UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 1999
Transaction Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transaction period from to
Commission File Number 0-11204
USBANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1424278
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Main & Franklin Streets, P.O. Box 430, Johnstown, PA 15907-0430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 533-5300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 30, 1999
Common Stock, par value $2.50 13,305,080
per share
<PAGE>1
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
March 31, 1999, December 31, 1998,
and March 31, 1998 3
Consolidated Statement of Income -
Three Months Ended March 31, 1999,
and 1998 4
Consolidated Statement of Changes
in Stockholders' Equity -
Three Months Ended
March 31, 1999, and 1998 6
Consolidated Statement of Cash Flows -
Three Months Ended
March 31, 1999, and 1998 7
Notes to Consolidated Financial
Statements 8
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations 22
Part II. Other Information 40
<PAGE>2
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
March 31 December 31 March 31
1999 1998 1998
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 37,806 $ 35,085 $ 39,733
Interest bearing deposits
with banks 110 3,855 187
Investment securities:
Available for sale 689,944 661,491 554,205
Held to maturity (market
value $497,839 on March 31,
1999, $516,452 on December
31, 1998, and $505,938 on
March 31, 1998) 492,297 508,142 501,238
Loans held for sale 62,022 51,317 30,786
Loans 1,024,960 1,020,280 992,989
Less: Unearned income 4,880 5,276 5,759
Allowance for loan losses 10,760 10,725 11,880
Net loans 1,009,320 1,004,279 975,350
Premises and equipment 18,346 18,020 17,774
Accrued income receivable 17,058 17,150 16,488
Mortgage servicing rights 16,127 16,197 13,785
Goodwill and core deposit intangibles 28,078 18,697 18,532
Bank owned life insurance 36,041 35,622 34,398
Other assets 10,223 7,226 5,321
TOTAL ASSETS $ 2,417,372 $ 2,377,081 $ 2,207,797
LIABILITIES
Non-interest bearing deposits $ 158,547 $ 166,701 $ 159,411
Interest bearing deposits 1,097,612 1,009,590 1,008,441
Total deposits 1,256,159 1,176,291 1,167,852
Federal funds purchased and
securities sold under
agreements to repurchase 106,781 101,405 93,421
Other short-term borrowings 96,267 129,003 61,362
Advances from Federal Home
Loan Bank 751,126 752,391 692,430
Guaranteed junior subordinated
deferrable interest debentures 34,500 34,500 -
Long-term debt 8,684 9,271 7,516
Total borrowed funds 997,358 1,026,570 854,729
Other liabilities 28,151 32,550 29,481
TOTAL LIABILITIES 2,281,668 2,235,411 2,052,062
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; 17,377,460 shares
issued and 13,331,541 outstanding
on March 31, 1999; 17,350,136
shares issued and 13,512,317
outstanding on December 31,
1998; 17,326,803 shares issued
and 14,387,412 outstanding on
March 31, 1998 43,444 43,375 14,437
Treasury stock at cost, 4,045,919
shares on March 31, 1998,
3,837,819 shares on December 31,
1997, and 2,939,391 shares on
March 31, 1998 (65,155) (61,521) (39,136)
Surplus 65,648 65,495 94,212
Retained earnings 94,895 91,737 82,882
Accumulated other comprehensive
income (3,128) 2,584 3,340
TOTAL STOCKHOLDERS' EQUITY 135,704 141,670 155,735
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,417,372 $ 2,377,081 $ 2,207,797
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>3
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
Three Months Ended
March 31
1999 1998
INTEREST INCOME
Interest and fees on loans and loans
held for sale:
Taxable $ 20,938 $ 20,658
Tax exempt 557 622
Deposits with banks 32 16
Investment securities:
Available for sale 10,751 8,933
Held to maturity 7,946 9,463
Total Interest Income 40,224 39,692
INTEREST EXPENSE
Deposits 10,116 10,197
Federal funds purchased and securities
sold under agreements to repurchase 1,204 1,261
Other short-term borrowings 1,589 1,126
Advances from Federal Home Loan Bank 10,329 10,125
Guaranteed junior subordinated deferrable
int. debentures 740 -
Long-term debt 101 122
Total Interest Expense 24,079 22,831
NET INTEREST INCOME 16,145 16,861
Provision for loan losses 375 150
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 15,770 16,711
NON-INTEREST INCOME
Trust fees 1,228 1,109
Net gains on investment securities 296 219
Net gains on loans held for sale 1,347 724
Wholesale cash processing fees 175 186
Service charges on deposit accounts 853 782
Net mortgage servicing fees 138 314
Bank owned life insurance 419 419
Other income 1,728 1,615
Total Non-Interest Income 6,184 5,368
NON-INTEREST EXPENSE
Salaries and employee benefits 7,983 7,490
Net occupancy expense 1,186 1,154
Equipment expense 1,022 796
Professional fees 700 792
Supplies, postage, and freight 694 671
Miscellaneous taxes and insurance 493 356
FDIC deposit insurance expense 68 38
Amortization of goodwill and core deposit
intangibles 712 590
Other expense 2,244 2,365
Total Non-Interest Expense $ 15,102 $ 14,252
CONTINUED ON NEXT PAGE
<PAGE>4
CONSOLIDATED STATEMENT OF INCOME
CONTINUED FROM PREVIOUS PAGE
Three Months Ended
March 31
1999 1998
INCOME BEFORE INCOME TAXES 6,852 7,827
Provision for income taxes 1,816 2,132
NET INCOME $ 5,036 $ 5,695
PER COMMON SHARE DATA:
Basic:
Net income $ 0.37 $ 0.39
Average number of common
shares outstanding 13,445,841 14,548,869
Diluted:
Net income $ 0.37 $ 0.38
Average number of common
shares outstanding 13,604,163 14,828,523
Cash dividend declared $ 0.14 $ 0.12
See accompanying notes to consolidated financial statements.
<PAGE>5
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Accumulated
Other
Preferred Common Treasury Retained Comprehensive
Stock Stock Stock Surplus Earnings Income Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1997 $ - $ 14,402 $(31,175) $ 93,934 $ 78,866 $ 2,153 $158,180
Net Income - - - - 5,695 - 5,695
Dividend reinvestment
and stock
purchase plan - 35 - 278 - - 313
Net unrealized holding
gains (losses) on
investment securities - - - - - 1,187 1,187
Treasury Stock, 112,839
shares at cost - - (7,961) - - - (7,961)
Cash dividends declared:
Common stock
($0.12 per share) - - - - (1,679) - (1,679)
Balance March 31,
1998 $ - $ 14,437 $(39,136) $ 94,212 $ 82,882 $ 3,340 $155,735
Balance December 31,
1998 $ - $ 43,375 $(61,521) $ 65,495 $ 91,737 $ 2,584 $141,670
Net Income - - - - 5,036 - 5,036
Dividend reinvest-
ment and stock
purchase plan - 69 - 153 - - 222
Net unrealized
holding gains
(losses) on
investment
securities - - - - - (5,712) (5,712)
Treasury Stock, 208,100
shares at cost - - (3,634) - - - (3,634)
Cash dividends
declared:
Common stock
($0.14 per share) - - - - (1,878) - (1,878)
Balance March 31,
1999 $ - $ 43,444 $(65,155) $65,648 $ 94,895 $ (3,128) $135,704
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>6
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,036 $ 5,695
Adjustments to reconcile net income
to net cash (used) provided by
operating activities:
Provision for loan losses 375 150
Depreciation and amortization expense 628 632
Amortization expense of goodwill and core
deposit intangibles 712 590
Amortization expense of mortgage
servicing rights 770 607
Net amortization of investment securities 378 178
Net realized gains on investment securities (296) (219)
Net realized gains on loans and
loans held for sale (1,347) (724)
Origination of mortgage loans held
for sale (132,978) (107,998)
Sales of mortgage loans held for sale 140,851 92,811
Decrease in accrued income receivable 92 829
Decrease in accrued expense payable (853) (1,123)
Net cash provided (used) by
operating activities 13,368 (8,572)
INVESTING ACTIVITIES
Purchases of investment securities and other
short-term investments (219,411) (119,224)
Proceeds from maturities of investment
securities and other short-term
investments 55,853 63,560
Proceeds from sales of investment securities
and other short-term investments 141,811 118,314
Long-term loans originated (78,976) (72,554)
Loans held for sale (62,022) (30,786)
Principal collected on long-term loans 126,069 89,016
Loans purchased or participated (9,734) -
Net decrease in credit card receivable and
other short-term loans 2,016 1,411
Purchases of premises and equipment (1,058) (776)
Sale/retirement of premises and equipment 104 -
Net decrease in assets held in trust for
collateralized mortgage obligation 270 317
Net (increase) decrease mortgage
servicing rights (700) 568
Net increase in other assets (10,434) (2,501)
Net cash (used) provided by
investing activities (56,212) 47,345
FINANCING ACTIVITIES
Proceeds from sales of certificates
of deposit 101,032 103,978
Payments for maturing certificates
of deposit (35,947) (92,583)
Net increase in demand and
savings deposits 14,783 16,930
Net (decrease) increase in federal funds
purchased, securities sold under
agreements to repurchase, and other
short-term borrowings (27,604) 3,791
Net principal repayments of advances from
Federal Home Loan Bank (1,265) (61,765)
Principal borrowings on long-term debt - 900
Repayments of long-term debt (343) (1,253)
Common stock cash dividends paid (811) (1,225)
Guaranteed junior subordinated deferrable
interest debenture dividends paid (729) -
Proceeds from dividend reinvestment, stock
purchase plan, and stock options exercised 222 313
Purchases of treasury stock (3,634) (7,961)
Net (decrease) increase in
other liabilities (3,884) 1,803
Net cash provided (used) by
financing activities 41,820 (37,072)
NET (DECREASE) INCREASE IN CASH EQUIVALENTS (1,024) 1,701
CASH EQUIVALENTS AT JANUARY 1 38,940 38,219
CASH EQUIVALENTS AT MARCH 31 $ 37,916 $ 39,920
</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, U.S. Bank ("U.S. Bank"),
Three Rivers Bank and Trust Company ("Three Rivers
Bank"), USBANCORP Trust Company ("Trust Company"),
UBAN Associates, Inc., ("UBAN Associates") and United
Bancorp Life Insurance Company ("United Life"). In
addition, the Parent Company is an administrative
group that provides support in such areas as audit,
finance, investments, loan review, general services,
loan policy, and marketing. Intercompany accounts and
transactions have been eliminated in preparing the
consolidated financial statements.
2. Basis of Preparation
The unaudited consolidated financial statements
have been prepared in accordance with generally
accepted accounting principles for interim financial
information. In the opinion of management, all
adjustments that are of a normal recurring nature and
are considered necessary for a fair presentation have
been included. They are not, however, necessarily
indicative of the results of consolidated operations
for a full year.
With respect to the unaudited consolidated
financial information of the Company for the three
month periods ended March 31, 1999, and 1998, Arthur
Andersen LLP, independent public accountants,
conducted reviews (based upon procedures established
by the American Institute of Certified Public
Accountants) and not audits, as set forth in their
separate review report dated April 16, 1999, 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, 1998, 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, 1998.
3. Earnings Per Common Share
Basic earnings per share includes only the
weighted average common shares outstanding. Diluted
earnings per share includes the weighted average
common shares outstanding and any dilutive common
stock equivalent shares in the calculation. All prior
periods have been restated to reflect this adoption.
Treasury shares are treated as retired for earnings
per share purposes.
<PAGE>8
4. Comprehensive Income
In January 1998, the Company adopted SFAS #130,
"Reporting Comprehensive Income," which established
standards for reporting and displaying comprehensive
income and its components in a financial statement.
For the Company, comprehensive income includes net
income and unrealized holding gains and losses from
available for sale investment securities. The changes
in other comprehensive income are reported net of
income taxes, as follows (in millions):
March 31, March 31,
1999 1998
Net income $ 5,036 $ 5,695
Other comprehensive income, before tax:
Unrealized holding gains(losses)
arising during the period (7,008) 1,670
Less: reclassification adjustment for
gains included in net income, net of tax (218) (159)
Other comprehensive income(loss), before tax (7,226) 1,511
Income tax expense(credit) related to items
of other comprehensive income (1,514) 324
Other comprehensive income(loss), net of tax (5,712) 1,187
Comprehensive (loss)income $ (676) $ 6,882
5. 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 $11,000 in income tax
payments in the first quarter of 1999 as compared to
$39,000 for the first three months of 1998. Total
interest expense paid amounted to $24,932,000 in
1999's first three months compared to $23,954,000 in
the same 1998 period.
6. Investment Securities
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).
<PAGE>9
These available for sale
securities are reported at fair value with unrealized
aggregate appreciation/(depreciation) excluded from
income and credited/(charged) to a separate component
of shareholders' equity on a net of tax basis. Any
security classified as trading assets are reported at
fair value with unrealized aggregate
appreciation/(depreciation) included in current income
on a net of tax basis. The Company presently does not
engage in trading activity. Realized gain or loss on
securities sold was computed upon the adjusted cost of
the specific securities sold. The book and market
values of investment securities are summarized as
follows (in thousands):
Investment securities available for sale:
March 31, 1999
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 199 $ 3 $ - $ 202
U.S. Agency 18,257 2 (68) 18,191
State and municipal 10,518 117 - 10,635
U.S. Agency mortgage-backed
securities 608,581 1,040 (5,919) 603,702
Other securities<F1> 57,486 7 (279) 57,214
Total $695,041 $ 1,169 $ (6,266) $689,944
Investment securities held to maturity:
March 31, 1999
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 17,185 $ 51 $ (50) $ 17,186
U.S. Agency 24,426 146 - 24,572
State and municipal 152,274 2,557 (1,550) 153,281
U.S. Agency mortgage-backed
securities 294,716 4,696 (410) 299,002
Other securities<F1> 3,696 102 - 3,798
Total $492,297 $ 7,552 $ (2,010) $497,839
<F1>Other investment securities include corporate
notes and bonds, asset-backed securities, and equity securities.
Maintaining investment quality is a primary
objective of the Company's investment policy which,
subject to certain limited exceptions, prohibits the
purchase of any investment security below a Moody's
Investor's Service or Standard & Poor's rating of "A."
At March 31, 1999, 97.6% of the portfolio was rated
"AAA" compared to 98.6% at March 31, 1998.
Approximately 1.5% of the portfolio was rated below
"A" or unrated on March 31, 1999.
<PAGE>10
7. Loans Held for Sale
At March 31, 1999, $48,253,000 of newly
originated fixed-rate residential mortgage loans were
classified as "held for sale." It is management's
intent to sell these residential mortgage loans during
the next several months. The residential mortgage
loans held for sale are carried at the lower of
aggregate cost or market value. Net realized and
unrealized gains and losses are included in "Net gains
(losses) on loans held for sale"; unrealized net
valuation adjustments (if any) are recorded in the
same line item on the Consolidated Statement of
Income. At March 31, 1999, $13,769,000 of credit card
loans were also classified as held for sale due to the
Company's plans to sell this portfolio in the second
quarter of 1999.
8. Loans
The loan portfolio of the Company consists of the
following (in thousands):
March 31 December 31 March 31
1999 1998 1998
Commercial $150,644 $139,751 $141,598
Commercial loans secured
by real estate 352,800 341,842 320,058
Real estate - mortgage 448,185 449,875 438,161
Consumer 73,331 88,812 93,172
Loans 1,024,960 1,020,280 992,989
Less: Unearned income 4,880 5,276 5,759
Loans, net of unearned
income $1,020,080 $1,015,004 $987,230
Real estate-construction loans were not material
at these presented dates and comprised 5.2% of total
loans net of unearned income at March 31, 1999. The
Company has no credit exposure to foreign countries or
highly leveraged transactions. Additionally, the
Company has no significant industry lending
concentrations.
9. Allowance for Loan Losses and Charge-Off Procedures
As a financial institution which assumes lending
and credit risks as a principal element of its
business, the Company anticipates that credit losses
will be experienced in the normal course of business.
Accordingly, the Company consistently applies a
comprehensive methodology and procedural discipline
which is updated on a quarterly basis at the
subsidiary bank level to determine both the adequacy
of the allowance for loan losses and the necessary
provision for loan losses to be charged against
earnings. This methodology includes:
a detailed review of all criticized and impaired
loans to determine if any specific reserve
allocations are required on an individual loan
basis. The specific reserve established for these
criticized and impaired loans is based on careful
analysis of the loan's performance, the related
collateral value, cash flow considerations and the
financial capability of any guarantor.
<PAGE>11
the application of formula driven reserve
allocations for all commercial and commercial
real-estate loans are calculated by using a three
year migration analysis of net losses incurred
within each risk grade for the entire commercial
loan portfolio. The difference between estimated
and actual losses is reconciled through the
dynamic nature of the migration analysis.
the application of formula driven 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 formula driven reserve
allocations to all outstanding loans and certain
unfunded commitments is based upon review of
historical losses and qualitative factors, which
include but are not limited to, economic trends,
delinquencies, concentrations of credit, trends in
loan volume, experience and depth of management,
examination and audit results, effects of any
changes in lending policies and trends in policy
exceptions.
the maintenance of a general unallocated reserve
in order to provide conservative positioning based
on an assessment of the regional economy and to
provide protection against credit risks resulting
from other external factors such as the continued
growth of the loan portfolio. It must be
emphasized that a general unallocated reserve is
prudent recognition of the fact that reserve
estimates, by definition, lack precision.
After completion of this process, a formal meeting
of the Loan Loss Reserve Committee is held to evaluate
the adequacy of the reserve and establish the
provision level for the next quarter. The Company
believes that the procedural discipline, systematic
methodology, and comprehensive documentation of this
quarterly process is in full compliance with all
regulatory requirements and provides appropriate
support for accounting purposes.
When it is determined that the prospects for
recovery of the principal of a loan have significantly
diminished, the loan is immediately charged against
the allowance account; subsequent recoveries, if any,
are credited to the allowance account. In addition,
non-accrual and large delinquent loans are reviewed
monthly to determine potential losses. Consumer loans
are considered losses when they are 90 days past due,
except loans that are insured for credit loss.
<PAGE>12
The Company's policy is to individually review, as
circumstances warrant, each of its commercial and
commercial mortgage loans to determine if a loan is
impaired. At a minimum, credit reviews are mandatory
for all commercial and commercial mortgage loans with
balances in excess of $250,000 within an 18 month
period. The Company has also identified two pools of
small dollar value homogeneous loans which are
evaluated collectively for impairment. These separate
pools are for residential mortgage loans and consumer
loans. Individual loans within these pools are
reviewed and removed from the pool if factors such as
significant delinquency in payments of 90 days or
more, bankruptcy, or other negative economic concerns
indicate impairment.
An analysis of the changes in the allowance for
loan losses follows (in thousands, except ratios):
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31 December 31
1999 1998 1998
<S> <C> <C> <C>
Balance at beginning of period $ 10,725 $ 12,113 $ 12,113
Charge-offs:
Commercial 168 128 899
Real estate-mortgage 210 92 359
Consumer 234 299 1,260
Total charge-offs 612 519 2,518
Recoveries:
Commercial 125 21 113
Real estate-mortgage 102 36 132
Consumer 45 79 285
Total recoveries 272 136 530
Net charge-offs 340 383 1,988
Provision for loan losses 375 150 600
Balance at end of period $ 10,760 $ 11,880 $ 10,725
As a percent of average loans
and loans held for
sale, net of unearned
income:
Annualized net charge-offs 0.13% 0.16% 0.19%
Annualized provision for loan losses 0.14 0.06 0.06
Allowance as a percent of loans
and loans held for sale, net
of unearned income at period end 0.99 1.17 1.05
Total classified loans $25,339 $31,870 $28,307
Dollar allocation of reserve
to general risk 5,181 5,723 4,663
Percentage allocation of
reserve to general risk 48.15% 48.17% 43.48%
(For additional information, refer to the "Provision for Loan
Losses" and "Loan Quality" sections in the Management's
Discussion and Analysis of Consolidated Financial Condition and
Results of Operations on pages 27 and 33, respectively.)
<PAGE>13
10. Components of Allowance for Loan Losses
For impaired loans, 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.
The Company had loans totalling $1,690,000 and
$1,143,000 being specifically identified as impaired
and a corresponding allocation reserve of $969,000 and
$650,000 at March 31, 1999, and March 31, 1998,
respectively. The average outstanding balance for
loans being specifically identified as impaired was
$1,725,000 for the first quarter of 1999 compared to
$1,078,000 for the first quarter of 1998. All of the
impaired loans are collateral dependent, therefore the
fair value of the collateral of the impaired loans is
evaluated in measuring the impairment. There was no
interest income recognized on impaired loans during
the first quarter of 1999 or 1998.
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>
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998 March 31, 1998
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 $ 901 13.9% $ 1,004 13.1% $ 1,143 13.9%
Commercial
loans secured
by real estate 2,098 32.6 2,082 32.1 2,505 31.4
Real Estate -
mortgage 991 47.2 1,038 47.0 414 46.1
Consumer 620 6.3 1,563 7.8 1,445 8.6
Allocation to
general risk 5,181 - 4,663 - 5,723 -
Allocation for
impaired loans 969 - 375 - 650 -
Total $10,760 100.0% $10,725 100.0% $11,880 100.0%
</TABLE>
Even though real estate-mortgage loans comprise
approximately 47% of the Company's total loan
portfolio, only $991,000 or 9.2% 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.
<PAGE>14
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. The decline in the allocation for
consumer loans between March 31, 1999, and December
31, 1998, is due to the elimination of a specific
reserve for credit card loans due to the Company's
plans to sell the credit card portfolio in the second
quarter of 1999.
At March 31, 1999, 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 #9.)
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 immediately upon becoming 90 days past due in
either principal or interest. In addition, if
circumstances warrant, the accrual of interest may be
discontinued prior to 90 days. In all cases, payments
received on non-accrual loans are credited to
principal until full recovery of principal has been
recognized; it is only after full recovery of
principal that any additional payments received are
recognized as interest income. The only exception to
this policy is for residential mortgage loans wherein
interest income is recognized on a cash basis as
payments are received.
The following table presents information
concerning non-performing assets (in thousands, except
percentages):
March 31 December 31 March 31
1999 1998 1998
Non-accrual loans $ 5,840 $ 5,206 $ 5,521
Loans past due 90
days or more 476 1,579 165
Other real estate owned 1,650 1,451 1,172
Total non-performing
assets $ 7,966 $ 8,236 $ 6,858
Total non-performing
assets as a percent
of loans and loans
held for sale, net
of unearned income,
and other
real estate owned 0.74% 0.77% 0.67%
<PAGE>15
The Company is unaware of any additional loans
which are required to either be charged-off or added
to the non-performing asset totals disclosed above.
Other real estate owned is recorded at the lower of
1)fair value minus estimated costs to sell, or
2)carrying cost.
The following table sets forth, for the periods
indicated, (i) the gross interest income that would
have been recorded if non-accrual loans had been
current in accordance with their original terms and
had been outstanding throughout the period or since
origination if held for part of the period, (ii) the
amount of interest income actually recorded on such
loans, and (iii) the net reduction in interest income
attributable to such loans (in thousands).
Three Months Ended
March 31
1999 1998
Interest income due in accordance
with original terms $ 87 $ 99
Interest income recorded (9) (2)
Net reduction in interest income $ 78 $ 97
12. Off-Balance Sheet Hedge Instruments
Policies
The Company uses various interest rate contracts,
such as interest rate swaps, caps and floors, to help
manage interest rate and market valuation risk
exposure, which is incurred in normal recurrent
banking activities. These interest rate contracts
function as hedges against specific assets or
liabilities on the Consolidated Balance Sheet.
Unrealized gains or losses on these hedge transactions
are deferred. It is the Company's policy not to
terminate hedge transactions prior to expiration date.
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. Because only interest
payments are exchanged, the cash requirement and
exposure to credit risk are significantly less than
the notional amount.
Any premium or transaction fee incurred to
purchase interest rate caps or floors is deferred and
amortized to interest income or interest expense over
the term of the contract. Unamortized premiums
related to the purchase of caps and floors are
included in "Other assets" on the Consolidated Balance
Sheet. A summary of the off-balance sheet derivative
transactions outstanding as of March 31, 1999, are as
follows:
<PAGE>16
Borrowed Funds Hedges
The Company has entered into several interest
rate swaps to hedge short-term borrowings used to
leverage the balance sheet. Specifically, FHLB
advances which reprice between 30 days and one year
are being used to fund fixed-rate agency
mortgage-backed securities with durations ranging from
two to three years. Under these swap agreements,
the Company pays a fixed rate of interest and receives
a floating rate which resets either monthly,
quarterly, or annually. The following table
summarizes the interest rate swap transactions which
impacted the Company s first three months of 1999
performance:
Fixed Floating Impact
Notional Start Termination Rate Rate Repricing On Interest
Amount Date Date Paid Received Frequency Expense
$40,000,000 3-17-97 3-15-99 6.19% 5.07% Expired $ 88,958
50,000,000 5-08-97 5-10-99 6.20 5.43 Annually 96,250
25,000,000 6-20-97 6-20-99 5.96 4.68 Monthly 80,028
50,000,000 9-25-97 9-25-99 5.80 4.73 Monthly 133,708
The Company believes that its exposure to credit
loss in the event of non-performance by any of the
counterparties (which include Mellon Bank and First
Union) in the interest rate swap agreements is remote.
The Company monitors and controls all off-balance
sheet derivative products with a comprehensive Board
of Director approved hedging policy. This policy
permits a total maximum notional amount outstanding of
$500 million for interest rate swaps, and interest
rate caps/floors. The Company had no interest rate
caps or floors outstanding at March 31, 1999, or March
31, 1998.
13. Goodwill and Core Deposit Intangible Assets
USBANCORP's balance sheet shows both tangible
assets (such as loans, buildings, and investments) and
intangible assets (such as goodwill). The Company now
carries $13.5 million of goodwill and $14.6 million of
core deposit intangible assets on its balance sheet.
$10 million of this core deposit intangible was
established in the first quarter of 1999 with the
purchase of the First Western branches. A
reconciliation of the Company's intangible asset
balances is as follows (in thousands):
Balance at December 31, 1998 $ 18,697
Additions due to branch acquisitions 10,093
Amortization expense (712)
Balance at March 31, 1999 28,078
The Company is amortizing core deposit
intangibles over periods ranging from five to ten
years while goodwill is being amortized over a 15 year
life. The straight-line method of amortization is
being used for both of these categories of
intangibles. The amortization expense of these
intangible assets reduced the first three months of
1999 diluted earnings per share by $0.05.
<PAGE>17
It is
important to note that this intangible amortization
expense is not a future cash outflow. The following
table reflects the future amortization expense of the
intangible assets (in thousands):
Remaining 1999 $ 2,892
2000 3,139
2001 3,110
2002 3,110
2003 3,110
2004 and after 12,717
14. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following at
March 31, 1999, (in thousands,
except percentages):
Type Maturing Amount Weighted
Average
Rate
Open Repo Plus Overnight $ 49,000 4.99%
Advances and 1999 220,000 5.01
wholesale 2000 3,750 6.15
repurchase 2001 10,126 8.22
agreements 2002 258,500 5.72
2003 218,750 5.11
2004 and after 40,000 4.66
Total Advances and 751,126 5.31
wholesale repurchase
agreements
Total FHLB Borrowings $800,126 5.29%
All of the above borrowings bear a fixed rate of
interest, with the only exceptions being the Open Repo
Plus advances whose rate can change daily. All FHLB
stock along with an interest in unspecified mortgage
loans and mortgage-backed securities, with an
aggregate statutory value equal to the amount of the
advances, have been pledged as collateral with the
Federal Home Loan Bank of Pittsburgh to support these
borrowings.
<PAGE>18
15. Capital
The Company is subject to various capital
requirements administered by the federal banking
agencies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The
Company's capital amounts and classification are also
subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional
discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Company's financial statements.
Quantitative measures established by regulation to
ensure capital adequacy require the Company to
maintain minimum amounts and ratios(set forth in the
table below) of total and Tier 1 capital to risk-
weighted assets, and of Tier 1 capital to average
assets. Management believes that as of March 31,
1999, the Company meets all capital adequacy
requirements to which it is subject.
As of March 31, 1999, and 1998, as well as,
December 31, 1998, the Federal Reserve categorized the
Company as "Well Capitalized" under the regulatory
framework for prompt corrective action. To be
categorized as well capitalized, the Company must
maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since notification
that management believes have changed the Company's
classification category.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
As of March 31, 1999 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk (In thousands, except ratios)
Weighted Assets)
Consolidated $ 154,416 13.27% $ 93,125 8.00% $ 116,406 10.00%
U.S. Bank 82,928 13.16 50,418 8.00 63,023 10.00
Three Rivers Bank 72,224 13.61 42,438 8.00 53,048 10.00
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated 143,656 12.34 46,562 4.00 69,844 6.00
U.S. Bank 78,403 12.44 25,209 4.00 37,814 6.00
Three Rivers Bank 65,989 12.44 21,219 4.00 31,829 6.00
Tier 1 Capital (to Average
Assets)
Consolidated 143,656 6.04 95,164 4.00 118,956 5.00
U.S. Bank 78,403 5.96 52,640 4.00 65,800 5.00
Three Rivers Bank 65,989 6.24 42,270 4.00 52,838 5.00
</TABLE>
<PAGE>19
16. Segment Results
The financial performance of the Company is also
monitored by an internal funds transfer pricing
profitability measurement system which produces line
of business results and key performance measures. The
Company's major business units include community
banking, mortgage banking, trust, and
investment/parent. The reported results reflect the
underlying economics of the business segments.
Expenses for centrally provided services are allocated
based upon the cost and estimated usage of those
services. Capital has been allocated among the
businesses on a risk-adjusted basis. The businesses
are match-funded and interest rate risk is centrally
managed and accounted for within the investment/parent
business segment. The key performance measures the
Company focuses on for each business segment are net
income and risk-adjusted return on equity.
Community banking includes the deposit-gathering
branch franchise along with lending to both
individuals and businesses. Lending activities
include commercial and commercial real-estate loans,
residential mortgage loans, direct consumer loans and
credit cards. Mortgage banking includes the servicing
of mortgage loans and the origination of residential
mortgage loans through a wholesale broker network.
The trust segment has three primary business
divisions, institutional trust, personal trust, and
financial services. Institutional trust products and
services include 401(k) plans, defined benefit and
defined contribution employee benefit plans,
individual retirement accounts, and collective
investment funds for trade union pension funds.
Personal trust products and services include personal
portfolio investment management, estate planning and
administration, custodial services and pre-need
trusts. Financial services include the sale of mutual
funds and annuities to individuals. The
investment/parent includes the net results of
investment securities and borrowing activities,
general corporate expenses not allocated to the
business segments, interest expense on corporate debt,
and centralized interest rate risk management.
The contribution of the major business segments to
the consolidated results for the first quarter of 1999
and 1998 were as follows (in thousands, except
ratios):
<TABLE>
<CAPTION>
March 31, 1999 Community Banking Mortgage Banking Trust Investment/Parent Total
<S> <C> <C> <C> <C> <C>
Net Income $ 1,925 $ 312 $ 180 $ 2,619 $ 5,036
Risk adjusted
return on equity 9.9% 15.0% 23.2% 21.1% 14.4%
Total assets $1,163,394 $ 70,058 $ 1,679 $1,182,241 $2,417,372
March 31, 1998 Community Banking Mortgage Banking Trust Investment/Parent Total
Net Income $ 2,335 $ 231 $ 220 $ 2,909 $ 5,695
Risk adjusted
return on equity 11.0% 9.1% 24.3% 20.1% 14.6%
Total assets $1,097,056 $ 53,710 $ 1,588 $1,055,443 $2,207,797
</TABLE>
<PAGE>20
17. Branch Acquisition/Disposition
Acquisition:
On February 12, 1999, the Company and First
Western Bancorp, Inc. (First Western), completed an
agreement for the Company to purchase three branch
offices in western Pennsylvania from First Western in
exchange for cash and one branch from the Company.
The Company's U.S. Bank subsidiary acquired the
Ebensburg and Barnesboro offices of First Western
which are located in Cambria County. The Company's
Three Rivers Bank subsidiary acquired the Kiski Valley
office of First Western located in Westmoreland County
in exchange for Three Rivers Bank's Moon Township
office which is located in Allegheny County. On a net
basis, the Company acquired $91 million in deposits,
$10 million in consumer loans and the related fixed
assets, leases, safe deposit box business and other
agreements at the branch offices. The Company paid a
core deposit premium of approximately $10 million for
the acquired deposits and purchased the consumer loans
and fixed assets at book value.
Disposition:
On February 26, 1999, the Company announced that
its U.S. Bank subsidiary will sell the Loretto office
to Portage National Bank. Portage National Bank will
purchase the approximate $8 million of deposits at a
premium of 8.5%. The sale is expected to be completed
in the second quarter of 1999.
18. Subsequent Event
On April 30, 1999, the Company announced that the
credit card portfolio of its U.S. Bank subsidiary had
been sold to First National Bank of Omaha. The
portfolio consists of 16,878 credit card accounts with
outstanding balances totaling $13.8 million. The
credit card portfolio was sold for a 16% premium which
means that the Company will recognize a $1.2 million
after tax gain on the transaction in the second
quarter of 1999. Simultaneously, the Company entered
into an Agent Bank Agreement with First National Bank
of Omaha which will enable the Company's banking
subsidiaries to continue to offer credit cards to
their customers.
<PAGE>21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
("M.D.& A.")
.....PERFORMANCE OVERVIEW.....The Company's net income
for the first quarter of 1999 totaled $5.0 million or
$0.37 per share on a diluted basis. When compared to
the $5.7 million or $0.38 per diluted share reported
for the first quarter of 1998, the 1999 results
reflect a 2.6% decrease in diluted earnings per share
and a 11.6% decrease in net income. The Company's
return on equity averaged 14.49% for the first quarter
of 1999 which was comparable with the 14.58% return on
equity reported in the first quarter of 1998. The
Company s return on assets dropped by 18 basis points
to 0.85% in the first quarter of 1999. When compared
to the Company s more recent fourth quarter 1998
performance, the 1999 first quarter results reflect a
15.6% improvement in diluted earnings per share and a
14.1% increase in net income.
Compression in the Company s net interest margin, a
higher level of non-interest expense, and an increased
loan loss provision offset the benefit of an increased
amount of non-interest income to cause the drop in
earnings in the first quarter of 1999. Specifically,
total non-interest income increased by $816,000 or
15.2% while net interest income declined by $716,000
or 4.2% from the prior year first quarter. This net
$100,000 increase in total revenue was offset by
higher non-interest expense and an increase in the
provision for loan losses. Total non-interest expense
was $850,000 or 6.0% higher in the first quarter of
1999 while the provision for loan losses increased by
$225,000. The Company's earnings per share declined
by a lesser amount than net income due to the success
of the Company s ongoing treasury stock repurchase
program. There were 1.2 million fewer average diluted
shares outstanding in the first quarter of 1999 than
the first quarter of 1998. The following table
summarizes some of the Company's key performance
indicators(in thousands, except per share and ratios):
Presented on this page was a graph reflecting the past six
quarters Return on Equity. The data points were 14.49%, 12.03%,
14.55%, 15.32%, 14.58%, and 14.67% respectively.
<PAGE>22
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
Net income $ 5,036 $ 5,695
Diluted earnings per share 0.37 0.38
Return on average equity 14.49% 14.58%
Return on average assets 0.85 1.03
Average diluted common
shares outstanding 13,604 14,829
.....NET INTEREST INCOME AND MARGIN.....The Company's
net interest income represents the amount by which
interest income on earning assets exceeds interest
paid on interest bearing liabilities. Net interest
income is a primary source of the Company's earnings;
it is affected by interest rate fluctuations as well
as changes in the amount and mix of earning assets and
interest bearing liabilities. It is the Company's
philosophy to strive to optimize net interest margin
performance in varying interest rate environments.
The following table compares the Company's net
interest income performance for the first quarter of
1999 to the first quarter of 1998 (in thousands,
except percentages):
Three Months Ended
March 31
1999 1998 $ Change % Change
Interest income $ 40,224 $ 39,692 532 1.3
Interest expense 24,079 22,831 1,248 5.5
Net interest income 16,145 16,861 (716) (4.2)
Tax-equivalent
adjustment 773 720 53 7.4
Net tax-equivalent
interest income $ 16,918 $ 17,581 (663) (3.8)
Net interest margin 2.95% 3.28% (0.33)% N/M
N/M - Not meaningful
USBANCORP's net interest income on a tax-
equivalent basis decreased by $663,000 or 3.8% due to
the negative impact of a 33 basis point decline in the
net interest margin to 2.95%. The drop in the net
interest margin reflects a 40 basis point decline in
the earning asset yield due primarily to accelerated
prepayments in both the securities and loan portfolios
resulting from the flat treasury yield curve and the
reinvestment of these cash flows in lower yielding
assets. This decline in the earning asset yield more
than offset a 13 basis point drop in the cost of
funds. Overall, this margin compression offset the
benefits resulting from growth in the earning asset
base.
<PAGE>23
Total average earning assets were $147 million
higher in the first quarter of 1999 due primarily to
a $72 million or 7.2% increase in total loans and a
$74 million or 6.6% increase in investment securities.
The Company has been able to demonstrate solid loan
growth in commercial loans, direct consumer loans, and
residential mortgage and home equity loans over the
past several quarters. The higher level of investment
securities resulted from the use of funds provided
with the First Western Branches Acquisition which
closed on February 12, 1999. As part of this
acquisition, the Company acquired approximately $91
million of deposits and $10 million of consumer loans.
The Company expects these branch acquisitions to be
accretive to earnings in 1999. The overall growth in
the earning asset base was one strategy used by the
Company to leverage its capital. The maximum amount
of leveraging the Company can perform is controlled by
internal policy requirements to maintain a minimum
asset leverage ratio of no less than 6.0% (see further
discussion under Capital Resources) and to limit net
interest income variability to plus or minus 7.5% and
net income variability to plus or minus 15% over a
twelve month period. (See further discussion under
Interest Rate Sensitivity) .
...COMPONENT CHANGES IN NET INTEREST
INCOME...Regarding the separate components of net
interest income, the Company's total tax-equivalent
interest income for the first quarter of 1999
increased by $585,000 or 1.4% when compared to the
same 1998 period. This increase was due primarily to
a $147 million or 7.0% increase in total average
earning assets which caused interest income to rise by
$2.7 million. This positive factor was partially
offset by a 40 basis point drop in the earning asset
yield to 7.26% that caused a $2.3 million reduction in
interest income. Within the earning asset base, the
yield on the total loan portfolio declined by 50 basis
points to 8.11% due to the downward repricing of
floating rate assets and the reinvestment of cash
received on higher yielding prepaying assets into
loans with lower interest rates. The yield on total
investment securities decreased by 28 basis points to
6.49% due to accelerated mortgage prepayments and the
reinvestment of this cash into lower yielding
securities. These heightened prepayments reflect
increased customer refinancing activity due to drops
in intermediate- and long-term interest rates on the
treasury yield curve throughout 1998.
Continued improvement in the loan-to-deposit ratio
contributed to the earning asset growth. The Company s
loan-to-deposit ratio averaged 88.1% for the first
quarter of 1999 compared to an average of 86.5% for
the first quarter of 1998. This loan growth resulted
from the Company s ability to take market share from
its competitors through strategies which emphasize
convenient customer service, niche products and hard
work. Other factors contributing to the loan growth
were a stable economic environment and increased loan
volumes from two loan production offices in the higher
growth markets of Westmoreland and Centre Counties.
The Company's total interest expense for the first
quarter of 1999 increased by $1.2 million or 5.5% when
compared to the same 1998 period. This higher
interest expense was due primarily to a $163 million
increase in average interest bearing liabilities. The
growth in interest bearing liabilities included the
issuance of $34.5 million of 8.45% guaranteed junior
subordinated deferrable interest debentures which
increased interest expense by $740,000 in the first
quarter of 1999.
<PAGE>24
The proceeds from this retail
offering of trust preferred securities provided the
Company with the necessary capital to continue to
execute an active treasury stock repurchase program
and complete five branch acquisitions with $118
million in deposits over the past year. The remainder
of the interest bearing liability increase occurred in
short-term borrowings and FHLB advances which were
used to help fund the previously mentioned earning
asset growth. These borrowed funds had an average
cost of 5.35% in the first quarter of 1999 which was
22 basis points lower than their cost in the prior
year first quarter but 145 basis points greater than
the average cost of deposits which amounted to 3.90%.
The Company was able to reduce its cost of deposits by
21 basis points given the reductions in interest rates
by the Federal Reserve in the fourth quarter of 1998.
Overall, the Company s total cost of funds dropped by
13 basis points to 4.70% as the pricing declines for
both deposits and borrowings were partially offset by
a greater use of borrowings to fund the earning asset
base.
It is recognized that interest rate risk does
exist 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 $125 million of
off-balance sheet hedging transactions which help fix
the variable funding costs associated with the use of
short-term borrowings to fund earning assets. (See
further discussion under Note #12.) The Company also
has asset liability policy parameters which limit the
maximum amount of borrowings to 40% of total assets.
As of March 31, 1999, the level of borrowed funds to
total assets was 39.5% as the Company did use a
portion of funds from the First Western Branches
Acquisition to pay down borrowings. Additionally, if
the incremental spread on new investment security
purchases is not at least 100 basis points greater
than the short-term borrowed funds costs, then the
Company will de-lever the balance sheet by paying-off
borrowings with cash flow from mortgage backed
securities.
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>25
Three Months Ended March 31 (In thousands, except percentages)
<TABLE>
<CAPTION>
1999 1998
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 $ 1,066,527 $ 21,682 8.11% $ 994,892 $ 21,486 8.61%
Deposits with banks 3,602 32 3.51 2,144 16 2.94
Investment securities:
Available for sale 692,483 10,909 6.31 594,426 9,709 6.53
Held to maturity 498,450 8,374 6.73 522,994 9,201 7.04
Total investment
securities 1,190,933 19,283 6.49 1,117,420 18,910 6.77
Total interest earning
assets/interest income 2,261,062 40,997 7.26 2,114,456 40,412 7.66
Non-interest earning assets:
Cash and due from banks 35,757 32,076
Premises and equipment 18,126 17,798
Other assets 103,074 99,079
Allowance for loan losses (10,829) (12,067)
TOTAL ASSETS $2,407,190 $2,251,342
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>26
THREE MONTHS ENDED MARCH 31
CONTINUED FROM PREVIOUS PAGE
<TABLE>
<CAPTION>
1999 1998
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 $ 93,750 $ 230 0.99% $ 89,821 $ 219 0.99%
Savings 170,845 662 1.57 174,406 654 1.52
Money markets 176,350 1,439 3.31 162,441 1,527 3.81
Other time 611,209 7,785 5.17 578,655 7,797 5.46
Total interest bearing
deposits 1,052,154 10,116 3.90 1,005,323 10,197 4.11
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other short-term borrowings 228,829 2,793 4.91 182,822 2,387 5.24
Advances from Federal
Home Loan Bank 751,655 10,329 5.57 717,355 10,125 5.72
Guaranteed junior subordinated
deferrable interest debentures 34,500 740 8.58 - - -
Long-term debt 8,934 101 4.58 7,803 122 6.34
Total interest bearing
liabilities/interest expense 2,076,072 24,079 4.70 1,913,303 22,831 4.83
Non-interest bearing liabilities:
Demand deposits 165,010 151,671
Other liabilities 25,114 27,939
Stockholders' equity 140,994 158,429
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,407,190 $2,251,342
Interest rate spread 2.57 2.82
Net interest income/
net interest margin 16,918 2.95% 17,581 3.28%
Tax-equivalent adjustment (773) (720)
Net Interest Income $16,145 $16,861
</TABLE>
....PROVISION FOR LOAN LOSSES.....The Company's
provision for loan losses for the first quarter of
1999 totalled $375,000 or 0.14% of average total loans
which represented a $225,000 increase from the
provision level experienced in the 1998 first quarter.
The Company s net loan charge-offs amounted to
$340,000 or 0.13% of average loans in the first
quarter of 1999 compared to net charge-offs of
$383,000 or 0.16% of average loans in the 1998 first
quarter. The higher provision in 1999 was due to
continued growth of the loan portfolio particularly
commercial and commercial real-estate loans. The
Company applies a consistent methodology and
procedural discipline to evaluate the adequacy of the
allowance for loan losses at each subsidiary bank on
a quarterly basis.(See further discussion in Note #1
and the Allowance for Loan Losses section of the
MD&A.)
<PAGE>27
.....NON-INTEREST INCOME.....Non-interest income for
the first quarter of 1999 totaled $6.2 million which
represented an $816,000 or 15.2% increase when
compared to the same 1998 quarter. This increase was
primarily due to the following items:
a $119,000 or 10.7% increase in trust fees to $1.2
million in the first quarter of 1999. This trust
fee growth reflects increased assets under
management due to the profitable expansion of the
Trust Company's business.
a $623,000 increase in gains realized on loans
held for sale due to continued strong residential
mortgage production activity at the Company s
mortgage banking subsidiary and more profitable
execution of loan sales into the secondary market.
a $113,000 or 7.0% increase in other fee income
due in part to additional income resulting from
ATM surcharging, other mortgage banking processing
fees, and increased revenue generated from annuity
and mutual fund sales in the Company s financial
service subsidiaries.
a $176,000 decrease in net mortgage servicing fee
income due to greater amortization expense on
mortgage servicing rights as a result of faster
mortgage prepayment speeds.
Non-interest income as a percentage of total revenue
increased from 24.1% in the first quarter of 1998 to
27.7% in the first quarter of 1999.
.....NON-INTEREST EXPENSE.....Non-interest expense for
the first quarter of 1999 totaled $15.1 million which
represented an $850,000 or 6.0% increase when compared
to the same 1998 quarter. This increase was primarily
due to the following items:
a $493,000 or 6.6% increase in salaries and
employee benefits due to merit pay increases,
higher commission and incentive pay, and increased
medical insurance premiums.
a $226,000 increase in equipment expense due to
higher technology related expenses such as the
system costs associated with wide area networks
and optical disk imaging of customer statements.
a $122,000 increase in goodwill and core deposit
amortization expense due to the amortization
expense associated with the $10 million core
deposit premium resulting from the First Western
Branches Acquisition.
<PAGE>28
.....YEAR 2000.....The Year 2000 (Y2K) issue, is the
result of computer programs having been written using
two digits, rather than four, to define the applicable
year. Any of the Company's computer systems that have
date-sensitive software or date-sensitive hardware may
potentially recognize a date using 00 as the Year 1900
rather than the Year 2000. This could result in
system failure or miscalculations causing disruptions
of operations, including, among other things, a
temporary inability to process transactions, send
statements or engage in similar normal business
activities.
Due to the critical nature of the Y2K issue
quarterly status reports are provided to the Boards of
both bank subsidiaries and the Company. Personnel
from all operational areas of the company are involved
in the Y2K solution.
The Y2K process has also required that the
Company work with vendors, third-party service
providers, and customers. The Company continues to
communicate with all its vendors and large commercial
customers to determine the extent to which the Company
is vulnerable to these parties' failure to remediate
there own Year 2000 issue. Mission critical vendors
have affirmed their Year 2000 compliance. No mission
critical system vendor changes are expected at this
time.
The Company's business resumption plan is also
being expanded to address the potential problems of
Y2K such as the loss of power, telecommunications, or
the failure of a mission critical vendor. An outside
consulting firm has been retained to create a company
wide business resumption plan. The firm will use its
considerable experience with business resumption
planning and the existing company contingency plans to
create a business resumption plan which will support
our continued operation in the face of external or
internal Y2K caused disruptions.
The Company recognizes the serious risks it faces
regarding credit customers not properly remediating
their automated systems to conform with Year 2000
related problems. The failure of a loan customer to
prepare adequately to conform with Year 2000 could
have an adverse effect on such customer's operations
and profitability, in turn limiting their ability to
repay loans in accordance with scheduled terms.
During the second half of 1998, the Company completed
a detailed analysis of its major loan customers'
compliance with Year 2000. The focus of the analysis
was on commercial credit exposures with balances in
excess of $250,000 and included discussions between
loan officers, customers, and information system
representatives in select cases. As a result of this
analysis, the Company currently believes that the
portion of the loan loss reserve allocated for general
risk is adequate to cover the customer credit risk
associated with Year 2000.
The Company has also begun to address the
potential liquidity risks associated with Year 2000.
The Company has reviewed its top 100 deposit customers
by branch and offered educational sessions to help
them better understand the Y2K problem. Additionally,
the Company has developed a contingency funding plan
which provides for the use of the Federal Reserve
Discount Window, brokered deposits and more aggressive
wholesale borrowings should the Company experience an
outflow of deposits.
<PAGE>29
From an asset liability
management standpoint, the Company has begun to
emphasize deposit products which encourage extension
of shorter term maturities into products maturing
after the century date change to further limit
liquidity risk. Additionally in May of 1999, the
Company purchased a $120 million one year interest
rate cap to hedge against short-term borrowings whose
costs may become more volatile as we get closer to the
century date change.
The Company is using both internal and external
resources to complete its comprehensive Y2K compliance
program. The Company currently estimates that the
total cost to achieve Y2K compliance will approximate
$1.4 million. Approximately 66% of this total cost
represents incremental expenses to the Company while
approximately 34% represents the internal cost of
redeploying existing information technology resources
to the Y2K issue. To date, the Company has expensed
$750,000 or 54% of its total estimated cost to achieve
Year 2000 compliance. The Company does not believe
that these expenditures have yet had, nor will have,
a material impact on the results of operation,
liquidity, or capital resources.
Based on the companies efforts to date, mission
critical information systems and non-information
systems are expected to function properly before and
after January 1, 2000. The company does not currently
anticipate that internal systems failures will result
in any material adverse effect to its operations or
financial condition. At this time, the company
believes that the most likely "worst case" scenario
involves potential disruptions in areas in which the
company operations must rely on third parties whose
systems may not work properly after January 1, 2000.
While such failures could affect important operations
of the company in a significant manner, the company
cannot at present estimate either the likelihood or
the potential cost of such failures. The following
chart summarizes the Company's Y2K progress.
<PAGE>30
<TABLE>
<CAPTION>
Resolution
Phases Assessment Remediation Testing Implementation
<S> <C> <C> <C> <C>
Information 100% complete 90% complete 95% complete 90% complete
Technology
External contractors Testing of one All internal supported
have been scheduled remaining mission mission critical programs
to complete changes critical system is are Y2K compliant.
by 6-30-99. expected in
April 1999.
Business critical One externally provided
applications will be mission critical system has
tested by the end been tested but is not in
of July 1999. production. Implementation
is scheduled for completion
by 5-31-99
- ------------------------------------------------------------------------------------------------------------
Operating
equipment 100% complete 95% complete 50% complete 95% complete
with embedded
chips or
software. The last component Tests are Most of the equipment
is expected to be scheduled with and buildings are of a
installed by vendors to be vintage which is not
June 30, 1999. competed by date dependent.
June 30, 1999.
- ------------------------------------------------------------------------------------------------------------
Third Party 100% complete 90% for system 90% complete for 90% complete for
interfaces system interfaces system interfaces
Contingency plans Completion is Expected completion
are being developed. expected by by June 30, 1999.
Due June 30, 1999. June 30, 1999.
Contingency plans being
developed.
Due June 30, 1999.
</TABLE>
.....INCOME TAX EXPENSE.....The Company's provision
for income taxes for the first quarter of 1999 was
$1.8 million reflecting an effective tax rate of
26.5%. The Company's 1998 first quarter income tax
provision was $2.1 million or an effective tax rate of
27.2%. The lower effective tax rate in 1999 was due
to a reduced level of pre-tax income combined with
increased total tax-free asset holdings in the first
quarter of 1999. The tax-free asset holdings consist
primarily of municipal investment securities, bank
owned life insurance, and commercial loan tax
anticipation notes. Net deferred income taxes of $3.4
million have been provided as of March 31, 1999, on
the differences between taxable income for financial
and tax reporting purposes.
.....NET OVERHEAD BURDEN.....The Company's efficiency
ratio (non-interest expense divided by total revenue)
increased to 65.4% in the first quarter of 1999
compared to 62.1% for the first quarter of 1998.
Factors contributing to the higher efficiency ratio in
1999 included the compression experienced in the net
interest margin which resulted in lower net interest
income and an increased level of non-interest expenses
which included Year 2000 costs.
<PAGE>31
Additionally, the
repurchase of the Company's stock has a favorable
impact on return on equity but a negative impact on
the efficiency ratio due to the interest cost
associated with borrowings which provide funds to
repurchase the stock (i.e. the $740,000 interest
expense on the $34.5 million of guaranteed junior
subordinated deferrable interest debentures). The
amortization of intangible assets also creates a $2.8
million annual non-cash charge that negatively impacts
the efficiency ratio. The first quarter 1999
efficiency ratio, stated on a cash basis excluding the
intangible amortization, was 62.3% or 3.1% lower than
the reported efficiency ratio of 65.4%. Total assets
per employee improved 7.0% from $3.0 million in the
first quarter of 1998 to $3.2 million in the first
quarter of 1999.
.....BALANCE SHEET.....The Company's total
consolidated assets were $2.42 billion at March 31,
1999, compared with $2.38 billion at December 31,
1998, which represents an increase of $40 million or
1.7% due to the funds provided from the First Western
Branches Acquisition. During the first quarter of
1999, total loans and loans held for sale increased by
approximately $16 million or 1.5% due to the loans
acquired from First Western and continued growth in
commercial and commercial mortgage loans. Consumer
loans continued to decline due to net run-off
experienced in the indirect auto loan portfolio as the
Company has exited this low margin line of business.
Total investment securities increased by $13 million
as a portion of the acquired deposits were used to
purchase securities. Intangible assets increased by
$10 million due to the core deposit intangible
resulting from the First Western Branches Acquisition.
Total deposits increased by $80 million or 6.8%
since December 31, 1998, due to the acquisition of the
First Western Branches. The Company's total borrowed
funds position decreased by $29 million as portion of
the acquired deposits were used to paydown short term
borrowings.
<PAGE>32
.....LOAN QUALITY.....The following table sets forth
information concerning USBANCORP's loan delinquency
and other non-performing assets (in thousands, except
percentages):
March 31 December 31 March 31
1999 1998 1998
Total loan delinquency (past due
30 to 89 days) $13,419 $15,427 $15,266
Total non-accrual loans 5,840 5,206 5,521
Total non-performing assets<F1> 7,966 8,236 6,858
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 1.24% 1.45% 1.50%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned income 0.54 0.49 0.54
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 0.74 0.77 0.67
<F1>Non-performing assets are comprised of (i) loans
that are on a non-accrual basis, (ii) loans that are
contractually past due 90 days or more as to interest
and principal payments some of which are insured for
credit loss, and (iii) other real estate owned. All
loans, except for loans that are insured for credit
loss, are placed on non-accrual status upon becoming
90 days past due in either principal or interest.
Between December 31, 1998, and March 31, 1999,
total loan delinquency declined by $2 million causing
the delinquency ratio to drop to 1.24%. Total non-
performing assets decreased by $270,000 since year-end
1998 causing the non-performing assets to total loans
ratio to drop to 0.74%. The overall improvement in
asset quality resulted from enhanced collection
efforts on residential mortgage loans and continued
low levels of non-performing commercial loans.
<PAGE>33
.....ALLOWANCE FOR LOAN LOSSES.....The following table
sets forth changes in the allowance for loan losses
and certain ratios for the periods ended (in
thousands, except percentages):
March 31 December 31 March 31
1999 1998 1998
Allowance for loan losses $ 10,760 $ 10,725 $ 11,880
Amount in the allowance
for loan losses
allocated to "general risk" 5,181 4,663 5,723
Allowance for loan losses as
a percentage of each of
the following:
total loans and loans
held for sale,
net of unearned income 0.99% 1.01% 1.17%
total delinquent loans
(past due 30 to 89 days) 80.18 69.52 77.82
total non-accrual loans 184.25 206.01 215.18
total non-performing assets 135.07 130.22 173.23
Since December 31, 1998, the balance in the
allowance for loan losses has increased by $35,000 due
to the loan loss provision slightly exceeding net
charge-offs. The Company's allowance for loan losses
at March 31, 1999, was 135% of non-performing assets
and 184% of non-accrual loans. It is important to
note that approximately $4.0 million or 50% of the
Company s non-performing assets are residential
mortgages which exhibit a historically low level of
net charge-off.
.....INTEREST RATE SENSITIVITY.....Asset/liability
management involves managing the risks associated with
changing interest rates and the resulting impact on
the Company's net interest income, net income and
capital. The management and measurement of interest
rate risk at USBANCORP is performed by using the
following tools: 1) simulation modeling which
analyzes the impact of interest rate changes on net
interest income, net income and capital levels over
specific future time periods. The simulation modeling
forecasts earnings under a variety of scenarios that
incorporate changes in the absolute level of interest
rates, the shape of the yield curve, prepayments and
changes in the volumes and rates of various loan and
deposit categories. The simulation modeling also
incorporates all off balance sheet hedging activity as
well as assumptions about reinvestment and the
repricing characteristics of certain assets and
liabilities without stated contractual maturities;
2)static "GAP" analysis which analyzes the extent to
which interest rate sensitive assets and interest rate
sensitive liabilities are matched at specific points
in time; and 3) market value of portfolio equity
sensitivity analysis. The overall interest rate risk
position and strategies are reviewed by senior
management and Company's Board of Directors on an
ongoing basis.
<PAGE>34
The following table presents a summary of the
Company's static GAP positions (in thousands, except
for the GAP ratios):
March 31 December 31 March 31
1999 1998 1998
Six month cumulative GAP
RSA........................$ 654,486 $ 715,996 $ 711,033
RSL....................... (910,144) (856,470) (973,519)
Off-balance sheet hedges.. - 50,000 165,000
GAP....................... $ (255,658) $ (90,474) $ (97,486)
GAP ratio.............. 0.72X 0.89X 0.88X
GAP as a % of total
assets................ (10.58)% (3.81)% (4.42)%
GAP as a % of total
capital............... (188.39) (63.86) (62.60)
One year cumulative GAP
RSA...................... $ 899,896 $ 1,063,674 $ 1,078,735
RSL...................... (1,076,088) (1,032,533) (1,251,179)
Off-balance sheet
hedges.............. - - 125,000
GAP...................... $ (176,192) $ 31,141 $ (47,444)
GAP ratio.............. 0.84X 1.03X 0.96X
GAP as a % of total
assets............... (7.29)% 1.31% (2.15)%
GAP as a % of total
capital............... (129.84) 21.98 (30.46)
When March 31, 1999, is compared to December 31,
1998, both the Company's six month and one year
cumulative GAP ratios became more negative due
primarily to reduced asset sensitivity resulting from
slowing prepayment speeds on mortgage-backed
securities. Also, since all hedge transactions are
scheduled to mature within the next six months, they
are having no impact on the GAP ratios. (See Note
#12.)
Management places primary emphasis on simulation
modeling to manage and measure interest rate risk.
The Company's asset liability management policy seeks
to limit net interest income variability over the
first twelve months of the forecast period to plus or
minus 7.5% and net income variability to plus or minus
15.0% based upon varied economic rate forecasts which
include interest rate movements of up to 200 basis
points and alterations of the shape of the yield
curve. Additionally, the Company also uses market
value sensitivity measures to further evaluate the
balance sheet exposure to changes in interest rates.
Market value of portfolio equity sensitivity analysis
captures the dynamic aspects of long-term interest
rate risk across all time periods by incorporating the
net present value of expected cash flows from the
Company s assets and liabilities. No formal ALCO
policy parameters have yet been established for
changes in the variability of market value of
portfolio equity.
<PAGE>35
The following table presents an analysis of the
sensitivity inherent in the Company s net interest
income, net income and market value of portfolio
equity. The interest rate scenarios in the table
compare the Company s base forecast or most likely
rate scenario at March 31, 1998, to scenarios which
reflect ramped increases and decreases in interest
rates of 200 basis points along with performance in a
stagnant rate scenario with interest rates held flat
at the March 31, 1998, levels. The Company s most
likely rate scenario is based upon published economic
consensus estimates. Each rate scenario contains
unique prepayment and repricing assumptions which are
applied to the Company s expected balance sheet
composition which was developed under the most likely
interest rate scenario.
Variability of Change In
Interest Rate Net Interest Variability of Market Value of
Scenario Income Net Income Portfolio Equity
Base 0% 0% 0%
Flat 0.37 0.67 1.89
200bp increase (6.10) (12.42) (22.28)
200bp decrease 2.97 (4.95) 17.10
As indicated in the table, the maximum negative
variability of USBANCORP's net interest income and net
income over the next twelve month period was (6.1%)
and (12.4%) respectively, under an upward rate shock
forecast reflecting a 200 basis point increase in
interest rates. The noted variability under this
forecast was within the Company s ALCO policy limits.
The variability of market value of portfolio equity
was (22.3%) under this interest rate scenario. The
off-balance sheet borrowed funds hedge transactions
also helped reduce the variability of forecasted net
interest income, net income, and market value of
portfolio equity in a rising interest rate
environment. Finally, this sensitivity analysis is
limited by the fact that it does not include any
balance sheet repositioning actions the Company may
take should severe movements in interest rates occur
such as lengthening or shortening the duration of the
securities portfolio or entering into additional
off-balance sheet hedging transactions. These actions
would likely reduce the variability of each of the
factors identified in the above table in the more
extreme interest rate shock forecasts.
.....LIQUIDITY......Liquidity can be analyzed by
utilizing the Consolidated Statement of Cash Flows.
Cash equivalents decreased by $1 million from December
31, 1998, to March 31, 1999, due primarily to $56
million of net cash used by investing activities.
This more than offset $13 million of net cash provided
by operating activities and $42 million of net cash
provided by financing activities. Within investing
activities, purchases of investment securities
exceeded cash proceeds from investment security
maturities and sales by $22 million. Cash advanced
for new loan fundings totalled $141 million and was
approximately $15 million greater than the cash
received from loan principal payments. Within
financing activities, net deposits increased by $80
million due to the First Western Branches Acquisition.
The net paydown of advances from the Federal Home Loan
Bank and short-term borrowings used $29 million of
cash.
<PAGE>36
.....CAPITAL RESOURCES.....As presented in Note #15,
each of the Company s regulatory capital ratios
decreased between December 31, 1998, and March 31,
1999, due to a reduction in tangible equity resulting
from the $10 million core deposit premium associated
with the First Western Branches Acquisition. The
Company targets an operating range of 6.0% to 6.50%
for the asset leverage ratio because management and
the Board of Directors believes that this level
provides an optimal balance between regulatory capital
requirements and shareholder value needs. Strategies
the Company uses to manage its capital ratios include
common dividend payments, treasury stock repurchases,
and earning asset growth.
The Company repurchased 208,000 shares or $3.6
million of its common stock during the first quarter
of 1999. Through March 31, 1999, the Company has
repurchased a total of four million shares of its
common stock at a total cost of $65.2 million or
$16.10 per share. The Company plans to continue its
treasury stock repurchase program which currently
permits a maximum total repurchase authorization of
$70 million.
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.
The Company's declared Common Stock cash dividend
per share was $0.14 for the first quarter of 1999
which was a 16.7% increase over the $0.12 per share
dividend for the same 1998 quarter. Additionally, the
Board of Directors recently increased the quarterly
cash dividend 7.1% from $0.14 to $0.15 commencing with
the next scheduled dividend declaration on May 28,
1999. This is the eleventh dividend increase since
1990, raising the annual payout per common share to
$0.60 or an approximate yield of 3.8%. The Company's
Board of Directors believes that a better than peer
common dividend is a key component of total
shareholder return particularly for retail
shareholders.
.....FORWARD LOOKING STATEMENT.....This report
contains various forward-looking statements and
includes assumptions concerning the Company's
operations, future results, and prospects. These
forward-looking statements are based upon current
expectations and are subject to risk and
uncertainties. In connection with the "safe harbor"
provisions of the Private Securities Litigation Reform
Act of 1995, the Company provides the following
cautionary statement identifying important factors
which could cause the actual results or events to
differ materially from those set forth in or implied
by the forward-looking statements and related
assumptions.
<PAGE>37
Such factors include the following: (i) the
effect of changing regional and national economic
conditions; (ii) significant changes in interest rates
and prepayment speeds; (iii) credit risks of
commercial, real estate, consumer, and other lending
activities; (iv) changes in federal and state banking
regulations; (v) the presence in the Company's market
area of competitors with greater financial resources
than the Company; (vi) the effect of Y2K on borrowers
ability to repay based on contractual terms and; (vii)
other external developments which could materially
impact the Company's operational and financial
performance.
<PAGE>38
SERVICE AREA MAP
Presented on this page was a map reflecting the
six counties served by the Company.
<PAGE>39
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation, as
amended (Incorporated by
reference to Exhibit III to
Registration Statement No. 2-
79639 on Form S-14, Exhibits
4.2 and 4.3 to Registration
Statement No. 33-685 on Form
S-2, Exhibit 4.1 to
Registration Statement No.
33-56604 on Form S-3, and
Exhibit 3.1 to the
Registrant's Annual Report on
Form 10-K for the year ended
December 31, 1994).
3.2 Bylaws, as amended and
restated (Incorporated by
reference to Exhibit 3.2 to
the Registrant's Annual
Report on Form 10-K for the
year ended December 31,
1994).
15.1 Letter re: unaudited interim
financial information
27.1 Financial Data Schedule
(b) Reports on Form 8-K: There were no
reports filed on Form 8-K for the quarter ending March 31, 1999.
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant duly caused this
report to be signed on its behalf by the undersigned
thereunto duly authorized.
USBANCORP, Inc.
Registrant
Date: May 14, 1999 /s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: May 14, 1999 /s/Jeffrey A. Stopko
Jeffrey A. Stopko
Senior Vice President and
Chief Financial Officer
<PAGE>40
STATEMENT OF MANAGEMENT RESPONSIBILITY
April 16, 1999
To the Stockholders and
Board of Directors of
USBANCORP, Inc.
Management of USBANCORP, Inc. and its subsidiaries
have prepared the consolidated financial statements
and other information in the Form 10-Q in accordance
with generally accepted accounting principles and are
responsible for its accuracy.
In meeting its responsibilities, management relies on
internal accounting and related control systems, which
include selection and training of qualified personnel,
establishment and communication of accounting and
administrative policies and procedures, appropriate
segregation of responsibilities, and programs of
internal audit. These systems are designed to provide
reasonable assurance that financial records are
reliable for preparing financial statements and
maintaining accountability for assets, and that assets
are safeguarded against unauthorized use or
disposition. Such assurance cannot be absolute
because of inherent limitations in any internal
control system.
Management also recognizes its responsibility to
foster a climate in which Company affairs are
conducted with the highest ethical standards. The
Company's Code of Conduct, furnished to each employee
and director, addresses the importance of open
internal communications, potential conflicts of
interest, compliance with applicable laws, including
those related to financial disclosure, the
confidentiality of propriety information, and other
items. There is an ongoing program to assess
compliance with these policies.
The Audit Committee of the Company's Board of
Directors consists solely of outside directors. The
Audit Committee meets periodically with management and
the independent accountants to discuss audit,
financial reporting, and related matters. Arthur
Andersen LLP and the Company's internal auditors have
direct access to the Audit Committee.
/s/Terry K. Dunkle /s/Jeffrey A. Stopko
Terry K. Dunkle Jeffrey A. Stopko
Chairman, President & Senior Vice President &
Chief Executive Officer Chief Financial Officer
<PAGE>41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
USBANCORP, Inc. :
We have reviewed the accompanying consolidated
balance sheets of USBANCORP, Inc. (a Pennsylvania
corporation) and subsidiaries as of March 31, 1999
and 1998, and the related consolidated statements of
income, changes in stockholders equity and cash
flows for the three-month periods then ended. These
financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified
Public Accountants. A review of interim financial
information consists principally of applying
analytical procedures to financial data and making
inquiries of persons responsible for financial and
accounting matters. It is substantially less in
scope than an audit conducted in accordance with
generally accepted auditing standards, the objective
of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any
material modifications that should be made to the
financial statements referred to above for them to
be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with
generally accepted auditing standards, the
consolidated balance sheet of USBANCORP, Inc. as of
December 31, 1998, and, in our report dated January
22, 1999, 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, 1998, is fairly stated, in all
material respects, in relation to the balance sheet
from which it has been derived.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
April 16, 1999
<PAGE>42
April 16, 1998
To the Stockholders and Board of Directors of
USBANCORP, INC.:
We are aware that USBANCORP, Inc. has incorporated
by reference in its Registration Statements on Form
S-3 (Registration No. 33-56604); Form S-8
(Registration No. 33-53935); Form S-8 (Registration
No. 33-55845); Form S-8 (Registration No. 33-55207);
and Form S-8 (Registration No. 33-55211) its Form
10-Q for the quarter ended March 31, 1999, which
includes our report dated April 16, 1999, 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>43
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