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, 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 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 2, 1999
Common Stock, par value $2.50 13,303,562
per share
<PAGE>1
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
June 30, 1999, December 31, 1998,
and June 30, 1998 3
Consolidated Statement of Income -
Three and Six Months Ended June 30, 1999,
and 1998 4
Consolidated Statement of Changes
in Stockholders' Equity -
Six Months Ended
June 30, 1999, and 1998 6
Consolidated Statement of Cash Flows -
Six Months Ended
June 30, 1999, and 1998 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 45
<PAGE>2
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
June 30 December 31 June 30
1999 1998 1998
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 41,248 $ 35,085 $ 31,354
Interest bearing deposits with banks 424 3,855 241
Investment securities:
Available for sale 729,719 661,491 577,524
Held to maturity (market value $519,539 on
June 30, 1999, $516,452 on December 31, 1998,
and $488,766 on June 30, 1998) 525,478 508,142 483,586
Loans held for sale 37,873 51,317 24,798
Loans 1,039,736 1,020,280 996,822
Less: Unearned income 5,286 5,276 5,616
Allowance for loan losses 10,891 10,725 11,886
Net loans 1,023,559 1,004,279 979,320
Premises and equipment 19,188 18,020 18,120
Accrued income receivable 18,030 17,150 16,384
Mortgage servicing rights 16,254 16,197 15,093
Goodwill and core deposit intangibles 27,239 18,697 19,869
Bank owned life insurance 36,454 35,622 34,802
Other assets 13,296 7,226 8,233
TOTAL ASSETS $ 2,488,762 $ 2,377,081 $ 2,209,324
LIABILITIES
Non-interest bearing deposits $ 163,446 $ 166,701 $ 157,228
Interest bearing deposits 1,077,986 1,009,590 1,021,178
Total deposits 1,241,432 1,176,291 1,178,406
Federal funds purchased and securities
sold under agreements to repurchase 59,348 101,405 89,922
Other short-term borrowings 142,337 129,003 88,055
Advances from Federal Home Loan Bank 851,126 752,391 637,418
Guaranteed junior subordinated deferrable
interest debentures 34,500 34,500 34,500
Long-term debt 8,678 9,271 9,643
Total borrowed funds 1,095,989 1,026,570 859,538
Other liabilities 27,440 32,550 27,306
TOTAL LIABILITIES 2,364,861 2,235,411 2,065,250
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;
24,000,000 shares authorized; 17,382,349
shares issued and 13,301,430 outstanding
on June 30, 1999; 17,350,136 shares
issued and 13,512,317 outstanding on December 31,
1998; 17,338,983 shares issued and 13,853,664
outstanding on June 30, 1998 43,456 43,375 43,347
Treasury stock at cost, 4,080,919 shares
on June 30,1999, 3,837,819 shares on
December 31, 1998, and 3,485,319 shares
on June 30, 1998 (65,725) (61,521) (53,733)
Surplus 65,668 65,495 65,421
Retained earnings 98,441 91,737 86,653
Accumulated other comprehensive income (17,939) 2,584 2,386
TOTAL STOCKHOLDERS' EQUITY 123,901 141,670 144,074
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,488,762 $ 2,377,081 $ 2,209,324
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>3
<TABLE>
<CAPTION>
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and loans
held for sale:
Taxable $ 21,037 $ 21,274 $ 41,975 $ 41,932
Tax exempt 555 621 1,112 1,243
Deposits with banks 26 63 58 79
Investment securities:
Available for sale 11,425 8,863 22,176 17,796
Held to maturity 8,167 8,310 16,113 17,773
Total Interest Income 41,210 39,131 81,434 78,823
INTEREST EXPENSE
Deposits 10,423 10,253 20,539 20,450
Federal funds purchased and securities
sold under agreements to repurchase 713 1,279 1,917 2,593
Other short-term borrowings 2,025 1,131 3,614 2,204
Advances from Federal Home Loan Bank 10,527 9,493 20,856 19,618
Guaranteed junior subordinated
deferrable interest 740 501 1,480 501
Long-term debt 108 111 209 233
Total Interest Expense 24,536 22,768 48,615 45,599
NET INTEREST INCOME 16,674 16,363 32,819 33,224
Provision for loan losses 1,150 150 1,525 300
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 15,524 16,213 31,294 32,924
NON-INTEREST INCOME
Trust fees 1,249 1,117 2,477 2,226
Net realized gains on
investment securities 138 799 434 1,018
Net realized gains on loans
held for sale 2,508 1,083 3,855 1,807
Wholesale cash processing fees 143 166 318 352
Service charges on deposit accounts 891 825 1,744 1,607
Net mortgage servicing fees 182 267 320 581
Bank owned life insurance 413 403 832 822
Gain on sale of branch 540 - 540 -
Other income 1,902 1,691 3,630 3,306
Total Non-Interest Income 7,966 6,351 14,150 11,719
NON-INTEREST EXPENSE
Salaries and employee benefits 8,176 7,590 16,159 15,080
Net occupancy expense 1,172 1,124 2,358 2,278
Equipment expense 1,078 1,034 2,100 1,830
Professional fees 903 760 1,603 1,552
Supplies, postage, and freight 670 683 1,364 1,354
Miscellaneous taxes and insurance 411 388 904 744
FDIC deposit insurance expense 67 99 135 137
Amortization of goodwill and
core deposit intangibles 839 547 1,551 1,136
Other expense 2,749 2,482 4,993 4,848
Total Non-Interest Expense $ 16,065 $ 14,707 $ 31,167 $ 28,959
</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
1999 1998 1999 1998
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAXES $ 7,425 $ 7,857 $ 14,277 $ 15,684
Provision for income taxes 1,885 2,120 3,701 4,252
NET INCOME $ 5,540 $ 5,737 $ 10,576 $ 11,432
PER COMMON SHARE DATA:
Basic:
Net income $ 0.42 $ 0.41 $ 0.79 $ 0.80
Average shares outstanding 13,308,296 14,142,453 13,376,689 14,343,861
Diluted:
Net income $ 0.41 $ 0.40 $ 0.78 $ 0.78
Average shares outstanding 13,423,813 14,424,516 13,513,949 14,626,275
Cash Dividends Declared $ 0.15 $ 0.14 $ 0.29 $ 0.26
</TABLE>
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 - - - - 11,432 - 11,432
Dividend reinvestment
and stock purchase plan - 47 - 385 - - 432
Effect of 3 for 1 stock split
In the form of a 200%
stock dividend - 28,898 - (28,898) - - -
Net unrealized holding
gains (losses) on
investment
securities - - - - - 233 233
Treasury Stock, 884,445
shares at cost - - (22,558) - - - (22,558)
Cash dividends
declared:
Common stock - - - - (3,645) - (3,645)
Balance June 30, 1998 $ - $ 43,347 $(53,733) $ 65,421 $ 86,653 $ 2,386 $144,074
Balance December 31,
1998 $ - $ 43,375 $(61,521) $ 65,495 $ 91,737 $ 2,584 $141,670
Net Income - - - - 10,576 - 10,576
Dividend reinvest-
ment and stock
purchase plan - 81 - 173 - - 254
Net unrealized
holding gains
(losses) on
investment
securities - - - - - (20,523) (20,523)
Treasury Stock, 243,100
shares at cost - - (4,204) - - - (4,204)
Cash dividends
declared:
Common stock - - - - (3,872) - (3,872)
Balance June 30, 1999 $ - $ 43,456 $(65,725) $ 65,668 $ 98,441 $ (17,939) $123,901
</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
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,576 $ 11,432
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Provision for loan losses 1,525 300
Depreciation and amortization expense 1,299 1,247
Amortization expense of goodwill and
core deposit intangibles 1,551 1,136
Amortization expense of mortgage servicing rights 1,482 1,230
Net amortization of investment securities 1,045 410
Net realized gains on investment securities (434) (1,018)
Net realized gains on loans and loans held for sale (3,855) (1,807)
Origination of mortgage loans held for sale (253,703) (205,662)
Sales of mortgage loans held for sale 266,682 188,480
Decrease (increase) in accrued income receivable (880) 933
Decrease in accrued expense payable (890) (1,145)
Net cash provided (used) by operating activities 24,398 (4,464)
INVESTING ACTIVITIES
Purchases of investment securities and other short-term
investments (415,085) (283,161)
Proceeds from maturities of investment securities and
other short-term investments 111,103 133,614
Proceeds from sales of investment securities and
other short-term investments 185,767 205,334
Long-term loans originated (203,615) (183,049)
Loans held for sale (37,873) (24,798)
Principal collected on long-term loans 214,298 198,662
Loans purchased or participated (9,734) -
Loans sold or participated 4,600 -
Net decrease in credit card receivable and
other short-term loans 15,839 1,218
Purchases of premises and equipment (2,624) (1,796)
Sale/retirement of premises and equipment 156 59
Net decrease in assets held in trust for
collateralized mortgage obligation 468 611
Net (increase) decrease mortgage servicing rights (1,539) (1,363)
Net increase in other assets (5,947) (5,868)
Net cash (used) provided by investing activities (144,186) 39,463
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit 206,216 257,101
Payments for maturing certificates of deposit (163,178) (238,785)
Net increase in demand and savings deposits 22,103 20,563
Net (decrease) increase in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings (29,148) 26,720
Net principal borrowings (repayments) of advances
from Federal Home Loan Bank 98,735 (116,777)
Principal borrowings on long-term debt - 3,623
Repayments of long-term debt (168) (1,584)
Common stock cash dividends paid (2,686) (4,870)
Guaranteed junior subordinated deferrable
interest debenture dividends paid (1,458) (486)
Proceeds from dividend reinvestment, stock
purchase plan, and stock options exercised 254 432
Purchases of treasury stock (4,204) (22,558)
Net (decrease) increase in other liabilities (3,946) 1,815
Net cash provided (used) by financing activities 122,520 (41,623)
NET INCREASE (DECREASE) IN CASH EQUIVALENTS 2,732 (6,624)
CASH EQUIVALENTS AT JANUARY 1 38,940 38,219
CASH EQUIVALENTS AT JUNE 30 $ 41,672 $ 31,595
</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 and Financial Services 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 June 30, 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
July 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. 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $5,540 $5,737 $10,576 $11,432
Other comprehensive income, before tax:
Unrealized holding gains(losses) on
investment securities (19,713) (507) (27,270) 1,337
Less: reclassification adjustment for
gains included in net income (138) (799) (434) (1,018)
Other comprehensive income(loss)
before tax (19,851) (1,306) (27,704) 319
Income tax expense(credit) related to
items of other comprehensive income (5,040) (352) (7,181) 86
Other comprehensive income(loss),
net of tax (14,811) (954) (20,523) 233
Comprehensive income $( 9,271) $4,783 $( 9,947) $11,665
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 $1,812,000
in income tax
payments in the first six months of 1999 as compared to $3,007,000
for the first
six months of 1998. Total interest expense paid amounted to
$49,505,000 in 1999's first six months compared to $46,744,000 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.
<PAGE>9
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
shareholders' equity on a net of tax basis. Any security
classified as trading
assets are reported at fair value with unrealized aggregate
appreciation/(depreciation) included in current income on a net of
tax basis. The
Company presently does not engage in trading activity. Realized
gain or loss on
securities sold was computed upon the adjusted cost of the
specific securities
sold. The book and market values of investment securities are
summarized as
follows (in thousands):
Investment securities available for sale:
June 30, 1999
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 199 $ - $ - $ 199
U.S. Agency 18,367 - (479) 17,888
State and municipal 10,518 54 - 10,572
U.S. Agency mortgage-backed
securities 658,430 27 (26,512) 631,945
Other securitiesF1 70,090 - (975) 69,115
Total $757,604 $ 81 $ (27,966) $ 729,719
Investment securities held to maturity:
June 30, 1999
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 17,164 $ 26 $ (66) $ 17,124
U.S. Agency 24,422 - (785) 23,637
State and municipal 162,270 1,417 (4,721) 158,966
U.S. Agency mortgage-backed
securities 317,971 2,358 (4,243) 316,086
Other securitiesF1 3,651 75 - 3,726
Total $525,478 $ 3,876 $ (9,815) $ 519,539
F1Other 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 June 30, 1999, 95.8% of the
portfolio was
rated "AAA" compared to 98.7% at June 30, 1998. Approximately
3.1% of the
portfolio was rated below "A" or unrated on June 30, 1999.
<PAGE>10
7. Loans Held for Sale
At June 30, 1999, $37,873,000 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.
8. Loans
The loan portfolio of the Company consists of the following (in
thousands):
June 30 December 31 June 30
1999 1998 1998
Commercial $158,506 $139,751 $136,522
Commercial loans secured
by real estate 359,542 341,842 322,104
Real estate - mortgage 449,523 449,875 447,521
Consumer 72,165 88,812 90,675
Loans 1,039,736 1,020,280 996,822
Less: Unearned income 5,286 5,276 5,616
Loans, net of unearned
income $1,034,450 $1,015,004 $991,206
Real estate-construction loans were not material at these
presented dates
and comprised 5.0% of total loans net of unearned income at June
30, 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>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Balance at beginning of period $ 10,760 $ 11,880 $ 10,725 $ 12,113
Charge-offs:
Commercial 960 - 1,128 128
Real estate-mortgage 214 35 424 127
Consumer 74 264 308 563
Total charge-offs 1,248 299 1,860 818
Recoveries:
Commercial 149 27 274 48
Real estate-mortgage 20 57 122 93
Consumer 60 71 105 150
Total recoveries 229 155 501 291
Net charge-offs 1,019 144 1,359 527
Provision for loan losses 1,150 150 1,525 300
Balance at end of period $ 10,891 $ 11,886 $ 10,891 $ 11,886
As a percent of average loans and loans held
for sale, net of unearned income:
Annualized net charge-offs 0.39% 0.06% 0.26% 0.11%
Annualized provision for loan losses 0.44 0.06 0.29 0.06
Allowance as a percent of loans and loans
held for sale, net of unearned income
at period end 1.02 1.17 1.02 1.17
Total classified loans $24,224 $30,445 $24,224 $30,445
Dollar allocation of reserve to
general risk 6,293 6,012 6,293 6,012
Percentage allocation of
reserve to general risk 57.78% 50.58% 57.78% 50.58%
</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 on pages 28 and 38,
respectively.)
10. Components of Allowance for Loan Losses
For impaired loans, the measurement of impairment may be based
upon: 1)
the resent 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.
<PAGE>13
The Company had loans totaling $7,452,000 and $1,197,000 being
specifically
identified as impaired and a corresponding allocation reserve was
zero and
$650,000 at June 30, 1999, and June 30, 1998, respectively. The
average
outstanding balance for loans being specifically identified as
impaired was
$4,571,000 for the first six months of 1999 compared to $1,170,000
for the first
six months 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 six months 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):
June 30, 1999 December 31, 1998 June 30, 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
Commercial $ 1,046 14.8% $ 1,004 13.1% $ 996 13.4%
Commercial
loans secured
by real estate 2,145 33.5 2,082 32.1 2,391 31.7
Real Estate -
mortgage 791 45.5 1,038 47.0 406 46.5
Consumer 616 6.2 1,563 7.8 1,431 8.4
Allocation to
general risk 6,293 - 4,663 - 6,012 -
Allocation for
impaired loans - - 375 - 650 -
Total $10,891 100.0% $10,725 100.0% $11,886 100.0%
Even though real estate-mortgage loans comprise
approximately 46% of the
Company's total loan portfolio, only $791,000 or 7.3% of the total
allowance for
loan losses is allocated against this loan category. The real
estate-mortgage
loan allocation is based upon the Company's five year historical
average of
actual loan charge-offs experienced in that category. The
disproportionately
higher allocations for commercial loans and commercial loans
secured by real
estate reflect the increased credit risk associated with this type
of lending and
the Company's historical loss experienced in these categories.
<PAGE>14
At June 30, 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 with
adequate loan to
value ratios 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):
June 30 December 31 June 30
1999 1998 1998
Non-accrual loans $ 10,247 $ 5,206 $ 5,212
Loans past due 90
days or more 435 1,579 1,032
Other real estate owned 1,170 1,451 712
Total non-performing
assets $ 11,852 $ 8,236 $ 6,956
Total non-performing assets as
a percent of loans and loans
held for sale, net
of unearned income, and
other real estate owned 1.10% 0.77% 0.68%
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.
<PAGE>15
The following table sets forth, for the periods indicated, (i) the
gross
interest income that would have been recorded if non-accrual loans
had been
current in accordance with their original terms and had been
outstanding
throughout the period or since origination if held for part of the
period, (ii)
the amount of interest income actually recorded on such loans, and
(iii) the net
reduction in interest income attributable to such loans (in
thousands).
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
Interest income due in accordance
with original terms $ 65 $ 98 $ 152 $ 197
Interest income recorded (5) (4) (14) (6)
Net reduction in interest income $ 60 $ 94 $ 138 $ 191
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 June
30, 1999, are as follows:
Borrowed Funds Hedges
The Company has entered into several interest rate
contracts 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 the swap agreements, the Company pays a
fixed rate of
interest and receives a floating rate which resets either monthly,
quarterly, or
annually. For the $120 million interest rate cap, the Company
only receives
payment from the counterparty if the federal funds rate goes above
the 5.00%
strike rate. The following table summarizes the interest rate swap
and cap
transactions which impacted the Company's first six months of 1999
performance:
<PAGE>16
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 Expired 138,903
25,000,000 6-20-97 6-20-99 5.96 4.72 Expired 148,499
50,000,000 9-25-97 9-25-99 5.80 4.73 Monthly 267,611
120,000,000 5-03-99 5-03-00 5.00 N/A Daily 24,000
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
floors outstanding at June 30, 1999, or June 30, 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 $13.0 million of goodwill and $14.2
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 (1,551)
Balance at June 30, 1999 27,239
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>17
Remaining 1999 $ 1,593
2000 3,139
2001 3,110
2002 3,110
2003 3,110
2004 and after 13,177
14. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following at June
30, 1999, (in
thousands,
except percentages):
Type Maturing Amount Weighted
Average
Rate
Open Repo Plus Overnight $ 92,150 5.11%
Advances and 1999 300,000 5.21
wholesale 2000 163,750 4.88
repurchase 2001 10,126 8.22
agreements 2002 258,500 5.72
2003 and after 118,750 5.31
Total Advances and 851,126 5.39
wholesale repurchase agreements
Total FHLB Borrowings $943,276 5.37%
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.
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.
<PAGE>18
Quantitative measures established by regulation to ensure capital
adequacy
require the Company to maintain minimum amounts and ratios(set
forth in the table
below) of total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital
to average assets. Management believes that as of June 30, 1999,
the Company
meets all capital adequacy requirements to which it is subject.
As of June 30, 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 June 30, 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 $ 159,992 13.53% $ 94,633 8.00% $ 118,292 10.00%
U.S. Bank 87,379 13.72 50,946 8.00 63,682 10.00
Three Rivers Bank 73,797 13.59 43,435 8.00 54,294 10.00
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated 149,101 12.60 47,317 4.00 70,975 6.00
U.S. Bank 82,078 12.89 25,473 4.00 38,209 6.00
Three Rivers Bank 68,207 12.56 21,717 4.00 32,576 6.00
Tier 1 Capital (to Average
Assets)
Consolidated 149,101 6.13 97,261 4.00 121,576 5.00
U.S. Bank 82,078 6.15 53,393 4.00 66,741 5.00
Three Rivers Bank 68,207 6.26 43,618 4.00 54,522 5.00
</TABLE>
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.
<PAGE>19
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 two primary
business divisions,
institutional trust and personal trust. 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. 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 half of 1999 and 1998 were as follows (in thousands,
except ratios):
<TABLE>
<CAPTION>
June 30, 1999 Community Banking Mortgage Banking Trust Investment/Parent Total
<S> <C> <C> <C> <C> <C>
Net Income $ 4,607 $ 197 $ 473 $ 5,299 $ 10,576
Risk adjusted
return on equity 12.1% 4.7% 30.8% 21.3% 15.4%
Total assets $1,167,138 $64,696 $1,731 $1,255,197 $2,488,762
June 30, 1998 Community Banking Mortgage Banking Trust Investment/Parent Total
Net Income $ 5,120 $ 485 $ 467 $ 5,360 $ 11,432
Risk adjusted
return on equity 12.0% 9.9% 26.6% 19.8% 14.9%
Total assets $1,088,577 $58,020 $1,617 $1,061,110 $2,209,324
</TABLE>
17. Branch Acquisition
On February 12, 1999, the Company completed the purchase of
three branch
offices in western Pennsylvania from First Western Bancorp in
exchange for cash
and one branch office 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 fair value.
<PAGE>20
18. Sale of Credit Card Portfolio
On April 1, 1999, the Company completed the sale of the
credit card
portfolio of its U.S. Bank subsidiary to First National Bank of
Omaha. The
portfolio consisted of 16,878 credit card accounts with
outstanding balances
totaling approximately $14 million. The credit card portfolio was
sold for a 16%
premium which equated to a $1.6 million pre-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.
19. Branch Sale
On June 18, 1999, the Company's U.S. Bank subsidiary sold
its Loretto
branch to Portage National Bank. Approximately $6 million in
deposits were sold
at an 8.50% premium which resulted in the Company recognizing a
pre-tax gain of
$540,000 in the second quarter of 1999.
20. Subsequent Event
On July 12, 1999, the Company announced that its Board of
Directors has
approved a plan to split the Company's banking subsidiaries into
two separate
publicly traded companies. The plan would be effected through a
tax-free spin-
off of its Three Rivers Bank subsidiary to the Company's
shareholders.
Completion of the spin-off is expected to take six to nine months
and is
contingent upon a favorable tax ruling from the Internal Revenue
Service and
regulatory approvals.
Under the proposed tax-free spin-off plan, 100% of the shares of the
holding
company to be formed for Three Rivers Bank would be distributed to shareholders
of the Company
in proportion to their existing Company ownership. Shareholders
would retain
their existing Company shares. Standard Mortgage Company (SMC), a
mortgage
banking company, currently a subsidiary of Three Rivers Bank, will
be internally
spun-off from Three Rivers Bank to the Company prior to
consummation of the
proposed Three Rivers Bank spin-off.
<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
second quarter of
1999 totaled $5.5 million or $0.41 per share on a diluted basis.
When compared
to the $5.7 million or $0.40 per diluted share reported for the
second quarter
of 1998, the 1999 results reflect a 2.5% increase in diluted
earnings per share
and a 3.4% decrease in net income. The Company's return on equity
averaged
16.32% for the second quarter of 1999 which represented an
improvement over the
15.39% return on equity reported in the second quarter of 1998.
When compared
to the Company's more recent first quarter 1999 performance, the
1999 second
quarter results reflect a 10.8% improvement in diluted earnings
per share and a
10.0% increase in net income.
Growth in total revenue and active capital management were the key
factors
responsible for the improvement in the Company's diluted earnings
per share and
return on equity in the second quarter of 1999. Specifically, non
interest
income increased by $1.6 million or 25.4% while net interest
income grew by
$311,000 or 1.9%. The Company used its treasury stock repurchase
program to
actively manage its capital and reduce both total equity and
common shares
outstanding. As a result of the success of this program, there
were 1.0 million
fewer average diluted shares outstanding in the second quarter of
1999 than the
second quarter of 1998. The Company's 1999 second quarter
financial performance
was negatively impacted by a $1.4 million or 9.2% increase in non-
interest
expense and a $1 million increase in the provision for loan
losses. The
following table summarizes some of the Company's key performance
indicators(in
thousands, except per share and ratios):
<PAGE>22
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
Net income $ 5,540 $ 5,737
Diluted earnings per share 0.41 0.40
Return on average equity 16.32% 15.32%
Return on average assets 0.90 1.04
Average diluted common
shares outstanding 13,424 14,425
.....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
1999 to the second quarter of 1998 (in thousands, except
percentages):
Three Months Ended
June 30
1999 1998 $ Change % Change
Interest income $ 41,210 $ 39,131 2,079 5.3
Interest expense 24,536 22,768 1,768 7.8
Net interest income 16,674 16,363 311 1.9
Tax-equivalent
adjustment 799 704 95 13.5
Net tax-equivalent
interest income $ 17,473 $ 17,067 406 2.4
Net interest margin 3.00% 3.25% (0.25)% N/M
N/M - Not meaningful
USBANCORP's net interest income on a tax-equivalent basis
increased by
$406,000 or 2.4% due to growth in earning assets. Total average
earning assets
were $229 million higher in the second quarter of 1999 due to a
$49 million or
4.9% increase in total loans and a $183 million or 17.2% increase
in investment
securities. The Company was able to achieve solid loan growth in
commercial
loans, commercial mortgage loans, and home equity loans over the
past several
quarters. Consumer loans declined between periods due to the sale
of the
Company's $14 million credit card portfolio in the second quarter
of 1999. The
higher level of investment securities resulted in part from the
use of funds
provided with the First Western Branches Acquisition which closed
in the first
quarter of 1999. As part of this acquisition, the Company
acquired approximately
$91 million of deposits and $10 million of consumer loans.
<PAGE>23
The income benefit from this growth in earning assets was
partially offset
by a 25 basis point decline in the net interest margin to 3.00%.
The drop in the
net interest margin reflects a 38 basis point decline in the
earning asset yield
which more than offset the benefit of a 22 basis point reduction
in the cost of
funds. Accelerated prepayments in both the securities and loan
portfolios were
the primary factor causing the lower earning asset yield between
years. The
Company has, however, experienced a noticeable slowing of
prepayment speeds in
the second quarter of 1999 which was one key factor contributing
to the five
basis point improvement in the net interest margin from 2.95% to
3.00% on a
linked quarter basis.
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 second quarter of 1999 increased by $2.2 million or 5.5% when
compared to the
same 1998 period. This increase was due to the previously
mentioned $229 million
or 11.0% increase in total average earning assets which caused
interest income
to rise by $4.2 million. This positive factor was partially
offset by a 38 basis
point drop in the earning asset yield to 7.26% that caused a $2.0
million
reduction in interest income. Within the earning asset base, the
yield on the
total loan portfolio declined by 51 basis points to 8.15% due to
the downward
repricing of floating rate loans 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 18 basis points to 6.47%
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. This refinancing
activity slowed
significantly in the second quarter of 1999 when the treasury
yield curve began
to steepen again.
The Company's total interest expense for the second quarter of
1999
increased by $1.8 million or 7.8% when compared to the same 1998
period. This
higher interest expense was due primarily to a $246 million
increase in average
interest bearing liabilities. The growth in interest bearing
liabilities included
an $81 million increase in interest bearing deposits due largely
to the deposits
acquired with the First Western Branches Acquisition. 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
second quarter
of 1999 which was 32 basis points lower than their cost in the
prior year second
quarter but 152 basis points greater than the average cost of
deposits which
amounted to 3.83%. The Company was able to reduce its cost of
deposits by 24
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
22 basis points to 4.62%.
<PAGE>24
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 $170 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. For
the second
quarter of 1999, the level of borrowed funds to total assets
averaged 40.4%. The
Company plans to use cash flow from mortgage-backed securities to
pay down
borrowings to bring the ratio back within policy guidelines during
the second
half of 1999.
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 35% is used to compute tax equivalent
yields.
<PAGE>25
Three Months Ended June 30 (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 $ 1,059,303 $ 21,754 8.15% $ 1,010,058 $ 22,099 8.66%
Deposits with banks 4,076 26 2.54 7,029 63 3.57
Investment securities:
Available for sale 731,394 11,578 6.31 566,046 9,054 6.40
Held to maturity 515,289 8,651 6.69 497,656 8,619 6.93
Total investment
securities 1,246,683 20,229 6.47 1,063,702 17,673 6.65
Total interest earning
assets/interest income 2,310,062 42,009 7.26 2,080,789 39,835 7.64
Non-interest earning assets:
Cash and due from banks 37,380 34,406
Premises and equipment 19,087 17,880
Other assets 103,552 98,438
Allowance for loan
losses (11,322) (11,904)
TOTAL ASSETS $ 2,458,759 $ 2,219,609
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>26
THREE MONTHS ENDED JUNE 30
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 $ 95,353 $ 235 0.99% $ 90,690 $ 224 0.99%
Savings 176,464 713 1.62 173,305 640 1.48
Money markets 186,981 1,557 3.34 166,309 1,555 3.75
Other time 632,423 7,918 5.02 580,049 7,834 5.42
Total interest bearing
deposits 1,091,221 10,423 3.83 1,010,353 10,253 4.07
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other short-term borrowings 223,856 2,738 4.91 184,787 2,410 5.16
Advances from Federal
Home Loan Bank 770,015 10,527 5.48 656,852 9,493 5.80
Guaranteed junior subordinated
deferrable interest debentures 34,500 740 8.58 23,383 501 8.58
Long-term debt 8,762 108 4.94 7,113 111 6.26
Total interest bearing
liabilities/interest expense 2,128,354 24,536 4.62 1,882,488 22,768 4.84
Non-interest bearing liabilities:
Demand deposits 168,674 159,561
Other liabilities 25,567 27,382
Stockholders' equity 136,164 150,178
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,458,759 $2,219,609
Interest rate spread 2.64 2.79
Net interest income/
net interest margin 17,473 3.00% 17,067 3.25%
Tax-equivalent adjustment (799) (704)
Net Interest Income $16,674 $16,363
</TABLE>
....PROVISION FOR LOAN LOSSES..... The Company's provision for
loan losses for
the second quarter of 1999 totaled $1.2 million or 0.44% of
average total loans
which represented a $1 million increase from the provision level
experienced in
the 1998 second quarter. The Company's net loan charge-offs
amounted to $1.0
million or 0.39% of average loans in the second quarter of 1999
compared to net
charge-offs of $144,000 or 0.06% of average loans in the 1998
second quarter.
The higher provision in 1999 was due to increased net-charge-
offs, continued
growth of the commercial and commercial mortgage loan portfolio,
and a higher
level of non-performing assets. 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 second
quarter of 1999
totaled $8.0 million which represented a $1.6 million or 25.4%
increase when
compared to the same 1998 quarter. This increase was primarily
due to the
following items:
a $132,000 or 11.8% increase in trust fees to $1.2 million in the
second
quarter of 1999. This trust fee growth reflects increased assets
under
management due to the profitable expansion of the Trust Company's
business.
a $1.4 million increase in gains realized on loans held for sale
due entirely
to a $1.6 million gain realized on the sale of the Company's $14
million
credit card portfolio. As a result of the 16% premium recognized
on the sale,
the Company was able to profitably exit a line of business where
it did not
have the scale to effectively compete on a long-term basis.
a $661,000 decrease in gains realized on investment security sales
as the
steeper yield curve has limited investment portfolio repositioning
opportunities in 1999.
a $540,000 gain on the sale of a small marginally profitable
branch office
with approximately $6 million in deposits. The Company received
an 8.5%
premium for the core deposits in that branch office.
.....NON-INTEREST EXPENSE..... Non-interest expense for the second
quarter of
1999 totaled $16.1 million which represented a $1.4 million or
9.2% increase when
compared to the same 1998 quarter. This increase was primarily
due to the
following items:
a $586,000 or 7.7% increase in salaries and employee benefits due
to merit
pay increases, increased medical insurance premiums, and 13
additional
employees resulting from the acquisition of the Republic Bank
Wholesale
Mortgage Banking Department.
a $292,000 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.
a $267,000 increase in other expense due primarily to
approximately $300,000
of costs associated with achieving Year 2000 compliance.
A $143,000 increase in professional fees due to higher legal and
other professional fees.
<PAGE>28
.....YEAR 2000..... USBANCORP has been actively working on the
Year 2000 computer
problem and has made significant progress in ensuring that both
its information
technology and non-information technology systems and applications
will be Y2K
compliant. To date, the Company has completed the inventory,
assessment,
remediation, testing, and nearly all the implementation phases of
its Year 2000
program.
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.
The Company's business resumption plan has been 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
was retained
to create a company wide business resumption plan. The firm used
its
considerable experience with business resumption planning and the
existing
company contingency plans to create a business resumption plan
which supports our
continued operation in the face of external or internal Y2K caused
disruptions.
A test of the branch plan for operation was performed on June 19,
1999.
Customers were served with no disruption.
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 it will not have a
material adverse
effect from Year 2000 customer credit risks.
The Company is addressing the potential liquidity risks
associated with Year
2000. A study of cash and liquidity has been undertaken. Cash
levels and
investments will be adjusted to meet the need. Additionally, the
Company has
developed a contingency funding plan which provides for the use of
the Federal
Home Loan Bank, Federal Reserve Discount Window, brokered
deposits and more
aggressive wholesale borrowings should the Company experience an
outflow of
deposits. From an asset liability management standpoint, the
Company has
emphasized deposit products which encourage extension of shorter
term maturities
into products maturing after the century date change to further
limit liquidity
risk.
<PAGE>29
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 $1.7
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 $1,317,000 or 77% 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.
<TABLE>
<CAPTION>
Resolution
Phases Assessment Remediation Testing Implementation
<S> <C> <C> <C> <C>
Information 100% complete 100% complete 100% complete 99% complete
Technology
All mission critical and
critical system have been
implemented. Non-
essential PC upgrades are
scheduled through
8-15-99.
- ------------------------------------------------------------------------------
Operating equipment 100% complete 100% complete 100% complete 100% complete
with embedded chips
or software.
- ------------------------------------------------------------------------------
Third Party 100% compete 100% for system 100% complete. 99% complete for
interfaces system interfaces
PCs need upgraded.
</TABLE>
.....INCOME TAX EXPENSE..... The Company's provision for income
taxes for the
second quarter of 1999 was $1.9 million reflecting an effective
tax rate of
25.4%. The Company's 1998 second quarter income tax provision was
$2.1 million
or an effective tax rate of 27.0%. 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 second 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 $4.9
million have been provided as of June 30, 1999, on the differences
between
taxable income for financial and tax reporting purposes.
<PAGE>30
SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE 30, 1998
.....PERFORMANCE OVERVIEW..... The Company's net income for the
first six months
of 1999 totaled $10.6 million or $0.78 per share on a diluted
basis. The
Company's net income for the first half of 1998 totaled $11.4
million or $0.78
per share on a diluted basis. The 1999 results reflect no change
in diluted
earnings per share and an $856,000 or 7.5% decrease in net income
when compared
to the same six-month period in 1998. The Company's return on
equity averaged
15.39% for the first six months of 1999 which represented a 45
basis point
improvement over the 14.94% return on equity reported in the first
half of 1998.
The Company's return on assets dropped by 15 basis points to
0.88% for the first
six months of 1999.
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 net
income in the
first half of 1999. Specifically, total non-interest income
increased by $2.4
million or 20.7% while net interest income declined by $405,000 or
1.2% from the
same prior year period. This net $2 million 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 $2.2 million or 7.6% higher in the
first half of
1999 while the provision for loan losses increased by $1.2
million. Even though
net income decreased for the first six months of 1999, there was
no change in
diluted earnings per share due to the success of the Company's
common stock
repurchase program. As a result of this active capital management
strategy,
there were 1.1 million fewer average diluted shares outstanding in
the first half
of 1999. 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, 1999 June 30, 1998
Net income $10,576 $11,432
Diluted earnings per share 0.78 0.78
Return on average equity 15.39% 14.94%
Return on average assets 0.88 1.03
Average diluted common
shares outstanding 13,514 14,626
<PAGE>31
.....NET INTEREST INCOME AND MARGIN..... The following table
compares the
Company's net interest income performance for the first six months
of 1999 to the
first six months of 1998 (in thousands, except percentages):
Six Months Ended
June 30
1999 1998 $ Change % Change
Interest income $ 81,434 $ 78,823 2,611 3.3
Interest expense 48,615 45,599 3,016 6.6
Net interest income 32,819 33,224 (405) (1.2)
Tax-equivalent
adjustment 1,572 1,424 148 10.4
Net tax-equivalent
interest income $ 34,391 $ 34,648 (257) (0.7)
Net interest margin 2.98% 3.27% (0.29)% N/M
N/M - Not meaningful.
USBANCORP's net interest income on a tax-equivalent basis
decreased by
$257,000 or 0.7% due to the negative impact of a 29 basis point
decline in the
net interest margin to 2.98%. The drop in the net interest margin
reflects a 39
basis point decline in the earning asset yield due primarily to
accelerated
prepayments in both the securities and loan portfolios and the
reinvestment of
these cash flows in lower yielding assets. This decline in the
earning asset
yield more than offset an 18 basis point drop in the cost of funds
due to lower
deposit and borrowing costs. Overall, this margin compression
offset the
benefits resulting from growth in the earning asset base. Total
average earning
assets were $188 million higher in the first half of 1999 as total
loans grew by
$60 million or 6.0% while investment securities increased by $128
million or
11.8%.
...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 1999 increased by $2.8 million or 3.4%
when compared to
the same 1998 period. This increase was due primarily to a $188
million or 9.0%
increase in total average earning assets which caused interest
income to rise by
$6.8 million. This positive factor was partially offset by a 39
basis point drop
in the earning asset yield to 7.26% which caused a $4.0 million
reduction in
interest income. Within the earning asset base, the yield on
total investment
securities decreased by 23 basis points to 6.48% while the yield
on the total
loan portfolio declined by 51 basis points to 8.13%. Accelerated
prepayments of
mortgage related assets and the reinvestment of this cash into
lower yielding
assets was the primary factor causing the compression in the
earning asset yield.
Continued growth of the loan portfolio was an important component
of the
earning asset growth. The Company's loan-to-deposit ratio averaged
86.3% for the
first half of 1999. 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 half of 1999
increased
by $3.0 million or 6.6% when compared to the same 1998 period.
This higher
interest expense was due primarily to a $204 million increase in
average interest
bearing liabilities which caused interest expense to rise by $4.7
million. This
growth in interest bearing liabilities occurred in both deposits
and borrowings
which were used to fund the previously mentioned earning asset
growth. For the
first six months of 1999, the Company's total level of short-term
borrowed funds
and FHLB advances averaged $987 million or 40.6% of total assets
compared to an
average of $871 million or 39.0% of total assets for the first six
months of
1998. The Company's cost of both borrowed funds and deposits
declined in 1999
which contributed to a $1.8 million reduction in interest expense.
Overall, the
Company's total cost of funds dropped by 18 basis points to
average 4.66% for the
first six months of 1999.
<PAGE>32
The table that follows provides an analysis of net interest income
on a
tax-equivalent basis for the six month periods ended June 30,
1999, and June 30,
1998. For a detailed discussion of the components and assumptions
included in
the table, see the paragraph before the quarterly tables on page
26.
<PAGE>33
Six Months Ended June 30 (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 $ 1,062,914 $ 43,436 8.13% $ 1,002,476 $ 43,585 8.64%
Deposits with banks 3,839 58 2.99 4,586 79 3.43
Investment securities:
Available for sale 711,939 22,487 6.32 580,234 18,763 6.47
Held to maturity 506,870 17,025 6.72 510,326 17,820 6.98
Total investment
securities 1,218,809 39,512 6.48 1,090,560 36,583 6.71
Total interest earning
assets/interest income 2,285,562 83,006 7.26 2,097,622 80,247 7.65
Non-interest earning assets:
Cash and due from banks 36,569 33,241
Premises and equipment 18,606 17,839
Other assets 103,313 98,758
Allowance for loan
losses (11,076) (11,985)
TOTAL ASSETS $ 2,432,974 $ 2,235,475
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>34
SIX MONTHS ENDED JUNE 30
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 $ 94,328 $ 465 0.99% $ 90,256 $ 444 0.98%
Savings 173,654 1,375 1.58 173,855 1,294 1.48
Money markets 181,888 2,996 3.29 164,374 3,082 3.74
Other time 621,817 15,703 5.09 579,353 15,630 5.45
Total interest bearing
deposits 1,071,687 20,539 3.86 1,007,838 20,450 4.09
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other
short-term borrowings 226,344 5,531 4.87 183,803 4,797 5.21
Advances from Federal
Home Loan Bank 760,834 20,856 5.47 687,103 19,618 5.69
Guaranteed junior subordinated
deferrable interest debentures 34,500 1,480 8.58 11,692 501 8.58
Long-term debt 8,848 209 4.72 7,459 233 6.23
Total interest bearing
liabilities/interest expense 2,102,213 48,615 4.66 1,897,895 45,599 4.84
Non-interest bearing liabilities:
Demand deposits 166,842 155,616
Other liabilities 25,340 27,661
Stockholders' equity 138,579 154,303
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,432,974 $2,235,475
Interest rate spread 2.60 2.81
Net interest income/
net interest margin 34,391 2.98% 34,648 3.27%
Tax-equivalent adjustment (1,572) (1,424)
Net Interest Income $32,819 $33,224
</TABLE>
....PROVISION FOR LOAN LOSSES The Company's provision for loan
losses for the
first six months of 1999 totaled $1.5 million or 0.29% of average
total loans
which represented a $1.2 million increase from the provision level
experienced
in the first six months of 1998. The Company's net charge-offs
amounted to $1.4
million or 0.26% of average loans in first half of 1999 compared
to net charge-
offs of $527,000 or 0.11% of average loans in the first half of
1998. The higher
provision in 1999 was due to the increased net-charge-offs,
continued growth of
commercial and commercial real-estate loans, and a higher level of
non-performing
assets. At June 30, 1999, the allowance for loan losses totaled
$10.9 million
or 1.02% of total loans and 92% of total non-performing assets.
<PAGE>35
.....NON-INTEREST INCOME.....Non-interest income for the first six
months of 1999
totaled $14.2 million which represented a $2.4 million or 20.7%
increase when
compared to the same 1998 period. This increase was primarily
due to the
following items:
a $251,000 or 11.3% increase in trust fees to $2.5 million
in the first half
of 1999. This trust fee growth reflects increased assets under
management
due to the profitable expansion of the Trust Company's business.
a $2.0 million increase in gains realized on loans held for
sale due largely
to the previously discussed $1.6 million gain recognized on the
sale of the
Company's credit card portfolio. The remainder of the increase
was due to
continued strong residential mortgage production at the Company's
mortgage
banking subsidiary and more profitable execution of loan sales
into the
secondary market. With the steepening of the treasury yield curve
later in
the second quarter of 1999, the Company expects to see reductions
in both
the volume and net spread earned mortgage loan sales in the second
half of
1999.
a $324,000 or 9.8% increase in other income due in part to
additional income
resulting from ATM surcharging, other mortgage banking processing
fees, and
revenue generated from annuity and mutual fund sales in the
Company's
financial service subsidiaries.
a $261,000 or 44.9% decrease in net mortgage servicing fee income
due to
greater amortization expense on mortgage servicing rights as a
result of
faster mortgage prepayment speeds in 1999.
Non-interest income as a percentage of total revenue increased
from 26.1% in the
first six months of 1998 to 30.1% in the first six months of 1999.
.....NON-INTEREST EXPENSE.....Non-interest expense for the first
six months of
1999 totaled $31.2 million which represented a $2.2 million or
7.6% increase when
compared to the same 1998 period. This increase was primarily due
to the
following items:
a $1.1 million or 7.2% increase in salaries and employee
benefits due to
merit pay increases, higher commission and incentive pay,
increased medical
insurance premiums, and the additional full-time equivalent
employees
("FTE") resulting from the First Western Branches Acquisition and
the
acquisition of the Republic Bank Wholesale Mortgage Banking
Department.
a $415,000 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.
The
amortization expense of intangible assets reduced the first six
months of
1999 diluted earnings per share by $0.10.
a $270,000 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.
<PAGE>36
.....INCOME TAX EXPENSE..... The Company's provision for income
taxes for the
first six months of 1999 was $3.7 million reflecting an effective
tax rate of
25.9%. The Company's comparable period 1998 income tax provision
was $4.3 million
or an effective tax rate of 27.1%. The lower income tax expense
and effective
tax rate in 1999 was due primarily to a reduced level of pre-tax
income combined
with an increased level of tax-free income.
.....NET OVERHEAD BURDEN.....The Company's efficiency ratio (non-
interest expense
divided by total revenue) increased to 64.2% in the first half of
1999 compared
to 62.5% for the first six months 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. 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
$1.5 million of
interest expense on the $34.5 million of guaranteed junior
subordinated
deferrable interest debentures). The amortization of intangible
assets also
creates a $3.1 million annual non-cash charge that negatively
impacts the
efficiency ratio. The efficiency ratio for the first six months of
1999, stated
on a cash basis excluding the intangible amortization, was 61.0%
or 3.2% lower
than the reported efficiency ratio of 64.2%. Net overhead expense
as a
percentage of tax equivalent net interest income was relatively
consistent
between periods at 49.5%.
.....BALANCE SHEET..... The Company's total consolidated assets
were $2.49
billion at June 30, 1999, compared with $2.38 billion at December
31, 1998, which
represents an increase of $112 million or 4.7% due primarily to
the funds
provided from the First Western Branches Acquisition. During the
first half of
1999, total loans and loans held for sale increased by
approximately $6.0 million
due to the loans acquired from First Western and continued growth
in commercial
mortgage loans. This loan portfolio growth occurred despite the
sale of the
Company's $14 million credit card portfolio. Total investment
securities
increased by $86 million as the acquired deposits were used to
purchase
securities. Intangible assets increased by $8.5 million due to
the core deposit
intangible resulting from the First Western Branches Acquisition.
Total deposits increased by $65 million or 5.5% since
December 31, 1998,
due to the acquisition of the First Western Branches. Deposit
totals were
negatively impacted by the sale of a $6.0 million marginally
profitable branch
office and run-off of certificates of deposit. The Company's total
borrowed funds
position increased by $69 million in order to fund the earning
asset growth.
Total equity declined by $18 million due to a decline in
accumulated other
comprehensive income as a result of a decrease in the market value
of the
available for sale securities portfolio.
<PAGE>37
.....LOAN QUALITY.....The following table sets forth information
concerning
USBANCORP's loan delinquency and other non-performing assets (in
thousands,
except percentages):
June 30 December 31 June 30
1999 1998 1998
Total loan delinquency (past due
30 to 89 days) $10,600 $15,427 $ 9,769
Total non-accrual loans 10,247 5,206 5,212
Total non-performing assetsF1 11,852 8,236 6,956
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 0.99% 1.45% 0.96%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned income 0.96 0.49 0.51
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 1.10 0.77 0.68
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 June 30, 1999, total loan
delinquency
declined by $4.8 million causing the delinquency ratio to drop to
0.99%. Total
non-performing assets increased by $3.6 million since year-end
1998 causing the
non-performing assets to total loans ratio to increase to 1.10%.
The increase
in non-performing assets and non-accrual loans is due to a
commercial mortgage
loan on a construction project which is believed to have value in
excess of the
loan balance.
.....ALLOWANCE FOR LOAN LOSSES.....The following table sets forth
changes in the
allowance for loan losses and certain ratios for the periods ended
(in thousands,
except percentages):
June 30 December 31 June 30
1999 1998 1998
Allowance for loan losses $ 10,891 $ 10,725 $ 11,886
Amount in the allowance
for loan losses
allocated to "general risk" 6,293 4,663 6,012
Allowance for loan losses as
a percentage of each of
the following:
total loans and loans
held for sale,
net of unearned income 1.02% 1.01% 1.17%
total delinquent loans
(past due 30 to 89 days) 102.75 69.52 121.67
total non-accrual loans 106.28 206.01 228.05
total non-performing assets 91.89 130.22 170.87
<PAGE>38
Since December 31, 1998, the balance in the allowance for
loan losses has
increased by $166,000 due to the loan loss provision slightly
exceeding net
charge-offs. The Company's allowance for loan losses at June 30,
1999, was 92%
of non-performing assets and 106% of non-accrual loans.
.....INTEREST RATE SENSITIVITY..... Asset/liability management
involves managing
the risks associated with changing interest rates and the
resulting impact on the
Company's net interest income, 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.
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
1999 1998 1998
<S> <C> <C> <C>
Six month cumulative GAP
RSA........................ $ 671,545 $ 715,996 $ 724,764
RSL....................... (863,192) (856,470) (1,009,185)
Off-balance sheet
hedges............... - 50,000 115,000
GAP.................... $ (191,647) $ (90,474) $ (169,421)
GAP ratio.............. 0.78X 0.89X 0.81X
GAP as a % of total
assets................ (7.70)% (3.81)% (7.67)%
GAP as a % of total
capital............... (154.68) (63.86) (117.59)
One year cumulative GAP
RSA...................... $ 938,788 $ 1,063,674 $ 1,039,485
RSL...................... (1,157,627) (1,032,533) (1,246,439)
Off-balance sheet
hedges.............. - - 50,000
GAP...................... $ (218,839) $ 31,141 $ (156,954)
GAP ratio.............. 0.81X 1.03X 0.87X
GAP as a % of total
assets............... (8.79)% 1.31% (7.10)%
GAP as a % of total
capital............... (176.62) 21.98 (108.94)
</TABLE>
<PAGE>39
When June 30, 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. An increase in the Company's short-
term borrowed
funds also contributed to increased rate sensitive liabilities.
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.
The Company monitors the trends in market value of portfolio
equity sensitivity
analysis on a quarterly basis.
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 June 30, 1999, 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 June
30, 1999, 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 0.64 1.30 2.07
200bp increase (6.64) (13.55) (33.11)
200bp decrease 5.54 1.61 27.02
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 (6.6%)
and (13.6%) 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 (33.1%) 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.
<PAGE>40
.....LIQUIDITY...... Liquidity can be analyzed by utilizing the
Consolidated
Statement of Cash Flows. Cash equivalents increased by $3 million
from December
31, 1998, to June 30, 1999, due primarily to $123 million of net
cash provided
by financing activities and $24 million of net cash provided by
operating
activities. This more than offset $144 million of net cash used
by investing
activities. Within investing activities, purchases of investment
securities
exceeded cash proceeds from investment security maturities and
sales by $118
million. Cash advanced for new loan fundings totaled $251 million
and was
approximately $16.5 million greater than the cash received from
loan principal
payments and the sale of the credit card portfolio. Within
financing activities,
net deposits increased by $65 million due primarily to the First
Western Branches
Acquisition. Advances from the Federal Home Loan Bank provided
$99 million of
cash.
.....CAPITAL RESOURCES..... As presented in Note #15, each of the
Company's
regulatory capital ratios decreased between December 31, 1998, and
June 30, 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 243,100 shares or $4.2 million of
its common stock
during the first six months of 1999. Through June 30, 1999, the
Company has
repurchased a total of 4.1 million shares of its common stock at a
total cost of
$65.7 million. The Company has suspended its treasury stock
repurchase program
in order to build capital ratios in anticipation of the planned
spin-off of its'
Three Rivers Bank subsidiary at the end of the first quarter of
2000.
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
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
$0.29 for
the first six months of 1999 which was an 11.5% increase over the
$0.26 per share
dividend for the same 1998 period. The current dividend yield on
the Company's
common stock approximates 3.9%. 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.
<PAGE>41
.....FORWARD LOOKING STATEMENT.....This report contains various
forward-looking
statements and includes assumptions concerning the Company's
operations, future
results, and prospects. These forward-looking statements are
based upon current
expectations and are subject to risk and uncertainties. In
connection with the
"safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995,
the Company provides the following cautionary statement
identifying important
factors which could cause the actual results or events to differ
materially from
those set forth in or implied by the forward-looking statements
and related
assumptions.
Such factors include the following: (i) the effect of changing
regional
and national economic conditions; (ii) significant changes in
interest rates and
prepayment speeds; (iii) credit risks of commercial, real estate,
consumer, and
other lending activities; (iv) changes in federal and state
banking regulations;
(v) the presence in the Company's market area of competitors with
greater
financial resources than the Company; (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>42
SERVICE AREA MAP
Presented on this page was a service area map depicting the six counties
serviced by the Company.
<PAGE>43
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 27, 1999. The result of the item submitted for a vote was
as follows:
The following four Directors, whose term will expire in
2002, were
elected:
Number of Votes % of total
Cast for Class I outstanding
Director shares voted
Jerome M. Adams 9,575,756 71%
James M. Edwards, Sr. 9,502,928 71%
Richard W. Kappel 9,574,316 71%
Robert L. Wise 9,562,316 71%
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 June 30, 1999.
<PAGE>44
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 12, 1999 /s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: August 12, 1999 /s/Jeffrey A. Stopko
Jeffrey A. Stopko
Senior Vice President and
Chief Financial Officer
<PAGE>45
STATEMENT OF MANAGEMENT RESPONSIBILITY
July 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>46
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, 1999 and 1998, and the related consolidated statements of
income for
the three-month and six-month periods then ended and the related
consolidated statements of changes in stockholders' equity and
cash
flows for the six-month periods then ended. These financial
statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established
by the
American Institute of Certified Public Accountants. A review of
interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons
responsible
for financial and accounting matters. It is substantially less
in
scope than an audit conducted in accordance with generally
accepted
auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that
should be made to the financial statements referred to above for
them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of USBANCORP,
Inc. as
of December 31, 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,
July 16, 1999
<PAGE>47
July 16, 1999
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, 1999, which
includes
our report dated July 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>48
[ARTICLE] 9
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-END] JUN-30-1999
[CASH] 41,248
[INT-BEARING-DEPOSITS] 424
[FED-FUNDS-SOLD] 0
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 729,719
[INVESTMENTS-CARRYING] 525,478
[INVESTMENTS-MARKET] 519,539
[LOANS] 1,072,323
[ALLOWANCE] 10,891
[TOTAL-ASSETS] 2,488,762
[DEPOSITS] 1,241,432
[SHORT-TERM] 201,685
[LIABILITIES-OTHER] 913,066
[LONG-TERM] 8,678
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 43,456
[OTHER-SE] 80,445
[TOTAL-LIABILITIES-AND-EQUITY] 2,488,762
[INTEREST-LOAN] 43,087
[INTEREST-INVEST] 38,289
[INTEREST-OTHER] 58
[INTEREST-TOTAL] 81,434
[INTEREST-DEPOSIT] 20,539
[INTEREST-EXPENSE] 48,615
[INTEREST-INCOME-NET] 32,819
[LOAN-LOSSES] 1,525
[SECURITIES-GAINS] 434
[EXPENSE-OTHER] 31,167
[INCOME-PRETAX] 14,277
[INCOME-PRE-EXTRAORDINARY] 14,277
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 10,576
[EPS-BASIC] .79
[EPS-DILUTED] .78
[YIELD-ACTUAL] 7.65
[LOANS-NON] 10,247
[LOANS-PAST] 435
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 10,725
[CHARGE-OFFS] 1,860
[RECOVERIES] 501
[ALLOWANCE-CLOSE] 10,891
[ALLOWANCE-DOMESTIC] 10,891
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 6,293
</TABLE>
