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 September 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 October 31, 1997
Common Stock, par value $2.50 4,959,354
per share
1
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
September 30, 1997, December 31, 1996,
and September 30, 1996 3
Consolidated Statement of Income -
Three and Nine Months Ended
September 30, 1997, and 1996 4
Consolidated Statement of Changes
in Stockholders' Equity -
Nine Months Ended
September 30, 1997, and 1996 6
Consolidated Statement of Cash Flows -
Nine Months Ended
September 30, 1997, and 1996 7
Notes to Consolidated Financial
Statements 8
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations 21
Part II. Other Information 40
2
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
September 30 December 31 September 30
1997 1996 1996
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 35,169 $ 43,183 $ 48,121
Interest bearing deposits with banks 207 1,218 5,304
Federal funds sold and securities purchased
under agreements to resell - - -
Investment securities:
Available for sale 526,073 455,890 494,315
Held to maturity (market value $559,899 on
September 30, 1997, $549,427 on December 31, 1996,
and $516,637 on September 30, 1996) 552,440 546,318 519,483
Assets held in trust for collateralized mortgage
obligation 4,545 5,259 5,651
Loans held for sale 9,773 14,809 9,490
Loans 972,453 929,736 897,088
Less: Unearned income 5,182 4,819 2,999
Allowance for loan losses 12,930 13,329 13,871
Net Loans 954,341 911,588 880,218
Premises and equipment 17,868 18,201 18,385
Accrued income receivable 17,170 17,362 16,927
Mortgage servicing rights 16,384 12,494 11,708
Goodwill and core deposit intangibles 19,711 21,478 22,068
Bank owned life insurance 33,583 32,451 32,096
Other assets 4,954 6,861 7,077
TOTAL ASSETS $ 2,192,218 $ 2,087,112 $ 2,070,843
LIABILITIES
Non-interest bearing deposits $ 146,553 $ 144,314 $ 147,920
Interest bearing deposits 1,006,976 994,424 1,004,754
Total deposits 1,153,529 1,138,738 1,152,674
Federal funds purchased and securities sold under
agreements to repurchase 99,147 76,672 82,807
Other short-term borrowings 93,926 79,068 139,559
Advances from Federal Home Loan Bank 649,207 605,499 516,011
Collateralized mortgage obligation 4,018 4,691 5,088
Long-term debt 4,829 4,172 4,482
Total borrowed funds 851,127 770,102 747,947
Other liabilities 26,551 26,355 21,182
TOTAL LIABILITIES 2,031,207 1,935,195 1,921,803
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; 5,759,579 shares issued and 4,984,351
outstanding on September 30, 1997; 5,742,264 shares
issued and 5,081,004 outstanding on December 31,
1996; 5,740,247 shares issued and 5,147,749
outstanding on September 30, 1996 14,399 14,356 14,351
Treasury stock at cost, 775,228 shares on September 30,
1997, 661,260 shares on December 31, 1996, and
592,498 shares on September 30, 1996 (25,231) (19,538) (16,805)
Surplus 93,913 93,527 93,481
Retained earnings 75,853 63,358 60,403
Net unrealized holding gains (losses) on
available for sale securities 2,077 214 (2,390)
TOTAL STOCKHOLDERS' EQUITY 161,011 151,917 149,040
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,192,218 $ 2,087,112 $ 2,070,843
See accompanying notes to consolidated financial statements.
3
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
INTEREST INCOME
Interest and fees on loans and loans held for sale:
Taxable $ 20,637 $ 18,248 $ 60,585 $ 53,626
Tax exempt 616 403 1,796 1,158
Deposits with banks 53 62 174 96
Federal funds sold and securities
purchased under agreements to resell - - 2 34
Investment securities:
Available for sale 8,170 8,075 23,835 22,082
Held to maturity 9,721 8,430 28,925 23,980
Assets held in trust for collateralized
mortgage obligation 87 112 275 366
Total Interest Income 39,284 35,330 115,592 101,342
INTEREST EXPENSE
Deposits 10,963 10,472 32,074 31,721
Federal funds purchased and securities
sold under agreements to repurchase 1,290 1,254 3,771 2,846
Other short-term borrowings 659 2,030 2,421 2,729
Advances from Federal Home Loan Bank 9,345 5,814 26,674 18,419
Collateralized mortgage obligation 118 115 316 367
Long-term debt 26 24 79 107
Total Interest Expense 22,401 19,709 65,335 56,189
NET INTEREST INCOME 16,883 15,621 50,257 45,153
Provision for loan losses 23 23 68 68
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 16,860 15,598 50,189 45,085
NON-INTEREST INCOME
Trust fees 1,025 924 3,024 2,806
Net realized gains on investment securities 145 250 301 569
Net realized gains on loans held for sale 519 320 1,107 769
Wholesale cash processing fees 236 269 794 808
Service charges on deposit accounts 841 837 2,479 2,397
Net mortgage servicing fees 567 655 1,718 1,738
Bank owned life insurance 393 394 1,248 1,225
Other income 1,425 1,273 3,903 3,712
Total Non-Interest Income 5,151 4,922 14,574 14,024
NON-INTEREST EXPENSE
Salaries and employee benefits 7,114 6,485 21,005 18,774
Net occupancy expense 1,111 1,114 3,312 3,368
Equipment expense 768 726 2,426 2,318
Professional fees 837 800 2,430 2,208
Supplies, postage, and freight 685 674 2,035 2,033
Miscellaneous taxes and insurance 369 350 1,118 1,080
FDIC deposit insurance expense 69 2,083 51 2,409
Amortization of goodwill and core deposit intangibles 589 589 1,767 1,770
Other expense 2,082 1,854 6,143 5,406
Total Non-Interest Expense $ 13,624 $ 14,675 $ 40,287 $ 39,366
CONTINUED ON NEXT PAGE
4
CONSOLIDATED STATEMENT OF INCOME
CONTINUED FROM PREVIOUS PAGE
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
INCOME BEFORE INCOME TAXES $ 8,387 $ 5,845 $ 24,476 $ 19,743
Provision for income taxes 2,370 1,546 6,951 5,219
NET INCOME $ 6,017 $ 4,299 $ 17,525 $ 14,524
PER COMMON SHARE DATA:
Primary:
Net incom $ 1.18 $ 0.83 $ 3.43 $ 2.77
Average shares outstanding 5,085,385 5,203,533 5,107,955 5,252,006
Fully Diluted:
Net income $ 1.18 $ 0.82 $ 3.42 $ 2.76
Average shares outstanding 5,090,283 5,217,025 5,127,093 5,270,000
Cash Dividends Declared $ 0.35 $ 0.30 $ 1.00 $ 0.87
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 - - - - 14,524 - 14,524
Dividend reinvestment
and stock purchase plan - 17 - 120 - - 137
Net unrealized holding
gains (losses) on
investment securities - - - - - (5,793) (5,793)
Treasury stock, 169,286
shares at cost - - (5,798) - - - (5,798)
Cash dividends declared:
Common stock ($0.27 per
share on 5,266,539 shares
and $0.30 per share
on 5,186,989 and
5,147,403 shares) - - - - (4,522) - (4,522)
Balance September 30, 1996 $ - $ 14,351 $(16,805) $ 93,481 $ 60,403 $ (2,390)$149,040
Balance December 31, 1996 $ - $ 14,356 $(19,538) $ 93,527 $ 63,358 $ 214 $151,917
Net Income - - - - 17,525 - 17,525
Dividend reinvest-
ment and stock
purchase plan - 43 - 386 - - 429
Net unrealized holding gains
(losses) on investment
securities - - - - - 1,863 1,863
Treasury stock, 113,968
shares at cost - - (5,693) - - - (5,693)
Cash dividends declared:
Common stock($0.30 per share
on 5,085,429 shares, $0.35
per share on 5,021,429 and
4,993,318 shares) - - - - (5,030) - (5,030)
Balance September 30, 1997 $ - $ 14,399 $(25,231) $ 93,913 $ 75,853 $2,077 $161,011
See accompanying notes to consolidated financial statements.
6
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
Nine Months Ended
September 30
1997 1996
OPERATING ACTIVITIES
Net income $ 17,525 $ 14,524
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 68 68
Depreciation and amortization expense 1,800 1,949
Amortization expense of goodwill and core deposit intangibles 1,767 1,770
Amortization expense of mortgage servicing rights 1,261 944
Net (accretion) amortization of investment securities (5) 200
Net realized gains on investment securities (301) (569)
Net realized gains on loans and loans held for sale (1,107) (769)
Origination of mortgage loans held for sale (190,206) (145,095)
Sales of mortgage loans held for sale 182,184 153,239
Decrease (increase) in accrued income receivable 192 (175)
Decrease in accrued expense payable (7) (406)
Net cash provided by operating activities 13,171 25,680
INVESTING ACTIVITIES
Purchases of investment securities and other short-term
investments (418,445) (500,891)
Proceeds from maturities of investment securities and
other short-term investments 95,595 123,437
Proceeds from sales of investment securities and
other short-term investments 249,723 246,174
Long-term loans originated (214,256) (258,840)
Loans held for sale (9,773) (9,490)
Principal collected on long-term loans 193,651 191,285
Loans purchased or participated (2) (519)
Loans sold or participated 234 663
Net decrease (increase) in credit card receivable and other
short-term loans 1,490 (530)
Purchases of premises and equipment (1,531) (1,796)
Sale/retirement of premises and equipment 61 49
Net decrease in assets held in trust for collateralized
mortgage obligation 714 1,448
Net increase mortgage servicing rights (5,151) (1,280)
Net (increase) decrease in other assets (229) 722
Net cash used by investing activities (107,919) (209,568)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit 209,325 200,304
Payments for maturing certificates of deposits (182,571) (221,101)
Net decrease in demand and savings deposits (11,963) (4,387)
Net increase in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings 36,660 126,550
Net principal borrowings of advances from Federal Home Loan
Bank 43,708 87,794
Principal borrowings on long-term debt 5,068 -
Repayments of long-term debt (4,411) (579)
Common stock cash dividends paid (7,572) (2,978)
Proceeds from dividend reinvestment, stock
purchase plan, and stock options exercised 429 137
Purchases of treasury stock (5,693) (5,798)
Net increase (decrease) in other liabilities 2,743 (2,797)
Net cash provided by financing activities 85,723 177,145
NET DECREASE IN CASH EQUIVALENTS (9,025) (6,743)
CASH EQUIVALENTS AT JANUARY 1 44,401 60,168
CASH EQUIVALENTS AT SEPTEMBER 30 $ 35,376 $ 53,425
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 nine month periods
ended September 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 October 16, 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. Recent Pronouncements
In the first quarter of 1997 the Financial Accounting
Standards Board issued Statement of Financial Accounting 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
In June 1997, the Financial Accounting Standards Board issued
SFAS 130 "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income and its
components in financial statements. This statement is effective
for periods beginning after December 15, 1997. Also in June 1997,
SFAS 131 "Disclosures about Segments of an Enterprise and Related
Information" was issued. This statement requires that a public
business enterprise segments. This statement is effective for
periods beginning after December 15, 1997. The Company has not
determined the ultimate reporting and disclosure changes to be made
to the financial statements as a result of SFAS 130 and 131.
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 $5,887,000 in income tax
payments in the first nine months of 1997 as compared to $3,789,000
for the first nine months of 1996. Total interest expense paid
amounted to $65,342,000 in 1997's first nine months compared to
$56,595,000 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):
9
Investment securities available for sale:
September 30, 1997
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 10,696 $ 32 $ (9) $ 10,719
U.S. Agency 1,020 12 - 1,032
State and municipal 13,513 310 - 13,823
U.S. Agency mortgage-backed
securities 458,506 4,272 (1,158) 461,620
Other securities<F1> 38,879 - - 38,879
Total $522,614 $ 4,626 $ (1,167) $526,073
Investment securities held to maturity:
September 30, 1997
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 10,299 $ 10 $ (3) $ 10,306
U.S. Agency 27,496 134 (7) 27,623
State and municipal 113,552 2,363 (35) 115,880
U.S. Agency mortgage-backed
securities 398,133 5,867 (1,001) 402,999
Other securities<F1> 2,960 131 - 3,091
Total $ 552,440 $ 8,505 $ (1,046) $559,899
<F1>Other investment securities include corporate notes and bonds,
asset-backed securities, and equity securities.
Maintaining investment quality is a primary objective of the
Company's investment policy which, subject to certain limited
exceptions, prohibits the purchase of any investment security below
a Moody's Investor's Service or Standard & Poor's rating of "A."
At September 30, 1997, 98.8% of the portfolio was rated "AAA" and
98.9% "AA" or higher as compared to 98.8% and 98.9%, respectively,
at September 30, 1996. Less than 1.0% of the portfolio was rated
below "A" or unrated at September 30, 1997.
The Company may sell covered call options on securities held
in the available for sale investment portfolio. At the time a call
is written, the Company records a liability equal to the premium
fee received. The call liability is marked to market monthly and
the offset is made to earnings. During the first nine months of
1997, there was $25,000 of income generated on call options. As of
September 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.
10
6. Loans Held for Sale
At September 30, 1997, $9,773,000 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 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):
September 30 December 31 September 30
1997 1996 1996
Commercial $150,050 $138,008 $140,128
Commercial loans secured
by real estate 284,242 266,700 228,296
Real estate - mortgage 441,846 414,003 415,197
Consumer 96,315 111,025 113,467
Loans 972,453 929,736 897,088
Less: Unearned income 5,182 4,819 2,999
Loans, net of unearned income $967,271 $924,917 $894,089
Real estate-construction loans were not material at these
presented dates and comprised 1.9% of total loans net of unearned
income at September 30, 1997. The Company has no credit exposure
to foreign countries or highly leveraged transactions.
Additionally, the Company has no significant industry lending
concentrations.
8. Allowance for Loan Losses and Charge-Off Procedures
As a financial institution which assumes lending and credit
risks as a principal element of its business, the Company
anticipates that credit losses will be experienced in the normal
course of business. Accordingly, the Company consistently applies
a comprehensive methodology and procedural discipline which is
updated on a quarterly basis at the subsidiary bank level to
determine both the adequacy of the allowance for loan losses and
the necessary provision for loan losses to be charged against
earnings. This methodology includes:
a detailed review of all 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.
11
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.
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.
12
An analysis of the changes in the allowance for loan losses
follows (in thousands, except ratios):
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Balance at beginning of period $ 13,303 $ 13,988 $ 13,329 $ 14,914
Charge-offs:
Commercial 244 13 323 1,016
Real estate-mortgage 15 55 95 84
Consumer 389 210 894 535
Total charge-offs 648 278 1,312 1,635
Recoveries:
Commercial 170 65 368 247
Real estate-mortgage 5 - 237 33
Consumer 77 73 240 244
Total recoveries 252 138 845 524
Net charge-offs 396 140 467 1,111
Provision for loan losses 23 23 68 68
Balance at end of period $ 12,930 $ 13,871 $ 12,930 $ 13,871
As a percent of average loans and loans
held for sale, net of unearned income:
Annualized net charge-offs 0.16% 0.06% 0.06% 0.18%
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 1.32 1.54 1.32 1.54
Allowance as a multiple of annualized
net charge-offs, at period end 8.23X 24.90X 20.71X 9.35X
Total classified loans $23,489 $25,519 $23,489 $25,519
Dollar allocation of reserve
to general risk 6,570 5,564 6,570 5,564
Percentage allocation of
reserve to general risk 50.81% 40.11% 50.81% 40.11%
(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 25 and 33, respectively.)
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.
13
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.
The Company had loans totalling $1,698,000 and $2,107,000
being specifically identified as impaired and a corresponding
allocation reserve of $1,066,000 and $937,000 at September 30,
1997, and September 30, 1996, respectively. The average
outstanding balance for loans being specifically identified as
impaired was $1,949,000 for the first nine months of 1997 compared
to $2,486,000 for the first nine 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 nine 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):
September 30, 1997 December 31, 1996 September 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 $ 830 15.4% $ 1,826 14.7% $ 1,902 15.5%
Commercial
loans secured
by real estate 2,756 29.1 2,796 28.4 3,914 25.3
Real Estate -
mortgage 449 46.2 472 45.6 570 47.0
Consumer 1,259 9.3 959 11.3 984 12.2
Allocation to
general risk 6,570 - 6,984 - 5,564 -
Allocation for
impaired loans 1,066 - 292 - 937 -
Total $12,930 100.0% $13,329 100.0% $13,871 100.0%
14
Even though real estate-mortgage loans comprise approximately
46% of the Company's total loan portfolio, only $449,000 or 3.5% 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 September 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.
The following table presents information concerning non-
performing assets (in thousands, except percentages):
September 30 December 31 September 30
1997 1996 1996
Non-accrual loans $6,368 $6,365 $5,635
Loans past due 90 days or more 1,419 2,043 1,709
Other real estate owned 1,084 263 151
Total non-performing assets $8,871 $8,671 $7,495
Total non-performing assets
as a percent of loans and loans
held for sale, net of unearned
income, and other real estate
owned 0.91% 0.92% 0.83%
15
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 Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Interest income due in accordance
with original terms $ 116 $ 101 $ 351 $ 423
Interest income recorded (14) (6) (95) (12)
Net reduction in interest income $ 102 $ 95 $ 256 $ 411
11. Incentive Stock Option Plan
Under the Incentive Stock Option Plan (the "Plan"), options
can be granted (the "Grant Date") to employees with executive,
managerial, technical, or professional responsibility as selected
by a committee of the board of directors. The 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 for the
nine months ended:
September 30, September 30,
1997 1996
(In thousands, except per share data)
Net Income
As Reported $17,525 $14,524
Pro Forma 17,373 14,369
Primary Earnings Per Share
As Reported $ 3.43 $ 2.77
Pro Forma 3.40 2.74
Fully Diluted Earnings Per Share
As Reported $ 3.42 $ 2.76
Pro Forma 3.39 2.73
16
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.
In the first nine 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
September 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. 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
nine months of 1997 performance:
17
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 5.71 Matured 64,023
40,000,000 3-17-97 3-15-99 6.19 5.64 Monthly 117,321
50,000,000 5-08-97 5-10-99 6.20 5.88 Annually 63,556
25,000,000 6-20-97 6-20-99 6.20 5.54 Monthly 47,527
50,000,000 9-25-97 9-25-99 5.80 5.50 Monthly 1,250
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 total maximum notional
amount outstanding of $500 million for interest rate swaps, and
interest rate caps/floors. The Company had no interest rate caps
or floors outstanding at September 30, 1997, or September 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 $15.8 million of goodwill and
$3.9 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 nine months of 1997 fully diluted earnings per share
by $0.31. 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 $ 589
1998 2,170
1999 2,014
2000 1,904
2001 1,865
2002 and after 11,169
18
14. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following at September
30, 1997, (in thousands,
except percentages):
Type Maturing Amount Weighted
Average
Rate
Advances and 1997 $ 195,054 5.51%
wholesale 1998 359,777 5.43
repurchase 1999 126,250 5.86
agreements 2000 3,750 6.15
2001 10,126 8.22
2002 and after 12,250 6.92
Total Advances and 707,207 5.55
wholesale repurchase
agreements
Total FHLB Borrowings $707,207 5.55%
All of the above borrowings bear a fixed rate of interest,
with the only exceptions being the Flexline whose rate can change
daily. All FHLB stock along with an interest in unspecified
mortgage loans and mortgage-backed securities, with an aggregate
statutory value equal to the amount of the advances, have been
pledged as collateral with
the Federal Home Loan Bank of Pittsburgh to support these
borrowings.
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 September 30, 1997, the
Company meets all capital adequacy requirements to which it is
subject.
19
As of September 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.
To Be Well
Capitalized Under
For Capital Prompt Corrective
As of September 30, 1997 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(In thousands, except ratios)
Total Capital (to Risk
Weighted Assets)
Consolidated $ 151,414 14.45% $ 83,844 8.00% $ 104,805 10.00%
U.S. Bank 92,118 16.45 44,809 8.00 56,011 10.00
Three Rivers Bank 65,616 13.45 38,964 8.00 48,705 10.00
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated 138,484 13.21 41,922 4.00 62,883 6.00
U.S. Bank 85,224 15.22 22,404 4.00 33,607 6.00
Three Rivers Bank 59,580 12.23 19,482 4.00 29,223 6.00
Tier 1 Capital (to Average
Assets)
Consolidated 138,484 6.45 85,851 4.00 107,314 5.00
U.S. Bank 85,224 7.08 48,142 4.00 60,177 5.00
Three Rivers Bank 59,580 6.35 37,530 4.00 46,913 5.00
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
("M.D.& A.")
THIRD QUARTER September 30, 1997 VS. THIRD QUARTER September 30,
1996
.....PERFORMANCE OVERVIEW.....The Company's net income for the
third quarter of 1997 totalled $6,017,000 or $1.18 per share on a
fully diluted basis. The Company's net income for the third
quarter of 1996 totalled $4,299,000 or $0.82 per share on a fully
diluted basis. The 1997 results reflect a $1.7 million or 40.0%
earnings increase and a $0.36 or 43.9% improvement in fully diluted
earnings per share when compared to the 1996 third quarter results.
In the third quarter of 1996, the Company recognized a one-time
assessment mandated by Congress to recapitalize the Savings
Association Insurance Fund. The negative after-tax impact of this
special assessment on net income was $1.4 million or $0.26 on fully
diluted earnings per share. For the third quarter of 1997, the
Company's return on average equity was 15.07% while the return on
average assets was 1.10%.
The Company's improved financial performance was driven by a
$1.5 million increase in total revenue as each of the key revenue
components experienced growth during the third quarter of 1997.
Specifically, net interest income increased by $1.3 million or 8.1%
while total non-interest income grew by $229,000 or 4.7%. Total
non-interest expense was $1.1 million or 7.2% lower in the third
quarter of 1997 due to reduced FDIC Insurance Expense. 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 127,000 fewer average fully diluted shares outstanding in the
third quarter of 1997 when compared to the third quarter of 1996.
The following table summarizes some of the Company's key
performance indicators (in thousands, except per share and ratios):
Presented on this page was a graph of the past seven quarters of
fully diluted earnings per share. The data points presented were
$1.18, $1.14, $1.10, $1.06, $0.82, $1.01, and $0.93, respectively.
21
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
Net income $ 6,017 $ 4,299
Fully diluted earnings per share 1.18 0.82
Return on average assets 1.10% 0.86%
Return on average equity 15.07 11.53
Average fully diluted common
shares outstanding 5,090 5,217
.....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 third quarter of 1997 to the third quarter of
1996 (in thousands, except percentages):
Three Months Ended
September 30
1997 1996 $ Change % Change
Interest income $ 39,284 $ 35,330 3,954 11.2
Interest expense 22,401 19,709 2,692 13.7
Net interest income 16,883 15,621 1,262 8.1
Tax-equivalent adjustment 721 730 (9) (1.2)
Net tax-equivalent
interest income $ 17,604 $ 16,351 1,253 7.7
Net interest margin 3.46% 3.51% (0.05)bp N/M
bp - Basis points
N/M - Not meaningful.
USBANCORP's net interest income on a tax-equivalent basis
increased by $1.3 million or 7.7% due to growth in earning assets.
Total average earning assets were $169 million higher in the third
quarter of 1997 as total loans grew by $114 million or 13.3% while
investment securities increased by $57 million or 5.7%. This
growth in the earning asset base was funded primarily with
borrowings from the Federal Home Loan Bank which was a key factor
causing a five 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).
22
...COMPONENT CHANGES IN NET INTEREST INCOME...Regarding the
separate components of net interest income, the Company's total
interest income for the third quarter of 1997 increased by $4.0
million or 11.2% when compared to the same 1996 period. This
increase was due primarily to a $169 million or 9.1% increase in
total average earning assets which caused interest income to rise
by $3.3 million. The remainder of the increase in interest income
was caused by a 12 basis point improvement in the earning asset
yield to 7.83%. Within the earning asset base, the yield on total
investment securities increased by 13 basis points to 7.01% while
the yield on the total loan portfolio increased by six basis points
to 8.67%.
A ninth 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 83.6% in the third quarter of 1997 compared to an
average of 73.8% in the third quarter of 1996. The loan yield also
benefitted from a continued mix shift in the loan portfolio
composition towards higher yielding commercial and commercial
mortgage loans. Total commercial and commercial mortgage loans
comprised 44.5% of total loans at September 30, 1997, compared to
40.8% at September 30, 1996. The higher commercial loan totals
resulted from increased production from both middle market and
small business lending (loans less than $250,000).
The Company's total interest expense for the third quarter of
1997 increased by $2.7 million or 13.7% when compared to the same
1996 period. This higher interest expense was due primarily to a
$157 million increase in average interest bearing liabilities which
caused interest expense to rise by $1.9 million. The remainder of
the increase in interest expense was due to a 19 basis point
increase in the cost of interest bearing deposits to 4.28% and a
greater proportionate use of borrowed money to fund the earning
asset base. Within the liability mix, total borrowed funds
increased by $160 million in order to fund greater balance sheet
leverage as average total deposits were essentially flat between
periods. For the third quarter of 1997, the Company's total level
of short-term borrowed funds and FHLB advances averaged $810
million or 37.4% of total assets compared to an average of $649
million or 32.6% of total assets for the third quarter of 1996.
These borrowed funds had an average cost of 5.52% in the third
quarter of 1997 which was 124 basis points greater than the average
cost of deposits which amounted to 4.28%. The combination of all
these price and liability composition movements caused USBANCORP's
average cost of interest bearing liabilities to increase by 18
basis points from 4.66% in the third quarter of 1996 to 4.84% in
the third 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 $165 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.)
23
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 September 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 $ 972,332 $ 21,454 8.67% $ 858,047 $ 18,796 8.61%
Deposits with banks 3,496 53 5.92 4,650 62 5.18
Federal funds sold and securities
purchased under agreement
to resell - - - - - -
Investment securities:
Available for sale 486,916 8,411 6.91 483,479 8,075 6.68
Held to maturity 563,117 10,000 7.10 509,541 9,015 7.08
Total investment securities 1,050,033 18,411 7.01 993,020 17,090 6.88
Assets held in trust for
collateralized
mortgage obligation 4,689 87 7.35 5,977 112 7.48
Total interest earning
assets/interest income 2,030,550 $40,005 7.83% 1,861,694 $36,060 7.71%
Non-interest earning assets:
Cash and due from banks 32,639 34,706
Premises and equipment 17,987 18,273
Other assets 97,814 92,949
Allowance for loan losses (12,998) (13,964)
TOTAL ASSETS $2,165,992 $1,993,658
CONTINUED ON NEXT PAGE
24
THREE MONTHS ENDED September 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 $ 90,921 $ 226 0.99% $ 94,752 $ 234 0.98%
Savings 184,631 791 1.70 207,638 876 1.68
Money markets 153,868 1,449 3.74 148,111 1,311 3.52
Other time 587,650 8,497 5.74 569,173 8,051 5.63
Total interest bearing deposits 1,017,070 10,963 4.28 1,019,674 10,472 4.09
Short term borrowings:
Federal funds purchased,
securities sold under agreements
to repurchase and other
short-term borrowings 152,790 1,949 5.00 247,582 3,284 5.23
Advances from Federal
Home Loan Bank 657,045 9,345 5.64 401,674 5,814 5.76
Collateralized mortgage obligation 4,143 118 11.29 5,409 115 8.47
Long-term debt 5,000 26 2.06 4,608 24 2.12
Total interest bearing
liabilities/interest
expense 1,836,048 22,401 4.84 1,678,947 19,709 4.66
Non-interest bearing liabilities:
Demand deposits 145,949 143,596
Other liabilities 25,542 22,810
Stockholders' equity 158,453 148,305
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,165,992 $1,993,658
Interest rate spread 3.00 3.05
Net interest income/
net interest margin 17,604 3.46% 16,351 3.51%
Tax-equivalent adjustment (721) (730)
Net Interest Income $16,883 $15,621
....PROVISION FOR LOAN LOSSES.....The Company's provision for loan
losses for the third quarter of 1997 totalled $23,000 or 0.01% of
average total loans which equalled the provision level experienced
in the 1996 third quarter. The strength of the allowance for loan
losses at each of the Company s banking subsidiaries supported
continued low loan loss provision levels. The Company applies a
consistent methodology and procedural discipline to evaluate the
adequacy of the allowance for loan losses at each subsidiary bank
on a quarterly basis. At September 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 $6.6 million at September 30, 1997, or
50.8% of the allowance for loan losses. The Company expects a
moderate increase in its loan loss provision level in future
periods due to continued loan growth and increased holdings of
commercial and commercial real estate loans.
25
.....NON-INTEREST INCOME.....Non-interest income for the third
quarter of 1997 totalled $5.2 million which represented a $229,000
or 4.7% increase when compared to the same 1996 period. This
increase was primarily due to the following items:
a $101,000 or 10.9% increase in trust fees to $1.0 million in
the third 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 $199,000 increase in gains realized on loans held for sale
due to heightened residential mortgage origination and sales
activity at the Company's mortgage banking subsidiary. Total
mortgage originations amounted to $80 million in the third
quarter of 1997 compared to $52 million in the same 1996
period. It is the Company s ongoing strategy to sell newly
originated 30 year fixed-rate residential mortgage loans
excluding those loans retained for CRA purposes.
a $152,000 or 11.9% increase in other income due in part to
additional income resulting from ATM transaction charges, other
mortgage banking processing fees, credit card charges, and
premium income commissions from insurance sales.
an $88,000 or 13.4% decrease in net mortgage servicing fees due
to greater amortization expense on mortgage servicing rights.
.....NON-INTEREST EXPENSE.....Non-interest expense for the third
quarter of 1997 totalled $13.6 million which represented a $1.1
million or 7.2% decrease when compared to the same 1996 quarter.
This decrease was primarily due to the following items:
a $2.0 million decrease in FDIC deposit insurance expense due
to the non-recurrence of a $1.4 million special assessment and
lower basic deposit premium costs on SAIF insured deposits.
a $629,000 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 $42,000 increase in equipment expense due to the purchase of
additional personal computers and enhancements to local and
wide area networks.
a $228,000 increase in other expense due to higher
telecommunication costs, employee training costs, advertising
expense and outside processing fees.
26
.....INCOME TAX EXPENSE.....The Company's provision for income
taxes for the third quarter of 1997 was $2.4 million reflecting an
effective tax rate of 28.3%. The Company's 1996 third quarter
income tax provision was $1.5 million or an effective tax rate of
26.4%. The higher effective tax rate in 1997 was due to the
Company s increased pre-tax earnings combined with a relatively
consistent level of tax-free income. Net deferred income taxes of
$3.4 million have been provided as of September 30, 1997, on the
differences between taxable income for financial and tax reporting
purposes.
NINE MONTHS ENDED September 30, 1997 VS. NINE MONTHS ENDED
September 30, 1996
.....PERFORMANCE OVERVIEW.....The Company's net income for the
first nine months of 1997 totalled $17.5 million or $3.42 per share
on a fully diluted basis. The Company's net income for the first
nine months of 1996 totalled $14.5 million or $2.76 per share on a
fully diluted basis. The 1997 results reflect a $3.0 million or
20.7% earnings increase and a $0.66 or 23.9% improvement in fully
diluted earnings per share when compared to the same period in
1996. For the first nine months of 1997, the Company's return on
average equity increased by 210 basis points to 15.12% while the
return on average assets grew by nine basis points to 1.10%.
The Company's improved financial performance was due to a
combination of increased revenue generated from its core businesses
and effective capital management strategies. Specifically, net
interest income increased by $5.1 million or 11.3% while total non-
interest income grew by $550,000 or 3.9%. This increased revenue
more than offset higher non-interest expense which partially
resulted from the start-up costs of several new strategic
initiatives which are designed to further diversify the Company s
revenue stream in future years. These new strategic initiatives
include the selling of annuities, mutual funds, and insurance, the
formation of a subsidiary which offers investment and
asset/liability management services to smaller financial
institutions, the establishment of the first full service mobile
bank branch in Western Pennsylvania, and the opening of two loan
production offices. Overall, total non-interest expense was
$921,000 or 2.3% higher in the first nine months of 1997. The
Company's earnings per share were also enhanced by the repurchase
of its common stock as there were 143,000 fewer average fully
diluted shares outstanding in the first nine months of 1997 when
compared to the same period in 1996. The following table summarizes
some of the Company's key performance indicators (in thousands,
except per share and ratios):
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
Net income $ 17,525 $ 14,524
Fully diluted earnings per share 3.42 2.76
Return on average assets 1.10% 1.01%
Return on average equity 15.12 13.02
Average fully diluted common
shares outstanding 5,127 5,270
27
.....NET INTEREST INCOME AND MARGIN.....The following table
compares the Company's net interest income and margin performance
for the first nine months of 1997 to the first nine months of 1996
(in thousands, except percentages):
Nine Months Ended
September 30
1997 1996 $ Change % Change
Interest income $ 115,592 $101,342 14,250 14.1
Interest expense 65,335 56,189 9,146 16.3
Net interest income 50,257 45,153 5,104 11.3
Tax-equivalent adjustment 2,225 2,259 (34) (1.5)
Net tax-equivalent
interest income $ 52,482 $ 47,412 5,070 10.7
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 $5.1 million or 10.7% due to growth in earning assets.
Total earning assets were $217 million higher in the first nine
months of 1997 with this growth in earning assets distributed
between loans and investment securities. 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 nine months of 1997 increased by
$14.3 million or 14.1% when compared to the same 1996 period. This
increase was due primarily to a $217 million or 12.1% increase in
total average earning assets which caused interest income to rise
by $12.7 million. The increase in average earning assets reflects
$115 million of growth in total loans and a $103 million increase
in total investment securities. The remainder of the increase in
interest income was caused by a 11 basis point improvement in the
earning asset yield to 7.82%. Within the earning asset base, the
yield on total investment securities increased by 16 basis points
to 6.99% while the yield on the total loan portfolio increased by
five basis points to 8.68%. The loan yield improvement resulted
from the previously discussed shift in the loan portfolio
composition away from fixed-rate residential mortgage loans and
lower yielding indirect auto loans to higher yielding commercial
and commercial mortgage loans. The Company s loan to deposit ratio
averaged 82.8% for the first nine months of 1997 compared to 72.0%
for the first nine months of 1996.
28
The Company's total interest expense for the first nine months
of 1997 increased by $9.1 million or 16.3% when compared to the
same 1996 period. This higher interest expense was due primarily
to a $206 million increase in average interest bearing liabilities
which caused interest expense to rise by $7.4 million. The
remainder of the increase was due to a 16 basis point rise in the
cost of funds to 4.81%. The cost of deposits increased by 12 basis
points to 4.23% 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 average
borrowed funds increased by $222 million in order to fund the
earning asset growth and replace a $17 million outflow in interest
bearing deposits. For the first nine months of 1997, the Company's
total level of short-term borrowed funds and FHLB advances averaged
$793 million or 37.1% of total assets compared to an average of
$570 million or 29.6% of total assets for the first nine months of
1996. These borrowed funds had an average cost of 5.54% in the
first nine months of 1997 which was 131 basis points greater than
the average cost of deposits which amounted to 4.23%. 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
ten basis points lower in the first nine months of 1997.
The table that follows provides an analysis of net interest
income on a tax-equivalent basis for the nine month periods ended
September 30, 1997, and September 30, 1996. For a detailed
discussion of the components and assumptions included in the table,
see the paragraph before the quarterly tables on page 23.
Nine Months Ended September 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 $ 956,796 $ 62,985 8.68% $ 841,961 $ 55,171 8.63%
Deposits with banks 4,797 174 4.80 2,670 96 4.72
Federal funds sold and securities
purchased under agreement
to resell 48 2 5.22 834 34 5.38
Investment securities:
Available for sale 466,799 23,904 6.83 444,908 22,082 6.62
Held to maturity 570,946 30,477 7.12 490,334 25,852 7.03
Total investment securities 1,037,745 54,381 6.99 935,242 47,934 6.83
Assets held in trust for
collateralized
mortgage obligation 4,938 275 7.45 6,475 366 7.55
Total interest earning
assets/interest income 2,004,324 $117,817 7.82% 1,787,182 $103,601 7.71%
Non-interest earning assets:
Cash and due from banks 32,965 35,154
Premises and equipment 17,989 18,315
Other assets 97,368 96,658
Allowance for loan losses (13,192) (14,510)
TOTAL ASSETS $2,139,454 $1,922,799
CONTINUED ON NEXT PAGE
29
NINE MONTHS ENDED September 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 $ 90,681 $ 673 0.99% $ 96,775 $ 722 1.00%
Savings 189,053 2,394 1.69 212,664 2,683 1.69
Money markets 152,424 4,206 3.69 143,534 3,659 3.42
Other time 581,188 24,801 5.71 576,947 24,657 5.70
Total interest bearing deposits 1,013,346 32,074 4.23 1,029,920 31,721 4.11
Short term borrowings:
Federal funds purchased,
securities sold under agreements
to repurchase and other
short-term borrowings 159,398 6,192 5.19 144,160 5,575 5.18
Advances from Federal
Home Loan Bank 633,373 26,674 5.63 425,516 18,419 5.80
Collateralized mortgage obligation 4,367 316 9.66 5,911 367 8.30
Long-term debt 5,251 79 2.00 4,727 107 2.38
Total interest bearing
liabilities/interest
expense 1,815,735 65,335 4.81 1,610,234 56,189 4.65
Non-interest bearing liabilities:
Demand deposits 142,019 139,739
Other liabilities 26,690 23,767
Stockholders' equity 155,010 149,059
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,139,454 $1,922,799
Interest rate spread 3.01 3.06
Net interest income/
net interest margin 52,482 3.47% 47,412 3.52%
Tax-equivalent adjustment (2,225) (2,259)
Net Interest Income $50,257 $45,153
.....PROVISION FOR LOAN LOSSES.....The Company's provision for loan
losses for the first nine months of 1997 totalled $68,000 or 0.01%
of average total loans which equalled the provision level
experienced in the first nine months of 1996. The Company s net
charge-offs amounted to $467,000 or 0.06% of average loans in the
first nine months of 1997 compared to net charge-offs of $1.1
million or 0.18% of average loans in the first nine months 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 September 30, 1997, the balance in the
allowance for loan losses totalled $12.9 million or 146% of total
non-performing assets.
30
.....NON-INTEREST INCOME.....Non-interest income for the first nine
months of 1997 totalled $14.6 million which represented a $550,000
or 3.9% increase when compared to the same 1996 period. This
increase was primarily due to the following items:
a $218,000 or 7.8% increase in trust fees to $3.0 million in
the first nine months 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 $268,000 reduction in gains realized on the sale of
investments securities available for sale.
a $338,000 or 44% increase in gains realized on loans held for
sale due to heightened residential mortgage origination and
sales activity in 1997.
a $82,000 or 3.4% increase in deposit service charges to $2.5
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 $191,000 or 5.1% increase in other income due in part to
additional income resulting from ATM transaction charges, other
mortgage banking processing fees, credit card charges, and
premium income commissions from insurance sales.
.....NON-INTEREST EXPENSE.....Non-interest expense for the first
nine months of 1997 totalled $40.3 million which represented a
$921,000 or 2.3% increase when compared to the same 1996 period.
This increase was primarily due to the following items:
a $2.2 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 $222,000 or 10.1% increase in professional fees due to higher
legal and other professional fees in the first nine months of
1997.
a $2.4 million decrease in FDIC deposit insurance expense due
to the non-recurrence of a $1.4 million special assessment and
lower basic deposit premium costs on SAIF insured deposits.
a $737,000 or 13.6% increase in other expense due to higher
telecommunication costs, advertising expense, employee training
costs, and outside processing fees.
31
.....INCOME TAX EXPENSE.....The Company's provision for income
taxes for the first nine months of 1997 was $7.0 million reflecting
an effective tax rate of 28.4%. The Company's comparable period
1996 income tax provision was $5.2 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 $2.0 million lower on
average in the first nine months of 1997 as compared to the first
nine months of 1996.
.....NET OVERHEAD BURDEN.....The Company's efficiency ratio(non-
interest expense divided by total revenue) demonstrated continued
improvement as it declined from 64.1% for the first nine months of
1996 to 60.1% for the first nine months of 1997. The increased
revenue generated in the first nine months 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 nine
months of 1997 a 9.0% increase over the $2.6 million average for
the same prior year period. Net income per employee also increased
by 18.2% to $23,000 for the first nine months of 1997.
.....BALANCE SHEET.....The Company's total consolidated assets were
$2.192 billion at September 30, 1997, compared with $2.087 billion
at December 31, 1996, which represents an increase of $105 million
or 5.0% due to increased leveraging of the balance sheet. During
the first nine months of 1997, total loans and loans held for sale
increased by approximately $37.3 million due primarily to the
previously mentioned growth in commercial and commercial mortgage
loans. Consumer loans continued to decline due to net run-off
experienced in the indirect auto loan portfolio as the Company has
not actively pursued new loans in this low margin line of business.
Total investment securities increased by $76.3 million due to
purchases of mortgage-backed securities.
Total deposits increased by $14.8 million or 1.3% since
December 31, 1996, due to a successful certificate of deposit
promotion which helped raise new funds with maturities of 30-36
months. Seasonal factors and increased loan relationships also
contributed to $2.2 million of growth in non-interesting bearing
deposits. The Company's total borrowed funds position increased by
$81.0 million due to additional leveraging of the balance sheet
with FHLB borrowings. These new FHLB borrowings have maturities
ranging from 90 days to two years. Total equity increased by $9.1
million due to net income retained and a $1.9 million increase in
the equity valuation allowance for available for sale securities.
Overall, the Company's asset leverage ratio was 6.45% at September
30, 1997, compared to 6.51% at December 31, 1996.
Presented on this page was a graph of the efficiency ratio for the
past seven quarters. The data points presented were 59.87%, 60.00%,
60.37%, 61.41%, 68.98%, 60.79%, and 62.18%, respectively.
32
.....MARKET AREA ECONOMY.....Despite the concerns evident in the
stock market, there is little evidence that the current expansion
is coming to an end, or even slowing significantly. With the last
four quarters totalling 4.0% growth, the economy has actually
accelerated from its recent pace. The economy should slow over the
next year. The volatile stock market should take some steam out of
the economy, resulting in a slowdown in real Gross Domestic
Product. Also, early signs suggest consumer confidence is topping
out.
The nation's seasonally unemployment rate dropped to 4.7
percent in October from 4.9 percent in September 1997, the lowest
level in a quarter century. The economy created 284,000 jobs.
Service businesses accounted for 213,000 jobs including an
unusually large gain in financial industries. Worker's average
hourly earnings (take home pay) jumped six cents to $12.41 in
October. That brought the year-on-year increase in earnings to 4.2
percent, the largest increase since 1989.
In the Pittsburgh market, there may be some major changes on
the horizon for the retail district in Pittsburgh. These include
a Lord & Taylor at Smithfield Street, a larger Saks Fifth Avenue,
Planet Hollywood, Niketown, and Eddie Bauer. These national
retailers are all participants in a project pursued by Urban Retail
Properties Co. Additionally, AMC Entertainment will make its
Pittsburgh debut with a 30-screen mega-complex in Collier Township.
The developer plans to build five to six restaurants, the theater,
and 125,000 square feet of additional retail space.
In the Greater Johnstown marketplace, five municipalities in
Cambria and Somerset counties were awarded a total of $1.35 million
in community development grants. The state gave out $7.5 million
in grants for housing and water and sewer service projects in 21
counties across Pennsylvania. Cambria and Somerset County
municipalities received funds designated to rehabilitate low-income
housing. The grants are part of approximately $60 million
distributed in Pennsylvania through the 1997 federally funded
Community Development Block Grants Program. In addition, the
University of Pittsburgh at Johnstown dedicated a 42,000 square-
foot administration classroom building named after former
University President Frank H. Blackington III. Blackington Hall
has several administration offices, three lecture halls, a computer
lab, a language lab, and an audio-visual room.
.....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.
33
The following table sets forth information concerning
USBANCORP's loan delinquency and other non-performing assets (in
thousands, except percentages):
September 30 December 31 September 30
1997 1996 1996
Total loan delinquency (past due 30 to 89 days) $15,227 $20,284 $14,608
Total non-accrual loans 6,368 6,365 5,635
Total non-performing assets<F1> 8,871 8,671 7,495
Loan delinquency, as a percentage of total loans
and loans held for sale, net of unearned income 1.56% 2.16% 1.62%
Non-accrual loans, as a percentage of total loans
and loans held for sale, net of unearned income 0.65 0.68 0.62
Non-performing assets, as a percentage of total
loans and loans held for sale, net of unearned
income, and other real estate owned 0.91 0.92 0.83
<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 September 30, 1997, two of the
three key asset quality indicators were relatively consistent while
total loan delinquency declined by $5.1 million causing the
delinquency ratio to drop to 1.56%. The lower delinquency resulted
from enhanced collection efforts on residential mortgage loans and
seasonal factors. It is also important to note that approximately
$5.1 million or 58% 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):
September 30 December 31 September 30
1997 1996 1996
Allowance for loan losses $ 12,930 $ 13,329 $ 13,871
Amount in the allowance for loan losses
allocated to "general risk" 6,570 6,984 5,564
Allowance for loan losses as a percentage
of each of the following:
total loans and loans held for sale,
net of unearned income 1.32% 1.42% 1.54%
total delinquent loans
(past due 30 to 89 days) 84.91 65.71 94.95
total non-accrual loans 203.05 209.41 246.16
total non-performing assets 145.76 153.72 185.07
34
Since December 31, 1996, the balance in the allowance for loan
losses has declined moderately by $399,000. The Company's
allowance for loan losses at September 30, 1997, was 146% of non-
performing assets and 203% of non-accrual loans. The portion of
the allowance allocated to general risk continues to be strong at
$6.6 million and represents 50.8% of the total allowance for loan
losses.
.....INTEREST RATE SENSITIVITY.....Asset/liability management
involves managing the risks associated with changing interest rates
and the resulting impact on the Company's net interest income and
capital. The management and measurement of interest rate risk at
USBANCORP is performed by using the following tools: 1) 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 nine months or one year.
The following table presents a summary of the Company's static
GAP positions (in thousands, except for the GAP ratios):
September 30 December 31 September 30
1997 1996 1996
Nine month cumulative GAP
RSA........................ $ 634,767 $ 609,088 $ 643,036
RSL........................ (1,031,024) (865,296) (891,937)
Off-balance sheet
hedges.................. 90,000 25,000 25,000
GAP........................ $ (306,257) $ (231,208) $(223,901)
GAP ratio.................. 0.67X 0.72X 0.74X
GAP as a % of total
assets.................. (13.97)% (11.08)% (10.81)%
GAP as a % of total
capital................. (190.21) (152.19) (150.23)
One year cumulative GAP
RSA...................... $ 882,407 $ 840,813 $ 868,548
RSL...................... (1,202,558) (1,061,514) (1,018,097)
Off-balance sheet
hedges................ 140,000 - -
GAP...................... $ (180,151) $ (220,701) $(149,549)
GAP ratio................ 0.83X 0.79X 0.85X
GAP as a % of total
assets................ (8.22)% (10.57)% (7.22)%
GAP as a % of total
capital............... (111.89) (145.28) (100.34)
35
When September 30, 1997, is compared to December 31, 1996, the
Company's six month GAP became more negative while the one year
cumulative GAP ratios became less negative. 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
$90 million and the one year GAP by $140 million.
A portion of the Company's funding base is low cost core
deposit accounts which do not have a specific maturity date. The
accounts which comprise these low cost core deposits include
passbook savings accounts, money market accounts, NOW accounts,
daily interest savings accounts, purpose clubs, etc. At September
30, 1997, the balance in these accounts totalled $422 million or
19.2% of total assets. Within the above static GAP table,
approximately $155 million or 37% 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 September 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 (3.5%) 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
(6.8%) 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 minus7.5% 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 September 30, 1997, 49% of
the portfolio is currently classified as available for sale and 51%
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.
36
.....LIQUIDITY.....Liquidity can be analyzed by utilizing the
Consolidated Statement of Cash Flows. Cash equivalents decreased
by $9.0 million from December 31, 1996, to September 30, 1997, due
primarily to $107.9 million of net cash used by investing
activities. This more than offset $85.7 million of net cash
provided by financing activities and $13.2 million of net cash
provided by operating activities. Within investing activities,
purchases of investment securities exceeded the cash proceeds from
investment security maturities and sales by approximately $73.1
million. Cash advanced for new loan fundings totalled $214.3
million and was approximately $30.4 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 $26.8 million. Net principal borrowings of advances
from the Federal Home Loan Bank provided $43.7 million of cash.
.....CAPITAL RESOURCES.....As presented in Note 15, each of the
Company s regulatory capital ratios increased modestly between
December 31, 1996, and September 30, 1997. The Company targets an
operating level of approximately 6.50% for the asset leverage ratio
because management and the Board of Directors believes that this
level provides an optimal balance between regulatory capital
requirements and shareholder value needs. Accordingly throughout
the remainder of 1997, the Company will continue to leverage the
additional capital generated from earnings through common dividend
payments, treasury stock repurchases, and modest earning asset
growth.
The Company repurchased 114,000 shares or $5.7 million of its
common stock during the first nine months of 1997. Through
September 30, 1997, the Company has repurchased a total of 775,000
shares of its common stock at a total cost of $25.2 million or
$32.55 per share. The Company plans to continue its treasury stock
repurchase program which currently permits a maximum total
repurchase authorization of $40 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%.
Presented on this page was a graph of the past seven quarters
average fully dilutes number of shares outstanding. The data points were
5090, 5104, 5146, 5172, 5217, 5241, and 5312, respectively.
37
The Company's declared Common Stock cash dividend per share
was $1.00 for the first nine months of 1997 which was a 15.0%
increase over the $0.87 per share dividend for the same 1996
interim period. Between common dividend payments($5.0 million) and
treasury stock repurchases($5.7 million), the Company has
distributed 61% of its nine month net income back to its
shareholders.
.....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.
38
Presented on this page was a service area map reflecting the six
county area serviced by the Company.
39
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
15.1 Letter re: unaudited interim financial information
(b) Reports on Form 8-K: There were no reports filed on
Form 8-K for the quarter ending September 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: November 12, 1997 \s\Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: November 12, 1997 \s\Jeffrey A. Stopko
Jeffrey A. Stopko
Senior Vice President and
Chief Financial Officer
40
STATEMENT OF MANAGEMENT RESPONSIBILITY
October 16, 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
41
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 September 30, 1997 and 1996, and the
related consolidated statements of income and changes in
stockholders equity for the three- and nine-month periods
then ended and the related consolidated statements of cash
flows for the nine 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,
October 16, 1997
42
October 16, 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 September 30,
1997, which includes our report dated October 16, 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
43