UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 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 I.R.S. Employer Identification
incorporation or organization) 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 November 1, 1999
Common Stock, par value $2.50 13,303,605
per share
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
September 30, 1999, December 31, 1998,
and September 30,
1998.......................................................3
Consolidated Statement of Income -
Three and Nine Months Ended September 30, 1999,
and 1998...................................................4
Consolidated Statement of Changes
in Stockholders' Equity - Nine Months Ended
September 30, 1999, and 1998 ..............................6
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1999, and
1998.......................................................7
Notes to Consolidated Financial Statements.................8
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations.................................22
Part II. Other Information...............................42
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
September 30 December 31 September 30
1999 1998 1998
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $41,740 $35,085 $35,583
Interest bearing deposits with banks 266 3,855 854
Investment securities:
Available for sale 1,212,987 661,491 651,785
Held to maturity (market value
$516,452 on December 31, 1998,
and $506,628 on September 30, 1998) - 508,142 496,102
Loans held for sale 21,901 51,317 27,675
Loans 1,057,137 1,020,280 1,012,473
Less: Unearned income 7,391 5,276 5,209
Allowance for loan losses 10,911 10,725 11,717
Net loans 1,038,835 1,004,279 995,547
Premises and equipment 18,975 18,020 18,021
Accrued income receivable 17,379 17,150 17,216
Mortgage servicing rights 14,457 16,197 15,168
Goodwill and core deposit intangibles 26,447 18,697 19,283
Bank owned life insurance 36,869 35,622 35,213
Other assets 18,837 7,226 8,492
TOTAL ASSETS $2,448,693 $2,377,081 $2,320,939
LIABILITIES
Non-interest bearing deposits $ 178,430 $ 166,701 $ 160,706
Interest bearing deposits 1,035,962 1,009,590 1,004,890
Total deposits 1,214,392 1,176,291 1,165,596
Federal funds purchased and securities sold
under agreements to repurchase 52,748 101,405 59,196
Other short-term borrowings 145,103 129,003 60,946
Advances from Federal Home Loan Bank 852,008 752,391 817,403
Guaranteed junior subordinated deferrable
interest debentures 34,500 34,500 34,500
Long-term debt 7,841 9,271 5,061
Total borrowed funds 1,092,200 1,026,570 977,106
Other liabilities 24,292 32,550 31,938
TOTAL LIABILITIES 2,330,884 2,235,411 2,174,640
STOCKHOLDERS' EQUITY
Preferred stock, no par value;
2,000,000 shares authorized; there
were no shares issued and outstanding
for the periods presented - - -
Common stock, par value $2.50 per share;
12,000,000 shares authorized; 17,384,524 shares
issued and 13,303,605 outstanding on September
30, 1999; 17,350,136 shares issued and
13,512,317 outstanding on December 31,
1998; 17,348,334 shares issued and 13,661,215
outstanding on September 30, 1998 43,461 43,375 43,371
Treasury stock at cost, 4,080,919 shares on
September 30, 1999; 3,837,819 shares on
December 31, 1998; and 3,687,119 shares on
September 30, 1998 (65,725) (61,521) (58,543)
Surplus 65,662 65,495 65,484
Retained earnings 101,537 91,737 90,043
Accumulated other comprehensive income (27,126) 2,584 5,944
TOTAL STOCKHOLDERS' EQUITY 117,809 141,670 146,299
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,448,693 $2,377,081 $2,320,939
See accompanying notes to consolidated financial statements.
</TABLE>
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and
loans held for sale:
Taxable $ 21,208 $ 21,354 $ 63,183 $ 63,286
Tax exempt 557 625 1,669 1,868
Deposits with banks 31 22 89 101
Investment securities:
Available for sale 11,827 9,990 34,285 27,786
Held to maturity 8,329 8,261 24,160 26,034
Total Interest Income 41,952 40,252 123,386 119,075
INTEREST EXPENSE
Deposits 10,153 10,427 30,692 30,877
Federal funds purchased and securities
sold under agreements to repurchase 776 1,564 2,693 4,157
Other short-term borrowings 1,504 1,022 5,118 3,226
Advances from Federal Home Loan Bank 11,921 10,178 32,777 29,796
Guaranteed junior subordinated
deferrable interest 740 740 2,220 1,241
Long-term debt 105 122 314 355
Total Interest Expense 25,199 24,053 73,814 69,652
NET INTEREST INCOME 16,753 16,199 49,572 49,423
Provision for loan losses 225 150 1,750 450
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 16,528 16,049 47,822 48,973
NON-INTEREST INCOME
Trust fees 1,217 1,104 3,694 3,330
Net realized (losses) gains on
investment securities (3) 737 431 1,755
Net realized gains on loans held for
sale 445 887 4,300 2,694
Wholesale cash processing fees 159 178 477 530
Service charges on deposit accounts 910 899 2,654 2,506
Net mortgage servicing fees 216 154 536 735
Bank owned life insurance 415 411 1,247 1,233
Gain on sale of branch - - 540 -
Other income 1,894 1,857 5,524 5,163
Total Non-Interest Income 5,253 6,227 19,403 17,946
NON-INTEREST EXPENSE
Salaries and employee benefits 8,044 7,732 24,203 22,812
Net occupancy expense 1,110 1,075 3,468 3,353
Equipment expense 1,016 874 3,116 2,704
Professional fees 919 944 2,522 2,496
Supplies, postage, and freight 677 664 2,041 2,018
Miscellaneous taxes and insurance 439 399 1,343 1,143
FDIC deposit insurance expense 69 68 204 205
Amortization of goodwill and core
deposit intangibles 792 586 2,343 1,722
Impairment charge (credit) for
mortgage servicing rights (625) 266 (625) 266
Other expense 2,476 2,472 7,469 7,320
Total Non-Interest Expense $ 14,917 $ 15,080 $ 46,084 $ 44,039
INCOME BEFORE INCOME TAXES $ 6,864 $ 7,196 $ 21,141 $ 22,880
Provision for income taxes 1,772 1,896 5,473 6,148
NET INCOME $ 5,092 $ 5,300 $ 15,668 $ 16,732
PER COMMON SHARE DATA:
Basic:
Net income $ 0.38 $ 0.39 $ 1.17 $ 1.18
Average shares outstanding 13,302,997 13,760,019 13,351,855 14,147,108
Diluted:
Net income $ 0.38 $ 0.38 $ 1.16 $ 1.16
Average shares outstanding 13,404,177 14,001,368 13,477,277 14,410,365
Cash dividends declared $ 0.15 $ 0.14 $ 0.44 $ 0.40
</TABLE>
See accompanying notes to consolidated financial statements.
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Other
Accumulated compre-
Preferred Common Treasury Retained hensive
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 - - - - 16,732 - 16,732
Dividend reinvestment
and stock
purchase plan - 71 - 448 - - 519
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 - - - - - 3,791 3,791
Treasury Stock, 1,086,245
shares at cost - - (27,368) - - - (27,368)
Cash dividends
declared:
Common stock - - - - (5,555) - (5,555)
Balance September 30, 1998 $ - $ 43,371 $(58,543) $ 65,484 $ 90,043 $5,944 $146,299
Balance December 31,
1998 $ - $ 43,375 $(61,521) $ 65,495 $ 91,737 $2,584 $141,670
Net Income - - - - 15,668 - 15,668
Dividend reinvest-
ment and stock
purchase plan - 86 - 167 - - 253
Net unrealized
holding gains
(losses) on
investment
securities - - - - - (29,710) (29,710)
Treasury Stock, 243,100
shares at cost - - (4,204) - - - 4,204)
Cash dividends
declared:
Common stock - - - - (5,868) - (5,868)
Balance September 30,
1999 $ - $ 43,461 $(65,725) $ 65,662 $101,537 $(27,126) $117,809
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
Nine Months Ended
September 30
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 15,668 $ 16,732
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,750 450
Depreciation and amortization expense 1,943 1,871
Amortization expense of goodwill and core
deposit intangibles 2,343 1,722
Amortization expense of mortgage servicing rights 2,111 1,950
Net amortization of investment securities 1,045 553
Net realized gains on investment securities (431) (1,755)
Net realized gains on loans and loans held for sale (4,300) (2,694)
Origination of mortgage loans held for sale (333,973) (305,206)
Sales of mortgage loans held for sale 359,657 297,895
(Increase) decrease in accrued income receivable (229) 101
Increase in accrued expense payable 537 492
Net cash provided by operating activities 46,121 12,111
INVESTING ACTIVITIES
Purchases of investment securities and other
short-term investments (474,999) (532,482)
Proceeds from maturities of investment securities
and other short-term investments 163,003 185,937
Proceeds from sales of investment securities and
other short-term investments 221,824 321,095
Long-term loans originated (294,515) (272,589)
Loans held for sale (21,901) (27,675)
Principal collected on long-term loans 277,627 261,566
Loans purchased or participated (9,743) -
Loans sold or participated 4,611 44
Net decrease in credit card receivable and
other short-term loans 15,647 2,449
Purchases of premises and equipment (3,111) (2,329)
Sale/retirement of premises and equipment 211 67
Net decrease in assets held in trust for
collateralized mortgage obligation 793 1,139
Net increase mortgage servicing rights (371) (2,158)
Net increase in other assets (7,250) (8,453)
Net cash used by investing activities (128,174) (73,389)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit 343,612 375,822
Payments for maturing certificates of deposit (329,873) (364,526)
Net increase in demand and savings deposits 24,362 14,773
Net decrease in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings (33,279) (31,592)
Net principal borrowings of advances from
Federal Home Loan Bank 99,617 63,208
Principal borrowings on long-term debt - 11,123
Repayments of long-term debt (708) (13,189)
Common stock cash dividends paid (4,681) (4,870)
Proceeds from sale of guaranteed junior deferrable
interest debentures, net of expenses - 33,183
Guaranteed junior subordinated deferrable interest
debenture dividends paid (2,187) (1,215)
Proceeds from dividend reinvestment, stock
purchase plan, and stock options exercised 253 519
Purchases of treasury stock (4,204) (27,368)
Net (decrease) increase in other liabilities (7,793) 3,628
Net cash provided by financing activities 85,119 59,496
NET INCREASE (DECREASE) IN CASH EQUIVALENTS 3,066 (1,782)
CASH EQUIVALENTS AT JANUARY 1 38,940 38,219
CASH EQUIVALENTS AT SEPTEMBER 30 $ 42,006 $ 36,437
</TABLE>
See accompanying notes to consolidated financial statements.
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 and nine month periods
ended September 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 October 15, 1999, appearing herein.
This report does not express an opinion on the interim unaudited
consolidated financial information. Arthur Andersen LLP has not
carried out any significant or additional audit tests beyond
those which would have been necessary if its report had not been
included. The December 31, 1998, numbers are derived from
audited financial statements.
For further information, refer to the consolidated
financial statements and accompanying notes included in the
Company's "Annual Report and Form 10-K" for the year ended
December 31, 1998.
3. Earnings Per Common Share
Basic earnings per share includes only the weighted average
common shares outstanding. Diluted earnings per share includes
the weighted average common shares outstanding and any dilutive
common stock equivalent shares in the calculation. All prior
periods have been restated to reflect this adoption. Treasury
shares are treated as retired for earnings per share purposes.
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 Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $5,092 $5,300 $15,668 $16,732
Other comprehensive income,
before tax:
Unrealized holding gains(losses)
on investment securities (12,388) 5,568 (39,658) 6,939
Less: reclassification adjustment
for losses (gains) included in
net income 3 (737) (431) (1,755)
Other comprehensive income(loss)
before tax (12,385) 4,831 (40,089) 5,184
Income tax expense(credit)
related to items of other
comprehensive income (3,198) 1,273 (10,379) 1,393
Other comprehensive income(loss),
net of tax (9,187) 3,558 (29,710) 3,791
Comprehensive income $ (4,095) $8,858 $(14,042) $20,523
</TABLE>
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 $3,477,000 in income
tax payments in the first nine months of 1999 as compared to
$4,930,000 for the first nine months of 1998. Total interest
expense paid amounted to $73,277,000 in 1999's first nine months
compared to $69,160,000 in the same 1998 period.
6. Investment Securities
Securities are classified at the time of purchase as
investment securities held to maturity if it is management's
intent and the Company has the ability to hold the securities
until maturity. These held to maturity securities are carried on
the Company's books at cost, adjusted for amortization of
premium and accretion of discount which is computed using the
level yield method which approximates the effective interest
method. Alternatively, securities are classified as available
for sale if it is management's intent at the time of purchase to
hold the securities for an indefinite period of time and/or to
use the securities as part of the Company's asset/liability
management strategy. Securities classified as available for
sale include securities which may be sold to effectively manage
interest rate risk exposure, prepayment risk, and other factors
(such as liquidity requirements).
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:
<TABLE>
<CAPTION>
September 30, 1999
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 16,072 $ 3 $ (72) $ 16,003
U.S. Agency 42,894 - (1,868) 41,026
State and municipal 162,735 1,174 (6,248) 157,661
U.S. Agency mortgage-
backed securities 953,357 991 (34,436) 919,912
Other securities(1) 79,661 69 (1,345) 78,385
Total $1,254,719 $ 2,237 $ (43,969) $1,212,987
</TABLE>
[FN]
(1) Other investment securities include corporate notes and
bonds, asset-backed securities, and equity securities.
During the third quarter of 1999, the Company in
preparation for liquidity needs for Year 2000 sold $16 million
of mortgage backed securities that had been purchased in 1993
through 1995 and classified as held to maturity. The Company
believed the sales were allowable under the provision of SFAS
#115 which permits the sale of held to maturity mortgage backed
securities after a substantial portion (85%) of the principal
had been collected through repayment. The Company, however,
misinterpreted this provision and computed the 85% paydown
factor against the principal outstanding at issuance as opposed
to using the principal outstanding at the point the Company
purchased the securities in the secondary market. As a result
of this interpretation error, the Company tainted its held to
maturity portfolio and transferred all securities classified as
held to maturity to available for sale. The time period for the
taint will be two years. At the time of transfer, these
securities had an amortized cost of $495.8 million and a market
value of $485.4 million. Prior to the transfer, approximately
60% of the Company's investment securities were already
classified as available for sale. With the entire portfolio now
being classified as available for sale, the Company will have
greater flexibility to manage the securities portfolio to better
achieve overall balance sheet rate sensitivity goals and provide
liquidity to fund growth if needed. The mark to market of the
available for sale portfolio does inject more volatility in the
book value of equity but has no impact on regulatory capital.
Maintaining investment quality is a primary objective of
the Company's investment policy which, subject to certain
limited exceptions, prohibits the purchase of any investment
security below a Moody's Investor's Service or Standard & Poor's
rating of "A." At September 30, 1999, 97.5% of the portfolio
was rated "AAA" compared to 98.6% at September 30, 1998.
Approximately 1.4% of the portfolio was rated below "A" or
unrated on September 30, 1999.
7. Loans Held for Sale
At September 30, 1999, $21,901,000 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):
<TABLE>
<CAPTION>
September 30 December 31 September 30
1999 1998 1998
<S> <C> <C> <C>
Commercial $ 169,891 $139,751 $149,962
Commercial loans secured
by real estate 366,604 341,842 332,458
Real estate - mortgage 451,853 449,875 441,834
Consumer 68,789 88,812 88,219
Loans 1,057,137 1,020,280 1,012,473
Less: Unearned income 7,391 5,276 5,209
Loans, net of unearned
income $1,049,746 $1,015,004 $1,007,264
</TABLE>
Real estate-construction loans were not material at these
presented dates and comprised 5.1% of total loans net of
unearned income at September 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.
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.
The Company's policy is to individually review, as
circumstances warrant, each of its commercial and commercial
mortgage loans to determine if a loan is impaired. At a minimum,
credit reviews are mandatory for all commercial and commercial
mortgage loans with balances in excess of $250,000 within an 18
month period. The Company has also identified two pools of
small dollar value homogeneous loans which are evaluated
collectively for impairment. These separate pools are for
residential mortgage loans and consumer loans. Individual loans
within these pools are reviewed and removed from the pool if
factors such as significant delinquency in payments of 90 days
or more, bankruptcy, or other negative economic concerns
indicate impairment.
An analysis of the changes in the allowance for loan losses
follows (in thousands, except ratios):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Balance at beginning of period $ 10,891 $ 11,886 $ 10,725 $ 12,113
Charge-offs:
Commercial 5 36 1,133 164
Real estate-mortgage 131 145 555 272
Consumer 154 267 462 830
Total charge-offs 290 448 2,150 1,266
Recoveries:
Commercial 1 27 275 75
Real estate-mortgage 33 32 155 125
Consumer 51 70 156 220
Total recoveries 85 129 586 420
Net charge-offs 205 319 1,564 846
Provision for loan losses 225 150 1,750 450
Balance at end of period $ 10,911 $ 11,717 $ 10,911 $ 11,717
As a percent of average loans
and loans held for sale,
net of unearned income:
Annualized net charge-offs 0.08% 0.12% 0.20% 0.11%
Annualized provision for
loan losses 0.08 0.06 0.22 0.06
Allowance as a percent of loans
and loans held for sale,
net of unearned income
at period end 1.02 1.13 1.02 1.13
Total classified loans $27,323 $28,089 $27,323 $28,089
</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 26 and 36, respectively.)
10. Components of Allowance for Loan Losses
For impaired loans, the measurement of impairment may be
based upon: 1) the present value of expected future cash flows
discounted at the loan's effective interest rate; 2) the
observable market price of the impaired loan; or 3) the fair
value of the collateral of a collateral dependent loan.
The Company had loans totaling $7,129,000 and $1,977,000
being specifically identified as impaired and a corresponding
allocation reserve of $500,000 and $955,000 at September 30,
1999, and September 30, 1998, respectively. The average
outstanding balance for loans being specifically identified as
impaired was $5,424,000 for the first nine months of 1999
compared to $1,439,000 for the first nine 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 nine 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):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998 September 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
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 535 15.9% $ 1,004 13.1% $ 1,004 14.5%
Commercial loans secured
by real estate 2,344 34.2 2,082 32.1 2,142 32.1
Real Estate -
mortgage 824 44.2 1,038 47.0 777 45.4
Consumer 619 5.7 1,563 7.8 1,429 8.0
Allocation to
general risk 6,089 - 4,663 - 5,410 -
Allocation for
impaired loans 500 - 375 - 955 -
Total $10,911 100.0% $10,725 100.0% $11,717 100.0%
</TABLE>
Even though real estate-mortgage loans comprise
approximately 44% of the Company's total loan portfolio, only
$824,000 or 7.6% of the total allowance for loan losses is
allocated against this loan category. The real estate-mortgage
loan allocation is based upon the Company's five year historical
average of actual loan charge-offs experienced in that category.
The disproportionately higher allocations for commercial loans
and commercial loans secured by real estate reflect the
increased credit risk associated with this type of lending and
the Company's historical loss experienced in these categories.
At September 30, 1999, management of the Company believes
the allowance for loan losses was adequate to cover potential
yet undetermined losses within the Company's loan portfolio.
The Company's management is unable to determine in what loan
category future charge-offs and recoveries may occur. (For a
complete discussion concerning the operations of the "Allowance
for Loan Losses" refer to Note #9.)
11. Non-performing Assets
Non-performing assets are comprised of (i) loans which are
on a non-accrual basis, (ii) loans which are contractually past
due 90 days or more as to interest or principal payments some of
which are insured for credit loss, and (iii) other real estate
owned (real estate acquired through foreclosure and in-substance
foreclosures). All loans, except for loans that are insured for
credit loss, are placed on non-accrual status immediately upon
becoming 90 days past due in either principal or interest. In
addition, if circumstances warrant, the accrual of interest may
be discontinued prior to 90 days. In all cases, payments
received on non-accrual loans are credited to principal until
full recovery of principal has been recognized; it is only after
full recovery of principal that any additional payments received
are recognized as interest income. The only exception to this
policy is for residential mortgage loans wherein interest income
is recognized on a cash basis as payments are received.
The following table presents information concerning non-
performing assets (in thousands, except percentages):
<TABLE>
<CAPTION>
September 30 December 31 September 30
1999 1998 1998
<S> <C> <C> <C>
Non-accrual loans $ 9,888 $ 5,206 $ 5,196
Loans past due 90
days or more 453 1,579 905
Other real estate owned 1,290 1,451 1,217
Total non-performing
assets $ 11,631 $ 8,236 $ 7,318
Total non-performing
assets as a percent
of loans and loans
held for sale, net
of unearned income,
and other real
estate owned 1.08% 0.77% 0.71%
</TABLE>
The Company is unaware of any additional loans which are
required to either be charged-off or added to the non-performing
asset totals disclosed above. Other real estate owned is
recorded at the lower of 1)fair value minus estimated costs to
sell, or 2)carrying cost.
The following table sets forth, for the periods indicated,
(i) the gross interest income that would have been recorded if
non-accrual loans had been current in accordance with their
original terms and had been outstanding throughout the period or
since origination if held for part of the period, (ii) the
amount of interest income actually recorded on such loans, and
(iii) the net reduction in interest income attributable to such
loans (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income due in accordance
with original terms $ 174 $ 99 $ 326 $ 296
Interest income recorded (5) (10) (19) (16)
Net reduction in interest income $ 169 $ 89 $ 307 $ 280
</TABLE>
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 September 30, 1999, are as
follows:
Borrowed Funds Hedges
The Company has entered into several interest rate swaps to
hedge short-term borrowings used to leverage the balance sheet.
Specifically, FHLB advances which reprice between 30 days and
one year are being used to fund fixed-rate agency mortgage-
backed securities with durations ranging from two to three
years. Under 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 counter
party if the federal funds rate goes above the 5.00% strike
rate. The following table summarizes the interest rate swap
transactions which impacted the Company's first nine months of
1999 performance:
<TABLE>
<CAPTION>
Fixed Floating Impact
Notional Start Termination Rate Rate Repricing On Interest
Amount Date Date Paid Received Frequency Expense
<S> <C> <C> <C> <C> <C> <C>
$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 4.85 Expired 354,834
120,000,000 5-01-99 4-30-00 5.00 5.25 Monthly 30,401
</TABLE>
The Company believes that its exposure to credit loss in
the event of non-performance by any of the counterparts (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 September 30, 1999, or
September 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 $12.7 million of
goodwill and $13.7 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 (2,343)
Balance at September 30, 1999 $ 26,447
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):
Remaining 1999 $ 791
2000 3,149
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
September 30, 1999,(in thousands, except percentages):
Type Maturing Amount Weighted
Average Rate
Open Repo Plus Overnight $ 108,400 5.58%
Advances and 1999 435,000 5.37
wholesale 2000 193,750 4.95
repurchase 2001 10,126 8.22
agreements 2002 183,500 5.84
2003 28,750 5.44
2004 and after 878 6.71
Total Advances and 852,004 5.42
wholesale repurchase
agreements
Total FHLB Borrowings $960,404 5.43%
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.
Quantitative measures established by regulation to ensure
capital adequacy require the Company to maintain minimum amounts
and ratios(set forth in the table below) of total and Tier 1
capital to risk-weighted assets, and of Tier 1 capital to
average assets. Management believes that as of September 30,
1999, the Company meets all capital adequacy requirements to
which it is subject.
As of September 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 September 30, 1999 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except ratios)
Total Capital (to Risk
Weighted Assets)
Consolidated $ 163,234 13.77% $ 94,808 8.00% $ 118,510 10.00%
U.S. Bank 89,237 13.96 51,129 8.00 63,912 10.00
Three Rivers Bank 74,061 13.66 43,375 8.00 54,218 10.00
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated 152,323 12.85 47,404 4.00 71,106 6.00
U.S. Bank 84,001 13.14 25,565 4.00 38,347 6.00
Three Rivers Bank 68,386 12.61 21,687 4.00 32,531 6.00
Tier 1 Capital (to Average
Assets)
Consolidated 152,323 6.22 97,890 4.00 122,363 5.00
U.S. Bank 84,001 6.27 53,608 4.00 67,010 5.00
Three Rivers Bank 68,386 6.21 44,045 4.00 55,057 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.
XXX
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 nine months of 1999 and 1998
were as follows (in thousands, except ratios):
<TABLE>
<CAPTION>
September 30, 1999 Community Banking Mortgage Banking Trust Investment/Parent Total
<S> <C> <C> <C> <C> <C>
Net Income $ 7,397 $ 200 $ 799 $ 7,272 $ 15,668
Risk adjusted
return on equity 12.9% 3.2% 36.0% 21.2% 15.7%
Total assets $1,014,032 $51,585 $1,716 $1,388,348 $2,455,681
<CAPTION>
September 30, 1998 Community Banking Mortgage Banking Trust Investment/Parent Total
Net Income $ 7,761 $ 539 $ 639 $ 7,793 $ 16,732
Risk adjusted
return on equity 12.1% 7.6% 26.2% 19.8% 14.8%
Total assets $ 937,161 $48,822 $1,617 $1,333,339 $2,320,939
</TABLE>
17. Branch Acquisition
On February 12, 1999, the Company and First Western Bancorp,
Inc. (First Western), completed an agreement for the Company
to purchase three branch offices in western Pennsylvania from
First Western in exchange for cash and one branch from the
Company. The Company's U.S. Bank subsidiary acquired the
Ebensburg and Barnesboro offices of First Western which are
located in Cambria County. The Company's Three Rivers Bank
subsidiary acquired the Kiski Valley office of First Western
located in Westmoreland County in exchange for Three Rivers
Bank's Moon Township office which is located in Allegheny
County. On a net basis, the Company acquired $91 million in
deposits, $10 million in consumer loans and the related fixed
assets, leases, safe deposit box business and other agreements
at the branch offices. The Company paid a core deposit
premium of approximately $10 million for the acquired deposits
and purchased the consumer loans and fixed assets at book value.
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 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. Proposed Tax-Free Spin-Off Plan
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, and 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, to be
known as Three Rivers Bancorp, Inc., would be distributed as a
dividend to the 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.
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
third quarter of 1999 totaled $5.1 million or $0.38 per share on
a diluted basis. The third quarter 1999 results are
consistent with the $5.3 million or $0.38 per diluted share
reported for the third quarter of 1998. The Company's return
on equity(ROE) averaged 16.27% for the third quarter of 1999
which represented an improvement over the 14.55% ROE reported in
the third quarter of 1998. The Company's return on assets
dropped by ten basis points to 0.82% in the third quarter of
1999.
Growth in net interest income, a reduced level of non-interest
expense, and a lower equity base were factors that contributed
positively to the improved ROE in the third quarter of 1999.
Specifically, net interest income increased by $554,000 or 3.4%
while non-interest expense declined by $163,000 or 1.1%. The
Company also used its treasury stock repurchase program
throughout 1998 and the first quarter of 1999 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 597,000 fewer average diluted shares outstanding in
the third quarter of 1999 compared to the third quarter of 1998.
The Company's equity base was also reduced by a drop in other
comprehensive income due to a decline in value of the Company's
available for sale securities portfolio. The Company's 1999
third quarter financial performance was negatively impacted by a
$974,000 or 15.6% decrease in non-interest income and a $75,000
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):
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
Net income $ 5,092 $ 5,300
Diluted earnings per
share 0.38 0.38
Return on average equity 16.27% 14.55%
Return on average assets 0.82 0.92
Average diluted common
shares outstanding 13,404 14,001
.....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 income performance in varying
interest rate environments. The following table compares the
Company's net interest income performance for the third quarter
of 1999 to the third quarter of 1998 (in thousands, except
percentages):
Three Months Ended
September 30
1999 1998 $ Change % Change
Interest income $41,952 $40,252 1,700 4.2
Interest expense 25,199 24,053 ,146 4.8
Net interest income 16,753 16,199 554 3.4
Tax-equivalent
adjustment 775 711 64 9.0
Net tax-equivalent
interest income $17,528 $16,910 618 3.7
Net interest margin 2.99% 3.15% (0.16)% N/M
N/M - Not meaningful
USBANCORP's net interest income on a tax-equivalent basis
increased by $618,000 or 3.7% due to growth in earning assets.
Total average earning assets were $190 million higher in the
third quarter of 1999 due to a $45 million or 4.5% increase in
total loans and a $143 million or 12.7% 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. 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.
The income benefit from this growth in earning assets was
partially offset by a 16 basis point decline in the net interest
margin to 2.99%. The drop in the net interest margin
reflects a 32 basis point decline in the earning asset yield
which more than offset the benefit of a 24 basis point reduction
in the cost of funds. The Company, has, however experienced
a stabilization of the net interest margin on a quarterly basis
in 1999 due to a noticeable slowing of asset prepayment speeds,
continued solid loan growth and the favorable impact of the
First Western Branches Acquisition. Net interest income has
increased in each consecutive quarter during 1999 while the net
interest margin has operated in a narrow range of 2.95% to
3.00%.
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 third quarter of 1999
increased by $1.8 million or 4.3% when compared to the same 1998
period. This increase was due to the previously mentioned
$190 million or 8.9% increase in total average earning assets
which caused interest income to rise by $3.5 million. This
positive factor was partially offset by a 32 basis point drop in
the earning asset yield to 7.27% that caused a $1.9 million
reduction in interest income. Within the earning asset base,
the yield on the total loan portfolio declined by 50 basis
points to 8.08% due to the downward repricing of floating rate
assets and the reinvestment of cash received on higher yielding
prepaying assets into loans with lower interest rates. The
yield on total investment securities decreased by 12 basis
points to 6.55% 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 particularly in the
fourth quarter of 1998 and first quarter of 1999. This
refinancing activity slowed significantly beginning in the
second quarter of 1999 when the treasury yield curve began to
steepen again.
The Company's total interest expense for the third quarter of
1999 increased by $1.1 million or 4.8% when compared to the same
1998 period. This higher interest expense was due primarily
to a $197 million increase in average interest bearing
liabilities. The growth in interest bearing liabilities
included a $43 million increase in interest bearing deposits due
largely to the deposits acquired with the First Western Branches
Acquisition net of certificate of deposit run-off and the sale
of one small branch office. The remainder of the interest
bearing liability increase occurred in FHLB advances which were
used to help fund the previously mentioned earning asset growth.
Short-term borrowings and FHLB advances had an average cost of
5.38% in the third quarter of 1999 which was 32 basis points
lower than their cost in the prior year third quarter but 159
basis points greater than the average cost of deposits which
amounted to 3.79%. The Company was able to reduce its cost
of deposits by 27 basis points due primarily to lower costs for
certificates of deposit. Overall, the Company's total cost
of funds dropped by 24 basis points to 4.64% as the pricing
declines for both deposits and borrowings were partially offset
by a greater use of borrowings to fund the earning asset base.
It is recognized that interest rate risk does exist from this
use of borrowed funds to leverage the balance sheet. To
neutralize a portion of this risk, the Company has executed a
total of $120 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 third quarter of
1999, the level of short-term borrowed funds and FHLB advances
to total assets averaged 42.3%. 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 next
several quarters. .
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.
<TABLE>
<CAPTION>
Three Months Ended September 30
(In thousands, except percentages)
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 $1,061,789 $ 21,940 8.08% $1,016,548 $22,179 8.58%
Deposits with banks 4,779 31 2.56 2,856 22 3.03
Investment securities:
Available for sale 757,487 12,268 6.48 631,619 10,180 6.45
Held to maturity 510,927 8,488 6.65 494,061 8,582 6.95
Total investment
securities 1,268,414 20,756 6.55 1,125,680 18,762 6.67
Total interest earning
assets/interest income 2,334,982 42,727 7.27 2,145,084 40,963 7.59
Non-interest earning assets:
Cash and due from banks 38,259 36,064
Premises and equipment 19,199 18,116
Other assets 92,204 100,218
Allowance for loan losses (10,947) (11,898)
TOTAL ASSETS $2,473,697 $2,287,584
<CAPTION>
THREE MONTHS ENDED JUNE 30
1999 1998
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 93,710 $ 233 0.99% $ 89,774 $ 224 0.99%
Savings 173,760 726 1.66 172,594 671 1.54
Money markets 185,809 1,634 3.49 171,993 1,566 3.61
Other time 609,678 7,560 4.92 585,710 7,966 5.40
Total interest bearing
deposits 1,062,957 10,153 3.79 1,020,071 10,427 4.06
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other short-term
borrowings 177,623 2,280 5.01 188,632 2,586 5.36
Advances from Federal
Home Loan Bank 867,555 11,921 5.45 703,303 10,253 5.79
Guaranteed junior subordinated
deferrable interest debentures 34,500 740 8.58 34,500 740 8.58
Long-term debt 8,220 105 5.07 7,456 47 2.50
Total interest bearing
liabilities/interest expense 2,150,855 25,199 4.64 1,953,962 24,053 4.88
Non-interest bearing liabilities:
Demand deposits 173,549 163,321
Other liabilities 25,135 25,788
Stockholders' equity 124,158 144,513
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,473,697 $2,287,584
Interest rate spread 2.63 2.71
Net interest income/
net interest margin 17,528 2.99% 16,910 3.15%
Tax-equivalent adjustment (775) (711)
Net Interest Income $16,753 $16,199
</TABLE>
...PROVISION FOR LOAN LOSSES.....The Company's provision for
loan losses for the third quarter of 1999 totaled $225,000 or
0.08% of average total loans which represented a $75,000
increase from the provision level experienced in the 1998 third
quarter. The Company's net loan charge-offs amounted to
$205,000 or 0.08% of average loans in the third quarter of 1999.
The higher provision in 1999 was due to 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.)
.....NON-INTEREST INCOME.....Non-interest income for the third
quarter of 1999 totaled $5.3 million which represented a
$974,000 or 15.6% decrease when compared to the same 1998
quarter. This decrease was primarily due to the following
items:
a $740,000 decrease in gains realized on investment security
sales as the steeper yield curve has limited investment
portfolio repositioning opportunities in 1999.
a $442,000 decrease in gains realized on loans held for sale as
a sharp drop in mortgage refinancing activity has reduced both
the volume and spread on loan sales into the secondary market in
the third quarter of 1999. a $113,000 or 10.2% increase in
trust fees to $1.2 million in the third quarter of 1999. This
trust fee growth reflects increased assets under management due
to the profitable expansion of the Company's trust operations.
.....NON-INTEREST EXPENSE.....Non-interest expense for the third
quarter of 1999 totaled $14.9 million which represented a
$163,000 or 1.1% decrease when compared to the same 1998
quarter. This decrease was primarily due to the following
items:
slower mortgage prepayment speeds and the steeper yield curve
caused the value of the Company's mortgage servicing rights to
increase in the third quarter of 1999. As a result of this
improved valuation, the Company reversed $625,000 of the
impairment reserve on mortgage servicing rights that had been
established in 1998. This partial reversal of the impairment
reserve favorably reduced non-interest expense in the third
quarter of 1999.
a $312,000 or 4.0% increase in salaries and employee benefits
due to merit pay increases and increased medical insurance
premiums.
a $206,000 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.
.....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. Mission
critical systems which had maintenance applied since their
original Y2K test were retested. The organization is
practicing "clean management" of all mission critical and
critical systems.
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
their 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 and additional
reviews in the third quarter of 1999, 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.
Customer confidence is a key issue. A joint advertising
campaign with five local banks and the Federal Reserve has been
undertaken to insure customers "the safest place for your money
is in FDIC insured financial institutions." A series of
community meetings was organized and co-sponsored with the five
banks, a State Senator, local cable TV, and local utilities to
communicate with our customers. A video of the meeting was
shown on the Public Access Channel multiple times.
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 and bank operation
resources to the Y2K issue. To date, the Company has
expensed $1,600,000 or 94% 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.
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 100% complete
Technology
All mission critical and
critical system have been
implemented.
- --------------------------------------------------------------------
Operating 100% complete 100% complete 100% complete 100% complete
eqiupment with embedded chips
or software.
- --------------------------------------------------------------------
Third Party 100% complete 100% for system 100% complete. 99% complete
interfaces Minor accounting
and legal service
providers outstanding.
</TABLE>
Based on the Company's 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. The widespread failure of electrical,
gas, telecommunications, water, sewerage services or loss of
access to transportation by the Company, its employees,
suppliers or customers; loss of government supplied services;
loss of information technology equipment or software suppliers;
loss of confidence in the banking system by our customers; loss
of key liquidity sources; loss of access to the financial
markets; recession or depression and cumulative smaller issues
would have a significant negative impact on the Company.
The Company could face significant claims from customers due to
failure to perform, loss of revenues, reduced return values,
inability to meet our contractual obligations in a timely basis,
increased expense, and personal hardship. The Company could
also experience loan loss increases and revenue stream
reductions due to the inability of our customers or financial
agents to repay, on a timely basis or at all, obligations owed
the Company. 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.
.....INCOME TAX EXPENSE.....The Company's provision for income
taxes for the third quarter of 1999 was $1.8 million reflecting
an effective tax rate of 25.8%. The Company's 1998 third
quarter income tax provision was $1.9 million or an effective
tax rate of 26.4%. 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 third 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
$6.1 million have been provided as of September 30, 1999, on the
differences between taxable income for financial and tax
reporting purposes.
NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED
SEPTEMBER 30, 1998
.....PERFORMANCE OVERVIEW.....The Company's net income for the
first nine months of 1999 totaled $15.7 million or $1.16 per
share on a diluted basis. The Company's net income for first
nine months of 1998 totaled $16.7 million or $1.16 per share on
a diluted basis. The 1999 results reflect no change in
diluted earnings per share and a $1.1 million or 6.4% decrease
in net income when compared to the same nine month period in
1998. The Company's return on equity averaged 15.66% for the
first nine months of 1999 which compares favorably to the 14.81%
return on equity reported in the first nine months of 1998.
The Company's return on assets dropped by 13 basis points to
0.86% in the first nine months of 1999.
Growth in total revenue, which includes both net interest income
and non-interest income, was a key factor that contributed
positively to the Company's financial performance in 1999.
Specifically, total non-interest income increased by $1.5
million or 8.1% while net interest income increased by $149,000
or 0.3% from the same prior year period. This $1.6 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 $2.0 million or 4.6% higher in
the first nine months of 1999 while the provision for loan
losses increased by $1.3 million. Even though net income
decreased for the first nine 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 933,000
fewer average diluted shares outstanding in the first nine
months of 1999. The lower equity base also favorably
contributed to the Company's improved ROE in 1999. The
following table summarizes some of the Company's key performance
indicators (in thousands, except per share and ratios):
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
<S> <C> <C>
Net income $15,668 $16,732
Diluted earnings per share 1.16 1.16
Return on average equity 15.66% 14.81%
Return on average assets 0.86 0.99
Average diluted common
shares outstanding 13,477 14,410
</TABLE>
.....NET INTEREST INCOME AND MARGIN.....The following table
compares the Company's net interest income performance for the
first nine months of 1999 to the first nine months of 1998 (in
thousands, except percentages):
Nine Months Ended
September 30
1999 1998 $ Change % Change
Interest income $123,386 $119,075 4,311 3.6
Interest expense 73,814 69,652 4,162 6.0
Net interest income 49,572 49,423 149 0.3
Tax-equivalent
adjustment 2,347 2,135 212 9.90
Net tax-equivalent
interest income $ 51,919 $ 51,558 361 0.7
Net interest margin 2.98% 3.23% (0.25)% N/M
N/M - Not meaningful.
USBANCORP's net interest income on a tax-equivalent basis
increased by $361,000 or 0.7% due to growth in earning assets.
Total average earning assets were $189 million higher in the
first nine months of 1999 as total loans grew by $55 million or
5.5% while investment securities increased by $133 million or
12.1%. The income benefit from this growth in earning assets
more than offset the negative impact of a 25 basis point decline
in the net interest margin to 2.98%. The drop in the net
interest margin reflects a 37 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. The decline in the
earning asset yield more than offset a 20 basis point drop in
the cost of funds due to lower deposit and borrowing costs.
...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 nine months of 1999
increased by $4.5 million or 3.7% when compared to the same 1998
period. This increase was due primarily to a $189 million or
8.9% increase in total average earning assets which caused
interest income to rise by $10.2 million. This positive
factor was partially offset by a 37 basis point drop in the
earning asset yield to 7.26% which caused a $5.7 million
reduction in interest income. Within the earning asset base,
the yield on total investment securities decreased by 19 basis
points to 6.50% while the yield on the total loan portfolio
declined by 52 basis points to 8.11%. 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 86.4% for the first nine-months 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 nine months
of 1999 increased by $4.2 million or 6.0% when compared to the
same 1998 period. This higher interest expense was due
primarily to a $202 million increase in average interest bearing
liabilities which caused interest expense to rise by $7.0
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
nine months of 1999, the Company's total level of short-term
borrowed funds and FHLB advances averaged $1.0 billion or 41.1%
of total assets compared to an average of $880 million or 39.1%
of total assets for the first nine months of 1998. The
Company's cost of both borrowed funds and deposits declined in
1999 which contributed to a $3.0 million reduction in interest
expense. Overall, the Company's total cost of funds dropped
by 20 basis points to average 4.65% in the first nine months of
1999
The table that follows provides an analysis of net interest
income on a tax-equivalent basis for the nine month periods
ended September 30, 1999, and September 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.
<TABLE>
<CAPTION>
Nine Months Ended September 30
(In thousands, except percentages)
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 $1,062,539 $ 65,376 8.11% $1,007,166 $ 65,764 8.63%
Deposits with banks 4,152 89 2.83 4,009 101 3.33
Investment securities:
Available for sale 727,122 34,755 6.37 597,363 28,943 6.46
Held to maturity 508,222 25,513 6.69 504,905 26,402 6.97
Total investment
securities 1,235,344 60,268 6.50 1,102,268 55,345 6.69
Total interest earning
assets/interest income 2,302,035 125,733 7.26 2,113,443 121,210 7.63
Non-interest earning assets:
Cash and due from banks 37,132 34,182
Premises and equipment 18,804 17,931
Other assets 99,610 99,245
Allowance for loan
losses (11,033) (11,956)
TOTAL ASSETS $2,446,548 $2,252,845
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
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 $ 94,122 $ 698 0.99% $ 90,094 $ 669 0.99%
Savings 173,690 2,101 1.62 173,434 1,965 1.51
Money markets 183,194 4,630 3.38 166,914 4,648 3.72
Other time 617,771 23,263 5.03 581,473 23,595 5.43
Total interest bearing
deposits 1,068,777 30,692 3.84 1,011,915 30,877 4.08
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other short-term borrowings 210,104 7,811 4.97 185,414 7,383 5.32
Advances from Federal
Home Loan Bank 796,408 32,777 5.50 694,870 30,048 5.79
Guaranteed junior subordinated
deferrable interest debentures 34,500 2,220 8.58 19,294 1,241 8.58
Long-term debt 8,638 314 4.85 5,091 103 2.70
Total interest bearing
liabilities/interest expense 2,118,427 73,814 4.65 1,916,584 69,652 4.85
Non-interest bearing liabilities:
Demand deposits 169,078 158,185
Other liabilities 25,271 27,036
Stockholders' equity 133,772 151,040
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,446,548 $2,252,845
Interest rate spread 2.61 2.78
Net interest income/
net interest margin 51,919 2.98% 51,558 3.23%
Tax-equivalent adjustment (2,347) (2,135)
Net Interest Income $49,572 $49,423
</TABLE>
.....PROVISION FOR LOAN LOSSES.....The Company's provision for
loan losses for the first nine months of 1999 totaled $1.8
million or 0.22% of average total loans which represented a $1.3
million increase from the provision level experienced in the
first nine months of 1998. The Company's net charge-offs
amounted to $1.6 million or 0.20% of average loans in first nine
months of 1999 compared to net charge-offs of $846,000 or 0.11%
of average loans in the first nine months of 1998. The higher
provision in 1999 was due to the increased net charge-offs and
continued growth of commercial and commercial real-estate loans.
The Company applies a consistent methodology and procedural
discipline to evaluate the adequacy of the allowance for loan
losses at each subsidiary bank on a quarterly basis. At
September 30, 1999, the allowance for loan losses totaled $10.9
million or 1.02% of total loans and 94% of total non-performing
assets.
.....NON-INTEREST INCOME.....Non-interest income for the first
nine months of 1999 totaled $19.4 million which represented a
$1.5 million or 8.1% increase when compared to the same 1998
period. This increase was primarily due to the following
items:
a $364,000 or 10.9% increase in trust fees to $3.7 million in
the first nine months of 1999. This trust fee growth reflects
increased assets under management due to the profitable
expansion of the Company's trust operations.
a $1.6 million increase in gains realized on loans held for sale
due 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 $1.3 million decrease in gains realized on investment security
sales as the steeper yield curve has limited investment
portfolio repositioning opportunities in 1999.
a $361,000 or 7.0% increase in other income due in part to
additional income resulting from ATM surcharging, commercial
leasing fees, and revenue generated from annuity and mutual fund
sales in the Company's financial service subsidiaries.
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 income as a percentage of total revenue increased
from 26.6% in the first nine months of 1998 to 28.1% in the
first nine months of 1999.
.....NON-INTEREST EXPENSE.....Non-interest expense for the first
nine months of 1999 totaled $46.1 million which represented a
$2.0 million or 4.6% increase when compared to the same 1998
period. This increase was primarily due to the following
items:
a $1.4 million or 6.1% increase in salaries and employee
benefits due to merit pay increases, higher 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 $412,000 increase in equipment expense due to higher
technology related expenses such as system cost associated with
wide area networks and optical disk imaging of customer
statements.
a $621,000 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 nine months of 1999 diluted earnings
per share by $0.15.
the previously discussed $625,000 partial reversal of the
impairment reserve on mortgage servicing rights favorably
reduced non-interest expense in 1999.
.....INCOME TAX EXPENSE.....The Company's provision for income
taxes for the first nine months of 1999 was $5.5 million
reflecting an effective tax rate of 25.9%. The Company's
comparable period 1998 income tax provision was $6.1 million or
an effective tax rate of 26.9%. 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
64.6% in the first nine months of 1999 compared to 63.4% for the
same period of 1998. Factors contributing to the higher
efficiency ratio in 1999 included the compression experienced in
the net interest margin 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 $2.2 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 nine months of
1999, stated on a cash basis excluding the intangible
amortization, was 61.3% or 3.3% lower than the reported
efficiency ratio of 64.6%. Net overhead expense as a
percentage of tax equivalent net interest income was relatively
consistent between periods at 51.4%.
.....BALANCE SHEET.....The Company's total consolidated assets
were $2.456 billion at September 30, 1999, compared with $2.377
billion at December 31, 1998, which represents an increase of
$79 million or 3.3% due to the funds provided from the First
Western Branches Acquisition. During the first nine months
of 1999, total loans and loans held for sale increased by
approximately $5 million due to the loans acquired from First
Western and continued growth in commercial and commercial
mortgage loans. This loan portfolio growth occurred despite
the sale of the Company's $14 million credit card portfolio and
a $30 million reduction in loans held for sale due to a slow
down in mortgage refinance activity. Total investment
securities increased by $54 million as the acquired deposits
were used to purchase securities. Intangible assets
increased by $8 million due to the core deposit intangible
resulting from the First Western Branches Acquisition.
Total deposits increased by $38 million or 3.2% 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 $66 million in order to fund the earning
asset growth. Total equity declined by $17 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 and increased holdings of treasury stock.
.....LOAN QUALITY.....At all dates presented, the Company had no
troubleddebt restructurings which involve forgiving a portion of
interest or principal on any loans or making loans at a rate
materially less than that of market rates. The following
table sets forth information concerning USBANCORP's loan
delinquency and other non-performing assets (in thousands,
except percentages):
<TABLE>
<CAPTION>
September 30 December 31 September 30
1999 1998 1998
<S> <C> <C> <C>
Total loan delinquency (past due
30 to 89 days) $ 9,199 $15,427 $ 12,858
Total non-accrual loans 9,888 5,206 5,196
Total non-performing assets(1) 11,631 8,236 7,318
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 0.86% 1.45% 1.24%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned
income 0.92 0.49 0.50
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 1.08 0.77 0.71
</TABLE>
(1) 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 September 30, 1999, total loan
delinquency declined by $6.2 million causing the delinquency
ratio to drop to 0.86%. Total non-performing assets
increased by $3.4 since year-end 1998 causing the non-performing
assets to total loans ratio to increase to 1.08%. The
increase in non-performing assets and non-accrual loans is due
to a $6.5 million commercial mortgage loan on a construction
project for which a $500,000 specific reserve allocation has
been established. The allocation was based upon the
Company's best estimate of the property's value given
indications of interest from potential buyers.
.....ALLOWANCE FOR LOAN LOSSES.....The following table sets
forth changes in the allowance for loan losses and certain
ratios for the periods ended (in thousands, except percentages):
<TABLE>
<CAPTION>
September 30 December 31 September 30
1999 1998 1998
<S> <C> <C> <C>
Allowance for loan losses $ 10,911 $ 10,725 $ 11,717
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% 1.13%
total delinquent loans
(past due 30 to 89 days) 118.61 69.52 91.13
total non-accrual loans 110.35 206.01 225.50
total non-performing assets 93.81 130.22 160.11
</TABLE>
Since December 31, 1998, the balance in the allowance for loan
losses has increased by $186,000 due to the loan loss provision
slightly exceeding net charge-offs. The Company's allowance
for loan losses at September 30, 1999, was 94% of non-performing
assets and 110% 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>
September 30 December 31 September 30
1999 1998 1998
<S> <C> <C> <C>
Six month cumulative GAP
RSA...................... $ 603,143 $ 715,996 $ 691,165
RSL...................... (938,541) (856,470) (804,125)
Off-balance sheet
hedges............. 120,000 50,000 75,000
GAP..................... $ (215,398) $ (90,474) $ (37,960)
GAP ratio.............. 0.74X 0.89X 0.95X
GAP as a % of total
assets............ (8.77)% (3.81)% (1.64)%
GAP as a % of total
capital......... (172.60) (63.86) (25.95)
One year cumulative GAP
RSA...................... $ 864,890 $ 1,063,674 $1,052,030
RSL............. ....... (1,084,103) (1,032,533) (982,394)
Off-balance sheet
hedges.............. - - -
GAP...................... $ (219,213) $ 31,141 $ 69,636
GAP ratio.............. 0.80X 1.03X 1.07X
GAP as a % of total
assets............... (8.93)% 1.31% 3.00%
GAP as a % of total
capital............... (175.66) 21.98 47.60
</TABLE>
When September 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 FHLB
borrowings combined with the maturity of several off-balance
sheet hedges 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 September 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 September 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.
<TABLE>
<CAPTION>
Variability of Change In
Interest Rate Net Interest Variability of Market Value of
Scenario Income Net Income Portfolio Equity
<S> <C> <C> <C>
Base 0% 0% 0%
Flat 1.2 2.6 5.9
200bp increase (6.9) (15.0) (47.7)
200bp decrease 2.4 (2.9) 40.3
</TABLE>
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 (6.9%) and (15.0%) respectively, under
an upward rate shock forecast reflecting a 200 basis point
increase in interest rates. The variability of market value
of portfolio equity was (47.7%) under this interest rate
scenario. The off-balance sheet borrowed funds hedge
transactions also helped reduce the variability of forecasted
net interest income, net income, and market value of portfolio
equity in a rising interest rate environment. Finally, this
sensitivity analysis is limited by the fact that it does not
include any balance sheet repositioning actions the Company may
take should severe movements in interest rates occur such as
lengthening or shortening the duration of the securities
portfolio or entering into additional off-balance sheet hedging
transactions. These actions would likely reduce the
variability of each of the factors identified in the above table
in the more extreme interest rate shock forecasts.
.....LIQUIDITY......Liquidity can be analyzed by utilizing the
Consolidated Statement of Cash Flows. Cash equivalents
increased by $3 million from December 31, 1998, to September 30,
1999, due primarily to $85 million of net cash provided by
financing activities and $46 million of net cash provided by
operating activities. This more than offset $128 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 $90
million. Cash advanced for new loan fundings totaled $295
million and was approximately $17 million greater than the cash
received from loan principal payments. Within financing
activities, net deposits increased by $38 million due primarily
to the First Western Branches Acquisition. Advances from the
Federal Home Loan Bank provided $100 million of cash.
.....CAPITAL RESOURCES.....As presented in Note #15, each of the
Company's regulatory capital ratios decreased between December
31, 1998, and September 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 243,000 shares or $4.2 million of its
common stock during 1999. Through September 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
$0.44 for the first nine months of 1999 which was a 10.0%
increase over the $0.40 per share dividend for the same 1998
period. The current dividend yield on the Company's common
stock approximates 4.4%. 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.
.....PROPOSED TAX-FREE SPIN-OFF PLAN....As discussed in Note
#20, The Company plans to spin-off its Three Rivers Bank and
Trust subsidiary by the second quarter of 2000 pending
regulatory approvals. Upon consummation of the proposed
spin-off, the resulting companies will have the following
corporate profiles based upon financial data as of September
30, 1999.
Pro Forma Financial Information
As of September 30, 1999
(Unaudited)
[/TABLE]
[CAPTION]
USBANCORP Three Rivers Bancorp, Inc
[S] [C] [C]
Total Assets $1.4 billion $1.0 billion
Total Loans $591 million $ 481 million
Total Deposits $666 Million $ 549 million
Corporate Headquarters Johnstown Monroeville
Deposit Market Share in
Primary County 25% 2%
YTD Net Income $8,187,000 $7,481,000
Contribution to YTD EPS $0.61 $0.55
Return on Equity 14.3% 17.5%
[/TABLE]
.....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
SERVICE AREA MAP
Presented on this page was a service area map depicting the six
countiesserviced by the Company.
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation, as amended
(Incorporated by reference to Exhibit III to
Registration Statement No. 2-79639 on Form S-14,
Exhibits 4.2 and 4.3 to Registration Statement
No. 33-685 on Form S-2, Exhibit 4.1 to
Registration Statement No. 33-56604 on Form S-3,
and Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the year ended December 31,
1994).
3.2 Bylaws, as amended and restated (Incorporated by
reference to Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1994).
15.1 Letter re: unaudited interim financial
information
27.1 Financial Data Schedule
(b) Reports on Form 8-K: There was an 8-K filed on July
14, 1999 announcing the Companies plans to "Spin-off"
its Three Rivers Bank and Trust Subsidiary.
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant duly caused this amended report to be
signed on its behalf by the undersigned thereunto duly
authorized.
USBANCORP, Inc.
Registrant
Date: March 13, 2000 /s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President and
Chief Executive Officer
Date: March 13, 2000 /s/Jeffrey A. Stopko
Jeffrey A. Stopko
Senior Vice President and
Chief Financial Officer
STATEMENT OF MANAGEMENT RESPONSIBILITY
October 15, 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
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
USBANCORP, Inc.:
We have reviewed the accompanying consolidated balance sheets of
USBANCORP, Inc. (a Pennsylvania corporation) and subsidiaries
as of September 30, 1999 and 1998, and the related consolidated
statements of income for the three-month and nine-month periods
then ended and the related consolidated statements of changes in
stockholders' equity and cash flows for the nine-month periods
then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet of
USBANCORP, Inc. as of December 31, 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
Pittsburgh, Pennsylvania,
October 15, 1999
October 15, 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 September 30,
1999, which includes our report dated October 15, 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
42
03/16/00/SL1 52575v1/00000.000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 41,740
<INT-BEARING-DEPOSITS> 266
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,212,987
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,071,647
<ALLOWANCE> 10,911
<TOTAL-ASSETS> 2,448,693
<DEPOSITS> 1,214,392
<SHORT-TERM> 197,851
<LIABILITIES-OTHER> 878,089
<LONG-TERM> 40,552
0
0
<COMMON> 43,461
<OTHER-SE> 74,348
<TOTAL-LIABILITIES-AND-EQUITY> 2,448,693
<INTEREST-LOAN> 64,852
<INTEREST-INVEST> 58,445
<INTEREST-OTHER> 89
<INTEREST-TOTAL> 123,386
<INTEREST-DEPOSIT> 30,692
<INTEREST-EXPENSE> 73,814
<INTEREST-INCOME-NET> 49,572
<LOAN-LOSSES> 1,750
<SECURITIES-GAINS> 431
<EXPENSE-OTHER> 46,082
<INCOME-PRETAX> 21,141
<INCOME-PRE-EXTRAORDINARY> 21,141
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,668
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 7.27
<LOANS-NON> 9,888
<LOANS-PAST> 453
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,725
<CHARGE-OFFS> 2,150
<RECOVERIES> 586
<ALLOWANCE-CLOSE> 10,911
<ALLOWANCE-DOMESTIC> 10,911
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,458
</TABLE>
