UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the period ended March 31, 1997
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
(State or other jurisdiction of incorporation or organization)
25-1424278
(I.R.S. Employer 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, 1997
Common Stock, par value $2.50 5,033,429
per share
1
USBANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION: Page No.
Consolidated Balance Sheet -
March 31, 1997, December 31, 1996,
and March 31, 1996 3
Consolidated Statement of Income -
Three Months Ended March 31, 1997,
and 1996 4
Consolidated Statement of Changes
in Stockholders' Equity -
Three Months Ended
March 31, 1997, and 1996 6
Consolidated Statement of Cash Flows -
Three Months Ended
March 31, 1997, and 1996 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 38
2
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
March 31 December 31 March 31
1997 1996 1996
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 46,096 $ 43,183 $ 40,906
Interest bearing deposits with banks 5,556 1,218 5,981
Investment securities:
Available for sale 438,032 455,890 446,455
Held to maturity (market value
$575,071 on March 31, 1997,
$549,427 on December 31, 1996,
and $469,620 on March 31, 1996) 579,576 546,318 469,897
Assets held in trust for
collateralized mortgage obligation 5,032 5,259 6,675
Loans held for sale 8,782 14,809 6,917
Loans 945,512 929,736 836,751
Less: Unearned income 5,195 4,819 2,680
Allowance for loan losses 13,206 13,329 14,720
Net Loans 927,111 911,588 819,351
Premises and equipment 17,897 18,201 18,283
Accrued income receivable 16,913 17,362 16,661
Mortgage servicing rights 14,360 12,494 11,212
Goodwill and core deposit intangibles 20,889 21,478 23,247
Bank owned life insurance 32,836 32,451 31,291
Other assets 8,245 6,861 6,704
TOTAL ASSETS $ 2,121,325 $ 2,087,112 $ 1,903,580
LIABILITIES
Non-interest bearing deposits $ 141,217 $ 144,314 $ 135,416
Interest bearing deposits 1,013,088 994,424 1,034,538
Total deposits 1,154,305 1,138,738 1,169,954
Federal funds purchased and securities
sold under agreements to repurchase 98,188 76,672 53,382
Other short-term borrowings 56,621 79,068 39,163
Advances from Federal Home Loan Bank 625,734 605,499 459,326
Collateralized mortgage obligation 4,438 4,691 6,117
Long-term debt 5,790 4,172 4,833
Total borrowed funds 790,771 770,102 562,821
Other liabilities 25,600 26,355 21,798
TOTAL LIABILITIES 1,970,676 1,935,195 1,754,573
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; 5,758,157 shares issued
and 5,060,929 outstanding on March 31, 1997;
5,742,264 shares issued and 5,081,004
outstanding on December 31, 1996; 5,739,451
shares issued and 5,266,539
outstanding on March 31, 1996 14,395 14,356 14,349
Treasury stock at cost, 697,228 shares on March 31,
1997, 661,260 shares on December 31, 1996, and
472,912 shares on March 31, 1996 (21,200) (19,538) (12,651)
Surplus 93,887 93,527 93,465
Retained earnings 67,501 63,358 53,922
Net unrealized holding (losses) gains on
available for sale securities (3,934) 214 (78)
TOTAL STOCKHOLDERS' EQUITY 150,649 151,917 149,007
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,121,325 $ 2,087,112 $ 1,903,580
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
1997 1996
INTEREST INCOME
Interest and fees on loans and loans
held for sale:
Taxable $ 19,677 $ 17,528
Tax exempt 561 367
Deposits with banks 28 17
Federal funds sold and securities
purchased under agreements to resell - 6
Investment securities:
Available for sale 7,875 6,862
Held to maturity 9,200 7,855
Assets held in trust for collateralized
mortgage obligation 97 132
Total Interest Income 37,438 32,767
INTEREST EXPENSE
Deposits 10,326 10,694
Federal funds purchased and securities
sold under agreements to repurchase 1,326 657
Other short-term borrowings 969 390
Advances from Federal Home Loan Bank 8,193 6,320
Collateralized mortgage obligation 88 135
Long-term debt 31 71
Total Interest Expense 20,933 18,267
NET INTEREST INCOME 16,505 14,500
Provision for loan losses 23 23
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 16,482 14,477
NON-INTEREST INCOME
Trust fees 1,000 919
Net realized gains (losses) on investment
securities 102 255
Net gains on loans held for sale 275 235
Wholesale cash processing fees 283 267
Service charges on deposit accounts 817 760
Net mortgage servicing fees 572 507
Bank owned life insurance 384 419
Other income 1,190 1,168
Total Non-Interest Income 4,623 4,530
NON-INTEREST EXPENSE
Salaries and employee benefits 6,929 6,119
Net occupancy expense 1,127 1,144
Equipment expense 872 875
Professional fees 764 684
Supplies, postage, and freight 652 648
Miscellaneous taxes and insurance 378 366
FDIC deposit insurance expense (87) 166
Amortization of goodwill and core deposit
intangibles 589 591
Other expense 1,982 1,718
Total Non-Interest Expense $ 13,206 $ 12,311
CONTINUED ON NEXT PAGE
4
CONSOLIDATED STATEMENT OF INCOME
CONTINUED FROM PREVIOUS PAGE
Three Months Ended
March 31
1997 1996
INCOME BEFORE INCOME TAXES 7,899 6,696
Provision for income taxes 2,231 1,753
NET INCOME $ 5,668 $ 4,943
PER COMMON SHARE DATA:
Primary:
Net income $ 1.10 $ 0.93
Average number of common shares outstanding 5,146,014 5,312,157
Fully Diluted:
Net income $ 1.10 $ 0.93
Average number of common shares outstanding 5,146,014 5,312,423
Cash Dividend Declared $ 0.30 $ 0.27
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,
1995 $ - $ 14,334 $(11,007) $ 93,361 $ 50,401 $ 3,403 $150,492
Net Income - - - - 4,943 - 4,943
Dividend reinvestment
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
Balance December 31,
1996 $ - $ 14,356 $(19,538) $ 93,527 $ 63,358 $ 214 $151,917
Net Income - - - - 5,668 - 5,668
Dividend reinvest
ment and stock
purchase plan - 39 - 360 - - 399
Net unrealized
holding gains
(losses) on
investment
securities - - - - - (4,148) (4,148)
Treasury Stock, 35,968
shares at cost - - (1,662) - - - (1,662)
Cash dividends
declared:
Common stock
($0.30 per share
on 5,085,429
shares) - - - - (1,525) - (1,525)
Balance March 31,
1997 $ - $ 14,395 $(21,200) $ 93,887 $ 67,501 $ (3,934) $150,649
See accompanying notes to consolidated financial statements.
6
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
Three Months Ended
March 31
1997 1996
OPERATING ACTIVITIES
Net income $ 5,668 $ 4,943
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 23 23
Depreciation and amortization expense 610 660
Amortization expense of goodwill and core
deposit intangibles 589 591
Amortization expense of mortgage servicing
rights 399 370
Net (accretion) amortization of investment
securities (32) 63
Net realized gains on investment securities (102) (255)
Net realized gains on loans and loans held
for sale (275) (235)
Origination of mortgage loans held for sale (50,891) (36,710)
Sales of mortgage loans held for sale 56,179 42,282
Decrease in accrued income receivable 449 91
Increase (decrease) in accrued expense payable 926 (2,110)
Net cash provided by operating activities 13,543 9,713
INVESTING ACTIVITIES
Purchases of investment securities and
other short-term investments (164,929) (165,167)
Proceeds from maturities of investment
securities and other short-term investments 44,578 49,755
Proceeds from sales of investment securities
and other short-term investments 98,709 84,961
Long-term loans originated (83,789) (81,021)
Loans held for sale (8,782) (6,917)
Principal collected on long-term loans 78,290 76,293
Loans purchased or participated (1,087) (200)
Loans sold or participated - 50
Net decrease (increase) in credit card receivable
and other short-term loans 836 (113)
Purchases of premises and equipment (311) (355)
Sale/retirement of premises and equipment 7 -
Net decrease in assets held in trust for
collateralized mortgage obligation 227 424
Net increase mortgage servicing rights (2,265) (210)
Net decrease in other assets 459 650
Net cash used by investing activities (38,057) (41,850)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit 79,128 66,958
Payments for maturing certificates of deposits (56,481) (69,509)
Net decrease in demand and savings deposits (7,080) (5,353)
Net decrease in federal funds purchased,
securities sold under agreements to
repurchase, and other short-term borrowings (1,184) (1,811)
Net principal borrowings of advances from
Federal Home Loan Bank 20,235 30,678
Principal borrowings on long-term debt 5,068 -
Repayments of long-term debt (3,450) (228)
Common stock cash dividends paid (2,541) -
Proceeds from dividend reinvestment, stock
purchase plan, and stock options exercised 399 119
Purchases of treasury stock (1,662) (1,644)
Net decrease in other liabilities (667) (354)
Net cash provided by financing activities 31,765 18,856
NET INCREASE (DECREASE) IN CASH EQUIVALENTS 7,251 (13,281)
CASH EQUIVALENTS AT JANUARY 1 44,401 60,168
CASH EQUIVALENTS AT MARCH 31 $ 51,652 $ 46,887
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"),
UBAN Associates, Inc., ("UBAN Associates") 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, 1997, and 1996, 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 18,
1997, 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, 1996, 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, 1996.
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. Primary earnings per share amounts
are computed by dividing net income, after deducting
preferred stock dividend requirements, (if any), by the
weighted average number of common stock and common stock
equivalent shares outstanding. Treasury shares are
treated as retired for earnings per share purposes. In
the first quarter of 1997 the Financial Accounting
Standards Board issued SFAS 128, "Earnings Per Share,"
which establishes standards for computing and presenting
earnings per share. This statement is effective for
periods ending after December 15, 1997. The Company
believes that the adoption of this standard will not
have a material impact on the Company's financial
statements.
8
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 $1,186,000 in income tax payments in the
first quarter of 1997 as compared to $1,011,000 for the
first three months of 1996. Total interest expense paid
amounted to $20,007,000 in 1997's first three months
compared to $20,377,000 in the same 1996 period.
5. Investment Securities
The Company uses 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.
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
shareholders' equity on a net of tax basis. Any security
classified as trading assets are reported at fair value
with unrealized aggregate appreciation/ (depreciation)
included in current income 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):
Investment securities available for sale:
March 31, 1997
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 10,939 $ 85 $ (30) $ 10,994
U.S. Agency 19,222 - (412) 18,810
State and municipal 21,296 407 (5) 21,698
U.S. Agency mortgage-backed
securities 356,422 860 (6,624) 350,658
Other securities<F1> 35,872 - - 35,872
Total $443,751 $ 1,352 $ (7,071) $438,032
<F1>Other investment securities include corporate notes
and bonds, asset-backed securities, and equity
securities.
9
Investment securities held to maturity:
March 31, 1997
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 10,296 $ - $ (72) $ 10,224
U.S. Agency 27,479 - (544) 26,935
State and municipal 115,062 1,084 (567) 115,579
U.S. Agency mortgage-backed
securities 423,712 1,332 (5,809) 419,235
Other securities<F1> 3,027 75 (4) 3,098
Total $579,576 $ 2,491 $ (6,996) $ 575,071
Investment securities available for sale:
December 31, 1996
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 10,934 $ 147 $ (21) $ 11,060
U.S. Agency 4,224 12 (39) 4,197
State and municipal 21,772 524 (1) 22,295
U.S. Agency mortgage-backed
securities 382,384 2,459 (2,385) 382,458
Other securities<F1> 35,880 - - 35,880
Total $ 455,194 $ 3,142 $ (2,446) $455,890
Investment securities held to maturity:
December 31, 1996
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 10,198 $ 4 $ (13) $ 10,189
U.S. Agency 27,468 113 (29) 27,552
State and municipal 110,287 1,624 (308) 111,603
U.S. Agency mortgage-backed
securities 395,199 3,937 (2,281) 396,855
Other securities<F1> 3,166 62 - 3,228
Total $ 546,318 $ 5,740 $ (2,631) $549,427
<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 (losses) on investment securities," in
the Consolidated Statement of Income.
10
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, 1997, 98.6% of the portfolio was rated "AAA"
and 98.7% "AA" or higher as compared to 97.6% and 98.0%,
respectively, at March 31, 1996. Approximately 1.0% of
the portfolio was rated below "A" or unrated on March 31,
1997.
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
1997, there was $25,000 of income generated on call
options. As of March 31, 1997, there were no written
open call options. The Company limits total covered call
options outstanding at any time to $25 million of
available for sale securities.
6. Loans Held for Sale
At March 31, 1997, $8,782,000 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. 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
1997 1996 1996
Commercial $149,266 $138,008 $109,151
Commercial loans secured
by real estate 278,871 266,700 194,067
Real estate - mortgage 412,364 414,003 405,981
Consumer 105,011 111,025 127,552
Loans 945,512 929,736 836,751
Less: Unearned income 5,195 4,819 2,680
Loans, net of unearned
income $940,317 $924,917 $834,071
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, 1997. The Company
has no credit exposure to foreign countries or highly
leveraged transactions. Additionally, the Company has no
significant industry lending concentrations.
11
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 criticized and impaired
loans to determine if any specific reserve
allocations are required on an individual loan
basis.
the application of reserve allocations for all
commercial and commercial real-estate loans are
calculated by using a two year migration analysis of
net losses incurred within the entire commercial
loan portfolio.
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 loans
is based upon review of historical and qualitative
factors, which include but are not limited to,
national and economic trends, delinquencies,
concentrations of credit, and trends in loan volume.
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 and
provides appropriate support for accounting purposes.
12
When it is determined that the prospects for
recovery of the principal of a loan have significantly
diminished, the loan is immediately charged against the
allowance account; subsequent recoveries, if any, are
credited to the allowance account. In addition,
non-accrual and large delinquent loans are reviewed
monthly to determine potential losses. Consumer loans are
considered losses when they are 90 days past due, except
loans that are insured for credit loss.
An analysis of the changes in the allowance for loan
losses follows (in thousands, except ratios):
Three Months Ended Year Ended
March 31 December 31
1997 1996 1996
Balance at beginning of period $ 13,329 $ 14,914 $ 14,914
Charge-offs:
Commercial 10 221 1,705
Real estate-mortgage 49 29 156
Consumer 241 206 746
Total charge-offs 300 456 2,607
Recoveries:
Commercial 53 160 527
Real estate-mortgage 22 2 108
Consumer 79 77 297
Total recoveries 154 239 932
Net charge-offs 146 217 1,675
Provision for loan losses 23 23 90
Balance at end of period $ 13,206 $ 14,720 $ 13,329
As a percent of average loans
and loans held for
sale, net of unearned
income:
Annualized net charge-offs 0.06% 0.11% 0.20%
Annualized provision for
loan losses 0.01 0.01 0.01
Allowance as a percent of loans
and loans held for sale, net
of unearned income at period
end 1.39 1.75 1.42
Allowance as a multiple of
annualized net charge-offs,
at period end 22.30X 16.87X 7.96X
Total classified loans $21,044 $26,783 $24,027
Dollar allocation of reserve
to general risk 6,398 7,020 6,984
Percentage allocation of
reserve to general risk 48.45% 47.69% 52.40%
(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 28 and 31, respectively.)
13
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.
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, credit reviews are mandatory for
all commercial and commercial mortgage loans with
balances in excess of $250,000 within an 18 month period.
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, 1997, the Company had loans totalling
$2,271,000 and $2,098,000 being specifically identified
as impaired and a corresponding allocation reserve of
$1,260,000 and $1,311,000 at March 31, 1997, and March
31, 1996, respectively. The average outstanding balance
for loans being specifically identified as impaired was
$2,281,000 for the first quarter of 1997 compared to
$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 1997 or 1996.
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):
14
March 31, 1997 December 31, 1996 March 31, 1996
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 $ 1,415 15.7% $ 1,826 14.7% $ 2,746 12.9%
Commercial
loans secured
by real estate 2,856 29.4 2,796 28.4 2,702 23.0
Real Estate -
mortgage 400 44.4 472 45.6 338 49.0
Consumer 877 10.5 959 11.3 603 15.1
Allocation to
general risk 6,398 - 6,984 - 7,020 -
Allocation for
impaired loans 1,260 - 292 - 1,311 -
Total $13,206 100.0% $13,329 100.0% $14,720 100.0%
Even though real estate-mortgage loans comprise
approximately 44% of the Company's total loan portfolio,
only $400,000 or 3.0% 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
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, 1997, 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. Non-performing Assets
Non-performing assets are comprised of (i) loans
which are on a non-accrual basis, (ii) loans which are
contractually past due 90 days or more as to interest or
principal payments some of which are insured for credit
loss, and (iii) other real estate owned (real estate
acquired through foreclosure and in-substance
foreclosures). All loans, except for loans that are
insured for credit loss, are placed on non-accrual status
immediately upon becoming 90 days past due in either
principal or interest. In addition, if circumstances
warrant, the accrual of interest may be discontinued
prior to 90 days. In all cases, payments received on
non-accrual loans are credited to principal until full
recovery of principal has been recognized; it is only
after full recovery of principal that any additional
payments received are recognized as interest income. The
only exception to this policy is for residential mortgage
loans wherein interest income is recognized on a cash
basis as payments are received.
15
The following table presents information concerning
non-performing assets (in thousands, except percentages):
March 31 December 31 March 31
1997 1996 1996
Non-accrual loans $ 6,846 $6,365 $6,891
Loans past due 90
days or more 3,040 2,043 1,320
Other real estate owned 524 263 636
Total non-performing
assets $10,410 $8,671 $8,847
Total non-performing
assets as a percent
of loans and loans
held for sale, net
of unearned income,
and other real estate
owned 1 .10% 0.92% 1.05%
The Company is unaware of any additional loans which
are required to either be charged-off or added to the
non-performing asset totals disclosed above. Other real
estate owned is recorded at the lower of 1)fair value
minus estimated costs to sell, or 2)carrying cost.
The following table sets forth, for the periods
indicated, (i) the gross interest income that would have
been recorded if non-accrual loans had been current in
accordance with their original terms and had been
outstanding throughout the period or since origination if
held for part of the period, (ii) the amount of interest
income actually recorded on such loans, and (iii) the net
reduction in interest income attributable to such loans
(in thousands).
Three Months Ended
March 31
1997 1996
Interest income due in accordance
with original terms $ 144 $ 171
Interest income recorded (30) (3)
Net reduction in
interest income $ 114 $ 168
16
11. Incentive Stock Option Plan
In 1991, the Company's Board of Directors adopted an
Incentive Stock Option Plan(the "Plan") authorizing the
grant of options covering 128,000 shares of common stock.
In April 1995, the Company amended the Plan to increase
the number of shares available for issuance thereunder
from 128,000 to 285,000 shares. Under 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 Company accounts for this Plan under APB
Opinion 25, "Accounting for Stock Issued to Employees,"
under which no compensation cost has been recognized.
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. Had compensation cost for these plans been
determined consistent with SFAS 123, "Accounting for
Stock-Based Compensation," the Company's net income and
earnings per share would have been reduced to the
following pro forma amounts:
March 31, December 31, March 31,
1997 1996 1996
(In thousands, except per share data)
Net Income
As Reported $5,668 $20,019 $4,943
Pro Forma 5,627 19,810 4,910
Primary Earnings Per Share
As Reported $ 1.10 $ 3.83 $ 0.93
Pro Forma 1.09 3.79 0.92
Fully Diluted Earnings
Per Share
As Reported $ 1.10 $ 3.81 $ 0.93
Pro Forma 1.09 3.77 0.92
Because SFAS 123 method of accounting has not been
applied to options granted prior to January 1, 1995, the
resulting pro forma compensation cost may not be
representative of that to be expected in future periods.
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.
A summary of the status of the Company's Stock
Option Plan at March 31, 1997 and 1996, and December 31,
1996, and changes during the quarter and year then ended
is presented in the table and narrative following:
17
March 31, 1997 December 31, 1996 March 31, 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 175,258 $28.11 105,821 $24.34 105,821 $24.34
Granted 1,500 42.95 78,000 32.56 78,000 32.56
Exercised (15,893) 25.10 (8,563) 22.87 (5,750) 20.77
Outstanding at
end of period 160,865 28.54 175,258 28.11 178,071 28.05
Exercisable at
period end 78,918 26.27 54,280 23.29 53,540 23.34
Weighted average
fair value of
options granted
since 1-1-95 7.03 6.99 6.98
A total of 78,918 of the 160,865 options outstanding
at March 31, 1997, have exercise prices between $17.25
and $32.56, with a weighted average exercise price of
$26.27 and a weighted average remaining contractual life
of 7.5 years. All of these options are exercisable.
The remaining 81,947 options have exercise prices between
$21.25 and $42.95, with a weighted average exercise price
of $30.73 and a weighted average remaining contractual
life of 8.7 years.
In the first quarter of 1997, one option grant
totalling 1,500 shares was issued, compared to one option
grant totalling 78,000 shares for the same 1996 period.
The fair value of each option grant is estimated on the
grant date using the Black-Scholes option pricing model
with the following assumptions used for grants in the
presented 1997 and 1996 periods, respectively: risk-free
interest rate 6.49% and 5.49%; expected dividend yields
3.25% for both periods; expected lives 7 years for both
periods; expected volatility 20.96% and 21.28%.
12. 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 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.
18
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 is 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,
1997, are as follows:
Borrowed Funds Hedges
The Company has entered into several interest rate
swaps 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. Under these swap agreements, the Company pays
a fixed rate of interest and receives either 30 day Libor
which resets monthly or 90 day Libor which resets
quarterly. The following table summarizes the interest
rate swap transactions which impacted the Company s first
quarter 1997 performance:
Fixed Floating Impact
Notional Start Termination Rate Rate On Interest
Amount Date Date Paid Received Expense
$60,000,000 3-16-95 3-16-97 6.93% 5.54% $184,000
25,000,000 9-29-95 9-29-97 6.05 5.57 28,000
40,000,000 3-17-97 3-15-99 6.19 5.44 15,000
The Company believes that its exposure to credit
loss in the event of non-performance by any of the
counterparties in the interest rate swap agreements 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, 1997, or March 31, 1996.
19
13. 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 $16.5 million of goodwill and $4.4 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. The amortization
expense of these intangible assets reduced first quarter
1997 fully diluted earnings per share by $0.10. It is
important to note that this intangible amortization
expense is not a cash outflow. The following table
reflects the future amortization expense of the
intangible assets (in thousands):
Remaining 1997 $ 1,755
1998 2,170
1999 2,014
2000 1,904
2001 1,865
2002 and after 11,181
A reconciliation of the Company's intangible asset
balances for the first three months of 1997 is as follows
(in thousands):
Total goodwill & core deposit
intangible assets at 12/31/96 $21,478
Intangible amortization expense
through 3/31/97 (589)
Total goodwill & core deposit
intangible assets at 3/31/97 $20,889
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. This review is consistent with SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be disposed of," which the
Company adopted in the first quarter of 1996. This
adoption did not have a material impact on the Company's
Financial Statements.
20
14. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following at
March 31, 1997, (in thousands,
except percentages):
Type Maturing Amount Weighted
Average
Rate
Advances and 1997 $ 299,023 5.59%
wholesale 1998 255,786 5.23
repurchase 1999 76,250 5.90
agreements 2000 3,750 6.15
2001 10,126 8.22
2002 and after 12,250 6.92
Total Advances and 657,185 5.55
wholesale repurchase
agreements
Total FHLB Borrowings $657,185 5.55%
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 along with
an interest in unspecified mortgage loans and mortgage-
backed securities, 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 1997 and as
reflected in the above table, the Company extended $75
million of FHLB borrowings from a 30 day maturity to a
one year term at a fixed cost of 5.43% and $75 million of
borrowings from a 90 day maturity to a two year term at
a fixed cost of 5.90%.
15. Capital
The Company is subject to various capital
requirements administered by the federal banking
agencies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The
Company's capital amounts and classification are also
subject to qualitative judgements by the regulators about
components, risk weightings, and other factors. Failure
to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements.
21
Quantitative measures established by regulation to
ensure capital adequacy require the Company to maintain
minimum amounts and ratios(set forth in the table below)
of total and tier 1 capital to risk-weighted assets, and
of tier 1 capital to average assets. Management believes
that as of March 31, 1997, the Company meets all capital
adequacy requirements to which it is subject.
As of March 31, 1997, and 1996, as well as, December
31, 1996, the Federal Reserve categorized the Company as
"Well Capitalized" under the regulatory framework for
prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum total
risk-based, tier 1 risk-based, and tier 1 leverage ratios
as set forth in the table. There are no conditions or
events since that notification that management believes
have changed the Company's classification category.
To Be Well
Capitalized Under
For Capital Prompt Corrective
As of March 31, 1997 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(In thousands, except ratios)
Total Capital (to Risk
Weighted Assets)
Consolidated $146,032 14.18% $ 82,403 8.00% $103,004 10.00%
U.S. Bank 88,771 15.69 45,255 8.00 56,569 10.00
Three Rivers Bank 32,801 13.98 18,775 8.00 23,468 10.00
Community Savings Bank 30,039 13.14 18,291 8.00 22,864 10.00
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated 133,694 12.98 41,201 4.00 61,802 6.00
U.S. Bank 81,700 14.44 22,627 4.00 33,941 6.00
Three Rivers Bank 30,197 12.87 9,387 4.00 14,081 6.00
Community Savings Bank 27,718 13.14 9,145 4.00 13,718 6.00
Tier 1 Capital (to Average
Assets)
Consolidated 133,694 6.43 83,126 4.00 103,907 5.00
U.S. Bank 81,700 6.79 48,165 4.00 60,206 5.00
Three Rivers Bank 30,197 6.52 18,527 4.00 23,159 5.00
Community Savings Bank 27,718 6.77 16,391 4.00 20,489 5.00
To Be Well
Capitalized Under
For Capital Prompt Corrective
As of December 31, 1996 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(In thousands, except percentages)
Total Capital (to Risk
Weighted Assets)
Consolidated $142,832 14.16% $ 80,683 8.00% $100,853 10.00%
U.S. Bank 86,087 15.47 44,505 8.00 55,631 10.00
Three Rivers Bank 31,878 13.55 18,818 8.00 23,523 10.00
Community Savings Bank 29,287 13.52 17,334 8.00 21,668 10.00
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated 130,225 12.91 40,341 4.00 60,512 6.00
U.S. Bank 79,133 14.22 22,252 4.00 33,379 6.00
Three Rivers Bank 29,281 12.45 9,409 4.00 14,114 6.00
Community Savings Bank 26,579 12.27 8,667 4.00 13,001 6.00
Tier 1 Capital (to Average
Assets)
Consolidated 130,225 6.51 79,966 4.00 99,958 5.00
U.S. Bank 79,133 6.91 45,790 4.00 57,238 5.00
Three Rivers Bank 29,281 6.44 18,174 4.00 22,718 5.00
Community Savings Bank 26,579 6.65 15,986 4.00 19,982 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 1997 totalled $5,668,000 or
$1.10 per share on a fully diluted basis. 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 1997 results reflect a $725,000 or 14.7% earnings
increase and a $0.17 or 18.3% improvement in fully
diluted earnings per share when compared to the 1996
first quarter results. For the first quarter of 1997,
the Company's return on average equity increased by 178
basis points to 14.92% while the return on average assets
increased by four basis points to 1.10%.
The Company's improved financial performance was due
to increased revenue generated from its core banking
business. Specifically, net interest income increased by
$2.0 million or 13.8% while total non-interest income
grew by $93,000 or 2.0%. This increased revenue more
than offset higher non-interest expense which resulted
from additional investment in the infrastructure of the
organization. Total non-interest expense was $895,000 or
7.3% higher in the first quarter of 1997. The Company's
earnings per share were also enhanced by the repurchase
of its common stock because there were 166,000 fewer
average fully diluted shares outstanding in the first
quarter of 1997, when compared to the first quarter of
1996. The following table summarizes some of the
Company's key performance indicators (in thousands,
except per share and ratios):
Presented on this page was a graph of Fully Diluted Earnings
Per Share for the past seven quarters. The data points were;
$1.10, 1.06, 0.82, 1.01, 0.93, 0.77, and 0.72, respectively.
23
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
Net income $ 5,668 $ 4,943
Fully diluted earnings per share 1.10 0.93
Return on average assets 1.10% 1.06%
Return on average equity 14.92 13.14
Average fully diluted common
shares outstanding 5,146 5,312
.....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 1997 to the first quarter of
1996 (in thousands, except percentages):
Three Months Ended
March 31
1997 1996 $ Change % Change
Interest income $ 37,438 $ 32,767 4,671 14.3
Interest expense 20,933 18,267 2,666 14.6
Net interest income 16,505 14,500 2,005 13.8
Tax-equivalent
adjustment 748 768 (20) (2.6)
Net tax-equivalent
interest income $ 17,253 $ 15,268 1,985 13.0
Net interest margin 3.48% 3.49% (0.01)% N/M
N/M Not meaningful.
USBANCORP's net interest income on a tax-equivalent
basis increased by $2.0 million or 13.0% due to growth in
earning assets and a relatively stable net interest
margin performance. Total earning assets were $226
million higher in the first quarter of 1997 with this
growth in earning assets almost evenly distributed
between investment securities and loans. The Company s
loan to deposit ratio averaged 82.6% in the first quarter
of 1997 compared to an average of 71.4% in the first
quarter of 1996. A seventh consecutive quarter of loan
growth fueled the improvement in the loan-to-deposit
ratio and was a key factor contributing to the relatively
stable net interest margin performance of 3.48%. The
overall balanced growth in the earning asset base was one
important strategy used by the Company to leverage its
capital. 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).
24
...COMPONENT CHANGES IN NET INTEREST INCOME...Regarding
the separate components of net interest income, the
Company's total tax-equivalent interest income for the
first quarter of 1997 increased by $4.7 million or 13.9%
when compared to the same 1996 period. This increase was
due primarily to a $226 million or 13.1% increase in
total average earning assets which caused interest income
to rise by $4.4 million. This increase in average
earning assets reflects $117 million of growth in
investment securities and a $110 million increase in
total average loans. The remainder of the increase in
interest income was caused by an eight basis point
improvement in the earning asset yield to 7.80%. Within
the earning asset base, the yield on total investment
securities increased by 11 basis points to 6.95% while
the yield on the total loan portfolio increased by six
basis points to 8.68%. The higher investment securities
yield resulted from modest extension of the portfolio as
the duration of total investment securities portfolio was
47 months at March 31, 1997, compared to a duration of 43
months at March 31, 1996. The loan yield improvement
resulted from a continued mix shift in the loan portfolio
composition away from fixed-rate residential mortgage
loans to higher yielding commercial and commercial
mortgage loans. Total commercial and commercial mortgage
loans comprised 45.1% of total loans at March 31, 1997,
compared to 35.9% at March 31, 1996. Residential
mortgage loans comprised 44.4% of total loans at March
31, 1997, compared to 49.0% at March 31, 1996. The
higher commercial loan totals resulted from increased
production from both small business(loans less than
$250,000) and middle market lending due to more effective
sales efforts.
The Company's total interest expense for the first
quarter of 1997 increased by $2.7 million or 14.6% when
compared to the same 1996 period. This higher interest
expense was due primarily to a $216 million increase in
average interest bearing liabilities which caused
interest expense to rise by $2.5 million. Within the
liability mix, total borrowed funds increased by $245
million in order to fund greater balance sheet leverage
and replace a $29 million outflow in interest bearing
deposits. For the first quarter of 1997, the Company's
total level of short-term borrowed funds and FHLB
advances averaged $764 million or 36.4% of total assets
compared to an average of $517 million or 27.6% of total
assets for the first quarter of 1996. These borrowed
funds had an average cost of 5.57% in the first quarter
of 1997 which was 140 basis points greater than the
average cost of deposits which amounted to 4.17%. This
greater dependance on borrowings to fund the earning
asset base was a key factor responsible for the seven
basis point increase in the total cost of interest
bearing liabilities from 4.70% in the first quarter of
1996 to 4.77% in the first quarter of 1997.
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 $65 million of off-balance sheet
hedging transactions which help fix the variable funding
costs associated with the use of short-term borrowings to
fund earning assets. (See further discussion under Note
12.)
25
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)
1997 1996
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 $ 937,813 $ 20,434 8.68% $ 827,493 $ 18,027 8.62%
Deposits with banks 3,249 28 3.51 1,896 17 3.52
Federal funds sold
and securities
purchased under
agreement to resell 39 - 4.81 383 6 5.96
Investment securities:
Available for sale 441,251 7,959 7.21 418,442 7,093 6.78
Held to maturity 573,682 9,668 6.74 479,567 8,260 6.89
Total investment
securities 1,014,933 17,627 6.95 898,009 15,353 6.84
Assets held in trust for
collateralized
mortgage obligation 5,182 97 7.61 6,954 132 7.61
Total interest earning
assets/interest income 1,961,216 38,186 7.80 1,734,735 33,535 7.72
Non-interest earning assets:
Cash and due from banks 33,759 35,085
Premises and equipment 18,086 18,518
Other assets 99,287 101,239
Allowance for loan losses (13,311) (14,875)
TOTAL ASSETS $2,099,037 $1,874,702
CONTINUED ON NEXT PAGE
26
THREE MONTHS ENDED MARCH 31
CONTINUED FROM PREVIOUS PAGE
1997 1996
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand $ 89,787 $ 219 0.99% $ 97,539 $ 246 1.01%
Savings 193,004 804 1.69 215,716 908 1.69
Money markets 152,882 1,367 3.63 137,399 1,123 3.29
Other time 569,773 7,936 5.65 583,348 8,417 5.80
Total interest bearing
deposits 1,005,446 10,326 4.17 1,034,002 10,694 4.16
Short term borrowings:
Federal funds
purchased, secur-
ities sold under
agreements to
repurchase and other
short-term
borrowings 172,981 2,295 5.31 85,992 1,047 4.82
Advances from Federal
Home Loan Bank 590,747 8,193 5.63 431,080 6,320 5.90
Collateralized mortgage
obligation 4,599 88 7.74 6,395 135 8.49
Long-term debt 5,269 31 2.40 5,623 71 5.08
Total interest bearing
liabilities/interest
expense 1,779,042 20,933 4.77 1,563,092 18,267 4.70
Non-interest bearing
liabilities:
Demand deposits 138,627 135,065
Other liabilities 27,290 25,221
Stockholders' equity 154,078 151,324
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $2,099,037 $1,874,702
Interest rate spread 3.04 3.02
Net interest income/
net interest margin 17,253 3.48% 15,268 3.49%
Tax-equivalent adjustment (748) (768)
Net Interest Income $16,505 $14,500
27
....PROVISION FOR LOAN LOSSES.....The Company's provision
for loan losses for the first quarter of 1997 totalled
$23,000 or 0.01% of average total loans which equalled
the provision level experienced in the 1996 first
quarter. The Company s net charge-offs amounted to
$146,000 or 0.06% of average loans in the first quarter
of 1997 compared to net charge-offs of $217,000 or 0.11%
of average loans in the 1996 first quarter. The strength
of the allowance for loan losses at each of the Company s
banking subsidiaries supported continued low loan loss
provision levels. 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, 1997,
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 $6.4 million at March 31, 1997, or 48.5% of
the allowance for loan losses. Additionally, the low
provision level was also supported by a favorable
downward trend in substandard and doubtful classified
asset categories experienced over the past two year
period. Total classified loans dropped by $5.7 million
or 21.4% from $26.8 million at March 31, 1996, to $21.0
million at March 31, 1997.
.....NON-INTEREST INCOME.....Non-interest income for the
first quarter of 1997 totalled $4.6 million which
represented a $93,000 or 2.0% increase when compared to
the same 1996 period. This increase was primarily due to
the following items:
an $81,000 or 8.8% increase in trust fees to $1
million in the first quarter of 1997. This trust fee
growth reflects increased assets under management
due to the profitable expansion of the Trust
Company's business throughout western Pennsylvania.
a $153,000 reduction in gains realized on the sale
of investments securities available for sale due to
fewer security transactions in the first quarter of
1997.
a $57,000 or 7.5% increase in deposit service
charges to $817,000. This increase resulted
primarily from fewer waivers of overdraft charges
due to enhanced monitoring techniques and pricing
increases on several demand deposit account related
services.
a $65,000 or 12.8% increase in net mortgage
servicing fee income to $572,000. This amount
resulted from $971,000 of mortgage servicing fees
net of $399,000 of amortization expense of the cost
of purchased and originated mortgage servicing
rights. The increase in earnings between years was
due to higher revenue generated from the servicing
of an additional $262 million in loans during the
first quarter of 1997.
.....NON-INTEREST EXPENSE.....Non-interest expense for
the first quarter of 1997 totalled $13.2 million which
represented an $895,000 or 7.3% increase when compared to
the same 1996 period. This increase was primarily due to
the following items:
28
an $810,000 increase in salaries and employee
benefits due to 16 additional full time equivalent
employees ("FTE"), merit pay increases and the
reinstatement of salary rollbacks, higher profit
sharing expense, and increased hospitalization
premiums.
an $80,000 increase in professional fees due to
higher legal and other professional fees in the
first quarter of 1997.
a $253,000 decrease in FDIC deposit insurance
expense due to a reduction in the premium assessment
rate on deposits covered by the Savings Association
Insurance Fund( SAIF ). The Company also benefitted
from a $100,000 refund of a portion of the special
assessment paid in the fourth quarter of 1996.
a $264,000 increase in other expense due to higher
telecommunication costs, employee training costs,
advertising expense and outside processing fees.
.....INCOME TAX EXPENSE.....The Company's provision for
income taxes for the first quarter of 1997 was $2.2
million reflecting an effective tax rate of 28.2%. The
Company's 1996 first quarter income tax provision was
$1.8 million or an effective tax rate of 26.2%. The
higher effective tax rate in 1997 was due to a
combination of the Company s increased pre-tax earnings
and reduced total tax-free asset holdings which were
$10.4 million lower on average in the first quarter of
1997 as compared to the first quarter of 1996. The tax-
free asset holdings consist primarily of municipal
investment securities and bank owned life insurance. Net
deferred income taxes of $1.1 million have been provided
as of March 31, 1997, 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)
demonstrated continued improvement as it declined from
62.2% for the first quarter of 1996 to 60.4% for the
first quarter of 1997. The increased revenue generated in
the first quarter of 1997 was the key factor responsible
for the improved efficiency ratio. The Company is well
positioned to achieve its goal of reducing this ratio to
below 60% by mid-year 1997. Employee productivity ratios
also continued to demonstrate improvement as total assets
per employee averaged $2.8 million for the first quarter
of 1997 a 9.6% increase over the $2.5 million average for
the same prior year quarter. Net income per employee
also increased by 12.2% to $7,500 for the first quarter
of 1997.
Presented on this page was a graph of the Efficiency Ratio
for the past seven quarters. The data points presented
were; 60.37%, 61.41, 68.98, 60.79, 62.18, 66.92, and 67.69,
respectively.
29
.....BALANCE SHEET.....The Company's total consolidated
assets were $2.121 billion at March 31, 1997, compared
with $2.087 billion at December 31, 1996, which
represents an increase of $34 million or 1.6% due to
increased leveraging of the balance sheet. During the
first quarter of 1997, total loans and loans held for
sale increased by approximately $9.4 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 as the Company has not actively pursued new
loans in this low margin line of business. Total
investment securities increased by $15.4 million due to
purchases of mortgage-backed and municipal securities.
Total deposits increased by $15.6 million or 1.4%
since December 31, 1996, due to a successful certificate
of deposit promotion which helped raise new funds with
maturities of 30-36 months at a cost of approximately
6.15%. The Company's total borrowed funds position
increased by $20.7 million due to additional leveraging
of the balance sheet with FHLB borrowings. The Company
did extend $75 million of FHLB advances from a 90 day
maturity to a two year term in order to reduce short-term
interest rate risk. Overall, the Company's asset
leverage ratio was 6.43% at March 31, 1997, compared to
6.51% at March 31, 1996.
.....MARKET AREA ECONOMY.....The Federal Reserve nudged
interest rates higher for the first time in two years,
hoping to stifle any threat of rising inflation. The
central bank characterized its increase as a prudent step
that would guard against higher inflation and the risk of
recession. Analysts suggested the Fed's quarter-point
increase was not the end of the story, with one or two
more boosts possible by the end of the year to slow the
surprisingly strong economy.
In the Pittsburgh marketplace, CityLink Airlines,
Inc., a low-fare carrier, plans to start passenger
service from Pittsburgh to Dallas, Minneapolis, Newark,
and Chicago. With government approval, CityLink could
fill a void at Pittsburgh International Airport, where
USAir accounts for 80% of passenger traffic. CityLink
will use $15 million of private financing and employ 300
people.
In the Johnstown region, Cambria County's new $18
million prison will open this spring in the midst of what
has become a rapidly expanding prison system in Cambria
and Somerset counties. The area prisons employ 1,687
people. Also, the move of an Air National Guard unit
from State College to Johnstown Airport will add at least
$2.5 million annually to the area's economy. Full-time
employees will rise from 14 to 38. Concurrent
Technologies Corp., in Richland Township has received a
five-year contract worth up to $188 million to operate 11
electronic commerce resource centers throughout the
nation for the Department of Defense. This represents
the largest single award made to Concurrent Technologies
since its formation nine years ago.
<page 30>
.....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. Credit reviews are
mandatory for all commercial loans and for all commercial
mortgages in excess of $250,000 within an 18 month
period. 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
1997 1996 1996
Total loan delinquency
(past due 30 to 89 days) $17,194 $20,284 $11,647
Total non-accrual loans 6,846 6,365 6,891
Total non-performing assets<F1> 10,410 8,671 8,847
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 1.81% 2.16% 1.38%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned
income 0.72 0.68 0.82
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 1.10 0.92 1.05
<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, 1996, and March 31, 1997, total
loan delinquency declined by $3.1 million causing the
delinquency ratio to drop to 1.8%. The lower delinquency
resulted from enhanced collection efforts on residential
mortgage loans. Total non-performing assets increased by
$1.7 million since year-end 1996 causing the non-
performing assets to total loans ratio to increase to
1.1%. The majority of the increase in non-performing
assets occurred in loans 90 days past due.
31
.....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
1997 1996 1996
Allowance for loan losses $ 13,206 $ 13,329 $ 14,720
Amount in the allowance
for loan losses
allocated to "general risk" 6,398 6,984 7,020
Allowance for loan losses as
a percentage of each of
the following:
total loans and loans
held for sale,
net of unearned income 1.39% 1.42% 1.75%
total delinquent loans
(past due 30 to 89 days) 76.81 65.71 126.38
total non-accrual loans 192.90 209.41 213.61
total non-performing assets 126.86 153.72 166.38
Since December 31, 1996, the balance in the
allowance for loan losses has declined by $123,000 to
$13.2 million due to net charge-offs exceeding the loan
loss provision. The Company's allowance for loan losses
at March 31, 1997, was 127% of non-performing assets and
193% of non-accrual loans. Both of these coverage ratios
decreased since year-end 1996 due to the Company's higher
level of non-performing assets combined with the modest
drop in the allowance for loan losses. The portion of
the allowance allocated to general risk declined to $6.4
million due to increased specific allocations on impaired
loans.
.....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. For static GAP
analysis, USBANCORP typically defines interest rate
sensitive assets and liabilities as those that reprice
within six months or one year.
32
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
1997 1996 1996
Six month cumulative GAP
RSA........................ $ 576,926 $ 609,088 $ 564,681
RSL....................... (748,929) (865,296) (757,707)
Off-balance sheet
hedges............... 40,000 25,000 75,000
GAP....................... $ (132,003) $ (231,208) $(118,026)
GAP ratio.............. 0.81X 0.72X 0.83X
GAP as a % of total
assets................ (6.22)% (11.08)% (6.20)%
GAP as a % of total
capital............... (87.62) (152.19) (79.21)
One year cumulative GAP
RSA...................... $ 801,118 $ 840,813 $ 768,502
RSL...................... (1,182,337) (1,061,514) (862,245) Off-balance sheet
hedges.............. 40,000 - 25,000
GAP...................... $ (341,219) $ (220,701) $ (68,743)
GAP ratio.............. 0.70X 0.79X 0.92X
GAP as a % of total
assets............... (16.09)% (10.57)% (3.61)%
GAP as a % of total
capital............... (226.50) (145.28) (46.13)
When March 31, 1997, is compared to December 31,
1996, the Company's six month GAP became less negative
while the one year cumulative GAP ratios became more
negative. The Company did extend in February 1997, $75
million of FHLB advances with a 30 day maturity out to a
one year term in order to reduce short term interest rate
risk. This extension reduced the negativity of the six
month GAP but had no impact on the one year GAP. As
separately disclosed in the above table, the hedge
transactions (described in detail in Note 12) reduced the
negativity of both the six month and one year GAP by $40
million.
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, 1997,
the balance in these accounts totalled $432 million or
20.4% of total assets. Within the above static GAP
table, approximately $152 million or 35% 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 200 basis point increase in rates will not
necessitate a change in the cost of these accounts.
33
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, 1997, these
varied economic interest rate simulations indicated that
the maximum negative variability of USBANCORP's net
interest income over the next twelve month period was
(4.8%) under an upward rate shock forecast reflecting a
200 basis point increase in interest rates above
published economic consensus estimates. Capital
impairment under this simulation was estimated to be
less than (2.0%) and net income was reduced by
approximately (9.1%). 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 over the first twelve months of the forecast
period to plus or minus 7.5% and net income variability
to plus or minus 15.0% based upon varied economic rate
forecasts which include interest rate movements of up to
200 basis points and alterations of the shape of the
yield curve.
Within the investment portfolio at March 31, 1997,
43% of the portfolio is currently classified as available
for sale and 57% 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.
.....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. Maturing and repaying
loans as well as the monthly cash flow associated with
certain mortgage-backed securities are the significant
sources of asset liquidity for the Company.
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. Each of
the Company's subsidiary banks are active borrowers with
the Federal Home Loan Bank which provides the opportunity
to obtain overnight 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 $164 million.
Furthermore, USBANCORP had available at March 31, 1997,
$6.7 million of a total $14.5 million unsecured line of
credit.
34
Liquidity can be further analyzed by utilizing the
Consolidated Statement of Cash Flows. Cash equivalents
increased by $7.3 million from December 31, 1996, to
March 31, 1997, due primarily to $31.8 million of net
cash provided by financing activities and $13.5 million
of net cash provided by operating activities. This more
than offset $38.1 million of net cash used by investing
activities. Within investing activities, purchases of
investment securities exceeded the cash proceeds from
investment security maturities and sales by approximately
$21.6 million. Cash advanced for new loan fundings
totalled $84.9 million and was approximately $6.6 million
greater than the cash received from loan principal
payments. Within financing activities, cash generated
from the sale of new certificates of deposit exceeded the
cash payments for maturing certificates of deposit by
$22.6 million. Net principal borrowings of advances from
the Federal Home Loan Bank provided $20.2 million of
cash.
.....CAPITAL RESOURCES.....As presented in Note 15, each
of the Company s regulatory capital ratios demonstrated
little change between December 31, 1996, and March 31,
1997. The Company targets an operating level of
approximately 6.50% for the asset leverage ratio because
management and the Board of Directors believes that this
level provides an optimal balance between regulatory
capital requirements and shareholder value needs.
Accordingly throughout the remainder of 1997, the Company
will continue to leverage the additional capital
generated from earnings through common dividend payments,
treasury stock repurchases, and earning asset growth.
The Company used funds provided by a $14.5 million
unsecured line of credit to repurchase 36,000 shares or
$1.7 million of its common stock during the first quarter
of 1997. Through March 31, 1997, the Company has
repurchased a total of 697,000 shares of its common stock
at a total cost of $21.2 million or $30.41 per share.
The Company plans to continue its treasury stock
repurchase program throughout 1997 which currently
permits a maximum total repurchase authorization of $30
million. The maximum price per share at which the
Company can repurchase stock is 180% 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.
Presented on this page was a graph of Average Fully Diluted
Number of Shares Outstanding for the past seven quarters.
The data points presented were in thousands: 5,146, 5,172,
5,217, 5,241, 5,312, 5,336, and 5,456, respectively.
35
It is, however, the Company's intent to
maintain the FDIC "well capitalized" classification for
each of its subsidiaries to ensure the lowest deposit
insurance premium and to maintain an asset leverage ratio
of no less than 6.0%.
The Company's declared Common Stock cash dividend
per share was $0.30 for the first quarter of 1997 which
was an 11.1% increase over the $0.27 per share dividend
for the same 1996 interim period. Additionally, in
consideration of the demonstrated sustainability over the
past 15 months of the Company s net income at a higher
operating level, the Board of Directors increased the
quarterly cash dividend 16.7% from $0.30 to $0.35
commencing with the next scheduled dividend declaration
on May 23, 1997. This is the ninth dividend increase
since 1990, raising the annual payout per common share to
$1.40 or an approximate yield of 3.1%. The average common
dividend yield for Pennsylvania bank holding companies is
approximately 2.7%. 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 peers.
.....FORWARD LOOKING STATEMENT.....This report contains
various forward-looking statements and includes
assumptions concerning the Company's operations, future
results, and prospects. These forward-looking statements
are based upon current expectations and are subject to
risk and uncertainties. In connection with the "safe
harbor" provisions of the Private Securities Litigation
Reform Act of 1995, the Company provides the following
cautionary statement identifying important factors which
could cause the actual results or events to differ
materially from those set forth in or implied by the
forward-looking statements and related assumptions.
Such factors include the following: (i) the effect
of changing regional and national economic conditions;
(ii) significant changes in interest rates and prepayment
speeds; (iii) credit risks of commercial, real estate,
consumer, and other lending activities; (iv) changes in
federal and state banking regulations; (v) the presence
in the Company's market area of competitors with greater
financial resources than the Company and; (vi) other
external developments which could materially impact the
Company's operational and financial performance.
36
SERVICE AREA MAP
Appearing on this page was the service area map for the
Company reflecting the six county area serviced by the
Company.
37
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:
USBANCORP, Inc. announced promotion of
Jeffrey A. Stopko to Senior Vice President and
Chief Financial Officer on March 19, 1997.
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 13, 1997 /s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: May 13, 1997 /s/Jeffrey A. Stopko
Jeffrey A. Stopko
Senior Vice President and
Chief Financial Officer
38
STATEMENT OF MANAGEMENT RESPONSIBILITY
April 18, 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/Jeffrey A. Stopko
Terry K. Dunkle Jeffrey A. Stopko
Chairman, President & Senior Vice President &
Chief Executive Officer Chief Financial Officer
39
ARTHUR ANDERSEN LLP
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, 1997 and 1996, 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 upon 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, 1996, and,
in our report dated January 23, 1997, 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, 1996, 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 18, 1997
40
ARTHUR ANDERSEN
April 18, 1997
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, 1997, which includes
our report dated April 18, 1997, 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 by our
firm within the meaning of Sections 7 and 11 of the Act.
Very truely your,
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
41