UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the
X Securities Exchange Act of 1934
For the period ended March 31, 1996
Transaction Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transaction period from to
Commission File Number 0-11204
USBANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1424278
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization
Identification No.)
Main & Franklin Streets, P.O. Box 430, Johnstown, PA 15907-0430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 533-5300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
X Yes No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 30, 1996
Common Stock, par value $2.50 5,186,539
per share
1
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
March 31, 1996, December 31, 1995,
and March 31, 1995 3
Consolidated Statement of Income -
Three Months Ended March 31, 1996,
and 1995 4
Consolidated Statement of Changes
in Stockholders' Equity -
Three Months Ended
March 31, 1996, and 1995 6
Consolidated Statement of Cash Flows -
Three Months Ended
March 31, 1996, and 1995 7
Notes to Consolidated Financial
Statements 8
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations 23
Part II. Other Information 41
2
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
March 31 December 31 March 31
1996 1995 1995
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 40,906 $ 45,771 $ 38,665
Interest bearing deposits with
banks 5,981 647 6,707
Federal funds sold and securities
purchased under agreements to
resell - 13,750 15,000
Investment securities:
Available for sale 446,455 427,112 320,624
Held to maturity (market value
$469,620 on March 31, 1996,
$471,191 on December 31, 1995,
and $521,288 on March 31, 1995) 469,897 463,951 526,613
Assets held in trust for collateralized
mortgage obligation 6,675 7,099 8,688
Loans held for sale 6,917 5,224 2,346
Loans 836,751 832,126 823,458
Less: Unearned income 2,680 2,716 2,874
Allowance for loan losses 14,720 14,914 15,258
Net Loans 819,351 814,496 805,326
Premises and equipment 18,283 18,588 18,780
Accrued income receivable 16,661 16,752 17,425
Mortgage servicing rights 11,212 11,372 11,609
Goodwill and core deposit intangibles 23,247 23,838 26,407
Other assets 37,995 36,772 14,104
TOTAL ASSETS $ 1,903,580 $ 1,885,372 $ 1,812,294
LIABILITIES
Non-interest bearing deposits $ 135,416 $ 145,379 $ 132,334
Interest bearing deposits 1,034,538 1,032,479 1,084,014
Total deposits 1,169,954 1,177,858 1,216,348
Federal funds purchased and
securities sold under agreements
to repurchase 53,382 63,828 125,334
Other short-term borrowings 39,163 30,528 68,126
Advances from Federal Home Loan Bank 459,326 428,217 222,696
Collateralized mortgage obligation 6,117 6,548 7,836
Long-term debt 4,833 5,061 5,550
Other liabilities 21,798 22,840 23,382
TOTAL LIABILITIES 1,754,573 1,734,880 1,669,272
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;
5,739,451 shares issued and 5,266,539
outstanding on March 31, 1996;
5,733,701 shares issued and
5,310,489 outstanding on December 31,
1995; 5,712,922 shares issued and
5,585,222 outstanding on
March 31, 1995 14,349 14,334 14,282
Treasury stock at cost, 472,912 shares
on March 31, 1996, 423,212 shares
on December 31, 1995, and 127,700
shares on March 31, 1995 (12,651) (11,007) (3,064)
Surplus 93,465 93,361 92,970
Retained earnings 53,922 50,401 42,858
Net unrealized (losses) gains on
available for sale securities (78) 3,403 (4,024)
TOTAL STOCKHOLDERS' EQUITY 149,007 150,492 143,022
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,903,580 $ 1,885,372 $ 1,812,294
See accompanying notes to consolidated financial statements.
3
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
Three Months Ended
March 31
1996 1995
INTEREST INCOME
Interest and fees on loans and loans held
for sale:
Taxable $ 17,528 $ 17,610
Tax exempt 367 617
Deposits with banks 17 73
Federal funds sold and securities
purchased under agreements to
resell 6 38
Investment securities:
Available for sale 6,862 4,466
Held to maturity 7,855 9,245
Assets held in trust for collateralized
mortgage obligation 132 174
Total Interest Income 32,767 32,223
INTEREST EXPENSE
Deposits 10,694 10,862
Federal funds purchased and securities
sold under agreements to repurchase 657 2,111
Other short-term borrowings 390 553
Advances from Federal Home Loan Bank 6,320 3,643
Collateralized mortgage obligation 135 243
Long-term debt 71 78
Total Interest Expense 18,267 17,490
NET INTEREST INCOME 14,500 14,733
Provision for loan losses 23 120
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 14,477 14,613
NON-INTEREST INCOME
Trust fees 919 845
Net gains (losses) on investment securities 255 (1)
Net gains (losses) on loans held for sale 235 (866)
Gain on disposition of business line - 905
Wholesale cash processing fees 267 289
Service charges on deposit accounts 760 708
Net mortgage servicing fees 507 682
Other income 1,587 926
Total Non-Interest Income 4,530 3,488
NON-INTEREST EXPENSE
Salaries and employee benefits 6,119 6,424
Net occupancy expense 1,144 1,096
Equipment expense 875 887
Professional fees 684 573
Supplies, postage, and freight 648 651
Miscellaneous taxes and insurance 366 327
FDIC deposit insurance expense 166 682
Amortization of goodwill and
core deposit intangibles 591 602
Other expense 1,718 1,276
Total Non-Interest Expense $ 12,311 $ 12,518
4
CONSOLIDATED STATEMENT OF INCOME
CONTINUED FROM PREVIOUS PAGE
Three Months Ended
March 31
1996 1995
INCOME BEFORE INCOME TAXES 6,696 5,583
Provision for income taxes 1,753 1,684
NET INCOME $ 4,943 $ 3,899
PER COMMON SHARE DATA:
Primary:
Net income $ 0.93 $ 0.70
Average shares outstanding 5,312,157 5,583,227
Fully Diluted:
Net income $ 0.93 $ 0.70
Average shares outstanding 5,312,423 5,583,227
Cash Dividend Declared $ 0.27 $ 0.25
See accompanying notes to consolidated financial statements.
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, 1994 $ - $ 14,275 $ (3,064) $ 92,923 $ 40,355 $ (7,353) $137,136
Net Income - - - - 3,899 - 3,899
Dividend reinvestment
and stock purchase plan - 7 - 47 - - 54
Net unrealized holding
gains (losses) on
investment securities - - - - - 3,329 3,329
Cash dividends
declared:
Common stock
($0.25 per share
on 5,584,722
shares) - - - - (1,396) - (1,396)
Balance March 31, 1995 $ - $ 14,282 $ (3,064) $ 92,970 $ 42,858 $ (4,024) $143,022
Balance December 31, 1995 $ - $ 14,334 $(11,007) $ 93,361 $ 50,401 $ 3,403 $150,492
Net Income - - - - 4,943 - 4,943
Dividend reinvest-
ment and stock
purchase plan - 15 - 104 - - 119
Net unrealized
holding gains
(losses) on
investment securities - - - - - (3,481) (3,481)
Treasury Stock, 49,700
shares at cost - - (1,644) - - - (1,644)
Cash dividends
declared:
Common stock
($0.27 per share
on 5,266,539 shares) - - - - (1,422) - (1,422)
Balance March 31, 1996 $ - $ 14,349 $(12,651) $ 93,465 $ 53,922 $ (78) $149,007
See accompanying notes to consolidated financial statements.
6
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
Three Months Ended
March 31
1996 1995
OPERATING ACTIVITIES
Net income $ 4,943 $ 3,899
Adjustments to reconcile net income to net cash
provided by operating activities:
Origination of mortgage loans held for sale (36,710) (9,294)
Sales of mortgage loans held for sale 42,282 14,881
Provision for loan losses 23 120
Depreciation and amortization expense 660 591
Amortization expense of goodwill and core
deposit intangibles 591 602
Amortization expense of mortgage servicing rights 370 285
Net amortization (accretion) of investment securities 63 (1,217)
Net realized (gains) losses on investment securities (255) 1
Net realized (gains) losses on loans and loans
held for sale (235) 866
Decrease (increase) in accrued income receivable 91 (531)
(Decrease) increase in accrued expense payable (2,110) 1,136
Net cash provided by operating activities 9,713 11,339
INVESTING ACTIVITIES
Purchases of investment securities and other
short-term investments (165,167) (70,460)
Proceeds from maturities of investment securities and
other short-term investments 49,755 13,304
Proceeds from sales of investment securities and
other short-term investments 84,961 348
Long-term loans originated (81,021) (88,408)
Mortgage loans held for sale (6,917) (2,346)
Principal collected on long-term loans 76,293 94,979
Loans purchased or participated (200) (587)
Loans sold or participated 50 34,335
Net decrease (increase) in credit card receivable
and other short-term loans (113) 196
Purchases of premises and equipment (355) (405)
Sale/retirement of premises and equipment - 134
Net decrease in assets held in trust for
collateralized mortgage obligation 424 416
Net increase mortgage servicing rights (210) (442)
Net decrease (increase) in other assets 650 (962)
Net cash used by investing activities (41,850) ( 19,898)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit 66,958 168,289
Payments for maturing certificates of deposits (69,509) (120,716)
Net decrease in demand and savings deposits (5,353) (27,471)
Net decrease in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings (1,811) (25,124)
Net principal borrowings of advances
from Federal Home Loan Bank 30,678 22,187
Repayments of long-term debt (228) (256)
Common stock cash dividends paid - (1,404)
Proceeds from dividend reinvestment, stock
purchase plan, and stock options exercised 119 54
Purchases of treasury stock (1,644) -
Net decrease in other liabilities (354) (519)
Net cash provided by financing activities 18,856 15,040
NET INCREASE (DECREASE) IN CASH EQUIVALENTS (13,281) 6,481
CASH EQUIVALENTS AT JANUARY 1 60,168 53,891
CASH EQUIVALENTS AT MARCH 31 $ 46,887 $ 60,372
See accompanying notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The consolidated financial statements include the accounts of
USBANCORP, Inc. (the "Company") and its wholly-owned subsidiaries,
United States National Bank in Johnstown ("U.S. Bank"), Three Rivers
Bank and Trust Company ("Three Rivers Bank"), Community Bancorp,
Inc. ("Community"), USBANCORP Trust Company ("Trust Company"), and
United Bancorp Life Insurance Company ("United Life"). In addition,
the Parent Company is an administrative group that provides support
in such areas as audit, finance, investments, loan review, general
services, loan policy, and marketing. Intercompany accounts and
transactions have been eliminated in preparing the consolidated
financial statements.
2. Basis of Preparation
The unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information. In the opinion of management,
all adjustments that are of a normal recurring nature and are
considered necessary for a fair presentation have been included.
They are not, however, necessarily indicative of the results of
consolidated operations for a full year.
With respect to the unaudited consolidated financial
information of the Company for the three month periods ended March
31, 1996, and 1995, 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 review report dated April 19,
1996, 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, 1995, 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, 1995.
8
3. Earnings Per Common Share
The Company uses the treasury stock method to calculate common
stock equivalent shares outstanding for purposes of determining both
primary and fully diluted earnings per share. Treasury shares are
treated as retired for earnings per share purposes.
4. 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. For the
Parent Company, cash equivalents also include short-term
investments. The Company made $1,011,000 in income tax payments in
the first quarter of 1996 as compared to $166,000 for the first
three months of 1995. Total interest expense paid amounted to
$20,377,000 in 1996's first three months compared to $15,314,000 in
the same 1995 period.
5. 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," which specifies a
methodology for the classification of securities as either held to
maturity, available for sale, or as trading assets. Securities are
classified at the time of purchase as investment securities held to
maturity if it is management's intent and the Company has the
ability to hold the securities until maturity. These held to
maturity securities are carried on the Company's books at cost,
adjusted for amortization of premium and accretion of discount which
is computed using the level yield method which approximates the
effective interest method. Alternatively, securities are classified
as available for sale if it is management's intent at the time of
purchase to hold the securities for an indefinite period of time
and/or to use the securities as part of the Company's
asset/liability management strategy. Securities classified as
available for sale include securities which may be sold to
effectively manage interest rate risk exposure, prepayment risk, and
other factors (such as liquidity requirements). These available for
sale securities are reported at fair value with unrealized aggregate
appreciation/(depreciation) excluded from income and
credited/(charged) to a separate component of shareholder's equity
on a net of tax basis. The Company presently does not engage in
trading activity. Realized gain or loss on securities sold was
computed upon the adjusted cost of the specific securities sold.
The book and market values of investment securities are summarized
as follows (in thousands):
9
Investment securities available for sale:
March 31, 1996
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 13,941 $ 276 $ (36) $ 14,181
U.S. Agency 1,548 - (23) 1,525
State and municipal 57,255 1,016 (151) 58,120
U.S. Agency mortgage-backed
securities 345,942 3,284 (3,983) 345,243
Other securities<F1> 27,386 - - 27,386
Total $446,072 $ 4,576 $ (4,193) $446,455
Investment securities held to maturity:
March 31, 1996
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 6,068 $ 9 $ (13) $ 6,064
U.S. Agency 23,527 90 (97) 23,520
State and municipal 102,167 1,040 (616) 102,591
U.S. Agency mortgage-backed
securities 334,825 2,386 (3,118) 334,093
Other securities<F1> 3,310 43 (1) 3,352
Total $469,897 $ 3,568 $ (3,845) $469,620
Investment securities available for sale:
December 31, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 22,431 $ 421 $ (14) $ 22,838
U.S. Agency 12,408 7 (27) 12,388
State and municipal 58,698 1,269 (89) 59,878
U.S. Agency mortgage-backed
securities 296,669 4,784 (311) 301,142
Other securities<F1> 30,869 1 (4) 30,866
Total $421,075 $ 6,482 $ (445) $427,112
Investment securities held to maturity:
December 31, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 796 $ 11 $ - $ 807
U.S. Agency 31,512 511 (9) 32,014
State and municipal 97,900 1,973 (140) 99,733
U.S. Agency mortgage-backed
securities 330,312 5,777 (957) 335,132
Other securities<F1> 3,431 75 (1) 3,505
Total $463,951 $ 8,347 $ (1,107) $471,191
<F1>Other investment securities include corporate
notes and bonds, asset-backed securities, and equity securities.
10
Investment securities available for sale:
March 31, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 23,413 $ 177 $ (242) $ 23,348
U.S. Agency 31,245 22 (1,157) 30,110
State and municipal 1,437 - (89) 1,348
Mortgage-backed securities 231,464 1,656 (3,775) 229,345
Other securities<F1> 37,083 2 (612) 36,473
Total $324,642 $ 1,857 $ (5,875) $320,624
Investment securities held to maturity:
March 31, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 596 $ - $ (1) $ 595
U.S. Agency 35,912 127 (1,623) 34,416
State and municipal 131,257 1,756 (2,314) 130,699
U.S. Agency mortgage-backed
securities 355,149 3,963 (7,217) 351,895
Other securities<F1> 3,699 14 (30) 3,683
Total $526,613 $ 5,860 $ (11,185) $521,288
<F1> Other investment 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."
Maintaining investment quality is a primary objective of the
Company's investment policy which, subject to certain limited
exceptions, prohibits the purchase of any investment security below
a Moody's Investor's Service or Standard & Poor's rating of "A." At
March 31, 1996, 97.6% of the portfolio was rated "AAA" and 98.0%
"AA" or higher as compared to 96.2% and 96.9%, respectively, at
March 31, 1995. Less than 1.2% of the portfolio was rated below "A"
or unrated on March 31, 1996.
The Company may sell covered call options on securities held in
the available for sale investment portfolio. At the time a call is
written, the Company records a liability equal to the premium fee
received. The call liability is marked to market monthly and the
offset is made to earnings. During the first quarter of 1996, one
contract covering securities totalling $9 million closed generating
$11,000 of income. The Company limits total covered call options
outstanding at any time to $25 million of available for sale
securities. There were no open written call options at March 31,
1996.
11
6. Loans Held for Sale
At March 31, 1996, $6,917,000 of newly originated 30 year
fixed-rate residential mortgage loans were classified as "held for
sale." It is management's intent to sell these residential mortgage
loans during the next several months. Servicing rights are
generally retained on sold loans. This strategy is 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. Net realized and
unrealized gains and losses are included in "Net gains (losses) on
loans held for sale"; unrealized net valuation adjustments (if any)
are recorded in the same line item on the Consolidated Statement of
Income.
7. Loans
The loan portfolio of the Company consists of the following
(in thousands):
March 31 December 31 March 31
1996 1995 1995
Commercial $109,151 $103,546 $111,444
Commercial loans secured
by real estate 194,067 179,793 179,384
Real estate - mortgage 405,981 414,967 385,376
Consumer 127,552 133,820 147,254
Loans 836,751 832,126 823,458
Less: Unearned income 2,680 2,716 2,874
Loans, net of unearned income $834,071 $829,410 $820,584
Real estate-construction loans were not material at these
presented dates and comprised 1.8% of total loans net of unearned
income at March 31, 1996. The Company has no credit exposure to
foreign countries or highly leveraged transactions. Additionally,
the Company has no significant industry lending concentrations.
8. 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, the Company consistently applies
a comprehensive methodology and procedural discipline which is
updated on a quarterly basis at the subsidiary bank level to
determine both the adequacy of the allowance for loan losses and the
necessary provision for loan losses to be charged against earnings.
This methodology includes:
a detailed review of all classified assets to determine if any
specific reserve allocations (which includes impaired loans)
are required on an individual loan basis.
12
the application of reserve allocations to all criticized and
classified assets based upon allocation percentages which were
calculated by using a five-year historical average for actual
losses incurred on loans with an olem (other loans especially
mentioned), substandard, or doubtful rating.
the application of reserve allocations to installment and mortgage
loans which are based upon historical charge-off experience for
those loan types. The residential 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 application of reserve allocations to all performing loans
based upon a five year historical average for actual losses
incurred from all loan review categories.
the maintenance of a general unallocated reserve of at least
20% of the systematically determined minimum amount from the
items listed above in order to provide conservative positioning
in the event of any unforeseen deterioration in the economy.
This 20% policy requirement was mandated by the Board of
Directors after the Company experienced significant credit
quality problems in the period from 1985 to 1989. It must be
emphasized that the Board views this policy as establishing a
minimum requirement only and the requirement of a general
unallocated reserve of at least 20% of the determined need is
prudent recognition of the fact that reserve estimates, by
definition, lack precision.
After completion of this process, a formal meeting of the Loan
Loss Reserve Committee is held to evaluate the adequacy of the
reserve and establish the provision level for the next quarter. The
Company believes that the procedural discipline, systematic
methodology, and comprehensive documentation of this quarterly
process is in full compliance with all regulatory requirements.
When it is determined that the prospects for recovery of the
principal of a loan(including impaired loans) 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.
13
An analysis of the changes in the allowance for loan losses
follows (in thousands, except ratios):
Three Months Ended Year Ended
March 31 December 31
1996 1995 1995
Balance at beginning of period $ 14,914 $ 15,590 $ 15,590
Reduction due to disposition of
business line - (342) (342)
Charge-offs:
Commercial 221 95 576
Real estate-mortgage 29 40 135
Consumer 206 164 589
Total charge-offs 456 299 1,300
Recoveries:
Commercial 160 64 183
Real estate-mortgage 2 8 41
Consumer 77 117 457
Total recoveries 239 189 681
Net charge-offs 217 110 619
Provision for loan losses 23 120 285
Balance at end of period $ 14,720 $ 15,258 $ 14,914
As a percent of average loans
and loans held for
sale, net of unearned
income:
Annualized net charge-offs 0.11% 0.05% 0.08%
Annualized provision for
loan losses 0.01 0.06 0.03
Allowance as a percent of loans
and loans held for sale, net
of unearned income at period
end 1.75 1.85 1.81
Allowance as a multiple of
annualized net charge-offs,
at period end 16.87X 34.68X 24.09X
Total classified loans $26,783 $38,002 $28,355
Dollar allocation of reserve
to general risk 7,020 6,766 7,471
Percentage allocation of
reserve to general risk 47.69% 44.34% 50.09%
(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 29 and 33, respectively.)
14
9. 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 Company's policy is to individually review, as
circumstances warrant, each of its commercial and commercial
mortgage loans to determine if a loan is impaired. At a minimum,
annual credit reviews are mandatory for all commercial and
commercial mortgage loans with balances in excess of $300,000. The
Company has also identified two pools of small-dollar-value
homogeneous loans which are evaluated collectively for impairment.
These separate pools are for residential mortgage loans and consumer
loans. Individual loans within these pools are reviewed and removed
from the pool if factors such as significant delinquency in payments
of 90 days or more, bankruptcy, or other negative economic concerns
indicate impairment.
At March 31, 1996, the Company had $2,098,000 in loans being
specifically identified as impaired and a corresponding allocation
of $1,311,000 was made to the allowance. The average outstanding
balance for loans being specifically identified as impaired was
$2,163,000 for the first quarter of 1996. All of the impaired loans
are collateral dependent, therefore the fair value of the collateral
of the impaired loans is evaluated in measuring the impairment.
There was no interest income recognized on impaired loans during the
first quarter of 1996 as the Company generally applies any collected
cash interest payments on impaired loans directly to principal.
The following table sets forth the allocation of the allowance
for loan losses among various categories. This allocation is
determined by using the consistent quarterly procedural discipline
which was discussed above. 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):
15
March 31, 1996 December 31, 1995 March 31, 1995
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
Amount to Loans Amount to Loans Amount to Loans
Commercial $ 2,746 12.9% $ 2,127 12.3% $ 1,390 13.5%
Commercial loans secured
by real estate 2,702 23.0 3,286 21.5 5,381 21.7
Real Estate -
mortgage 338 49.0 345 50.2 308 47.0
Consumer 603 15.1 600 16.0 947 17.8
Allocation to
general risk 7,020 - 7,471 - 6,766 -
Allocation for
impaired loans 1,311 - 1,085 - 466 -
Total $14,720 100.0% $14,914 100.0% $15,258 100.0%
Even though real estate-mortgage loans comprise approximately
49% of the Company's total loan portfolio, only $338,000 or 2.3% 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 and the Company's
historical loss experienced in these categories.
At March 31, 1996, 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 8.)
10. Purchased and Originated Mortgage Servicing Rights
During the second quarter of 1995, the Company adopted SFAS
122, "Accounting for Mortgage Servicing Rights," an amendment of
SFAS 65, "Accounting for Certain Mortgage Banking Activities." In
accordance with this new standard, the Company recognizes as
separate assets the rights to service mortgage loans for others
whether the servicing rights are acquired through purchases or loan
originations. The fair value of capitalized mortgage servicing
rights is based upon the present value of estimated expected future
cash flows. Based upon current fair values, capitalized mortgage
servicing rights are periodically assessed for impairment, which is
recognized in the income statement during the period in which
impairment occurs by establishing a corresponding valuation
allowance. For purposes of performing its impairment evaluation,
the Company stratifies its portfolio of capitalized mortgage
servicing rights on the basis of certain risk characteristics,
including loan type and note rate.
16
Under SFAS 65, the cost of originated mortgage servicing
rights was not recognized as an asset and was charged to earnings
when the related loan was sold. The effect of SFAS 122 was the
capitalization of costs of originating mortgage servicing rights of
$123,000 in the first quarter 1996.
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 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.
The following table presents information concerning non-
performing assets (in thousands, except percentages):
March 31 December 31 March 31
1996 1995 1995
Non-accrual loans $6,891 $7,517 $5,401
Loans past due 90
days or more 1,320 995 2,731
Other real estate owned 636 914 767
Total non-performing
assets $8,847 $9,426 $8,899
Total non-performing
assets as a percent
of loans and loans
held for sale, net
of unearned income,
and other real estate
owned 1.05% 1.13% 1.08%
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.
17
The following table sets forth, for the periods indicated, (i)
the gross interest income that would have been recorded if non-
accrual loans had been current in accordance with their original
terms and had been outstanding throughout the period or since
origination if held for part of the period, (ii) the amount of
interest income actually recorded on such loans, and (iii) the net
reduction in interest income attributable to such loans (in
thousands). There was no interest income recognized on impaired
loans during the first quarter of 1996.
Three Months Ended
March 31
1996 1995
Interest income due in accordance
with original terms $ 171 $ 145
Interest income recorded (3) (42)
Net reduction (increase) in
interest income $ 168 $ 103
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:
Shares Shares Option
Under Available Price
Option For Option Per Share
Balance at December 31, 1994 75,867 38,500
Increased authorized
options - 157,000
Options granted 56,800 (56,800) $21.44-30.63
Options exercised (23,846) - 17.25-25.00
Options forfeited (3,000) 3,000 21.44-23.88
Balance at December 31, 1995 105,821 141,700 $17.25-30.63
Options granted 78,000 (78,000) $32.56
Options exercised (5,750) - 17.25-23.88
Balance at March 31, 1996 178,071 63,700 $17.25-32.56
On or after the first anniversary of the Grant Date, one-third of
such options may be exercised. On or after the second anniversary
of the Grant Date, two-thirds of such options may be exercised minus
the aggregate number of such options previously exercised. On or
after the third anniversary of the Grant Date, the remainder of the
options may be exercised.
18
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 Consolidated Balance Sheet. Gains or losses on these
hedge transactions are deferred and recognized as adjustments to
interest income or interest expense of the underlying assets or
liabilities over the hedge period.
For interest rate swaps, the interest differential to be paid
or received is accrued by the Company and recognized as an
adjustment to interest income or interest expense of the underlying
assets or liabilities being hedged. Since only interest payments
are exchanged, the cash requirement and exposure to credit risk are
significantly less than the notional amount.
Any premium or transaction fee incurred to purchase interest
rate caps or floors are deferred and amortized to interest income or
interest expense over the term of the contract. Unamortized
premiums related to the purchase of caps and floors are included in
other assets on the Consolidated Balance Sheet. A summary of the
off-balance sheet derivative transactions outstanding as of March
31, 1996, are as follows:
Borrowed Funds Hedges
On March 16, 1995, the Company entered into an interest rate
swap agreement with a notional amount of $60 million and a
termination date of March 16, 1997. Under the terms of the swap
agreement, the Company pays a two year fixed interest rate of 6.93%
and receives 90 day Libor which resets quarterly. The counter-party
in this unsecured transaction is PNC Bank.
This swap agreement was executed to hedge short-term borrowings
which were incurred to fund investment securities as part of the
increased leveraging of the balance sheet. Specifically, FHLB term
advances which reprice quarterly are being used to fund fixed-rate
agency mortgage-backed securities with durations ranging from two to
three years. This hedge transaction increased interest expense by
$167,000 for the first quarter of 1996 and by $7,000 for the first
quarter of 1995.
19
On September 29, 1995, the Company entered into an interest
rate swap agreement with a notional amount of $25 million and a
termination date of September 29, 1997. Under the terms of the swap
agreement, the Company pays a two year fixed interest rate of 6.05%
and receives 90 day Libor which resets quarterly. The counterparty
in this unsecured transaction is Mellon Bank.
This swap agreement was executed to hedge short-term borrowings
used to leverage the balance sheet. Specifically, FHLB advances
which reprice every 30 to 90 days are being used to fund fixed-rate
agency mortgage-backed securities with a two year duration. This
hedge transaction increased interest expense by
$23,000 for the first quarter of 1996.
CMO Liability Hedge
During the first quarter of 1994, the Company entered into an
interest rate swap agreement with 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 Consolidated 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 $16,000 in the first quarter
of 1996 and $26,000 for the same 1995 period.
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. This policy permits a maximum notional amount
outstanding of $250 million for interest rate swaps, and a maximum
notional amount outstanding of $250 million for interest rate
caps/floors. The Company had no interest rate caps or floors
outstanding at March 31, 1996.
20
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 $18.1 million of goodwill and
$5.1 million of core deposit intangible assets on its balance sheet.
The majority of these intangible assets came from the 1994 Johnstown
Savings Bank acquisition ($25.9 million) and the 1993 Integra
Branches acquisition ($1.2 million).
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 outflow. The following table reflects the future
amortization expense of the intangible assets (in thousands):
Remaining 1996 $ 1,769
1997 2,356
1998 2,170
1999 2,014
2000 1,904
2001 and after 13,034
A reconciliation of the Company's intangible asset balances
for the first three months of 1996 is as follows (in thousands):
Total goodwill & core deposit
intangible assets at 12/31/95 $23,838
Intangible amortization expense
through 3/31/96 (591)
Total goodwill & core deposit
intangible assets at 3/31/96 $23,247
Goodwill and other intangible assets are reviewed for possible
impairment at a minimum annually, or more frequently, if events or
changed circumstances may affect the underlying basis of the asset.
The Company uses an estimate of the subsidiary banks undiscounted
future earnings over the remaining life of the goodwill and other
intangibles in measuring whether these assets are recoverable.
21
15. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following at March 31, 1996,
(in thousands, except percentages):
Type Maturing Amount Weighted
Average
Rate
Flexline Overnight $ 16,000 5.81%
Advances and 1996 258,700 5.47
wholesale 1997 2,750 5.61
repurchase 1998 176,676 5.11
agreements 1999 1,250 6.09
2000 3,750 6.15
2001 and
after 16,200 7.61
Total Advances and 459,326 5.42
wholesale repurchase
agreements
Total FHLB Borrowings $475,326 5.44%
All of the above borrowings bear a fixed rate of interest, with the
only exceptions being the Flexline whose rate can change daily. All
FHLB stock and an interest in unspecified mortgage loans, with an
aggregate statutory value equal to the amount of the advances, have
been pledged as collateral with the Federal Home Loan Bank of
Pittsburgh to support these borrowings. During the first quarter of
1996 and as reflected in the above table, the Company extended $150
million of FHLB borrowings from a 30 day maturity to a two year term
at a fixed cost of approximately 5.00%.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ("M.D.& A.")
.....PERFORMANCE OVERVIEW.....The Company's net income for the first
quarter of 1996 totalled $4,943,000 or $0.93 per share on a fully
diluted basis. The Company's net income for the first quarter of
1995 totalled $3,899,000 or $0.70 per share on a fully diluted
basis. The 1996 results reflect a $1,044,000 or 26.8% earnings
increase and a $0.23 or 32.9% improvement in fully diluted earnings
per share when compared to the 1995 first quarter results. A
similar comparison of first quarter 1996 results with fourth quarter
1995 performance reflects a 20.1% earnings growth and a 20.8% per
fully diluted earnings per share increase. For the first quarter of
1996, the Company's return on average equity increased by 170 basis
points to 13.14% while the return on average assets increased by 18
basis points to 1.06%.
The Company's improved financial performance was due primarily
to increased non-interest income, lower non-interest expense, and a
reduced loan loss provision. These positive items were partially
offset by a reduced amount of net interest income. The Company's
earnings per share were also enhanced by the repurchase of its
common stock because there were 271,000 fewer average fully diluted
shares outstanding in the first quarter of 1996. 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
March 31, 1996 March 31, 1995
Net income $ 4,943 $ 3,899
Fully diluted earnings
per share 0.93 0.70
Return on average assets 1.06% 0.88%
Return on average equity 13.14 11.44
Average fully diluted common
shares outstanding 5,312 5,583
Presented on this page was a graph reflecting the past five quarters
of the return on equity. The data points of which were 13.14, 11.15,
10.68, 10.87, and 11.44, respectively.
.....NET INTEREST INCOME AND MARGIN.....The Company's net interest
income represents the amount by which interest income on earning
assets exceeds interest paid on interest bearing liabilities. Net
interest income is a primary source of the Company's earnings; it is
affected by interest rate fluctuations as well as changes in the
amount and mix of earning assets and interest bearing liabilities.
It is the Company's philosophy to strive to optimize net interest
margin performance in varying interest rate environments. The
following table compares the Company's net interest income
performance for the first quarter of 1996 to the first quarter of
1995 (in thousands, except percentages):
23
Three Months Ended
March 31
1996 1995 $ Change % Change
Interest income $ 32,767 $ 32,223 544 1.7
Interest expense 18,267 17,490 777 4.4
Net interest income 14,500 14,733 (233) (1.6)
Tax-equivalent
adjustment 768 694 74 10.7
Net tax-equivalent
interest income $ 15,268 $ 15,427 (159) 1.0
Net interest margin 3.49% 3.64% (0.15)% N/M
N/M - Not meaningful.
USBANCORP's net interest income on a tax-equivalent basis
decreased by $159,000 or 1.0% while the net interest margin
percentage declined by 15 basis points to 3.49%. The reduction in
both net interest income and the net interest margin percentage was
due to the earning asset yield decreasing to a greater extent than
the cost of funds. Specifically, the Company's earning asset yield
decreased by nine basis points to 7.72% while the cost of funds
decreased by only one basis point to 4.70%. The decrease in the
earning asset yield resulted from a greater dependence on investment
securities as an earning asset due to a reduced volume of average
loans outstanding and increased leveraging of the balance sheet.
The decline in the cost of funds was limited by a disintermediation
of deposits from lower cost savings accounts into higher cost fixed-
rate certificates of deposits.
.....BALANCE SHEET LEVERAGING.....The Company's ongoing strategy to
use borrowed funds to purchase earning assets in order to leverage
the balance sheet and equity contributes to increased net interest
income but a lower net interest margin percentage. The source for
the borrowed funds is predominately the Federal Home Loan Bank
("FHLB") as each of the Company's subsidiary banks are members of
the FHLB. Examples of FHLB borrowings used by the Company include
one-year term funds tied to 90 day Libor, 30 and 90 day wholesale
reverse repurchase agreements, overnight Flexline borrowings, and
term advances. These funds are used primarily to purchase available
for sale and held to maturity investment securities with durations
ranging from one to three years. For the first quarter of 1996, the
Company's total level of short-term borrowed funds and FHLB advances
averaged $517 million or 27.6% of total assets compared to an
average of $419 million or 23.3% of total assets for the first
quarter of 1995. These borrowed funds had an average cost of 5.72%
in the first quarter of 1996 which was 156 basis points greater than
the average cost of deposits which amounted to 4.16%. When compared
to the Company's first quarter 1996 earning asset yield, the net
interest spread earned on assets funded with deposits amounted to
3.56% compared to a net interest spread of 2.00% on assets funded
with short-term borrowings and FHLB advances. Consequently, this
leveraging strategy contributes to an incremental improvement in net
interest income dollars while causing a regression in the net
interest margin percentage.
24
The maximum amount of leveraging the Company can perform is
controlled by internal policy requirements to maintain a minimum
asset leverage ratio of no less than 6.0% (see further discussion
under Capital Resources) and to limit net interest income
variability to plus or minus 7.5% (see further discussion under Interest Rate
Sensitivity). The Company continuously evaluates the approximate
$10 million of cash flow received monthly from the investment
portfolio and makes one of the following three decisions which can
impact the leveraged position of the balance sheet:
1) The Company can use the money to fund any loan demand that
cannot be funded with existing cash flow from the loan portfolio or
deposits.
2) The Company can use the money to fund new investment
security purchases provided that the incremental spread over the
current short-term borrowing cost is not less than 100 basis points.
3) The Company can use the money to paydown short-term
borrowings if the incremental spread that can be earned on new
investment purchases is not deemed sufficient.
It is recognized that interest rate risk does exist,
particularly in a rising interest rate environment, from this use of
borrowed funds to leverage the balance sheet. To neutralize a
portion of this risk, the Company has executed a total of $85
million of off-balance sheet hedging transactions which help fix the
variable funding costs associated with the leveraging of the balance
sheet. (See further discussion under Note 13.) Additionally, during
the first quarter of 1996 the Company took advantage of the flatness
of the Treasury yield curve to further reduce the interest rate risk
associated with the balance sheet leveraging. Specifically, $150
million of non-hedged borrowings with the FHLB were extended from a
30 day maturity to a two year term at a fixed cost of approximately
5.0%. This liability extension strategy helped reduce both short
term interest rate risk and the cost of borrowings as these funds
had a cost of approximately 5.75% in the fourth quarter of 1995.
25
Regarding the separate components of net interest income, the
Company's total tax-equivalent interest income for the first quarter
of 1996 increased by $618,000 or 1.9% when compared to the same 1995
period. This increase was due entirely to a $42 million or 2.5%
increase in total average earning assets which caused interest
income to rise by $810,000. This net increase in average earning
assets reflects $87 million of growth in investment securities and
a $40 million decline in total loans. The additional interest
income generated from higher earning asset volumes was partially
offset by an unfavorable rate variance as the Company's total
earning asset yield decreased by nine basis points to 7.72%. Within
the earning asset base, the yield on total investment securities
declined by 18 basis points to 6.84% due primarily to the lower
interest rate environment experienced in the first quarter of 1996.
Both the prime rate and fed funds rate were approximately 50 basis
points lower in the first quarter of 1996 as compared to the first
quarter of 1995. Despite the lower interest rate environment, the
yield on the total loan portfolio increased modestly by six basis
points to 8.62%. This yield improvement resulted from a shift in
the loan portfolio composition away from fixed-rate residential
mortgage loans to higher yielding commercial and commercial mortgage
loans. Fixed-rate residential mortgage loans comprised 25.3% of the
total average loan portfolio in the first quarter of 1996 compared
to an average of 29.2% for the same 1995 quarter. Commercial and
commercial mortgage loans comprised 37.4% of the total average loan
portfolio in the 1996 first quarter compared to 35.8% for the 1995
first quarter. This growth in commercial loans resulted from a
refocused emphasis on small business commercial lending(loans less
than $250,000) which began in the second half of 1995. The reduced
dependence on fixed-rate residential mortgage loans as an earning
asset reflects the Company's ongoing strategy to sell newly
originated 30 year fixed-rate mortgage product and the success of a
balance sheet repositioning strategy executed late in the first
quarter of 1995.(See further discussion under Non-Interest Income).
The Company's total interest expense for the first quarter of
1996 increased by $777,000 or 4.4% when compared to the same 1995
period. This higher interest expense was caused by a $61 million
increase in average interest bearing liabilities. Within the
liability mix, total borrowed funds increased by $96 million in
order to fund greater balance sheet leverage and replace a $35
million outflow in interest bearing deposits. The Company's cost of
deposits increased by four basis points to 4.16% due to a
disintermediation of funds from lower cost savings and NOW accounts
into higher cost fixed-rate certificates of deposit. For the 1996
first quarter, savings and now accounts comprised 28.8% of interest
bearing deposits compared to an average of 31.7% for the 1995 first
quarter. Due to the lower interest rate environment and the
favorable extension of FHLB borrowings mentioned above, the
Company's cost of short-term borrowings and FHLB advances averaged
5.72% in the first quarter of 1996 or 33 basis points lower than the
6.05% average in the first quarter of 1995. The combination of all
these price and liability composition movements caused USBANCORP's
average cost of interest bearing liabilities to decrease by only one
basis point from 4.71% during the first quarter of 1995 to 4.70%
during the first quarter of 1996.
26
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.
Three Months Ended March 31 (In thousands, except percentages)
1996 1995
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 $ 827,493 $ 18,027 8.62% $ 867,456 $ 18,427 8.56%
Deposits with banks 1,896 17 3.52 3,526 73 8.23
Federal funds sold
and securities
purchased under
agreement to resell 383 6 5.96 2,092 38 7.18
Investment securities:
Available for sale 418,442 7,093 6.78 242,379 4,466 7.38
Held to maturity 479,567 8,260 6.89 568,452 9,739 6.86
Total investment
securities 898,009 15,353 6.84 810,831 14,205 7.02
Assets held in trust for
collateralized
mortgage obligation 6,954 132 7.61 8,834 174 7.98
Total interest earning
assets/interest income 1,734,735 33,535 7.72 1,692,739 32,917 7.81
Non-interest earning assets:
Cash and due from banks 35,085 39,601
Premises and equipment 18,518 19,051
Other assets 101,239 61,312
Allowance for loan
losses (14,875) (15,591)
TOTAL ASSETS $1,874,702 $1,797,112
CONTINUED ON NEXT PAGE
27
THREE MONTHS ENDED MARCH 31
CONTINUED FROM PREVIOUS PAGE
1996 1995
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand $ 82,130 $ 208 1.02% $ 99,427 $ 358 1.46%
Savings 215,716 908 1.69 239,003 1,150 1.95
Other time 736,156 9,578 5.23 730,420 9,354 5.19
Total interest bearing
deposits 1,034,002 10,694 4.16 1,068,850 10,862 4.12
Short term borrowings:
Federal funds
purchased, secur-
ities sold under
agreements to
repurchase and other
short-term
borrowings 85,992 1,047 4.82 191,585 2,664 5.64
Advances from Federal
Home Loan Bank 431,080 6,320 5.90 227,665 3,643 6.40
Collateralized mortgage
obligation 6,395 135 8.49 7,978 243 12.34
Long-term debt 5,623 71 5.08 5,864 78 5.42
Total interest bearing
liabilities/interest
expense 1,563,092 18,267 4.70 1,501,942 17,490 4.71
Non-interest bearing
liabilities:
Demand deposits 135,065 133,532
Other liabilities 25,221 23,377
Stockholders' equity 151,324 138,261
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $1,874,702 $1,797,112
Interest rate spread 3.02 3.10
Net interest income/
net interest margin 15,268 3.49% 15,427 3.64%
Tax-equivalent adjustment (768) (694)
Net Interest Income $14,500 $14,733
28
When the Company's net interest performance for the first
quarter of 1996 is compared to the fourth quarter of 1995, net
interest income increased by $590,000 while the net interest margin
improved by 12 basis points to 3.49%. A 14 basis point decline in
the cost of funds caused the increased net interest income and
margin as the earning asset yield was relatively stable between
quarters. The reduced cost of funds was caused by declines in both
deposit and borrowing costs. Growth in loans helped stabilize the
earning asset yield despite the lower interest rate environment
experienced in the first quarter of 1996. Total loans increased by
$6.4 million or at an annualized growth rate of approximately 3.0%
between December 31, 1995, and March 31, 1996. This growth, during
a historically slower seasonal period, was due to increased
commercial and commercial mortgage loan production and was not
significantly influenced by refinancing activity. The Company's
present loan pipelines suggest that this loan growth momentum will
continue through the second quarter of 1996.
....PROVISION FOR LOAN LOSSES.....The Company's provision for loan
losses for the first quarter of 1996 totalled $23,000 or 0.01% of
average total loans. This represented a reduction of $97,000 from
the first quarter 1995 provision of $120,000 or 0.06% of average
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 March 31, 1996, the allowance for loan losses at each of
the Company's banking subsidiaries was in compliance with the
Company's policy of maintaining a general unallocated reserve of at
least 20% of the systematically determined minimum reserve need. In
total, the Company's general unallocated reserve was $7.0 million at
March 31, 1996, or 47.7% of the allowance for loan losses.
Additionally, the reduction in the provision level was also
supported by a favorable downward trend in substandard and doubtful
classified asset categories experienced during 1995 and the first
quarter of 1996. Total classified loans dropped by $11.2 million or
29.5% from $38.0 million at March 31, 1995, to $26.8 million at
March 31, 1996.
.....NON-INTEREST INCOME.....Non-interest income for the first
quarter 1996 totalled $4.5 million which represented a $1.0 million
or 29.9% increase when compared to the same 1995 period. This
increase was primarily due to the following items:
a $74,000 or 8.8% increase in trust fees to $919,000 in the
first quarter of 1996. This core trust fee growth is prompted
by the profitable expansion of the Company's business
throughout western Pennsylvania including the Greater
Pittsburgh marketplace.
a $255,000 gain realized on the sale of investments securities
available for sale in the first quarter of 1996. This gain
resulted primarily from the sale of $80 million of agency
mortgage-backed securities as well as a few small portfolio
clean up transactions. These sales were executed to (1)
provide liquidity to fund anticipated loan growth and (2)
improve overall portfolio quality.
29
a $235,000 gain realized on the sale of loans held for sale in
the first quarter of 1996 compared to an $866,000 loss realized
on this same type of activity in the first quarter of 1995 (a
net favorable shift of $1.1 million). The 1996 gain resulted
from normal sales activity at the Company's mortgage banking
subsidiary. The 1995 first quarter loss resulted from the sale
of $34 million of fixed-rate residential mortgage loans with a
weighted average coupon of 7.79% and a weighted average
maturity of 168 months. This sale was executed to diversify
the Company's balance sheet mix and reduce its overall level of
fixed-rate residential mortgage loans resulting from the
Johnstown Savings Bank acquisition. The majority of the
proceeds from the sale were reinvested in adjustable-rate
agency securities to increase the repricing sensitivity of the
Company's earning assets.
a $175,000 or 25.7% decrease in net mortgage servicing fee
income to $507,000. This amount resulted from $877,000 of
mortgage servicing fees net of $370,000 of amortization expense
of the cost of purchased and originated mortgage servicing
rights. The decline in earnings between years was primarily
due to increased amortization expense on the mortgage servicing
rights as a result of faster mortgage prepayment speeds in
1996.
a $905,000 gain was realized on the disposition of Frontier
Finance Company, a subsidiary of Community Savings Bank, in the
first quarter of 1995. 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.
There were no business line dispositions in the first quarter
of 1996.
a $661,000 increase in other income due in part to a $419,000
increase in the net cash surrender value of a $31 million Bank
Owned Life Insurance Policy. The remainder of the increase was
due to additional income resulting from ATM transaction
charges, other mortgage banking processing fees, letters of
credit fees, and check supply sales.
.....NON-INTEREST EXPENSE.....Non-interest expense for the first
quarter of 1996 totalled $12.3 million which represented a $207,000
or 1.7% decrease when compared to the same 1995 period. This
decrease was primarily due to the following items:
a $305,000 decrease in salaries and employee benefits due to 16
fewer full-time equivalent employees ("FTE"), reduced profit
sharing expense, and the benefits of the Company's shared
proportionate sacrifice program which took effect January 1,
1996. This program, which was discussed in detail in the
Company's 1995 Annual Report, was implemented in order to
reduce expense and demonstrate employee commitment to achieving
and sustaining an intermediate term 13% return on equity. The
program included salary rollbacks ranging from 3% to 10% for
officers and a wage freeze for all other employees.
a $111,000 increase in professional fees due to higher legal
and other professional fees in the first quarter of 1996.
30
a $516,000 decrease in FDIC deposit insurance expense due to a
reduction in the premium assessment rate on deposits covered by
the Bank Insurance Fund ("BIF") from $0.23 per hundred dollars
of deposits to zero per hundred dollars of deposits.
Approximately $900 million or 77% of the Company's deposits are
covered by the BIF while the remaining $270 million or 23% are
part of the Savings Association Insurance Fund ("SAIF"). The
premium rate assessment on deposits covered by SAIF continues
at $0.23 per hundred dollars of deposits. The proposed
recapitalization of the SAIF may result in a one-time special
assessment to the Company (currently estimated to be $0.85 per
hundred dollars of deposits) sometime in 1996.
a $442,000 increase in other expense due to higher advertising
expense, other real estate owned expense and outside processing
fees.
.....INCOME TAX EXPENSE.....The Company's provision for income taxes
for the first quarter of 1996 was $1.8 million reflecting an
effective tax rate of 26.2%. The Company's 1995 first quarter income
tax provision was $1.7 million or an effective tax rate of 30.2%.
The lower effective tax rate was caused by increased total tax-free
asset holdings which were $32.9 million higher on average in the
first quarter of 1996 as compared to the first quarter of 1995. The
tax-free asset holdings consist primarily of municipal investment
securities and bank owned life insurance. Net deferred income taxes
of $651,000 have been provided as of March 31, 1996, on the
differences between taxable income for financial and tax reporting
purposes.
.....NET OVERHEAD BURDEN.....The Company's efficiency ratio(non-
interest expense divided by total revenue) showed significant
improvement as it declined from 66.2% for the first quarter of 1995
to 62.2% for the first quarter of 1996. The combination of increased
non-interest income and reduced non-interest expense were the key
factors responsible for the decline. The Company is well positioned
to achieve its goal of reducing this ratio to below 60% over the
next 12 to 15 month period. Employee productivity ratios also
continued to demonstrate improvement as total assets per employee
averaged $2.6 million for the first quarter of 1996 a 8.3% increase
over the $2.4 million average for the same prior year quarter.
Presented on this page was a graph of the Efficiency ratio for the
past five quarters. The data points were 62.18, 66.92, 67.69,
67.08, and 66.18, respectively.
.....BALANCE SHEET.....The Company's total consolidated assets were
$1.904 billion at March 31, 1996, compared with $1.885 billion at
December 31, 1995, which represents a modest increase of $19 million
or 1.0% due to increased leveraging of the balance sheet. During
the first quarter of 1996, total loans and loans held for sale
increased by approximately $6.4 million due to the previously
mentioned growth in commercial and commercial mortgage loans.
Consumer loans continued to decline due to net run-off experienced
in the indirect auto loan portfolio. Total investment securities
increased by $25.3 million due to purchases of mortgage-backed and
municipal securities.
31
Total deposits decreased by $7.9 million or 0.7% since December
31, 1995, due to reduced non-interest bearing deposits as the year-
end 1995 figures reflected a seasonal build up in demand deposit
account balances. The Company's total borrowed funds position
increased by $28.6 million due to additional leveraging of the
balance sheet with FHLB borrowings. As previously mentioned, the
Company did extend $150 million of FHLB advances from a 30 day
maturity to a two year term in order to reduce short-term interest
rate risk. Overall, the Company's asset leverage ratio was 6.69% at
March 31, 1996.
The Company now carries $18.1 million of goodwill and $5.1
million of core deposit intangible assets on its balance sheet. The
majority of these intangible assets were originated with the
Johnstown Savings Bank(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 which approximated $5
million for the full year 1995.
.....MARKET AREA ECONOMY.....The economy-at-large is experiencing a
significant volatility in the financial market arena. Treasury bond
yields have moved upward since mid-February, in some cases by as
much as 150 basis points, causing a steepening of the yield curve.
Much of the economic data presented over this period suggests solid
economic growth, which have revived concerns of inflation. Many
economists are presently projecting 1996 third quarter Gross
Domestic Product well beyond the 2% to 3% target set by the Federal
Reserve.
Both regions in the Company's marketplace, which includes
Greater Johnstown and suburban Pittsburgh, are experiencing slightly
increasing deposit volumes. Lending pipelines have markedly
improved and activity is increasing.
The confidence in the local economy is evidenced by the
Pennsylvania Economy League giving its endorsement to a $20 million
expansion of the Cambria County War Memorial Arena in Johnstown, PA.
This vision would more than double the arena's seating capacity,
creating seats for 9,000 to 11,000 people. Conference space on a
new third floor would accommodate 500 people, and a seven story
garage would provide parking. Additionally, plans were announced
for a new discount motel and a restaurant to open near this
development.
32
In the Pittsburgh marketplace the merger of Allegheny Ludlum
Corp. with Teledyne, Inc. will improve the Pittsburgh company's
financial health and give it a chance to expand. The companies
announced that they are entering a $3.2 billion merger that will
create a new corporation, to be called Allegheny Teledyne, Inc. The
new corporation will have annual sales of about $4 billion.
Additionally, Lycos Inc., which designs on-line guides to the World
Wide Web, is set to make an initial offering of 3 million shares of
stock in hopes of raising between $35-$37 million.
.....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 and for all
commercial mortgages in excess of $300,000. 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):
March 31 December 31 March 31
1996 1995 1995
Total loan delinquency (past due
30 to 89 days) $11,647 $14,324 $16,408
Total non-accrual loans 6,891 7,517 5,401
Total non-performing assets<F1> 8,847 9,426 8,899
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 1.38% 1.72% 1.99%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned
income 0.82 0.90 0.66
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 1.05 1.13 1.08
<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. All loans, except for loans that are insured for credit loss,
are placed on non-accrual status upon becoming 90 days past due in
either principal or interest.
Between December 31, 1995, and March 31, 1996, total loan
delinquency declined by $2.7 million causing the delinquency ratio
to drop to 1.38%. The lower delinquency resulted from enhanced
collection efforts on residential mortgage loans. Both non-accrual
loans and non-performing assets also demonstrated favorable declines
since year-end due to the success of the Company's ongoing workout
programs.
33
Potential problem loans consist of loans which are included in
performing loans, but for which potential credit problems of the
borrowers have caused management to have concerns as to the ability
of such borrowers to comply with present repayment terms. At March
31, 1996, 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):
March 31 December 31 March 31
1996 1995 1995
Allowance for loan losses $ 14,720 $ 14,914 $ 15,258
Amount in the allowance
for loan losses
allocated to "general risk" 7,020 7,471 6,766
Allowance for loan losses as
a percentage of each of
the following:
total loans and loans
held for sale,
net of unearned income 1.75% 1.79% 1.85%
total delinquent loans
(past due 30 to 89 days) 126.38 104.12 92.99
total non-accrual loans 213.61 198.40 282.50
total non-performing assets 166.38 158.22 171.46
Since December 31, 1995, the balance in the allowance for loan
losses has declined modestly by $194,000 to $14.7 million due to net
charge-offs exceeding the loan loss provision. Net charge-offs for
the first quarter of 1996 amounted to $217,000 or 0.10% of total
average loans compared to net charge-offs of $110,000 or 0.05% of
total average loans for the same 1995 period. The Company's
allowance for loan losses at March 31, 1996, was 166% of non-
performing assets and 214% of non-accrual loans. Both of these
coverage ratios increased since year-end 1995 due to the Company's
improved asset quality.
.....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) 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; and 2)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.
34
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):
March 31 December 31 March 31
1996 1995 1995
Six month cumulative GAP
RSA................ $ 564,681 $ 589,200 $ 592,876
RSL................ (757,707) (845,020) (747,061)
Off-balance sheet
hedges.......... 75,000 (75,000) 50,000
GAP................ $(118,026) $(180,820) $(104,185)
GAP ratio.......... 0.83X 0.77X 0.85X
GAP as a % of total
assets.......... (6.20)% (9.59)% (5.75)%
GAP as a % of total
capital......... (79.21) (120.15) (72.85)
One year cumulative GAP
RSA................ $ 768,502 $ 787,615 $ 774,135
RSL................ (862,245) (986,669) (877,857)
Off-balance sheet
hedges.......... 25,000 (75,000) 50,000
GAP................ $ (68,743) $(124,054) $ (53,722)
GAP ratio.......... 0.92X 0.86X 0.94X
GAP as a % of total
assets.......... (3.61)% (6.58)% (2.96)%
GAP as a % of total
capital......... (46.13) (82.43) (37.56)
When March 31, 1996, is compared to December 31, 1995, both the
Company's six month and one year cumulative GAP ratios became less
negative due to fewer rate sensitive liabilities. The extension of
$150 million of FHLB advances from a 30 day maturity to a two year
term was the primary factor responsible for the reduction in rate
sensitive liabilities. As separately disclosed in the above table,
the hedge transactions (described in detail in Note 13) reduced the
negativity of the six month GAP by $75 million and the one year GAP
by $25 million.
35
A portion of the Company's funding base is low cost core
deposit accounts which do not have a specific maturity date. The
accounts which comprise these low cost core deposits include
passbook savings accounts, money market accounts, NOW accounts,
daily interest savings accounts, purpose clubs, etc. At March 31,
1996, the balance in these accounts totalled $454 million or 23.8%
of total assets. Within the above static GAP table, approximately
$141 million or 31% of the total low cost core deposits are assumed
to be rate sensitive liabilities which reprice in one year or less;
this 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.
There are some inherent limitations in using static GAP
analysis to measure and manage interest rate risk. For instance,
certain assets and liabilities may have similar maturities or
periods to repricing but the magnitude or degree of the repricing
may vary significantly with changes in market interest rates. As a
result of these GAP limitations, management places primary emphasis
on simulation modeling to manage and measure interest rate risk. At
March 31, 1996, 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 -2.4% 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 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 plu or minus7.5% based upon varied
economic rate forecasts which include interest rate movements of up
to 200 basis points.
Within the investment portfolio at March 31, 1996, 48.7% of the
portfolio is currently classified as available for sale and 51.3% as
held to maturity. The available for sale classification provides
management with greater flexibility to manage the securities
portfolio to better achieve overall balance sheet rate sensitivity
goals and provide liquidity if needed. Furthermore, it is the
Company's intent to continue to diversify its loan portfolio to
increase liquidity and rate sensitivity and to better manage
USBANCORP's long-term interest rate risk by continuing to sell newly
originated 30 year fixed-rate mortgage loans. The Company will
usually 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.
.....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 $136 million at March 31,
1996, and $169 million at both December 31, 1995, and March 31,
1995. Maturing and repaying loans as well as the monthly cash flow
associated with certain asset- and mortgage-backed securities are
other significant sources of asset liquidity.
36
Liability liquidity can be met by attracting deposits with
competitive rates, using repurchase agreements, buying federal
funds, or utilizing the facilities of the Federal Reserve or the
Federal Home Loan Bank systems. USBANCORP's subsidiaries utilize a
variety of these methods of liability liquidity. At March 31, 1996,
USBANCORP's subsidiaries had approximately $122.4 million of unused
lines of credit available under informal arrangements with
correspondent banks compared to $167.7 million at March 31, 1995.
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 $289 million. Furthermore,
USBANCORP had available at March 31, 1996, $7.6 million of a total
$12.5 million unsecured line of credit.
Liquidity can be further analyzed by utilizing the Consolidated
Statement of Cash Flows. Cash equivalents decreased by $13.3
million from December 31, 1995, to March 31, 1996, due primarily to
$41.8 million of net cash used by investing activities. This more
than offset $9.7 million of net cash provided by operating
activities and $18.9 million of net cash provided by financing
activities. Within investing activities, purchases of investment
securities exceeded the cash proceeds from investment security
maturities and sales by approximately $30.5 million. Cash advanced
for new loan fundings totalled $88.3 million and was approximately
$11.9 million greater than the cash received from loan principal
payments and sales. Within financing activities, cash payments for
maturing certificates of deposit exceeded cash generated from the
sale of new certificates of deposit by $2.6 million. Net principal
borrowings of advances from Federal Home Loan Bank provided $30.5
million of cash.
.....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.
37
.....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):
March 31, 1996 December 31, 1995 March 31, 1995
Amount Ratio Amount Ratio Amount Ratio
RISK-ADJUSTED
CAPITAL RATIOS
Tier 1 capital $ 125,838 13.72% $ 123,251 13.63% $ 120,639 12.89%
Tier 1 capital
minimum requirements 36,696 4.00 36,162 4.00 37,438 4.00
Excess $ 89,142 9.72% $ 87,089 9.63% $ 83,201 8.89%
Total capital $ 137,305 14.97% $ 134,552 14.88% $ 132,338 14.14%
Total capital
minimum requirements 73,392 8.00 72,325 8.00 74,876 8.00
Excess $ 63,913 6.97% $ 62,227 6.88% $ 57,462 6.14%
Total risk-adjusted
assets $ 917,399 $ 904,062 $ 935,946
ASSET LEVERAGE
RATIO
Tier 1 capital $ 125,838 6.69% $ 123,251 6.63% $ 120,639 6.74%
Minimum requirements 94,021 5.00 92,907 5.00 89,496 5.00
Excess $ 31,817 1.69% $ 30,344 1.63% $ 31,143 1.74%
Total adjusted assets $1,880,411 $ 1,858,131 $1,789,911
Between December 31, 1995, and March 31, 1996, each of the
Company's regulatory capital ratios increased slightly due to
overall net growth in equity. The Company continued to balance
regulatory capital requirements with shareholder value needs by
optimizing the asset leverage ratio between the 6% to 7% range. The
Company used funds provided by a $10 million unsecured line of
credit to repurchase 50,000 shares or $1.6 million of its common
stock during the first quarter of 1996. The rate on this unsecured
line of credit floats at 50 basis points under the prime rate.
Through March 31, 1996, the Company has repurchased a total of
473,000 shares of its common stock at a total cost of $12.7 million
or $26.75 per share. The Company plans to continue its treasury
stock repurchase program throughout 1996 which currently permits a
maximum total repurchase authorization of $18 million. The maximum
price per share at which the Company can repurchase stock is 130% of
book value.
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%.
38
The Company's declared Common Stock cash dividend per share was
$0.27 for the first quarter of 1996 which was an 8.0% increase over
the $0.25 per share dividend for the same 1995 interim period.
Additionally, in consideration of both the improving net income and
the Company's "Strategic and Capital Plan," the Board of Directors
increased the quarterly cash dividend 11.1% from $0.27 to $0.30
commencing with the next scheduled dividend declaration on May 24,
1996. This is the eighth dividend increase since 1990, raising the
annual payout per common share to $1.20 or an approximate yield of
3.4%. The average common dividend yield for Pennsylvania bank
holding companies is approximately 2.8%. This Board action further
demonstrates the Company's commitment to a progressive total
shareholder return which includes maintaining the common dividend at
a higher level than its' peers.
Presented on this page was a graph of fully diluted earnings per
share for the past five quarters. The data points were $0.93,
$0.77, $0.72, $0.70, and $0.70, respectively.
39
Presented on this page is the service area map reflecting the
six counties serviced by USBANCORP, Inc.
40
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
15.1 Letter re: unaudited interim financial
information
(b) Reports on Form 8-K: There were no reports filed on
Form 8-K during the first quarter of 1996.
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
USBANCORP, Inc.
Registrant
Date: May 14, 1996 /s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: May 14, 1996 /s/Orlando B. Hanselman
Orlando B. Hanselman
Executive Vice President &
Chief Financial Officer
41
STATEMENT OF MANAGEMENT RESPONSIBILITY
April 19, 1996
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
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
USBANCORP, Inc. :
We have reviewed the accompanying consolidated balance sheets
of USBANCORP, Inc. (a Pennsylvania corporation) and
subsidiaries as of March 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders
equity and cash flows for the three-month periods then ended.
These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet of
USBANCORP, Inc. as of December 31, 1995 and, in our report
dated January 25, 1996, we expressed an unqualified opinion on
that statement. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31,
1995, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
April 19, 1996
43
April 19, 1996
To the Stockholders and Board of Directors of
USBANCORP, INC.:
We are aware that USBANCORP, Inc. has incorporated
by reference in its Registration Statements on Form
S-3 (Registration No. 33-56604); Form S-8
(Registration No. 33-53935); Form S-8 (Registration
No. 33-55845); Form S-8 (Registration No. 33-55207);
and Form S-8 (Registration No. 33-55211) its Form
10-Q for the quarter ended March 31, 1996, which
includes our report dated April 19, 1996, covering
the unaudited interim financial statement
information contained therein. Pursuant to
Regulation C of the Securities Act of 1933 (the
Act), that report is not considered a part of the
registration statements prepared or certified by our
firm or a report prepared or certified by our firm
within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP