UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 1996
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transaction period from to
Commission File Number 0-11204
USBANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1424278
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Main & Franklin Streets, P.O. Box 430, Johnstown, PA 15907-0430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 533-5300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
X Yes No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 1, 1996
Common Stock, par value $2.50 5,186,989
per share
<PAGE>1
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
June 30, 1996, December 31, 1995,
and June 30, 1995 3
Consolidated Statement of Income -
Three Months and Six Months Ended
June 30, 1996, and 1995 4
Consolidated Statement of Changes
in Stockholders' Equity -
Six Months Ended
June 30, 1996, and 1995 6
Consolidated Statement of Cash Flows -
Six Months Ended
June 30, 1996, and 1995 7
Notes to Consolidated Financial
Statements 8
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations 23
Part II. Other Information 48
<PAGE>2
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
June 30 December 31 June 30
1996 1995 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 39,383 $ 45,771 $ 40,661
Interest bearing deposits with
banks 801 647 6,174
Federal funds sold and securities
purchased under agreements to
resell 400 13,750 16,850
Investment securities:
Available for sale 426,989 427,112 316,958
Held to maturity (market value
$499,620 on June 30, 1996,
$471,191 on December 31, 1995,
and $527,459 on June 30, 1995) 507,560 463,951 523,655
Assets held in trust for collateralized
mortgage obligation 6,144 7,099 8,298
Loans held for sale 9,050 5,224 3,822
Loans 849,110 832,126 800,885
Less: Unearned income 2,799 2,716 2,963
Allowance for loan losses 13,988 14,914 14,886
Net Loans 832,323 814,496 783,036
Premises and equipment 18,001 18,588 18,881
Accrued income receivable 17,212 16,752 16,933
Mortgage servicing rights 11,631 11,372 11,457
Goodwill and core deposit intangibles 22,658 23,838 25,783
Other assets 39,323 36,772 26,440
TOTAL ASSETS $ 1,931,475 $ 1,885,372 $ 1,798,948
LIABILITIES
Non-interest bearing deposits $ 145,550 $ 145,379 $ 163,685
Interest bearing deposits 1,033,372 1,032,479 1,070,812
Total deposits 1,178,922 1,177,858 1,234,497
Federal funds purchased and
securities sold under agreements
to repurchase 87,689 63,828 59,916
Other short-term borrowings 41,891 30,528 75,469
Advances from Federal Home Loan Bank 447,435 428,217 246,200
Collateralized mortgage obligation 5,586 6,548 7,436
Long-term debt 4,644 5,061 4,292
Total borrowed funds 587,245 534,182 393,313
Other liabilities 19,157 22,840 24,519
TOTAL LIABILITIES 1,785,324 1,734,880 1,652,329
STOCKHOLDERS' EQUITY
Preferred stock, no par value;
2,000,000 shares authorized;
there were no shares issued and
outstanding for the periods
presented - - -
Common stock, par value $2.50 per share;
12,000,000 shares authorized;
5,739,901 shares issued and 5,186,989
outstanding on June 30, 1996;
5,733,701 shares issued and
5,310,489 outstanding on December 31,
1995; 5,712,922 shares issued and
5,531,966 outstanding on
June 30, 1995 14,350 14,334 14,282
Treasury stock at cost, 552,912 shares
on June 30, 1996, 423,212 shares
on December 31, 1995, and 180,956
shares on June 30, 1995 (15,406) (11,007) (4,261)
Surplus 93,472 93,361 92,970
Retained earnings 57,648 50,401 45,245
Net unrealized holding (losses) gains on
available for sale securities (3,913) 3,403 (1,617)
TOTAL STOCKHOLDERS' EQUITY 146,151 150,492 146,619
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,931,475 $ 1,885,372 $ 1,798,948
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>3
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and loans held
for sale:
Taxable $ 17,850 $ 16,403 $ 35,378 $ 34,013
Tax exempt 388 632 755 1,249
Deposits with banks 17 120 34 193
Federal funds sold and securities
purchased under agreements to resell 28 60 34 98
Investment securities:
Available for sale 6,914 5,647 14,007 10,353
Held to maturity 7,926 8,730 15,550 17,735
Assets held in trust for collateralized
mortgage obligation 122 173 254 347
Total Interest Income 33,245 31,765 66,012 63,988
INTEREST EXPENSE
Deposits 10,555 11,707 21,249 22,569
Federal funds purchased and securities
sold under agreements to repurchase 935 1,898 1,592 4,009
Other short-term borrowings 309 652 699 1,205
Advances from Federal Home Loan Bank 6,285 3,686 12,605 7,329
Collateralized mortgage obligation 117 239 252 482
Long-term debt 12 47 83 125
Total Interest Expense 18,213 18,229 36,480 35,719
NET INTEREST INCOME 15,032 13,536 29,532 28,269
Provision for loan losses 22 75 45 195
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 15,010 13,461 29,487 28,074
NON-INTEREST INCOME
Trust fees 963 849 1,882 1,694
Net realized gains (losses)
on investment securities 64 725 319 724
Net realized gains(losses) on loans and
loans held for sale 214 108 449 (758)
Gain on disposition of business line - - - 905
Wholesale cash processing fees 272 298 539 587
Service charges on deposit accounts 800 706 1,560 1,414
Net mortgage servicing fees 576 651 1,083 1,333
Other income 1,683 1,201 3,270 2,127
Total Non-Interest Income 4,572 4,538 9,102 8,026
NON-INTEREST EXPENSE
Salaries and employee benefits 6,170 6,214 12,289 12,638
Net occupancy expense 1,110 1,045 2,254 2,141
Equipment expense 717 851 1,592 1,738
Professional fees 724 540 1,408 1,113
Supplies, postage, and freight 711 645 1,359 1,296
Miscellaneous taxes and insurance 364 366 730 693
FDIC deposit insurance expense 160 675 326 1,357
Amortization of goodwill and
core deposit intangibles 589 624 1,180 1,226
Other expense 1,835 1,635 3,553 2,911
Total Non-Interest Expense $ 12,380 $ 12,595 $ 24,691 $ 25,113
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>4
CONSOLIDATED STATEMENT OF INCOME
CONTINUED FROM PREVIOUS PAGE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAXES $ 7,202 $ 5,404 $ 13,898 $ 10,987
Provision for income taxes 1,920 1,523 3,673 3,207
NET INCOME $ 5,282 $ 3,881 $ 10,225 $ 7,780
PER COMMON SHARE DATA:
Primary:
Net income $ 1.01 $ 0.70 $ 1.94 $ 1.40
Average shares outstanding 5,241,045 5,556,409 5,276,507 5,569,818
Fully Diluted:
Net income $ 1.01 $ 0.70 $ 1.94 $ 1.40
Average shares outstanding 5,241,045 5,562,355 5,276,507 5,572,791
Cash Dividends Declared $ 0.30 $ 0.27 $ 0.57 $ 0.52
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>5
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Net
Unrealized
Holding
Preferred Common Treasury Retained Gains
Stock Stock Stock Surplus Earnings (Losses) Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 $ - $ 14,275 $ (3,064) $ 92,923 $ 40,355 $ (7,353) $137,136
Net income - - - - 7,780 - 7,780
Dividend reinvestment
and stock
purchase plan - 7 - 47 - - 54
Net unrealized holding
gains (losses) on
investment
securities - - - - - 5,736 5,736
Cash dividends
declared:
Common stock($0.25
per share on 5,584,722
shares and $0.27 per
share on 5,531,966
shares) - - - - (2,890) - (2,890)
Treasury stock, purchase of
53,256 shares at cost - - (1,197) - - - (1,197)
Balance June 30, 1995 $ - $ 14,282 $ (4,261) $ 92,970 $ 45,245 $ (1,617) $146,619
Balance December 31, 1995 $ - $ 14,334 $(11,007) $ 93,361 $ 50,401 $ 3,403 $150,492
Net income - - - - 10,225 - 10,225
Dividend reinvest-
ment and stock
purchase plan - 16 - 111 - - 127
Net unrealized
holding gains
(losses) on
investment
securities - - - - - (7,316) (7,316)
Cash dividends
declared:
Common stock
($0.27 per share
on 5,266,539
shares and $0.30 per
share on 5,186,989
shares) - - - - (2,978) - (2,978)
Treasury stock, purchase of
129,700 shares at cost - - (4,399) - - - (4,399)
Balance June 30, 1996 $ - $ 14,350 $(15,406) $ 93,472 $ 57,648 $ (3,913) $146,151
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>6
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Six Months Ended
June 30
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,225 $ 7,780
Adjustments to reconcile net income to net cash
provided by operating activities:
Origination of mortgage loans held for sale (92,785) (43,651)
Sales of mortgage loans held for sale 100,950 41,975
Provision for loan losses 45 195
Depreciation and amortization expense 1,305 1,273
Amortization expense of goodwill and core
deposit intangibles 1,180 1,226
Amortization expense of mortgage servicing
rights 689 570
Net amortization (accretion) of investment securities 198 (1,445)
Net realized gains on investment securities (319) (724)
Net realized (gains) losses on loans and loans
held for sale (449) 758
Increase in accrued income receivable (460) (39)
Increase (decrease) in accrued expense payable (2,951) 2,911
Net cash provided by operating activities 17,628 10,829
INVESTING ACTIVITIES
Purchases of investment securities and other
short-term investments (278,136) (149,195)
Proceeds from maturities of investment securities and
other short-term investments 88,196 34,687
Proceeds from sales of investment securities and
other short-term investments 135,320 68,949
Long-term loans originated (174,917) (128,964)
Mortgage loans held for sale (9,050) (3,822)
Principal collected on long-term loans 154,446 147,898
Loans purchased or participated (186) (587)
Loans sold or participated 663 47,303
Net (increase) decrease in credit card receivable
and other short-term loans (370) 4,451
Purchases of premises and equipment (740) (1,183)
Sale/retirement of premises and equipment 22 134
Net decrease in assets held in trust for
collateralized mortgage obligation 955 806
Net increase of mortgage servicing rights (948) (575)
Net decrease (increase) in other assets 1,389 (14,568)
Net cash (used) provided by investing activities $ (83,356) $ 5,334
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit $ 134,729 $ 247,866
Payments for maturing certificates of deposits (139,751) (203,752)
Net increase (decrease) in demand and savings deposits 6,086 (5,863)
Net increase (decrease) in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings 34,262 (84,014)
Net principal borrowings of advances
from Federal Home Loan Bank 19,218 46,106
Repayments of long-term debt (417) (1,514)
Common stock cash dividends paid (1,422) (2,800)
Proceeds from dividend reinvestment, stock
purchase plan, and stock options exercised 127 54
Purchases of treasury stock (4,399) (1,197)
Net decrease in other liabilities (2,289) (1,255)
Net cash provided (used) by financing activities 46,144 (6,369)
NET (DECREASE) INCREASE IN CASH EQUIVALENTS (19,584) 9,794
CASH EQUIVALENTS AT JANUARY 1 60,168 53,891
CASH EQUIVALENTS AT JUNE 30 $ 40,584 $ 63,685
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The consolidated financial statements include the accounts of
USBANCORP, Inc. (the "Company") and its wholly-owned subsidiaries,
United States National Bank in Johnstown ("U.S. Bank"), Three Rivers
Bank and Trust Company ("Three Rivers Bank"), Community Bancorp,
Inc. ("Community"), USBANCORP Trust Company ("Trust Company"), and
United Bancorp Life Insurance Company ("United Life"). In addition,
the Parent Company is an administrative group that provides support
in such areas as audit, finance, investments, loan review, general
services, loan policy, and marketing. Intercompany accounts and
transactions have been eliminated in preparing the consolidated
financial statements.
2. Basis of Preparation
The unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information. In the opinion of management,
all adjustments that are of a normal recurring nature and are
considered necessary for a fair presentation have been included.
They are not, however, necessarily indicative of the results of
consolidated operations for a full year.
With respect to the unaudited consolidated financial
information of the Company for the three month and six month periods
ended June 30, 1996, and 1995, Arthur Andersen LLP, independent
public accountants, conducted reviews (based upon procedures
established by the American Institute of Certified Public
Accountants) and not audits, as set forth in their separate report
dated July 19, 1996, appearing herein. This report does not express
an opinion on the interim unaudited consolidated financial
information. Arthur Andersen LLP has not carried out any
significant or additional audit tests beyond those which would have
been necessary if its report had not been included. The December
31, 1995, numbers are derived from audited financial statements.
For further information, refer to the consolidated financial
statements and accompanying notes included in the Company's "Annual
Report and Form 10-K" for the year ended December 31, 1995.
3. Earnings Per Common Share
The Company uses the treasury stock method to calculate common
stock equivalent shares outstanding for purposes of determining both
primary and fully diluted earnings per share. Treasury shares are
treated as retired for earnings per share purposes.
<PAGE>8
4. Consolidated Statement of Cash Flows
On a consolidated basis, cash equivalents include cash and due
from banks, interest bearing deposits with banks, and federal funds
sold and securities purchased under agreements to resell. For the
Parent Company, cash equivalents also include short-term
investments. The Company made $2,026,000 in income tax payments in
the first six months of 1996 as compared to $1,817,000 for the first
six months of 1995. Total interest expense paid amounted to
$39,431,000 in 1996's first six months compared to $31,768,000 in
the same 1995 period.
5. Investment Securities
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") 115, "Accounting for Certain
Investments in Debt and Equity Securities," which specifies a
methodology for the classification of securities as either held to
maturity, available for sale, or as trading assets. Securities are
classified at the time of purchase as investment securities held to
maturity if it is management's intent and the Company has the
ability to hold the securities until maturity. These held to
maturity securities are carried on the Company's books at cost,
adjusted for amortization of premium and accretion of discount which
is computed using the level yield method which approximates the
effective interest method. Alternatively, securities are classified
as available for sale if it is management's intent at the time of
purchase to hold the securities for an indefinite period of time
and/or to use the securities as part of the Company's
asset/liability management strategy. Securities classified as
available for sale include securities which may be sold to
effectively manage interest rate risk exposure, prepayment risk, and
other factors (such as liquidity requirements). These available for
sale securities are reported at fair value with unrealized aggregate
appreciation/(depreciation) excluded from income and
credited/(charged) to a separate component of shareholder's equity
on a net of tax basis. The Company presently does not engage in
trading activity. The book and market values of investment
securities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Investment securities available for sale:
June 30, 1996
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 13,922 $ 189 $ (48) $ 14,063
U.S. Agency 1,546 - (52) 1,494
State and municipal 53,749 731 (233) 54,247
U.S. Agency mortgage-backed
securities 336,718 2,052 (8,226) 330,544
Other securities<F1> 26,641 - - 26,641
Total $432,576 $ 2,972 $ (8,559) $426,989
<F1>Other investment securities include corporate notes and bonds,
asset-backed securities, and equity securities.
</TABLE>
<PAGE>9
<TABLE>
<CAPTION>
Investment securities held to maturity:
June 30, 1996
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 6,073 $ - $ (50) $ 6,023
U.S. Agency 27,450 - (531) 26,919
State and municipal 103,282 668 (1,378) 102,572
U.S. Agency mortgage-backed
securities 367,473 644 (7,309) 360,808
Other securities<F1> 3,282 37 (21) 3,298
Total $507,560 $ 1,349 $ (9,289) $499,620
Investment securities available for sale:
December 31, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 22,431 $ 421 $ (14) $ 22,838
U.S. Agency 12,408 7 (27) 12,388
State and municipal 58,698 1,269 (89) 59,878
U.S. Agency mortgage-backed
securities 296,669 4,784 (311) 301,142
Other securities<F1> 30,869 1 (4) 30,866
Total $421,075 $ 6,482 $ (445) $427,112
Investment securities held to maturity:
December 31, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 796 $ 11 $ - $ 807
U.S. Agency 31,512 511 (9) 32,014
State and municipal 97,900 1,973 (140) 99,733
U.S. Agency mortgage-backed
securities 330,312 5,777 (957) 335,132
Other securities<F1> 3,431 75 (1) 3,505
Total $463,951 $ 8,347 $ (1,107) $471,191
<F1>Other investment securities include corporate notes and bonds,
asset-backed securities, and equity securities.
</TABLE>
<PAGE>10
<TABLE>
<CAPTION>
Investment securities available for sale:
June 30, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 23,418 $ 377 $ (76) $ 23,719
U.S. Agency 36,688 14 (487) 36,215
State and municipal 1,435 3 (30) 1,408
U.S. Agency mortgage-backed
securities 220,430 2,993 (679) 222,744
Other securities<F1> 33,365 2 (495) 32,872
Total $315,336 $ 3,389 $ (1,767) $316,958
Investment securities held to maturity:
June 30, 1995
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 596 $ 6 $ - $ 602
U.S. Agency 35,944 90 (84) 35,950
State and municipal 134,497 1,469 (1,305) 134,661
U.S. Agency mortgage-backed
securities 349,086 4,360 (757) 352,689
Other securities<F1> 3,532 26 (1) 3,557
Total $523,655 $ 5,951 $ (2,147) $527,459
<F1>Other investment securities include corporate notes and bonds,
asset-backed securities, and equity securities.
</TABLE>
All purchased investment securities are recorded on settlement
date which is not materially different from the trade date.
Realized gains and losses are calculated by the specific
identification method and are included in "Net realized gain or loss
on investment securities."
Maintaining investment quality is a primary objective of the
Company's investment policy which, subject to certain limited
exceptions, prohibits the purchase of any investment security below
a Moody's Investor's Service or Standard & Poor's rating of "A." At
June 30, 1996, 98.0% of the portfolio was rated "AAA" and 98.2% "AA"
or higher as compared to 96.9% and 97.5%, respectively, at June 30,
1995. Approximately 1.0% of the portfolio was rated below "A" or
unrated on June 30, 1996.
The Company may sell covered call options on securities held
in the available for sale investment portfolio. At the time a call
is written, the Company records a liability equal to the premium fee
received. The call liability is marked to market monthly and the
offset is made to earnings. During the first half of 1996,
contracts covering securities totalling $18 million closed
generating $28,000 of income. The Company limits total covered call
options outstanding at any time to $25 million of available for sale
securities. There were no open written call options at June 30,
1996.
<PAGE>11
6. Loans Held for Sale
At June 30, 1996, $9,050,000 of fixed-rate residential
mortgage loans originated during 1996 were classified as "held for
sale." It is management's intent to sell these residential mortgage
loans during the next several months. Servicing rights are
generally retained on sold loans. This strategy is executed in an
effort to help neutralize long-term interest rate risk. The
residential mortgage loans held for sale are carried at the lower of
aggregate amortized cost or market value. Net realized and
unrealized gains and losses are calculated by the specific
identification method and are included in "Net gains (losses) on
loans held for sale"; unrealized net valuation adjustments (if any)
are recorded in the same line item on the Consolidated Statement of
Income.
7. Loans
The loan portfolio of the Company consists of the following
(in thousands):
<TABLE>
<CAPTION>
June 30 December 31 June 30
1996 1995 1995
<S> <C> <C> <C>
Commercial $116,540 $103,546 $ 96,989
Commercial loans secured
by real estate 204,376 179,793 169,455
Real estate - mortgage 409,157 414,967 391,821
Consumer 119,037 133,820 142,620
Loans 849,110 832,126 800,885
Less: Unearned income 2,799 2,716 2,963
Loans, net of unearned
income $846,311 $829,410 $797,922
</TABLE>
Real estate-construction loans were not material at these
presented dates and comprised 1.6% of total loans net of unearned
income at June 30, 1996. The Company has no credit exposure to
foreign countries or highly leveraged transactions. Additionally,
the Company has no significant industry lending concentrations.
8. Allowance for Loan Losses and Charge-Off Procedures
As a financial institution which assumes lending and credit
risks as a principal element of its business, the Company
anticipates that credit losses will be experienced in the normal
course of business. Accordingly, the Company consistently applies
a comprehensive methodology and procedural discipline which is
updated on a quarterly basis at the subsidiary bank level to
determine both the adequacy of the allowance for loan losses and the
necessary provision for loan losses to be charged against earnings.
This methodology includes:
a detailed review of all classified assets to determine if any
specific reserve allocations (which includes impaired loans)
are required on an individual loan basis.
<PAGE>12
the application of reserve allocations to all criticized and
classified assets based upon allocation percentages which were
calculated by using a five year historical average for actual
losses incurred on loans with an olem (other loans especially
mentioned), substandard, or doubtful rating.
the application of reserve allocations to installment and mortgage loans
which are based upon historical charge-off
experience for those loan types. The residential mortgage loan
allocation is based upon the Company's five year historical
average of actual loan charge-offs experienced in that category. The
same methodology is used to determine the
allocation for consumer loans except the allocation is based
upon an average of the most recent actual three year historical
charge-off experience for consumer loans.
the application of reserve allocations to all performing loans
based upon a five year historical average for actual losses
incurred from all loan review categories.
the maintenance of a general unallocated reserve of at least
20% of the systematically determined minimum amount from the
items listed above in order to provide conservative positioning
in the event of any unforeseen deterioration in the economy.
This 20% policy requirement was mandated by the Board of
Directors after the Company experienced significant credit
quality problems in the period from 1985 to 1989. It must be
emphasized that the Board views this policy as establishing a
minimum requirement only and the requirement of a general
unallocated reserve of at least 20% of the determined need is
prudent recognition of the fact that reserve estimates, by
definition, lack precision.
After completion of this process, a formal meeting of the Loan
Loss Reserve Committee is held to evaluate the adequacy of the
reserve and establish the provision level for the next quarter. The
Company believes that the procedural discipline, systematic
methodology, and comprehensive documentation of this quarterly
process is in full compliance with all regulatory requirements.
When it is determined that the prospects for recovery of the
principal of a loan(including impaired loans) have significantly
diminished, the loan is immediately charged against the allowance
account; subsequent recoveries, if any, are credited to the
allowance account. In addition, non-accrual and large delinquent
loans are reviewed monthly to determine potential losses. Consumer
loans are considered losses when they are 90 days past due, except
loans that are insured for credit loss.
<PAGE>13
An analysis of the changes in the allowance for loan losses
follows (in thousands, except ratios):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Balance at beginning of period $14,720 $15,258 $14,914 $15,590
Reduction due to disposition of
business line - - - (342)
Charge-offs:
Commercial 782 410 1,003 505
Real estate-mortgage - 45 29 85
Consumer 119 124 325 288
Total charge-offs 901 579 1,357 878
Recoveries:
Commercial 22 32 182 96
Real estate-mortgage 31 3 33 11
Consumer 94 97 171 214
Total recoveries 147 132 386 321
Net charge-offs 754 447 971 557
Provision for loan losses 22 75 45 195
Balance at end of period $13,988 $14,886 $13,988 $14,886
As a percent of average loans
and average loans held for
sale, net of unearned income:
Annualized net charge-offs 0.36% 0.22% 0.23% 0.13%
Annualized provision for
loan losses 0.01 0.04 0.01 0.05
Allowance as a percent of loans
and loans held for sale,
net of unearned income at
period end 1.64 1.86 1.64 1.86
Allowance as a multiple of net
annualized charge-offs, at
period end 4.61x 8.30x 7.16x 13.25x
Total classified loans $25,286 $28,272 $25,286 $28,272
Dollar allocation of reserve
to general risk 7,102 8,192 7,102 8,192
Percentage allocation of
reserve to general risk 50.77% 55.03% 50.77% 55.03%
</TABLE>
(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 beginning on
pages 29 and 40, 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. The measurement of impairment may be
based upon: 1) the present value of expected future cash flows
discounted at the loan's effective interest rate; 2) the observable
market price of the impaired loan; or 3) the fair value of the
collateral of a collateral dependent loan. Additionally, SFAS 118
requires the disclosure of how the creditor recognizes interest
income related to these impaired loans.
<PAGE>14
The Company's policy is to individually review, as
circumstances warrant, each of its commercial and commercial
mortgage loans to determine if a loan is impaired. At a minimum,
annual credit reviews are mandatory for all commercial and
commercial mortgage loans with balances in excess of $300,000. The
Company has also identified two pools of small dollar value
homogeneous loans which are evaluated collectively for impairment.
These separate pools are for residential mortgage loans and consumer
loans. Individual loans within these pools are reviewed and removed
from the pool if factors such as significant delinquency in payments
of 90 days or more, bankruptcy, or other negative economic concerns
indicate impairment.
At June 30, 1996, the Company had $2,240,000 in loans being
specifically identified as impaired and a corresponding allocation
of $729,000 was made to the allowance. The average outstanding
balance for loans being specifically identified as impaired was
$2,169,000 for the first six months of 1996. All of the impaired
loans are collateral dependent, therefore the fair value of the
collateral of the impaired loans is evaluated in measuring the
impairment. There was no interest income recognized on impaired
loans during the first six months of 1996 as the Company generally
applies any collected cash interest payments on impaired loans
directly to principal.
The following table sets forth the allocation of the allowance
for loan losses among various categories. This allocation is
determined by using the consistent quarterly procedural discipline
which was discussed above. This allocation, however, is not
necessarily indicative of the specific amount or specific loan
category in which future losses may ultimately occur (in thousands,
except percentages):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
Amount to Loans Amount to Loans Amount to Loans
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 1,197 13.6% $ 2,127 12.3% $ 1,750 12.0%
Commercial
loans secured
by real
estate 3,634 23.8 3,286 21.5 3,369 21.1
Real estate -
mortgage 590 48.7 345 50.2 316 49.2
Consumer 736 13.9 600 16.0 925 17.7
Allocation to
general risk 7,102 - 7,471 - 8,192 -
Allocation for
impaired
loans 729 - 1,085 - 334 -
Total $13,988 100.0% $14,914 100.0% $14,886 100.0%
</TABLE>
<PAGE>15
Even though real estate-mortgage loans comprise approximately
49% of the Company's total loan portfolio, only $590,000 or 4.2% of
the total allowance for loan losses is allocated against this loan
category. The real estate-mortgage loan allocation is based upon
the Company's five year historical average of actual loan charge-
offs experienced in that category. The same methodology is used to
determine the allocation for consumer loans except the allocation is
based upon an average of the most recent actual three year
historical charge-off experience for consumer loans. The
disproportionately higher allocations for commercial loans and
commercial loans secured by real estate reflect the increased credit
risk associated with this type of lending and the Company's
historical loss experienced in these categories.
At June 30, 1996, management of the Company believes the
allowance for loan losses was adequate to cover potential yet
undetermined losses within the Company's loan portfolio. The
Company's management is unable to determine in what loan category
future charge-offs and recoveries may occur. (For a complete
discussion concerning the operations of the "Allowance for Loan
Losses" refer to Note 8.)
10. Purchased and Originated Mortgage Servicing Rights
During the second quarter of 1995, the Company adopted SFAS
122, "Accounting for Mortgage Servicing Rights," an amendment of
SFAS 65, "Accounting for Certain Mortgage Banking Activities." In
accordance with this new standard, the Company recognizes as
separate assets the rights to service mortgage loans for others
whether the servicing rights are acquired through purchases or loan
originations. The fair value of capitalized mortgage servicing
rights is based upon the present value of estimated expected future
cash flows. Based upon current fair values, capitalized mortgage
servicing rights are periodically assessed for impairment, which is
recognized in the income statement during the period in which
impairment occurs by establishing a corresponding valuation
allowance. For purposes of performing its impairment evaluation,
the Company stratifies its portfolio of capitalized mortgage
servicing rights on the basis of certain risk characteristics,
including loan type and note rate.
Under SFAS 65, the cost of originated mortgage servicing
rights was not recognized as an asset and was charged to earnings
when the related loan was sold. The net effect of SFAS 122 was the
capitalization of costs of originating mortgage servicing rights of
$131,000 and $93,000 in the first six months of 1996 and 1995,
respectively.
<PAGE>16
11. Non-performing Assets
Non-performing assets are comprised of (i) loans which are on
a non-accrual basis, (ii) loans which are contractually past due 90
days or more as to interest or principal payments some of which are
insured for credit loss, and (iii) other real estate owned (real
estate acquired through foreclosure and in-substance foreclosures).
All loans, except for loans that are insured for credit loss, are
placed on non-accrual status upon becoming 90 days past due in
either principal or interest. In addition, if circumstances
warrant, the accrual of interest may be discontinued prior to 90
days. In all cases, payments received on non-accrual loans are
credited to principal until full recovery of principal has been
recognized; it is only after full recovery of principal that any
additional payments received are recognized as interest income. The
only exception to this policy is for residential mortgage loans
wherein interest income is recognized on a cash basis as payments
are received.
The following table presents information concerning non-
performing assets (in thousands, except percentages):
<TABLE>
<CAPTION>
June 30 December 31 June 30
1996 1995 1995
<S> <C> <C> <C>
Non-accrual loans $6,554 $7,517 $5,929
Loans past due 90
days or more 909 995 2,250
Other real estate owned 119 914 1,288
Total non-performing
assets $7,582 $9,426 $9,467
Total non-performing
assets as a percent
of loans and loans
held for sale, net
of unearned income,
and other real estate
owned 0.89% 1.13% 1.18%
</TABLE>
The Company is unaware of any additional loans which are
required to either be charged-off or added to the non-performing
asset totals disclosed above. Other real estate owned is recorded
at the lower of 1) fair value minus estimated costs to sell or 2)
carrying cost.
The following table sets forth, for the periods indicated, (i)
the gross interest income that would have been recorded if non-
accrual loans had been current in accordance with their original
terms and had been outstanding throughout the period or since
origination if held for part of the period, (ii) the amount of
interest income actually recorded on such loans, and (iii) the net
reduction in interest income attributable to such loans (in
thousands). There was no interest income recognized on impaired
loans during the first half of 1996 or 1995.
<PAGE>17
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Interest income due in accordance
with original terms $151 $142 $322 $287
Interest income recorded (3) 19) (6) (61)
Net reduction in interest
income $148 $123 $316 $226
</TABLE>
12. Incentive Stock Option Plan
Under the Company's Incentive Stock Option Plan (the "Plan")
options can be granted (the "Grant Date") to employees with
executive, managerial, technical, or professional responsibility as
selected by a committee of the board of directors. The Plan was
amended on April 25, 1995, to authorize the grant of options
covering up to 285,000 shares of common stock. The option price at
which a stock option may be exercised shall be a price as determined
by the board committee but shall not be less than 100% of the fair
market value per share of common stock on the Grant Date. The
maximum term of any option granted under the Plan cannot exceed 10
years. The following stock options were granted:
<TABLE>
<CAPTION>
Shares Shares Option
Under Available Price
Option For Option Per Share
<S> <C> <C> <C>
Balance at December 31, 1994 75,867 38,500
Increased authorized
options - 157,000
Options granted 56,800 (56,800) $21.44-30.63
Options exercised (23,846) - 17.25-25.00
Options forfeited (3,000) 3,000 21.44-23.88
Balance at December 31, 1995 105,821 141,700 $17.25-30.63
Options granted 78,000 (78,000) $32.56
Options exercised (6,200) - 17.25-23.88
Balance at June 30, 1996 177,621 63,700 $17.25-32.56
</TABLE>
On or after the first anniversary of the Grant Date, one-third of
such options may be exercised. On or after the second anniversary
of the Grant Date, two-thirds of such options may be exercised minus
the aggregate number of such options previously exercised. On or
after the third anniversary of the Grant Date, the remainder of the
options may be exercised.
<PAGE>18
13. Off-Balance Sheet Hedge Instruments
Policies
The Company uses various interest rate contracts, such as
interest rate swaps, caps and floors, to help manage interest rate
and market valuation risk exposure, which is incurred in normal
recurrent banking activities. These interest rate contracts
function as hedges against specific assets or liabilities on the
Company's Consolidated Balance Sheet. Gains or losses on these
hedge transactions are deferred and recognized as adjustments to
interest income or interest expense of the underlying assets or
liabilities over the hedge period.
For interest rate swaps, the interest differential to be paid
or received is accrued by the Company and recognized as an
adjustment to interest income or interest expense of the underlying
assets or liabilities being hedged. Since only interest payments
are exchanged, the cash requirement and exposure to credit risk are
significantly less than the notional amount.
Any premium or transaction fee incurred to purchase interest
rate caps or floors are deferred and amortized to interest income or
interest expense over the term of the contract. Unamortized
premiums related to the purchase of caps and floors are included in
other assets on the Consolidated Balance Sheet. A summary of the
off-balance sheet hedge transactions outstanding as of June 30,
1996, are as follows:
Borrowed Funds Hedges
On March 16, 1995, the Company entered into an interest rate
swap agreement with a notional amount of $60 million and a
termination date of March 16, 1997. Under the terms of the swap
agreement, the Company pays a two year fixed interest rate of 6.93%
and receives 90 day Libor which resets quarterly. The counter-party
in this unsecured transaction is PNC Bank.
This swap agreement was executed to hedge short-term borrowings
which were incurred to fund investment securities as part of the
increased leveraging of the balance sheet. Specifically, FHLB term
advances which reprice quarterly are being used to fund fixed-rate
agency mortgage-backed securities with durations ranging from two to
three years. This hedge transaction increased interest expense by
$380,000 for the first six months of 1996 and by $104,000 for the
first six months of 1995.
On September 29, 1995, the Company entered into an interest
rate swap agreement with a notional amount of $25 million and a
termination date of September 29, 1997. Under the terms of the swap
agreement, the Company pays a two year fixed interest rate of 6.05%
and receives 90 day Libor which resets quarterly. The counterparty
in this unsecured transaction is Mellon Bank.
<PAGE>19
This swap agreement was executed to hedge short-term borrowings
used to leverage the balance sheet. Specifically, FHLB advances
which reprice every 30 to 90 days are being used to fund fixed-rate
agency mortgage-backed securities with a two year duration. This
hedge transaction increased interest expense by $69,000 for the
first six months of 1996.
CMO Liability Hedge
During the first quarter of 1994, the Company entered into an
interest rate swap agreement with a termination date of February 11,
1997. Under the terms of the swap agreement, the Company will
receive a fixed interest rate of 5% and pay a floating interest rate
defined as the 90 day Libor which resets quarterly. The counter-
party in this unsecured transaction is PNC Bank.
This swap agreement was initiated to hedge interest rate risk
in a declining, stable, or modestly rising rate environment.
Specifically, this transaction hedges the CMO liability on the
Company's Consolidated Balance Sheet by effectively converting the
fixed percentage cost to a variable rate cost. This hedge also
offsets market valuation risk since any change in the market value
of the swap agreement correlates in the opposite direction with a
change in the market value of the CMO liability. Overall, this swap
agreement increased interest expense by $25,000 in the first six
months of 1996 and $57,000 for the same 1995 period.
The Company believes that its exposure to credit loss in the
event of non-performance by any of the counter-parties is remote.
The Company monitors and controls all off-balance sheet
derivative products with a comprehensive Board of Director approved
hedging policy. This policy permits a maximum notional amount
outstanding of $250 million for interest rate swaps, and a maximum
notional amount outstanding of $250 million for interest rate
caps/floors. The Company had no interest rate caps or floors
outstanding at June 30, 1996.
14. Goodwill and Core Deposit Intangible Assets
USBANCORP's balance sheet shows both tangible assets (such as
loans, buildings, and investments) and intangible assets (such as
goodwill). The Company now carries $17.7 million of goodwill and
$5.0 million of core deposit intangible assets on its balance sheet.
The majority of these intangible assets came from the 1994 JSB
acquisition ($25.9 million) and the 1993 Integra Branches
acquisition ($1.2 million).
The Company is amortizing core deposit intangibles over
periods ranging from five to ten years while goodwill is being
amortized over a 15 year life. The straight line method of
amortization is being used for both of these categories of
intangibles. It is important to note that this intangible
amortization expense is not a future cash outflow. The following
table reflects the future amortization expense of the intangible
assets (in thousands):
<PAGE>20
Remaining 1996 $ 1,180
1997 2,356
1998 2,170
1999 2,014
2000 1,904
2001 and after 13,034
A reconciliation of the Company's intangible asset balances for
the first six months of 1996 is as follows (in thousands):
Total goodwill & core deposit
intangible assets at 12/31/95 $23,838
Intangible amortization expense
through 6/30/96 (1,180)
Total goodwill & core deposit
intangible assets at 6/30/96 $22,658
Goodwill and other intangible assets are reviewed for possible
impairment at a minimum annually, or more frequently, if events or
changed circumstances may affect the underlying basis of the asset.
The Company uses an estimate of the subsidiary banks undiscounted
future earnings over the remaining life of the goodwill and other
intangibles in measuring whether these assets are recoverable.
15. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following at June 30, 1996,
(in thousands, except percentages):
<TABLE>
<CAPTION>
Type Maturing Amount Weighted
Average
Rate
<S> <C> <C> <C>
Flexline Overnight $ 17,000 5.91%
Advances and 1996 246,700 5.46
wholesale 1997 2,750 5.61
repurchase 1998 176,785 5.11
agreements 1999 1,250 6.09
2000 3,750 6.15
2001 and
after 16,200 7.61
Total advances and 447,435 5.41
wholesale repurchase
agreements
Total FHLB Borrowings $464,435 5.43%
</TABLE>
<PAGE>21
All of the above borrowings bear a fixed rate of interest, with
the only exceptions being the Flexline whose rate can change daily.
All FHLB stock and an interest in unspecified mortgage loans, with
an aggregate statutory value equal to the amount of the advances,
have been pledged as collateral with the Federal Home Loan Bank of
Pittsburgh to support these borrowings. During the first quarter of
1996 and as reflected in the above table, the Company extended $150
million of FHLB borrowings from a 30 day maturity to a two year term
at a fixed cost of approximately 5.00%.
<PAGE>22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ("M.D.& A.")
SECOND QUARTER JUNE 30, 1996 vs. SECOND QUARTER JUNE 30, 1995
.....PERFORMANCE OVERVIEW.....The Company's net income for the
second quarter of 1996 totalled $5,282,000 or $1.01 per share on a
fully diluted basis. The Company's net income for the second
quarter of 1995 totalled $3,881,000 or $0.70 per share on a fully
diluted basis. The 1996 results reflect a $1,401,000 or 36.1%
earnings increase and a $0.31 or 44.3% improvement in fully diluted
earnings per share when compared to the 1995 second quarter results.
For the second quarter of 1996, the Company's return on average
equity increased by 353 basis points to 14.40% while the return on
average assets increased by 26 basis points to 1.12%.
Continued success in executing tactical strategies contained in
the Company's 1996 budget plan and described in the 1995 annual
report generated increased earnings from the core banking business.
The Company's improved financial performance reflects increased
levels of both net interest income and non-interest income, lower
non-interest expense, and a reduced loan loss provision. The
Company's earnings per share were also enhanced by the repurchase of
its common stock. There were 321,000 fewer average fully diluted
shares outstanding in the second quarter of 1996 than in the same
1995 period. The following table summarizes some of the Company's
key performance indicators (in thousands, except per share and
ratios):
Appearing on this page was a graph depicting the last five quarters
of fully diluted earnings per share. The data points were $1.01,
$0.93, $0.77, $0.72 and $0.70.
<PAGE>23
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1996 June 30, 1995
<S> <C> <C>
Net income $ 5,282 $ 3,881
Fully diluted earnings
per share 1.01 0.70
Return on average assets 1.12% 0.86%
Return on average equity 14.40 10.87
Average fully diluted common
shares outstanding 5,241 5,562
</TABLE>
.....NET INTEREST INCOME AND MARGIN.....The Company's net interest
income represents the amount by which interest income on earning
assets exceeds interest paid on interest bearing liabilities. Net
interest income is a primary source of the Company's earnings; it is
affected by interest rate fluctuations as well as changes in the
amount and mix of earning assets and interest bearing liabilities.
It is the Company's philosophy to strive to optimize net interest
margin performance in varying interest rate environments. The
following table compares the Company's net interest income
performance for the second quarter of 1996 to the second quarter of
1995 (in thousands, except percentages):
<TABLE>
<CAPTION>
Three Months Ended
June 30
1996 1995 Change % Change
<S> <C> <C> <C> <C>
Interest income $ 33,245 $ 31,765 $ 1,480 4.7
Interest expense 18,213 18,229 (16) (0.1)
Net interest income 15,032 13,536 1,496 11.1
Tax-equivalent
adjustment 761 701 60 8.6
Net tax-equivalent
interest income $ 15,793 $ 14,237 $ 1,556 10.9
Net interest margin 3.55% 3.38% 0.17% N/M
N/M-Not meaningful.
</TABLE>
USBANCORP's net interest income on a tax-equivalent basis
increased by $1.6 million or 10.9% while the net interest margin
percentage increased by 17 basis points to 3.55%. The improvement
in both net interest income and net interest margin was due to a
stable earning asset yield combined with a decreasing cost of
funds. Specifically, the Company's earning asset yield was
unchanged at 7.70% while the cost of funds decreased by 27 basis
points to 4.61%. Growth in loans helped stabilize the earning asset
yield despite the lower interest rate environment experienced in
the second quarter of 1996. Total loans outstanding averaged $840
million or 71.4% of total deposits in the second quarter of 1996
compared to an average of $816 million or 67.2% of total deposits in
the second quarter of 1995. The Company's ability to reduce its
cost of funds in the lower rate environment was evidenced by a 25
basis point drop in the cost of deposits and a 65 basis point drop
in the cost of borrowed funds. As a result of the lower borrowing
costs, stable earning asset yield, and a higher volume of earning
assets, the Company generated increased net interest income from
leveraging its balance sheet in the second quarter of 1996.
<PAGE>24
.....BALANCE SHEET LEVERAGING.....The Company's ongoing strategy to
use borrowed funds to purchase earning assets in order to leverage
the balance sheet and equity contributes to increased net interest
income but a lower net interest margin percentage. The source for
the borrowed funds is predominately the Federal Home Loan Bank
("FHLB") as each of the Company's subsidiary banks are members of
the FHLB. Examples of FHLB borrowings used by the Company include
one year term funds tied to 90 day Libor, 30 and 90 day wholesale
reverse repurchase agreements, overnight Flexline borrowings, and
term advances. These funds are used primarily to purchase available
for sale and held to maturity investment securities with durations
ranging from one to three years. For the second quarter of 1996,
the Company's total level of short-term borrowed funds and FHLB
advances averaged $542 million or 28.5% of total assets compared to
an average of $405 million or 22.5% of total assets for the second
quarter of 1995. These borrowed funds had an average cost of 5.59%
in the second quarter of 1996 which was 149 basis points greater
than the average cost of deposits which amounted to 4.10%. When
compared to the Company's second quarter 1996 earning asset yield,
the net interest spread earned on assets funded with deposits
amounted to 3.60% compared to a net interest spread of 2.11% on
assets funded with short-term borrowings and FHLB advances. This
second quarter 1996 net interest spread of 2.11% on assets funded
with borrowed money compared favorably to a net interest spread of
1.56% earned on leveraged assets in the prior year second quarter.
The maximum amount of leveraging the Company can perform is
controlled by internal policy requirements to maintain a minimum
asset leverage ratio of no less than 6.0% (see further discussion
under Capital Resources) and to limit net interest income
variability to plus or minus 7.5% (see further discussion under Interest Rate
Sensitivity). The Company continuously evaluates the approximate
$10 million of cash flow received monthly from the investment
portfolio and makes one of the following three decisions which can
impact the leveraged position of the balance sheet:
1) The Company can use the money to fund any loan demand that
cannot be funded with existing cash flow from the loan portfolio or
deposits.
<PAGE>25
2) The Company can use the money to fund new investment
security purchases provided that the incremental spread over the
current short-term borrowing cost is not less than 100 basis points.
3) The Company can use the money to paydown short-term
borrowings if the incremental spread that can be earned on new
investment purchases is not deemed sufficient.
It is recognized that interest rate risk does exist,
particularly in a rising interest rate environment, from this use of
borrowed funds to leverage the balance sheet. To neutralize a
portion of this risk, the Company has executed a total of $85
million of off-balance sheet hedging transactions which help fix the
variable funding costs associated with the leveraging of the balance
sheet. (See further discussion under Note 13.) Additionally, during
the first quarter of 1996 the Company took advantage of the flatness
of the Treasury yield curve to further reduce the interest rate risk
associated with the balance sheet leveraging. Specifically, $150
million of non-hedged borrowings with the FHLB were extended from a
30 day maturity to a two year term at a fixed cost of approximately
5.0%. This liability extension strategy helped reduce both short
term interest rate risk and the cost of borrowings.
.....COMPONENT CHANGES IN NET INTEREST INCOME.....Regarding the
separate components of net interest income, the Company's total tax-
equivalent interest income for the second quarter of 1996 increased
by $1.5 million or 4.7% when compared to the 1995 second quarter.
This increase was due to a $78 million or 4.6% increase in total
average earning assets because the earning asset yield remained
constant between quarters. This net increase in average earning
assets reflects $25 million of growth in total loans and $64 million
of growth in investment securities which more than offset a $9
million decline in fed funds sold and time deposits with banks.
Within the earning asset base, the yield on total investment
securities declined by 22 basis points to 6.77% due primarily to the
lower interest rate environment experienced in 1996. Both the
prime rate and fed funds rate were approximately 75 basis points
lower in the second quarter of 1996 as compared to the second
quarter of 1995. Despite the lower interest rate environment, the
yield on the total loan portfolio increased by 18 basis points to
8.65%. This yield improvement resulted from a shift in the loan
portfolio composition away from fixed-rate residential mortgage
loans to higher yielding commercial and commercial mortgage loans.
Fixed-rate residential mortgage loans comprised 25.0% of the total
average loan portfolio in the second quarter of 1996 compared to an
average of 26.3% for the same 1995 quarter. Commercial and
commercial mortgage loans comprised 39.2% of the total average loan
portfolio in the 1996 second quarter compared to 36.8% for the 1995
second quarter. This growth in commercial loans resulted from
<PAGE>26
increased production from both small business (loans less than
$250,000) and middle market lending. This improved new loan
production was due primarily to more effective sales efforts which
have included an intensive customer calling program and commercial
canvassing of small businesses. The reduced dependence on fixed-
rate residential mortgage loans as an earning asset reflects the
Company's ongoing strategy to sell newly originated 30 year fixed-
rate mortgage product.
The Company's total interest expense for the second quarter of
1996 decreased minimally by only $16,000 when compared to the same
1995 period. This slight reduction in interest expense was due
entirely to a reduced cost of funds which more than offset
additional interest expense generated from an increased volume of
interest bearing liabilities. Specifically, total interest bearing
liabilities were $93 million higher on average in the second quarter
of 1996 which caused interest expense to increase by $1.1 million.
Within the liability mix, total borrowed funds increased by $136
million in order to fund greater balance sheet leverage and replace
a $42 million outflow in interest bearing deposits. Interest
expense savings resulting from reductions in the rates paid for both
deposits and borrowed funds offset the additional interest expense
resulting from the increased size of the balance sheet. As
previously mentioned, the Company's cost of deposits decreased by 25
basis points to 4.10% and the cost of all borrowed funds dropped by
65 basis points to 5.58%. The combination of all these price and
liability composition movements caused USBANCORP's average cost of
interest bearing liabilities to decrease by 27 basis points from
4.88% during the second quarter of 1995 to 4.61% during the second
quarter of 1996.
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.
<PAGE>27
<TABLE>
<CAPTION>
Three Months Ended June 30 (In thousands, except percentages)
1996 1995
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans and loans held
for sale, net of
unearned income $ 840,345 $ 18,348 8.65% $ 815,770 $ 17,240 8.47%
Deposits with banks 1,466 17 4.71 8,739 120 5.47
Federal funds sold
and securities
purchased under
agreement to resell 2,119 28 5.30 3,983 60 5.96
Investment securities:
Available for sale 432,754 6,914 6.39 306,396 5,647 7.38
Held to maturity 481,941 8,577 7.12 544,115 9,226 6.79
Total investment
securities 914,695 15,491 6.77 850,511 14,873 6.99
Assets held in trust for
collateralized
mortgage obligation 6,494 122 7.56 8,425 173 8.23
Total interest earning
assets/interest income 1,765,119 34,006 7.70 1,687,428 32,466 7.70
Non-interest earning assets:
Cash and due from banks 35,671 34,991
Premises and equipment 18,155 18,831
Other assets 95,827 72,473
Allowance for loan
losses (14,692) (15,135)
TOTAL ASSETS $1,900,080 $1,798,588
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>28
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
CONTINUED FROM PREVIOUS PAGE
1996 1995
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand $ 83,140 $ 205 0.99% $ 97,577 $ 353 1.45%
Savings 214,642 899 1.68 232,956 1,127 1.94
Other time 738,306 9,451 5.15 747,974 10,227 5.48
Total interest bearing
deposits 1,036,088 10,555 4.10 1,078,507 11,707 4.35
Short term borrowings:
Federal funds
purchased, secur-
ities sold under
agreements to
repurchase and other
short-term
borrowings 98,215 1,244 5.09 181,576 2,550 5.65
Advances from Federal
Home Loan Bank 443,792 6,285 5.70 223,132 3,686 6.54
Collateralized mortgage
obligation 5,929 117 7.94 7,568 239 12.66
Long-term debt 4,641 12 1.05 4,600 47 4.14
Total interest bearing
liabilities/interest
expense 1,588,665 18,213 4.61 1,495,383 18,229 4.88
Non-interest bearing
liabilities:
Demand deposits 140,556 135,025
Other liabilities 23,285 24,943
Stockholders' equity 147,574 143,237
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $1,900,080 $1,798,588
Interest rate spread 3.09 2.82
Net interest income/
net interest margin 15,793 3.55% 14,237 3.38%
Tax-equivalent adjustment (761) (701)
Net Interest Income $15,032 $13,536
</TABLE>
....PROVISION FOR LOAN LOSSES.....The Company's provision for loan
losses for the second quarter of 1996 totalled $22,000 or 0.01% of
average total loans. This represented a reduction of $53,000 from
the second quarter 1995 provision of $75,000 or 0.04% of average
total loans. The continued adequacy of the allowance for loan
losses at each of the Company's banking subsidiaries supported the
reduction in the provision level. The Company applies a consistent
methodology and procedural discipline to evaluate the adequacy of
the allowance for loan losses at each subsidiary bank on a quarterly
<PAGE>29
basis. At June 30, 1996, the allowance for loan losses at each of
the Company's banking subsidiaries was in compliance with the
Company's policy of maintaining a general unallocated reserve of at
least 20% of the systematically determined minimum reserve need. In
total, the Company's general unallocated reserve was $7.1 million at
June 30, 1996, or 50.8% of the allowance for loan losses.
Additionally, the reduction in the provision level was also
supported by a favorable downward trend in substandard and doubtful
classified asset categories experienced during 1995 and the first
half of 1996. Total classified loans dropped by $3.0 million or
10.6% from $28.3 million at June 30, 1995, to $25.3 million at June
30, 1996.
.....NON-INTEREST INCOME.....Non-interest income for the second
quarter of 1996 totalled $4.6 million which represented a $34,000 or
0.7% increase when compared to the same 1995 period. This modest
increase was primarily due to a combination of the following items:
a $114,000 or 13.4% increase in trust fees to $963,000 in the
second quarter of 1996. This core trust fee growth is prompted
by increased assets under management due to the profitable
expansion of the Trust Company's business throughout western
Pennsylvania including the Greater Pittsburgh marketplace. For
the first half of 1996, the Trust Company's business
development efforts have generated new trust assets amounting
to $44 million which will generate annual fees approximating
$196,000.
a $64,000 gain realized on the sale of investment securities
available for sale in the first quarter of 1996 compared to a
$725,000 gain realized on investment security sales in the
second quarter of 1995(a decrease of $661,000). The more
significant prior year gain resulted from the sale of $69
million of adjustable-rate mortgage-backed securities while the
1996 second quarter gain was primarily due to the sale of $50
million of mortgage pass thru securities. In both periods,
these sales were executed to (1) provide liquidity to fund
anticipated loan growth and (2) improve overall portfolio
quality.
a $94,000 or 13.3% increase in deposit service charges to
$800,000. This increase resulted primarily from fewer waivers
of overdraft charges due to enhanced monitoring techniques and
pricing increases on several demand deposit account related
services.
a $482,000 increase in other income due in part to a $278,000
increase in the net cash surrender value of a $31.7 million
Bank Owned Life Insurance Policy. The remainder of the
increase was due to additional income resulting from ATM
transaction charges, other mortgage banking processing fees,
credit card charges, letters of credit fees, and check supply
sales.
<PAGE>30
.....NON-INTEREST EXPENSE.....Non-interest expense for the second
quarter of 1996 totalled $12.4 million which represented a $215,000
or 1.7% decrease when compared to the same 1995 period. This
decrease was primarily due to the following items:
a $44,000 decrease in salaries and employee benefits due to
five fewer full-time equivalent employees ("FTE"), reduced
profit sharing expense, and the benefits of the Company's
shared proportionate sacrifice program which took effect
January 1, 1996.
a $184,000 increase in professional fees due to higher legal
and other professional fees in the second quarter of 1996.
a $515,000 decrease in FDIC deposit insurance expense due to a
reduction in the premium assessment rate on deposits covered by
the Bank Insurance Fund ("BIF") from $0.23 per hundred dollars
of deposits to zero per hundred dollars of deposits.
Approximately $909 million or 77% of the Company's deposits are
covered by the BIF while the remaining $270 million or 23% are
part of the Savings Association Insurance Fund ("SAIF"). The
premium rate assessment on deposits covered by SAIF continues
at $0.23 per hundred dollars of deposits. The proposed
recapitalization of the SAIF may result in a one-time special
assessment to the Company (currently estimated to be $0.85 per
hundred dollars of deposits) sometime in the future.
a $200,000 increase in other expense due to higher advertising
expense, other real estate owned expense, telephone expense and
outside processing fees.
.....INCOME TAX EXPENSE.....The Company's provision for income taxes
for the second quarter of 1996 was $1.9 million reflecting an
effective tax rate of 26.7%. The Company's 1995 second quarter
income tax provision was $1.5 million or an effective tax rate of
28.2%. The lower effective tax rate was caused by increased total
tax-free asset holdings which were $22.6 million higher on average
in the second quarter of 1996 as compared to the second quarter of
1995. The tax-free asset holdings consist primarily of municipal
investment securities and bank owned life insurance. Net deferred
income taxes of $2,361,000 have been provided as of June 30, 1996,
on the differences between taxable income for financial and tax
reporting purposes.
<PAGE>31
SIX MONTHS ENDED JUNE 30, 1996 vs. SIX MONTHS ENDED JUNE 30, 1995
.....PERFORMANCE OVERVIEW.....The Company's net income for the first
six months of 1996 totalled $10,225,000 or $1.94 per share on a
fully diluted basis. The Company's net income for the first six
months of 1995 totalled $7,780,000 or $1.40 per share on a fully
diluted basis. The 1996 results reflect a $2,445,000 or 31.4%
earnings increase and a $0.54 or 38.6% improvement in fully diluted
earnings per share when compared to the 1995 first six months
results. For year-to-date 1996, the Company's return on average
equity increased by 261 basis points to 13.76% while the return on
average assets increased by 22 basis points to 1.09%.
The Company's improved financial performance reflects the
initial success of executing tactical strategies contained in the
Company's 1996 budget plan. This improved financial performance is
evidenced by increased levels of both net interest income and non-
interest income, lower non-interest expense, and a reduced loan loss
provision. The Company's earnings per share were also enhanced by
the repurchase of its common stock. There were 296,000 fewer
average fully diluted shares outstanding in the first half of 1996
than in the same 1995 period. The following table summarizes some of
the Company's key performance indicators (in thousands, except per
share and ratios):
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
Net income $10,225 $ 7,780
Fully diluted earnings
per share 1.94 1.40
Return on average assets 1.09% 0.87%
Return on average equity 13.76 11.15
Average fully diluted common
shares outstanding 5,277 5,573
Appearing on this page was a graph of the last five quarters of
the return on equity. The data points were 14.40%, 13.14%, 11.15%
10.68% and 10.87%.
<PAGE>32
.....NET INTEREST INCOME AND MARGIN.....The following table compares
the Company's net interest income and margin performance for the
first six months of 1996 to the first six months of 1995 (in
thousands, except percentages):
<TABLE>
<CAPTION>
Six Months Ended
June 30
1996 1995 Change % Change
<S> <C> <C> <C> <C>
Interest income $ 66,012 $ 63,988 $ 2,024 3.2
Interest expense 36,480 35,719 761 2.1
Net interest income 29,532 28,269 1,263 4.5
Tax-equivalent
adjustment 1,529 1,395 134 9.6
Net tax-equivalent
interest income $ 31,061 $ 29,664 $ 1,397 4.7
Net interest margin 3.52% 3.51% 0.01% N/M
N/M-Not meaningful.
</TABLE>
USBANCORP's net interest income on a tax-equivalent basis
increased by $1.4 million or 4.7% while the net interest margin
percentage improved modestly by one basis point to 3.52%. The
increased net interest income was due primarily to a higher volume
of earning assets as the net interest margin percentage was
relatively consistent for both periods. For the first half of 1996,
total average earning assets were $60 million higher than the
comparable 1995 period due to greater leveraging of the balance
sheet(see previous discussion under Balance Sheet Leveraging). The
slight improvement in the net interest margin percentage reflects
the cost of funds decreasing to a greater extent than the earning
asset yield.
.....COMPONENT CHANGES IN NET INTEREST INCOME.....Regarding the
separate components of net interest income, the Company's total tax-
equivalent interest income for the first six months of 1996
increased by $2.2 million or 3.3% when compared to the same 1995
period. This increase was due entirely to a $60 million or 3.5%
increase in total average earning assets which caused interest
income to rise by $2.3 million. This net increase in average
earning assets reflects $76 million of growth in investment
securities and an $8 million decline in total loans. The additional
interest income generated from higher earning asset volumes was
partially offset by an unfavorable rate variance as the Company's
total earning asset yield decreased by five basis points to 7.71%.
Within the earning asset base, the yield on total investment
securities declined by 20 basis points to 6.81% due primarily to the
lower interest rate environment experienced in the first six months
of 1996. Both the prime rate and fed funds rate were approximately
60 basis points lower in the first six months of 1996 as compared to
the first six months of 1995. Despite the lower interest rate
environment, the yield on the total loan portfolio increased by 11
basis points to 8.63%. This yield improvement resulted from the
previously discussed shift in the loan portfolio composition away
from fixed-rate residential mortgage loans to higher yielding
commercial and commercial mortgage loans.
<PAGE>33
The Company's total interest expense for the first six months
of 1996 increased by $761,000 or 2.1% when compared to the same 1995
period. This higher interest expense was caused by a $77 million
increase in average interest bearing liabilities which caused
interest expense to rise by $1.8 million. Within the liability mix,
total borrowed funds increased by $116 million in order to fund
greater balance sheet leverage and replace a $39 million outflow in
interest bearing deposits. Lower rates paid for both deposits and
FHLB borrowings caused a favorable rate variance which partially
offset the increased interest expense resulting from the higher
level of interest bearing liabilities. The cost of deposits
decreased by 11 basis points to 4.13% as the Company was able to
reprice all major deposit categories downward during the first six
months of 1996. Due to the lower interest rate environment and the
favorable extension of $150 million of non-hedged FHLB borrowings at
a fixed rate of 5.0%, the Company's cost of borrowed funds averaged
5.68% for the first six months of 1996 or 51 basis points lower than
the 6.19% average for the first six months of 1995. The combination
of all these price and liability composition movements caused
USBANCORP's average cost of interest bearing liabilities to decrease
by 14 basis points from 4.79% during the first six months of 1995 to
4.65% during the first six months of 1996.
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.
<PAGE>34
<TABLE>
<CAPTION>
Six Months Ended June 30 (In thousands, except percentages)
1996 1995
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans and loans held
for sale, net of
unearned income $ 833,919 $ 36,375 8.63% $ 841,469 $ 35,668 8.52%
Deposits with banks 1,681 34 4.03 6,147 193 6.26
Federal funds sold
and securities
purchased under
agreement to resell 1,251 34 5.40 3,043 98 6.38
Investment securities:
Available for sale 424,887 14,007 6.59 283,488 10,353 7.31
Held to maturity 481,465 16,837 6.99 547,294 18,724 6.85
Total investment
securities 906,352 30,844 6.81 830,782 29,077 7.01
Assets held in trust for
collateralized
mortgage obligation 6,724 254 7.61 8,628 347 8.11
Total interest earning
assets/interest income 1,749,927 67,541 7.71 1,690,069 65,383 7.76
Non-interest earning assets:
Cash and due from banks 35,378 37,283
Premises and equipment 18,336 18,940
Other assets 98,512 66,924
Allowance for loan
losses (14,784) (15,362)
TOTAL ASSETS $1,887,369 $1,797,854
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>35
SIX MONTHS ENDED JUNE 30
CONTINUED FROM PREVIOUS PAGE
<TABLE>
<CAPTION>
1996 1995
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand $ 82,635 $ 413 1.01% $ 98,497 $ 711 1.46%
Savings 215,179 1,807 1.70 235,963 2,277 1.95
Other time 737,231 19,029 5.19 739,245 19,581 5.34
Total interest bearing
deposits 1,035,045 21,249 4.13 1,073,705 22,569 4.24
Short term borrowings:
Federal funds
purchased, secur-
ities sold under
agreements to
repurchase and other
short-term
borrowings 92,448 2,291 5.01 186,370 5,214 5.64
Advances from Federal
Home Loan Bank 437,436 12,605 5.83 225,386 7,329 6.47
Collateralized mortgage
obligation 6,162 252 8.22 7,772 482 12.50
Long-term debt 4,787 83 2.13 5,412 125 4.67
Total interest bearing
liabilities/interest
expense 1,575,878 36,480 4.65 1,498,645 35,719 4.79
Non-interest bearing
liabilities:
Demand deposits 137,811 134,283
Other liabilities 24,244 24,164
Stockholders' equity 149,436 140,762
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $1,887,369 $1,797,854
Interest rate spread 3.06 2.97
Net interest income/
net interest margin 31,061 3.52% 29,664 3.51%
Tax-equivalent adjustment (1,529) (1,395)
Net Interest Income $29,532 $28,269
</TABLE>
....PROVISION FOR LOAN LOSSES.....The Company's provision for loan
losses for the first six months of 1996 totalled $45,000 or 0.01% of
average total loans compared to a provision of $195,000 or 0.05% of
average total loans for the same 1995 period. The reduced provision
in 1996 reflects the continued adequacy of the allowance for loan
losses at each of the Company's banking subsidiaries and a declining
trend in classified assets. At June 30, 1996, the balance in the
allowance for loan losses totalled $14 million or 184.5% of total
non-performing assets.
<PAGE>36
.....NON-INTEREST INCOME.....Non-interest income for the first six
months of 1996 totalled $9.1 million which represented a $1.1
million or 13.4% increase when compared to the same 1995 period.
This increase was primarily due to the following items:
a $188,000 or 11.1% increase in trust fees to $1.9 million in
the first six months of 1996. This trust fee growth reflects
increased assets under management as a result of successful
business development efforts in the Company's Southwestern
Pennsylvania marketplace.
a $449,000 gain realized on the sale of loans held for sale in
the first six months of 1996 compared to a $758,000 loss
realized on this same type of activity in the first half of
1995 (a net favorable shift of $1.2 million). The 1996 gain
resulted from normal sales activity at the Company's mortgage
banking subsidiary. The 1995 loss resulted from the first
quarter sale of $34 million of fixed-rate residential mortgage
loans with a weighted average coupon of 7.79% and a weighted
average maturity of 168 months. This sale was executed to
diversify the Company's balance sheet mix and reduce its
overall level of fixed-rate residential mortgage loans
resulting from the Johnstown Savings Bank acquisition. The
majority of the proceeds from the sale were reinvested in
adjustable-rate agency securities to increase the repricing
sensitivity of the Company's earning assets.
a $250,000 or 18.7% decrease in net mortgage servicing fee
income to $1.1 million. This amount resulted from $1.8 million
of mortgage servicing fees net of $689,000 of amortization
expense of the cost of purchased and originated mortgage
servicing rights. The decline in earnings between years was
primarily due to increased amortization expense on the mortgage
servicing rights as a result of faster mortgage prepayment
speeds in 1996.
a $905,000 gain was realized on the disposition of Frontier
Finance Company, a subsidiary of Community Savings Bank, in the
first quarter of 1995. This business line was sold because it
did not fit into the Company's future strategic plans and was
not meeting internal return on equity performance requirements.
There were no business line dispositions in the first six
months of 1996.
a $1.1 million increase in other income due in part to an
approximate $700,000 increase in the net cash surrender value
of a $31.7 million Bank Owned Life Insurance Policy. The
remainder of the increase was due to additional income
resulting from ATM transaction charges, other mortgage banking
processing fees, credit card charges, letters of credit fees,
and check supply sales.
<PAGE>37
.....NON-INTEREST EXPENSE.....Non-interest expense for the first six
months of 1996 totalled $24.7 million which represented a $422,000
or 1.7% decrease when compared to the same 1995 period. This
decrease was primarily due to the following items:
a $349,000 decrease in salaries and employee benefits due to
ten fewer FTE, reduced profit sharing expense, and the benefits
of the Company's shared proportionate sacrifice program which
took effect January 1, 1996. This program, which was discussed
in detail in the Company's 1995 Annual Report, was implemented
in order to reduce expense and demonstrate employee commitment
to achieving and sustaining an intermediate-term 13% return on
equity. The program included salary rollbacks ranging from 3%
to 10% for officers and a wage freeze for all other employees.
For the first six months of 1996, the shared proportionate
sacrifice program increased net income by $310,000 and fully
diluted earnings per share by $0.06.
a $295,000 increase in professional fees due to higher legal
and other professional fees in the first half of 1996.
a $1.0 million decrease in FDIC deposit insurance expense due
to the previously discussed reduction in the premium assessment
rate on deposits covered by the Bank Insurance Fund from $0.23
per hundred dollars of deposits to zero per hundred dollars of
deposits.
a $642,000 increase in other expense due to higher advertising
expense, other real estate owned expense, telephone expense,
and outside processing fees.
.....INCOME TAX EXPENSE.....The Company's provision for income taxes
for the first six months of 1996 was $3.7 million reflecting an
effective tax rate of 26.4%. The Company's income tax provision for
the first six months of 1995 was $3.2 million or an effective tax
rate of 29.2%. The lower effective tax rate was caused by increased
total tax-free asset holdings which were $32 million higher on
average in the first six months of 1996 as compared to the first six
months of 1995.
<PAGE>38
.....NET OVERHEAD BURDEN.....The Company's efficiency ratio(non-
interest expense divided by total revenue, which consists of tax-
equivalent interest income and non-interest income) showed
significant improvement as it declined from 66.6% for the first six
months of 1995 to 61.5% for the first six months of 1996. The
favorable combination of increased net interest income, higher non-
interest income, and reduced non-interest expense was responsible
for the improved efficiency ratio. The Company is well positioned
to achieve its goal of reducing this ratio to below 60% over the
next twelve month period. Employee productivity ratios also
continued to demonstrate improvement as total assets per employee
averaged $2.5 million for the first six months of 1996 a 6.4%
increase over the $2.4 million average for the same period in 1995.
Appearing on this page was a graph depicting the last five quarters
of the efficiency ratio. The data points were 60.79%, 62.18%, 66.92%,
67.69% and 67.08.
.....BALANCE SHEET.....The Company's total consolidated assets were
$1.931 billion at June 30, 1996, compared with $1.885 billion at
December 31, 1995, which represents an increase of $46 million or
2.4% due to increased leveraging of the balance sheet. During the
first half of 1996, total loans and loans held for sale increased by
approximately $20.7 million or 2.5% due to the previously mentioned
growth in commercial and commercial mortgage loans. Consumer loans
continued to decline due to net run-off experienced in the indirect
auto loan portfolio. This indirect auto loan run-off has
overshadowed improved direct consumer loan production from the
Company's branch offices which for the first six months of 1996 was
$9 million or 55% greater than the comparable 1995 period.
Investment securities increased by $43.5 million due to purchases of
mortgage-backed and municipal securities.
Total deposits were relatively stable increasing by only $1.1
million or 0.1% since December 31, 1995. The Company's total
borrowed funds position increased by $53.1 million due to additional
leveraging of the balance sheet with FHLB borrowings and wholesale
repurchase agreements. As previously mentioned, the Company did
extend $150 million of FHLB advances from a 30 day maturity to a two
year term in order to reduce short-term interest rate risk.
Overall, the Company's asset leverage ratio was 6.66% at June 30,
1996.
<PAGE>39
The Company now carries $17.7 million of goodwill and $5.0
million of core deposit intangible assets on its balance sheet. The
majority of these intangible assets were originated with the
Johnstown Savings Bank("JSB") acquisition. The Company paid this
premium for JSB and believes its franchise value has been
strengthened by the acquisition for several reasons:
JSB's customer base, branch locations, and stable core deposits
allowed the Company to obtain a 25% market share leadership
position in Cambria County - one of its primary markets.
the intra-market consolidation opportunities are generating
significant ongoing earnings enhancements which approximated $5
million for the full year 1995.
.....MARKET AREA ECONOMY.....The economy is experiencing low
unemployment, but a weaker-than-expected employment report for July
indicates that the economy is slowing from previous periods. This
slowing growth reduces fears that the Federal Reserve will raise
interest rates in the near future. Bond prices rose after the Labor
Department said July's jobless rate rose to 5.4% from June's 5.3%
and that fewer jobs were created than economists had expected.
The Johnstown region has experienced stable deposit volumes in
the first six months of 1996. Deposits in the Company's suburban
Pittsburgh market have improved and may be beginning a desirable
upward trend. Lending pipelines for both markets have improved and
activity is either stable or increasing.
The Johnstown economy was bolstered by the sale of Johnstown
Corp. to H.I.G. Capital Management of Miami, Florida. Under a
reorganization plan, H.I.G. will retain almost all of the 500
employees, modernize the plant and add some new product lines.
Additionally, Conemaugh Health System and Windber Hospital are
affiliating because of the increase in managed health care and
consumer demands for lower costs. The agreement calls for Conemaugh
to spend $500,000 to upgrade Windber's critical care unit and to
provide services in a more cost effective manner.
In the Pittsburgh marketplace, Pittsburgh city officials and
Federated Department Stores are planning a 300,000 square foot
office tower above Federated's new 250,000 square foot department
store. Federated, the Cincinnati-based retailing giant, will own
the department store at Fifth Avenue and Wood Street, which is
expected to be a Lazarus or a Macy's.
.....LOAN QUALITY.....USBANCORP's written lending policies require
underwriting, credit analysis, and loan documentation standards be
met prior to funding any loan. After the loan has been approved and
funded, continued periodic credit review is required. Annual credit
reviews are mandatory for all commercial loans and for all
commercial mortgages in excess of $300,000. In addition, due to the
secured nature of residential mortgages and the smaller balances of
individual installment loans, sampling techniques are used on a
continuing basis for credit reviews in these loan areas.
<PAGE>40
The following table sets forth information concerning
USBANCORP's loan delinquency and other non-performing assets (in
thousands, except percentages):
<TABLE>
<CAPTION>
June 30 December 31 June 30
1996 1995 1995
<S> <C> <C> <C>
Total loan delinquency (past due
30 to 89 days) $10,982 $14,324 $10,340
Total non-accrual loans 6,554 7,517 5,929
Total non-performing assets<F1> 7,582 9,426 9,467
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 1.28% 1.72% 1.29%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned
income 0.77 0.90 0.74
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 0.89 1.13 1.18
<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.
</TABLE>
Between December 31, 1995, and June 30, 1996, total loan
delinquency declined by $3.3 million causing the delinquency ratio
to drop to 1.28%. The lower delinquency resulted from enhanced
collection efforts on residential mortgage loans. Non-performing
assets also demonstrated a favorable decline since year-end due
primarily to fewer loans past due 90 days or more and the success of
the Company's ongoing workout programs.
.....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):
<TABLE>
<CAPTION>
June 30 December 31 June 30
1996 1995 1995
<S> <C> <C> <C>
Allowance for loan losses $ 13,988 $ 14,914 $ 14,886
Amount in the allowance
for loan losses
allocated to "general risk" 7,102 7,471 8,192
Allowance for loan losses as
a percentage of each of
the following:
total loans and loans
held for sale,
net of unearned income 1.64% 1.79% 1.86%
total delinquent loans
(past due 30 to 89 days) 127.37 104.12 143.97
total non-accrual loans 213.43 198.40 251.07
total non-performing assets 184.49 158.22 157.24
</TABLE>
<PAGE>41
Since December 31, 1995, the balance in the allowance for loan
losses has declined by $926,000 to $14.0 million due to net charge-
offs exceeding the loan loss provision. Net charge-offs for the
first six months of 1996 amounted to $971,000 or 0.23% of total
average loans compared to net charge-offs of $557,000 or 0.13% of
total average loans for the same 1995 period. The higher 1996 net
charge-offs reflect the second quarter charge-off of one $756,000
commercial loan(for which a full loan loss reserve allocation had
been previously established in 1995) and is not indicative of any
broad based asset quality deterioration within the loan portfolio.
The Company's allowance for loan losses as a percentage of non-
performing assets increased to 184.5% at June 30, 1996, compared to
158.2% at December 31, 1995. This coverage ratio improved since
year-end 1995 due to the Company's reduced level of non-performing
assets.
.....INTEREST RATE SENSITIVITY.....Asset/liability management
involves managing the risks associated with changing interest rates
and the resulting impact on the Company's net interest income and
capital. The management and measurement of interest rate risk at
USBANCORP is performed by using the following tools: 1) simulation
modeling which analyzes the impact of interest rate changes on net
interest income and capital levels over specific future time periods
by projecting the yield performance of assets and liabilities in
numerous varied interest rate environments; and 2)static "GAP"
analysis which analyzes the extent to which interest rate sensitive
assets and interest rate sensitive liabilities are matched at
specific points in time.
For static GAP analysis, USBANCORP typically defines interest
rate sensitive assets and liabilities as those that reprice within
six months or one year. Maintaining an appropriate match is one
method of avoiding wide fluctuations in net interest margin during
periods of changing interest rates. The difference between rate
sensitive assets and rate sensitive liabilities is known as the
"interest sensitivity GAP." A positive GAP occurs when rate
sensitive assets exceed rate sensitive liabilities repricing in the
same time period and a negative GAP occurs when rate sensitive
liabilities exceed rate sensitive assets repricing in the same time
period. A GAP ratio (rate sensitive assets divided by rate
sensitive liabilities) of one indicates a statistically perfect
match. A GAP ratio of less than one suggests that a financial
institution may be better positioned to take advantage of declining
interest rates rather than increasing interest rates, and a GAP
ratio of more than one suggests the converse.
<PAGE>42
The following table presents a summary of the Company's static
GAP positions (in thousands, except for the GAP ratios):
<TABLE>
<CAPTION>
June 30 December 31 June 30
1996 1995 1995
<S> <C> <C> <C>
Six month cumulative GAP
RSA................ $ 565,417 $ 589,200 $ 537,659
RSL................ (781,858) (845,020) (692,610)
Off-balance sheet
hedges.......... 75,000 75,000 50,000
GAP................ $(141,441) $(180,820) $(104,951)
GAP ratio.......... 0.80X 0.77X 0.84X
GAP as a % of total
assets.......... (7.32)% (9.59)% (5.83)%
GAP as a % of total
capital......... (96.78) (120.15) (71.58)
One year cumulative GAP
RSA................ $ 781,358 $ 787,615 $ 721,672
RSL................ (888,280) (986,669) (839,446)
Off-balance sheet
hedges......... 25,000 75,000 50,000
GAP................ $ (81,922) $(124,054) $ (67,774)
GAP ratio.......... 0.91X 0.86X 0.91X
GAP as a % of total
assets.......... (4.24)% (6.58)% (3.77)%
GAP as a % of total
capital......... (56.05) (82.43) (46.22)
</TABLE>
When June 30, 1996, is compared to December 31, 1995, both the
Company's six month and one year cumulative GAP ratios became less
negative due to fewer rate sensitive liabilities. The extension of
$150 million of FHLB advances from a 30 day maturity to a two year
term was the primary factor responsible for the reduction in rate
sensitive liabilities. As separately disclosed in the above table,
the hedge transactions (described in detail in Note 13) reduced the
negativity of the six month GAP by $75 million and the one year GAP
by $25 million.
A portion of the Company's funding base is low cost core
deposit accounts which do not have a specific maturity date. The
accounts which comprise these low cost core deposits include
passbook savings accounts, money market accounts, NOW accounts,
daily interest savings accounts, purpose clubs, etc. At June 30,
1996, the balance in these accounts totalled $456 million or 23.6%
of total assets. Within the above static GAP table, approximately
$148 million or 32% of the total low cost core deposits are assumed
to be rate sensitive liabilities which reprice in one year or less;
this assumption is based upon historical experience in varying
interest rate environments and is consistently used for all GAP
ratios presented. The Company recognizes that the pricing of these
accounts is somewhat inelastic when compared to normal rate
movements and generally assumes that up to a 250 basis point
increase in rates will not necessitate a change in the cost of these
accounts.
<PAGE>43
There are some inherent limitations in using static GAP
analysis to measure and manage interest rate risk. For instance,
certain assets and liabilities may have similar maturities or
periods to repricing but the magnitude or degree of the repricing
may vary significantly with changes in market interest rates. As a
result of these GAP limitations, management places primary emphasis
on simulation modeling to manage and measure interest rate risk. At
June 30, 1996, these varied economic interest rate simulations
indicated that the maximum negative variability of USBANCORP's net
interest income over the next twelve month period was -3.4% under an
upward rate shock forecast reflecting a 200 basis point increase in
interest rates. Capital impairment under this simulation was
estimated to be less than 1.0% and net income was reduced by
approximately 7.0%. The off-balance sheet borrowed funds hedge
transactions also helped reduce the variability of forecasted net
interest income in a rising interest rate environment. The
Company's asset liability management policy seeks to limit net
interest income variability to plus or minus 7.5% based upon varied economic
rate forecasts which include interest rate movements of up to 200 basis
points.
Within the investment portfolio at June 30, 1996, 45.7% of the
portfolio is currently classified as available for sale and 54.3% as
held to maturity. The available for sale classification provides
management with greater flexibility to manage the securities
portfolio to better achieve overall balance sheet rate sensitivity
goals and provide liquidity if needed. Furthermore, it is the
Company's intent to continue to diversify its loan portfolio to
increase liquidity and rate sensitivity and to better manage
USBANCORP's long-term interest rate risk by continuing to sell newly
originated 30 year fixed-rate mortgage loans. The Company will
usually retain servicing rights at its mortgage banking subsidiary
and recognize fee income over the remaining lives of the loans sold
at an average rate of approximately 30 basis points on the loan
balances outstanding.
.....LIQUIDITY.....Financial institutions must maintain liquidity to
meet day-to-day requirements of depositor and borrower customers,
take advantage of market opportunities, and provide a cushion
against unforeseen needs. Liquidity needs can be met by either
reducing assets or increasing liabilities. Sources of asset
liquidity are provided by short-term investment securities, time
deposits with banks, federal funds sold, banker's acceptances, and
commercial paper. These assets totalled $151 million at June 30,
1996, $169 million at December 31, 1995, and $187 at June 30, 1995.
Maturing and repaying loans as well as the monthly cash flow
associated with certain mortgage-backed securities are other
significant sources of asset liquidity.
<PAGE>44
Liability liquidity can be met by attracting deposits with
competitive rates, using repurchase agreements, buying federal
funds, or utilizing the facilities of the Federal Reserve or the
Federal Home Loan Bank systems. USBANCORP's subsidiaries utilize a
variety of these methods of liability liquidity. At June 30, 1996,
USBANCORP's subsidiaries had approximately $121.4 million of unused
lines of credit available under informal arrangements with
correspondent banks compared to $168.4 million at June 30, 1995.
These lines of credit enable USBANCORP's subsidiaries to purchase
funds for short-term needs at current market rates. Additionally,
each of the Company's subsidiary banks are members of the Federal
Home Loan Bank which provides the opportunity to obtain
intermediate- to longer-term advances up to approximately 80% of
their investment in assets secured by one-to-four family residential
real estate. This would suggest a current total available Federal
Home Loan Bank borrowing capacity of approximately $303 million.
Furthermore, USBANCORP had available at June 30, 1996, $6.3 million
of a total $12.5 million unsecured line of credit.
Liquidity can be further analyzed by utilizing the Consolidated
Statement of Cash Flows. Cash equivalents decreased by $19.6
million from December 31, 1995, to June 30, 1996, due primarily to
$83.4 million of net cash used by investing activities. This more
than offset $17.6 million of net cash provided by operating
activities and $46.1 million of net cash provided by financing
activities. Within investing activities, purchases of investment
securities exceeded the cash proceeds from investment security
maturities and sales by approximately $54.6 million. Cash advanced
for new loan fundings totalled $174.9 million and was approximately
$20.5 million greater than the cash received from loan principal
payments. Within financing activities, cash payments for maturing
certificates of deposit exceeded cash generated from the sale of new
certificates of deposit by $5.0 million. Net principal borrowings
of advances from Federal Home Loan Bank and long-term debt provided
$18.8 million of cash.
.....CAPITAL RESOURCES.....The following table highlights the
Company's compliance with the required regulatory capital ratios for
each of the periods presented (in thousands, except ratios):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
RISK-ADJUSTED
CAPITAL RATIOS
Tier 1 capital $ 127,406 13.78% $ 123,251 13.63% $ 122,453 13.09%
Tier 1 capital
minimum
requirements 36,990 4.00 36,162 4.00 37,408 4.00
Excess $ 90,416 9.78% $ 87,089 9.63% $ 85,045 9.09%
Total capital $ 138,965 15.03% $ 134,552 14.88% $ 134,143 14.34%
Total capital
minimum
requirements 73,979 8.00 72,325 8.00 74,816 8.00
Excess $ 64,986 7.03% $ 62,227 6.88% $ 59,327 6.34%
Total risk-
adjusted
assets $ 924,741 $ 904,062 $ 935,199
ASSET LEVERAGE
RATIO
Tier 1 capital $ 127,406 6.66% $ 123,251 6.63% $ 122,453 6.90%
Minimum
requirements 95,637 5.00 92,907 5.00 88,739 5.00
Excess $ 31,769 1.66% $ 30,344 1.63% $ 33,714 1.90%
Total adjusted
assets $1,912,730 $1,858,131 $1,774,782
</TABLE>
<PAGE>45
Between December 31, 1995, and June 30, 1996, each of the
Company's regulatory capital ratios increased slightly due to
overall net growth in equity. The Company continued to balance
regulatory capital requirements with shareholder value needs by
optimizing the asset leverage ratio between the 6.5% to 7% range.
The Company used funds provided by a $10 million unsecured line of
credit to repurchase 130,000 shares or $4.4 million of its common
stock during the first six months of 1996. The rate on this
unsecured line of credit floats at 50 basis points under the prime
rate. Through June 30, 1996, the Company has repurchased a total
of 553,000 shares of its common stock at a total cost of $15.4
million or $27.86 per share. The Company plans to continue its
treasury stock repurchase program which currently permits a maximum
total repurchase authorization of $18 million. The maximum price
per share at which the Company can repurchase stock is 130% of book
value. At June 30, 1996, the book value of the Company's common
stock was $28.18 per share.
The Company exceeds all regulatory capital ratios for each of
the periods presented. Furthermore, each of the Company's
subsidiary banks are considered "well capitalized" under all
applicable FDIC regulations. It is the Company's ongoing intent to
continue to prudently leverage the capital base in an effort to
increase return on equity performance while maintaining necessary
capital requirements. It is, however, the Company's intent to
maintain the FDIC "well capitalized" classification for each of its
subsidiaries to ensure the lowest deposit insurance premium and to
maintain an asset leverage ratio of no less than 6.0%.
The Company's declared Common Stock cash dividend per share was
$0.57 for the first six months of 1996 which was a 9.6% increase
over the $0.52 per share dividend for the same 1995 interim period.
The dividend yield on the Company's common stock now approximates
3.7% compared to an average common dividend yield for Pennsylvania
bank holding companies of approximately 2.8%. The Company remains
committed to a progressive total shareholder return which includes
maintaining the common dividend at a higher level than peer.
<PAGE>46
Presented on this page was a service area map depicting the six
counties serviced by the Company.
<PAGE>47
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of USBANCORP, Inc. was
held on April 23, 1996. The results of the items submitted for a
vote are as follows:
The following five Directors, whose term will expire in
1999, were re-elected:
Number of Votes % of total
Cast for Class I outstanding
Director shares voted
Jerome M. Adams 4,139,250 98.45%
James M. Edwards, Sr. 4,034,800 95.97%
Richard W. Kappel 4,141,419 98.50%
James C. Spangler 4,139,616 98.46%
Robert L. Wise 4,140,894 98.49%
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
15.1 Letter re: unaudited interim financial
information
(b) Reports on Form 8-K: There were no reports filed on
Form 8-K during the first six months of 1996.
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
USBANCORP, Inc.
Registrant
Date: August 14, 1996 /s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: August 14, 1996 /s/Orlando B. Hanselman
Orlando B. Hanselman
Executive Vice President &
Chief Financial Officer
<PAGE>48
STATEMENT OF MANAGEMENT RESPONSIBILITY
July 19, 1996
To the Stockholders and
Board of Directors of
USBANCORP, Inc.
Management of USBANCORP, Inc. and its subsidiaries
have prepared the consolidated financial statements
and other information in the Form 10-Q in accordance
with generally accepted accounting principles and are
responsible for its accuracy.
In meeting its responsibilities, management relies on
internal accounting and related control systems, which
include selection and training of qualified personnel,
establishment and communication of accounting and
administrative policies and procedures, appropriate
segregation of responsibilities, and programs of
internal audit. These systems are designed to provide
reasonable assurance that financial records are
reliable for preparing financial statements and
maintaining accountability for assets, and that assets
are safeguarded against unauthorized use or
disposition. Such assurance cannot be absolute
because of inherent limitations in any internal
control system.
Management also recognizes its responsibility to
foster a climate in which Company affairs are
conducted with the highest ethical standards. The
Company's Code of Conduct, furnished to each employee
and director, addresses the importance of open
internal communications, potential conflicts of
interest, compliance with applicable laws, including
those related to financial disclosure, the
confidentiality of propriety information, and other
items. There is an ongoing program to assess
compliance with these policies.
The Audit Committee of the Company's Board of
Directors consists solely of outside directors. The
Audit Committee meets periodically with management and
the independent accountants to discuss audit,
financial reporting, and related matters. Arthur
Andersen LLP and the Company's internal auditors have
direct access to the Audit Committee.
/S/Terry K. Dunkle /s/Orlando B. Hanselman
Terry K. Dunkle Orlando B. Hanselman
Chairman, President & Executive Vice President
Chief Executive Officer Chief Financial Officer
<PAGE>49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
USBANCORP, Inc. :
We have reviewed the accompanying consolidated
balance sheets of USBANCORP, Inc. (a Pennsylvania
corporation) and subsidiaries as of June 30, 1996
and 1995, and the related consolidated statements of
income, changes in stockholders equity and cash
flows for the three-month and six-month periods
ended June 30, 1996 and 1995. These financial
statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards
established by the American Institute of Certified
Public Accountants. A review of interim financial
information consists principally of applying
analytical procedures to financial data and making
inquiries of persons responsible for financial and
accounting matters. It is substantially less in
scope than an audit conducted in accordance with
generally accepted auditing standards, the objective
of which is the expression of an opinion regarding
the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any
material modifications that should be made to the
financial statements referred to above for them to
be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with
generally accepted auditing standards, the
consolidated balance sheet of USBANCORP, Inc. as of
December 31, 1995, and, in our report dated January
25, 1996, we expressed an unqualified opinion on
that statement. In our opinion, the information set
forth in the accompanying consolidated balance sheet
as of December 31, 1995, is fairly stated, in all
material respects, in relation to the balance sheet
from which it has been derived.
/S/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
July 19, 1996
<PAGE>50
July 19, 1996
To the Stockholders and Board of Directors of
USBANCORP, INC.:
We are aware that USBANCORP, Inc. has incorporated
by reference in its Registration Statements on Form
S-3 (Registration No. 33-56604); Form S-8
(Registration No. 33-53935); Form S-8 (Registration
No. 33-55845); Form S-8 (Registration No. 33-55207);
and Form S-8 (Registration No. 33-55211) its Form
10-Q for the quarter ended June 30, 1996, which
includes our report dated July 19, 1996, covering
the unaudited interim financial statement
information contained therein. Pursuant to
Regulation C of the Securities Act of 1933 (the
Act), that report is not considered a part of the
registration statements prepared or certified by our
firm or a report prepared or certified by our firm
within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
<PAGE>51
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-12-1996
<PERIOD-END> JUN-30-1996
<CASH> 39,383
<INT-BEARING-DEPOSITS> 801
<FED-FUNDS-SOLD> 400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 426,989
<INVESTMENTS-CARRYING> 507,560
<INVESTMENTS-MARKET> 499,620
<LOANS> 855,361
<ALLOWANCE> 13,988
<TOTAL-ASSETS> 1,931,475
<DEPOSITS> 1,178,922
<SHORT-TERM> 582,601
<LIABILITIES-OTHER> 19,157
<LONG-TERM> 4,644
0
0
<COMMON> 14,350
<OTHER-SE> 131,801
<TOTAL-LIABILITIES-AND-EQUITY> 1,931,475
<INTEREST-LOAN> 36,133
<INTEREST-INVEST> 29,557
<INTEREST-OTHER> 322
<INTEREST-TOTAL> 66,012
<INTEREST-DEPOSIT> 21,249
<INTEREST-EXPENSE> 15,231
<INTEREST-INCOME-NET> 29,532
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 1,882
<EXPENSE-OTHER> 24,691
<INCOME-PRETAX> 13,898
<INCOME-PRE-EXTRAORDINARY> 13,898
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,225
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.94
<YIELD-ACTUAL> 7.71
<LOANS-NON> 6,554
<LOANS-PAST> 909
<LOANS-TROUBLED> 1,395
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,914
<CHARGE-OFFS> 1,357
<RECOVERIES> 386
<ALLOWANCE-CLOSE> 13,988
<ALLOWANCE-DOMESTIC> 13,988
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,102
</TABLE>
