
Collateralized mortgage obligation 7,436 8,251 9,787
Long-term debt 4,292 5,806 2,787
Due to JSB shareholders - - 19,701
Other liabilities 24,519 22,773 23,458
TOTAL LIABILITIES 1,652,329 1,651,754 1,554,040
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;
5,531,966 shares issued and outstand-
ing on June 30, 1995; 5,582,155 shares
issued and outstanding on December 31,
1994; 5,703,104 shares issued and
outstanding on June 30, 1994 14,282 14,275 14,258
Treasury stock, 180,956 shares at cost (4,261) (3,064) -
Surplus 92,970 92,923 92,779
Retained earnings 45,245 40,355 35,794
Net unrealized holding losses on
available for sale securities (1,617) (7,353) (5,730)
TOTAL STOCKHOLDERS' EQUITY 146,619 137,136 137,101
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,798,948 $ 1,788,890 $ 1,691,141
See accompanying notes to consolidated financial statements.
3
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
INTEREST INCOME
Interest and fees on loans and loans held
for sale:
Taxable $ 16,403 $ 14,313 $ 34,013 $ 28,993
Tax exempt 632 451 1,249 826
Deposits with banks 120 6 193 17
Federal funds sold and securities
purchased under agreements to resell 60 18 98 38
Investment securities:
Available for sale 5,647 2,754 10,353 7,937
Held to maturity 8,730 3,393 17,735 3,918
Assets held in trust for collateralized
mortgage obligation 173 249 347 521
Total Interest Income 31,765 21,184 63,988 42,250
INTEREST EXPENSE
Deposits 11,707 7,342 22,569 14,685
Federal funds purchased and securities
sold under agreements to repurchase 1,898 228 4,009 341
Other short-term borrowings 652 332 1,205 341
Advances from Federal Home Loan Bank 3,686 415 7,329 767
Collateralized mortgage obligation 239 257 482 544
Long-term debt 47 65 125 126
Total Interest Expense 18,229 8,639 35,719 16,804
NET INTEREST INCOME 13,536 12,545 28,269 25,446
Provision for loan losses 75 405 195 810
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 13,461 12,140 28,074 24,636
NON-INTEREST INCOME
Trust fees 849 712 1,694 1,430
Net realized gains (losses)
on investment securities 725 (482) 724 (211)
Net realized gains(losses) on loans and
loans held for sale 108 448 (758) 541
Gain on disposition of business line - - 905 -
Wholesale cash processing fees 298 306 587 624
Service charges on deposit accounts 706 684 1,414 1,276
Net mortgage servicing fees 651 - 1,333 -
Other income 1,201 811 2,127 1,475
Total Non-Interest Income 4,538 2,479 8,026 5,135
NON-INTEREST EXPENSE
Salaries and employee benefits 6,214 5,225 12,638 10,568
Net occupancy expense 1,045 965 2,141 1,953
Equipment expense 851 679 1,738 1,482
Professional fees 540 533 1,113 981
Supplies, postage, and freight 645 546 1,296 1,093
Miscellaneous taxes and insurance 366 291 693 587
FDIC deposit insurance expense 675 585 1,357 1,172
Amortization of goodwill and
core deposit intangibles 624 222 1,226 443
Acquisition charge - 2,437 - 2,437
Other expense 1,635 1,369 2,911 2,776
Total Non-Interest Expense $ 12,595 $ 12,852 $ 25,113 $ 23,492
INCOME BEFORE INCOME TAXES $ 5,404 $ 1,767 $ 10,987 $ 6,279
Provision for income taxes 1,523 863 3,207 2,336
NET INCOME $ 3,881 $ 904 $ 7,780 $ 3,943
PER COMMON SHARE DATA:
Primary:
Net income $ 0.70 $ 0.19 $ 1.40 $ 0.83
Average shares outstanding 5,556,409 4,751,396 5,569,818 4,745,929
Fully Diluted:
Net income $ 0.70 $ 0.19 $ 1.40 $ 0.83
Average shares outstanding 5,562,355 4,751,396 5,572,791 4,745,929
Cash Dividends Declared $ 0.27 $ 0.25 $ 0.52 $ 0.47
See accompanying notes to consolidated financial statements.
4
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5
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Unaudited
Net
Unrealized
Holding
Preferred Common Treasury Retained Gains
Stock Stock Stock Surplus Earnings (Losses) Total
Balance December 31,
1993 $ - $ 11,815 $ - $ 70,720 $ 34,080 $ - $116,615
Net income - - - - 3,943 - 3,943
Dividend reinvestment
and stock
purchase plan - 48 - 387 - - 435
Net unrealized holding
gains (losses) on
investment
securities - - - - - (5,730) (5,730)
Common shares issued to
acquire Johnstown Savings
Bank (957,857 shares @
$25.125 per share) - 2,395 - 21,672 - - 24,067
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
Balance December 31,
1994 $ - $ 14,275 $(3,064) $ 92,923 $ 40,355 $ (7,353) $137,136
Net income - - - - 7,780 - 7,780
Dividend reinvest-
ment and stock
purchase plan - 7 - 47 - - 54
Net unrealized
holding gains
(losses) on
investment
securities - - - - - 5,736 5,736
Cash dividends
declared:
Common stock
($0.25 per share
on 5,584,722
shares and $0.27 per
share on 5,531,966
shares) - - - - (2,890) - (2,890)
Treasury stock, purchase
of 53,256 shares at cost - - (1,197) - - - (1,197)
Balance June 30, 1995 $ - $ 14,282 $(4,261) $ 92,970 $ 45,245 $ (1,617) $146,619
See accompanying notes to consolidated financial statements.
6
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
Six Months Ended
June 30
1995 1994
OPERATING ACTIVITIES
Net income $ 7,780 $ 3,943
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 195 810
Depreciation and amortization expense 1,273 1,532
Amortization expense of goodwill and core
deposit intangibles 1,226 443
Amortization expense of purchased mortgage
servicing rights 570 -
Net (accretion) amortization of investment securities (1,445) 843
Net realized (gains) losses on investment securities (724) 211
Net realized losses (gains) on loans and loans
held for sale 758 (541)
Increase in accrued income receivable (39) (1,370)
Increase (decrease) in accrued expense payable 2,911 (685)
Net cash provided by operating activities 12,505 5,186
INVESTING ACTIVITIES
Purchases of investment securities and other
short-term investments (149,195) (225,108)
Proceeds from maturities of investment securities and
other short-term investments 34,687 96,309
Proceeds from sales of investment securities and
other short-term investments 68,949 45,433
Long-term loans originated (128,964) (169,691)
Mortgage loans held for sale (3,822) (2,153)
Principal collected on long-term loans 146,222 148,831
Loans purchased or participated (587) -
Loans sold or participated 47,303 32,789
Net increase in credit card receivable
and other short-term loans 4,451 1,134
Purchases of premises and equipment (1,183) (768)
Sale/retirement of premises and equipment 134 17
Net decrease in assets held in trust for
collateralized mortgage obligation 806 3,095
Net increase purchased mortgage servicing rights (575) -
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 increase in other assets (14,568) (1,918)
Net cash provided (used) by investing activities $ 3,658 $ (432,327)
CONTINUED ON NEXT PAGE
7
CONSOLIDATED STATEMENT OF CASH FLOWS
CONTINUED FROM PREVIOUS PAGE
Six Months Ended
June 30
1995 1994
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit $ 247,866 $ 167,653
Payments for maturing certificates of deposits (203,752) (183,363)
Net decrease in demand and savings deposits (5,863) (8,891)
Net (decrease) increase in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings (83,199) 69,284
Net principal borrowings of advances
from Federal Home Loan Bank and long-term debt 43,777 41,428
Common stock cash dividends paid (2,800) (2,081)
Proceeds from dividend reinvestment, stock
purchase plan, and stock options exercised 54 435
Purchases of treasury stock (1,197) -
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 (decrease) increase in other liabilities (1,255) 764
Net cash (used) provided by financing activities (6,369) 452,091
NET INCREASE IN CASH EQUIVALENTS 9,794 24,950
CASH EQUIVALENTS AT JANUARY 1 53,891 50,415
CASH EQUIVALENTS AT JUNE 30 $ 63,685 $ 75,365
See accompanying notes to consolidated financial statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The consolidated financial statements include the accounts of USBANCORP,
Inc. (the "Company") and its wholly-owned subsidiaries, United States National
Bank in Johnstown ("U.S. Bank"), Three Rivers Bank and Trust Company ("Three
Rivers Bank"), Community Bancorp, Inc. ("Community"), USBANCORP Trust Company
("Trust Company"), and United Bancorp Life Insurance Company ("United Life").
In addition, the Parent Company is an administrative group that provides support
in such areas as audit, finance, investments, loan review, general services,
loan policy, and marketing. Intercompany accounts and transactions have been
eliminated in preparing the consolidated financial statements.
2. Basis of Preparation
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. In the opinion of management, all adjustments that are of a normal
recurring nature and are considered necessary for a fair presentation have been
included. They are not, however, necessarily indicative of the results of
consolidated operations for a full year.
With respect to the unaudited consolidated financial information of the
Company for the three month and six month periods ended June 30, 1995, and 1994,
Arthur Andersen LLP, independent public accountants, conducted reviews (based
upon procedures established by the American Institute of Certified Public
Accountants) and not audits, as set forth in their separate report dated
July 20,
1995, appearing herein. This report does not express an opinion on the interim
unaudited consolidated financial information. Arthur Andersen LLP has not
carried out any significant or additional audit tests beyond those which would
have been necessary if its report had not been included. The December 31, 1994,
numbers are derived from audited financial statements.
For further information, refer to the consolidated financial statements and
accompanying notes included in the Company's "Annual Report and Form 10-K" for
the year ended December 31, 1994.
3. Johnstown Savings Bank ("JSB") Acquisition
For financial reporting purposes, the Merger ("Merger") with JSB was
effected on June 30, 1994. USBANCORP merged JSB with and into U.S. Bank, a
wholly-owned subsidiary of USBANCORP, with U.S. Bank surviving the Merger. The
separate existence of JSB ceased, and all property, rights, powers, duties,
obligations and liabilities of JSB were automatically transferred to U.S. Bank,
in accordance with Federal and Pennsylvania law.
9
The Merger was treated as a purchase for financial accounting purposes.
The
total cost of the acquisition was $43.8 million, which was represented by the
issuance of 957,857 common shares and $19.7 million in cash. Accounting for the
acquisition as a purchase, USBANCORP recognized newly created core deposit
intangibles of $5.7 million and goodwill of $20.2 million and began realizing
net
income immediately from July 1, 1994. Furthermore, the Company recorded
approximately $2.4 million of additional restructuring expenses during the
second
quarter of 1994 as a result of the JSB acquisition including employee severance,
data processing conversion costs, marketing and advertising expenses, and other
costs.
The following table compares the Company's actual financial performance
for
the six months ended June 30, 1995, to the financial performance calculated on
a pro forma basis for the six month period ended June 30, 1994, for USBANCORP
and JSB as if the merger had been consummated on January 1, 1994:
Actual Pro forma
June 30, 1995 June 30, 1994
(In thousands, except per share data)
Net interest income $28,269 $31,094
Provision for loan losses 195 1,268
Non-interest income 8,026 7,583
Non-interest expense 25,113 30,554
Provision for income taxes 3,207 2,382
Net income $ 7,780 $ 4,473
Net income per fully diluted
common share $ 1.40 $ 0.78
4. Earnings Per Common Share
Primary earnings per share amounts are computed by dividing net income by
the weighted average number of common stock and common stock equivalent shares
outstanding.
5. Consolidated Statement of Cash Flows
On a consolidated basis, cash equivalents include cash and due from banks,
interest bearing deposits with banks, and federal funds sold and securities
purchased under agreements to resell; cash equivalents include short-term
investments. The Company made $1,500,000 of federal income tax payments for
the
first six months of 1995 as compared to $3,210,000 for the same 1994 interim
period. Total interest expense paid amounted to $31,768,000 in 1995's first six
months compared to $15,541,000 in the same 1994 period.
10
6. Investment Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") #115, "Accounting for Certain Investments in Debt
and Equity Securities." This statement addresses the accounting and reporting
for investments in equity securities that have readily determinable fair values
and for all investments in debt securities. Investment securities held to
maturity are carried at amortized cost while investment securities classified as
available for sale are reported at fair value. The book and market values of
investment securities are summarized as follows (in thousands):
Investment securities available for sale:
June 30, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 23,418 $ 377 $ (76) $ 23,719
U.S. Agency 36,688 14 (487) 36,215
State and municipal 1,435 3 (30) 1,408
U.S. Agency mortgage-backed
securities 220,430 2,993 (679) 222,744
Other securities<F1> 33,365 2 (495) 32,872
Total $315,336 $ 3,389 $ (1,767) $316,958
Investment securities held to maturity:
June 30, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 596 $ 6 $ - $ 602
U.S. Agency 35,944 90 (84) 35,950
State and municipal 134,497 1,469 (1,305) 134,661
U.S. Agency mortgage-backed
securities 349,086 4,360 (757) 352,689
Other securities<F1> 3,532 26 (1) 3,557
Total $523,655 $ 5,951 $ (2,147) $527,459
Investment securities available for sale:
December 31, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 23,411 $ - $ (494) $ 22,917
U.S. Agency 31,372 3 (1,971) 29,404
State and municipal 1,479 1 (123) 1,357
U.S. Agency mortgage-backed
securities 175,215 29 (5,490) 169,754
Other securities<F1> 37,087 1 (1,058) 36,030
Total $268,564 $ 34 $ (9,136) $259,462
<F1> Other investment securities include corporate notes and bonds,
asset-backed securities, and equity securities.
11
Investment securities held to maturity:
December 31, 1994
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 398 $ - $ (7) $ 391
U.S. Agency 35,879 - (2,622) 33,257
State and municipal 125,489 825 (6,410) 119,904
U.S. Agency mortgage-backed
securities 360,146 2,491 (17,378) 345,259
Other securities<F1> 2,726 10 (62) 2,674
Total $524,638 $ 3,326 $ (26,479) $501,485
Investment securities available for sale:
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<F2> 173,091 300 (1,489) 171,902
Other securities<F1> 68,828 27 (461) 68,394
Total $352,974 $ 584 $ (4,685) $348,873
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<F2> 215,740 1,018 (4,629) 212,129
Other securities<F1> 499 2 - 501
$343,435 $ 1,272 $ (8,331) $336,376
<F2>Approximately 98% of these obligations represent U.S. Agency issued
securities.
<F1>Other investment securities include corporate notes and bonds,
asset-backed securities, and equity securities.
All purchased investment securities are recorded on settlement date which
is not materially different from the trade date. Realized gains and losses are
calculated by the specific identification method and are included in "Net
realized gain or loss on investment securities." The Company's Investment
Policy prohibits trading of securities.
Maintaining investment quality is a primary objective of the Company's
investment policy which, subject to certain limited exceptions, prohibits the
purchase of any investment security below a Moody's Investor's Service or
Standard & Poor's rating of "A." At June 30, 1995, 96.9% of the portfolio was
rated "AAA" and 97.5% "AA" or higher as compared to 94.4% and 95.5%,
respectively, at June 30, 1994. Less than 1.0% of the portfolio was rated below
"A" or unrated on June 30, 1995.
12
7. Loans Held for Sale
At June 30, 1995, $3,822,000 of fixed-rate residential mortgage loans
originated during 1995 were classified as "held for sale." It is management's
intent to sell these residential mortgage loans during the next several months
and retain servicing rights for their remaining lives; this strategy will be
executed in an effort to help neutralize long-term interest rate risk. The
residential mortgage loans held for sale are carried at the lower of aggregate
amortized cost or market value. Realized gains and losses are calculated by the
specific identification method and are included in "Net realized gains or losses
on loans and loans held for sale"; unrealized net valuation adjustments (if any)
are recorded in the same line item on the Consolidated Statement of Income.
8. Loans
The loan portfolio of the Company consists of the following (in thousands):
June 30 December 31 June 30
1995 1994 1994
Commercial $ 96,989 $116,702 $109,029
Commercial loans secured
by real estate 169,455 168,238 163,872
Real estate - mortgage 391,821 407,177 405,814
Consumer 142,620 161,642 162,005
Loans 800,885 853,759 840,720
Less: Unearned income 2,963 3,832 4,729
Loans, net of unearned
income $797,922 $849,927 $835,991
Real estate-construction loans were not material at these presented dates
and comprised 2.7% of total loans net of unearned income at June 30, 1995. The
Company has no credit exposure to foreign countries or highly leveraged
transactions. Additionally, the Company has no significant industry lending
concentrations.
9. Allowance for Loan Losses and Charge-Off Procedures
As a financial institution which assumes lending and credit risks as a
principal element of its business, the Company anticipates that credit losses
will be experienced in the normal course of business. Accordingly, management
makes a quarterly determination as to an appropriate provision from earnings
necessary to maintain an allowance for loan losses that is adequate for
potential
yet undetermined losses. The amount charged against earnings is based upon
several factors including, at a minimum, each of the following:
a continuing review of delinquent, classified and non-accrual loans
large loans, and over all portfolio quality. This continuous review assesses
the risk characteristics of both individual loans and the total loan
portfolio.
13
regular examinations and reviews of the loan portfolio by representatives
of the regulatory authorities.
analytical review of loan charge-off experience, delinquency rates,
and other relevant historical and peer statistical ratios.
management's judgement with respect to local and general economic
conditions and their impact on the existing loan portfolio.
When it is determined that the prospects for recovery of the principal of
a loan have significantly diminished, the loan is immediately charged against
the
allowance account; subsequent recoveries, if any, are credited to the allowance
account. In addition, non-accrual and large delinquent loans are reviewed
monthly to determine potential losses. Consumer loans are considered losses
when
they are 90 days past due, except loans that are insured for credit loss.
An analysis of the changes in the allowance for loan losses follows (in
thousands, except ratios):
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
Balance at beginning of period $15,258 $15,553 $15,590 $15,260
Addition due to JSB acquisition - 3,422 - 3,422
Reduction due to disposition of
business line - - (342) -
Charge-offs:
Commercial 410 158 505 213
Real estate-mortgage 45 41 85 128
Consumer 124 148 288 280
Total charge-offs 579 347 878 621
Recoveries:
Commercial 32 60 96 104
Real estate-mortgage 3 35 11 44
Consumer 97 119 214 228
Total recoveries 132 214 321 376
Net charge-offs 447 133 557 245
Provision for loan losses 75 405 195 810
Balance at end of period $14,886 $19,247 $14,886 $19,247
As a percent of average loans
and average loans held for
sale, net of unearned income:
Annualized net charge-offs 0.22% 0.07% 0.13% 0.07%
Annualized provision for
loan losses 0.04 0.22 0.05 0.22
Allowance as a percent of loans
and loans held for sale,
net of unearned income at
period end 1.86 2.29 1.86 2.29
Allowance as a multiple of net
annualized charge-offs, at
period end 8.30x 36.11x 13.25x 38.96x
(For additional information, refer to the "Provision for Loan Losses" and "Loan
Quality" sections in the Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations on pages 30 and 42,
respectively.)
14
10. Components of Allowance for Loan Losses
Effective January 1, 1995, the Company adopted SFAS #114, "Accounting by
Creditors for Impairment of a Loan" which was subsequently amended by SFAS #118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures". SFAS #114 addresses the treatment and disclosure of certain loans
where it is probable that the creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. This standard defines
the term "impaired loan" and indicates the method used to measure the
impairment.
The measurement of impairment may be based upon: 1) the present value of
expected future cash flows discounted at the loan's effective interest rate; 2)
the observable market price of the impaired loan; or 3) the fair value of the
collateral of a collateral dependent loan. Additionally, SFAS #118 requires the
disclosure of how the creditor recognizes interest income related to these
impaired loans. The adoption of these standards resulted in four loans
totalling
$384,000 being specifically identified as impaired and a corresponding
allocation
reserve of $334,000 was established.
The following table sets forth the allocation of the allowance for loan
losses among various categories. This allocation is based upon historical
experience and management's review of the loan portfolio. This allocation,
however, is not necessarily indicative of the specific amount or specific loan
category in which future losses may ultimately occur (in thousands, except
percentages):
June 30,1995 December 31, 1994 June 30, 1994
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
Amount to Loans<F1> Amount to Loans<F1> Amount to Loans<F1>
Commercial $ 1,750 12.0% $ 1,894 13.4% $ 1,694 12.9%
Commercial
loans secured
by real
estate 3,369 21.1 5,278 19.3 6,809 19.3
Real estate -
mortgage 316 49.2 339 48.8 440 48.6
Consumer 925 17.7 1,436 18.5 1,675 19.2
Allocation to
general risk 8,192 - 6,643 - 8,629 -
Allocation for
impaired
loans 334 - - - - -
Total $14,886 100.0% $15,590 100.0% $19,247 100.0%
<F1>Includes loans "held for sale."
15
Even though real estate-mortgage loans comprise approximately 49% of the
Company's total loan portfolio, only $316,000 or 2.1% of the total allowance for
loan losses is allocated against this loan category. The real estate mortgage
loan allocation is based upon the Company's five year historical average of
actual loan charge-offs experienced in that category. The same methodology is
used to determine the allocation for consumer loans except the allocation is
based upon an average of the most recent actual three year historical charge-off
experience for consumer loans. The disproportionately higher allocations for
commercial loans and commercial loans secured by real estate reflect the
increased credit risk associated with this type of lending. To determine the
required allocations for these categories, the Company on a quarterly basis
performs 1) a detailed review of all classified assets to determine if any
specific reserve allocations are required on an individual loan basis, and 2)
applies reserve allocation percentages to all criticized and classified assets
based upon the Company's five year historical average for actual loss experience
in the various rating categories (i.e. substandard, doubtful, etc.).
At June 30, 1995, management of the Company believes the allowance for loan
losses was adequate to cover potential yet undetermined losses within the
Company's loan portfolio. The Company's management is unable to determine in
what loan category future charge-offs and recoveries may occur. (For a complete
discussion concerning the operations of the "Allowance for Loan Losses" refer to
Note #9.)
11. Non-performing Assets
Non-performing assets are comprised of (i) loans which are on a non-accrual
basis, (ii) loans which are contractually past due 90 days or more as to
interest
or principal payments some of which are insured for credit loss, and (iii) other
real estate owned (real estate acquired through foreclosure and in-substance
foreclosures). All loans, except for loans that are insured for credit loss,
are
placed on non-accrual status immediately upon becoming 90 days past due in
either
principal or interest. In addition, if circumstances warrant, the accrual of
interest may be discontinued prior to 90 days. In all cases, payments received
on non-accrual loans are credited to principal until full recovery of principal
has been recognized; it is only after full recovery of principal that any
additional payments received are recognized as interest income. The only
exception to this policy is for residential mortgage loans wherein interest
income is recognized on a cash basis as payments are received. Restoration of
a non-accrual loan to accrual status requires the approval of the Credit
Committee and/or Board Discount/Loan Committee with final authority for the
decision resting with USBANCORP's Chief Accounting Officer.
16
The following table presents information concerning non-performing assets
(in thousands, except percentages):
June 30 December 31 June 30
1995 1994 1994
Non-accrual loans $5,929 $5,446 $4,416
Loans past due 90
days or more 2,250 1,357 1,308
Other real estate owned 1,288 1,098 925
Total non-performing
assets $9,467 $7,901 $6,649
Total non-performing
assets as a percent
of loans and loans
held for sale, net
of unearned income,
and other real estate
owned 1.18% 0.91% 0.79%
The Company is unaware of any additional loans which are required to either
be charged-off or added to the non-performing asset totals disclosed above.
Other real estate owned is recorded at the lower of 1) fair value minus
estimated costs to sell or 2) carrying cost.
The following table sets forth, for the periods indicated, (i) the gross
interest income that would have been recorded if non-accrual loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if held for part of the period, (ii)
the amount of interest income actually recorded on such loans, and (iii) the net
reduction in interest income attributable to such loans (in thousands). There
was no interest income recognized on impaired loans during the first half of
1995.
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
Interest income due in accordance
with original terms $ 142 $ 85 $ 287 $ 248
Interest income recorded (19) (76) (61) (368)
Net reduction (increase) in
interest income $ 123 $ 9 $ 226 $ (120)
12. Incentive Stock Option Plan
Under the Company's Incentive Stock Option Plan (the "Plan") options can
be granted (the "Grant Date") to employees with executive, managerial,
technical,
or professional responsibility as selected by a committee of the board of
directors. The Plan was amended on April 25, 1995, to authorize the grant of
options covering up to 285,000 shares of common stock. The option price at
which
a stock option may be exercised shall be a price as determined by the board
committee but shall not be less than 100% of the fair market value per share of
common stock on the Grant Date. The maximum term of any option granted under
the Plan cannot exceed 10 years. The following stock options were granted:
17
Shares Shares Option
Under Available Price
Option For Option Per Share
Balance at December 31, 1993 49,834 71,500
Options granted 25,500 (25,500) 23.8750
Options granted 5,000 (5,000) 25.0000
Options granted 2,500 (2,500) 21.2500
Options exercised (2,967) - 17.2500
Options exercised (4,000) - 22.5600
Options cancelled or
expired - -
Balance at December 31, 1994 75,867 38,500
Increased Authorized
options - 157,000
Options granted 20,500 (20,500) 21.4375
Options exercised (3,067) - 17.2500
Options cancelled or
expired - -
Balance at June 30, 1995 93,300 175,000
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.
13. Off-Balance Sheet Hedge Instruments
Policies
The Company uses various interest rate contracts, such as interest rate
swaps, caps and floors, to help manage interest rate and market valuation risk
exposure, which is incurred in normal recurrent banking activities. These
interest rate contracts function as hedges against specific assets or
liabilities
on the Company's Balance Sheet. Gains or losses on these hedge transactions are
deferred and recognized as adjustments to interest income or interest expense of
the underlying assets or liabilities over the hedge period.
For interest rate swaps, the interest differential to be paid or received
is accrued by the Company and recognized as an adjustment to interest income or
interest expense of the underlying assets or liabilities being hedged. Since
only interest payments are exchanged, the cash requirement and exposure to
credit risk are significantly less than the notional amount.
18
Any premium or transaction fee incurred to purchase interest rate caps or
floors are deferred and amortized to interest income or interest expense over
the
term of the contract. Unamortized premiums related to the purchase of caps or
floors are included in other assets on the Consolidated Balance Sheet. A
summary
of the off-balance sheet derivative transactions completed to date are as
follows:
CMO Liability Hedge
During the first quarter of 1994, the Company entered into an interest rate
swap agreement with a notional amount of $10 million and a termination date of
February 11, 1997. Under the terms of the swap agreement, the Company will
receive a fixed interest rate of 5% and pay a floating interest rate defined as
the 90 day Libor which resets quarterly. The counter-party in this unsecured
transaction is PNC Bank.
This swap agreement was initiated to hedge interest rate risk in a
declining, stable, or modestly rising rate environment. Specifically, this
transaction hedges the CMO liability on the Company's Balance Sheet by
effectively converting the fixed percentage cost to a variable rate cost. This
hedge also offsets market valuation risk since any change in the market value of
the swap agreement correlates in the opposite direction with a change in the
market value of the CMO liability. Overall, this swap agreement increased
interest expense by $57,000 for the six months ended June 30, 1995.
Borrowed Funds Hedges
On September 28, 1994, the Company completed hedging transactions with a
notional amount of $100 million. The counter-party in these unsecured
transactions is Mellon Bank. The $100 million notional amount was comprised of
the following:
a $50 million interest rate swap agreement whereby the Company pays a one
year fixed interest rate of 6.08% and receives 90 day Libor which resets
quarterly. The termination date of this swap agreement is September 28,
1995.
a $50 million interest rate cap on 90 day Libor whereby the cap amounts
to 5.25% for the period covering September 28, 1994, through March 28,
1995, and then 5.75% for the period from March 29, 1995, through September
28, 1995. The cost of this cap was 63 basis points or $315,000 and is
being amortized as an interest expense over the life of the cap. At June
30, 1995, the unamortized premium amounted to $79,000.
19
The Company purchased these derivative products to hedge short-term
borrowings which were incurred to fund investment securities as part of the
increased leveraging of the balance sheet. Specifically, these Federal Home
Loan
Bank borrowings are tied to 90 day Libor and reprice on a quarterly basis.
Thus,
the interest rate swap is a hedge against these borrowed funds since under the
terms of the swap the Company receives 90 day Libor which resets quarterly
compared to the borrowed funds on which the Company pays a rate that floats
quarterly based upon a differential tied to 90 day Libor. The one year term of
the swap correlates with the 1.2 year modified duration of GNMA arm securities
which were purchased with the FHLB borrowed funds. These off-balance sheet
derivative hedge transactions reduced interest expense by approximately $82,000
for the six months ended June 30, 1995.
On March 16, 1995, the Company entered into an interest rate swap agreement
with a notional amount of $60 million and a termination date of March 16, 1997.
Under the terms of the swap agreement, the Company pays a two year fixed
interest
rate of 6.93% and receives 90 day Libor which resets quarterly. The initial
rate
for 90 day Libor was set at 6.25%. The counter-party in this unsecured
transaction is PNC Bank.
This swap agreement was executed to hedge specific borrowings.
Specifically, FHLB term advances tied to 90 day Libor are being used to fund
fixed-rate investment securities with durations ranging from two to three
years.
This hedge transaction increased interest expense by $104,000 for the six months
ended June 30, 1995.
The Company believes that its exposure to credit loss in the event of non-
performance by any of the counter-parties is remote.
The Company monitors and controls all off-balance sheet derivative products
with a comprehensive Board of Director approved hedging policy. In addition to
interest rate swaps and caps, the policy also allows for the use of interest
rate
floors. The Company has not instituted the use of interest rate floors as of
June 30, 1995.
14. Goodwill and Core Deposit Intangible Assets
USBANCORP's balance sheet shows both tangible assets (such as loans,
buildings, and investments) and intangible assets (such as goodwill). The
Company now carries $20.0 million of goodwill and $5.8 million of core deposit
intangible assets on its balance sheet. The majority of these intangible assets
came from the 1994 JSB acquisition ($25.9 million) and the 1993 Integra Branches
acquisition ($1.2 million).
20
The Company is amortizing core deposit intangibles over periods ranging
from five to ten years while goodwill is being amortized over a 15 year life.
The straight line method of amortization is being used for both of these
categories of intangibles. It is important to note that this intangible
amortization expense is not a future cash flow item. The following table
reflects the future amortization expense of the intangible assets
(in thousands):
Remaining 1995 $ 1,244
1996 2,408
1997 2,408
1998 2,222
1999 2,066
2000 and after 15,435
A reconciliation of the Company's intangible asset balances for the first
six months of 1995 is as follows (in thousands):
Total goodwill & core deposit
intangible assets at 12/31/94 $27,009
Intangible amortization expense
through 6/30/95 (1,226)
Total goodwill & core deposit
intangible assets at 6/30/95 $25,783
15. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following (in thousands, except
percentages):
Type Maturing Amount Weighted
Average
Rate
Flexline Overnight $ 50,500 6.69%
Advances and 1995 195,669 6.29
wholesale 1996 71,000 5.90
repurchase 1997 2,146 5.58
agreements 1998 6,954 5.87
1999 1,250 6.09
2000 3,750 6.15
2001 9,950 8.25
2002 2,500 6.59
2003 3,750 6.61
Total advances and 296,969 6.25
wholesale repurchase
agreements
Total FHLB Borrowings $347,469 6.32%
21
All of the above borrowings bear a fixed rate of interest, with the only
exceptions being the Flexline whose rate can change daily and certain advances
and wholesale repurchase agreements totalling $154.2 million which are tied to
the 90 day Libor rate and reset quarterly. All FHLB stock and an interest in
unspecified mortgage loans, with an aggregate statutory value equal to the
amount
of the advances, have been pledged as collateral with the Federal Home Loan Bank
of Pittsburgh to support these borrowings.
16. Other Accounting Matters
During the second quarter of 1995, the Company's mortgage banking subsidiary,
Standard Mortgage Corporation of Georgia, adopted SFAS #122, "Accounting for
Mortgage Servicing Rights." Prior to the issuance of this statement, SFAS #65,
"Accounting for Certain Mortgage Banking Activities" required capitalization of
the cost of the rights to service mortgage loans for others when those rights
were acquired through a purchase transaction but prohibited capitalization when
those rights were acquired through loan origination activities. SFAS #122
eliminates the accounting distinction between rights to service mortgage loans
for others that are acquired through loan origination activities and those
acquired through purchase transactions. When SMC sells a loan and retains the
mortgage servicing rights, the total cost of the mortgage loan is allocated to
the mortgage servicing rights and the loan based on their relative fair value.
The mortgage servicing rights are then amortized over the period of estimated
net
servicing income and will be evaluated for impairment based on their fair
value.
The net effect of implementing SFAS #122 in the second quarter of 1995 was
additional pre-tax income of $93,000.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ("M.D.& A.")
SECOND QUARTER 1995 vs. SECOND QUARTER 1994
.....PERFORMANCE OVERVIEW.....The Company's net income for the second quarter of
1995 totalled $3,881,000 or $0.70 per share on a fully diluted basis. 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 acquisition charge related to the purchase of Johnstown Savings Bank.
The 1995 results reflect a $1,095,000 or 39.3% earnings increase and an $0.11 or
18.6% improvement in fully diluted earnings per share when compared to the 1994
second quarter results. For the second quarter of 1995, the Company's return on
average equity was 10.87% while the return on average assets totalled 0.86%.
The Company's improved financial performance was due primarily to a reduced
loan loss provision, increased non-interest income and increased net interest
income resulting from the JSB acquisition, and greater leveraging of the balance
sheet. In conjunction with the JSB acquisition, the Company also issued 957,857
new shares of common stock which caused the 17.1% increase in weighted average
fully diluted shares outstanding to 5,562,000. This increase is net of the
repurchase of 180,956 shares of the Company's common stock since July 1, 1994.
The impact of these net additional shares was the primary reason that the fully
diluted EPS growth rate was lower than the net income growth rate experienced in
the second quarter of 1995. The following table summarizes some of the
Company's key performance indicators (in thousands, except per share and
ratios):
Three Months Ended Three Months Ended
June 30, 1995 June 30, 1994
Net income $ 3,881 $ 904
Net income (before acquisition
charge) 3,881 2,786
Fully diluted earnings per share 0.70 0.19
Fully diluted earnings per share
(before acquisition charge) 0.70 0.59
Return on average assets 0.86% 0.28%
Return on average assets (before
acquisition charge) 0.86 0.88
Return on average equity 10.87 3.13
Return on average equity (before
acquisition charge) 10.87 9.65
Average fully diluted common
shares outstanding 5,562 4,751
23
.....NET INTEREST INCOME AND MARGIN.....The Company's net interest income
represents the amount by which interest income on earning assets exceeds
interest
paid on interest bearing liabilities. Net interest income is a primary source
of the Company's earnings; it is impacted by interest rate fluctuations as well
as changes in the amount and mix of earning assets and interest bearing
liabilities. It is the Company's philosophy to strive to optimize net interest
margin performance in varying interest rate environments. The following table
compares the Company's net interest income performance for the second quarter of
1995 to the second quarter of 1994 (in thousands, except percentages):
Three Months Ended
June 30
1995 1994 $ Change % Change
Interest income $ 31,765 $ 21,184 10,581 49.9
Interest expense 18,229 8,639 9,590 111.0
Net interest income 13,536 12,545 991 7.9
Tax-equivalent
adjustment 701 330 371 112.4
Net tax-equivalent
interest income $ 14,237 $ 12,875 1,362 10.6
Net interest margin 3.38% 4.24% (0.86)% *
*Not meaningful.
USBANCORP's net interest income on a tax-equivalent basis increased by
$1,362,000 or 10.6% while the net interest margin percentage declined by 86
basis
points to 3.38%. The increased net interest income was due primarily to a
higher
volume of earning assets resulting from the JSB acquisition and a greater use of
borrowed funds to purchase investment securities to leverage the balance sheet.
For the second quarter of 1995, total average earning assets were $472 million
higher than the comparable 1994 period. While the JSB acquisition and increased
leveraging of the balance sheet did cause an increase in net interest income,
these same two factors combined with an unfavorable deposit mix shift to cause
a compression in the Company's net interest margin percentage which is explained
in the following discussion.
.....JSB ACQUISITION.....The Company's core net interest margin performance was
negatively impacted by the JSB acquisition and its lower net interest margin
performance (i.e., During the first half of 1994 prior to the acquisition, JSB's
net interest margin approximated 3.20% compared to the Company's 4.33% NIM
performance for that same period). This lower margin performance at JSB can be
attributed to its more typical savings bank balance sheet mix; this mix includes
a greater proportion of fixed-rate residential and commercial mortgage loans and
more reliance on certificates of deposit, rather than non-interest bearing
demand
deposits, as a funding source. The Company has executed investment portfolio
repositioning strategies to improve JSB's net interest margin performance. The
success of these strategies, however, has been limited by an increase in the
cost of funds from the acquisition date.
24
.....BALANCE SHEET LEVERAGING.....The Company's ongoing strategy to use borrowed
funds to purchase earning assets in order to leverage the balance sheet and
equity also contributed to increased net interest income but a lower net
interest
margin percentage. The source for the borrowed funds is predominately the
Federal Home Loan Bank (FHLB) as each of the Company's subsidiary banks are
members of the FHLB. Examples of FHLB borrowings used by the Company include
one
year term funds tied to 90 day Libor, 30 and 90 day wholesale reverse repurchase
agreements, and overnight Flexline borrowings. For the second quarter of the
1995, the Company's total level of short-term borrowed funds and FHLB advances
amounted to $405 million or 22.5% of total assets compared to an average of $92
million or 7.2% of total assets for the second quarter of 1994. These borrowed
funds had an average cost of 6.14% in the second quarter of 1995 or 179 basis
points greater than the average cost of deposits which amounted to 4.35%. When
compared to the Company's earning asset yield, the net interest spread earned on
assets funded with deposits amounted to 3.35% compared to a net interest spread
of 1.56% on assets funded with short-term borrowed funds. Consequently, this
leveraging strategy contributes to an incremental improvement in net interest
income dollars while causing a regression in the net interest margin percentage.
The maximum amount of leveraging the Company can perform is controlled by
an internal policy requirement to maintain a minimum asset leverage ratio of no
less than 6.0%. (See further discussion under Capital Resources.) The Company
continuously evaluates the approximate $10 million of cash flow received monthly
from the investment portfolio and makes one of the following three decisions
which can impact the leveraged position of the balance sheet:
1) The Company can use the money to fund any loan demand that cannot be
funded with existing cash flow from the loan portfolio or deposits.
2) The Company can use the money to fund new investment security purchases
provided that the incremental spread over the current short-term borrowing cost
is not less than 100 basis points.
3) The Company can use the money to paydown short-term borrowings if the
incremental spread that can be earned on new investment purchases is not deemed
sufficient.
It is recognized that interest rate risk does exist, particularly in a
rising interest rate environment, from this use of borrowed funds to leverage
the
balance sheet. To neutralize a portion of this risk, the Company has executed
a total of $160 million of off-balance sheet hedging transactions which help fix
the variable funding costs associated with the leveraging of the balance sheet
(see further discussion under Note 13).
25
When comparing the net interest margin performance for the second quarter
of 1995 to the first quarter of 1995, the Company's net interest margin declined
by 26 basis points from 3.64% to 3.38%. This decline was caused by a
combination
of an 11 basis point drop in the earning asset yield and a 17 basis point
increase in the cost of funds. The decline in the earning asset yield resulted
from net loan run-off experienced during the second quarter causing the average
loan to deposit ratio to drop 490 basis points from 72.1% to 67.2%. On average,
total loans between quarters were down by $51.5 million with approximately $39
million of the drop caused by a mortgage loan sale and the disposition of a
line
of business, both of which occurred late in the first quarter. The remainder of
the loan decline resulted from the pay-off of several large prime plus floating-
rate commercial and commercial mortgage loans. The 17 basis point increase in
the cost of funds was due to an unfavorable deposit mix shift and increase in
the
cost of borrowed funds. A continued customer preference for certificates of
deposit in the higher interest rate environment was reflected in the migration
of approximately $13.4 million of funds from lower cost savings & NOW accounts
into higher fixed-rate certificates of deposit. The Company did notice a
significant slow down in this certificate of deposit migration late in the
second
quarter. This migration of funds combined with upward repricing on maturing
certificates of deposit to increase the average cost of deposits by 23 basis
points to 4.35%. An eight basis point increase in the cost of borrowed funds
reflects the full quarter impact of the Federal Reserve action to increase
interest rates by 50 basis points on February 1, 1995.
Regarding the separate components of net interest income, the Company's
total tax-equivalent interest income for the second quarter of 1995 increased by
$11.0 million or 50.9% when compared to the same 1994 period. This increase was
due to the previously mentioned $472 million increase in total average earning
assets which caused interest income to rise by $6.3 million. The remainder of
the increase in interest income was caused by a favorable rate variance as the
Company's total earning asset yield increased by 61 basis points to 7.70%.
Within the earning asset base, the yield on total investment securities
increased
by 148 basis points to 6.99% while the yield on the total loan portfolio
increased by 41 basis points to 8.47%. The more significant yield increase in
the investment securities portfolio reflects the benefit of several significant
repositioning strategies executed during the second half of 1994. The yields in
both portfolios were positively impacted by the higher interest rate environment
as the prime rate and fed funds rate were approximately 210 basis points higher
in the second quarter of 1995 as compared to the second quarter of 1994.
Floating-rate assets such as commercial loans tied to prime and adjustable-rate
mortgage-backed securities demonstrate the most immediate repricing benefit in
a rising interest rate environment.
26
The Company's total interest expense for the second quarter of 1995
increased by $9.6 million or 111.0% when compared to the same 1994 period. This
higher interest expense was caused by a combination of an increased volume of
interest bearing liabilities and an unfavorable rate variance. A $3.9 million
volume variance reflects a $489 million increase in average interest bearing
liabilities due to the previously mentioned JSB acquisition and the use of FHLB
borrowings to fund the balance sheet leverage program. The unfavorable rate
variance was due to the higher interest rate environment and previously
discussed
deposit mix shift from lower cost savings accounts into certificates of
deposit.
The increased FHLB borrowings also negatively impacted the liability mix and
overall cost of funds since the cost of these borrowings averaged 6.14% for the
second quarter of 1995 compared to the Company's cost of deposits of 4.35%.
This
4.35% cost of deposits represented an 108 basis point increase from the prior
year quarter and unfavorably increased interest expense by $2.3 million.
It is important to note that the increased deposit cost was attributed
entirely to higher certificate of deposit rates and the mix shift caused by the
customer preference for certificates of deposit in the higher rate environment.
The Company was again able to maintain the pricing on its $459 million of low
cost core savings and NOW accounts during the second quarter of 1995. It has
been management's ongoing pricing strategy to position USBANCORP's deposit rates
within the lowest quartile of deposit rates offered by commercial banks in its
market area. Management believes that a constant level of high quality
service
mitigates the impact this rate positioning strategy has on the deposit base size
and funds availability provided that the rates offered are not appreciably below
competition. The combination of all these price and liability composition
movements caused USBANCORP's average cost of interest bearing liabilities to
increase by 144 basis points from 3.44% during the second quarter of 1994 to
4.88% during the second quarter of 1995.
The table that follows provides an analysis of net interest income on a tax-
equivalent basis setting forth (i) average assets, liabilities, and
stockholders'
equity, (ii) interest income earned on interest earning assets and interest
expense paid on interest bearing liabilities, (iii) average yields earned on
interest earning assets and average rates paid on interest bearing liabilities,
(iv) USBANCORP's interest rate spread (the difference between the average yield
earned on interest earning assets and the average rate paid on interest bearing
liabilities), and (v) USBANCORP's net interest margin (net interest income as a
percentage of average total interest earning assets). For purposes of this
table, loan balances include non-accrual loans and interest income on loans
includes loan fees or amortization of such fees which have been deferred, as
well
as, interest recorded on non-accrual loans as cash is received. Additionally,
a tax rate of approximately 34% is used to compute tax equivalent yields.
27
Three Months Ended June 30 (In thousands, except percentages)
1995 1994
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 $ 815,770 $ 17,240 8.47% $ 740,486 $ 14,887 8.06%
Deposits with banks 8,739 120 5.47 802 6 2.70
Federal funds sold
and securities
purchased under
agreement to resell 3,983 60 5.96 1,758 18 4.22
Investment securities:
Available for sale 306,396 5,647 7.38 216,256 2,754 5.09
Held to maturity 544,115 9,226 6.79 245,238 3,600 5.87
Total investment
securities 850,511 14,873 6.99 461,494 6,354 5.51
Assets held in trust for
collateralized
mortgage obligation 8,425 173 8.23 11,302 249 8.83
Total interest earning
assets/interest income 1,687,428 32,466 7.70 1,215,842 21,514 7.09
Non-interest earning assets:
Cash and due from banks 34,991 37,985
Premises and equipment 18,831 16,732
Other assets 72,473 16,868
Allowance for loan
losses (15,135) (15,724)
TOTAL ASSETS $1,798,588 $1,271,703
CONTINUED ON NEXT PAGE
28
THREE MONTHS ENDED June 30
CONTINUED FROM PREVIOUS PAGE
1995 1994
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Interest bearing
liabilities:
Interest bearing deposits:
Interest bearing demand $ 97,577 $ 353 1.45% $ 101,688 375 1.48%
Savings 232,956 1,127 1.94 230,322 1,085 1.89
Other time 747,974 10,227 5.48 568,914 5,882 4.15
Total interest bearing
deposits 1,078,507 11,707 4.35 900,924 7,342 3.27
Short term borrowings:
Federal funds
purchased, secur-
ities sold under
agreements to
repurchase and other
short-term
borrowings 181,576 2,550 5.65 57,915 560 3.91
Advances from Federal
Home Loan Bank 223,132 3,686 6.54 33,955 415 4.83
Collateralized mortgage
obligation 7,568 239 12.66 10,246 257 10.07
Long-term debt 4,600 47 4.14 2,955 65 8.82
Total interest bearing
liabilities/interest
expense 1,495,383 18,229 4.88 1,005,995 8,639 3.44
Non-interest bearing
liabilities:
Demand deposits 135,025 133,857
Other liabilities 24,943 16,091
Stockholders' equity 143,237 115,760
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $1,798,588 $1,271,703
Interest rate spread 2.82 3.64
Net interest income/
net interest margin 14,237 3.38% 12,875 4.24%
Tax-equivalent adjustment (701) (330)
Net Interest Income $13,536 $12,545
29
.....PROVISION FOR LOAN LOSSES.....The Company's provision for loan losses for
the second quarter of 1995 totalled $75,000 or 0.04% of total loans. This
represented a reduction of $330,000 from the second quarter 1994 provision of
$405,000 or 0.22% of total loans. The continued adequacy of the allowance
for loan losses at each of the Company's banking subsidiaries supported the
reduction in the provision level. The Company applies a consistent methodology
and procedural discipline to evaluate the adequacy of the allowance for loan
losses at each subsidiary bank on a quarterly
basis. At June 30, 1995, the allowance for loan losses at each of the Company's
banking subsidiaries was in compliance with the Company's policy of maintaining
a general unallocated reserve of at least 20% of the systematically
determined minimum reserve need. In total, the Company's general unallocated
reserve was $8.2 million at June 30, 1995. Additionally, the reduction in the
provision level was also supported by a favorable downward trend in classified
assets (i.e. loans classified olem, substandard, or doubtful) experienced
during 1995. Total classified assets dropped by $11 million or 28% from
$39.3 million at December 31, 1994, to $28.3 million at June 30, 1995.
.....NON-INTEREST INCOME.....Non-interest income for the second quarter 1995
totalled $4.5 million which represented a $2.1 million or 83.1% increase when
compared to the same 1994 period. This increase was primarily due to the
following items:
a $725,000 gain realized on the sale of investment securities available for
sale in the second quarter of 1995 compared to a $482,000 loss realized on
investment security transactions in the second quarter of 1994 (a net
favorable shift of $1.2 million). The 1995 gain resulted from the sale of
$68.6 million of adjustable-rate mortgage securities as well as a few small
portfolio clean-up transactions. These sales were executed to (1) provide
liquidity for future funding needs and (2) enhance asset/liability management
positioning whereby lower lifetime cap arm product was replaced with higher
lifetime cap arm product and fixed-rate mortgage pass through securities. The
1994 second quarter loss resulted from a portfolio restructuring designed to
reduce collateralized mortgage obligations in order to significantly lower
the market valuation risk of the available for sale portfolio, enhance yield
performance, and reduce cash flow volatility.
30
Presented on this page was a graphic presentation of trust income by quarter
for the past five quarters. The data points presented were 849, 845, 845, 748,
and 712.
the inclusion of $651,000 of net mortgage servicing income generated from
SMC acquired with the JSB acquisition. This amount resulted from
$936,000 of mortgage servicing fees net of $285,000 of amortization
expense of the cost of
purchased mortgage servicing rights. As of June 30, 1995, this mortgage
banking subsidiary was servicing $1.4 billion of mortgage loans.
a $137,000 or 19.2% increase in trust fees to $849,000 in the second quarter
of 1995. This core trust fee growth is prompted by the profitable expansion
of
the Company's business throughout western Pennsylvania including the Greater
Pittsburgh marketplace. The Trust staff's marketing skills combined with
their proven ability to deliver quality service has been the key to the
Company's growth rate, which has approximated 20% annually for each of the
past four years. While there can be no assurances of continuation of this
trend, these factors provide a foundation for future growth of this
important source of fee income.
a $390,000 increase in other income due in part to $134,000 increase in the
net cash surrender value of a $15 million Bank Owned Life Insurance Policy.
The remainder of the increase was due to additional fee income resulting
from
the JSB acquisition. Examples of fee income sources demonstrating increases
are: ATM transaction charges, other mortgage banking processing fees,
insurance commissions, and check supply sales.
31
Presented on this page was a graphic presentation of non-interest expense for
past four quarters. The data points presented were 12595, 12518, 12760, and
13267.
.....NON-INTEREST EXPENSE.....Non-interest expense for the second quarter of
1995 totalled $12.6 million which represented a $257,000 or 2.0% decrease when
compared to the same 1994 period. This decrease was primarily due to the
following items:
the 1994 second quarter results included a $2.4 million acquisition charge
related to the Company's acquisition of JSB. Included within this line item
were employee severance costs, data processing conversion costs, marketing
and
advertising expenses and other acquisition related costs. There were no
acquisition costs incurred in the second quarter of 1995.
a $1.0 million increase in salaries and employee benefits due to the
addition
of 90 full time equivalent employees ("FTE") associated with the JSB
acquisition, planned wage increases approximating 4.0%, and generally higher
group medical insurance and profit sharing costs. Since the initial quarter
of the JSB acquisition, the Company has reduced FTE by 70 as a result of
economy of scale benefits derived from this intra-market merger.
a $402,000 increase in amortization expense due entirely to the amortization
of the goodwill and core deposit intangibles resulting from the JSB
acquisition. (See further discussion in Note #14.)
a $252,000 increase in net occupancy and equipment expense due to the costs
associated with operating four additional JSB branches and the occupancy and
equipment costs related to the mortgage banking subsidiary.
a $99,000 increase in supplies, postage and freight expense due to the
increase in the size of the customer base and the additional branch offices
associated with the JSB acquisition.
a $90,000 increase in FDIC deposit insurance expense caused by the addition
of approximately $190 million of deposits associated with the JSB
acquisition.
32
.....INCOME TAX EXPENSE.....The Company's provision for income taxes for the
second quarter of 1995 was $1.5 million reflecting an effective tax rate of
28.2%. The Company's 1994 second quarter income tax provision was $863,000
or an effective tax rate of 48.8%. The $660,000 increase in income tax
expense was due entirely to the higher level of pre-tax earnings in the
second quarter of 1995 as the Company
benefitted from a reduction in its effective tax rate. This lower effective
tax rate was caused by increased total tax-free asset holdings which were
$86.5 million higher on average in the second quarter of 1995 as compared to
the second quarter of 1994. The tax-free asset holdings consist of municipal
investment securities,
commercial loan tax anticipation notes, and bank owned life insurance. The 1994
second quarter effective tax rate was also higher than normal due to the non-
deductibility of certain acquisition related costs for tax purposes. Net
deferred income taxes of $5,163,000 have been provided as of June 30, 1995,
on the differences between taxable income for financial and tax reporting
purposes.
SIX MONTHS ENDED JUNE 30, 1995 vs. SIX MONTHS ENDED JUNE 30, 1994
.....PERFORMANCE OVERVIEW.....The Company's net income for the first half of
1995 totalled $7,780,000 or $1.40 per share on a fully diluted basis. The
Company's net income for the first six months of 1994 totalled $3,943,000 or
$0.83 per share on a fully diluted basis. The 1994 results include a
$1,882,000 after-tax acquisition
charge related to the purchase of JSB. The 1995 results reflect a $3.8 million
or 97.3% earnings increase and a $0.57 or 68.7% improvement in fully diluted
earnings per share when compared to the 1994 first six months results. For
the first half of 1995, the Company's return on average equity was 11.15% while
the return on average assets totalled 0.87%.
The Company's improved financial performance was due primarily to a reduced
loan
loss provision, increased non-interest income, and increased net interest income
resulting from the JSB acquisition and greater leveraging of the balance sheet.
These positive items were partially offset by increased non-interest expense
caused
largely by the JSB acquisition. Note, however, that when average quarterly non-
interest expense for the first half of 1995 is compared to total non-interest
expense for the third quarter of 1994 (the first quarter that JSB was reflected
in
the Company's financial results) there was a $711,000 or 5.4% reduction in non-
interest expense due to the Company achieving economy of scale benefits from
this
intra-market merger. In conjunction with the JSB acquisition, the Company also
issued 957,857 new shares of common stock which caused the 17.4% increase in
weighted average fully diluted shares outstanding to 5,573,000. This increase
is
net of the repurchase of 180,956 shares of the Company's common stock since
July 1,
1994. The impact of these net additional shares was the primary reason that the
fully diluted EPS growth rate was lower than the net income growth rate
experienced
in the first half of 1995. The following table summarizes some of the
Company's key
performance indicators (in thousands, except per share and ratios):
33
Six Months Ended Six Months Ended
June 30, 1995 June 30, 1994
Net income $ 7,780 $ 3,943
Fully diluted earnings
per share 1.40 0.83
Return on average assets 0.87% 0.63%
Return on average equity 11.15 6.82
Average fully diluted common
shares outstanding 5,573 4,746
.....NET INTEREST INCOME AND MARGIN.....The following table compares the
Company's net interest income and margin performance for the first six months
of 1995 to the
first six months of 1994 (in thousands, except percentages):
Six Months Ended
June 30
1995 1994 $ Change % Change
Interest income $ 63,988 $ 42,250 21,738 51.5
Interest expense 35,719 16,804 18,915 112.6
Net interest income 28,269 25,446 2,823 11.1
Tax-equivalent
adjustment 1,395 562 833 148.2
Net tax-equivalent
interest income $ 29,664 $ 26,008 3,656 14.1
Net interest margin 3.51% 4.33% (0.82)% *
*Not meaningful.
USBANCORP's net interest income on a tax-equivalent basis increased by
$3,656,000 or 14.1% while the net interest margin percentage declined by 82
basis
points to 3.51%. The increased net interest income was due primarily to a
higher
volume of earning assets resulting from the JSB acquisition and a greater use of
borrowed funds to leverage the balance sheet. For the first half of 1995, total
average earning assets were $490 million higher than the comparable 1994 period.
While the JSB acquisition and increased leveraging of the balance sheet did
cause
an increase in net interest income, these same two factors combined with an
unfavorable deposit mix shift to cause a compression in the Company's net
interest
margin percentage. (See discussion in Net Interest Income and Margin section of
second quarter 1995 vs. second quarter 1994 comparison.)
34
Regarding the separate components of net interest income, the Company's
total tax-equivalent interest income for the first six months of 1995
increased by $22.6 million or 52.7% when compared to the same 1994 period.
This increase was due primarily to the previously mentioned $490 million
increase in total average earning
assets which caused interest income to rise by $13.5 million. The remainder of
the increase in interest income was caused by a favorable rate variance as the
Company's total earning asset yield increased by 61 basis points to 7.76%.
Within the earning asset base, the yield on total investment securities
increased by 157 basis points
to 7.01% while the yield on the total loan portfolio increased by 33 basis
points
to 8.52%. The more significant yield increase in the investment securities
portfolio reflects the benefit of several significant repositioning strategies
executed during the second half of 1994. The yields in both portfolios were
positively impacted by the higher interest rate environment as the prime rate
and fed funds rate were approximately 250 basis points higher in the first
six months of 1995 as compared to the first six months of 1994. Floating- rate
assets such as
commercial loans tied to prime and adjustable- rate mortgage-backed securities
demonstrate the most immediate repricing benefit in a rising interest rate
environment.
The Company's total interest expense for the first six months of 1995
increased by $18.9 million or 112.6% when compared to the same 1994 period.
This higher interest expense was caused by a combination of an increased volume
of interest bearing liabilities and an unfavorable rate variance. A $7.7
million increase in interest expense reflects a $506 million increase in
average interest bearing liabilities due to the previously mentioned JSB
acquisition and the use of
FHLB borrowings to fund the balance sheet leverage program. The unfavorable
rate variance was due to the higher interest rate environment and deposit mix
shift from
lower cost savings accounts into certificates of deposit. This deposit mix
shift
is evidenced by a 6.6% decline in the ratio of low cost deposits to total
deposits
from an average of 56.51% for the first six months of 1994 to an average of
49.9%
for the first six months of 1995. The increased FHLB borrowings also negatively
impacted the liability mix and overall cost of funds since the cost of these
borrowings averaged 6.09% for the first half of 1995 compared to the Company's
cost
of deposits of 4.24%. This 4.24% cost of deposits represented a 98 basis point
increase from the first six months of 1994 and unfavorably increased interest
expense by $4.2 million. The combination of all these price and liability
composition movements caused USBANCORP's average cost of interest bearing
liabilities to increase by 138 basis points from 3.41% during the first six
months
of 1994 to 4.79% during the first six months of 1995.
The table that follows provides an analysis of net interest income on a
tax-equivalent basis setting forth (i) average assets, liabilities, and
stockholders' equity, (ii) interest income earned on interest earning assets
and interest expense
paid on interest bearing liabilities, (iii) average yields earned on interest
earning assets and average rates paid on interest bearing liabilities, (iv)
USBANCORP's interest rate spread (the difference between the average yield
earned
on interest earning assets and the average rate paid on interest bearing
liabilities), and (v) USBANCORP's net interest margin (net interest income as a
percentage of average total interest earning assets). For purposes of this
table,
loan balances include non-accrual loans and interest income on loans includes
loan
fees or amortization of such fees which have been deferred, as well as, interest
recorded on non-accrual loans as cash is received. Additionally, a tax rate of
approximately 34% is used to compute tax equivalent yields.
35
Six Months Ended June 30 (In thousands, except percentages)
1995 1994
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 $ 841,469 $ 35,668 8.52% $ 737,767 $ 30,040 8.19%
Deposits with banks 6,147 193 6.26 1,185 17 2.72
Federal funds sold
and securities.
purchased under
agreement to resell 3,043 98 6.38 2,186 38 3.54
Investment securities:
Available for sale 283,488 10,353 7.31 300,755 7,937 5.27
Held to maturity 547,294 18,724 6.85 146,355 4,259 5.84
Total investment
securities 830,782 29,077 7.01 447,110 12,196 5.44
Assets held in trust for
collateralized
mortgage obligation 8,628 347 8.11 12,089 521 8.69
Total interest earning
assets/interest income 1,690,069 65,383 7.76 1,200,337 42,812 7.15
Non-interest earning assets:
Cash and due from banks 37,283 38,262
Premises and equipment 18,940 16,820
Other assets 66,924 18,517
Allowance for loan
losses (15,362) (15,562)
TOTAL ASSETS $1,797,854 $1,258,374
CONTINUED ON NEXT PAGE
36
SIX MONTHS ENDED June 30
CONTINUED FROM PREVIOUS PAGE
1995 1994
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand $ 98,497 711 1.46% $ 102,435 751 1.48%
Savings 235,963 2,277 1.95 231,597 2,171 1.89
Other time 739,245 19,581 5.34 573,070 11,763 4.13
Total interest bearing
deposits 1,073,705 22,569 4.24 907,102 14,685 3.26
Short term borrowings:
Federal funds
purchased, secur-
ities sold under
agreements to
repurchase and other
short-term
borrowings 186,370 5,214 5.64 39,082 682 3.54
Advances from Federal
Home Loan Bank 225,386 7,329 6.47 32,540 767 4.69
Collateralized mortgage
obligation 7,772 482 12.50 11,027 544 9.95
Long-term debt 5,412 125 4.67 3,107 126 8.21
Total interest bearing
liabilities/interest
expense 1,498,645 35,719 4.79 992,858 16,804 3.41
Non-interest bearing
liabilities:
Demand deposits 134,283 133,113
Other liabilities 24,164 15,884
Stockholders' equity 140,762 116,519
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $1,797,854 $1,258,374
Interest rate spread 2.97 3.74
Net interest income/
net interest margin 29,664 3.51% 26,008 4.33%
Tax-equivalent adjustment (1,395) (562)
Net Interest Income $28,269 $25,446
.....PROVISION FOR LOAN LOSSES.....The Company's provision for loan losses for
the first six months of 1995 totalled $195,000 or 0.05% of total loans compared
to a provision of $810,000 or 0.22% of total loans for the same 1994 period.
The reduced provision in 1995 reflects the continued adequacy of the allowance
for loan losses at each of the Company's banking subsidiaries and a declining
trend in classified assets. At June 30, 1995, the balance in the allowance
for loan losses totalled $14.9 million or 157.2% of total non-performing
assets.
37
.....NON-INTEREST INCOME.....Non-interest income for the first six months of
1995 totalled $8.0 million which represented a $2.9 million or 56.3% increase
when compared to the same 1994 period. This increase was primarily due to the
following items:
a $905,000 gain realized on the disposition of Frontier Finance Company, a
subsidiary of Community Savings Bank. This business line was sold because it
did not fit into the Company's future strategic plans and was not meeting
internal return on equity performance requirements.
a $758,000 loss realized on the sale of loans and loans held for sale in the
first six months of 1995 compared to a $541,000 gain realized in the first six
months of 1994 (a net unfavorable shift of $1.3 million). The 1995 loss
resulted primarily from the first quarter sale of $34 million of fixed-rate
residential mortgage loans with a weighted average coupon of 7.79% and a
weighted average maturity of 168 months. This sale was executed to diversify
the Company's balance sheet mix and reduce its overall dependence on fixed-rate
residential mortgage loans. The majority of the proceeds from the sale were
reinvested in adjustable-rate agency securities to increase the repricing
sensitivity of the Company's earning assets.
the inclusion of $1.3 million of net mortgage servicing income generated from
SMC acquired with the JSB acquisition. This amount resulted from $1.9 million
of mortgage servicing fees net of $570,000 of amortization expense of the cost
of purchased mortgage servicing rights. SMC's servicing portfolio has
benefited from higher interest rates in 1995 as the value of the servicing
portfolio typically increases in a rising interest rate environment due to
slower mortgage prepayment speeds. This consequently results in reduced
amortization expense for purchased mortgage servicing rights as evidenced by
a $176,000 reduction in amortization expense when the second half of 1994 is
compared to the first half of 1995.
a $724,000 gain realized on the sale of investments securities available for
sale in the first half of 1995 compared to a $211,000 loss realized on
investment security transactions in the first half of 1994 (a net favorable
shift of $935,000). The 1995 gain resulted from the sale of $68.6 million of
adjustable- rate mortgage securities as well as a few small portfolio clean up
transactions. These sales were executed to (1) provide liquidity for future
funding needs and (2) enhance asset/liability management positioning whereby
lower lifetime cap arm product was replaced with higher lifetime cap arm
product and fixed rate mortgage pass through securities.
a $264,000 or 18.5% increase in trust fees to $1.7 million in the first six
months of 1995. This core trust fee growth is prompted by the profitable
expansion of the Company's business throughout western Pennsylvania including
the Greater Pittsburgh marketplace.
38
.....NON-INTEREST EXPENSE.....Non-interest expense for the first six months of
1995 totalled $25.1 million which represented a $1.6 million or 6.9% increase
when compared to the same 1994 period. This increase was primarily due to the
following items:
the 1994 results included a $2.4 million acquisition charge related to the
Company's acquisition of JSB. There were no acquisition costs incurred in the
first six months of 1995.
a $2.1 million increase in salaries and employee benefits due to the addition
of 90 full time equivalent employees ("FTE") associated with the JSB
acquisition, planned wage increases approximating 4.0%, and generally higher
group medical insurance and profit sharing costs.
a $783,000 increase in amortization expense due entirely to the amortization
of the goodwill and core deposit intangibles resulting from the JSB
acquisition. (See further discussion in Note #14.)
a $444,000 increase in net occupancy and equipment expense due to the costs
associated with operating four additional JSB branches and the occupancy and
equipment costs related to the mortgage banking subsidiary.
a $203,000 increase in supplies, postage and freight expense due to the
increase in the size of the customer base and the additional branch offices
associated with the JSB acquisition.
a $185,000 increase in FDIC deposit insurance expense caused by the addition
of approximately $190 million of deposits associated with the JSB acquisition.
.....NET OVERHEAD BURDEN.....The Company's net overhead to tax equivalent net
interest income ratio showed improvement as it declined from 61.3% for the first
six
months of 1994 to 57.6% for the first six months of 1995. (The 1994 amount is
exclusive of the acquisition charge.) The successful integration of JSB and the
cost savings from intra-market consolidation related opportunities combined with
higher non-interest income to cause the improvement noted in the first six
months
of 1995. Management has targeted a goal of reducing the Company's net overhead
expense to net interest income ratio to 55% through additional productivity
enhancements, operational efficiencies, and growth of fee income.
39
.....JSB INTEGRATION BENEFITS.....During the first half of 1995, the Company
continued the process of integrating JSB into its U.S. Bank subsidiary in order
to
realize the targeted minimum of $3.8 million of pre-tax savings opportunities
resulting from this intra-market consolidation. Specific cost savings/revenue
generating actions completed since the acquisition included: a computer
conversion
from JSB's outside data processing service bureau to U.S. Bank's internal data
processing system, the consolidation of two JSB branches into the Company's
existing
retail delivery system, the consolidation of back room check clearing and item
processing operations, the consolidation of several administrative functions
such
as executive administration, accounting and internal audit, the transfer of all
subsidiary banks' mortgage servicing to Standard Mortgage Corporation, an
investment portfolio repositioning strategy that resulted in the sale of
approximately 90% of JSB's securities portfolio, and the downward repricing of
several low cost deposit products. The favorable pre-tax benefits recognized
during the first half of 1995 due to these initiatives amounted to
approximately $2.5 million and will approximate
$5.0 million for the full year 1995. The improved total pre-tax benefits from
the integration reflect better than expected net interest margin enhancements
at JSB, as the Company fully expects to garner each dollar of its initial
estimated annual cost savings. Overall, the Company has retained approximately
50 employees or just 42% of the original JSB total (excluding Standard Mortgage
Corporation) of 120 full-time equivalent employees.
.....INCOME TAX EXPENSE.....The Company's provision for income taxes for the
first six months of 1995 was $3.2 million reflecting an effective tax rate of
29.2%. The
Company's income tax provision for the first six months of 1994 was $2.3 million
or an effective tax rate of 37.2%. The $871,000 increase in income tax expense
was due entirely to the higher level of pre-tax earnings in the first half of
1995 as the
Company benefitted from a reduction in its effective tax rate. This lower
effective tax rate was caused by increased total tax-free asset holdings which
were
$86.5 million higher on average in the first six months of 1995 as compared to
the first six months of 1994.
.....BALANCE SHEET.....The Company's total consolidated assets were $1.799
billion
at June 30, 1995, compared with $1.789 billion at December 31, 1994, which
represents a modest increase of $10.1 million or 0.6%. When compared to June 30,
1994, total assets increased by $108 million or 6.4% due to increased leveraging
of the balance sheet through the use of funding sources available from the
Federal Home Loan Bank.
During the first half of 1995, total loans and loans held for sale declined by
approximately $66.3 million or 7.6% due primarily to the sale of $34 million of
fixed-rate residential mortgage loans, a $15 million reduction in consumer loans
due to the disposition of a business line, the early payoff of several large
commercial
loans which totalled approximately $20 million, and continued net loan run-off
experienced in the indirect auto loan portfolio. Total investment securities
increased by $56.5 million as purchases of adjustable-rate mortgage-backed
securities with higher lifetime caps, municipal securities and mortgage
pass-thru securities were made to utilize the funds provided by the overall net
loan portfolio runoff. The increase in other assets reflects the purchase of
a $15 million bank owned life insurance policy.
40
Total deposits increased by $38.2 million or 3.2% since December 31, 1994, with
the increase occurring equally in both non-interest bearing and interest bearing
deposits. The growth in interest bearing deposits has occurred predominately in
certificates of deposit as customers have demonstrated a preference for this
product in the higher interest rate environment. The growth in non-interest
bearing
deposits reflects an unusually large seasonal build up in demand deposits which
dropped to a more typical level a few days after quarter end. This demand
deposit build up was responsible for the $16.8 million federal funds sold
position at June 30, 1995.
The Company's total borrowed funds position declined by $39.4 million since
December 31, 1994, as balance sheet leverage opportunities were limited in
the second quarter
of 1995 due to a decline in the steepness of the yield curve. Accordingly, the
Company used funds generated from interest bearing deposit growth and the cash
flow from the securities portfolio to paydown FHLB borrowings. Overall, the
Company's asset leverage ratio increased by 26 basis points to 6.90% at
June 30, 1995.
The Company now carries $20.0 million of goodwill and $5.8
million of core deposit intangible assets on its balance sheet. The majority
of these intangible assets were originated with the JSB acquisition. The
Company paid this premium for JSB and believes its franchise value has been
strengthened by the acquisition for several reasons:
JSB's customer base, branch locations, and approximately $190 million of stable
low cost core deposits allowed the Company to obtain a 25% market share
leadership position in Cambria County - one of its primary markets.
the intra-market consolidation opportunities are generating significant
ongoing earnings enhancements.
.....MARKET AREA ECONOMY.....The economy-at-large can best be described as
"lackluster," with the majority of the market area experiencing little to no
economic growth. Although inflationary pressures are receding in response to
the
Federal Reserve's tight monetary policy, consumer loan demand has slowed to a
"trickle." Both the suburban Pittsburgh and Johnstown Region's have experienced
little growth in deposit volumes. Lending activity can best be described in
both
regions as steady. Loan payments continued to exceed new volume, causing loans
outstanding to steadily decline.
Cambria County continues to progress from a region of core steel manufacturing
to a more diversified business environment. Two Johnstown hospitals, Conemaugh
Hospital and Good Samaritan Medical Center, have embarked on a study to merge
some administrative functions, programs, and facilities. Significant cost
savings could be realized if the project is successfully implemented.
Additionally, the officials of the Cambria County War Memorial have entered
into a feasibility study on expanding the facility into a mini-convention
center.
41
In the suburban Pittsburgh Region, abandoned industrial sites in the Pittsburgh
area may become easier to transform thanks to legislators in Harrisburg. Passed
by the House and the Senate, Governor Ridge signed legislation which makes
"brownfield" sites (former industrial sites) that require environmental
rehabilitation easier to develop.
.....LOAN QUALITY.....USBANCORP's written lending policies require underwriting,
credit analysis, and loan documentation standards be met prior to funding any
loan.
After the loan has been approved and funded, continued periodic credit review is
required. Annual credit reviews are mandatory for all commercial loans in
excess of $100,000 and for all commercial mortgages in excess of $250,000. In
addition, due to the secured nature of residential mortgages and the smaller
balances of individual installment loans, sampling techniques are used on a
continuing basis for credit reviews in these loan areas.
The following table sets forth information concerning USBANCORP's loan
delinquency and other non-performing assets (in thousands, except percentages):
June 30 December 31 June 30
1995 1994 1994
Total loan delinquency (past due
30 to 89 days) $10,340 $12,832 $11,852
Total non-accrual loans 5,929 5,446 4,416
Total non-performing assets<F1> 9,467 7,901 6,649
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 1.29% 1.48% 1.41%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned
income 0.74 0.63 0.52
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 1.18 0.91 0.79
<F1>Non-performing assets are comprised of (i) loans that are on a non-accrual
basis, (ii) loans that are contractually past due 90 days or more as to
interest and principal payments some of which are insured for credit loss,
and (iii) other real estate owned.
At June 30, 1995, non-accrual loans as a percentage of total loans and
loans held for sale, net of unearned income, were 0.74%. Total non-performing
assets as a percentage of total loans and loans held for sale, net of
unearned income, and other real estate owned were 1.18% at this same date.
Both of these amounts increased from December 31, 1994, due to a higher
amount of non-performing mortgage loans and a reduced level of total loans
outstanding. Total loan delinquency (past due 30 to 89 days) decreased by
$2.5 million, when compared to December 31, 1994,
causing the ratio to total loans to decrease to 1.29%.
42
Potential problem loans consist of loans which are included in performing
loans, but for which potential credit problems of the borrowers have caused
management to have concerns as to the ability of such borrowers to comply with
present repayment terms. At June 30, 1995, all identified potential problem
loans were included in the preceding table.
.....ALLOWANCE FOR LOAN LOSSES.....The following table sets forth changes in the
allowance for loan losses and certain ratios for the periods ended (in
thousands, except percentages):
June 30 December 31 June 30
1995 1994 1994
Allowance for loan losses $ 14,886 $ 15,590 $ 19,247
Amount in the allowance
for loan losses
allocated to "general risk" 8,192 6,643 8,629
Allowance for loan losses as
a percentage of each of
the following:
total loans and loans
held for sale,
net of unearned income 1.86% 1.80% 2.29%
total delinquent loans
(past due 30 to 89 days) 143.97 121.49 162.39
total non-accrual loans 251.07 286.27 435.85
total non-performing assets 157.24 197.32 289.47
Since December 31, 1994, the balance in the allowance for loan losses has
declined by $704,000 to $14.9 million. The disposition of a business line
reduced the allowance for loan losses by $342,000. The remainder of the
decline was due to
net charge-offs exceeding the loan loss provision by $362,000. During the first
six months of 1995, net charge-offs amounted to $557,000 or 0.13% of total loans
compared to net charge-offs of $245,000 or 0.07% of total loans for the same
1994 period. The higher 1995 amount resulted from the charge-off of $350,000 of
commercial loans which had been allocated for within the allowance for loan
losses.
The portion of the Company's allowance which is allocated to "general risk"
and not to any particular loan or loan category increased to $8.2 million at
June 30, 1995. The amount of the reserve allocated to general risk now
represents 55.0% 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.
43
For static GAP analysis, USBANCORP typically defines interest rate
sensitive assets and liabilities as those that reprice within six months or one
year. Maintaining an appropriate match is one method of avoiding wide
fluctuations in net
interest margin during periods of changing interest rates. The difference
between
rate sensitive assets and rate sensitive liabilities is known as the "interest
sensitivity GAP." A positive GAP occurs when rate sensitive assets exceed rate
sensitive liabilities repricing in the same time period and a negative GAP
occurs when rate sensitive liabilities exceed rate sensitive assets repricing
in the same
time period. A GAP ratio (rate sensitive assets divided by rate sensitive
liabilities) of one indicates a statistically perfect match. A GAP ratio of
less than one suggests that a financial institution may be better positioned
to take advantage of declining interest rates rather than increasing interest
rates, and a GAP ratio of more than one suggests the converse.
The following table presents a summary of the Company's static GAP
positions (in thousands, except for the GAP ratios):
June 30 December 31 June 30
1995 1994 1994
Six month cumulative GAP
RSA................ $ 537,659 $ 487,450 $ 403,474
RSL................ (692,610) (673,196) (536,740)
Off-balance sheet
hedges.......... 50,000 90 000 -
GAP................ $(104,951) $ (95,746) $(133,266)
GAP ratio.......... 0.84X 0.84X 0.75X
GAP as a % of total
assets.......... (5.83)% (5.35)% (7.88)%
GAP as a % of total
capital......... (71.58) (69.82) (97.20)
One year cumulative GAP
RSA................ $ 721,672 $ 675,875 $ 597,293
RSL................ (839,446) (849,153) (693,816)
Off-balance sheet
hedges.......... 50,000 (10,000) -
GAP................ $ (67,774) $(183,278) $ (96,523)
GAP ratio.......... 0.91X 0.79X 0.86X
GAP as a % of total
assets.......... (3.77)% (10.25)% (5.71)%
GAP as a % of total
capital......... (46.22) (133.65) (70.40)
When June 30, 1995, is compared to December 31, 1994, the Company's six
month cumulative GAP ratio was relatively constant while the one year cumulative
GAP ratio became less negative. As separately disclosed in the above table, the
hedge transactions (described in detail in Note #13) reduced the negativity of
both the six month and one year GAP by $50 million. The purchase of adjustable-
rate mortgage-backed securities throughout the first half of 1995 to replace
maturing securities and the $34 million of sold fixed-rate mortgage loans
increased the earning asset sensitivity and also contributed to the reduction in
the negativity of the one year static GAP position.
44
A portion of the Company's funding base is low cost core deposit accounts
which do not have a specific maturity date. The accounts which comprise these
low cost core deposits include passbook savings accounts, money market accounts,
NOW accounts, daily interest savings accounts, purpose clubs, etc. At June 30,
1995, the balance in these accounts totalled $459 million or 25.5% of total
assets. Within the above static GAP table, approximately $135 million or 30%
of the total low cost core deposits are assumed to be rate sensitive liabilities
which reprice in one year or less; this 30% assumption is based upon historical
experience in varying interest rate environments and is consistently used for
all
GAP ratios presented. The Company recognizes that the pricing of these accounts
is somewhat inelastic when compared to normal rate movements and generally
assumes that up to a 250 basis point increase in rates will not necessitate a
change in the cost of these accounts. Indeed, throughout 1994 and the first
half
of 1995, the Company has been able to hold steady the pricing of these accounts
despite seven Federal Reserve rate movements which caused a total 300 basis
point
increase in both the fed funds and prime rate. Given the 25 basis point
reduction in the federal funds rate announced by the Federal Reserve in early
July, the Company believes it will be able to maintain the current pricing on
low cost accounts through the remainder of 1995.
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, 1995,
these varied economic interest rate simulations indicated that the maximum
negative variability of USBANCORP's net interest income over the next twelve
month period was -4.0% under an upward rate shock forecast reflecting a 200
basis
point increase in interest rates. Capital impairment under this simulation
was estimated to be less than 2.0%. A more moderate near-term forecast
simulation reflecting a 125 basis point increase in rates indicates net interest
income variability of -1.8% and capital impairment of less than 1.0%. The
off balance sheet borrowed funds hedge transactions also helped reduce the
variability of forecasted net
interest income in a rising interest rate environment. The Company's asset
liability management policy seeks to limit net interest income variability to
plus or minus 7.5%.
Within the investment portfolio, 37.7% of the portfolio is currently
classified as available for sale and 62.3% 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 and provide liquidity if needed. Furthermore, it is the
Company's intent to continue to diversify its loan portfolio to increase
liquidity and rate sensitivity and to better manage USBANCORP's long-term
interest rate risk by continuing to sell newly originated 30 year mortgage
loans.
The Company will retain servicing rights at its mortgage banking subsidiary and
recognize fee income over the remaining lives of the loans sold at an average
rate of approximately 30 basis points on the loan balances outstanding.
45
.....LIQUIDITY.....Financial institutions must maintain liquidity to meet day-
to-day requirements of depositor and borrower customers, take advantage of
market
opportunities, and provide a cushion against unforeseen needs. Liquidity needs
can be met by either reducing assets or increasing liabilities. Sources of
asset
liquidity are provided by short-term investment securities, time deposits with
banks, federal funds sold, banker's acceptances, and commercial paper. These
assets totalled $187 million at June 30, 1995, $146 million at December 31,
1994,
and $167 million at March 31, 1994. Maturing and repaying loans as well as the
monthly cash flow associated with certain asset- and mortgage-backed securities
are other sources of asset liquidity.
Liability liquidity can be met by attracting deposits with competitive
rates, using repurchase agreements, buying federal funds, or utilizing the
facilities of the Federal Reserve or the Federal Home Loan Bank systems.
USBANCORP's subsidiaries utilize a variety of these methods of liability
liquidity. At June 30, 1995, USBANCORP's subsidiaries had approximately $168.4
million of unused lines of credit available under informal arrangements with
correspondent banks compared to $137.6 million at June 30, 1994. These lines of
credit enable USBANCORP's subsidiaries to purchase funds for short-term needs at
current market rates. Additionally, each of the Company's subsidiary banks are
members of the Federal Home Loan Bank which provides the opportunity to obtain
intermediate to longer-term advances up to approximately 80% of their investment
in assets secured by one-to-four family residential real estate. This would
suggest a current total available Federal Home Loan Bank borrowing capacity of
approximately $339 million. Furthermore, USBANCORP had available at June 30,
1995, $1.5 million of a total $2.5 million unsecured line of credit.
Liquidity can be further analyzed by utilizing the Consolidated Statement
of Cash Flows. Cash equivalents increased by $9.8 million from December 31,
1994, to June 30, 1995, due primarily to $12.5 million of net cash provided by
operating activities. Investing activities provided net cash of $3.7 million
during the first half of 1995 while financing activities used $6.4 million of
net
cash during that same period. Within investing activities, purchases of
investment securities exceeded the cash proceeds from investment security
maturities and sales by approximately $45.6 million. Cash advanced for new loan
fundings totalled $129 million and was approximately $64.6 million less than the
cash received from loan principal payments and sales. Within financing
activities, cash generated from the sale of new certificates of deposit exceeded
cash payments for maturing certificates of deposit by $44.1 million.
46
.....EFFECTS OF INFLATION.....USBANCORP's asset and liability structure is
primarily monetary in nature. As such, USBANCORP's assets and liabilities tend
to move in concert with inflation. While changes in interest rates may have an
impact on the financial performance of the banking industry, interest rates do
not necessarily move in the same direction or in the same magnitude as prices of
other goods and services and may frequently reflect government policy
initiatives or economic factors not measured by a price index.
.....CAPITAL RESOURCES.....The following table highlights the Company's
compliance with the required regulatory capital ratios for each of the periods
presented (in thousands, except ratios):
June 30, 1995 December 31, 1994 June 30, 1994
Amount Ratio Amount Ratio Amount Ratio
RISK-ADJUSTED
CAPITAL RATIOS
Tier 1 capital $ 122,453 13.09% $ 117,480 12.45% $ 109,371 9.67%
Tier 1 capital
minimum
requirements 37,408 4.00 37,745 4.00 45,242 4.00
Excess $ 85,045 9.09% $ 79,735 8.45% $ 64,129 5.67%
Total capital $ 134,143 14.34% $ 129,275 13.70% $ 123,509 10.92%
Total capital
minimum
requirements 74,816 8.00 75,489 8.00 90,485 8.00
Excess $ 59,327 6.34% $ 53,786 5.70% $ 33,024 2.29%
Total risk-
adjusted
assets $ 935,199 $ 943,614 $1,131,057
ASSET LEVERAGE
RATIO
Tier 1 capital $ 122,453 6.90% $ 117,480 6.64% $ 109,371 6.58%
Minimum
requirements 88,739 5.00 88,462 5.00 83,171 5.00
Excess $ 33,714 1.90% $ 29,018 1.64% $ 26,200 1.58%
Total adjusted
assets $1,774,782 $1,769,234 $1,663,411
Between December 31, 1994, and June 30, 1995, there was an increase in each
of the regulatory capital ratios due to overall net growth in equity and a
reduction in the Company's borrowed funds position. The Company did repurchase
53,256 shares or $1.2 million of its common stock during the second quarter of
1995. Through June 30, 1995, the Company has repurchased a total of 180,956
shares of its common stock at a total cost of $4.3 million. The Company
recently
received approval from a correspondent bank for a $10 million line of credit
which will be used as needed for the buyback of common stock. The Company
currently estimates that it will repurchase approximately $2 to $3 million of
its common stock on a quarterly basis.
47
The Company exceeds all regulatory capital ratios for each of the periods
presented. Furthermore, each of the Company's subsidiary banks are considered
"well capitalized" under all applicable FDIC regulations. It is the Company's
ongoing intent to continue to prudently leverage the capital base in an effort
to increase return on equity performance while maintaining necessary capital
requirements. It is, however, the Company's intent to maintain the FDIC "well
capitalized" classification for each of its subsidiaries to ensure the lowest
deposit insurance premium and to maintain an asset leverage ratio of no less
than 6.0%.
The Company's declared Common Stock cash dividend per share was $0.52 for
the first six months of 1995 which was a 10.6% increase over the $0.47 per share
dividend for the same 1994 interim period. The dividend yield on the Company's
common stock now approximates 4.5% compared to an average common dividend yield
for Pennsylvania bank holding companies of approximately 3.0%. The Company
remains committed to a progressive total shareholder return which includes
maintaining the common dividend at a higher level than peer.
48
Presented on this page was a service area map reflecting the six counties
serviced by USBANCORP, Inc.
<page)49
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of shareholders of USBANCORP, Inc. was held on April
25, 1995. The results of the items submitted for a vote are as follows:
The proposed Executive Annual Incentive Plan:
Number of Votes % of total
Cast outstanding
shares
For 4,100,403 73.422%
Against 231,818 4.151%
Abstain 71,696 1.284%
The proposed amendment to the 1991 Stock Option Plan:
Number of Votes % of total
Cast outstanding
shares
For 4,053,493 72.582%
Against 375,844 6.730%
Abstain 76,096 1.363%
The proposed Independent Directors Annual Retainer Plan:
Number of Votes % of total
Cast outstanding
shares
For 4,102,268 73.455%
Against 232,019 4.155%
Abstain 69,630 1.247%
The following six Directors, whose term will expire in 1998, were re-
elected:
Number of Votes % of total
Cast for Class II outstanding
Director shares
Michael F. Butler 4,420,977 79.162%
James C. Dewar 4,399,107 78.770%
Terry K. Dunkle 4,414,826 79.052%
Dennis J. Fantaski 4,421,709 79.175%
John H. Kunkle, Jr. 4,209,657 75.378%
Jack Sevy 4,418,066 79.110%
50
The following Directors' terms will continue after this meeting:
Directors whose term will Directors whose term will
expire in 1996: expire in 1997:
Jerome M. Adams Clifford A. Barton
Robert A. Allen Louis Cynkar
James M. Edwards, Sr. James F. O'Malley
Richard W. Kappel Frank J. Pasquerilla
James C. Spangler Thomas C. Slater
Robert L. Wise W. Harrison Vail
There were 2,149 votes disqualified in all matters voted upon at the
1994 USBANCORP Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
The exhibits listed below are filed herewith or to other filings.
(a) Exhibit
3.1 Articles of Incorporation, as amended on
February 24, 1995.
3.2 Bylaws, as amended and restated on
February 24, 1995.
15.1 Letter re: unaudited interim financial
information.
27 Financial Data Schedule.
(b) Reports on Form 8-K
USBANCORP, Inc. corporate restructuring plan dated
May 1, 1995.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USBANCORP, Inc.
Registrant
Date: August 14, 1995 /s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: August 14, 1995 /s/Orlando B. Hanselman
Orlando B. Hanselman
Executive Vice President
and Chief Financial Officer
51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
USBANCORP, Inc.:
We have reviewed the accompanying consolidated balance sheets of
USBANCORP, Inc. (a Pennsylvania corporation) and Subsidiaries as
of June 30, 1995 and 1994, and the related consolidated
statements of income, changes in stockholders' equity and cash
flows for the three- and six-month periods ended June 30, 1995
and 1994. These financial statements are the responsibility of
the Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of USBANCORP,
Inc. as of December 31, 1994, and, in our report dated January
27, 1995, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the consolidated
balance sheet as of December 31, 1994, is fairly stated, in all
material respects, in relation to the balance sheet from which it
has been derived.
/s/ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
July 20, 1995
52
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 responsibilities, management relies on internal accounting and
related control systems, which include selection and training of qualified
personnel, establishment and communication of accounting and administrative
policies and procedures, appropriate segregation of responsibilities, and
programs of internal audit. These systems are designed to provide reasonable
assurance that financial records are reliable for preparing financial statements
and maintaining accountability for assets, and that assets are safeguarded
against unauthorized use or disposition. Such assurance cannot be absolute
because of inherent limitations in any internal control system.
Management also recognizes its responsibility to foster a climate in which
Company affairs are conducted with the highest ethical standards. The Company's
Code of Conduct, furnished to each employee and director, addresses the
importance of open internal communications, potential conflicts of interest,
compliance with applicable laws, including those related to financial
disclosure, the confidentiality of propriety information, and other items.
There is an ongoing program to assess compliance with these policies.
The Audit Committee of the Company's Board of Directors consists solely of
outside directors. The Audit Committee meets periodically with management and
the independent accountants to discuss audit, financial reporting, and related
matters. Arthur Andersen LLP and the Company's internal auditors have direct
access to the Audit Committee.
/s/Terry K. Dunkle /s/Orlando B. Hanselman
Terry K. Dunkle Orlando B. Hanselman
Chairman, President & Executive Vice President &
Chief Executive Officer Chief Financial Officer
53