UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 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 25-1424278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 August 1, 1997
Common Stock, par value $2.50 5,011,818
per share
1
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
June 30, 1997, December 31, 1996,
and June 30, 1996 3
Consolidated Statement of Income -
Three and Six Months Ended
June 30, 1997, and 1996 4
Consolidated Statement of Changes
in Stockholders' Equity -
Six Months Ended
June 30, 1997, and 1996 6
Consolidated Statement of Cash Flows -
Six Months Ended
June 30, 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 42
2
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
June 30 December 31 June 30
1997 1996 1996
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 46,320 $ 43,183 $ 39,383
Interest bearing deposits
with banks 5,378 1,218 801
Federal funds sold and
securities purchased
under agreements to resell - - 400 Investment securities:
Available for sale 479,367 455,890 426,989
Held to maturity (market
value $571,625 on June 30,
1997, $549,427 on December
31, 1996, and $499,620 on
June 30, 1996) 568,174 546,318 507,560
Assets held in trust for
collateralized mortgage
obligation 4,765 5,259 6,144
Loans held for sale 14,534 14,809 9,050
Loans 966,282 929,736 849,110
Less: Unearned income 5,205 4,819 2,799
Allowance for loan losses 13,303 13,329 13,988
Net Loans 947,774 911,588 832,323
Premises and equipment 17,780 18,201 18,001
Accrued income receivable 17,648 17,362 17,212
Mortgage servicing rights 14,163 12,494 11,631
Goodwill and core deposit
intangibles 20,300 21,478 22,658
Bank owned life insurance 33,189 32,451 31,703
Other assets 6,735 6,861 7,620
TOTAL ASSETS $ 2,176,127 $ 2,087,112 $ 1,931,475
LIABILITIES
Non-interest bearing deposits $ 149,438 $ 144,314 $ 145,550
Interest bearing deposits 1,015,692 994,424 1,033,372
Total deposits 1,165,130 1,138,738 1,178,922
Federal funds purchased and
securities sold under
agreements to repurchase 93,156 76,672 87,689
Other short-term borrowings 62,276 79,068 41,891
Advances from Federal Home Loan
Bank 663,722 605,499 447,435
Collateralized mortgage obligation 4,208 4,691 5,586
Long-term debt 5,302 4,172 4,644
Total borrowed funds 828,664 770,102 587,245
Other liabilities 26,146 26,355 19,157
TOTAL LIABILITIES 2,019,940 1,935,195 1,785,324
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; 5,758,546 shares
issued and 5,011,818
outstanding on June 30, 1997;
5,742,264 shares issued and
5,081,004 outstanding on
December 31,1996; 5,739,901
shares issued and 5,186,989
outstanding on June 30, 1996 14,396 14,356 14,350
Treasury stock at cost, 746,728
shares on June 30,1997,
661,260 shares on December 31,
1996, and 552,912 shares on
June 30, 1996 (23,491) (19,538) (15,406)
Surplus 93,894 93,527 93,472
Retained earnings 71,583 63,358 57,648
Net unrealized holding (losses)
gains on available for sale
securities (195) 214 (3,913)
TOTAL STOCKHOLDERS' EQUITY 156,187 151,917 146,151
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,176,127 $ 2,087,112 $ 1,931,475
See accompanying notes to consolidated financial statements.
3
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
INTEREST INCOME
Interest and fees on loans
and loans held for sale:
Taxable $ 20,271 $ 17,850 $ 39,948 $ 35,378
Tax exempt 619 388 1,180 755
Deposits with banks 93 17 121 34
Federal funds sold and securities
purchased under agreements to
resell 2 28 2 34
Investment securities:
Available for sale 7,790 6,914 15,665 14,007
Held to maturity 10,004 7,926 19,204 15,550
Assets held in trust for
collateralized mortgage
obligation 91 122 188 254
Total Interest Income 38,870 33,245 76,308 66,012
INTEREST EXPENSE
Deposits 10,785 10,555 21,111 21,249
Federal funds purchased and
securities sold under
agreements to repurchase 1,155 935 2,481 1,592
Other short-term borrowings 793 309 1,762 699
Advances from Federal Home
Loan Bank 9,136 6,285 17,329 12,605
Collateralized mortgage
obligation 110 117 198 252
Long-term debt 22 12 53 83
Total Interest Expense 22,001 18,213 42,934 36,480
NET INTEREST INCOME 16,869 15,032 33,374 29,532
Provision for loan losses 22 22 45 45
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 16,847 15,010 33,329 29,487
NON-INTEREST INCOME
Trust fees 999 963 1,999 1,882
Net realized gains (losses)
on investment securities 54 64 156 319
Net realized gains on loans held
for sale 313 214 588 449
Wholesale cash processing fees 275 272 558 539
Service charges on deposit accounts 821 800 1,638 1,560
Net mortgage servicing fees 579 576 1,151 1,083
Bank owned life insurance 471 412 855 831
Other income 1,288 1,271 2,478 2,439
Total Non-Interest Income 4,800 4,572 9,423 9,102
NON-INTEREST EXPENSE
Salaries and employee benefits 6,962 6,170 13,891 12,289
Net occupancy expense 1,074 1,110 2,201 2,254
Equipment expense 786 717 1,658 1,592
Professional fees 829 724 1,593 1,408
Supplies, postage, and freight 698 711 1,350 1,359
Miscellaneous taxes and insurance 371 364 749 730
FDIC deposit insurance expense 69 160 (18) 326
Amortization of goodwill and
core deposit intangibles 589 589 1,178 1,180
Other expense 2,079 1,835 4,061 3,553
Total Non-Interest Expense $ 13,457 $ 12,380 $ 26,663 $ 24,691
CONTINUED ON NEXT PAGE
4
CONSOLIDATED STATEMENT OF INCOME
CONTINUED FROM PREVIOUS PAGE
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
INCOME BEFORE INCOME TAXES $ 8,190 $ 7,202 $ 16,089 $ 13,898
Provision for income taxes 2,350 1,920 4,581 3,673
NET INCOME $ 5,840 $ 5,282 $ 11,508 $ 10,225
PER COMMON SHARE DATA:
Primary:
Net income $ 1.15 $ 1.01 $ 2.25 $ 1.94
Average shares outstanding 5,091,304 5,241,045 5,117,062 5,276,507
Fully Diluted:
Net income $ 1.14 $ 1.01 $ 2.24 $ 1.94
Average shares outstanding 5,104,003 5,241,045 5,132,521 5,276,507
Cash Dividends Declared $ 0.35 $ 0.30 $ 0.65 $ 0.57
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 - - - - 10,225 - 10,225
Dividend reinvestment
and stock purchase plan - 16 - 111 - - 127
Net unrealized holding
gains (losses) on
investment securities - - - - - (7,316) (7,316)
Treasury stock, 129,700
shares at cost - - (4,399) - - - (4,399)
Cash dividends declared:
Common stock
($0.27 per share
on 5,266,539 shares
and $0.30 per share
on 5,186,989 shares) - - - - (2,978) - (2,978)
Balance June 30, 1996 $ - $ 14,350 $(15,406) $ 93,472 $ 57,648 $ (3,913) $146,151
Balance December 31, 1996 $ - $ 14,356 $(19,538) $ 93,527 $ 63,358 $ 214 $151,917
Net Income - - - - 11,508 - 11,508
Dividend reinvest-
ment and stock
purchase plan - 40 - 367 - - 407
Net unrealized
holding gains
(losses) on
investment securities - - - - - (409) (409)
Treasury stock, 85,468
shares at cost - - (3,953) - - - (3,953)
Cash dividends declared:
Common stock
($0.30 per share
on 5,085,429 shares
$0.35 per share on
5,021,429 shares) - - - - (3,283) - (3,283)
Balance June 30, 1997 $ - $ 14,396 $(23,491) $ 93,894 $ 71,583 $ (195) $156,187
See accompanying notes to consolidated financial statements.
6
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
Six Months Ended
June 30
1997 1996
OPERATING ACTIVITIES
Net income $ 11,508 $ 10,225
Adjustments to reconcile
net income to net cash
provided by operating activities:
Provision for loan losses 45 45
Depreciation and amortization expense 1,206 1,305
Amortization expense of goodwill and
core deposit intangibles 1,178 1,180
Amortization expense of mortgage
servicing rights 831 689
Net (accretion) amortization of
investment securities (56) 198
Net realized gains on investment securities (156) (319)
Net realized gains on loans and
loans held for sale (588) (449)
Origination of mortgage loans held for sale (110,434) (92,785)
Sales of mortgage loans held for sale 106,250 100,950
Increase in accrued income receivable (286) (460)
Increase (decrease) in accrued
expense payable 1,233 (2,951)
Net cash provided by operating activities 10,731 17,628
INVESTING ACTIVITIES
Purchases of investment securities
and other short-term investments (317,021) (278,136)
Proceeds from maturities of investment
securities and other short-term
investments 64,536 88,196
Proceeds from sales of investment
securities and other short-term
investments 206,739 135,320
Long-term loans originated (153,563) (174,917)
Loans held for sale (14,534) (9,050)
Principal collected on long-term loans 135,537 154,446
Loans purchased or participated (2) (186)
Loans sold or participated 234 663
Net decrease (increase) in credit card
receivable and other short-term loans 1,144 (370)
Purchases of premises and equipment (820) (740)
Sale/retirement of premises and equipment 32 22
Net decrease in assets held in trust for
collateralized mortgage obligation 494 955
Net increase mortgage servicing rights (2,500) (948)
Net (increase) decrease in other assets (391) 1,389
Net cash used by investing activities (80,115) (83,356)
FINANCING ACTIVITIES
Proceeds from sales of certificates
of deposit 137,632 134,729
Payments for maturing certificates
of deposits (108,166) (139,751)
Net (decrease) increase in demand and
savings deposits (3,074) 6,086
Net (decrease) increase in federal funds
purchased, securities sold under
agreements to repurchase, and other
short-term borrowings (791) 34,262
Net principal borrowings of advances from
Federal Home Loan Bank 58,223 19,218
Principal borrowings on long-term debt 5,068 -
Repayments of long-term debt (3,938) (417)
Common stock cash dividends paid (4,067) (1,422)
Proceeds from dividend reinvestment,
stock purchase plan, and stock
options exercised 407 127
Purchases of treasury stock (3,953) (4,399)
Net decrease in other liabilities (660) (2,289)
Net cash provided by financing activities 76,681 46,144
NET INCREASE (DECREASE) IN CASH EQUIVALENTS 7,297 (19,584)
CASH EQUIVALENTS AT JANUARY 1 44,401 60,168
CASH EQUIVALENTS AT JUNE 30 $ 51,698 $ 40,584
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"), USBANCORP Trust Company
("Trust Company"), UBAN Associates, Inc., ("UBAN
Associates") and United Bancorp Life Insurance Company
("United Life"). The merger of Community Bancorp, Inc.
into Three Rivers Bank was successfully completed on July
3, 1997. In addition, the Parent Company is an
administrative group that provides support in such areas as
audit, finance, investments, loan review, general services,
loan policy, and marketing. Intercompany accounts and
transactions have been eliminated in preparing the
consolidated financial statements.
2. Basis of Preparation
The unaudited consolidated financial statements have
been prepared in accordance with generally accepted
accounting principles for interim financial information.
In the opinion of management, all adjustments that are of
a normal recurring nature and are considered necessary for
a fair presentation have been included. They are not,
however, necessarily indicative of the results of
consolidated operations for a full year.
With respect to the unaudited consolidated financial
information of the Company for the three and six month
periods ended June 30, 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 July 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
Statement of Financial Aaccounting Standards ("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,
short-term investments, and federal funds sold and
securities purchased under agreements to resell. The
Company made $3,886,000 in income tax payments in the first
six months of 1997 as compared to $2,026,000 for the first
six months of 1996. Total interest expense paid amounted
to $41,701,000 in 1997's first six months compared to
$39,431,000 in the same 1996 period.
5. Investment Securities
The Company uses 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:
June 30, 1997
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 10,942 $ 69 $ (15) $ 10,996
U.S. Agency 14,219 4 (81) 14,142
State and municipal 17,995 350 - 18,345
U.S. Agency mortgage-backed
securities 397,330 2,117 (2,405) 397,042
Other securities<F1> 38,842 - - 38,842
Total $479,328 $ 2,540 $ (2,501) $479,367
<F1>Other investment securities include corporate notes and
bonds, asset-backed securities, and equity securities.
9
Investment securities held to maturity:
June 30, 1997
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 10,298 $ - $ (19) $ 10,279
U.S. Agency 27,486 71 (49) 27,508
State and municipal 115,364 1,828 (182) 117,010
U.S. Agency mortgage-backed
securities 412,040 3,932 (2,217) 413,755
Other securities<F1> 2,986 87 - 3,073
Total $568,174 $ 5,918 $ (2,467) $ 571,625
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.
Maintaining investment quality is a primary objective
of the Company's investment policy which, subject to
certain limited exceptions, prohibits the purchase of any
investment security below a Moody's Investor's Service or
Standard & Poor's rating of "A." At June 30, 1997, 98.7%
of the portfolio was rated "AAA" and 98.8% "AA" or higher
as compared to 98.0% and 98.2%, respectively, at June 30,
1996. Less than 1.0% of the portfolio was rated below "A"
or unrated on June 30, 1997.
10
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 six months of 1997,
there was $25,000 of income generated on call options. As
of June 30, 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 June 30, 1997, $14,534,000 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):
June30 December 31 June 30
1997 1996 1996
Commercial $151,743 $138,008 $116,540
Commercial loans secured
by real estate 292,132 266,700 204,376
Real estate - mortgage 425,380 414,003 409,157
Consumer 97,027 111,025 119,037
Loans 966,282 929,736 849,110
Less: Unearned income 5,205 4,819 2,799
Loans, net of unearned income $961,077 $924,917 $846,311
Real estate-construction loans were not material at
these presented dates and comprised 1.8% of total loans net
of unearned income at June 30, 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 three 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 Six Months Ended
June 30 June 30
1997 1996 1997 1996
Balance at beginning of period $ 13,206 $ 14,720 $ 13,329 $ 14,914
Charge-offs:
Commercial 69 782 79 1,003
Real estate-mortgage 31 - 80 29
Consumer 264 119 505 325
Total charge-offs 364 901 664 1,357
Recoveries:
Commercial 145 22 198 182
Real estate-mortgage 210 31 232 33
Consumer 84 94 163 171
Total recoveries 439 147 593 386
Net (recoveries)charge-offs (75) 754 71 971
Provision for loan losses 22 22 45 45
Balance at end of period $ 13,303 $ 13,988 $ 13,303 $ 13,988
As a percent of average loans and loans held
for sale, net of unearned income:
Annualized net (recoveries) charge-offs (0.03)% 0.36% 0.02% 0.23%
Annualized provision for loan losses 0.01 0.01 0.01 0.01
Allowance as a percent of loans and loans
held for sale, net of unearned income
at period end 1.36 1.64 1.36 1.64
Allowance as a multiple of annualized
net (recoveries) charge-offs,
at period end (44.22)X 4.61X 92.91X 7.16X
Total classified loans $24,590 $25,286 $24,590 $25,286
Dollar allocation of reserve to general risk 6,874 7,102 6,874 7,102
Percentage allocation of reserve
to general risk 51.67% 50.77% 51.67% 50.77%
(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
27 and 35, 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 June 30, 1997, the Company had loans totalling
$1,879,000 and $2,240,000 being specifically identified as
impaired and a corresponding allocation reserve of
$1,275,000 and $729,000 at June 30, 1997, and June 30,
1996, respectively. The average outstanding balance for
loans being specifically identified as impaired was
$2,075,000 for the first six months of 1997 compared to
$2,169,000 for the first six months 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 six months 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
June 30, 1997 December 31, 1996 June 30, 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 $ 1,265 15.6% $ 1,826 14.7% $ 1,197 13.6%
Commercial
loans secured
by real estate 2,523 30.0 2,796 28.4 3,634 23.8
Real Estate -
mortgage 412 45.0 472 45.6 590 48.7
Consumer 954 9.4 959 11.3 736 13.9
Allocation to
general risk 6,874 - 6,984 - 7,102 -
Allocation for
impaired loans 1,275 - 292 - 729 -
Total $13,303 100.0% $13,329 100.0% $13,988 100.0%
Even though real estate-mortgage loans comprise
approximately 45% of the Company's total loan portfolio,
only $412,000 or 3.1% of the total allowance for loan
losses is allocated against this loan category. The real
estate-mortgage loan allocation is based upon the Company's
five year historical average of actual loan charge-offs
experienced in that category. The 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 June 30, 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):
June 30 December 31 June 30
1997 1996 1996
Non-accrual loans $ 6,036 $ 6,365 $ 6,554
Loans past due 90 days or more 1,515 2,043 909
Other real estate owned 906 263 119
Total non-performing assets $ 8,457 $ 8,671 $ 7,582
Total non-performing assets
as a percent of loans and loans
held for sale, net of unearned
income, and other real estate
owned 0.87% 0.92% 0.89%
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 Six Months Ended
June 30 June 30
1997 1996 1997 1996
Interest income due in accordance
with original terms $ 91 $ 151 $ 235 $ 322
Interest income recorded (51) (3) (81) (6)
Net reduction in interest income $ 40 $ 148 $ 154 $ 316
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:
June 30, December 31, June 30,
1997 1996 1996
(In thousands, except per share data)
Net Income
As Reported $11,508 $20,019 $10,225
Pro Forma 11,356 19,810 10,075
Primary Earnings Per Share
As Reported $ 2.25 $ 3.83 $ 1.94
Pro Forma 2.22 3.79 1.91
Fully Diluted Earnings Per Share
As Reported $ 2.24 $ 3.81 $ 1.94
Pro Forma 2.21 3.77 1.91
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 June 30, 1997 and 1996, and December 31, 1996, and
changes during the quarter and year then ended is presented
in the table and narrative following:
June 30, 1997 December 31, 1996 June 30, 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 (16,282) 25.02 (8,563) 22.87 (6,200) 20.59
Outstanding at
end of period 160,476 28.56 175,258 28.11 177,621 28.08
Exercisable at
period end 78,529 26.29 54,280 23.29 53,090 23.38
Weighted average
fair value of options
granted since 1-1-95 7.06 6.99 6.98
17
A total of 78,529 of the 160,476 options outstanding
at June 30, 1997, have exercise prices between $17.25 and
$32.56, with a weighted average exercise price of $26.29
and a weighted average remaining contractual life of 7.2
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 8.4 years.
In the first six months 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.
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 June 30,
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
between 30 days and one year are being used to fund
fixed-rate agency mortgage-backed securities with durations
ranging from two to three years.
18
Under these swap agreements, the Company pays a fixed rate of
interest and receives a floating rate which resets either monthly,
quarterly, or annually. The following table summarizes the
interest rate swap transactions which impacted the Company s
first six months of 1997 performance:
Fixed Floating Impact
Notional Start Termination Rate Rate Repricing On Interest
Amount Date Date Paid Received Frequency Expense
$60,000,000 3-16-95 3-16-97 6.93% 5.54% Matured $184,000
25,000,000 9-29-95 9-29-97 6.05 5.68 Quarterly 47,039
40,000,000 3-17-97 3-15-99 6.19 5.62 Monthly 66,612
50,000,000 5-08-97 5-10-99 6.20 5.88 Annually 23,556
25,000,000 6-20-97 6-20-99 6.20 5.50 Monthly 5,347
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 June 30, 1997, or June 30, 1996.
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 $16.1
million of goodwill and $4.2 million of core deposit
intangible assets on its balance sheet. The majority of
these intangible assets came from the 1994 Johnstown
Savings Bank acquisition and the 1993 Integra Branches
acquisition.
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 six months of 1997
fully diluted earnings per share by $0.21. 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 $ 1,178
1998 2,170
1999 2,014
2000 1,904
2001 1,865
2002 and after 11,181
19
A reconciliation of the Company's intangible asset
balances for the first six months of 1997 is as follows (in
thousands):
Total goodwill & core deposit
intangible assets at 12/31/96 $21,478
Intangible amortization expense
through 6/30/97 (1,178)
Total goodwill & core deposit
intangible assets at 6/30/97 $20,300
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.
14. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following at June
30, 1997, (in thousands,
except percentages):
Type Maturing Amount Weighted
Average
Rate
Advances and 1997 $ 329,463 5.67%
wholesale 1998 258,782 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 690,621 5.59
wholesale repurchase
agreements
Total FHLB Borrowings $690,621 5.59%
20
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.
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 June 30, 1997, the Company meets all capital adequacy
requirements to which it is subject.
As of June 30, 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.
21
To Be Well
Capitalized Under
For Capital Prompt Corrective
As of June 30, 1997 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(In thousands, except ratios)
Total Capital (to Risk
Weighted Assets)
Consolidated $149,372 14.05% $ 85,059 8.00% $106,324 10.00%
U.S. Bank 90,477 15.66 46,231 8.00 57,789 10.00
Three Rivers Bank 33,067 13.60 19,457 8.00 24,321 10.00
Community Savings Bank 31,601 13.09 19,313 8.00 24,141 10.00
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated 136,082 12.80 42,529 4.00 63,794 6.00
U.S. Bank 83,253 14.41 23,116 4.00 34,673 6.00
Three Rivers Bank 30,460 12.52 9,728 4.00 14,593 6.00
Community Savings Bank 28,583 11.84 9,657 4.00 14,485 6.00
Tier 1 Capital (to Average
Assets)
Consolidated 136,082 6.38 85,321 4.00 106,652 5.00
U.S. Bank 83,253 6.87 48,439 4.00 60,549 5.00
Three Rivers Bank 30,460 6.40 19,029 4.00 23,786 5.00
Community Savings Bank 28,583 6.42 17,814 4.00 22,268 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 ratios)
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.")
SECOND QUARTER JUNE 30, 1997 VS. SECOND QUARTER JUNE 30, 1996
.....PERFORMANCE OVERVIEW.....The Company's net income for
the second quarter of 1997 totalled $5,840,000 or $1.14 per
share on a fully diluted basis. The Company's net income
for the second quarter of 1996 totalled $5,282,000 or $1.01
per share on a fully diluted basis. The 1997 results
reflect a $558,000 or 10.6% earnings increase and a $0.13
or 12.9% improvement in fully diluted earnings per share
when compared to the 1996 second quarter results. For the
second quarter of 1997, the Company's return on average
equity increased by 96 basis points to 15.36% while the
return on average assets declined by three basis points to
1.09%.
The Company's improved financial performance was
driven by a $2.1 million increase in total revenue as each
of the key revenue components experienced growth during the
second quarter of 1997. Specifically, net interest income
increased by $1.8 million or 12.2% while total non-interest
income grew by $228,000 or 5.0%. This increased revenue
more than offset higher non-interest expense which resulted
from additional investment in the infrastructure of the
organization in terms of both personnel and technologies.
Total non-interest expense was $1.1 million or 8.7% higher
in the second quarter of 1997. Earnings per share grew at
a faster rate than net income due to the success of the
Company s ongoing treasury stock repurchase program. There
were 137,000 fewer average fully diluted shares outstanding
in the second quarter of 1997 when compared to the second
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 is a graphic representation of fully
diluted earnings per share for the past seven quarters. The
data points are 5,104,003; 5,146,014; 5,172,262; 5,217,025;
5,241,045; 5,312,423 and 5,499,750.
23
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
Net income $ 5,840 $ 5,282
Fully diluted earnings per share 1.14 1.01
Return on average assets 1.09% 1.12%
Return on average equity 15.36 14.40
Average fully diluted common
shares outstanding 5,104 5,241
.....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 second quarter of
1997 to the second quarter of 1996 (in thousands, except
percentages):
Three Months Ended
June 30
1997 1996 $ Change % Change
Interest income $ 38,870 $ 33,245 5,625 16.9
Interest expense 22,001 18,213 3,788 20.8
Net interest income 16,869 15,032 1,837 12.2
Tax-equivalent adjustment 756 761 (5) (0.7)
Net tax-equivalent
interest income $ 17,625 $ 15,793 1,832 11.6
Net interest margin 3.46% 3.55% (0.09)bp (1)
bp - Basis points
(1)Not meaningful.
USBANCORP's net interest income on a tax-equivalent
basis increased by $1.8 million or 11.6% due to growth in
earning assets. Total average earning assets were $256
million higher in the second quarter of 1997 as total loans
grew by $120 million or 14.3% while investment securities
increased by $134 million or 14.6%. This balanced growth
in the earning asset base was funded primarily with
borrowings from the Federal Home Loan Bank which was a key
factor causing a nine basis point decline in the net
interest margin to 3.46%. The overall 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).
...COMPONENT CHANGES IN NET INTEREST INCOME...Regarding the
separate components of net interest income, the Company's
total interest income for the second quarter of 1997
24
increased by $5.6 million or 16.9% when compared to the
same 1996 period. This increase was due primarily to a
$256 million or 14.5% increase in total average earning
assets which caused interest income to rise by $5.0
million. The remainder of the increase in interest income
was caused by a 12 basis point improvement in the earning
asset yield to 7.82%. Within the earning asset base, the
yield on total investment securities increased by 23 basis
points to 7.0% while the yield on the total loan portfolio
increased by four basis points to 8.69%. The higher
investment securities yield resulted from modest extension
of the portfolio as the duration of the total investment
securities portfolio was 46 months at June 30, 1997,
compared to a duration of 42 months at June 30, 1996.
An eighth consecutive quarter of loan growth fueled the
improvement in the loan-to-deposit ratio which contributed
to the increased loan portfolio yield. The Company s loan
to deposit ratio averaged 82.9% in the second quarter of
1997 compared to an average of 71.4% in the second quarter
of 1996. The loan yield also benefitted 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 45.5% of total
loans at June 30, 1997, compared to 37.4% at June 30, 1996.
Residential mortgage loans comprised 45.0% of total loans
at June 30, 1997, compared to 48.7% at June 30, 1996. The
higher commercial loan totals resulted from increased
production from both middle market and small business
lending (loans less than $250,000) due to more effective
sales efforts.
The Company's total interest expense for the second
quarter of 1997 increased by $3.8 million or 20.8% when
compared to the same 1996 period. This higher interest
expense was due primarily to a $243 million increase in
average interest bearing liabilities which caused interest
expense to rise by $2.9 million. The remainder of the
increase in interest expense was due to a 15 basis point
increase in the cost of interest bearing deposits to 4.25%
and a greater proportionate use of borrowed money to fund
the earning asset base. Within the liability mix, total
borrowed funds increased by $262 million in order to fund
greater balance sheet leverage and replace a $19 million
outflow in interest bearing deposits. For the second
quarter of 1997, the Company's total level of short-term
borrowed funds and FHLB advances averaged $805 million or
37.4% of total assets compared to an average of $542
million or 28.5% of total assets for the second quarter of
1996. These borrowed funds had an average cost of 5.51% in
the second quarter of 1997 which was 126 basis points
greater than the average cost of deposits which amounted to
4.25%. The combination of all these price and liability
composition movements caused USBANCORP's average cost of
interest bearing liabilities to increase by 20 basis points
from 4.61% in the second quarter of 1996 to 4.81% in the
second 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 currently
has outstanding a total of $140 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 June 30 (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 $ 960,245 $ 21,097 8.69% $ 840,345 $ 18,348 8.65%
Deposits with banks 7,646 93 4.83 1,466 17 4.71
Federal funds sold and
securities purchased
under agreement to resell 106 2 5.39 2,119 28 5.30
Investment securities:
Available for sale 472,233 8,086 6.85 432,754 6,914 6.39
Held to maturity 576,035 10,257 7.12 481,941 8,577 7.12
Total investment securities 1,048,268 18,343 7.00 914,695 15,491 6.77
Assets held in trust for
collateralized
mortgage obligation 4,942 91 7.38 6,494 122 7.56
Total interest earning
assets/interest income 2,021,207 39,626 7.82 1,765,119 34,006 7.70
Non-interest earning assets:
Cash and due from banks 32,499 35,671
Premises and equipment 17,894 18,155
Other assets 95,000 95,827
Allowance for loan losses (13,267) (14,692)
TOTAL ASSETS $2,153,333 $1,900,080
CONTINUED ON NEXT PAGE
26
THREE MONTHS ENDED JUNE 30
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 $ 91,335 $ 226 0.99% $ 98,032 $ 242 0.99%
Savings 189,524 799 1.69 214,642 899 1.68
Money markets 150,520 1,390 3.70 145,094 1,225 3.40
Other time 586,144 8,370 5.73 578,320 8,189 5.70
Total interest bearing deposits 1,017,523 10,785 4.25 1,036,088 10,555 4.10
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other short-term borrowings 152,421 1,948 5.10 98,215 1,244 5.09
Advances from Federal
Home Loan Bank 652,328 9,136 5.62 443,792 6,285 5.70
Collateralized mortgage
obligation 4,359 110 10.10 5,929 117 7.94
Long-term debt 5,484 22 1.64 4,641 12 1.05
Total interest bearing
liabilities/interest expense 1,832,115 22,001 4.81 1,588,665 18,213 4.61
Non-interest bearing liabilities:
Demand deposits 141,481 140,556
Other liabilities 27,238 23,285
Stockholders' equity 152,499 147,574
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,153,333 $1,900,080
Interest rate spread 3.01 3.09
Net interest income/
net interest margin 17,625 3.46% 15,793 3.55%
Tax-equivalent adjustment (756) (761)
Net Interest Income $16,869 $15,032
....PROVISION FOR LOAN LOSSES.....The Company's provision
for loan losses for the second quarter of 1997 totalled
$22,000 or 0.01% of average total loans which equalled the
provision level experienced in the 1996 second quarter.
The success of the Company s ongoing loan workout and
collection programs resulted in recoveries exceeding loan
charge-offs by $75,000 in the second quarter of 1997. This
compared favorably to net charge-offs of $754,000 or 0.36%
of average loans experienced in the second quarter of 1996.
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.
27
At June 30, 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 $6.9 million at June 30, 1997, or
51.7% of the allowance for loan losses. Additionally, the
low provision level was also supported by a favorable trend
in substandard and doubtful classified asset categories
experienced over the past two year period. Total
classified loans dropped from $25.3 million at June 30,
1996, to $24.6 million at June 30, 1997.
.....NON-INTEREST INCOME.....Non-interest income for the
second quarter of 1997 totalled $4.8 million which
represented a $228,000 or 5.0% increase when compared to
the same 1996 period. This increase was primarily due to
the following items:
a $36,000 or 3.7% increase in trust fees to $999,000 in
the second 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 $99,000 increase in gains realized on loans held for
sale due to heightened residential mortgage origination
and sales activity in 1997. It is the Company s
ongoing strategy to sell all newly originated 30 year
fixed-rate residential mortgage loans excluding those
loans retained for CRA purposes.
a $59,000 or 14.3% increase in income from bank owned
life insurance due to payment of an employee death
claim.
.....NON-INTEREST EXPENSE.....Non-interest expense for the
second quarter of 1997 totalled $13.5 million which
represented a $1.1 million or 8.7% increase when compared
to the same 1996 quarter. This increase was primarily due
to the following items:
a $792,000 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.
a $69,000 increase in equipment expense due to the
purchase of additional personal computers and
enhancements to local and wide area networks.
a $105,000 increase in professional fees due to higher
legal and other professional fees in the second quarter
of 1997.
a $91,000 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 ).
a $244,000 increase in other expense due to higher
telecommunication costs, employee training costs,
advertising expense and outside processing fees.
28
.....INCOME TAX EXPENSE.....The Company's provision for
income taxes for the second quarter of 1997 was $2.4
million reflecting an effective tax rate of 28.7%. The
Company's 1996 second quarter income tax provision was $1.9
million or an effective tax rate of 26.7%. 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 $5.1 million lower on
average in the second quarter of 1997 as compared to the
second quarter of 1996. The tax-free asset holdings
consist primarily of municipal investment securities,
municipality and school district loans, and bank owned life
insurance. Net deferred income taxes of $1.7 million have
been provided as of June 30, 1997, on the differences
between taxable income for financial and tax reporting
purposes.
SIX MONTHS ENDED JUNE 30, 1997 VS. SIX MONTHS ENDED JUNE 30, 1996
.....PERFORMANCE OVERVIEW.....The Company's net income for
the first six months of 1997 totalled $11.5 million or
$2.24 per share on a fully diluted basis. The Company's
net income for the first half of 1996 totalled $10.2
million or $1.94 per share on a fully diluted basis. The
1997 results reflect a $1.3 million or 12.5% earnings
increase and a $0.30 or 15.5% improvement in fully diluted
earnings per share when compared to the same period in
1996. For the first six months of 1997, the Company's
return on average equity increased by 138 basis points to
15.14% while the return on average assets was unchanged at
1.09%.
The Company's improved financial performance was due to
increased revenue generated from its core banking business.
Specifically, net interest income increased by $3.8 million
or 13.0% while total non-interest income grew by $321,000
or 3.5%. 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 $2.0 million or 8.0% higher
in the first six months of 1997. The Company's earnings
per share were also enhanced by the repurchase of its
common stock because there were 144,000 fewer average fully
diluted shares outstanding in the first half of 1997 when
compared to the first half of 1996. The following table
summarizes some of the Company's key performance indicators
(in thousands, except per share and ratios):
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
Net income $ 11,508 $ 10,225
Fully diluted earnings per share 2.24 1.94
Return on average assets 1.09% 1.09%
Return on average equity 15.14 13.76
Average fully diluted common
shares outstanding 5,133 5,277
.....NET INTEREST INCOME AND MARGIN.....The following table
compares the Company's net interest income and margin
performance for the first six months of 1997 to the first
six months of 1996 (in thousands, except percentages):
29
Six Months Ended
June 30
1997 1996 $ Change % Change
Interest income $ 76,308 $ 66,012 10,296 15.6
Interest expense 42,934 36,480 6,454 17.7
Net interest income 33,374 29,532 3,842 13.0
Tax-equivalent adjustment 1,504 1,529 (25) (1.6)
Net tax-equivalent
interest income $ 34,878 $ 31,061 3,817 12.3
Net interest margin 3.47% 3.52% (0.05)bp N/M
bp - Basis points
N/M - Not meaningful.
USBANCORP's net interest income on a tax-equivalent
basis increased by $3.8 million or 12.3% due to growth in
earning assets. Total earning assets were $241 million
higher in the first six months of 1997 with this growth in
earning assets almost evenly distributed between investment
securities and loans. Despite this balanced growth in the
earning asset base, the net interest margin declined by
five basis points to 3.47%. An increased use of borrowings
from the Federal Home Loan Bank to fund the earning asset
growth combined with a higher cost of deposits to cause the
compression in the net interest margin.
...COMPONENT CHANGES IN NET INTEREST INCOME...Regarding the
separate components of net interest income, the Company's
total interest income for the first six months of 1997
increased by $10.3 million or 15.6% when compared to the
same 1996 period. This increase was due primarily to a
$241 million or 13.8% increase in total average earning
assets which caused interest income to rise by $9.4
million. The increase in average earning assets reflects
$125 million of growth in investment securities and a $115
million increase in total average loans. The remainder of
the increase in interest income was caused by a 10 basis
point improvement in the earning asset yield to 7.81%.
Within the earning asset base, the yield on total
investment securities increased by 16 basis points to 6.97%
while the yield on the total loan portfolio increased by
six basis points to 8.69%. The improved investment
securities yield resulted from a modest increase in the
duration of the portfolio and a slightly higher interest
rate environment. The loan yield improvement resulted from
the previously discussed shift in the loan portfolio
composition away from fixed-rate residential mortgage loans
to higher yielding commercial and commercial mortgage
loans. The Company s loan to deposit ratio averaged 82.4%
for the first six months of 1997 compared to 71.1% for the
first six months of 1996.
30
The Company's total interest expense for the first half
of 1997 increased by $6.5 million or 17.7% when compared to
the same 1996 period. This higher interest expense was due
primarily to a $230 million increase in average interest
bearing liabilities which caused interest expense to rise
by $5.5 million. The remainder of the increase was due to
a 14 basis point rise in the cost of funds to 4.79%. The
cost of deposits increased by eight basis points to 4.21%
as the Company has experienced gradual disintermediation
within the deposit base from lower cost passbook savings
accounts to higher cost money market accounts and
certificates of deposit. Within the liability mix, total
borrowed funds increased by $253 million in order to fund
greater balance sheet leverage and replace a $24 million
outflow in interest bearing deposits. For the first six
months of 1997, the Company's total level of short-term
borrowed funds and FHLB advances averaged $784 million or
36.9% of total assets compared to an average of $530
million or 28.1% of total assets for the first six months
of 1996. These borrowed funds had an average cost of 5.50%
in the first half of 1997 which was 129 basis points
greater than the average cost of deposits which amounted to
4.21%. This greater dependence on borrowings to fund the
earning asset base was a key factor responsible for the
increased cost of funds even though the actual cost of the
short term borrowed funds and FHLB advances was 12 basis
points lower in the first half of 1997.
The table that follows provides an analysis of net
interest income on a tax-equivalent basis for the six month
periods ended June 30, 1997, and June 30, 1996. For a
detailed discussion of the components and assumptions
included in the table, see the paragraph before the
quarterly tables on page 26.
Six Months Ended June 30 (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 $ 949,029 $ 41,531 8.69% $ 833,919 $ 36,375 8.63%
Deposits with banks 5,448 121 4.42 1,681 34 4.03
Federal funds sold and securities
purchased under agreement
to resell 72 2 5.25 1,251 34 5.40
Investment securities:
Available for sale 456,741 16,045 7.03 424,887 14,007 6.59
Held to maturity 574,859 19,925 6.93 481,465 16,837 6.99
Total investment securities 1,031,600 35,970 6.97 906,352 30,844 6.81
Assets held in trust for
collateralized
mortgage obligation 5,062 188 7.50 6,724 254 7.61
Total interest earning
assets/interest income 1,991,211 77,812 7.81 1,749,927 67,541 7.71
Non-interest earning assets:
Cash and due from banks 33,129 35,378
Premises and equipment 17,990 18,336
Other assets 97,144 98,512
Allowance for loan losses (13,289) (14,784)
TOTAL ASSETS $2,126,185 $1,887,369
CONTINUED ON NEXT PAGE
31
SIX MONTHS ENDED JUNE 30
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 $ 90,561 $ 446 0.99% $ 97,785 $ 488 1.01%
Savings 191,264 1,603 1.69 215,179 1,807 1.70
Money markets 151,702 2,757 3.66 141,246 2,348 3.36
Other time 577,957 16,305 5.69 580,835 16,606 5.75
Total interest bearing deposits 1,011,484 21,111 4.21 1,035,045 21,249 4.13
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other short-term
borrowings 162,700 4,243 5.26 92,448 2,291 5.01
Advances from Federal
Home Loan Bank 621,538 17,329 5.62 437,436 12,605 5.83
Collateralized mortgage
obligation 4,479 198 8.91 6,162 252 8.22
Long-term debt 5,377 53 1.98 4,787 83 2.13
Total interest bearing
liabilities/interest expense 1,805,578 42,934 4.79 1,575,878 36,480 4.65
Non-interest bearing liabilities:
Demand deposits 140,054 137,811
Other liabilities 27,265 24,244
Stockholders' equity 153,288 149,436
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,126,185 $1,887,369
Interest rate spread 3.02 3.06
Net interest income/
net interest margin 34,878 3.47% 31,061 3.52%
Tax-equivalent adjustment (1,504) (1,529)
Net Interest Income $33,374 $29,532
.....PROVISION FOR LOAN LOSSES.....The Company's provision
for loan losses for the first six months of 1997 totalled
$45,000 or 0.01% of average total loans which equalled the
provision level experienced in the first six months of
1996. The Company s net charge-offs amounted to only
$71,000 or 0.02% of average loans in the first half of 1997
compared to net charge-offs of $971,000 or 0.23% of average
loans in the first half of 1996. The strength of the
allowance for loan losses at each of the Company s banking
subsidiaries supported continued low loan loss provision
levels. At June 30, 1997, the balance in the allowance for
loan losses totalled $13.3 million or 157% of total non-
performing assets.
32
.....NON-INTEREST INCOME.....Non-interest income for the
first six months of 1997 totalled $9.4 million which
represented a $321,000 or 3.5% increase when compared to
the same 1996 period. This increase was primarily due to
the following items:
a $117,000 or 6.2% increase in trust fees to $2 million
in the first half 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 $163,000 reduction in gains realized on the sale of
investments securities available for sale.
a $139,000 or 31% increase in gains realized on loans
held for sale due to heightened residential mortgage
origination and sales activity in 1997.
a $78,000 or 5.0% increase in deposit service charges
to $1.6 million. 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 $68,000 or 6.3% increase in net mortgage servicing
fee income to $1.2 million. This amount resulted from
$2.2 million of mortgage servicing fees net of $831,000
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 acquired during the first quarter of
1997.
.....NON-INTEREST EXPENSE.....Non-interest expense for the
first six months of 1997 totalled $26.7 million which
represented a $2 million or 8.0% increase when compared to
the same 1996 period. This increase was primarily due to
the following items:
a $1.6 million 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.
a $185,000 or 13.1% increase in professional fees due
to higher legal and other professional fees in the
first half of 1997.
a $344,000 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 $508,000 or 14.3% increase in other expense due to
higher telecommunication costs, advertising expense,
employee training costs, and outside processing fees.
33
.....INCOME TAX EXPENSE.....The Company's provision for
income taxes for the first six months of 1997 was $4.6
million reflecting an effective tax rate of 28.5%. The
Company's comparable period 1996 income tax provision was
$3.7 million or an effective tax rate of 26.4%. 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 $7.8 million lower on
average in the first half of 1997 as compared to the first
half of 1996.
.....NET OVERHEAD BURDEN.....The Company's efficiency
ratio(non-interest expense divided by total revenue)
demonstrated continued improvement as it declined from
61.5% for the first six months of 1996 to 60.2% for the
first six months of 1997. The increased revenue generated
in the first half of 1997 was the key factor responsible
for the improved efficiency ratio. Employee productivity
ratios also continued to demonstrate improvement as total
assets per employee averaged $2.8 million for the first
half of 1997 a 10.3% increase over the $2.5 million average
for the same prior year period. Net income per employee
also increased by 10.2% to $15,100 for the first six months
of 1997.
Presented on this page was a graphic representation of the
Efficiency Ratio for the past seven quarters. The data points
presented were 60.00%, 60.37%, 61.41%, 68.98%, 60.79%, 62.18%, and
66.92%, respectively.
.....BALANCE SHEET.....The Company's total consolidated
assets were $2.176 billion at June 30, 1997, compared with
$2.087 billion at December 31, 1996, which represents an
increase of $89 million or 4.3% due to increased leveraging
of the balance sheet. During the first six months of 1997,
total loans and loans held for sale increased by
approximately $35.9 million due to the previously mentioned
growth in commercial and commercial mortgage loans. The
Company s present loan pipelines suggest that the commercial
loan growth momentum should continue through the remainder
of 1997. 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 $45.3 million due to purchases of mortgage-
backed securities.
Total deposits increased by $26.4 million or 2.3% 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%. Seasonal factors and increased loan relationships
also contributed to $5.1 million of growth in non-
interesting bearing deposits. The Company's total borrowed
funds position increased by $58.6 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 6.38% at June 30, 1997, compared to
6.51% at December 31, 1996.
34
.....MARKET AREA ECONOMY.....National economic growth has
dropped sharply for the second quarter of 1997. Consumer
spending, which accounts for about two-thirds of economic
output, was the most significant factor in this slowdown.
It grew at only a slight 0.8 percent rate, compared to a
five year high of 5.3 percent reported in the first
quarter.
Employment, however, is surging. The nation's
unemployment rate dropped to a twenty-four year low of 4.8
percent in July 1997. Workers' average hourly earnings
rose at a 3.8 percent annual rate for the first five months
of the year, higher than last year's 3.3 percent gain in
the consumer price index. Analysts believe that plentiful
jobs, along with rising incomes, will propel faster
economic growth in the current quarter, hovering around a
three percent rate. It is unclear if this growth will be
enough to spur a Federal Reserve interest rate increase.
In the Western Region, Kennametal, Inc., may develop a
portion of its corporate campus into a 130-acre business
park. The plan is to market the land to corporate tenants
desiring "build to suit" deals, with each company housed in
a separate property, built to its specifications. Between
one million and 1.5 million square feet of office space
could be built on the 130-acres.
In the Greater Johnstown marketplace, McCrory's, a
downtown anchor of the central business district announced
that the local store will remain open. A federal
bankruptcy court accepted the bid of the McCrory chairman
to purchase the chain of 160 stores. Additionally,
Cambria County plans to award bids September 1 for
renovations to convert the former Glosser Bros. building in
downtown Johnstown into county offices and an academic
center. Finally, a new 84 Lumber store will open on August
15. The 34,000 square foot facility will offer building
supplies and hardware products for the do-it-yourselfer as
well as professional contractors.
.....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):
35
June 30 December 31 June 30
1997 1996 1996
Total loan delinquency (past due 30 to 89 days) $11,588 $20,284 $10,982
Total non-accrual loans 6,036 6,365 6,554
Total non-performing assets<F1> 8,457 8,671 7,582
Loan delinquency, as a percentage of total loans
and loans held for sale, net of unearned income 1.19% 2.16% 1.28%
Non-accrual loans, as a percentage of total loans
and loans held for sale, net of unearned income 0.62 0.68 0.77
Non-performing assets, as a percentage of total
loans and loans held for sale, net of unearned
income, and other real estate owned 0.87 0.92 0.89
<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 June 30, 1997, each of
the Company s key asset quality indicators demonstrated
improvement. Total loan delinquency declined by $8.7
million causing the delinquency ratio to drop to 1.2%. The
lower delinquency resulted from enhanced collection efforts
on residential mortgage loans and seasonal factors. Total
non-performing assets decreased by $214,000 since year-end
1996 causing the non-performing assets to total loans ratio
to decline to 0.87%. It is also important to note that
approximately $4.8 million or 57% of the Company s non-
performing assets are residential mortgages which
historically have demonstrated lower loss experience.
.....ALLOWANCE FOR LOAN LOSSES.....The following table sets
forth changes in the allowance for loan losses and certain
ratios for the periods ended (in thousands, except percentages):
June 30 December 31 June 30
1997 1996 1996
Allowance for loan losses $ 13,303 $ 13,329 $ 13,988
Amount in the allowance for loan losses
allocated to "general risk" 6,874 6,984 7,102
Allowance for loan losses as a percentage
of each of the following:
total loans and loans held for sale,
net of unearned income 1.36% 1.42% 1.64%
total delinquent loans
(past due 30 to 89 days) 114.80 65.71 127.37
total non-accrual loans 220.39 209.41 213.43
total non-performing assets 157.30 153.72 184.49
Since December 31, 1996, the balance in the allowance
for loan losses has remained relatively stable declining by
only $26,000. The Company's allowance for loan losses at
June 30, 1997, was 157% of non-performing assets and 220%
of non-accrual loans. Both of these coverage ratios
increased since year-end 1996 due to the Company's lower
level of non-performing assets. The portion of the
allowance allocated to general risk has been relatively
constant at approximately $6.9 million for each of the
periods presented.
36
.....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.
The following table presents a summary of the
Company's static GAP positions (in thousands, except for
the GAP ratios):
June 30 December 31 June 30
1997 1996 1996
Six month cumulative GAP
RSA........................ $ 610,020 $ 609,088 $ 565,417
RSL........................ (853,322) (865,296) (781,858)
Off-balance sheet
hedges................ 40,000 25,000 75,000
GAP........................ $ (203,302) $ (231,208) $(141,441)
GAP ratio.................. 0.75X 0.72X 0.80X
GAP as a % of total
assets.................. (9.34)% (11.08)% (7.32)%
GAP as a % of total
capital................. (130.17) (152.19) (96.78)
One year cumulative GAP
RSA........................ $ 839,269 $ 840,813 $ 781,358
RSL........................ (1,226,982) (1,061,514) (888,280)
Off-balance sheet
hedges.................. 90,000 - 25,000
GAP........................ $ (297,713) $ (220,701) $ (81,922)
GAP ratio.................. 0.74X 0.79X 0.91X
GAP as a % of total
assets.................. (13.68)% (10.57)% (4.24)%
GAP as a % of total
capital................. (190.61) (145.28) (56.05)
When June 30, 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. In
February 1997, the Company did extend $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 the six month
GAP by $40 million and the one year GAP by $90 million.
37
A portion of the Company's funding base is low cost
core deposit accounts which do not have a specific maturity
date. The accounts which comprise these low cost core
deposits include passbook savings accounts, money market
accounts, NOW accounts, daily interest savings accounts,
purpose clubs, etc. At June 30, 1997, the balance in these
accounts totalled $428 million or 19.7% of total assets.
Within the above static GAP table, approximately $149
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.
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 June 30, 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 (3.2%) under an upward rate
shock forecast reflecting a 200 basis point increase in
interest rates above published economic consensus
estimates. Net income was reduced by approximately (6.3%)
under this same scenario. 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 June 30, 1997, 46%
of the portfolio is currently classified as available for
sale and 54% 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.
38
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 $158 million. Furthermore, USBANCORP had
available at June 30, 1997, $6.6 million of a total $14.5
million unsecured line of credit.
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 June
30, 1997, due primarily to $76.7 million of net cash
provided by financing activities and $10.7 million of net
cash provided by operating activities. This more than
offset $80.1 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
$45.8 million. Cash advanced for new loan fundings
totalled $153.6 million and was approximately $18.0 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 $29.5
million. Net principal borrowings of advances from the
Federal Home Loan Bank provided $58.2 million of cash.
.....CAPITAL RESOURCES.....As presented in Note 15, each of
the Company s regulatory capital ratios decreased modestly
between December 31, 1996, and June 30, 1997, as the growth
in assets exceeded the growth of capital. 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.
Presented on this page was a graphic representation of the
Average Fully Diluted Number of Shares Outstanding for the
past seven quarters. The data points presented were 5,104,
5,146, 5,172, 5,217, 5,241, 5,312, and 5,336, respectively.
39
The Company used funds provided by a $14.5 million
unsecured line of credit to repurchase 85,000 shares or
$4.0 million of its common stock during the first six
months of 1997. Through June 30, 1997, the Company has
repurchased a total of 747,000 shares of its common stock
at a total cost of $23.5 million or $31.46 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 200% 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%.
The Company's declared Common Stock cash dividend per
share was $0.65 for the first six months of 1997 which was
a 14.0% increase over the $0.57 per share dividend for the
same 1996 interim period. On June 30,1997, the dividend
yield on the Company s common stock was 2.6% compared to an
average common dividend yield for Pennsylvania bank holding
companies of approximately 2.4%. The Company believes that
the payment of a higher than peer level of common dividends
is an integral component needed to achieve a progressive
total shareholder return.
.....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.
40
SERVICE AREA MAP
Presented on this page was a service area map reflecting
the six counties serviced by USBANCORP, Inc.
41
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of
USBANCORP, Inc. was held on April 22, 1997.
The results of the items submitted for a vote
are as follows:
The following four Directors, whose term will expire in 2000, were elected:
Number of Votes % of total
Cast for Class I outstanding
Director shares voted
Clifford A. Barton 4,044,166 79.51%
Margaret A. O'Malley 4,014,481 78.93%
Mark E. Pasquerilla 4,001,347 78.67%
Thomas C. Slater 4,030,741 79.25%
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
for the quarter ending June 30, 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: August 11, 1997 /s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: August 11, 1997 /s/Jeffrey A. Stopko
Jeffrey A. Stopko
Senior Vice President and
Chief Financial Officer
42
STATEMENT OF MANAGEMENT RESPONSIBILITY
July 18, 1997
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
43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
USBANCORP, Inc. :
We have reviewed the accompanying consolidated balance
sheets of USBANCORP, Inc. (a Pennsylvania corporation)
and subsidiaries as of June 30, 1997 and 1996, and the
related consolidated statements of income, changes in
stockholders equity and cash flows for the three and
six 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,
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,
July 18, 1997
44
July 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 June 30, 1997, which includes our report
dated July 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 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
45