-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Aav3YohgPNRKHb2phFVOJ2pCOQYDmbxUItrxfRRlqns0eeixtaaDzKoBrX8oz108 knKOUXasHIyhM2+4VdUQ/w== 0000707605-97-000003.txt : 19970325 0000707605-97-000003.hdr.sgml : 19970325 ACCESSION NUMBER: 0000707605-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: USBANCORP INC /PA/ CENTRAL INDEX KEY: 0000707605 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251424278 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11204 FILM NUMBER: 97561073 BUSINESS ADDRESS: STREET 1: MAIN & FRANKLIN STS STREET 2: PO BOX 430 CITY: JOHNSTOWN STATE: PA ZIP: 15907 BUSINESS PHONE: 8145335300 10-K 1 USBANCORP, INC. USBANCORP, INC. 1996 ANNUAL REPORT AND FORM 10-K CONTENTS Financial Highlights at a Glance 2 Financial Highlights 3 Shareholder Information at a Glance 4 Message to the Shareholder 5 Service Area Map 14 Consolidated Balance Sheet 17 Consolidated Statement of Income 18 Consolidated Statement of Changes in Stockholders' Equity 19 Consolidated Statement of Cash Flows 20 Notes to Consolidated Financial Statements 23 Statement of Management Responsibility 45 Report of Independent Public Accountant 46 Market Price and Dividend Data 48 Selected Five-Year Consolidated Financial Data 49 Selected Quarterly Consolidated Financial Data 50 Management's Discussion and Analysis 51 Form 10-K 72 USBANCORP Directors and General Officers 92 Subsidiaries' Directors, General Officers, and Advisory Boards 93 Office Locations 96 Shareholder Information Inside Back Cover Graph Data Points Annex A 1 FINANCIAL HIGHLIGHTS AT A GLANCE See Annex A 2 FINANCIAL HIGHLIGHTS
% Increase 1996 1995 (Decrease) FOR THE YEAR (In thousands, except per share and ratio data) Net interest income $ 61,138 $ 56,147 9 Net income 20,019 15,803 27 Performance ratios: Return on average assets 1.03% 0.87% 18 Return on average equity 13.36 11.03 21 Net interest margin 3.52 3.45 2 Net charge-offs as a percentage of average loans, net of unearned income 0.20 0.08 150 Loan loss provision as a percentage of average loans, net of unearned income 0.01 0.03 (67) Efficiency ratio 63.39 66.97 (5) PER COMMON SHARE Net income: Primary $3.83 $2.88 33 Fully diluted 3.81 2.87 33 Cash dividends declared 1.37 1.06 29 Dividend payout ratio 35.28% 36.43% (3) Price earnings ratio 10.96x 11.50x (5) AT PERIOD END Total assets $2,087,112 $1,885,372 11 Investment securities: Available for sale 455,890 427,112 7 Held to maturity 546,318 463,951 18 Loans and loans held for sale, net of unearned income 939,726 834,634 13 Allowance for loan losses 13,329 14,914 (11) Goodwill and core deposit intangibles 21,478 23,838 (10) Deposits 1,138,738 1,177,858 (3) Stockholders' equity 151,917 150,492 1 Trust assets (discretionary and non-discretionary) 1,157,072 1,043,001 11 Non-performing assets 8,671 9,426 (8) Non-performing assets as a percentage of loans and loans held for sale, net of unearned income, and other real estate owned 0.92% 1.13% (19) Capital ratios: Common equity 7.28 7.98 (9) Total risk-based 14.16 14.88 (5) Asset leverage 6.51 6.65 (2) Per common share: Book value $29.90 $28.34 6 Market value 41.75 33.00 27 Market price to book value ratio 139.63% 116.44% 20 Assets per employee $2,588 $2,417 7 STATISTICAL DATA AT YEAR END (Amounts not rounded) Full-time equivalent employees 759 742 2 Branch locations 44 45 (2) Common shareholders 6,246 6,212 1 Common shares outstanding 5,081,004 5,310,489 (4) NASDAQ Symbol: UBAN
3 Shareholder Information - at a glance See Annex A 4 MESSAGE TO THE SHAREHOLDER Dear Shareholder: The record success your Company has achieved in 1996 is particularly satisfying in light of the demanding goals I originally communicated to you in our 1995 Annual Report. These goals provided a clear focus for striking a productive "partnership for success" among shareholders, customers, and employees while creating an improving value for each. DEMONSTRATING A COMMITMENT TO SHAREHOLDER VALUE I am pleased to report to you that key 1996 strategies to improve earnings performance and to reposition your company to effectively compete in an ever changing financial services environment have resulted in improved value to you our shareholder. The implementation of a flexible marketing and sales strategy, combined with a balanced approach between new business generation and expense control, resulted in a 1996 ROE of 13.4%. Our increasing earnings momentum throughout the year created a fourth quarter 1996 ROE of 14.4% which strengthens your Company's position for further ROE enhancement in 1997 and beyond. The ability to improve our earnings performance contributed to a growing Earnings Per Share ("EPS") for the full year 1996. Our stated goal was to achieve an annualized EPS growth rate in the 15% to 20% range. For 1996, your Company far exceeded this goal by reporting a record fully diluted EPS of $3.81 - or a growth of 32.8% compared to 1995. Your Company's ability to execute strategies to generate more revenue from our core banking business was the key driver of the 1996 EPS growth and also contributed to an improved efficiency ratio. By the fourth quarter of 1996, the efficiency ratio had improved to 61.4% compared to an average of 67% in 1995. Your Company is well positioned to further improve this ratio to below 60% by the end of the second quarter of 1997 which is within the time frame I had pledged in my message to you last year. The 32.8% growth in EPS achieved in 1996 is even more impressive when you consider the fact that our financial results included a special assessment to recapitalize the Savings Association Insurance Fund ("SAIF"). This Congressionally mandated special assessment amounted to $1.3 million on an after-tax basis and reduced our 1996 EPS by $0.26. One positive outcome from this SAIF legislation is that we will now be able to consolidate our Western Region Banks - Three Rivers Bank and Community Savings Bank - into one bank in 1997 without any negative tax consequences. Additionally, the one time special assessment will be recovered over a three to four year period in the form of lower insurance premiums on deposits insured by the SAIF. The investment community demonstrated an increasing confidence in your Company's ability to improve earnings performance through the execution of strategies outlined in my message to you last year. Published analyst research reports, which accurately detailed our significant success in advancing towards our pre-stated goals, contributed to increased investor confidence and an improved 1996 stock price. The price at year end 1996 reached $41.75 per share - a 26.5% improvement compared to the end of year 1995. The stock price appreciation created an additional $46 million in wealth for you our shareholders. Common dividends totalled approximately $7.1 million for 1996 and treasury stock repurchases totalled $8.5 million, resulting in 78% ($15.6 million) of 1996 corporate net income being distributed back to our shareholders. These 1996 actions confirm your Company's commitment to providing a progressive total shareholder return. 5 This increasing value created for shareholders was achieved through the leadership of the management team I introduced to you in 1995. These leaders embraced our mission and passionately executed key strategies and tactics which resulted in our record 1996 successes. Through their vision and demonstrated work ethic they motivated employees to join them in "rolling up their sleeves" and to work as a team to achieve our goals. The leaders are Orlando B. Hanselman, President and Chief Executive Officer for U.S. Bank; W. Harrison Vail, President and Chief Executive Officer for Three Rivers and Community Savings Bank; Ronald W. Virag, President and Chief Executive Officer of USBANCORP Trust Company; and Kevin O'Neil, President and Chief Executive Officer for Standard Mortgage Corporation of Georgia. This management team facilitated the shift to a flatter, more flexible customer-driven organization throughout 1996, one which is capable of supporting "real time" decision-making autonomy at all levels of the organization. Their hands-on, action oriented approach to our goals is evidenced by the results of 1996, and by the challenging strategic vision we share for future success. IMPROVING CUSTOMER VALUE WITH CONVENIENCE Listening and responding to customer feedback has directed your leadership team in the implementation of value-added customer services. Customers have communicated their wishes through processes first introduced in late 1995, such as the Dazzled Or Disappointed process and the ongoing President's Branch Visits. Your leadership team has acted on this valuable feedback by improving our responsiveness to customer needs, exploring profitable ways to enhance our products, and raising the level of service beyond that offered at competing banks. These actions strengthened our relationships with existing customers and encouraged more new customers to select us as their "Bank of Choice." Customer feedback is the driving force behind the implementation of the successful "high-touch" customer service positioning strategy first introduced during the last half of 1995. This large scale change to the processes by which we measure the quality of our service has produced impressive results in 1996. Driven by the knowledge that customers respond positively to flexibility and speed from our delivery system, your leadership team intensified efforts to close the gap between our current service and total customer satisfaction. The following high-touch, medium-tech strategies were employed in 1996 to close this gap. Expanding The Place And Time Of Delivery Loan revenues improved significantly in 1996 due to the implementation of strategic initiatives designed to demonstrate our commitment to customer convenience. The introduction of the Sales Blitz and Neighborhood Canvassing programs created face-to-face customer sales contacts between our sales people and potential customers. The Canvassing program was staffed almost entirely with a cross-section of employee volunteers. Both programs emphasized to our service communities that we were willing to outwork our competition by literally bringing bank services directly to the customer at a location and time convenient to them. Customers responded to this value-added approach to customer service. U.S. Bank branch leaders made more than 3,200 Sales Blitz calls outside the branch office in 1996. New commercial and consumer loan business was secured within 90 days on 35% of these calls. 6 Branch-generated commercial loans for 1996 improved 220% over the previous year. Branch consumer lending increases of 148% for closed end home equity loans, 102% for direct auto loans, 60% for mortgage loans, and 26% for other installment loans emphasize the importance of flexible service for the creation of new business. The Western Region banks' introduction of the Sales Blitz and Neighborhood Canvassing initiatives in the last half of 1996 offered the added strategic advantage of increasing community awareness for our two suburban Pittsburgh banks competing within a metropolitan area where the alternative media advertising costs are extremely high. I am pleased to report that our 1996 consumer and commercial loan originations through the retail delivery system have exceeded our targeted goal. The consolidation of Community Savings Bank into Three Rivers Bank on July 4, 1997, will give Western Region customers more banking location options. After this date, customers can make all their banking transactions at any Three Rivers Bank or former Community Savings Bank office. The consolidation will achieve three long-range goals: 1) To provide a unified marketing and sales approach for the Western Region which will lead to a higher state of customer awareness as we continue to introduce new products, services and customer advantages in the highly competitive Pittsburgh market, 2) To expand the variety of products offered by continuing our transition from a savings bank to a full-service commercial bank, and 3) To improve customer convenience by allowing customers to now perform all banking transactions at any of the 24 Western Region locations. Expanding Methods Of Delivery The Loan Patrol initiative enhances our high-touch positioning by incorporating loan requests by phone with our willingness to deliver services directly to a customer's home or office. Marketing resources were directed at the 18-54 year old customer, and the success of the message is found in the loan improvements of 1996. Phone-originated banking contributed to a 53% increase in direct consumer loan volume at U.S. Bank and provided the bank with another means to prove its commitment to convenience. The added value of the Loan Patrol to our customers is evident in the fact that 40% of the U.S. Bank loan request phone calls were received after traditional banking hours. In the Western Region, the Loan Patrol and the new Telemarketing Center contributed to increased consumer loan growth of 38% after only six months of operation. The success of the Sales Blitz, Neighborhood Canvassing and Loan Patrol in delivering banking services to the customer was followed by a review of current branch operating hours. A cross functional high performance work team recommended the expansion of office hours in select high-traffic locations. The result was expanded weekend hours and Sunday operating hours within high-traffic mall branches. U.S. Bank's commitment to customer convenience, high-touch service, and technology will reach new heights in 1997 with the introduction of our market area's first "mobile branch" office. The mobile branch will be one of only 40 full-service branch-on-wheels in the country. U.S. Bank - the largest bank in its mostly rural, four county marketplace - will operate the mobile branch to bring more convenience to our current customers while providing expanding business opportunities in growth areas of our market. The mobile branch will provide the capability to test new market locations prior to any investment in brick and mortar. A mobile branch office is a perfect match with our mission of high convenience, high-touch service, and our intent to outwork the competition. 7 Optimizing The Retail Delivery System To Increase Commercial Business The Small Business Loan Center - operating for its first full year in 1996 - forged a productive working process with the retail delivery channels at all affiliate banks. The Center's centralized processing ability enables the retail delivery system to effectively sell commercial loans of under $250,000 within the branch office. The Center processed more than 929 in-branch commercial loan applications resulting in approvals for 688 customers seeking small business commercial loans. The Small Business Loan Center accounted for over $40 million in new loans in 1996 and provided more than $16 million in larger loan referrals to the middle market commercial lending group. Operating as a team to increase sales, the affiliate retail segments improved the volume of new demand deposit accounts by 4% in 1996 - an improvement which was significantly impacted by the new cross selling opportunities presented to the retail segment by the Small Business Loan Center. The lending success of the Small Business Loan Center and the retail delivery system freed the Commercial Middle Market segment operation to concentrate their efforts on larger commercial lending customers. This redistribution of commercial responsibilities allowed the middle market segment to contribute a record $202 million in loan originations to the loan to deposit ratio success for 1996. In addition to the overall loan growth, a mix shift within the loan portfolio towards higher yielding commercial loans has improved loan portfolio yields. At December 31, 1996, total commercial and commercial mortgage loans comprised 43.1% of total loans, compared to 33.9% at the end of 1995. As a result of the successes achieved in both commercial and consumer lending, our loan to deposit ratio significantly improved from 70.9% at the end of 1995 to 82.5% by the end of 1996. Improving Technology To Enhance Product Delivery The high-touch approach to customer service in 1996 was enhanced through the addition of technology which provides easy access to our current retail delivery system. This technology has provided electronic options for routine banking transactions, freeing our customer service representatives to provide more high-touch contact for those customers who value personal service. TellerPhone Banking, originally introduced in late 1995, allows customers to access their account information 24 hours a day, 365 days a year. An average of 10,000 customer TellerPhone calls per month were received in 1996, allowing retail delivery sales staff to concentrate on the development of profitable new business. An even higher state of technology was applied to this successful service with the fourth quarter introduction of PC TellerPhone Banking for customers operating a personal computer with a modem. The Western Region introduced another form of technology which helps build profitable relationships through enhanced customer service. Platform automation for loan transactions has been in use since the third quarter of 1996, and deposit service automation will be operational during the first quarter of 1997. Service representatives are equipped to access and review one complete customer profile which verifies every account relationship, and to immediately identify possible cross-selling opportunities at the point of sale. This information is valuable to our newly empowered front-line sales people, who can make immediate sales decisions on their own during any sales session. Customer convenience was further enhanced in the Western Region with the introduction of a debit card product. Customers can deduct payments directly from their checking or savings account by simply presenting their debit card at any business which accepts the VISA credit card. 8 More than 3,000 fee-generating debit card transactions were made by Three Rivers Bank and Community Savings Bank customers during the first three weeks after the introduction of the debit card. A late 1997 introduction of the debit card product is scheduled at U.S. Bank. Access to banking services during non-traditional banking hours was improved with the addition of automatic teller machines ("ATM"s) in new service areas. For 1997, affiliate banks have the goal of operating at least one ATM within every community served by our bank offices. Your Company's success with the Loan Patrol, TellerPhone Banking, platform automation, the debit card product, and more automated teller machines reaffirms our belief that the market will embrace technology and is eager to use these convenient new customer service options. The time-savings benefit of this technology is being reinvested back into the retail delivery system to produce new business, more profitable banking relationships, and improved revenue. Management will continue to explore technology with the capabilities to enhance our "high-touch" delivery system and to increase business. This commitment to technology has led to the first ever Five-Year Technology Plan for your Company. A balanced approach to achieving operational efficiencies through technology, while maintaining high-touch customer services, is the focus of our Plan. In the next phase of our technological evolution, your Company will maintain our high-touch customer service and gradually implement new technologies that will complete the transition from medium-tech to high-tech servicing. CREATING VALUE FOR OUR EMPLOYEES The high-touch positioning is linked to the career satisfaction of our employees, making our mission a mutually beneficial partnership for success. Employees demonstrated their ability to impact our mission by accepting the 13% ROE challenge and working together as a focused team to achieve the ROE goal well before the end of 1996. The implementation of the following key strategies helped create value for our employees in 1996. Expanding Decision Making Autonomy At All Levels: Your Company has taken steps to enhance career satisfaction by encouraging our employees to exercise greater decision making autonomy and to expand their current responsibilities. Increased employee input has resulted in a greater "ownership" for each new initiative, such as the Sales Blitz and Neighborhood Canvass, and raises the level of employee commitment to achieving key strategic goals. The newly empowered employee has the flexibility to adjust rates, immediately respond to customer requests and to contribute to the future direction of the bank. Employee involvement in evaluating and responding to improvement opportunities is created through employee-driven high performance work teams which review and recommend service process improvements. Increasing Learning To Advance The Mission: Employees are better prepared to execute the mission as a result of training which has a direct impact on meeting strategic objectives. During 1996, skills based training increased by 300% over 1995. This increase is a result of more flexible training alternatives such as video learning centers, self study modules, and PC training. As I pledged to you last year, we have developed and are now implementing in-house certification programs for product management, supervision and leadership programs. The High Achiever's Forum at U.S. Bank prepares mid-level managers for a successful transition into leadership roles. 9 By the end of 1996, nearly half the forum participants were promoted to positions of increased leadership responsibilities. For 1997, your Company will assess the product learning needs of our employees and develop an in-house certification program to enhance the sales abilities of our front-line employees. We have increased our training budget to keep pace with the expanding employee responsibilities created by the high-touch, medium-tech approach to service. Rewarding Performance: The shared sacrifice program of 1996 contributed to reduced expenses and demonstrated employee commitment to improving performance and achieving an ROE of 13%. Employees were, however, given the opportunity to earn "Dazzle Dollars" which could be redeemed for corporate merchandise or a gift certificate from local merchants. These Dazzle Dollars were awarded for work outside the scope of standard job responsibilities and for extraordinary customer service efforts. The record performance documented by year end 1996 led to the development of a performance based incentive compensation program for employees at all organizational levels. On January 21, 1997, employees received an incentive reward for their 1996 contributions to your Company's success. This is the first step in expanding our performance based incentive compensation program, the goal I pledged to our employees. IMPROVING NET INCOME THROUGH NON-AFFILIATE BANKING USBANCORP Trust Company contributed to improved performance for your Company by generating total trust revenue of $3.7 million for 1996. Net income for the Trust Company continued its positive upward trend for 1996, increasing by 22% over 1995. The 9.2% increase in trust revenues over 1995 was led by the strong growth of the Trust Company's 401(k) product line and improved performance in the institutional trust area. By year end 1996, more than $12 million in pre-need funeral home trusts were booked, making the outlook for business expansion in this new product line a priority for 1997. In addition, the Trust Company developed a new integrated demand deposit and money market sweep account which by year end achieved $10 million in managed assets, with $25 to $50 million in sweep assets. Your Company's mortgage servicing affiliate, Standard Mortgage Corporation of Georgia, headquartered in Atlanta, achieved a record year in both profitability and residential mortgage loan production. Net income after taxes for 1996 reached $1.3 million, representing a 26% increase over 1995, with an average return on equity of 14%. Standard Mortgage closed more than $211 million in residential mortgage loans in 1996. These closings resulted in a $680,000 increase in loan origination fees, processing fees, and gains or sales of mortgage loans when compared to 1995. The increase in production volume was influenced by a relatively stable and affordable interest rate environment, a continued robust economy in the southeastern states, new loan products and geographical expansion. For the first time in 1996, Standard Mortgage originated government insured loans and began origination activity in the suburban Washington, D.C. area, resulting in $9 million in volume in three months. The mortgage servicing portfolio remained stable during 1996 at nearly $1.4 billion, which includes the servicing of 26,000 loans. Standard Mortgage will emphasize expansion into government-controlled markets and into new suburban Washington, D.C. and Georgia markets with a 1997 goal of attaining $280 million in loan originations. 10 GROWING THE FRANCHISE THROUGH INNOVATIVE LINES OF BUSINESS Your Company is committed to continually enhancing our retail delivery system's sales performance as a strategic direction for providing a progressive shareholder return. For 1997, your Company will explore new opportunities to create increased earnings performance within a changing bank environment. Our goal is to increase revenues and further improve return on equity, while diversifying our income stream by creating additional sources of non-interest income. Analysis of banking trends, and the needs of our current and potential customers, has led your Company to introduce three new enterprises. Insurance and annuity sales, the Three Rivers Mortgage Company, and UBAN Associates, Inc., represent our first cautious steps toward growing the franchise through innovative new lines of business. Expanding Retail Delivery System Products The sale of insurance and annuities through the retail system at all affiliate banks is an important tactical step forward as your Company expands its retail product offerings to include life insurance, annuities, and mutual funds. These new products will be sold through the affiliate banks beginning in the fourth quarter of 1997. This expansion to our retail product offerings will generate improving customer sales volume and fee income through our retail delivery system of community branch offices, TellerPhone, the mobile branch, and Loan Patrol home delivery. Your Company's Five Year Strategic Plan (1997-2001) specifies the development of increasing sales through existing delivery channels. The sales of insurance and annuities meets this objective, complements the current product offering, and will position our banking affiliates to be the "primary financial service provider of choice" for the critical 18-34 year old target demographic group with investible money between $1,000 and $15,000. Timothy D. McDonald, the newly appointed Vice President of Life Insurance and Annuities at U.S. Bank, has extensive experience in U.S. Bank's existing retail delivery system having served as the affiliate's Vice President of Retail Banking - Northern Region, until his most recent promotion. Prior to joining U.S. Bank, McDonald built a successful career outside the banking industry with a national life insurance company, making him uniquely qualified for this new U.S. Bank position. In addition to generating fee income, the sale of insurance and annuities will provide customers with more product variety and will contribute to sustaining long-term growth from the existing retail delivery system. Western Region Mortgage Company The Three Rivers Mortgage Company will begin operations in the first quarter of 1997. Immediate savings are expected as both the Three Rivers Bank and Community Savings Bank mortgage operations are consolidated with the opening of the Three Rivers Mortgage Company. Three Rivers Mortgage Company President James Lomeo has built an impressive reputation in the Pittsburgh market over the past 12 years, previously serving as CEO of one of the more successful independent mortgage companies in Allegheny County. The new affiliate's success in originating and selling mortgages on the secondary market - while targeting new markets outside our standard service area where there is strong mortgage growth potential - will improve our ability to generate increasing fee income. 11 This mortgage expansion strategy into new markets is similar to the growth strategy employed by affiliate Standard Mortgage Corporation of Georgia, which enjoyed a record year of growth in both mortgage originations and fee income. The Western Region Mortgage Company expects to return start up costs during 1997, and will begin to contribute to our profitability in 1998. Providing Services To New Markets UBAN Associates, Inc., offers the greatest potential for attracting an entirely new customer base. The registered investment advisory firm administers investment portfolios, offers operational support systems and provides asset and liability services to small and mid-sized community banks as well as savings and loans. Ray M. Fisher, formerly USBANCORP's Chief Investment Officer, will direct the new firm. Fisher, who has been in banking for 25 years, has gained experience in areas which make him uniquely qualified to lead UBAN Associates. These areas of expertise include investment portfolio management, asset liability management, accounting, and balance sheet leveraging. An experienced investment staff was selected from existing USBANCORP, Inc., employees, emphasizing our commitment to provide expanding promotional opportunities for our people. The precedent for this type of service comes from the insurance industry, where firms are electing to out-source their investment management operations, rather than self-investment. UBAN Associates management expects the banking industry to duplicate this transition in the years ahead. In addition, recent banking forecasts reveal that many smaller community banks will remain independent and will rely on their "hometown" bank image to succeed. UBAN Associates delivers to these community banks the same investment resources used by larger financial institutions such as liquidity management, cash flow and net interest margin administration, and hedging capabilities for managing interest rate risk. As a result, the smaller community bank can direct their limited resources toward maintaining personal service, while improving investment performance. The goal for UBAN Associates is to create fee income by servicing at least three financial institutions by the third quarter of 1997, and to deliver value to an entirely new customer base. EARNING A LEADERSHIP ROLE IN THE COMMUNITY Employees have added credibility to our high-touch positioning within the communities and neighborhoods where they live and work. Your leadership team donates their expertise to the communities where they work, and actively promotes community involvement to our employees. This "leadership role" in community development and volunteerism has demonstrated to our service communities that your Company is earning the reputation as caring neighbors. An average of 400 community service and civic organizations benefit as a result of the more than 10,000 hours donated by employees at all levels. U.S. Bank was the primary sponsor of the largest annual event in Cambria County - the 1996 Johnstown FolkFest. More than 130 employees, their families and friends comprised the largest group of volunteers for the Labor Day weekend festival. USBANCORP shares the talents of the organization's skilled managers through a Speaker's Bureau which was introduced in 1996. Company managers and technicians from all levels are volunteering their expertise and are speaking before civic and non-profit groups to present your Company as a knowledgeable business leader in the community. This commitment to our communities is on record, as all of your Company's affiliate banks enter 1997 with an "outstanding" Community Reinvestment Act ("CRA") rating. 12 BUILDING ON OUR MOMENTUM FOR 1997 AND BEYOND Throughout 1997 and into 1998, each banking affiliate will strengthen its position as the Bank of Choice, and will continue the momentum they have built towards a high-touch, medium-tech service delivery system. Management's goals for 1997 and beyond will remain focused on creating value for shareholders, customers and employees. For shareholders our goals are to: Achieve a sustainable Return On Equity which is in the top quartile of our peer group. Entry into this quartile of high performing banks would require a minimum ROE of 15%. Achieve an annual total shareholder return approximating 15-20%. Continue to optimally leverage the organization to maximize shareholder value through stock repurchases, dividend payments, loan growth, proactive management of the investment securities portfolio, and the entry into promising new lines of business. For customers our goals are to: Continue to foster the delivery of a high-touch approach to servicing the needs of each customer. Leverage technology, such as new ATM locations, TellerPhone and a mobile branch office, to make banking more convenient to the customer. Expand our current product line to offer insurance and annuities to position our banks as the "primary financial service provider of choice." For employees our goals are to: Provide the opportunity for skills-based training to add value and satisfaction to their work. Introduce a performance-based evaluation system which correctly measures each employee's contribution towards improving value for our shareholders and customers. Continue to enhance career satisfaction through greater decision-making autonomy and expanded responsibilities. Management and employees are proud of the achievements we have recorded in 1996. Your Company's improved performance and the initiatives set into place during the past year provide the foundation for steady improvement and sustained growth into the next century. I want to thank our dedicated employees and directors for their tireless efforts and you, our shareholder, for your continued support. /s/Terry K. Dunkle Terry K. Dunkle Chairman, President & CEO USBANCORP, Inc. 13 See Annex A - for Service Area Map presented on this page. 14 Financial Statements - divider page 15 This page left intentionally blank 16 CONSOLIDATED BALANCE SHEET
At December 31 1996 1995 (In thousands) ASSETS Cash and due from banks $ 43,183 $ 45,771 Interest bearing deposits with banks 1,218 647 Federal funds sold and securities purchased under agreements to resell - 13,750 Investment securities: Available for sale 455,890 427,112 Held to maturity (market value $549,427 on December 31, 1996, and $471,191 on December 31, 1995) 546,318 463,951 Assets held in trust for collateralized mortgage obligation 5,259 7,099 Loans held for sale 14,809 5,224 Loans 929,736 832,126 Less: Unearned income 4,819 2,716 Less: Allowance for loan losses 13,329 14,914 Net loans 911,588 814,496 Premises and equipment 18,201 18,588 Accrued income receivable 17,362 16,752 Mortgage servicing rights 12,494 11,372 Goodwill and core deposit intangibles 21,478 23,838 Bank owned life insurance 32,451 30,872 Other assets 6,861 5,900 TOTAL ASSETS $2,087,112 $1,885,372 LIABILITIES Non-interest bearing deposits $ 144,314 $ 145,379 Interest bearing deposits 994,424 1,032,479 Total deposits 1,138,738 1,177,858 Federal funds purchased and securities sold under agreements to repurchase 76,672 63,828 Other short-term borrowings 79,068 30,528 Advances from Federal Home Loan Bank 605,499 428,217 Collateralized mortgage obligation 4,691 6,548 Long-term debt 4,172 5,061 Total borrowed funds 770,102 534,182 Other liabilities 26,355 22,840 TOTAL LIABILITIES 1,935,195 1,734,880 Commitments and contingent liabilities (Note 16) STOCKHOLDERS' EQUITY Preferred stock, no par value; 2,000,000 shares authorized; there were no shares issued and outstanding on December 31, 1996, and 1995 - - Common stock, par value $2.50 per share; 12,000,000 shares authorized; 5,742,264 shares issued and 5,081,004 outstanding on December 31, 1996; 5,733,701 shares issued and 5,310,489 shares outstanding on December 31, 1995 14,356 14,334 Treasury stock at cost, 661,260 shares on December 31, 1996, and 423,212 shares on December 31, 1995 (19,538) (11,007) Surplus 93,527 93,361 Retained earnings 63,358 50,401 Net unrealized gains (losses) on available for sale securities 214 3,403 TOTAL STOCKHOLDERS' EQUITY 151,917 150,492 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,087,112 $1,885,372 See accompanying notes to consolidated financial statements.
17 CONSOLIDATED STATEMENT OF INCOME
Year ended December 31 1996 1995 1994 (In thousands, except per share data) INTEREST INCOME Interest and fees on loans: Taxable $ 72,873 $ 69,019 $ 64,461 Tax exempt 1,560 2,134 2,039 Deposits with banks 132 280 121 Federal funds sold and securities purchased under agreements to resell 36 165 94 Investment securities: Available for sale 29,025 22,940 15,531 Held to maturity 33,237 34,621 19,645 Assets held in trust for collateralized mortgage obligation 470 556 920 Total Interest Income 137,333 129,715 102,811 INTEREST EXPENSE Deposits 42,060 45,403 34,283 Federal funds purchased and securities sold under agreements to repurchase 3,888 4,769 4,545 Other short-term borrowings 3,706 2,284 804 Advances from Federal Home Loan Bank 25,952 20,043 6,006 Collateralized mortgage obligation 470 848 1,024 Long-term debt 119 221 331 Total Interest Expense 76,195 73,568 46,993 NET INTEREST INCOME 61,138 56,147 55,818 Provision for loan losses 90 285 (2,765) NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 61,048 55,862 58,583 NON-INTEREST INCOME Trust fees 3,708 3,395 3,023 Net gains (losses) on loans held for sale 1,060 (124) 763 Net realized gains (losses) on investment securities 638 702 (3,972) Gain on disposition of business line - 905 - Wholesale cash processing fees 1,085 1,154 1,237 Service charges on deposit accounts 3,264 2,937 2,779 Net mortgage servicing fees 2,312 2,555 1,130 Bank owned life insurance 1,574 738 - Other income 5,048 4,281 3,227 Total Non-Interest Income 18,689 16,543 8,187 NON-INTEREST EXPENSE Salaries and employee benefits 25,483 25,305 23,311 Net occupancy expense 4,463 4,215 4,133 Equipment expense 3,111 3,292 3,089 Professional fees 2,770 2,570 2,303 Supplies, postage, and freight 2,693 2,608 2,383 Miscellaneous taxes and insurance 1,418 1,414 1,215 FDIC deposit insurance expense 2,561 1,728 2,576 Acquisition charge - - 2,437 Amortization of goodwill and core deposit intangibles 2,360 2,473 1,805 Other expense 7,615 6,952 6,267 Total Non-Interest Expense 52,474 50,557 49,519 INCOME BEFORE INCOME TAXES 27,263 21,848 17,251 Provision for income taxes 7,244 6,045 5,931 NET INCOME $20,019 $15,803 $11,320 NET INCOME APPLICABLE TO COMMON STOCK $20,019 $15,803 $11,320 PER COMMON SHARE DATA: Primary: Net income $3.83 $2.88 $2.18 Average number of common shares outstanding 5,231,587 5,480,527 5,191,885 Fully Diluted: Net income $3.81 $2.87 $2.18 Average number of shares outstanding 5,252,695 5,499,750 5,191,885 Cash Dividends Declared $1.37 $1.06 $0.97 See accompanying notes to consolidated financial statements.
18 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Net Unrealized Preferred Common Treasury Retained Gains Stock Stock Stock Surplus Earnings (Losses) Total (In thousands) Balance at December 31, 1993 $- $11,815 $ - $70,720 $34,080 $ - $116,615 1994 Net income for the year 1994 - - - - 11,320 - 11,320 Dividend reinvestment and stock purchase plan - 47 - 408 - - 455 Stock options exercised - 18 - 123 - - 141 Common stock issued to acquire Johnstown Savings Bank ("JSB") (957,857 shares at $25.125 per share) - 2,395 - 21,672 - - 24,067 Net unrealized holding losses on available for sale securities - - - - - (7,353) (7,353) Cash dividends declared: Common stock ($0.22 per share on 4,737,321 shares;$0.25 per share on 4,745,247 shares; $0.25 per share on 5,648,550 shares; and $0.25 per share on 5,617,055 shares) - - - - (5,045) - (5,045) Treasury stock, 127,700 shares at cost - - (3,064) - - - (3,064) Balance at December 31, 1994 - 14,275 (3,064) 92,923 40,355 (7,353) 137,136 1995 Net income for the year 1995 - - - - 15,803 - 15,803 Stock options exercised - 59 - 438 - - 497 Net unrealized holding gains on available for sale securities - - - - - 10,756 10,756 Cash dividends declared: Common stock ($0.25 per share on 5,584,722 shares; $0.27 per share on 5,531,966 shares; $0.27 per share on 5,304,457 shares; and $0.27 per share on 5,310,489 shares) - - - - (5,757) - (5,757) Treasury stock, 295,512 shares at cost - - (7,943) - - - (7,943) Balance at December 31, 1995 - 14,334 (11,007) 93,361 50,401 3,403 150,492 1996 Net income for the year 1996 - - - - 20,019 - 20,019 Stock options exercised - 22 - 166 - - 188 Net unrealized holding losses on available for sale securities - - - - - (3,189) (3,189) Cash dividends declared: Common stock ($0.27 per share on 5,266,539 shares; $0.30 per share on 5,186,989 shares; $0.30 per share on 5,147,403 shares; $0.30 per share on 5,081,004 shares; and $0.20 per share on 5,081,004 shares) - - - - (7,062) - (7,062) Treasury stock, 238,048 shares at cost - - (8,531) - - - (8,531) Balance at December 31, 1996 $- $14,356 $(19,538) $93,527 $63,358 $214 $151,917 See accompanying notes to consolidated financial statements.
19 CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31 1996 1995 1994 (In thousands) OPERATING ACTIVITIES Net income $ 20,019 $ 15,803 $ 11,320 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision (credit) for loan losses 90 285 (2,765) Depreciation and amortization expense 2,564 2,484 2,346 Amortization expense of goodwill and core deposit intangibles 2,360 2,473 1,805 Amortization expense of mortgage servicing rights 1,249 1,175 746 Net amortization (accretion) of investment securities 182 (3,694) (163) Net realized (gains) losses on investment securities (638) (702) 3,972 Net realized (gains) losses on loans and loans held for sale (1,060) 124 (763) Origination of mortgage loans held for sale (191,299) (102,780) (48,868) Sales of mortgage loans held for sale 196,238 97,424 34,969 Decrease (increase) in accrued income receivable (610) 142 (6,145) Net gain on disposition of business line - (905) - Increase in accrued expense payable 397 4,773 1,040 Net cash provided (used) by operating activities 29,492 16,602 (2,506) INVESTING ACTIVITIES Purchase of investment securities and other short-term investments (633,641) (468,096) 616,095) Proceeds from maturities of investment securities and other short-term investments 128,973 108,880 115,474 Proceeds from sales of investment securities and other short-term investments 389,068 273,118 320,237 Long-term loans originated (348,152) (267,167) (323,409) Principal collected on long-term loans 240,679 243,965 250,276 Loans purchased or participated (1,614) (31,760) - Loans sold or participated 663 90,933 78,547 Net (increase) decrease in credit card receivables and other short-term loans (2,222) 1,670 (6,262) Purchases of premises and equipment (2,227) (2,383) (2,081) Sale/retirement of premises and equipment 49 411 17 Net decrease in assets held in trust for collateralized mortgage obligation 1,840 2,005 4,711 Increase in mortgage servicing rights (2,371) (1,095) - Cash received from disposition of business line - 5,644 - Premium paid to purchase Bank Owned Life Insurance - (30,000) - Increase due to JSB acquisition: Investment securities - - (190,092) Loans - - (118,150) Loans held for sale - - (4,063) Premises and equipment - - (2,422) Accrued income received - - (1,857) Mortgage service rights - - (10,360) Intangible assets - - (25,917) Other assets - - (8,115) Net (increase) decrease in other assets (817) (1,601) 3,182 Net cash used by investing activities $(229,772) $(75,476) $(536,379) (continued on next page) See accompanying notes to consolidated financial statements.
20 CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Year ended December 31 1996 1995 1994 (In thousands) FINANCING ACTIVITIES Proceeds from sales of certificates of deposit $ 248,589 $ 386,052 $ 383,260 Payments for maturing certificates of deposit (272,838) (370,851) (379,456) Net decrease in demand and savings deposits (14,871) (33,589) (65,324) Net increase (decrease) in federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings 59,527 (124,228) 164,227 Net principal borrowings on advances from Federal Home Loan Bank 177,282 226,420 103,068 Principal borrowings of long-term debt - 4,800 - Repayments of long-term debt (889) (5,545) (1,564) Common stock dividends paid (4,522) (7,160) (4,679) Proceeds from dividend reinvestment and stock purchase plan and stock options exercised 188 497 596 Purchases of treasury stock (8,531) (7,943) (3,064) Increase due to JSB acquisition: Certificates of deposit - - 102,959 Demand and savings deposits - - 105,941 Other short-term borrowings - - 41,439 Advances from Federal Home Loan Bank - - 65,243 Due to JSB shareholders - - 19,701 Capital - - 24,067 Other liabilities - - 7,512 Cash cost of JSB acquisition - - (19,498) Net increase (decrease) in other liabilities 578 (3,302) (2,067) Net cash provided by financing activities 184,513 65,151 542,361 NET (DECREASE) INCREASE IN CASH EQUIVALENTS (15,767) 6,277 3,476 CASH EQUIVALENTS AT JANUARY 1 60,168 53,891 50,415 CASH EQUIVALENTS AT DECEMBER 31 $44,401 $60,168 $53,891 See accompanying notes to consolidated financial statements.
21 THIS PAGE IS INTENTIONALLY LEFT BLANK. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AT AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Nature of Operations: USBANCORP, Inc. (the "Company") is a multi-bank holding company headquartered in Johnstown, Pennsylvania. Through its banking subsidiaries the Company operates 44 banking offices in six southwestern Pennsylvania counties. These offices provide a full range of consumer, mortgage, commercial, and trust financial products including deposit and credit card services. These operations represent one industry segment. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, United States National Bank in Johnstown ("U.S. Bank"), Three Rivers Bank and Trust Company ("Three Rivers Bank"), Community Bancorp, Inc. including its principal subsidiaries, Community Savings Bank and Standard Mortgage Corporation of Georgia, ("Community"), USBANCORP Trust Company ("Trust Company"), and United Bancorp Life Insurance Company ("United Life"). Intercompany accounts and transactions have been eliminated in preparing the consolidated financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from these estimates. Investment Securities: The Company uses Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity Securities," which specifies a methodology for the classification of securities as either held to maturity, available for sale, or as trading assets. Securities are classified at the time of purchase as investment securities held to maturity if it is management's intent and the Company has the ability to hold the securities until maturity. These held to maturity securities are carried on the Company's books at cost, adjusted for amortization of premium and accretion of discount which is computed using the level yield method which approximates the effective interest method. Alternatively, securities are classified as available for sale if it is management's intent at the time of purchase to hold the securities for an indefinite period of time and/or to use the securities as part of the Company's asset/liability management strategy. Securities classified as available for sale include securities which may be sold to effectively manage interest rate risk exposure, prepayment risk, and other factors (such as liquidity requirements). These available for sale securities are reported at fair value with unrealized aggregate appreciation (depreciation) excluded from income and credited (charged) to a separate component of 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. Loans: Interest income is recognized using methods which approximate a level yield related to principal amounts outstanding. The Company's subsidiaries immediately discontinue the accrual of interest income when loans, except for loans that are insured for credit loss, become 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 the residential mortgage loans wherein interest income is recognized on a cash basis as payments are received. A non-accrual loan is placed on accrual status after becoming current and remaining current for twelve consecutive payments (except for residential mortgage loans which only have to become current) and upon the approval of the Credit Committee and/or Board Discount/Loan Committee with final approval resting with the Chief Accounting Officer. Loan Fees: Loan origination and commitment fees, net of associated direct costs, are deferred and amortized into interest and fees on loans over the loan or commitment period. Fee amortization is determined by either the straight-line method, or the effective interest method, which do not differ materially. Mortgage Loans Held For Sale: Newly originated 30 year fixed-rate residential mortgage loans are classified as "held for sale," if it is management's intent to sell these residential mortgage loans. Servicing rights are generally retained on sold loans. 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" in the Consolidated Statement of Income. 23 Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is charged to operations over the estimated useful lives of the premises and equipment using the straight-line method. Useful lives of up to 45 years for buildings and up to 12 years for equipment are utilized. Leasehold improvements are amortized using the straight-line method over the terms of the respective leases or useful lives of the improvements, whichever is shorter. Maintenance, repairs, and minor alterations are charged to current operations as expenditures are incurred. Allowance for Loan Losses and Charge-off Procedures: As a financial institution which assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, the Company consistently applies a comprehensive methodology and procedural discipline which is updated on a quarterly basis at the subsidiary bank level to determine both the adequacy of the allowance for loan losses and the necessary provision for loan losses to be charged against earnings. This methodology includes: A detailed review of all criticized and impaired loans to determine if any specific reserve allocations are required on an individual loan basis. The application of reserve allocations for all commercial and commercial real-estate loans are calculated by using a two year migration analysis of net losses incurred within the entire commercial loan portfolio. The application of reserve allocations to installment and mortgage loans which are based upon historical charge-off experience for those loan types. The residential mortgage loan allocation is based upon the Company's five year historical average of actual loan charge-offs experienced in that category. The same methodology is used to determine the allocation for consumer loans except the allocation is based upon an average of the most recent actual three year historical charge-off experience for consumer loans. The application of reserve allocations to all loans is based upon review of historical and qualitative factors, which include but are not limited to, national and economic trends, delinquencies, concentrations of credit, and trends in loan volume. The maintenance of a general unallocated reserve of at least 20% of the systematically determined minimum amount from the items listed above in order to provide conservative positioning in the event of any unforeseen deterioration in the economy. This 20% policy requirement was mandated by the Board of Directors after the Company experienced significant credit quality problems in the period from 1985 to 1989. It must be emphasized that the Board views this policy as establishing a minimum requirement only and the requirement of a general unallocated reserve of at least 20% of the determined need is prudent recognition of the fact that reserve estimates, by definition, lack precision. After completion of this process, a formal meeting of the Loan Loss Reserve Committee is held to evaluate the adequacy of the reserve and establish the provision level for the next quarter. The Company believes that the procedural discipline, systematic methodology, and comprehensive documentation of this quarterly process is in full compliance with all regulatory requirements and provides appropriate support for accounting purposes. When it is determined that the prospects for recovery of the principal of a loan have significantly diminished, the loan is immediately charged against the allowance account; subsequent recoveries, if any, are credited to the allowance account. In addition, non-accrual and large delinquent loans are reviewed monthly to determine potential losses. Consumer loans are considered losses when they are 90 days past due, except loans that are insured for credit loss. Effective January 1, 1995, the Company adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan" which was subsequently amended by SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS 114 addresses the treatment and disclosure of certain loans where it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. This standard defines the term "impaired loan" and indicates the method used to measure the impairment. The measurement of impairment may be based upon: 1) the present value of expected future cash flows discounted at the loan's effective interest rate; 2) the observable market price of the impaired loan; or 3) the fair value of the collateral of a collateral dependent loan. Additionally, SFAS 118 requires the disclosure of how the creditor recognizes interest income related to these impaired loans. 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. 24 Purchased and Originated Mortgage Servicing Rights: During the second quarter of 1995, the Company adopted SFAS 122, "Accounting for Mortgage Servicing Rights." The Company recognizes as assets the rights to service mortgage loans for others whether the servicing rights are acquired through purchases or originations. Purchased mortgage servicing rights are capitalized at cost. For loans originated and sold where servicing rights have been retained, the Company allocates the cost of originating the loan to the loan (without the servicing rights) and the servicing rights retained based on their relative fair market values if it is practicable to estimate those fair values. Where it is not practicable to estimate the fair values, the entire cost of originating the loan is allocated to the loan without the servicing rights. For purposes of evaluating and measuring impairment, the Company stratifies the rights based on risk characteristics. If the discounted projected net cash flows of a stratum are less than the carrying amount of the stratum, the stratum is written down to the amount of the discounted projected net cash flows through a valuation account. The Company has determined that the predominant risk characteristics of its portfolio are loan type and interest rate. For the purposes of evaluating impairment, the Company has stratified its portfolio in 200-basis point tranches by loan type. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income. The value of mortgage servicing rights is subject to interest rate and prepayment risk. It is reasonably possible that the value of these assets will change if prepayments occur at greater than the expected rate. The effect of implementing SFAS 122 was the capitalization of costs of originating mortgage servicing rights of $693,000 in 1996 and $479,000 in 1995. Trust Fees: All trust fees are recorded on the cash basis which approximates the accrual basis for such income. Earnings Per Common Share: The Company uses the treasury stock method to calculate common stock equivalent shares outstanding for purposes of determining both primary and fully diluted earnings per share. Primary earnings per share amounts are computed by dividing net income, after deducting preferred stock dividend requirements (if any), by the weighted average number of common stock and common stock equivalent shares outstanding. Treasury shares are treated as retired for earnings per share purposes. 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 $4,870,000 in income tax payments in 1996; $3,590,000 in 1995; and $3,699,000 in 1994. The Company made total interest expense payments of $75,798,000 in 1996; $68,795,000 in 1995; and $45,953,000 in 1994. Income Taxes: As discussed in Note 13, the Company accounts for income taxes utilizing SFAS 109, "Accounting for Income Taxes." Under SFAS 109, deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. Interest Rate Contracts: The Company uses various interest rate contracts, such as interest rate swaps, caps and floors, to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. These interest rate contracts function as hedges against specific assets or liabilities on the Consolidated Balance Sheet. Gains or losses on these hedge transactions are deferred and recognized as adjustments to interest income or interest expense of the underlying assets or liabilities over the hedge period. For interest rate swaps, the interest differential to be paid or received is accrued by the Company and recognized as an adjustment to interest income or interest expense of the underlying assets or liabilities being hedged. Since only interest payments are exchanged, the cash requirement and exposure to credit risk are significantly less than the notional amount. Any premium or transaction fee incurred to purchase interest rate caps or floors is deferred and amortized to interest income or interest expense over the term of the contract. Unamortized premiums related to the purchase of caps and floors are included in "Other assets" on the Consolidated Balance Sheet. Risk Management Overview: Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, including interest rate, credit, and liquidity risk. The Company controls and monitors these risks with policies, procedures, and various levels of managerial and Board oversight. The Company's objective is to optimize profitability while managing and controlling risk within Board approved policy limits. Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets, liabilities, and off-balance sheet positions. The Company uses its asset liability management policy and hedging policy to control and manage interest rate risk. 25 Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from extending credit to customers, purchasing securities, and entering into certain off-balance sheet financial instruments. The Company's primary credit risk occurs in the loan portfolio. The Company uses its credit policy and disciplined approach to evaluating the adequacy of the allowance for loan losses to control and manage credit risk. The Company's investment policy and hedging policy strictly limit the amount of credit risk that may be assumed in the investment portfolio and through off-balance sheet activities. Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as, the obligations to depositors and debtholders. The Company uses its asset liability management policy and contingency funding plan to control and manage liquidity risk. Future Accounting Standard: In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which provides for standardized accounting for transfers and servicing of financial assets and extinguishments of liabilities. This statement is effective for related transactions occurring after December 31, 1996, however, the FASB has indefinitely delayed the effective date for certain portions of this statement pending further clarification. Management does not believe the effect of adoption of this standard will be material. 2. CASH AND DUE FROM BANKS Cash and due from banks at December 31, 1996, and 1995, included $11,883,000 and $11,546,000, respectively, of reserves required to be maintained under Federal Reserve Bank regulations. 3. INTEREST BEARING DEPOSITS WITH BANKS The book value of interest bearing deposits with domestic banks are as follows: At December 31 1996 1995 (In thousands) Total $1,218 $647 All interest bearing deposits with domestic banks mature within three months. The Company had no deposits in foreign banks nor in foreign branches of United States banks. 4. INVESTMENT SECURITIES The book and market values of investment securities are summarized as follows: Investment securities available for sale:
Gross Gross Book Unrealized Unrealized Market At December 31, 1996 Value Gains Losses Value (In thousands) U.S. Treasury $ 10,934 $ 147 $ (21) $ 11,060 U.S. Agency 4,224 12 (39) 4,197 State and municipal 21,772 524 (1) 22,295 U.S. Agency mortgage-backed securities 382,384 2,459 (2,385) 382,458 Other securities 35,880 - - 35,880 Total $455,194 $3,142 $(2,446) $455,890 Investment securities held to maturity: Gross Gross Book Unrealized Unrealized Market At December 31, 1996 Value Gains Losses Value (In thousands) U.S. Treasury $ 10,198 $ 4 $ (13) $ 10,189 U.S. Agency 27,468 113 (29) 27,552 State and municipal 110,287 1,624 (308) 111,603 U.S. Agency mortgage-backed securities 395,199 3,937 (2,281) 396,855 Other securities 3,166 62 - 3,228 Total $546,318 $5,740 $(2,631) $549,427 Other investment securities include corporate notes and bonds, asset-backed securities, and equity securities.
26
Investment securities available for sale: Gross Gross Book Unrealized Unrealized Market At December 31, 1995 Value Gains Losses Value (In thousands) U.S. Treasury $ 22,431 $ 421 $ (14) $ 22,838 U.S. Agency 12,408 7 (27) 12,388 State and municipal 58,698 1,269 (89) 59,878 U.S. Agency mortgage-backed securities 296,669 4,784 (311) 301,142 Other securities 30,869 1 (4) 30,866 Total $421,075 $6,482 $ (445) $427,112 Investment securities held to maturity: Gross Gross Book Unrealized Unrealized Market At December 31, 1995 Value Gains Losses Value (In thousands) U.S. Treasury $ 796 $ 11 $ - $ 807 U.S. Agency 31,512 511 (9) 32,014 State and municipal 97,900 1,973 (140) 99,733 U.S. Agency mortgage-backed securities 330,312 5,777 (957) 335,132 Other securities 3,431 75 (1) 3,505 Total $463,951 $8,347 $(1,107) $471,191 Other investment securities include corporate notes and bonds, asset-backed securities, and equity securities.
The Company took advantage of the one-time SFAS 115 accounting opportunity in the fourth quarter of 1995 to reposition the securities portfolio without risk of tainting securities in the held to maturity portfolio. A total of $174 million in securities were reclassified from held to maturity to available for sale with $58 million subsequently sold at a net loss of $643,000 to improve the ongoing earnings of the securities portfolio. Additionally, the Company also transferred $43 million of securities from available for sale to held to maturity as part of this repositioning strategy. The unrealized holding gain on these securities at the date of transfer amounted to $120,000 and is being amortized over the remaining life of the securities as an adjustment of yield. All purchased investment securities are recorded on settlement date which is not materially different from the trade date. Realized gains and losses are calculated by the specific identification method and are included in "Net realized gain or (loss) on investment securities" in the Consolidated Statement of Income. 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 Investors Service or Standard & Poor's rating of "A." At December 31, 1996, 98.7% of the portfolio was rated "AAA" and 98.8% "AA" or higher as compared to 97.5% and 97.9%, respectively, at December 31, 1995. Only 1.0% of the portfolio was rated below "A" or unrated on December 31, 1996. The book value of securities pledged to secure public and trust deposits, as required by law, was $371,725,000 at December 31, 1996, and $234,414,000 at December 31, 1995. The Company realized $2,462,000 and $2,490,000 of gross investment security gains and $1,824,000 and $1,788,000 of gross investment security losses on available for sale securities in 1996 and 1995, respectively. The Company may sell covered call options on securities held in the available for sale investment portfolio. At the time a call is written, the Company records a liability equal to the premium fee received. The call liability is marked to market monthly and the offset is made to earnings. During 1996, $70,000 of income was generated from call option contracts on securities totalling $29 million. At December 31, 1996, one contract covering securities totalling $20 million remained open with a market value liability of $25,000. During 1995, $42,000 of income was generated from call option contracts on securities totalling $15 million. The Company limits total covered call options outstanding at any time to $25 million of available for sale securities. The following table sets forth the contractual maturity distribution of the investment securities, book and market values, and the weighted average yield for each type and range of maturity as of December 31, 1996. Yields are not presented on a tax-equivalent basis, but are based upon book value and are weighted for the scheduled maturity. Average maturities are based upon the original contractual maturity dates with the exception of mortgage-backed securities and asset-backed securities for which the average lives were used. At December 31, 1996, the Company's consolidated investment securities portfolio had a weighted average contractual maturity of approximately 9.49 years and a modified duration of approximately 3.71 years. 27
Investment securities available for sale: After 1 Year After 5 Years but but Within 1 Year Within 5 Years Within 10 Years After 10 Years Total At December 31, 1996 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield (In thousands, except yields) Book Value U.S. Treasury $ 8,435 7.53% $ 2,499 4.04% $ - -% $ - -% $ 10,934 6.73% U.S. Agency - - - - 4,224 7.46 - - 4,224 7.46 State and municipal 1,803 6.31 2,230 5.61 7,037 5.63 10,702 5.87 21,772 5.80 U.S. Agency mortgage- backed securities - - 39,780 6.48 154,711 6.89 187,893 7.16 382,384 6.98 Other securities 35,880 5.99 - - - - - - 35,880 5.99 Total investment securities available for sale $46,118 6.28% $44,509 6.30% $165,972 6.85% $198,595 7.09% $455,194 6.84% Market Value U.S. Treasury $ 8,577 -% $ 2,483 -% $ - -% $ - -% $ 11,060 -% U.S. Agency - - - - 4,197 - - - 4,197 - State and municipal 1,831 - 2,271 - 7,189 - 11,004 - 22,295 - U.S. Agency mortgage- backed securities - - 39,794 - 154,039 - 188,625 - 382,458 - Other securities 35,880 - - - - - - - 35,880 - Total investment securities available for sale $46,288 -% $44,548 -% $165,425 -% $199,629 -% $455,890 -% Investment securities held to maturity: After 1 Year After 5 Years but but Within 1 Year Within 5 Years Within 10 Years After 10 Years Total At December 31, 1996 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield (In thousands, except yields) Book Value U.S. Treasury $ 504 5.60% $ 9,694 5.66% $ - -% $ - -% $ 10,198 5.66% U.S. Agency - - 2,009 6.14 25,459 6.73 - - 27,468 6.69 State and municipal 500 5.09 2,979 5.79 45,339 4.93 61,469 5.58 110,287 5.32 U.S. Agency mortgage- backed securities 197 6.59 169,330 6.98 76,721 7.58 148,951 7.42 395,199 7.26 Other securities 243 7.34 275 8.23 1,250 6.97 1,398 6.75 3,166 7.01 Total investment securities held to maturity $1,444 5.85% $184,287 6.88% $148,769 6.62% $211,818 6.88% $546,318 6.81% Market Value U.S. Treasury $ 500 -% $ 9,689 -% $ - -% $ - -% $ 10,189 -% U.S. Agency - - 1,992 - 25,560 - - - 27,552 - State and municipal 505 - 2,994 - 45,496 - 62,608 - 111,603 - U.S. Agency mortgage- backed securities 82 - 170,439 - 78,128 - 148,206 - 396,855 - Other securities 300 - 275 - 1,250 - 1,403 - 3,228 - Total investment securities held to maturity $1,387 -% $185,389 -% $150,434 -% $212,217 -% $549,427 -% Other investment securities include corporate notes and bonds, asset-backed securities, and equity securities.
28 5. LOANS The loan portfolio of the Company consisted of the following: At December 31 1996 1995 (In thousands) Commercial $138,008 $103,546 Commercial loans secured by real estate 266,700 179,793 Real estate-mortgage 414,003 414,967 Consumer 111,025 133,820 Loans 929,736 832,126 Less: Unearned income 4,819 2,716 Loans, net of unearned income $924,917 $829,410 Real estate construction loans were not material at these presented dates and comprised 1.9% and 2.8% of total loans net of unearned income at December 31, 1996, and 1995, respectively. The Company has no credit exposure to foreign countries or highly leveraged transactions. Most of the Company's loan activity is with customers located in the southwestern Pennsylvania geographic area. As of December 31, 1996, loans to customers engaged in similar activities and having similar economic characteristics, as defined by standard industrial classifications, did not exceed 10% of total loans. In the ordinary course of business, the subsidiaries have transactions, including loans, with their officers, directors, and their affiliated companies. These transactions were on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated parties and do not involve more than the normal credit risk. These loans totaled $8,105,000and $5,490,000 at December 31, 1996, and 1995, respectively. An analysis of these related party loans follows: Year ended December 31 1996 1995 (In thousands) Balance January 1 $5,490 $14,955 New loans 27,192 12,958 Payments (24,577) (22,423) Balance December 31 $8,105 $5,490 6. ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses follows: Year ended December 31 1996 1995 1994 (In thousands) Balance January 1 $14,914 $15,590 $15,260 Addition due to acquisition - - 3,422 Reduction due to disposition of business line - (342) - Provision for loan losses 90 285 (2,765) Recoveries on loans previously charged-off 932 681 771 Loans charged-off (2,607) (1,300) (1,098) Balance December 31 $13,329 $14,914 $15,590 In the first quarter of 1995, the Company sold Frontier Consumer Discount Company, a subsidiary of Community, at a gain of $905,000 and recognized a reduction to the allowance for loan losses which is reflected in the above table in the line item "Reduction due to disposition of business line." 7. 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. 29 The following table presents information concerning non-performing assets:
At December 31 1996 1995 1994 1993 1992 (In thousands, except percentages) Non-accrual loans $6,365 $7,517 $5,446 $5,304 $ 5,596 Loans past due 90 days or more 2,043 995 1,357 203 1,573 Other real estate owned: Foreclosed properties 263 914 1,098 991 934 In-substance foreclosures - - - - 2,188 Total non-performing assets $8,671 $9,426 $7,901 $6,498 $10,291 Total non-performing assets as a percent of loans and loans held for sale, net of unearned income, and other real estate owned 0.92% 1.13% 0.91% 0.89% 1.58%
The Company is unaware of any additional loans which are required to either be charged-off or added to the nonperforming 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. SFAS 114 addresses the treatment and disclosure of certain loans where it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company had loans totalling $2,297,000 and $2,227,000 being specifically identified as impaired and a corresponding allocation reserve of $292,000 and $1,085,000 at December 31, 1996, and 1995, respectively. The average outstanding balance for loans being specifically identified as impaired was $2,186,000 for 1996 and $1,694,000 for 1995. 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 1996 or 1995. 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.
Year ended December 31 1996 1995 1994 1993 1992 (In thousands) Interest income due in accordance with original terms $560 $601 $509 $753 $882 Interest income recorded (75) (648) (588) (442) (110) Net reduction (increase) in interest income $485 $(47) $(79) $311 $772
8. PREMISES AND EQUIPMENT An analysis of premises and equipment follows: At December 31 1996 1995 (In thousands) Land $ 2,131 $ 2,131 Premises 22,938 22,329 Furniture and equipment 17,946 15,294 Leasehold improvements 2,302 3,386 Total at cost 45,317 43,140 Less: Accumulated depreciation 27,116 24,552 Net book value $18,201 $18,588 30 9. FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, AND OTHER SHORT-TERM BORROWINGS The outstanding balances and related information for federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings are summarized as follows: Securities Federal Sold Under Other Funds Agreements to Short-term Purchased Repurchase Borrowings At December 31, 1996 (In thousands, except rates) Balance $29,000 $47,672 $ 79,068 Maximum indebtedness at any month end 46,433 56,325 249,035 Average balance during year 26,485 46,402 73,706 Average rate paid for the year 5.72% 5.45% 4.59% Average rate on period end balance 7.26 5.42 5.44 Securities Federal Sold Under Other Funds Agreements to Short-term Purchased Repurchase Borrowings At December 31, 1995 (In thousands, except rates) Balance $28,000 $ 35,828 $ 30,528 Maximum indebtedness at any month end 37,599 126,575 50,507 Average balance during year 25,184 81,732 28,868 Average rate paid for the year 6.36% 5.48% 4.16% Average rate on period end balance 6.01 5.38 4.54 Securities Federal Sold Under Other Funds Agreements to Short-term Purchased Repurchase Borrowings At December 31, 1994 (In thousands, except rates) Balance $13,650 $129,639 $ 75,295 Maximum indebtedness at any month end 59,373 145,885 79,272 Average balance during year 20,557 52,813 39,476 Average rate paid for the year 3.82% 5.14% 5.01% Average rate on period end balance 6.55 5.54 6.57 Average amounts outstanding during the year represent daily averages. Average interest rates represent interest expense divided by the related average balances. Collateral related to securities sold under agreements to repurchase are maintained within the Company's investment portfolio. Included in the above borrowings is a $17,642,000 outstanding balance on a $25 million mortgage warehouse line of credit at Standard Mortgage Corporation (a mortgage banking subsidiary of Community). This line of credit bears interest at a rate of 1.50% on the used portion for which a compensating balance is maintained and Libor plus 1.50% on the used portion for which no compensating balance is maintained. This line of credit, which expires July 1, 1997, is secured by Standard Mortgage Corporation inventory, servicing rights, and commitments. Compensating balances held by the lender are used in determining the interest rates charged on the mortgage warehouse lines of credit and a bank note (discussed in Note 11). These balances, which are derived from customer escrow balances, amounts of collections in transit on loans serviced and corporate cash balances, can further decrease the interest rate charged on the line of credit if the compensating balance is maintained at a level greater than the used portion of the line. These borrowing transactions range from overnight to one year in maturity. The average maturity was 124 days at the end of 1996, ten days at the end of 1995 and 68 days at the end of 1994. 10. DEPOSITS The following table sets forth the balance of the Company's deposits: At December 31 1996 1995 1994 (In thousands) Demand-non-interest bearing $ 144,314 $ 145,379 $ 144,012 Demand-interest bearing 89,035 99,051 102,501 Savings 196,650 216,115 246,400 Money markets 150,358 134,685 135,902 Certificates of deposit in denominations of $100,000 or more 36,886 42,786 30,246 Other time 521,495 539,842 537,185 Total interest on deposits $1,138,738 1,177,858 $1,196,246 Interest expense on deposits consisted of the following: At December 31 1996 1995 1994 (In thousands) Interest bearing demand $ 811 $ 1,258 $ 1,653 Savings 3,525 4,302 4,806 Money markets 4,977 4,226 3,152 Certificates of deposit in denominations of $100,000 or more 2,074 3,149 1,238 Other time 30,673 32,468 23,434 Total interest on deposits $42,060 $45,403 $34,283 The following table sets forth the balance of other time deposits maturing in the periods presented: Year (In thousands) 1997 $315,971 1998 95,729 1999 40,041 2000 15,469 2001 and after 54,285 31 11. ADVANCES FROM FEDERAL HOME LOAN BANK, COLLATERALIZED MORTGAGE OBLIGATION, AND LONG-TERM DEBT Advances from Federal Home Loan Bank: Advances from Federal Home Loan Bank consist of the following: At December 31 1996 Weighted Maturing Average Yield Balance (In thousands) 1997 5.52% $401,250 1998 5.11 176,873 1999 6.09 1,250 2000 6.15 3,750 2001 8.22 10,126 2002 and after 6.92 12,250 Total advances $605,499 At December 31 1995 Weighted Maturing Average Yield Balance (In thousands) 1996 5.82% $377,700 1997 5.61 2,750 1998 5.83 26,567 1999 6.09 1,250 2000 6.15 3,750 2001 and after 7.61 16,200 Total advances $428,217 Total Federal Home Loan Bank borrowing exposure at December 31, 1996, was $605,499,000. Total Federal Home Loan Bank borrowings consist of $281,999,000 of term advances and $323,500,000 of repo plus advances with maturities of less than 90 days. Total Federal Home Loan Bank borrowing exposure at December 31, 1995, was $428,217,000. Total Federal Home Loan Bank borrowings consisted of $121,517,000 of term advances and $306,700,000 of repo plus advances with maturities of less than 90 days. All Federal Home Loan Bank 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. Collateralized Mortgage Obligation: The collateralized mortgage obligation was issued through Community First Capital Corporation ("CFCC"), a wholly- owned, single-purpose finance subsidiary of Community Savings Bank. Community Savings Bank transferred in 1988 Federal Home Loan Mortgage Corporation ("FHLMC") securities with a book value of approximately $31,500,000 to CFCC which were then used as collateral for issuance of bonds with a par value of $27,787,000 in the form of a collateralized mortgage obligation. There are two classes of bonds, including one class of zero coupon bonds, which mature in the years 2000 through 2018; however, payments of the bonds may occur prior to maturity in accordance with certain provisions of the Trust Indenture between CFCC and the trustee. The remaining bonds have a weighted average adjusted effective rate of 10.25%. Assets held in trust for the collateralized mortgage obligation consist of the following: At December 31 1996 1995 (In thousands) FHLMC securities $4,834 $6,449 Accrued interest receivable on FHLMC 46 82 Funds held by trustee 379 568 Total $5,259 $7,099 Under provisions of the Trust Indenture, the bonds are fully collateralized by the FHLMC securities and funds held by the trustee. Funds held by the trustee represent payments received on FHLMC securities, collateral reserves, and reinvestment of earnings on such funds which have not been applied to pay principal and interest on the bonds. These funds are restricted to assure payment on the bonds in accordance with the Indenture. Long-Term Debt: The Company's long-term debt consisted of the following: At December 31 1996 1995 (In thousands) Bank notes $3,700 $4,800 Other 472 261 Total long-term debt $4,172 $5,061 The bank note evidences a $4.8 million non-revolving commercial loan commitment at Standard Mortgage Corporation of Georgia which is payable monthly in fixed principal installments of $100,000 through January 25, 2000. The commercial loan bears interest at 3% on the used portion for which a compensating balance is maintained and Prime Rate for which no compensating balance is maintained. This loan is secured by Standard Mortgage Corporation mortgage inventory, servicing rights, and commitments. Scheduled maturities of long-term debt for the years subsequent to December 31, 1996, are $1,384,000 in 1997; $1,361,000 in 1998; $1,306,000 in 1999; and $121,000 in 2000 and after. 32 12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires all entities to disclose the estimated fair value of its financial instrument assets and liabilities. For the Company, as for most financial institutions, approximately 95% of its assets and liabilities are considered financial instruments as defined in SFAS 107. Many of the Company's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimations and present value calculations were used by the Company for the purpose of this disclosure. Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. Management believes that cash, cash equivalents, and loans and deposits with floating interest rates have estimated fair values which approximate the recorded book balances. The estimation methodologies used, the estimated fair values, and recorded book balances at December 31, 1996, and 1995, were as follows: Financial instruments actively traded in a secondary market have been valued using quoted available market prices. 1996 1995 Estimated Recorded Estimated Recorded Fair Value Book Balance Fair Value Book Balance (In thousands) Federal funds sold $ - $ - $ 13,750 $ 13,750 Investment securities (including assets held in trust for collateralized mortgage obligation) 1,011,451 1,007,467 909,497 898,162 Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities. 1996 1995 Estimated Recorded Estimated Recorded Fair Value Book Balance Fair Value Book Balance (In thousands) Deposits with stated maturities $562,415 $558,383 $592,746 $582,632 Short-term borrowings 533,935 533,935 427,859 427,859 Long-term debt (including collateralized mortgage obligation and non- current portion of FHLB advances) 235,934 236,167 108,695 106,323 Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance. 1996 1995 Estimated Recorded Estimated Recorded Fair Value Book Balance Fair Value Book Balance (In thousands) Deposits with no stated maturities $580,355 $580,355 $595,226 $595,226 The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is based upon the treasury yield curve adjusted for non-interest operating costs, credit loss, and assumed prepayment risk. 1996 1995 Estimated Recorded Estimated Recorded Fair Value Book Balance Fair Value Book Balance (In thousands) Net loans (including loans held for sale) $927,043 $926,397 $830,184 $819,720 Purchased and originated mortgage servicing rights have been valued by an independent third party using a methodology which incorporates a discounted after-tax cash flow of the servicing (loan servicing fees and other related ancillary fee income less the costs of servicing the loans). This valuation also assumes current PSA prepayment speeds which are based upon industry data collected on mortgage prepayment trends. This methodology is consistent with SFAS 122. For further discussion see Note 1. 1996 1995 Estimated Recorded Estimated Recorded Fair Value Book Balance Fair Value Book Balance (In thousands) Purchased and originated mortgage servicing rights $14,596 $12,494 $12,985 $11,372 Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company's deposits is required by SFAS 107. Because of the Company's core deposit base (which comprises 96% of total deposits), its non-use of volatile funding sources such as brokered deposits, and a below peer cost of deposits (actual cost in 1996 of 4.12% vs. a peer average of 4.28% as of September 30, 1996), management believes the relationship value of these deposits is significant. Based upon the Company's most recent acquisitions and other limited secondary market transactions involving similar deposits, management estimates the relationship value of these funding liabilities to range between $45 million to $90 million less than their estimated fair value shown at December 31, 1996. The estimated fair value of off-balance sheet financial instruments, used for hedging purposes, is estimated by obtaining quotes from brokers. These values represent the estimated amount the Company would receive or pay, to terminate the agreements, considering current interest rates, as well as, the creditworthiness of the counterparties. At December 31, 1996, the notional value of the Company's off-balance sheet financial instruments (interest rate swaps) totalled $95 million with an estimated fair value of approximately ($333,000). 33 There is no material difference between the notional amount and the estimated fair value of the remaining off-balance sheet items which total $256.2 million and are primarily comprised of unfunded loan commitments which are generally priced at market at the time of funding. Management is concerned that reasonable comparability of these disclosed fair values between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. 13. INCOME TAXES The provision for federal income taxes is summarized below: Year ended December 31 1996 1995 1994 (In thousands) Current $6,468 $4,862 $4,748 Deferred 776 1,183 1,183 Income tax provision $7,244 $6,045 $5,931 The reconciliation between the federal statutory tax rate and the Company's effective consolidated income tax rate is as follows:
Year ended December 31 1996 1995 1994 Amount Rate Amount Rate Amount Rate (In thousands, except percentages) Tax expense based on federal statutory rate $ 9,542 35.0% $ 7,647 35.0% $ 5,938 34.4% State income taxes 200 0.7 350 1.6 570 3.3 Tax exempt income (3,168) (11.6) (2,766) (12.7) (1,736) (10.1) Goodwill and acquisition related costs 578 2.1 555 2.5 557 3.2 Other 92 0.3 259 1.3 602 3.6 Total provision for income taxes $7,244 26.5% $6,045 27.7% $5,931 34.4%
34 Deferred income taxes result from temporary differences in the recognition of revenue and expense for tax and financial reporting purposes. The following table presents the impact on income tax expense of the principal timing differences and the tax effect of each: Year ended December 31 1996 1995 1994 (In thousands) Provision for possible loan losses $ 555 $ 236 $1,083 Lease accounting 747 212 113 Accretion of discounts on securities, net 104 1,170 551 Investment write-downs 230 416 22 Core deposit and mortgage servicing intangibles (272) (209) (139) Deposit liability write-down (465) (453) (220) Deferred loan fees 82 82 76 Other, net (205) (271) (303) Total $776 $1,183 $1,183 At December 31, 1996, and 1995, deferred taxes are included in the accompanying consolidated balance sheet. The following table highlights the major components comprising the deferred tax assets and liabilities for each of the periods presented: At December 31 1996 1995 (In thousands) Deferred Assets: Provision for loan losses $ 4,665 $ 5,220 Investment security write-downsdue to SFAS 115 151 - Deferred loan fees 573 655 Tax credits and carryovers 540 2,045 Other 426 70 Total assets 6,355 7,990 Deferred Liabilities: Investment security write-ups due to SFAS 115 - (1,332) Accumulated depreciation (927) (1,062) Accretion of discount (2,247) (2,143) Lease accounting (1,576) (828) Core deposit and mortgage servicing intangibles (1,950) (2,222) Deposit liability write-down (345) (810) Other (570) (284) Total liabilities (7,615) (8,681) Valuation allowance (325) (325) Net deferred liability $(1,585) $(1,016) The change in the net deferred asset (liability) during 1996 and 1995 was attributed to the following: At December 31 1996 1995 (In thousands) Investment write-ups due to SFAS 115, Accounting for investments, and charged to equity $(1,483) $(5,738) Acquisition of JSB - 854 Use of JSB NOL (154) - Alternative minimum tax credit 292 (379) Deferred provision for income taxes 776 (1,183) Net decrease $ (569) $(6,446) Additional deferred tax asset attributable to tax benefits arising from completion of final JSB corporate tax returns. 14. PENSION AND PROFIT SHARING PLANS U.S. Bank: U.S. Bank has a trusteed, noncontributory defined benefit pension plan covering all employees who work at least 1,000 hours per year for U.S. Bank or the Company and who have not yet reached age 60 at their employment date. The benefits of the plan are based upon the employee's years of service and average annual earnings for the highest five consecutive calendar years during the final ten year period of employment. U.S. Bank's plan funding policy has been to contribute annually an amount within the statutory range of allowable minimum and maximum actuarially determined tax-deductible contributions. Plan assets are primarily debt securities (including U.S. Agency and Treasury securities, corporate notes and bonds), listed common stocks (including shares of USBANCORP, Inc. common stock), mutual funds, and short-term cash equivalent instruments. Net periodic pension cost for the plan is as follows: Year ended December 31 1996 1995 1994 (In thousands) Service cost $455 $399 $424 Interest cost 413 390 362 Deferred asset gain (loss) 241 575 (371) Amortization of transition asset (17) (17) (17) Amortization of unrecognized prior service cost (30) (31) (23) Actual return on plan assets (665) (919) 17 Net periodic pension cost $397 $397 $392 35 A reconciliation of the funded status of the plan to the recorded net pension liability is as follows: At December 31 1996 1995 (In thousands) Fair value of plan assets $ 6,599 $ 5,161 Projected benefit obligation (6,418) (6,345) Overfunded (unfunded) projected benefit obligation 181 (1,184) Unrecognized net transition asset (278) (294) Unrecognized prior service cost (480) (522) Unrecognized net (gain) loss (227) 108 Net pension liability $ (804) $(1,892) The actuarial present value of benefit obligations is as follows: At December 31 1996 1995 (In thousands) Accumulated benefit obligation $4,563 $4,488 Vested benefit obligation $4,339 $4,301 The following rate assumptions were used in the plan accounting: Jan. 1, Dec. 31, Jan. 1, Dec. 31, Measurement Date 1996 1996 1995 1995 Discount rate (weighted-average) 7.00% 7.25% 7.75% 7.00% Rate of compensation increases 3.50 3.50 4.00 3.50 Expected long-term rate of return on plan assets (weighted-average) 8.00 8.00 8.00 8.00 U.S. Bank also has a trusteed deferred profit sharing plan with contributions made by U.S. Bank based upon income as defined in the plan. All employees of U.S. Bank and the Company who work over 1,000 hours per year participate in the plan beginning on January 1 following six months of service. Contributions to this profit sharing plan were $287,000 in 1996; $764,000 in 1995; and $584,000 in 1994. Plan assets are primarily debt securities (including U.S. Agency and Treasury securities, corporate notes and bonds), listed common stocks (including shares of USBANCORP, Inc. common stock), mutual funds, and short-term cash equivalent instruments. Three Rivers Bank and Community Savings Bank (the Western Region Subsidiaries): The Western Region Subsidiaries have a trusteed, noncontributory defined benefit pension plan covering all employees who work at least 1,000 hours per year and who have not yet reached age 60 at their employment date. The benefits of the plan are based upon the employee's years of service and average annual earnings for the highest five consecutive calendar years during the final ten year period of employment. The Western Region Subsidiaries' plan funding policy has been to contribute annually an amount within the statutory range of allowable minimum and maximum actuarially determined tax-deductible contributions. Plan assets are primarily debt securities (including U.S. Agency and Treasury securities, corporate notes and bonds), listed common stocks (including shares of USBANCORP, Inc. common stock), mutual funds, and short-term cash equivalent instruments. Net periodic pension cost for the plan is as follows: Year ended December 31 1996 1995 1994 (In thousands) Service cost $ 518 $ 410 $ 346 Interest cost 316 259 302 Deferred asset gain (loss) 240 232 (160) Amortization of transition obligation 3 3 3 Amortization of unrecognized prior service cost 57 53 54 Actual return on plan assets (488) (448) (84) Amortization of loss 13 - 17 Net periodic pension cost $ 659 $ 509 $ 478 A reconciliation of the funded status of the plan to the recorded net pension asset (liability) is as follows: At December 31 1996 1995 (In thousands) Fair value of plan assets $ 4,157 $ 2,958 Projected benefit obligation (4,998) (4,383) Unfunded projected benefit obligation (841) (1,425) Unrecognized net transition obligation 19 22 Unrecognized prior service cost 674 669 Unrecognized net loss 278 411 Adjustment to recognize minimum required liability - (145) Net pension asset (liability) $ 130 $(468) The Western Region Subsidiaries recognized in 1995 an intangible asset of $145,000 related to the adjustment to recognize the minimum required liability due primarily to a reduction in the discount rate. No recognition of an intangible asset was necessary in 1996. The actuarial present value of benefit obligations is as follows: At December 31 1996 1995 (In thousands) Accumulated benefit obligation $3,903 $3,425 Vested benefit obligation $3,336 $3,129 36 The following rate assumptions were used in the plan accounting: Jan. 1, Dec. 31, Jan. 1, Dec. 31, Measurement Date 1996 1996 1995 1995 Discount rate (weighted-average) 7.00% 7.25% 7.75% 7.00% Rate of compensation increases 3.50 3.50 4.00 3.50 Expected long-term rate of return on plan assets (weighted-average) 8.00 8.00 8.00 8.00 The Western Region Subsidiaries also have a trusteed 401(k) plan with contributions made by the Western Region Subsidiaries matching those by eligible employees up to a maximum of 50% of the first 6% of their annual salary. All employees of the Western Region Subsidiaries who work over 1,000 hours per year are eligible to participate in the plan beginning on January 1 following six months of service. The Western Region Subsidiaries contribution to this 401(k) plan was $166,000 in 1996; $128,000 in 1995; and $79,000 in 1994. Except for the above pension benefits provided by each subsidiary, the Company has no significant additional exposure for any other post-retirement benefits. 15. LEASE COMMITMENTS The Company's obligation for future minimum lease payments on operating leases at December 31, 1996, is as follows: Year Future Minimum Lease Payments (In thousands) 1997 $512 1998 325 1999 205 2000 158 2001 and ther eafter (in total) 328 In addition to the amounts set forth above, certain of the leases require payments by the Company for taxes, insurance, and maintenance. Rent expense included in total non-interest expense amounted to $672,000, $533,000 and $540,000, in 1996, 1995, and 1994, respectively. 16. COMMITMENTS AND CONTINGENT LIABILITIES The Company's banking subsidiaries incur off-balance sheet risks in the normal course of business in order to meet the financing needs of their customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. Commitments to extend credit are obligations to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The banking subsidiaries evaluate each customer's creditworthiness on a case-by-case basis. Collateral which secures these types of commitments is the same as for other types of secured lending such as accounts receivable, inventory, and fixed assets. Standby letters of credit are conditional commitments issued by the banking subsidiaries to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including normal business activities, bond financings, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Letters of credit are issued both on an unsecured and secured basis. Collateral securing these types of transactions is similar to collateral securing the subsidiary banks' commercial loans. The Company's exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The banking subsidiaries use the same credit and collateral policies in making commitments and conditional obligations as for all other lending. The Company had outstanding various commitments to extend credit approximating $256,221,000 and standby letters of credit of $8,495,000 as of December 31, 1996. Additionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of management and legal counsel, neither the resolution of these claims nor the funding of these credit commitments will have a material adverse effect on the Company's consolidated financial position or results of operation. 17.INCENTIVE STOCK OPTION PLAN In 1991, the Company's Board of Directors adopted an Incentive Stock Option Plan authorizing the grant of options covering 128,000 shares of common stock. In April 1995, the Company amended the Plan to increase the number of shares available for issuance thereunder from 128,000 to 285,000 shares. 37 Under the Plan, options can be granted (the "Grant Date") to employees with executive, managerial, technical, or professional responsibility, as selected by a committee of the Board of Directors. The Company accounts for this Plan under APB Opinion 25, "Accounting for Stock Issued to Employees," under which no compensation cost has been recognized. The option price at which a stock option may be exercised shall be not less than 100% of the fair market value per share of common stock on the Grant Date. The maximum term of any option granted under the Plan cannot exceed 10 years. Had compensation cost for these plans been determined consistent with FASB 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the following pro forma amounts: At December 31 1996 1995 (In thousands, except per share data) Net Income: As Reported $20,019 $15,803 Pro Forma 19,810 15,767 Primary Earnings Per Share: As Reported $3.83 $2.88 Pro Forma 3.79 2.88 Fully Diluted Earnings Per Share: As Reported $3.81 $2.87 Pro Forma 3.77 2.87 Because SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. On or after the first anniversary of the Grant Date, one third of such options may be exercised. On or after the second anniversary of the Grant Date, two-thirds of such options may be exercised minus the aggregate number of such options previously exercised. On or after the third anniversary of the Grant Date, the remainder of the options may be exercised. A summary of the status of the Company's Stock Option Plan at December 31, 1996, and 1995, and changes during the years then ended is presented in the table and narrative following: Year ended December 31 1996 1995 Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price Outstanding at beginning of year 105,821 $24.34 75,867 $21.70 Granted 78,000 32.56 56,800 26.25 Exercised (8,563) 22.87 (23,846) 20.75 Forfeited - - (3,000) 22.40 Outstanding at end of year 175,258 28.11 105,821 24.34 Exercisable at end of year 54,280 23.29 20,854 20.09 Weighted average fair value of options granted since 1-1-95 $6.99 $6.38 38 A total of 54,280 of the 175,258 options outstanding at December 31, 1996, have exercise prices between $17.25 and $30.63, with a weighted average exercise price of $23.29 and a weighted average remaining contractual life of 6.9 years. All of these options are exercisable. The remaining 120,978 options have exercise prices between $21.25 and $32.56, with a weighted average exercise price of $30.27 and a weighted average remaining contractual life of 8.8 years. During 1996 one option grant totalling 78,000 shares was issued, compared to three option grants totalling 56,800 shares in 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1996 and 1995, respectively: risk-free interest rates of 5.49% for the 1996 options and 5.79%, 6.13%, and 7.82% for the 1995 Plan options; expected dividend yields of 3.25% for the 1996 options, and 3.25%, 3.50%, and 4.00% for the 1995 Plan options; expected lives of 7.0 years for all the 1996 and 1995 Plan options; expected volatility of 21.28% for the 1996 options, 21.29%, 21.85%, and 22.32% for the 1995 Plan options. 18.DIVIDEND REINVESTMENT PLAN The Company's Dividend Reinvestment and Common Stock Purchase Plan provides each record holder of Common Stock with a simple and convenient method of purchasing additional shares without payment of any brokerage commissions, service charges or other similar expense. A participant in the Plan may purchase shares of Common Stock by electing either to (1) reinvest dividends on all of his or her shares of Common Stock or (2) to make optional cash payments of not less than $10 each purchase up to a maximum of $2,000 per month and continue to receive regular dividend payments on his or her other shares. Participants who enroll to reinvest dividends may also make optional cash payments of not less than $10 each purchase up to a maximum of $2,000 per month. A participant may withdraw from the Plan at any time. Shares purchased under the Plan will be acquired at a three percent discount from the average market price. In the case of purchases from USBANCORP, Inc. of treasury or newly-issued shares of Common Stock, the average market price is determined by averaging the high and low sale price of the Common Stock as reported on the NASDAQ on the relevant investment date. At December 31, 1996, the Company had 263,048 unissued reserved shares available under the Plan. In the case of purchases of shares of Common Stock on the open market, the average market price will be the weighted average purchase price of shares purchased for the Plan in the market for the relevant investment date. 19. SHAREHOLDER RIGHTS PLAN Each share of the Company's Common Stock had attached to it one right (a "Right") issued pursuant to a Shareholder Protection Rights Agreement, dated November 10, 1989 (the "Rights Agreement"). Each Right entitled a holder to buy one-tenth of a share of the Company's Series B Preferred Stock at a price of $40.00, subject to adjustment (the "Exercise Price"). The Rights became exercisable if a person, group, or other entity acquired or announced a tender offer for 20% or more of the Company's Common Stock. They could also have been exercised if a person or group who had become a beneficial owner of at least 10% of the Company's Common Stock was declared by the Board of Directors to be an "adverse person" (as defined in the Rights Agreement). Under the Rights Agreement, any person, group, or entity would be deemed a beneficial owner of the Company's Common Stock if such person, group, or entity would be deemed to beneficially own the Company's Common Stock under the rules of the Securities and Exchange Commission which generally require that such person, group, or entity have, or have the right to acquire within sixty days, voting or dispositive power of the Company's Common Stock; provided, however, that the Rights Agreement excluded from the definition of beneficial owner, holders of revocable proxies, employee benefit plans of the Company or its subsidiaries and the Trust Company. 39 After the Rights became exercisable, the Rights (other than rights held by a 20% beneficial owner or an "adverse person") would entitle the holders to purchase, under certain circumstances, either the Company's Common Stock or common stock of the potential acquirer having a value equal to twice the Exercise Price. The Company was generally entitled to redeem the Rights at $0.01 per Right at any time until the twentieth business day following public announcement that a 20% position had been acquired or the Board of Directors had designated a holder of the Company's Common Stock an adverse person. The Rights expired on November 10, 1994. On February 24, 1995, the Company's Board of Directors adopted a Shareholder Rights Plan which is substantially similar to and replaces the previous Rights Agreement which expired on November 10, 1994. The only significant difference from the previous Rights Agreement is that under the new plan each right will initially entitle shareholders to buy one unit of a newly authorized series of junior participating preferred stock at an exercise price of $65.00. The rights attached to shares of USBANCORP Common Stock outstanding on March 15, 1995, and will expire in ten years. 20. JOHNSTOWN SAVINGS BANK ("JSB") ACQUISITION For financial reporting purposes, the Merger with JSB was effected on June 30, 1994. USBANCORP merged JSB with and into U.S. Bank, a wholly-owned subsidiary of USBANCORP, with U.S. Bank surviving the Merger. The separate existence of JSB ceased, and all property, rights, powers, duties, obligations, and liabilities of JSB were automatically transferred to U.S. Bank, in accordance with Federal and Pennsylvania law. Immediately following the Merger, U.S. Bank caused the intracompany transfer by Standard Mortgage Corporation of Georgia ("SMC") , a wholly-owned subsidiary of JSB, of all its assets, subject to all of its liabilities, to SMC Acquisition Corporation, an indirect subsidiary of Community. SMC Acquisition Corporation was renamed Standard Mortgage Corporation of Georgia and is a mortgage banking company organized under the laws of the State of Georgia and originates, sells, and services residential mortgage loans. The Merger was treated as a purchase for financial accounting purposes. The recorded purchase price was based on the average of the closing price of USBANCORP Common Stock ("UBAN") on the NASDAQ/NMS for the ten trading days immediately preceding the final closing date of the transaction. The ten day average of USBANCORP's Common Stock was $25.125, which resulted in a total cost of the acquisition being $43.8 million, which was represented by the issuance of 957,857 common shares and $19.7 million in cash. Accounting for the acquisition as a purchase, USBANCORP recognized newly created core deposit intangibles of $5.7 million and goodwill of $20.2 million and began realizing net income immediately from July 1, 1994. Furthermore, the Company incurred approximately $2.4 million of additional restructuring expenses during 1994 as a result of the JSB acquisition including employee severance, data processing conversion costs, marketing and advertising expenses, and other costs. These costs are included in the line item titled "Acquisition charge" in the accompanying Consolidated Statement of Income. The pro forma combined results of operations of the Company for the year ended December 31, 1994, after giving effect to the pro forma adjustments as of the beginning of the period, is as follows: Year ended December 31 1994 (In thousands, except per share data) Net interest income $61,466 Provision for loan losses (2,307) Non-interest income 10,635 Non-interest expense 56,581 Provision for income taxes 6,133 Net income $11,694 Net income per fully diluted common share $2.06 21. 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 $16.9 million of goodwill and $4.6 million of core deposit intangible assets on its balance sheet. The majority of these intangible assets came from the 1994 JSB acquisition ($25.9 million) and the 1993 Integra Branches acquisition ($1.2 million). 40 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: Year Expense (In thousands) 1997 $2,356 1998 2,170 1999 2,014 2000 1,904 2001 and after 13,034 A reconciliation of the Company's intangible asset balances for 1996 and 1995 is as follows: At December 31 1996 1995 (In thousands) Balance January 1 $23,838 $27,009 Amortization expense (2,360) (2,473) Goodwill reduction resulting from additional deferred tax asset - (698) Balance December 31 $21,478 $23,838 The additional deferred tax asset was attributed to tax benefits arising from the completion of the final JSB corporate tax return in 1995. Goodwill and other intangible assets are reviewed for possible impairment at a minimum annually, or more frequently, if events or changed circumstances may affect the underlying basis of the asset. The Company uses an estimate of the subsidiary banks undiscounted future earnings over the remaining life of the goodwill and other intangibles in measuring whether these assets are recoverable. This review is consistent with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of," which the Company adopted in the first quarter of 1996. This adoption did not have a material impact on the Company's Financial Statements. 22. OFF-BALANCE SHEET HEDGE INSTRUMENTS 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. A summary of the off-balance sheet hedging transactions outstanding as of December 31, 1996, and 1995, are as follows: Borrowed Funds Hedges: On March 16, 1995, the Company entered into an interest rate swap agreement with a notional amount of $60 million and a termination date of March 16, 1997. Under the terms of the swap agreement, the Company pays a two year fixed interest rate of 6.93% and receives 90 day Libor which resets quarterly. The counterparty in this unsecured transaction is PNC Bank. This swap agreement was executed to hedge short-term borrowings which were incurred to fund investment securities as part of the increased leveraging of the balance sheet. Specifically, FHLB term advances which reprice quarterly are being used to fund fixed-rate agency mortgage-backed securities with durations ranging from two to three years. This hedge transaction increased interest expense by $738,000 for 1996 and $367,000 for 1995. On September 29, 1995, the Company entered into an interest rate swap agreement with a notional amount of $25 million and a termination date of September 29, 1997. Under the terms of the swap agreement, the Company pays a two year fixed interest rate of 6.05% and receives 90 day Libor which resets quarterly. The counterparty in this unsecured transaction is Mellon Bank. This swap agreement was executed to hedge short-term borrowings used to leverage the balance sheet. Specifically, FHLB advances which reprice every 90 days are being used to fund fixed-rate agency mortgage-backed securities with a two year duration. This hedge transaction increased interest expense by $124,000 for 1996 and $12,000 for 1995. CMO Liability Hedge: During the first quarter of 1994, the Company entered into an interest rate swap agreement with a termination date of February 11, 1997. Under the terms of the swap agreement, the Company receives a fixed interest rate of 5% and pays a floating interest rate defined as the 90 day Libor which resets quarterly. The counterparty in this unsecured transaction is PNC Bank. This swap agreement was initiated to hedge interest rate risk in a declining, stable, or modestly rising rate environment. Specifically, this transaction hedges the CMO liability on the Consolidated Balance Sheet by effectively converting the fixed percentage cost to a variable rate cost. This hedge also offsets market valuation risk since any change in the market value of the swap agreement correlates in the opposite direction with a change in the market value of the CMO liability. Overall, this swap agreement increased interest expense by $60,000 for 1996 and $110,000 for 1995. The Company believes that its exposure to credit loss in the event of non-performance by any of the counterparties is remote. The Company monitors and controls all off-balance sheet derivative products with a comprehensive Board of Director approved hedging policy. This policy permits a maximum notional amount outstanding of $250 million for interest rate swaps, and a maximum notional amount outstanding of $250 million for interest rate caps/floors. The Company had no interest rate caps or floors outstanding at December 31, 1996, or December 31, 1995. 41 23. 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 I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes that as of December 31, 1996, the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1996, and 1995, 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 I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company's classification category.
To Be Well Capitalized Under For Capital Prompt Corrective As of December 31, 1996 Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio (In thousands, except ratios) Total Capital (to Risk Weighted Assets) Consolidated $142,832 14.16% $80,683 8.00% $100,853 10.00% U.S. Bank 86,087 15.47 44,505 8.00 55,631 10.00 Three Rivers Bank 31,878 13.55 18,818 8.00 23,523 10.00 Community Savings Bank 29,287 13.52 17,334 8.00 21,668 10.00 Tier 1 Capital (to Risk Weighted Assets) Consolidated 130,225 12.91 40,341 4.00 60,512 6.00 U.S. Bank 79,133 14.22 22,252 4.00 33,379 6.00 Three Rivers Bank 29,281 12.45 9,409 4.00 14,114 6.00 Community Savings Bank 26,579 12.27 8,667 4.00 13,001 6.00 Tier 1 Capital (to Average Assets) Consolidated 130,225 6.51 79,966 4.00 99,958 5.00 U.S. Bank 79,133 6.91 45,790 4.00 57,238 5.00 Three Rivers Bank 29,281 6.44 18,174 4.00 22,718 5.00 Community Savings Bank 26,579 6.65 15,986 4.00 19,982 5.00
42
To Be Well Capitalized Under For Capital Prompt Corrective As of December 31, 1995 Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio (In thousands, except ratios) Total Capital (to Risk Weighted Assets) Consolidated $134,552 14.88% $72,325 8.00% $90,406 10.00% U.S. Bank 80,593 15.52 41,532 8.00 51,915 10.00 Three Rivers Bank 29,312 15.05 15,578 8.00 19,472 10.00 Community Savings Bank 28,675 15.22 15,075 8.00 18,843 10.00 Tier 1 Capital (to Risk Weighted Assets) Consolidated 123,251 13.63 36,162 4.00 54,244 6.00 U.S. Bank 74,104 14.27 20,766 4.00 31,149 6.00 Three Rivers Bank 26,878 13.80 7,789 4.00 11,683 6.00 Community Savings Bank 26,320 13.97 7,537 4.00 11,306 6.00 Tier 1 Capital (to Average Assets) Consolidated 123,251 6.65 74,107 4.00 92,634 5.00 U.S. Bank 74,104 6.88 43,064 4.00 53,830 5.00 Three Rivers Bank 26,878 6.72 16,006 4.00 20,008 5.00 Community Savings Bank 26,320 7.07 14,882 4.00 18,602 5.00
24. PARENT COMPANY FINANCIAL INFORMATION The Parent Company functions primarily as a coordinating and servicing unit for all subsidiary entities. Provided services include general management, credit policies and procedures, accounting and taxes, loan review, auditing, investment advisory, compliance, marketing, insurance risk management, general corporate services, and financial and strategic planning. The following financial information relates only to the Parent Company operations: BALANCE SHEET At December 31 1996 1995 (In thousands) ASSETS Cash and cash equivalents $ 28 $ 314 Equity investment in banking subsidiaries 157,120 155,135 Equity investment in non-banking subsidiaries 2,128 2,079 Other assets 878 964 TOTAL ASSETS $160,154 $158,492 LIABILITIES Short-term borrowings $ 4,800 $ 7,452 Other liabilities 3,332 548 TOTAL LIABILITIES 8,132 8,000 STOCKHOLDERS' EQUITY Total stockholders' equity 152,022 150,492 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $160,154 $158,492 43 STATEMENT OF INCOME Year ended December 31 1996 1995 1994 (In thousands) INCOME Inter-entity management fees $ 3,817 $ 3,899 $ 3,332 Dividends from subsidiaries 15,491 9,237 5,530 Interest and dividend income 13 776 1,062 Net realized losses on investment securities - (469) (99) Total Income 19,321 13,443 9,825 EXPENSE Interest expense 676 1,343 535 Salaries and employee benefits 2,753 2,885 2,670 Other expense 1,522 1,563 1,924 Total Expense 4,951 5,791 5,129 INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 14,370 7,652 4,696 Provision for income taxes 484 641 5 Equity in undistributed income of subsidiaries 5,271 7,510 6,619 NET INCOME $20,125 $15,803 $11,320 STATEMENT OF CASH FLOWS Year ended December 31 1996 1995 1994 (In thousands) OPERATING ACTIVITIES Net income $ 20,125 $ 15,803 $ 11,320 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (5,271) (7,510) (6,619) Net cash provided by operating activities 14,854 8,293 4,701 INVESTING AND FINANCING ACTIVITIES Common stock cash dividends paid (4,522) (7,156) (4,679) Proceeds from issuance of common stock 188 497 596 Sale of investment securities - 16,356 - Purchase of treasury stock (8,531) (7,943) (3,064) (Repayment) borrowing to fund JSB acquisition - (16,669) 16,669 (Decrease) increase in borrowings (1,800) 5,600 1,000 Investment in subsidiaries - (200) (19,498) Other-net (475) (996) 3,884 Net cash used by investing and financing activities (15,140) (10,511) (5,092) NET DECREASE IN CASH EQUIVALENTS (286) (2,218) (391) CASH EQUIVALENTS AT JANUARY 1 314 2,532 2,923 CASH EQUIVALENTS AT DECEMBER 31 $ 28 $ 314 $ 2,532 The ability of subsidiary banks to upstream cash to the Parent Company is restricted by regulations. Federal law prevents the Parent Company from borrowing from its subsidiary banks unless the loans are secured by specified assets. Further, such secured loans are limited in amount to ten percent of the subsidiary banks' capital and surplus. In addition, the subsidiary banks are subject to legal limitations on the amount of dividends that can be paid to their shareholder. The dividend limitation generally restricts dividend payments to a bank's retained net income for the current and preceding two calendar years. Cash may also be upstreamed to the Parent Company by the subsidiary banks as an inter-entity management fee. At December 31, 1996, the subsidiary banks were permitted to upstream an additional $20,071,000 in cash dividends to the Parent Company. The subsidiary banks also had a combined $131,277,000 of restricted surplus and retained earnings at December 31, 1996. The Parent Company renewed a $2.5 million line of credit from a non-affiliated correspondent bank. This line of credit is unsecured and is subject to annual review on July 31, 1997. Future drawdowns on this line would be at short-term rates tied to 90 day Libor. Additionally, there is an annual commitment fee of 1/4% on any unused portion of the line. The Parent Company also entered into a $10 million unsecured line of credit from the same non-affiliated correspondent bank on August 1, 1995. Subsequently, this line of credit was increased to $12 million in July 1996 and is subject to annual review on July 31, 1997. Future drawdowns on this line would be the greater of (A) the Prime Rate less one-half of one percent (1/2%), or (B) the sum of the Federal Funds Rate plus fifty basis points (1/2%) per annum. Additionally, there is an annual commitment fee of one-tenth of one percent (1/10%) on the unused portion of the line. The Parent Company had available at December 31, 1996,$9.7 million of a total combined $14.5 million available credit line. 44 STATEMENT OF MANAGEMENT RESPONSIBILITY January 23, 1997 To the Stockholders and Board of Directors of USBANCORP, Inc. Management of USBANCORP, Inc. and its subsidiaries have prepared the consolidated financial statements and other information in the "Annual Report and Form 10-K" in accordance with generally accepted accounting principles and are responsible for its accuracy. In meeting its responsibility, 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 proprietary 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 public 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 Terry K. Dunkle Chairman, President & CEO /s/Orlando B. Hanselman Orlando B. Hanselman Executive Vice President & Chief Financial Officer 45 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of USBANCORP, Inc.: We have audited the accompanying consolidated balance sheets of USBANCORP, Inc. (a Pennsylvania corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USBANCORP, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As explained in Note 1 to the Consolidated Financial Statements, effective January 1, 1995, the Company changed its method of accounting for loan losses. In addition, the Company changed its method of accounting for mortgage servicing rights effective for the quarter ended June 30, 1995. Further, as discussed in Note 1 to the Consolidated Financial Statements, effective January 1, 1994, the Company changed its method of accounting for investments in debt and equity securities. /s/Arthur Andersen LLP Arthur Andersen LLP Pittsburgh, Pennsylvania January 23, 1997 46 Management's Discussion and Analysis - Divider Page 47 MARKET PRICE AND DIVIDEND DATA Common Stock USBANCORP's Common Stock is traded on the NASDAQ National Market System under the symbol "UBAN." The following table sets forth the high and low closing prices and the cash dividends declared per share for the periods indicated: CLOSING PRICES Cash Dividends High Low Declared Year ended December 31, 1996: First Quarter $33.50 $31.50 $0.27 Second Quarter 36.88 31.75 0.30 Third Quarter 38.94 31.00 0.30 Fourth Quarter 42.50 38.50 0.50 Year ended December 31, 1995: First Quarter $24.00 $20.50 $0.25 Second Quarter 23.50 19.75 0.27 Third Quarter 30.50 22.75 0.27 Fourth Quarter 34.25 29.25 0.27 48 SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA
At or for the year ended December 31 1996 1995 1994 1993 1992 (Dollars in thousands, except per share data and ratios) Summary of Income Statement Data: Total interest income $ 137,333 $ 129,715 $ 102,811 $ 85,735 $ 82,790 Total interest expense 76,195 73,568 46,993 36,250 38,349 Net interest income 61,138 56,147 55,818 49,485 44,441 Provision for loan losses 90 285 (2,765) 2,400 2,216 Net interest income after provision for loan losses 61,048 55,862 58,583 47,085 42,225 Total non-interest income 18,689 16,543 8,187 10,150 8,346 Total non-interest expense 52,474 50,557 49,519 40,715 36,248 Income before income taxes and cumulative effect of change in accounting principle 27,263 21,848 17,251 16,520 14,323 Provision for income taxes 7,244 6,045 5,931 5,484 5,440 Income before cumulative effect of change in accounting principle 20,019 15,803 11,320 11,036 8,883 Cumulative effect of change in accounting principle - - - 1,452 - Net income $ 20,019 $ 15,803 $ 11,320 $ 12,488 $ 8,883 Net income applicable to common stock $ 20,019 $ 15,803 $ 11,320 $ 12,385 $ 7,710 Per Common Share Data: Primary Earnings: Net income $ 3.83 $ 2.88 $ 2.18 $ 2.78 $ 2.67 Income before cumulative effect of change in accounting principle, and acquisition charge 3.83 2.88 2.54 2.45 2.67 Fully Diluted Earnings: Net income 3.81 2.87 2.18 2.72 2.53 Income before cumulative effect of change in accounting principle, and acquisition charge 3.81 2.87 2.54 2.41 2.53 Cash dividends declared 1.37 1.06 0.97 0.86 0.75 Book value at period end 29.90 28.34 24.57 24.67 23.08 Balance Sheet and Other Data: Total assets $2,087,112 $1,885,372 $1,788,890 $1,241,521 $1,139,855 Loans and loans held for sale, net of unearned income 939,726 834,634 868,004 727,186 648,915 Allowance for loan losses 13,329 14,914 15,590 15,260 13,752 Investment securities available for sale 455,890 427,112 259,462 428,712 366,888 Investment securities held to maturity 546,318 463,951 524,638 - - Deposits 1,138,738 1,177,858 1,196,246 1,048,866 997,591 Long-term debt 4,172 5,061 5,806 3,445 9,409 Stockholders' equity 151,917 150,492 137,136 116,615 82,971 Full-time equivalent employees 759 742 780 665 644 Selected Financial Ratios: Return on average total equity before SFAS 109 benefit and acquisition charge 13.36% 11.03% 10.41% 10.13% 11.41% Return on average assets before SFAS 109 benefit and acquisition charge 1.03 0.87 0.87 0.91 0.85 Loans and loans held for sale, net of unearned income, as a percent of deposits, at period end 82.52 70.86 72.56 69.33 65.05 Ratio of average total equity to average assets 7.69 7.85 8.39 8.96 7.48 Common stock cash dividends as a percent of net income applicable to common stock 35.28 36.43 44.57 32.28 28.16 Common and preferred stock cash dividends as a percent of net income 35.28 36.43 44.57 32.84 37.64 Interest rate spread 3.06 2.94 3.47 3.72 3.93 Net interest margin 3.52 3.45 4.03 4.34 4.58 Allowance for loan losses as a percentage of loans and loans held for sale, net of unearned income, at period end 1.42 1.79 1.80 2.10 2.12 Non-performing assets as a percentage of loans and loans held for sale and other real estate owned, at period end 0.92 1.13 0.91 0.89 1.58 Net charge-offs as a percentage of average loans and loans held for sale 0.20 0.08 0.04 0.13 0.58 Ratio of earnings to fixed charges and preferred dividends: Excluding interest on deposits 1.79x 1.77x 2.34x 5.26x 4.05x Including interest on deposits 1.36 1.30 1.37 1.45 1.36 One Year GAP ratio, at period end 0.79 0.86 0.79 1.10 1.14 Full-time equivalent employees in 1994 include 115 employees as a result of JSB acquisition. Full-time equivalent employees in 1993 include 18 employees as a result of the Integra Branches Acquisition. Full-time equivalent employees in 1992 include 127 employees as a result of the Community Acquisition. The ratio of earnings to fixed charges and preferred dividends is computed by dividing the sum of income before taxes, fixed charges, and preferred dividends by the sum of fixed charges and preferred dividends. Fixed charges represent interest expense and are shown as both excluding and including interest on deposits.
49 SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA The following table sets forth certain unaudited quarterly consolidated financial data regarding the Company:
1996 Quarter Ended Dec. 31 Sept. 30 June 30 March 31 (In thousands, except per share data) Interest income $35,991 $35,330 $33,245 $32,767 Non-interest income 4,665 4,922 4,572 4,530 Total operating income 40,656 40,252 37,817 37,297 Interest expense 20,006 19,709 18,213 18,267 Provision for loan losses 22 23 22 23 Non-interest expense 13,108 14,675 12,380 12,311 Income before income taxes 7,520 5,845 7,202 6,696 Provision for income taxes 2,025 1,546 1,920 1,753 Net income $ 5,495 $ 4,299 $ 5,282 $ 4,943 Primary Earnings Per Common Share: Net income $ 1.06 $ 0.83 $ 1.01 $ 0.93 Fully Diluted Earnings Per Common Share: Net income 1.06 0.82 1.01 0.93 Cash Dividends Declared Per Common Share 0.50 0.30 0.30 0.27 On September 30, 1996, the Company accrued a one-time assessment of $1,925,000 mandated by Congress to recapitalize the Savings Association Insurance Fund. The negative after-tax impact of this special assessment on net income was $1,368,000 or $0.26 on fully diluted EPS. 1995 Quarter Ended Dec. 31 Sept. 30 June 30 March 31 (In thousands, except per share data) Interest income $32,994 $32,733 $31,765 $32,223 Non-interest income 4,533 3,984 4,538 3,488 Total operating income 37,527 36,717 36,303 35,711 Interest expense 19,084 18,765 18,229 17,490 Provision for loan losses 45 45 75 120 Non-interest expense 12,838 12,606 12,595 12,518 Income before income taxes 5,560 5,301 5,404 5,583 Provision for income taxes 1,445 1,393 1,523 1,684 Net income $ 4,115 $ 3,908 $ 3,881 $ 3,899 Primary Earnings Per Common Share: Net income $ 0.77 $ 0.72 $ 0.70 $ 0.70 Fully Diluted Earnings Per Common Share: Net income 0.77 0.72 0.70 0.70 Cash Dividends Declared Per Common Share 0.27 0.27 0.27 0.25
50 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("M. D. & A.") The following discussion and analysis of financial condition and results of operations of USBANCORP should be read in conjunction with the consolidated financial statements of USBANCORP, including the related notes thereto, included elsewhere herein. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 RECENT ACQUISITION HISTORY...The following represents a brief summary of the Johnstown Savings Bank ("JSB") acquisition, which was the only acquisition that impacted the Company's financial performance over the three year period from January 1, 1994, through December 31, 1996. For a more comprehensive discussion of this acquisition, see Note 20. Johnstown Savings Bank: The acquisition of JSB for financial reporting purposes was effective June 30, 1994, and accordingly, impacted the Company's financial performance for six months in 1994 and the full year in both 1995 and 1996. At the acquisition date, JSB had total assets of $367 million, total loans of $125.6 million, and total deposits of $209 million. JSB was immediately merged into the Company's U.S. Bank subsidiary, which is also based in Johnstown, Pennsylvania, giving U.S. Bank an approximate 23% deposit market share leadership position in Cambria County. JSB also had a wholly-owned mortgage banking subsidiary, Standard Mortgage Company of Georgia, which U.S. Bank transferred on an intracompany basis immediately following the merger to Community Bancorp, Inc.. Standard Mortgage Company currently services approximately $1.4 billion of mortgage loans and has mortgage servicing rights totalling $12.5 million at December 31, 1996. The total cost of the JSB acquisition was $43.8 million. JSB initially had six branch office locations in the Greater Johnstown marketplace. Since the acquisition date, three of these offices have been merged into U.S. Bank's retail delivery system to achieve economy of scale benefits. PERFORMANCE OVERVIEW...The Company's net income for 1996 was $20.0 million or $3.81 on a fully diluted per share basis compared to net income of $15.8 million or $2.87 per fully diluted share for 1995 and net income of $11.3 million or $2.18 per fully diluted share for 1994. When 1996 is compared to 1995, the Company's net income increased by $4.2 million or 26.7% while fully diluted earnings per share increased by $0.94 or 32.8%. The Company's return on equity increased by 2.33% to 13.36% while return on assets increased by 16 basis points to 1.03%. This improved financial performance in 1996 was driven by increased revenue generated from the core banking business. Specifically, net interest income increased by $5.0 million or 8.9% while total non-interest income grew by $2.1 million or 13.0%. This growth in revenue more than offset the negative impact of higher non-interest expense. Total non-interest expense increased by $1.9 million or 3.8% due primarily to a special assessment to recapitalize the Savings Association Insurance Fund ("SAIF") in the third quarter of 1996. This special assessment amounted to $1.9 million on a pre-tax basis and reduced fully diluted earnings per share by $0.26 in 1996. Excluding the special SAIF assessment, the Company's total non-interest expense was essentially flat between years. 51 The Company's earnings per share were also enhanced by the repurchase of its common stock. There were 247,000 fewer average fully diluted shares outstanding in 1996 than in 1995 due to the success of the Company's ongoing stock buyback program. Overall, the Company demonstrated an improving quarterly earnings trend in 1996 as fully diluted earnings per share and return on equity improved from $0.93 and 13.14% in the first quarter to $1.06 and 14.38% in the fourth quarter. When 1995 is compared to 1994, the Company's net income increased by $4.5 million or 39.6% while fully diluted earnings per share increased by $0.69 or 31.7%. Note that the Company's 1994 net income included a $1.9 million after-tax acquisition restructuring charge related to the intra-market purchase of JSB. The Company's improved earnings performance in 1995 was due to higher non-interest income, increased net interest income, and a lower effective income tax rate. These favorable items were partially offset by a higher relative loan loss provision (because the Company benefited from a negative loan loss provision in 1994) and higher non-interest expense. The full year impact of the additional shares issued for the JSB acquisition was the primary reason that the fully diluted earnings per share growth rate was lower than the net income growth rate experienced in 1995. The following table summarizes some of the Company's key performance indicators for each of the past three years: Year ended December 31 1996 1995 1994 (In thousands, except per share data and ratios) Net income $20,019 $15,803 $11,320 Fully diluted earnings per share 3.81 2.87 2.18 Return on average assets 1.03% 0.87% 0.75% Return on average equity 13.36 11.03 8.92 Average fully diluted common shares outstanding 5,253 5,500 5,192 NET INTEREST INCOME AND MARGIN...The Company's net interest income represents the amount by which interest income on earning assets exceeds interest paid on interest bearing liabilities. Net interest income is a primary source of the Company's earnings; it is affected by interest rate fluctuations as well as changes in the amount and mix of earning assets and interest bearing liabilities. It is the Company's philosophy to strive to optimize net interest margin performance in varying interest rate environments. The following table summarizes the Company's net interest income performance for each of the past three years: Year ended December 31 1996 1995 1994 (In thousands, except ratios) Interest income $137,333 $129,715 $102,811 Interest expense 76,195 73,568 46,993 Net interest income 61,138 56,147 55,818 Tax-equivalent adjustment 2,954 2,807 1,746 Net tax-equivalent interest income $ 64,092 $ 58,954 $ 57,564 Net interest margin 3.52% 3.45% 4.03% 1996 NET INTEREST PERFORMANCE OVERVIEW...The Company's net interest income on a tax-equivalent basis increased by $5.1 million or 8.7% due to growth in earning assets and improved net interest margin performance. The 1996 net interest margin of 3.52% was seven basis points better than the 1995 net interest margin of 3.45% and reflects the benefits of reduced funding costs and six consecutive quarters of loan growth. 52 The total cost of funds decreased by 17 basis points as deposit and borrowing costs dropped by 15 and 55 basis points, respectively. Growth in higher yielding loans helped limit the decline in the earning asset yield to five basis points despite the lower interest rate environment which was experienced in 1996. Total loans outstanding averaged $858 million or 73.8% of total deposits in 1996 compared to an average of $824 million or 68.7% of total deposits in 1995. By the fourth quarter of 1996, the Company's loan to deposit ratio had improved to 79.4%. This growth in loans along with greater balance sheet leveraging through the investment securities portfolio caused total average earning assets to be $111 million higher in 1996 compared to 1995. BALANCE SHEET LEVERAGING...The Company's ongoing strategy to use borrowed funds to purchase earning assets in order to leverage the balance sheet and equity contributes to increased net interest income but a lower net interest margin percentage. The source for the borrowed funds is predominately the Federal Home Loan Bank ("FHLB") because each of the Company's subsidiary banks are members of the FHLB. Examples of FHLB borrowings used by the Company include 30 and 90 day wholesale reverse repurchase agreements, overnight borrowings, one year term funds tied to 90 day Libor, and term advances. These funds are used primarily to purchase available for sale and held to maturity mortgage-backed investment securities with durations ranging from one to three years. For the full year 1996, the Company's total level of short-term borrowed funds and FHLB advances averaged $600 million or 30.8% of total assets compared to an average of $449 million or 24.6% of total assets in 1995. These borrowed funds had an average cost of 5.59% in 1996 which was 147 basis points greater than the average cost of deposits which amounted to 4.12%. The net interest spread earned on assets funded with short-term borrowings and FHLB advances averaged 1.45% in 1996 which compared favorably to the net interest spread of 1.10% earned on leveraged assets in 1995. 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 of minus 7.5% under different interest rate scenarios (see further discussion under Interest Rate Sensitivity). The Company continuously evaluates the approximate $10 million of cash flow received monthly from the investment portfolio and makes one of the following three decisions which can impact the leveraged position of the balance sheet: (1) The Company can use the money to fund any loan demand that cannot be funded with existing cash flow from the loan portfolio or deposits. (2) The Company can use the money to fund new investment security purchases provided that the incremental spread over the current short-term borrowing cost is not less than 100 basis points. (3) The Company can use the money to paydown short-term borrowings if the incremental spread that can be earned on new investment purchases is not deemed sufficient. It is recognized that interest rate risk does exist, particularly in a rising interest rate environment, from this use of borrowed funds to leverage the balance sheet. To neutralize a portion of this risk, the Company has executed a total of $85 million of off-balance sheet hedging transactions which help fix the variable funding costs associated with the leveraging of the balance sheet. (See further discussion under Note 22.) Additionally, during the first quarter of 1996 the Company took advantage of the flatness of the Treasury yield curve to further reduce the interest rate risk associated with the balance sheet leveraging. 53 Specifically, $150 million of non-hedged borrowings with the FHLB were extended from a 30 day maturity to a two year term at a fixed cost of approximately 5.0%. This liability extension strategy helped reduce both short-term interest rate risk and the cost of borrowings. COMPONENT CHANGES IN NET INTEREST INCOME: 1996 VERSUS 1995...Regarding the separate components of net interest income, the Company's total 1996 tax-equivalent interest income increased by $7.8 million or 5.9% when compared to 1995. This increase was due primarily to a $111 million or 6.5% increase in total average earning assets which caused interest income to rise by $7.2 million. This net increase in average earning assets reflects $84 million of growth in average investment securities and a $34 million increase in total average loans. The additional interest income generated from higher earning asset volumes was partially offset by a five basis point decline in the earning asset yield to 7.72%. Within the earning asset base, the yield on total investment securities declined by eight basis points to 6.85% due primarily to the lower interest rate environment experienced in 1996. Both the prime rate and fed funds rate were approximately 50 basis points lower in 1996 as compared to 1995. Despite the lower interest rate environment, the yield on the total loan portfolio decreased by only five basis points to 8.62%. A mix shift in the loan portfolio towards higher yielding commercial product is favorably impacting the total loan portfolio yield. Total commercial and commercial mortgage loans comprised 43.1% of total loans at December 31, 1996, compared to 33.9% at December 31, 1995. Residential mortgage loans comprised 45.6% of total loans at December 31, 1996, compared to 50.3% at December 31, 1995. The higher commercial loan totals resulted from increased production from both small business (loans less than $250,000) and middle market lending. This improved new loan production was due primarily to more effective sales efforts which have included an intensive customer calling program and canvassing of small commercial businesses. During 1996, in its first full year of operation, the Company's small business loan center approved 688 applications for $40 million and closed 401 loans for $27 million with an average approval time of 48 hours. The Company will continue to aggressively focus on this market that was established over the past eighteen months. This enhanced commercial loan production also attests to the modest economic growth of the Western Pennsylvania market. The reduced dependence on residential mortgage loans as an earning asset reflects the Company's ongoing strategy to sell newly originated 30 year fixed-rate mortgage product. The decline in consumer loans from 15.8% of total loans at December 31, 1995, to 11.3% of total loans at December 31, 1996, was due entirely to net run-off experienced within the lower yielding indirect auto loan portfolio. This indirect auto loan run-off has more than offset improved production of higher yielding direct consumer loans from the Company's branch offices which for 1996 were $14 million or 40% greater than 1995. The Company's total interest expense for 1996 increased by $2.6 million, or 3.6%, when compared to 1995. This higher interest expense was caused by a $112 million increase in average interest bearing liabilities which caused interest expense to rise by $3.8 million. Within the liability mix, total borrowed funds increased by $153 million in order to fund greater balance sheet leverage and replace a $41 million outflow in interest bearing deposits. 54 Lower rates paid for both deposits and FHLB borrowings caused a favorable rate variance of $1.2 million which partially offset the increased interest expense resulting from the higher level of interest bearing liabilities. The cost of deposits decreased by 15 basis points to 4.12% as the Company was able to reprice all major deposit categories downward during 1996. Due to the lower interest rate environment and the favorable extension of $150 million of non-hedged FHLB borrowings at a fixed rate of 5.0%, the Company's cost of borrowed funds averaged 5.59% for 1996 or 55 basis points lower than the 6.14% average cost for 1995. The combination of all these price and liability composition movements caused USBANCORP's average cost of interest bearing liabilities to decrease by 17 basis points from 4.83% in 1995 to 4.66% in 1996. 1995 NET INTEREST PERFORMANCE OVERVIEW...The Company's net interest income on a tax-equivalent basis, between 1995 and 1994, increased by $1.4 million, or 2.4%, while the net interest margin percentage declined by 58 basis points to 3.45%. The increased net interest income was due primarily to a higher volume of earning assets resulting from the JSB acquisition and a greater use of borrowed funds to leverage the balance sheet. (See previous discussion under Balance Sheet Leveraging.) For 1995, total average earning assets were $270 million higher than 1994. The reduction in the net interest margin percentage was due to the cost of funds increasing to a greater extent than the earning asset yield. Specifically, the Company's cost of funds increased by 99 basis points to 4.83% while the earning asset yield increased by 46 basis points to 7.77%. Factors contributing to the higher cost of funds included an increased cost of short-term borrowings used to fund the Company's balance sheet leveraging and a disintermediation of deposits from lower cost savings accounts into higher cost fixed-rate certificates of deposit. COMPONENT CHANGES IN NET INTEREST INCOME: 1995 VERSUS 1994...Regarding the separate components of net interest income, the Company's total 1995 tax-equivalent interest income increased by $28.0 million or 26.7% when compared to 1994. The previously mentioned $270 million increase in average earning assets caused interest income to rise by $18.5 million between years. The remaining $9.5 million of the increase was due to a favorable rate variance as the Company's total earning asset yield increased by 46 basis points to 7.77%. Within the earning asset base, the yield on total investment securities increased by 90 basis points to 6.93% while the yield on the total loan portfolio increased 38 basis points to 8.67%. The yields in both portfolios were positively affected by the higher interest rate environment as the prime rate and fed funds rate were approximately 160 basis points higher in 1995 as compared to 1994. The more significant yield increase in the investment securities portfolio was due in part to the benefits received from the following portfolio repositioning strategy: Late in the fourth quarter of 1994, the Company repositioned its investment portfolio by selling $81 million of available for sale securities with a weighted average coupon of approximately 6.02% and remaining maturity of 29 months at a loss of $4 million. Securities in the amount of $77 million were purchased with a weighted average coupon of approximately 8.80% and a maturity of 49 months. The approximate 275 basis point yield improvement on this repositioning strategy generated $2.1 million of additional pre-tax interest earnings in 1995. The Company's loan to deposit ratio averaged 68.7% in 1995 compared to an average of 71.9% in 1994 or a decline of 3.2%. It is important to note that approximately 2.5% of this drop resulted from the following specific loan portfolio repositioning strategy executed in the first quarter of 1995: 55 In an effort to diversify the Company's balance sheet mix and reduce its higher level of fixed-rate residential mortgage loans that resulted from the JSB acquisition,$34 million of fixed-rate residential mortgage loans with a weighted average coupon of 7.79% and a weighted average maturity of 168 months were sold at a loss of $891,000. The proceeds from this sale were reinvested in adjustable-rate and shorter duration mortgage-backed securities at a comparable yield. Consequently, this sale had minimal impact on 1995 interest earnings and increased the repricing sensitivity of the Company's earning assets which provides greater flexibility for interest rate risk management. The remainder of the decline in the loan to deposit ratio resulted from net loan run-off experienced during the first half of 1995 in both the commercial loan and indirect auto loan portfolios. The Company was, however, able to reverse the net run-off trend and grow the total loan portfolio by $32.9 million or 4.1% during the second half of 1995 due to increased volumes for both commercial and adjustable rate mortgage loans. The Company's total interest expense for 1995 increased by $26.6 million or 56.6% when compared to 1994. This higher interest expense was caused by a combination of an increased volume of interest bearing liabilities ($18.9 million) and an unfavorable rate variance ($7.6 million) as each of these factors increased interest expense by the amount indicated in the parenthesis. A $297 million increase in average interest bearing liabilities reflects the first full year of the JSB acquisition and greater use of FHLB borrowings. The unfavorable rate variance was due to deposit disintermediation and the impact that the higher interest rate environment had on repricing upward maturing FHLB borrowings and certificates of deposit. Regarding deposit disintermediation, the Company saw a customer preference to move funds from lower cost savings and NOW accounts into higher cost fixed-rate certificates of deposits with maturities ranging from 18 months to three years. This trend began in the fourth quarter of 1994 and continued through the first half of 1995. The deposit disintermediation slowed in the second half of 1995 as interest rates started to decline. Overall, total 1995 average savings and NOW account balances were $34 million lower than 1994. The Company's ratio of low cost deposits to total deposits averaged 55.4% in 1994 compared to an average of 49.9% in 1995. While the movement of these funds cost the Company approximately $1.4 million, the extension of the liability base did reduce the negativity of the six month and one year static gap positions. The disintermediation combined with upward repricing of maturing certificates of deposit to cause an 80 basis point increase in the cost of deposits from 3.47% in 1994 to 4.27% in 1995. The combination of all these price and liability composition movements caused USBANCORP's average cost of interest bearing liabilities to increase by 99 basis points from 3.84% in 1994 to 4.83% in 1995. The table that follows provides an analysis of net interest income on a tax-equivalent basis setting forth (i) average assets, liabilities and stockholders' equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) USBANCORP's interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) USBANCORP's net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of this table, loan balances include non-accrual loans and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as, interest recorded on non-accrual loans as cash is received. Additionally, a tax rate of approximately 34% is used to compute tax equivalent yields. 56
Year ended December 31 1996 1995 1994 Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate (In thousands, except percentages) Interest earning assets: Loans, net of unearned income $ 857,921 $ 74,967 8.62% $ 823,807 $ 71,855 8.67% $ 809,695 $ 67,114 8.29% Deposits with banks 2,746 132 4.74 5,477 280 5.84 2,974 121 4.08 Federal funds sold and securities purchased under agreements to resale 667 36 5.35 2,715 165 5.94 2,330 94 4.06 Investment securities: Available for sale 441,638 29,719 6.73 322,172 22,940 7.11 276,225 15,531 5.62 Held to maturity 502,335 34,963 6.96 538,028 36,726 6.82 327,910 20,777 6.38 Total investment securities 943,973 64,682 6.85 860,200 59,666 6.93 604,135 36,308 6.03 Assets held in trust for collateralized mortgage obligation 6,236 470 7.54 8,143 556 6.85 10,825 920 8.50 Total interest earning assets/interest income 1,811,543 140,287 7.72 1,700,342 132,522 7.77 1,429,959 104,557 7.31 Non-interest earning assets: Cash and due from banks 35,547 36,657 42,609 Premises and equipment 18,325 19,052 18,014 Other assets 96,164 85,403 39,446 Allowance for loan losses (14,322) (15,146) (17,488) TOTAL ASSETS $1,947,257 $1,826,308 $1,512,540 Interest bearing liabilities: Interest bearing deposits: Interest bearing demand $ 81,233 $ 811 1.00% $ 91,596 $ 1,258 1.37% $ 106,665 $ 1,653 1.55% Savings 209,054 3,525 1.69 229,423 4,302 1.88 248,265 4,806 1.94 Other time 731,592 37,724 5.16 742,133 39,843 5.37 632,040 27,824 4.40 Total interest bearing deposits 1,021,879 42,060 4.12 1,063,152 45,403 4.27 986,970 34,283 3.47 Federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings 146,593 7,594 5.18 135,784 7,053 5.17 112,846 5,349 4.79 Advances from Federal Home Loan Bank 453,838 25,952 5.72 313,026 20,043 6.40 109,098 6,006 5.51 Collateralized mortgage obligation 5,670 470 8.29 7,388 848 11.48 9,861 1,024 10.38 Long-term debt 4,786 119 2.02 1,603 221 12.40 5,010 331 6.58 Total interest bearing liabilities/interest expense 1,632,766 76,195 4.66 1,520,953 73,568 4.83 1,223,785 46,993 3.84 Non-interest bearing liabilities: Demand deposits 140,574 136,543 138,428 Other liabilities 24,126 25,534 23,468 Stockholders' equity 149,791 143,278 126,859 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,947,257 $1,826,308 $1,512,540 Interest rate spread 3.06 2.94 3.47 Net interest income/net interest margin 64,092 3.52% 58,954 3.45% 57,564 4.03% Tax-equivalent adjustment (2,954) (2,807) (1,746) Net interest income $61,138 $56,147 $55,818
57 The average balance and yield on taxable securities was $797 million and 6.81%, $723 million and 6.95%, and $522 million and 6.00% for 1996, 1995, and 1994, respectively. The average balance and yield on tax-exempt securities was $146 million and 7.06%, $137 million and 6.83%, and $83 million and 6.25% for 1996, 1995, and 1994, respectively. Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The table below sets forth an analysis of volume and rate changes in net interest income on a tax-equivalent basis. For purposes of this table, changes in interest income and interest expense are allocated to volume and rate categories based upon the respective percentage changes in average balances and average rates. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.
1996 vs. 1995 1995 vs. 1994 Increase(decrease) Increase(decrease) due to change in: due to change in: Average Average Average Average Volume Rate Total Volume Rate Total (In thousands) Interest earned on: Loans, net of unearned income $ 2,546 $ 566 $ 3,112 $ 1,306 $ 3,435 $ 4,741 Deposits with banks (220) 72 (148) 105 54 159 Federal funds sold and securities purchased under agreements to resell (138) 9 (129) 19 52 71 Investment securities 5,117 (101) 5,016 17,275 6,083 23,358 Assets held in trust for collateralized mortgage obligation (74) (12) (86) (204) (160) (364) Total interest income 7,231 534 7,765 18,501 9,464 27,965 Interest paid on: Interest bearing demand deposits (481) 34 (447) (217) (178) (395) Savings deposits (819) 42 (777) (358) (146) (504) Other time deposits (2,125) 6 (2,119) 5,305 6,714 12,019 Federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings 572 (31) 541 1,226 478 1,704 Advances from Federal Home Loan Bank 6,883 (974) 5,909 12,921 1,116 14,037 Collateralized mortgage obligation (433) 55 (378) (305) 129 (176) Long-term debt 228 (330) (102) 366 (476) (110) Total interest expense 3,825 (1,198) 2,627 18,938 7,637 26,575 Change in net interest income $3,406 $1,732 $5,138 $(437) $1,827 $1,390
59 LOAN QUALITY...USBANCORP's written lending policies require underwriting, loan documentation, and credit analysis standards to be met prior to funding any loan. After the loan has been approved and funded, continued periodic credit review is required. Credit reviews are mandatory for all commercial loans and for all commercial mortgages in excess of $250,000 within an 18 month period. In addition, due to the secured nature of residential mortgages and the smaller balances of individual installment loans, sampling techniques are used on a continuing basis for credit reviews in these loan areas. The following table sets forth information concerning USBANCORP's loan delinquency and other non-performing assets:
At December 31 1996 1995 1994 (In thousands, except percentages) Total loan delinquency (past due 30 to 89 days) $20,284 $14,324 $12,832 Total non-accrual loans 6,365 7,517 5,446 Total non-performing assets 8,671 9,426 7,901 Loan delinquency as a percentage of total loans and loans held for sale, net of unearned income 2.16% 1.72% 1.48% Non-accrual loans as a percentage of total loans and loans held for sale, net of unearned income 0.68 0.90 0.63 Non-performing assets as a percentage of total loans and loans held for sale, net of unearned income, and other real estate owned 0.92 1.13 0.91 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 of which some 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 immediately upon becoming 90 days past due in either principal or interest.
Between December 31, 1995, and December 31, 1996, the ratio of delinquent loans to total loans increased from 1.72% to 2.16%. This increase is primarily attributable to greater delinquency in both commercial and residential mortgage loans in the 30-59 day past due category. Non-performing assets demonstrated a decline between 1995 and 1996 due largely to enhanced collection efforts on residential mortgage loans and the success of the Company's ongoing commercial loan workout programs. 59 ALLOWANCE AND PROVISION FOR LOAN LOSSES...The following table sets forth changes in the allowance for loan losses and certain ratios for the periods ended:
Year ended December 31 1996 1995 1994 1993 1992 (In thousands, except ratios and percentages) Balance at beginning of year: $ 14,914 $ 15,590 $ 15,260 $ 13,752 $ 13,003 Addition due to acquisitions - - 3,422 - 2,122 Reduction due to disposition of business line - (342) - - - Charge-offs: Commercial 1,705 576 352 383 2,286 Real estate-mortgage 156 135 155 628 1,141 Consumer 746 589 591 750 1,031 Total charge-offs 2,607 1,300 1,098 1,761 4,458 Recoveries: Commercial 527 183 199 338 291 Real estate-mortgage 108 41 100 27 166 Consumer 297 457 472 504 412 Total recoveries 932 681 771 869 869 Net charge-offs 1,675 619 327 892 3,589 Provision for loan losses 90 285 (2,765) 2,400 2,216 Balance at end of year $ 13,329 $ 14,914 $ 15,590 $ 15,260 $ 13,752 Loans and loans held for sale, net of unearned income: Average for the year $857,921 $823,807 $809,695 $708,690 $623,087 At December 31 939,726 834,634 868,004 727,186 648,915 As a percent of average loans and loans held for sale: Net charge-offs 0.20% 0.08% 0.04% 0.13% 0.58% Provision for loan losses 0.01 0.03 (0.34) 0.34 0.36 Allowance for loan losses 1.55 1.81 1.93 2.15 2.21 Allowance as a percent of each of the following: Total loans and loans held for sale, net of unearned income 1.42 1.79 1.80 2.10 2.12 Total delinquent loans (past due 30 to 89 days) 65.71 104.12 121.49 146.34 157.29 Total non-accrual loans 209.41 198.40 286.27 287.71 245.75 Total non-performing assets 153.72 158.22 197.32 234.84 133.63 Allowance as a multiple of net charge-offs 7.96x 24.09x 47.68x 17.11x 3.83x Total classified loans $ 24,027 $ 28,355 $ 39,338 $ 38,227 $ 41,799 Dollar allocation of reserve to general risk 6,984 7,471 6,643 7,635 5,437 Percentage allocation of reserve to general risk 52.40% 50.09% 42.61% 50.03% 39.54%
The Company recorded a provision for loan losses of $90,000 in 1996, $285,000 in 1995, and a negative provision of $2.8 million in 1994. When expressed as a percentage of average loans, the provision averaged 0.01% in 1996, 0.03% in 1995, and (0.34%) in 1994. The Company's net charge-offs amounted to $1.7 million or 0.20% of average loans in 1996, $619,000 or 0.08% in 1995, and $327,000 or 0.04% in 1994. The strength of the allowance for loan losses at each of the Company's banking subsidiaries supported continued low loan loss provision levels. The Company applies a consistent methodology and procedural discipline to evaluate the adequacy of the allowance for loan losses at each subsidiary bank on a quarterly basis. At December 31, 1996, the allowance for loan losses at each of the Company's banking subsidiaries was in compliance with the Company's policy of maintaining a general unallocated reserve of at least 20% of the systematically determined minimum reserve need. In total, the Company's general unallocated reserve was $7.0 million at December 31, 1996, or 52.4% of the allowance for loan losses. Additionally, the reduction in the provision level was also supported by a favorable downward trend in substandard and doubtful classified loans experienced during 1995 and 1996. Total classified loans dropped by $4.3 million, or 15.3%, in 1996 and $11.0 million, or 28%, in 1995. 60 The overall negative provision for 1994 resulted from a negative provision of $4 million recognized in the fourth quarter. This $4 million negative provision was comprised of a $3 million negative provision at the Company's U.S. Bank subsidiary and a $1 million negative provision at the Company's Three Rivers Bank subsidiary. This negative provision was driven by a sustained improvement in asset quality which was evidenced by favorable trends for net charge-offs, and declining amounts of classified loans, non-accrual loans and non-performing assets. The Company's allowance for loan losses at December 31, 1996, was 1.42% of total loans and 154% of non-performing assets. Both of these ratios declined from the December 31, 1995, levels of 1.79% and 158%, respectively, due to the decline in the reserve balance and growth in the loan portfolio. The Company's reserve levels continued to compare favorably to peer as demonstrated in the most recent SNL Securities bank analysis which showed that for banks throughout the country between $1 and $5 billion in assets the allowance to non-performing assets ratio was 142%. Management currently estimates that if the loan growth trends experienced in 1996 continue into future periods, it is likely that increased loan loss provisioning above the current low levels will be required. USBANCORP management is unable to determine in what loan category future charge-offs and recoveries may occur. The following schedule 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 previously discussed. The entire allowance for loan losses is available to absorb future loan losses in any loan category.
At December 31 1996 1995 1994 1993 1992 Percent of Percent Percent Percent Percent Loans in Loans in Loans in Loans in Loans in Each Each Each Each Each Category Category Category Category Category Amount to Loans Amount to Loans Amount to Loans Amount to Loans Amount to Loans (In thousands, except percentages) Commercial $ 1,826 14.7% $ 2,127 12.3% $ 1,894 13.4% $ 1,637 13.6% $ 1,653 11.6% Commercial loans secured by real estate 2,796 28.4 3,286 21.5 5,278 19.3 4,073 17.2 4,416 19.1 Real estate-mortgage 472 45.6 345 50.2 339 48.8 279 46.3 244 45.3 Consumer 959 11.3 600 16.0 1,436 18.5 1,636 22.9 2,002 24.0 Allocation to general risk 6,984 7,471 6,643 7,635 5,437 Allocation for impaired loans 292 1,085 - - - Total $13,329 $14,914 $15,590 $15,260 $13,752 Includes loans held for sale.
Even though real estate-mortgage loans comprise approximately 45.6% of the Company's total loan portfolio, only $472,000 or 3.5% of the total allowance for loan losses is allocated against this loan category. The real estate-mortgage loan allocation is based upon the Company's five year historical average of actual loan charge-offs experienced in that category. 61 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 experience in these categories. At December 31, 1996, management of the Company believes the allowance for loan losses was adequate to cover potential yet undetermined losses within the Company's loan portfolio. NON-INTEREST INCOME...Non-interest income for 1996 totalled $18.7 million which represented a $2.1 million, or 13.0%, increase when compared to 1995. This increase was primarily due to the following items: a $313,000, or 9.2%, increase in trust fees to $3.7 million in 1996. This trust fee growth is prompted by increased assets under management due to the profitable expansion of the Trust Company's business throughout western Pennsylvania including the Greater Pittsburgh marketplace. For the full year of 1996, the Trust Company's business development efforts have generated new trust assets amounting to $128 million which should generate annual fees approximating $364,000. a $1.1 million gain realized on the sale of loans held for sale in 1996 compared to a $124,000 loss realized on this same type of activity in 1995 (a net favorable shift of $1.2 million). The 1996 gain resulted from normal sales activity at the Company's mortgage banking subsidiary as SMC generated over $211 million of new loan originations in 1996. The 1995 loss resulted from the previously discussed first quarter sale of $34 million of fixed-rate residential mortgage loans at a loss of $891,000 as part of a balance sheet repositioning strategy after the JSB acquisition. a $905,000 gain realized on the disposition of Frontier Finance Company, a subsidiary of Community Savings Bank, in the first quarter of 1995. This business line was sold because it did not fit into the Company's future strategic plans and was not meeting internal return on equity performance requirements. There were no business line dispositions in 1996. a $327,000, or 11.1%, increase in deposit service charges to $3.3 million in 1996. This increase resulted primarily from fewer waivers of overdraft charges due to enhanced monitoring techniques and pricing increases on several demand deposit account related services. a $243,000, or 9.5%, decrease in net mortgage servicing fee income to $2.3 million. This amount resulted from $3.9 million of mortgage servicing fees net of $1.2 million of amortization expense of the cost of purchased and originated mortgage servicing rights ("MSR"). The decline in earnings between 1996 and 1995 was due in part to increased amortization expense on the mortgage servicing rights as a result of faster mortgage prepayment speeds in 1996. The following chart highlights some of the key information related to SMC's mortgage servicing portfolio: At December 31 1996 1995 (In thousands, except percentages and prepayment data) MSR balance $992,839 $990,299 Fair value of MSRs based upon discounted cash flow of servicing portfolio 14,596 12,985 Fair value as a percentage of MSR balance 1.36% 1.31% PSA prepayment speed 197 230 Weighted average portfolio interest rate 7.93% 8.04% 62 A rollforward of the MSRs is as follows: (In thousands) Balance as of December 31, 1995 $11,372 Acquisition of servicing rights 2,354 Amortization of servicing rights (1,232) Balance as of December 31, 1996 $12,494 an $836,000 increase in the net cash surrender value of a $32.5 million Bank Owned Life Insurance Policy because the total balance of this asset was outstanding for the entire year of 1996 compared to only a portion of the year in 1995. a $767,000, or 17.9%, increase in other income due in part to additional income resulting from ATM transaction charges, other mortgage banking processing fees, credit card charges, letters of credit fees, and check supply sales. Non-interest income for 1995 totalled $16.5 million which represented an $8.4 million or 102% increase when compared to 1994. This increase was primarily due to the following items: the realization of a $702,000 gain on investment securities available for sale in 1995 compared to a $4 million loss realized in 1994 (a net favorable shift of $4.7 million). The 1995 gain resulted primarily from the sale of $258 million of agency mortgage-backed securities. These sales were executed to: (1) provide liquidity for future funding needs; (2) enhance asset/liability management positioning whereby lower lifetime cap arm product was replaced with higher lifetime cap arm product and fixed-rate mortgage pass-through securities; and (3) improve overall portfolio quality and provide ongoing earnings enhancements. Approximately $95 million of the total sales occurred in the fourth quarter of 1995 because the Company took advantage of a one-time accounting opportunity under SFAS 115 to reposition its securities portfolio without risk of tainting the entire held to maturity portfolio. The 1994 loss resulted primarily from the previously discussed investment portfolio repositioning strategy executed late in the fourth quarter which was designed to enhance future net interest income performance. a $372,000, or 12.3%, increase in trust fees to $3.4 million in 1995. This trust fee growth reflects increased assets under management as a result of successful business development efforts in the Company's southwestern Pennsylvania marketplace. a $905,000 gain realized in 1995 on the disposition of Frontier Finance Company, a subsidiary of Community Savings Bank. a $1.4 million increase in net mortgage servicing fee income to $2.6 million. This amount resulted from $3.8 million of mortgage servicing fees net of $1.2 million of amortization expense of the cost of purchased and originated mortgage servicing rights. The improvement in earnings between years was primarily due to holding SMC for the full year in 1995 and reduced amortization expense on the mortgage servicing rights as a result of a slowdown in mortgage prepayment speeds. The quarterly average amortization expense on mortgage servicing rights was $80,000 lower in 1995 as compared to the quarterly average in 1994. a $124,000 loss realized on the sale of loans and loans held for sale in 1995 compared to a $763,000 gain realized in 1994 (a net unfavorable shift of 887,000). 63 The full year 1995 loss resulted primarily from the previously discussed first quarter sale of $34 million of fixed-rate residential mortgage loans at a loss of $891,000 as part of a balance sheet repositioning strategy after the JSB acquisition. The first quarter loss was partially offset by $767,000 of gains generated throughout the year on fixed-rate mortgage loan sales by SMC. a $1.1 million increase in other income in 1995 due to additional fee income resulting from the JSB acquisition. Examples of fee income sources demonstrating increases are ATM transaction charges, other mortgage banking processing fees, insurance commissions, and check supply sales. NON-INTEREST EXPENSE...Non-interest expense for 1996 totalled $52.5 million, which represented a $1.9 million, or 3.8%, increase when compared to 1995. This increase was primarily due to the following items: an $833,000 increase in FDIC deposit insurance expense due to a special assessment to recapitalize the SAIF in the third quarter of 1996. This Congressionally mandated special assessment amounted to $1.9 million on a pre-tax basis as a result of a charge of 65.7 cents per $100 of SAIF insured deposits held as of March 31, 1995. Beginning January 1, 1997, the annual rate the Company pays on SAIF deposits will drop from 23 cents to 6.44 cents per $100 of deposits while the rate on Bank Insurance Fund ("BIF") deposits will increase from zero cents to 1.29 cents per $100 of deposits. Approximately $879 million or 77% of the Company's deposits are covered by the BIF while the remaining $260 million or 23% are part of the SAIF. The Company estimates that 1997 pre-tax income will be favorably impacted by approximately $300,000 as a result of these deposit premium changes. a $178,000, or 0.7%, increase in salaries and employee benefits to $25.5 million. This modest increase was due to higher pension and bonus costs which were partially offset by three fewer FTE on average and lower group insurance medical premiums as a result of a switch to a managed care program. a $200,000 increase in professional fees due to higher legal and other professional fees in 1996. a $663,000 increase in other expense due to theft loss and higher advertising expense, other real estate owned expense, telephone expense, and outside processing fees. Non-interest expense for 1995 totalled $50.6 million which represented a $1.1 million, or 2.1%, increase when compared to 1994. This increase was primarily due to the following items: the 1994 results included a $2.4 million acquisition charge related to the Company's acquisition of JSB. There were no acquisition costs incurred in 1995. a $2.0 million increase in salaries and employee benefits due to 22 additional average full-time equivalent employees as a result of the full year of the JSB acquisition, planned wage increases of approximately 4%, and generally higher group medical insurance and profit sharing costs. a $668,000 increase in amortization expense due to the amortization of the goodwill and core deposit intangibles resulting from the JSB acquisition for the full year in 1995 compared to only six months in 1994. (See further discussion in Note 21.) 64 a $285,000 increase in net occupancy and equipment expense due to the costs associated with operating four additional JSB branches and the occupancy and equipment costs related to the mortgage banking subsidiary. an $848,000 decrease in FDIC deposit insurance expense due to a reduction in the premium assessment rate on deposits covered by the Bank Insurance Fund ("BIF") from 23 cents to four cents per hundred dollars of deposits effective June 1, 1995. a $267,000 increase in professional fees due primarily to higher legal fees in 1995. Included in the higher legal fees were the legal costs incurred to successfully negotiate a new four year collective bargaining agreement with the United Steelworkers of America, AFL-CIO-CLC, Local Union 8204, which is the bargaining unit for 250 non-supervisory employees of the Company's U.S. Bank subsidiary. (See further discussion under Other Matters-Collective Bargaining Agreement.) a $685,000 increase in other expense due to the cost associated with a claims audit and the write-off of a prepaid bond commitment fee at the Company's mortgage banking subsidiary, increased advertising expenses, and the inclusion of all JSB other expenses for the entire year in 1995. NET OVERHEAD BURDEN...The Company's efficiency ratio (non-interest expense divided by total revenue, which consists of tax-equivalent net interest income and non-interest income) showed significant improvement as it declined from 67.0% in 1995 to 63.4% in 1996. Excluding the $1.9 million SAIF special assessment, the Company's efficiency ratio for 1996 averaged 61.1%. The increased revenue generated in 1996 was the key factor responsible for the improved efficiency ratio. The Company is well positioned to achieve its goal of reducing this ratio to below 60% by mid-1997. Employee productivity ratios also continued to demonstrate improvement as total assets per employee averaged $2.6 million for 1996, a 7.1% increase over the $2.4 million average for 1995. Net income per employee also increased by $5,700 to $26,600 in 1996 compared to $20,900 in 1995. JSB INTEGRATION BENEFITS...The successful integration of JSB and the cost savings from intra-market consolidation opportunities also contributed to the improved efficiency and employee productivity ratios discussed above. Specific cost savings/revenue generating actions completed since the acquisition included: a computer conversion from JSB's outside data processing service bureau to U.S. Bank's internal data processing system, the consolidation of three JSB branches into the Company's existing retail delivery system, the consolidation of back room check clearing and item processing operations, the consolidation of several administrative functions such as executive administration, accounting and internal audit, the transfer of all subsidiary banks' mortgage servicing to Standard Mortgage Corporation, an investment portfolio repositioning strategy that resulted in the sale of approximately 90% of JSB's securities portfolio, and the downward repricing of several low cost deposit products. The continued favorable pre-tax benefits recognized annually for each of the past two years has amounted to approximately $5.0 million, which has exceeded the Company's targeted goal of $3.8 million of annual savings. Overall, the Company has retained approximately 50 employees or just 42% of the original JSB total of 120 full-time equivalent employees (excluding SMC). 65 INCOME TAX EXPENSE...The Company's provision for income taxes for 1996 was $7.2 million, reflecting an effective tax rate of 26.6%. The Company's income tax provision for 1995 was $6.0 million, reflecting an effective tax rate of 27.7%. The $1.2 million increase in income tax expense was due entirely to the higher level of pre-tax earnings in 1996 because the Company benefitted from a reduction in its effective tax rate. This lower effective tax rate was caused predominately by increased total tax-free asset holdings which were $13 million higher on average in 1996 as compared to 1995 and amounted to $200 million. The tax-free asset holdings consisted of municipal investment securities, bank owned life insurance, and commercial loan tax anticipation notes. These increasing levels of tax-free asset holding were also responsible for the decline in the effective tax rate from 34.4% in 1994 to 27.7% in 1995. OTHER MATTERS-COLLECTIVE BARGAINING AGREEMENT...The Company announced on October 17, 1995, that its wholly-owned subsidiary, U.S. Bank in Johnstown (the "Bank"), has reached a new four year collective bargaining agreement with the United Steelworkers of America, AFL-CIO-CLC, Local Union 8204, which is the bargaining unit for 250 non-supervisory employees of the Bank, or approximately 60% of the Bank's workforce. The agreement, approved by a majority of the bargaining unit members, was effective on October 16, 1995. The principal features of the collective bargaining agreement are as follows: The term of the agreement is four years and will expire on October 15, 1999. The agreement calls for a wage freeze for bargaining unit employees in the first year of the contract ending October 15, 1996. Thereafter, the agreement calls for annual raises of 2%, 4%, and 5%. The agreement does not alter the earnings-based formula for determining profit sharing payments under the Bank's deferred profit sharing plan, but participants in the plan (which includes all employees of the Bank) received 90% of the formula amount with respect to the calendar year ending December 31, 1995. In the next two years, participants will receive 25% and 75% of the formula amount, respectively. In the final year of the contract, profit sharing payments will be restored to 100% of the formula. The traditional indemnity health insurance coverage for bargaining unit employees will be replaced by a Blue Cross point of service managed care program. The pay scale of hourly workers beyond the entry level will be increased to be commensurate with the pay of full-time salaried employees performing similar jobs in order to encourage part-time employment and flexible scheduling. Management/labor task forces will be established to provide joint recommendations on certain operational issues. BALANCE SHEET...The Company's total consolidated assets were $2.087 billion at December 31, 1996, compared with $1.885 billion at December 31, 1995, which represents an increase of $202 million or 10.7% due principally to increased leveraging of the balance sheet. Total loans and loans held for sale increased by $105 million, or 12.6%, due to the previously mentioned growth in commercial and commercial mortgage loans. Investment securities increased by $111 million due to purchases of mortgage-backed and municipal securities. A significant portion of the securities portfolio growth occurred during the third quarter of 1996 because the Company took advantage of a temporary 30-50 basis point steepening of the treasury yield curve to purchase higher yielding securities. 66 Total deposits decreased by $39 million, or 3.3%, since December 31, 1995. The majority of this run-off occurred in certificates of deposit because the Company experienced more aggressive competitor deposit pricing in 1996 and customer movement towards mutual funds due to the strong returns offered by these products in a rising stock market. The Company's total borrowed funds position increased by $236 million. These borrowings were used to fund the growth in the balance sheet and replace deposits which ran-off. Overall, the Company's asset leverage ratio dropped to 6.51% at December 31, 1996, from 6.65% at December 31, 1995. The Company now carries $16.9 million of goodwill and $4.6 million of core deposit intangible assets on its balance sheet. The majority of these intangible assets were originated with the JSB acquisition. The Company paid this premium for JSB and believes its franchise value has been strengthened by the acquisition for several reasons: JSB's customer base, branch locations, and approximately $190 million of stable core deposits allowed the Company to obtain a 23% market share leadership position in Cambria County-one of its primary markets. the intra-market consolidation opportunities are generating significant ongoing earnings enhancements. (See JSB Integration Benefits.) 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 by projecting the yield performance of assets and liabilities in numerous varied interest rate environments; and 2) static "GAP" analysis which analyzes the extent to which interest rate sensitive assets and interest rate sensitive liabilities are matched at specific points in time. For static GAP analysis, USBANCORP typically defines interest rate sensitive assets and liabilities as those that reprice within six months or one year. Maintaining an appropriate match is one method of avoiding wide fluctuations in net interest margin during periods of changing interest rates. The difference between rate sensitive assets and rate sensitive liabilities is known as the "interest sensitivity GAP." A positive GAP occurs when rate sensitive assets exceed rate sensitive liabilities repricing in the same time period and a negative GAP occurs when rate sensitive liabilities exceed rate sensitive assets repricing in the same time period. A GAP ratio (rate sensitive assets divided by rate sensitive liabilities) of one indicates a statistically perfect match. A GAP ratio of less than one suggests that a financial institution may be better positioned to take advantage of declining interest rates rather than increasing interest rates, and a GAP ratio of more than one suggests the converse. 67 The following table presents a summary of the Company's static GAP positions at December 31, 1996:
Over Over 3 Months 6 Months 3 Months Through Through Over Interest Sensitivity Period or Less 6 Months 1 Year 1 Year Total (In thousands, except ratios and percentages) Rate sensitive assets: Loans $ 225,994 $ 69,938 $ 118,068 $ 512,397 $ 926,397 Investment securities and assets held in trust for collateralized mortgage obligation 268,058 43,880 81,206 620,190 1,013,334 Short-term assets 1,218 - - - 1,218 Other assets - - 32,451 - 32,451 Total rate sensitive assets $ 495,270 $ 113,818 $ 231,725 $ 1,132,587 $1,973,400 Rate sensitive liabilities: Deposits: Non-interest bearing deposits $ - $ - $ - $ 144,314 $ 144,314 NOW and Super NOW - - - 89,035 89,035 Money market 150,358 - - - 150,358 Other savings - - - 196,650 196,650 Certificates of deposit of $100,000 or more 23,261 4,568 4,140 4,917 36,886 Other time deposits 90,395 86,077 139,496 205,527 521,495 Total deposits 264,014 90,645 143,636 640,443 1,138,738 Borrowings 485,106 25,531 52,582 206,883 770,102 Total rate sensitive liabilities $ 749,120 $ 116,176 $ 196,218 $ 847,326 $1,908,840 Off-balance sheet hedges (25,000) - 25,000 - - Interest sensitivity GAP: Interval (228,850) (2,358) 10,507 285,261 - Cumulative $(228,850) $(231,208) $(220,701) $ 64,560 $ 64,560 Period GAP ratio 0.68x 0.98x 1.05x 1.34x Cumulative GAP ratio 0.68 0.72 0.79 1.03 Ratio of cumulative GAP to total assets (10.96)% (11.08)% (10.57)% (3.09)%
When December 31, 1996, is compared to December 31, 1995, both the Company's six month and one year cumulative GAP ratios became more negative due to increased leveraging of the balance sheet. As separately disclosed in the above table, the hedge transactions (described in detail in Note 22) reduced the negativity of the six month GAP by $25 million and had no impact on the one year GAP because the scheduled maturity of all off-balance sheet hedges is now under one year. A portion of the Company's funding base is low cost core deposit accounts which do not have a specific maturity date. The accounts which comprise these low cost core deposits include passbook savings accounts, money market accounts, NOW accounts, daily interest savings accounts, purpose clubs, etc.. At December 31, 1996, the balance in these accounts totalled $436 million or 20.9% of total assets. Within the above static GAP table, approximately $150 million or 34% of the low cost core deposits are assumed to be rate sensitive liabilities which reprice in one year or less; this assumption is based upon historical experience in varying interest rate environments and is consistently used for all GAP ratios presented. The Company recognizes that the pricing of these accounts is somewhat inelastic when compared to normal rate movements and generally assumes that up to a 250 basis point increase in rates will not necessitate a change in the cost of these accounts. There are some inherent limitations in using static GAP analysis to measure and manage interest rate risk. For instance, certain assets and liabilities may have similar maturities or periods to repricing but the magnitude or degree of the repricing may vary significantly with changes in market interest rates. 68 As a result of these GAP limitations, management places primary emphasis on simulation modeling to manage and measure interest rate risk. At December 31, 1996, these varied economic interest rate simulations indicated that the maximum negative variability of USBANCORP's net interest income over the next twelve month period was (4.4%) under an upward rate shock forecast reflecting a 200 basis point increase in interest rates above published economic consensus estimates. Capital impairment under this simulation was estimated to be less than (2.0%) and net income was reduced by approximately (8.3%). The off-balance sheet borrowed funds hedge transactions also helped reduce the variability of forecasted net interest income in a rising interest rate environment. The Company's asset liability management policy seeks to limit net interest income variability to plus or minus 7.5% and net income variability to plus or minus 15.0% based upon varied economic rate forecasts which include interest rate movements of up to 200 basis points and alterations of the shape of the yield curve. Within the investment portfolio at December 31, 1996, 45.5% of the portfolio is currently classified as available for sale ("AFS") and 54.5% as held to maturity ("HTM"). This compares to a portfolio composition breakdown of 47.9% AFS and 52.1% HTM at December 31, 1995. The available for sale classification provides management with greater flexibility to manage the securities portfolio to better achieve overall balance sheet rate sensitivity goals and provide liquidity to fund loan growth if needed. Furthermore, it is the Company's intent to continue to diversify its loan portfolio to increase liquidity and rate sensitivity and to better manage USBANCORP's long-term interest rate risk by continuing to sell newly originated 30 year fixed-rate mortgage loans. The Company will usually retain servicing rights at its mortgage banking subsidiary and recognize fee income over the remaining lives of the loans sold at an average rate of approximately 30 basis points on the loan balances outstanding. LIQUIDITY...Financial institutions must maintain liquidity to meet day-to-day requirements of depositor and borrower customers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. Sources of asset liquidity are provided by short-term investment securities, time deposits with banks, federal funds sold, banker's acceptances, and commercial paper. These assets totalled $160 million at December 31, 1996, compared to $169 million at December 31, 1995. Maturing and repaying loans, as well as the monthly cash flow associated with certain mortgage-backed securities are other significant sources of asset liquidity. Liability liquidity can be met by attracting deposits with competitive rates, using repurchase agreements, buying federal funds, or utilizing the facilities of the Federal Reserve or the Federal Home Loan Bank systems. USBANCORP's subsidiaries utilize a variety of these methods of liability liquidity. At December 31, 1996, USBANCORP's subsidiaries had approximately $55 million of unused lines of credit available under informal arrangements with correspondent banks compared to $246 million at December 31, 1995. These lines of credit enable USBANCORP's subsidiaries to purchase funds for short-term needs at current market rates. Additionally, each of the Company's subsidiary banks are members of the Federal Home Loan Bank which provides the opportunity to obtain intermediate to longer term advances up to approximately 80% of their investment in assets secured by one- to four-family residential real estate. 69 This would suggest a remaining current total available Federal Home Loan Bank aggregate borrowing capacity of approximately $302 million. Furthermore, USBANCORP had available at December 31, 1996, $9.7 million of a total $14.5 million unsecured line of credit. Liquidity can be further analyzed by utilizing the Consolidated Statement of Cash Flows. Cash equivalents decreased by $15.8 million between December 31, 1996, and December 31, 1995, due primarily to $229.8 million of net cash used by investing activities. This more than offset $29.5 million of net cash provided by operating activities and $184.5 million of net cash provided by financing activities. Within investing activities, purchases of investment securities exceeded the cash proceeds from investment security maturities and sales by approximately $115.6 million due to increased leveraging of the balance sheet. Cash advanced for new loan fundings totalled $348.2 million and was approximately $107 million greater than the cash received from loan principal payments. Within financing activities, cash payments for maturing certificates of deposit exceeded cash generated from the sale of new certificates of deposit by $24.2 million. Demand and savings deposits experienced a net decrease of $14.9 million in 1996 which represented a drop in the rate of run-off when compared to the prior two years. Net principal borrowings of advances from the Federal Home Loan Bank provided $177.3 million of cash. EFFECTS OF INFLATION...USBANCORP's asset and liability structure is primarily monetary in nature. As such, USBANCORP's assets and liabilities tend to move in concert with inflation. While changes in interest rates may have an impact on the financial performance of the banking industry, interest rates do not necessarily move in the same direction or in the same magnitude as prices of other goods and services and may frequently reflect government policy initiatives or economic factors not measured by a price index. CAPITAL RESOURCES...As presented in Note 23, each of the Company's regulatory capital ratios decreased between December 31, 1996, and December 31, 1995, due to greater leveraging of the balance sheet through the investment securities portfolio and loan portfolio. As a result of this increased size of the balance sheet, the asset leverage ratio dropped to 6.51% which is 14 basis points below the prior year level. The Company targets an operating level of approximately 6.50% for the asset leverage ratio because management and the Board of Directors believes that this level provides an optimal balance between regulatory capital requirements and shareholder value needs. Accordingly, in 1997, the Company will continue to leverage the additional capital generated from earnings through common dividend payments, treasury stock repurchases, and earning asset growth. The Company used funds provided by a $14.5 million unsecured line of credit to repurchase 238,000 shares or $8.5 million of its common stock during 1996. The rate on this unsecured line of credit floats at 50 basis points under the prime rate. Through December 31, 1996, the Company has repurchased a total of 661,000 shares of its common stock at a total cost of $19.5 million or $29.55 per share. The Company plans to continue its treasury stock repurchase program which currently permits a maximum total repurchase authorization of $30 million. The maximum price per share at which the Company can repurchase stock is 150% of book value. At December 31, 1996, the Company's common stock market price was $41.75 per share or 139.6% of the book value of $29.90 per share. This represented a 27% improvement from the December 31, 1995, common stock market price of $33.00 per share or 116.4% of book value. 70 The Company exceeds all regulatory capital ratios for each of the periods presented. Furthermore, each of the Company's subsidiary banks are considered "well capitalized" under all applicable FDIC regulations. It is the Company's ongoing intent to prudently leverage the capital base in an effort to increase return on equity performance while maintaining necessary capital requirements. It is, however, the Company's intent to maintain the FDIC "well capitalized" classification for each of its subsidiaries to ensure the lowest deposit insurance premium and to maintain an asset leverage ratio of no less than 6.0%. The Company's declared Common Stock cash dividend per share was $1.37 for 1996 which was a 29% increase over the $1.06 per share dividend for 1995. The 1996 dividends include a special $0.20 per share dividend which was declared in December in order to provide further opportunity to the Company's shareholders to participate in the record success that the Company achieved in 1996. Based upon the Company's total declared 1996 common dividends, the dividend yield on the Company's Common Stock was approximately 3.3%. This common dividend yield compares favorably to the Pennsylvania Bank Holding Companies' yield of approximately 2.8%. The Company remains committed to a progressive total shareholder return which includes a common dividend yield at slightly higher than peer levels. For the full year 1996, approximately $16 million, or 78%, of the Company's net income was distributed back to the shareholders through common dividends and treasury share repurchases. FORWARD LOOKING STATEMENT...This annual report contains various forward-looking statements and includes assumptions concerning the Company's operations, future results, and prospects. These forward-looking statements are based upon current expectations and are subject to risk and uncertainties. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (i) the effect of changing regional and national economic conditions; (ii) significant changes in interest rates and prepayment speeds; (iii) credit risks of commercial, real estate, consumer, and other lending activities; (iv) changes in federal and state banking regulations; (v) the presence in the Company's market area of competitors with greater financial resources than the Company and; (vi) other external developments which could materially impact the Company's operational and financial performance. 71 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1996 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from to Commission File Number 0-11204 USBANCORP, Inc. (Exact name of registrant as specified in its charter) Pennsylvania (State or other jurisdiction of incorporation or organization) 25-1424278 (I.R.S. Employer Identification No.) Main & Franklin Streets, P.O. Box 430, Johnstown, Pennsylvania 15907-0430 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (814) 533-5300 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Securities registered pursuant to Section 12(g) of the Act: Common Stock, $2.50 Par Value (Title of class) Share Purchase Rights (Title of class) 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 State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405.) $228,660,165.00 as of January 31, 1997. Note - If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form. Applicable only to registrants involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No (Applicable only to corporate registrants) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 5,081,337 shares were outstanding as of January 31, 1997. Documents incorporated by reference. List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). Portions of the annual shareholders' report for the year ended December 31, 1996, are incorporated by reference into Parts I and II. Portions of the proxy statement for the annual shareholders' meeting are incorporated by reference in Part III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K p229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X Exhibit Index is located on page 73. 72 FORM 10-K INDEX PART I Page Item 1.Business 74 Item 2.Properties 85 Item 3.Legal Proceedings 86 Item 4.Submission of Matters to a Vote of Security Holders 86 PART II Item 5.Market for the Registrant's Common Stock and Related Stockholder Matters 86 Item 6.Selected Consolidated Financial Data 86 Item 7.Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations 86 Item 8.Consolidated Financial Statements and Supplementary Data 86 Item 9.Changes In and Disagreements With Accountants On Accounting and Financial Disclosure 86 PART III Item 10.Directors and Executive Officers of the Registrant 87 Item 11.Executive Compensation 87 Item 12.Security Ownership of Certain Beneficial Owners and Management 87 Item 13.Certain Relationships and Related Transactions 87 PART IV Item 14.Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K 87 Signatures 90 73 PART I ITEM 1. BUSINESS General USBANCORP, Inc. (the "Company") is a registered bank holding company organized under the Pennsylvania Business Corporation Law and is registered under the Bank Holding Company Act of 1956, as amended (the "BHCA.") The Company became a holding company upon acquiring all of the outstanding shares of United States National Bank in Johnstown ("U.S. Bank") on January 5, 1983. The Company also acquired all of the outstanding shares of Three Rivers Bank and Trust Company ("Three Rivers Bank") in June 1984, McKeesport National Bank ("McKeesport Bank") in December 1985 (which was subsequently merged into Three Rivers Bank), Community Bancorp, Inc. (whose sole direct subsidiary is Community Savings Bank) in March 1992, and Johnstown Savings Bank ("JSB") in June 1994 (which was immediately merged into U.S. Bank). Immediately following the acquisition of JSB, U.S. Bank caused the intracompany transfer by Standard Mortgage Corporation of Georgia, a wholly-owned subsidiary of JSB, of all its assets, subject to all of its liabilities, to SMC Acquisition Corporation, an indirect subsidiary of Community. SMC Acquisition Corporation was renamed Standard Mortgage Corporation of Georgia and is a mortgage banking company organized under the laws of the State of Georgia that originates, sells, and services residential mortgage loans. In addition, the Company formed United Bancorp Life Insurance Company ("United Life") in October 1987, USBANCORP Trust Company (the "Trust Company") in October 1992, and UBAN Associates, Inc. ("UBAN Associates"), in January 1997. UBAN Associates is a registered investment advisory firm that administers investment portfolios, offers operational support systems and provides asset and liability services to small and mid-sized community banks. The Company's principal activities consist of owning and operating its six wholly-owned subsidiary entities. At December 31, 1996, the Company had, on a consolidated basis, total assets, deposits, and shareholders' equity of $2.09 billion, $1.14 billion and $152 million, respectively. The Company and the subsidiary entities derive substantially all their income from banking and bank-related services. The Company functions primarily as a coordinating and servicing unit for its subsidiary entities in general management, credit policies and procedures, accounting and taxes, loan review, auditing, investment advisory, compliance, marketing, insurance risk management, general corporate services, and financial and strategic planning. The Company, as a bank holding company, is regulated under the BHCA, and is supervised by the Board of Governors of the Federal Reserve System (the "Board.") In general, the BHCA limits the business of bank holding companies to owning or controlling banks and engaging in such other activities as the Board may determine to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. USBANCORP Banking Subsidiaries: U.S. Bank U.S. Bank is a national banking association organized under the laws of the United States. Through 20 locations in Cambria, Clearfield, Somerset, and Westmoreland Counties, Pennsylvania, U.S. Bank conducts a general banking business. 74 It is a full-service bank offering (i) retail banking services, such as demand, savings and time deposits, money market accounts, secured and unsecured loans, mortgage loans, safe deposit boxes, holiday club accounts, collection services, money orders, and traveler's checks; (ii) lending, depository and related financial services to commercial, industrial, financial, and governmental customers, such as real estate-mortgage loans, short- and medium-term loans, revolving credit arrangements, lines of credit, inventory and accounts receivable financing, personal and commercial property lease financing, real estate-construction loans, business savings accounts, certificates of deposit, wire transfers, night depository, and lock box services; and (iii) credit card operations through MasterCard and VISA. U.S. Bank also operates 24 automated bank teller machines ("ATM"s) through its 24 Hour Banking Network which is linked with MAC, a regional ATM network and CIRRUS, a national ATM network. U.S. Bank's deposit base is such that loss of one depositor or a related group of depositors would not have a materially adverse effect on its business. In addition, the loan portfolio is also diversified so that one industry or group of related industries does not comprise a material portion of the loan portfolio. U.S. Bank's business is not seasonal nor does it have any risks attendant to foreign sources. Since U.S. Bank is federally chartered, it is subject to primary supervision of the Office of the Comptroller of the Currency. U.S. Bank is also subject to the regulations of the Board of Governors of the Federal Reserve Bank and the Federal Deposit Insurance Corporation. The following is a summary of key data (dollars in thousands) and ratios at December 31, 1996: Headquarters Johnstown, PA Chartered 1933 Total Assets $1,212,670 (58.1% of the Company's total) Total Investment Securities $ 641,439 (64.0% of Company's total) Total Loans (net of unearned income) $ 489,439 (52.1% of the Company's total) Total Deposits $ 612,184 (53.8% of the Company's total) Total Net Income $ 12,978 (64.8% of the Company's total) Asset Leverage Ratio 6.91% 1996 Return on Average Assets 1.14% 1996 Return on Average Equity 13.20% Total Full-time Equivalent Employees 364 (48.0% of the Company's total) Number of Offices 20 (45.4% of the Company's total) Three Rivers Bank Three Rivers Bank is a state bank chartered under the Pennsylvania Banking Code of 1965, as amended (the "Pennsylvania Banking Code.") Through 12 locations in Allegheny and Washington Counties, Pennsylvania, Three Rivers Bank conducts a general retail banking business consisting of granting commercial, consumer, construction, mortgage and student loans, and offering checking, interest bearing demand, savings and time deposit services. 75 It also operates 12 ATMs that are affiliated with MAC, a regional ATM network, and Plus System, a national ATM network. Three Rivers Bank also offers wholesale banking services to other banks, merchants, governmental units, and other large commercial accounts. Such services include balancing services, lock box accounts, and providing coin and currency. Three Rivers Bank has an arrangement with Statewide Security Transport, Inc. (which conducts business under the name of Landmark Security Transport) pursuant to which it also provides cash collection and deposit services to its customers. Three Rivers Bank's deposit base is such that loss of one depositor or a related group of depositors would not have a materially adverse effect on its business. In addition, the loan portfolio is also diversified so that one industry or group of related industries does not comprise a material portion of the loan portfolio. Three Rivers Bank's business is not seasonal nor does it have any risks attendant to foreign sources. As a state chartered, federally-insured bank and trust company which is not a member of the Federal Reserve System, Three Rivers Bank is subject to supervision and regular examination by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. Various federal and state laws and regulations govern many aspects of its banking operations. The following is a summary of key data (dollars in thousands) and ratios at December 31, 1996: Headquarters McKeesport, PA Chartered 1965 Total Assets $476,164 (22.8% of the Company's total) Total Investment Securities $223,070 (22.3% of Company's total) Total Loans (net of unearned income) $223,904 (23.8% of the Company's total) Total Deposits $295,225 (25.9% of the Company's total) Total Net Income $ 5,815 (29.0% of the Company's total) Asset Leverage Ratio 6.44% 1996 Return on Average Assets 1.37% 1996 Return on Average Equity 20.21% Total Full-time Equivalent Employees 185 (24.4% of the Company's total) Number of Offices 12 (27.3% of the Company's total) Community In March 1992, USBANCORP acquired Community Bancorp, Inc., which subsequently became a bank holding company regulated under the BHCA and supervised by the Federal Reserve Board, and its sole direct subsidiary, Community Savings Bank ("Community.") Community is a state savings bank chartered under the Pennsylvania Banking Code. Community currently conducts its banking operation through 12 locations in Allegheny, Washington, and Westmoreland counties, Pennsylvania. Traditionally, Community originated and held fixed-rate residential mortgage loans that were funded primarily by certificates of deposit and offered a few fee-based services. 76 Under the direction of personnel transferred to Community from U.S. Bank and Three Rivers Bank, Community expanded its product offerings through the introduction of commercial lending and expanded consumer lending and deposit gathering in order to position itself as a full-service community bank. As part of the Community acquisition, USBANCORP acquired Community's direct subsidiaries: Community First Capital Corporation (a special purpose finance subsidiary), Community First Financial Corporation (a subsidiary engaged in real estate joint ventures with assets totalling $1.1 million), and Frontier Consumer Discount Company (Frontier Consumer Discount Company was subsequently sold in March 1995). Additionally, as part of the JSB acquisition on June 30, 1994, Standard Mortgage Corporation became a direct subsidiary of Community as a result of the intra-company purchase of all its assets, subject to all its liabilities. Standard Mortgage Corporation is a mortgage banking company that originates, sells, and services residential mortgage loans. In accordance with Federal Reserve policy, USBANCORP has committed to divest its equity investment in Community First Financial Corporation by March 24, 1997, or such longer period as the Federal Reserve Board may approve. Community's deposit base is such that loss of one depositor or a related group of depositors would not have a materially adverse effect on its business. In addition, the loan portfolio contains a high portion of residential mortgage and consumer loans that have less credit risk associated with them. The loan portfolio is also diversified so that one industry or group of related industries does not comprise a material portion of the loan portfolio. Community's business is not seasonal nor does it have any risks attendant to foreign sources. As a Pennsylvania-chartered, federally-insured savings bank that is not a member of the Federal Reserve System, Community Savings Bank is subject to supervision and regular examination by the Pennsylvania Department of Banking and the FDIC. Various federal and state laws and regulations also govern many aspects of its banking and bank-related operations. The following is a summary of key data (dollars in thousands) and ratios at December 31, 1996: Headquarters Monroeville, PA Chartered 1890 Total Assets $397,725 (19.1% of the Company's total) Total Investment Securities $134,690 (13.4% of Company's total) Total Loans (net of unearned income) $226,383 (24.1% of the Company's total) Total Deposits $234,112 (20.6% of the Company's total) Total Net Income $ 2,215 (11.1% of the Company's total) Asset Leverage Ratio 6.65% 1996 Return on Average Assets (excluding SAIF charge) 0.90% 1996 Return on Average Equity (excluding SAIF charge) 12.93% Total Full-time Equivalent Employees 156 (20.6% of the Company's total) Number of Offices 12 (27.3% of the Company's total) 77 USBANCORP Non-Banking Subsidiaries: United Life United Life is a captive insurance company organized under the laws of the State of Arizona. United Life engages in underwriting as reinsurer of credit life and disability insurance within the Company's six county market area. Operations of United Life are conducted in each office of the Company's banking subsidiaries. United Life is subject to supervision and regulation by the Arizona Department of Insurance, the Insurance Department of the Commonwealth of Pennsylvania, and the Board of Governors of the Federal Reserve Bank. At December 31, 1996, United Life had total assets of $1.7 million and total shareholder's equity of $865,000. USBANCORP Trust Company USBANCORP Trust Company is a trust company organized under Pennsylvania law in October 1992. USBANCORP Trust Company was formed to consolidate the trust functions of U.S. Bank and Three Rivers Bank and to increase market presence. As a result of this formation, the Trust Company now offers a complete range of trust services through each of the Company's subsidiary banks. At December 31, 1996, USBANCORP Trust Company had $1.16 billion in assets under management which included both discretionary and non-discretionary assets. Executive Officers Information relative to current executive officers of the Company or its subsidiaries is listed in the following table: Name Age Office with USBANCORP,Inc. and/or Subsidiary Terry K. Dunkle 55 Chairman, President & Chief Executive Officer of USBANCORP, Inc., and Chairman of U.S. Bank, Three Rivers Bank, Community Bancorp, Inc., and USBANCORP Trust Company Orlando B. Hanselman 37 Executive Vice President of USBANCORP, Inc., and President & Chief Executive Officer of U.S. Bank W. Harrison Vail 56 President & Chief Executive Officer of Three Rivers Bank, and President & Chief Executive Officer of Community Bancorp, Inc., and Community Savings Bank Ronald W. Virag, CFTA 51 President & Chief Executive Officer, USBANCORP Trust Company Kevin J. O'Neil 59 President & Chief Executive Officer, Standard Mortgage Corporation of Georgia Mr. Dunkle succeeded Clifford A. Barton in February 1994, as Chairman, President and Chief Executive Officer of USBANCORP. In April 1988, Mr. Dunkle was appointed as President and Chief Executive Officer of U.S. Bank and Executive Vice President and Secretary of USBANCORP. Mr. Dunkle served the five previous years as Executive Vice President of Commonwealth National Bank in Harrisburg, Pennsylvania. Mr. Hanselman joined U.S. Bank in January 1987 as Vice President and Chief Financial Officer and was appointed Executive Vice President in February 1994. In May 1995, Mr. Hanselman was awarded the expanded responsibility of President and Chief Executive Officer of U.S. Bank. Mr. Vail has been President and Chief Executive Officer of Three Rivers Bank since January 1985. In May 1995, he was awarded the additional responsibility of President and Chief Executive Officer of Community Savings Bank. He joined Three Rivers Bank as President on August 1, 1984. Mr. Virag was appointed as President and Chief Executive Officer of USBANCORP Trust Company in November 1994. 78 Prior to joining the Trust Company, Mr. Virag served as Senior Vice President and head of the trust group for Bank One in Charleston, West Virginia. Mr. O'Neil is President and Chief Executive Officer of Standard Mortgage Corporation of Georgia, a wholly-owned mortgage banking subsidiary of Community Savings Bank. Mr. O'Neil joined the Company through the acquisition of JSB, and has 27 years of mortgage banking experience. Monetary Policies Commercial banks are affected by policies of various regulatory authorities including the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Board of Governors are: open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements on bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments, and deposits, and may also affect interest rate charges on loans or interest paid for deposits. The monetary policies of the Board of Governors have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and the money markets (as well as the effect of actions by monetary and fiscal authorities including the Board of Governors), no prediction can be made as to possible future changes in interest rates, deposit levels or loan demand, or as to the impact of such changes on the business and earnings of the Company and its subsidiary entities. Competition The subsidiary entities face strong competition from other commercial banks, savings banks, savings and loan associations, and several other financial or investment service institutions for business in the communities they serve. Several of these institutions are affiliated with major banking and financial institutions, such as Mellon Bank Corporation and PNC Financial Corporation, which are substantially larger and have greater financial resources than the subsidiary entities. As the financial services industry continues to consolidate, the scope of potential competition affecting the subsidiary entities will also increase. For most of the services that the subsidiary entities perform, there is also competition from credit unions and issuers of commercial paper and money market funds. Such institutions, as well as brokerage houses, consumer finance companies, factors, insurance companies, and pension trusts, are important competitors for various types of financial services. In addition, personal and corporate trust investment counseling services are offered by insurance companies, other firms, and individuals. Market Area The Company, headquartered in Johnstown, Pennsylvania, operates through 44 branch offices in six southwestern Pennsylvania counties with a combined population of approximately 2.2 million: Allegheny, Cambria, Clearfield, Somerset, Washington, and Westmoreland. The Company's largest subsidiary, U.S. Bank has 20 offices and a $1.2 billion asset presence primarily in the Greater Johnstown marketplace. Community Savings Bank and Three Rivers Bank have a combined 24 offices and an $874 million asset presence in the western region, largely comprised of the suburban Pittsburgh marketplace. 79 National economic forecasts for 1997 suggest growth within the two to three percent range. None of the major economic forces, government, business, or consumer, appear to have sufficient strength to push the Gross Domestic Product upward much beyond 3%. The Pennsylvania economy tends to parallel the national economy, but at a slower pace. The seasonally adjusted unemployment rate in Pennsylvania at December 1996 was 4.9%, compared with the seasonally adjusted December 1995 unemployment rate of 6.3%. The Greater Johnstown economy generally trails Pennsylvania and the nation; however, the seasonally adjusted unemployment rate for December 1996 was 7.1% compared with 9.5% for December 1995. Recent economic activity in the Johnstown region includes: Attracting new businesses and people to Johnstown will be the focus of the next three year phase of the city's recovery plan. The draft plan includes hiring an economic development coordinator, increasing participation with economic development groups, improving recreational opportunities, and revitalizing neighborhoods. Bestform Foundations, Inc. has begun a $4 million expansion of its existing distribution center in Sidman. The project entails the construction of a two-level, 160,000 square foot addition. Employment is expected to grow from 67 workers to over 300 once the expanded facility becomes fully operational. A Wal-Mart store may be opened on a 32-acre parcel adjacent to the Hills Plaza along Route 22 near Ebensburg. If this possibility becomes fact, it could create 300 to 500 jobs. The Lowe's Home Improvement Warehouse in Richland opened recently with great success. Shoppers like the competitive prices, longer hours, and more than 40,000 items. Many of the store's 200 employees were hired locally. The merger of two Johnstown hospitals, Conemaugh Hospital and Good Samaritan, should pave the way for more advanced medical programs and extended community service projects. The area could save $30 million in medical costs over the next five years through the elimination of duplicate services, streamlined operations, and other money- saving factors. As evidenced by the above, Greater Johnstown continues to shift from an over-reliance on heavy industry to a more diversified economy including more light manufacturing and service related businesses. The Greater Pittsburgh region, where Three Rivers Bank and Community operate, correlates closely with the national economy; the seasonally adjusted unemployment rate for December 1996 was 4.5% compared with 6.2% for December 1995. The Company expects Pittsburgh to follow the national economy in a slow expansion over the next 12 months. Recent economic activity in the Pittsburgh region includes: The U.S. Army plans to build a $30 million, 200,000 square foot command center for reservists near Pittsburgh's old airport. Economic development officials predict the move will mean millions to the local economy with out-of-state reservists spending their per-diem allowances at local hotels and restaurants. West Penn Power is eliminating 600 employees as part of the company's plans to reduce its work force of 6,000 to 4,800 by the end of 1997. Roughly 400 of the 1,200 jobs to be cut over the next 18 months will be eliminated through attrition. 80 Recently, the federal government approved $650 million in improvements to three locks and dams on the Monongahela River; this construction will position local waterways for new economic growth. Another $270 million of work on the Gray's Landing and Point Marion locks and dams is nearly completed. The changes will bolster an industry that supports more than 38,000 local jobs. CityLink Airlines, Inc. a new low-fare carrier, plans to start passenger service from Pittsburgh to Dallas, Minneapolis, Newark, and Chicago. With government approval, CityLink could fill a void at Pittsburgh International Airport, where USAir accounts for 80% of passenger traffic. CityLink will use $15 million of private financing and employ 300 people. The Pittsburgh economy is generally well diversified. The Company believes that the state and regional economies will continue this diversification throughout 1997 and remain in a slow positive expansion period. Consequently, the Company's marketplace should continue to display modest growth. Employees The Company employed approximately 860 persons as of December 31, 1996, in full- and part-time positions. Approximately 265 non-supervisory employees of U.S. Bank are represented by a union. U.S. Bank and such employees are parties to a labor contract pursuant to which employees have agreed not to engage in any work stoppage during the term of the contract which will expire on October 15, 1999. U.S. Bank has not experienced a work stoppage since 1979. The Company successfully negotiated a four-year collective bargaining agreement with the local union which took effect October 16, 1995, see Other Matters-Collective Bargaining Agreement in the M.D.&A. for a complete discussion on that contract. Commitments and Lines of Credit The Company's banking subsidiaries are obligated under commercial, standby, and trade-related irrevocable letters of credit aggregating $8.5 million at December 31, 1996. In addition, the subsidiary banks have issued lines of credit to customers generally for periods of up to one year. Borrowings under such lines of credit are usually for the working capital needs of the borrower. At December 31, 1996, the Company's banking subsidiaries had unused loan commitments of approximately $256.2 million. Statistical Disclosures for Bank Holding Companies Certain information regarding statistical disclosure for bank holding companies pursuant to Guide 3 is provided in the 1996 Annual Report to Shareholders and such pages are incorporated herein by reference. The remaining Guide 3 information is included in this Form 10-K as listed below: I. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential Information. This section is presented on pages 57, 58, 67, 68, and 69. II. Investment Portfolio Information required by this section is presented on pages 26, 27, 28, 82, and 83. 81 III. Loan Portfolio Information required by this section appears on pages 29, 30, 83, 84, and 85. IV. Summary of Loan Loss Experience Information required by this section is presented on pages 29, 60, 61, and 62. V. Deposits Information required by this section follows on pages 31 and 85. VI. Return on Equity and Assets Information required by this section is presented on page 49. VII. Short-Term Borrowings Information required by this section is presented on page 31. Investment Portfolio Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Investment securities held to maturity are carried at amortized cost while investment securities classified as available for sale are reported at fair value. At December 31, 1996, approximately 55% of the portfolio was categorized as held to maturity and 45% as available for sale. The following table sets forth the book and market value of USBANCORP's investment portfolio as of the periods indicated: Investment Securities Available for Sale at December 31 1996 1995 1994 (In thousands) Book Value: U.S. Treasury $ 10,934 $ 22,431 $ 23,411 U.S. Agency 4,224 12,408 31,372 State and municipal 21,772 58,698 1,479 Mortgage-backed securities 382,384 296,669 175,215 Other securities 35,880 30,869 37,087 Total book value of investment securities available for sale $455,194 $421,075 $268,564 Total market value of investment securities available for sale $455,890 $427,112 $259,462 Investment Securities Held to Maturity at December 31 1996 1995 1994 (In thousands) Book Value: U.S. Treasury $ 10,198 $ 796 $ 398 U.S. Agency 27,468 31,512 35,879 State and municipal 110,287 97,900 125,489 Mortgage-backed securities 395,199 330,312 360,146 Other securities 3,166 3,431 2,726 Total book value of investment securities held to maturity $546,318 $463,951 $524,638 Total market value of investment securities held to maturity $549,427 $471,191 $501,485 82 The total securities portfolio increased by approximately $111 million between December 31, 1995, and December 31, 1996, and by $107 million between year end 1994 and year-end 1995. This growth in both years resulted from increased balance sheet leveraging in an effort to improve return on equity performance. The securities portfolio growth occurred primarily in mortgage-backed securities and municipal securities. Adjustable-rate securities were also purchased to increase the repricing sensitivity of the Company's earning assets as part of ongoing asset/liability management strategies. The increased purchase of municipal securities over this period was a key factor contributing to the drop in the Company's effective tax rate from 34.4% in 1994 to 26.6% in 1996. At December 31, 1996, investment securities having a book value of $371.7million were pledged as collateral for public funds and other purposes as required by law. The Company and its subsidiaries, collectively, did not hold securities of any single issuer, excluding U.S. Treasury and U.S. Agencies, that exceeded 10% of shareholders' equity at December 31, 1996. Maintaining investment quality is a primary objective of the Company's investment policy which, subject to certain minor exceptions, prohibits the purchase of any investment security below a Moody's Investor Service or Standard & Poor's rating of "A." At December 31, 1996, 98.7% of the portfolio was rated "AAA" and 98.8% was rated at least "AA" as compared to 97.5% and 97.9%, respectively, at December 31, 1995. Only 1.0% was rated below "A" or unrated at December 31, 1996. Loan Portfolio The following table sets forth the Company's loans by major category as of the dates set forth below:
At December 31 1996 1995 1994 1993 1992 (In thousands) Commercial $138,008 $103,546 $116,702 $ 99,321 $ 76,667 Commercial loans secured by real estate 266,700 179,793 168,238 126,044 125,846 Real estate-mortgage 414,003 414,967 407,177 338,778 298,963 Consumer 111,025 133,820 161,642 167,883 158,342 Loans 929,736 832,126 853,759 732,026 659,818 Less: Unearned income 4,819 2,716 3,832 5,894 10,903 Loans, net of unearned income $924,917 $829,410 $849,927 $726,132 $648,915 At December 31, 1996, and 1995, real estate-construction loans constituted 1.9% and 2.8% of the Company's total loans, net of unearned income, respectively.
Total loans, net of unearned income, increased by $95.5 million, or 11.5%, between December 31, 1995, and December 31, 1996. This growth occurred in commercial mortgage loans which increased by $86.9 million, or 48.3%, and commercial loans which grew by $34.5 million, or 33.3%. The higher loan totals in both commercial categories resulted from increased production from both middle market and small business lending (loans less than $250,000). This improved new loan production was due primarily to more effective sales efforts which have included an intensive customer calling program and canvassing of small commercial businesses. During 1996 in its first full year of operation, the Company's small business loan center approved 688 applications for $40 million and closed 401 loans for $27 million with an average approval time of 48 hours. Middle market loan originations exceeded $200 million in 1996. 83 Total residential mortgage loans were relatively flat between years as growth in adjustable-rate mortgage loans was more than offset by principal amortization in the existing fixed-rate mortgage loan portfolio. The Company is also selling all new 30 year fixed-rate mortgage product to assist in asset/liability positioning and to reduce the Company's overall dependence on residential mortgage loans. Total consumer loans declined by $22.8 million, or 17.0%, due to continued net run-off in the indirect auto loan portfolio. This indirect auto loan run-off has more than offset improved production of higher yielding direct consumer loans from the Company's branch offices which for 1996 were $14 million, or 40%, greater than 1995. Total loans, net of unearned income, declined by $20.5 million or 2.4% between December 31, 1994, and December 31, 1995. Total real estate mortgage loans increased by $7.8 million or 1.9% due to the generation of $44.5 million of adjustable-rate mortgage loans in the suburban Atlanta, Georgia market by SMC. These new adjustable-rate mortgage loans more than offset $34 million of fixed-rate mortgage loans sold in the first quarter of 1995 as part of a balance sheet repositioning strategy. Total commercial loans decreased by $13.2 million due to the maturity of $20 million of commercial loan tax anticipation notes which were not replaced. Consumer loans dropped by $27.8 million or 17.2% due to net loan run-off experienced in the indirect auto loan portfolio and a $5 million reduction resulting from the disposition of a business line. Total commercial mortgage loans grew by $11.6 million or 6.9% due primarily to a refocused emphasis on small business commercial lending (loans less than $250,000). During the last six months of 1995, the Company's small business loan center approved 219 applications for $14 million and closed 133 loans for $8.5 million. The amount of loans outstanding by category as of December 31, 1996, which are due in (i) one year or less, (ii) more than one year through five years, and(iii) over five years, are shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates.
More Than One Year One Year Through Over Total or Less Five Years Five Years Loans (Dollars in thousands) Commercial $23,587 $ 60,605 $ 53,816 $138,008 Commercial loans secured by real estate 30,572 98,310 137,818 266,700 Real estate-mortgage 22,854 65,025 326,124 414,003 Consumer 14,073 79,657 17,295 111,025 Total $91,086 $303,597 $535,053 $929,736 Loans with fixed-rate $37,988 $201,129 $357,219 $596,336 Loans with floating-rate 53,098 102,468 177,834 333,400 Total $91,086 $303,597 $535,053 $929,736 Percent composition of maturity 9.8% 32.7% 57.5% 100.0% Fixed-rate loans as a percentage of total loans 64.1% Floating-rate loans as a percentage of total loans 35.9%
The loan maturity information is based upon original loan terms and is not adjusted for principal paydowns and "rollovers." In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount at interest rates prevailing at the date of renewal. 84 At December 31, 1996, 64.1% of total loans were fixed-rate compared to 64.9% at December 31, 1995. This reduced dependence on fixed-rate loans reflects the success of several ongoing strategies which included: the generation of adjustable-rate mortgage loans in the suburban Atlanta, Georgia market and the ongoing sale of 30 year fixed-rate residential mortgage loans. As a result of these strategies, the percentage of the loan portfolio classified as floating rate grew to 35.9% at December 31, 1996. For additional information regarding interest rate sensitivity, see "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations-Interest Rate Sensitivity." Deposits The following table sets forth the average balance of the Company's deposits and the average rates paid thereon for the past three calendar years:
At December 31 1996 1995 1994 Amount Rate Amount Rate Amount Rate (In thousands, except rates) Demand - non-interest bearing $ 140,574 -% $ 136,543 -% $ 138,428 -% Demand - interest bearing 81,233 1.00 91,596 1.37 106,665 1.55 Savings 209,054 1.69 229,423 1.88 248,265 1.94 Other time 731,592 5.16 742,133 5.37 632,040 4.40 Total deposits $1,162,453 4.12% $1,199,695 4.27% $1,125,398 3.47%
The Company's average deposits decreased by $37.2 million, or 3.1%, in 1996. This drop in deposits reflects management's application of a consistent pricing strategy which emphasizes profitable net interest margin management rather than increased deposit size. Customer movement toward mutual funds due to the strong returns offered by these products in a rising stock market also contributed to the deposit decline. The drop in deposits occurred in all major categories except non-interest bearing demand deposit accounts. The growth in this product reflects the success of new business generated in conjunction with the increased commercial lending activity. The following table indicates the maturities and amounts of certificates of deposit issued in denominations of $100,000 or more as of December 31, 1996: Maturing in: (In thousands) Three months or less $23,261 Over three through six months 4,568 Over six through twelve months 4,140 Over twelve months 4,917 Total $36,886 ITEM 2. PROPERTIES The principal offices of the Company and U.S. Bank occupy a five-story building at the corner of Main and Franklin Streets in Johnstown plus several floors of the building adjacent thereto. The Company occupies the main office and its subsidiary entities have 34 other locations which are owned in fee. Fourteen additional locations are leased with terms expiring from March 31, 1998, to December 31, 2005. 85 ITEM 3. LEGAL PROCEEDINGS The Company is subject to a number of asserted and unasserted potential legal claims encountered in the normal course of business. In the opinion of both management and legal counsel, there is no present basis to conclude that the resolution of these claims will have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted by the Company to its shareholders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Information relating to the Company's Common Stock is presented on pages 37 and 48. As of January 31, 1997, the Company had 6,242 shareholders of its Common Stock. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Information required by this section is presented on page 49. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this section is presented on pages 51 to 71. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this section is presented on pages 17 to 44. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable for the years presented. 86 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this section relative to Directors of the Registrant is presented in the Proxy Statement for the Annual Meeting of Shareholders. Executive officer information has been provided in Item 1. ITEM 11. EXECUTIVE COMPENSATION Information required by this section is presented in the Proxy Statement for the Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this section is presented in the Proxy Statement for the Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this section is presented in the Proxy Statement for the Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Consolidated Financial Statements Filed: The consolidated financial statements listed below are from the 1996 Annual Report to Shareholders and Part II - Item 8. Page references are to said Annual Report. Consolidated Financial Statements: USBANCORP, Inc. and Subsidiaries Consolidated Balance Sheet, 17 Consolidated Statement of Income, 18 Consolidated Statement of Changes in Stockholders'Equity, 19 Consolidated Statement of Cash Flows, 20 Notes to Consolidated Financial Statements, 23 Statement of Management Responsibility, 45 Report of Independent Public Accountants, 46 Consolidated Financial Statement Schedules: These schedules are not required or are not applicable under Securities and Exchange Commission accounting regulations and therefore have been omitted. Reports on Form 8-K: There were no reports on Form 8-K for the quarter ended December 31, 1996. 87 Exhibits: The exhibits listed below are filed herewith or to other filings. Exhibit Prior Filing or Exhibit Number Description Page Number Herein 3.1 Articles of Incorporation, as amended on February 24, 1995. Exhibit III, Part II to Form S-14 File No. 2-79639 Exhibit 4.2 to Form S-2 File No. 33-685 Exhibit 4.3 to Form S-2 File No. 33-685 Exhibit 4.1 to Form S-3 File No. 33-56604 3.2 Bylaws, as amended and restated on February 24, 1995. Exhibit IV, Part II to Form S-14 File No. 2-79639 Exhibit 3.2 4.1 Rights Agreement, dated as of February 24, 1995, between USBANCORP, Inc. and USBANCORP Trust Company, as Rights Agent. Exhibit 1 to Form 8-A Dated March 1, 1995 10.2 Agreement, dated June 22, 1994, between USBANCORP, Inc. and Terry K. Dunkle. Exhibit 10.2 to 1994 Form 10-K Filed March 22, 1995 10.3 Agreement, dated October 25, 1994, between USBANCORP, Inc. and W. Harrison Vail. Exhibit 10.3 to 1994 Form 10-K Filed March 22, 1995 10.6 Loan Agreement, dated March 26, 1992, between USBANCORP, Inc. and Pittsburgh National Bank. Exhibit 10.6 to Form S-2 File No. 33-56684 10.7 Agreement, dated October 25, 1994, between USBANCORP, Inc. and Orlando B. Hanselman. Exhibit 10.7 to 1994 Form 10-K Filed March 22, 1995 10.8 1991 Stock Option Plan, dated August 23, 1991, as amended and restated on February 24, 1995. Exhibit 10.8 to 1994 Form 10-K Filed March 22, 1995 10.9 Agreement, dated December 1, 1994, between USBANCORP, Inc. and Ronald W. Virag. Exhibit 10.9 to 1994 Form 10-K Filed March 22, 1995 10.10 Agreement, dated July 15, 1994, between USBANCORP, Inc. and Kevin J. O'Neil. Exhibit 10.10 to 1994 Form 10-K Filed March 22, 1995 10.11 Collective Bargaining Agreement, dated October 16, 1995, between United States National Bank in Johnstown and Steel Workers of America, AFL-CIO-CLC Local Union 8204. Exhibit 10.1 to Form 8-K/A Dated March 1, 1996 13 1996 Annual Report to Shareholders. Page 1 22 Subsidiaries of the Registrant. Below 24.1 Consent of Arthur Andersen LLP. 88 EXHIBIT A (22) Subsidiaries of the Registrant Percent Jurisdiction Name of Ownership of Organization United States National Bank in Johnstown Main and Franklin Streets P.O. Box 520 Johnstown, PA 15907 100% United States of America Three Rivers Bank and Trust Company 633 State Route 51, South Jefferson Borough P.O. Box 10915 Pittsburgh, PA 15236 100% Commonwealth of Pennsylvania Community Bancorp, Inc. 2681 Moss Side Boulevard Monroeville, PA 15146 100% Commonwealth of Pennsylvania United Bancorp Life Insurance Company 1421 East Thomas Road Phoenix, AZ 85014 100% State of Arizona USBANCORP Trust Company Main and Franklin Streets P.O. Box 520 Johnstown, PA 15907 100% Commonwealth of Pennsylvania UBAN Associates, Inc. 110 Regent Court, Suite 104 State College, PA 16801 100% Commonwealth of Pennsylvania 89 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. USBANCORP, Inc. (Registrant) Date: February 28, 1997 By:/s/Terry K. Dunkle TERRY K. DUNKLE Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 28, 1997: /s/Terry K. Dunkle TERRY K. DUNKLE Chairman, President and Chief Executive Officer; Director /s/Orlando B. Hanselman ORLANDO B. HANSELMAN Executive Vice President, Chief Financial Officer Officer /s/Jerome M. Adams JEROME M. ADAMS, Director /s/Clifford A. Barton CLIFFORD A. BARTON, Director /s/Michael F. Butler MICHAEL F. BUTLER, Director /s/James C. Dewar JAMES C. DEWAR, Director /s/James M. Edwards, Sr. JAMES M. EDWARDS, SR., Director /s/Richard W. Kappel RICHARD W. KAPPEL, Director JOHN H. KUNKLE, JR., Director /s/James F. O'Malley JAMES F. O'MALLEY, Director /s/Frank J. Pasquerilla FRANK J. PASQUERILLA, Director /s/Jack Sevy JACK SEVY, Director /s/Thomas C. Slater THOMAS C. SLATER, Director /s/James C. Spangler JAMES C. SPANGLER, Director /s/W. Harrison Vail W. HARRISON VAIL, Director /s/Robert L. Wise ROBERT L. WISE, Director 90 USBANCORP, INC. DIRECTORS, GENERAL OFFICERS, AND ADVISORY BOARD COMMUNITY OFFICES SHAREHOLDER INFORMATION Divider page 91 USBANCORP, INC. Board of Directors Jerome M. Adams Senior Partner, Adams, Myers & Baczkowski Attorneys-at-Law Clifford A. Barton Retired; Former Chairman, President & CEO, USBANCORP, Inc., and Chairman of the Board of United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company Michael F. Butler Business Consultant & Attorney-at-Law James C. Dewar President & Owner, Jim Dewar Oldsmobile, Inc. Terry K. Dunkle Chairman, President & CEO, USBANCORP, Inc., and Chairman of the Board of United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company James M. Edwards, Sr. President & CEO, WJAC, Inc. Richard W. Kappel Retired CEO, Secretary & Treasurer, Wm. J. Kappel Wholesale Co. John H. Kunkle, Jr. Retired; Former Vice-Chairman & Director, Commonwealth Land Title Insurance Co. James F. O'Malley Senior Lawyer, Yost & O'Malley Attorneys-at-Law Frank J. Pasquerilla Chairman of the Board & CEO, Crown American Realty Trust Jack Sevy Retired; Former Owner & Operator, New Stanton West Auto/Truck Plaza Thomas C. Slater Owner, President & Director, Slater Laboratories, Inc. Clinical Laboratory James C. Spangler Retired; Former Owner, Somerset Auction and Transfer, Inc. W. Harrison Vail President & CEO, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and Community Savings Bank Robert L. Wise President, GPU Generation, Inc. General Officers Terry K. Dunkle Chairman, President & Chief Executive Officer Orlando B. Hanselman Executive Vice President Gary M. McKeown Senior Vice President, Manager of Credit Policy and Administration & Assistant Secretary Dan L. Hummel Senior Vice President & Marketing Director Jeffrey A. Stopko, CPA Senior Vice President & Chief Financial Officer John Suierveld, Jr. Senior Vice President & Chief Auditor Ray M. Fisher Vice President & Chief Investment Officer John H. Follansbee, III Vice President, Compliance John J. Legath Vice President, CRA/Community Development Leslie N. Morgenstern Vice President & Manager, Loan Review James E. Vennebush Vice President & Manager, General Services Betty L. Jakell Secretary 92 U.S. BANK Board of Directors Clifford A. Barton Retired; Former Chairman, President & CEO, USBANCORP, Inc., and Chairman of the Board of United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company Michael F. Butler Business Consultant & Attorney-at-Law William F. Casey CEO, Conemaugh Health Systems, Inc. Daniel R. DeVos President and CEO, Concurrent Technologies Corporation James C. Dewar President & Owner, Jim Dewar Oldsmobile, Inc. Bruce E. Duke III, M.D. Surgeon, Valley Surgeons Terry K. Dunkle Chairman, President & CEO, USBANCORP, Inc., and Chairman of the Board of United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company James M. Edwards, Sr. President & CEO, WJAC, Inc. Orlando B. Hanselman President & CEO, United States National Bank, and Executive Vice President, USBANCORP, Inc. Kim W. Kunkle President & CEO, Laurel Holding Company Rev. Christian R. Oravec President, St. Francis College Frank J. Pasquerilla Chairman of the Board & CEO, Crown American Realty Trust Howard M. Picking, III President, Miller-Picking Corporation Sara A. Sargent President, The Sargent's Group Fred R. Shaffer Senior Pharmacist/Director, Findley's Pharmacy, Inc. Thomas C. Slater Owner, President & Director, Slater Laboratories, Inc. Clinical Laboratory James C. Spangler Retired; Former Owner, Somerset Auction and Transfer, Inc. Robert L. Wise President, GPU Generation, Inc. General Officers Terry K. Dunkle Chairman of the Board Orlando B. Hanselman President & Chief Executive Officer Leo J. Fronczek Senior Vice President, Management Information Systems & Security Officer Jeryl L. Graham Senior Vice President, Lending & Leasing Robert S. Berezansky Vice President & Commercial Loan Officer James S. Bubenko Vice President & Manager of Retail Credit Operations Wayne A. Kessler Vice President, Community Banking Michael F. Komara Vice President, Human Resources Frank A. Krall Vice President, Mortgage Lending Timothy D. McDonald Vice President, Life Insurance and Annuities Mark D. Shelhammer Vice President, Community Banking Victor L. Tatum Vice President & Commercial Equipment Leasing Manager Directors Emeriti John N. Crichton John L. Williams Advisory Board Orlando B. Hanselman, Chairman Dr. Frank H. Blackington, III Edward J. Cernic Teresa T. Chianese David N. Crichton John M. Kriak David J. Rizzo Carl R. Sax Fred R. Shaffer James C. Spangler John B. Stockton 93 THREE RIVERS BANK Board of Directors Jerome M. Adams Senior Partner, Adams, Myers, & Baczkowski Attorneys-at-Law Clifford A. Barton Retired; Former Chairman, President & CEO, USBANCORP, Inc., and Chairman of the Board of United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company Janey D. Barton Retired; Vice President, Three Rivers Bank & Trust Company Terry K. Dunkle Chairman, President & CEO, USBANCORP, Inc., and Chairman of the Board of United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company J. Terrence Farrell Attorney-at-Law James R. Ferry President, Ferry Electric Company Electrical Contractor Stephen I. Richman Senior Partner, Ceisler, Richman, Smith Law Firm Jack Sevy Retired; Former Owner & Operator, New Stanton West Auto/Truck Plaza W. Harrison Vail President & CEO, Three Rivers Bank & Trust Company General Officers Terry K. Dunkle Chairman of the Board W. Harrison Vail President & Chief Executive Officer Louis S. Klippa Executive Vice President, Chief Operating Officer & Secretary Harry G. King Senior Vice President, Community Banking Vincent W. Locher Senior Vice President & Chief Commercial Loan Officer James F. Ackman Vice President, Consumer Loans Robert J. DeGrazia Vice President, Information Systems Patricia M. Smarra Vice President & Operations Officer Robert J. Smerker Vice President, Operations, Bank Secrecy Act Officer & Assistant Secretary Mary Pat Soltis Vice President, Sales & Business Development Hudson Stoner Vice President, Small Business Center Directors Emeriti J. Paul Farrell William R. Hoag COMMUNITY BANCORP, INC. Board of Directors Clifford A. Barton Retired; Former Chairman, President & CEO, USBANCORP, Inc., and Chairman of the Board of United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company Terry K. Dunkle Chairman, President & CEO, USBANCORP, Inc., and Chairman of the Board of United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company Marylouise Fennell, RSM, Ed.D. Senior Consultant, Counsel of Independent Colleges James R. Ferry President, Ferry Electric Company Electrical Contractor Richard W. Kappel Retired; CEO, Secretary & Treasurer, Wm. J. Kappel Wholesale Co. John H. Kunkle, Jr. Retired; Former Vice-Chairman & Director, Commonwealth Land Title Insurance Co. Edward W. Seifert Attorney-at-Law, Partner, Reed, Smith, Shaw & McClay W. Harrison Vail President & CEO, Community Bancorp, Inc. and Community Savings Bank General Officers Terry K. Dunkle Chairman of the Board W. Harrison Vail President & Chief Executive Officer Thomas J. Chunchick Senior Vice President, Administrative, Secretary, Community Development Officer & Compliance Officer Richard L. Barron Vice President, Human Resources Fred Geisler Vice President, Mortgage Lending 94 USBANCORP TRUST COMPANY Board of Directors Jerome M. Adams Senior Partner, Adams, Myers & Baczkowski Attorneys-at-Law Clifford A. Barton Retired; Former Chairman, President & CEO, USBANCORP, Inc., and Chairman of the Board of United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company John N. Crichton Chairman, Concurrent Technologies Corporation Terry K. Dunkle Chairman, President & CEO, USBANCORP, Inc., and Chairman of the Board of United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company William M. George President, PA AFL-CIO Orlando B. Hanselman Executive Vice President, USBANCORP, Inc., and President & CEO, United States National Bank Richard W. Kappel CEO, Secretary & Treasurer, Wm. J. Kappel Wholesale Co. John H. Kunkle, Jr. Retired; Former Vice Chairman & Director, Commonwealth Land Title Insurance Co. Kim W. Kunkle President & CEO, Laurel Holding Company Rev. Christian R. Oravec President, St. Francis College W. Harrison Vail President & CEO, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and Community Savings Bank Ronald W. Virag, CTFA President & CEO, USBANCORP Trust Company Robert L. Wise President, GPU Generation, Inc. General Officers Terry K. Dunkle Chairman of the Board Ronald W. Virag, CTFA President & Chief Executive Officer Jeffrey A. Stopko, CPA Treasurer David L. Mordan, CPA Senior Vice President & Manager of Institutional Trust Services Gerald R. Baxter, CPA, CTFA Vice President & Trust Officer Richard F. Chimelewski Vice President & Trust Business Development Officer Frank J. Lapinsky Vice President & Trust Investment Officer Karen A. Sebring, CPA Vice President and Manager of Personal Trust Services William S. Townsend Vice President & Trust Investment Officer James T. Vaughan Vice President & Manager of Western Region M. Randolph Westlund, CFA Vice President & Chief Investment Officer Director Emeritus James F. O'Malley, Esq. Senior Lawyer, Yost & O'Malley Attorneys-at-Law Trust Company Offices Main and Franklin Streets, 11th Floor U.S. Bank Building P.O. Box 520 Johnstown, Pennsylvania 15907-0520 500 Fifth Avenue, 2nd Floor Three Rivers Bank and Trust Company Building McKeesport, Pennsylvania 15132-2500 UBAN ASSOCIATES, INC. General Officers Terry K. Dunkle Chairman of the Board Ray M. Fisher President & Chief Executive Officer Wendy L. Rager Vice President & Chief Operating Officer UBAN Associates, Inc., Office 110 Regent Court, Suite 104 State College, PA 16801-7966 95 U.S. BANK OFFICE LOCATIONS X Main Office Downtown 216 Franklin Street P.O. Box 520 Johnstown, PA 15907-0520 (814) 533-5300 X Westmont Office 110 Plaza Drive Johnstown, PA 15905-1211 (814) 255-6836 X University Heights Office 1404 Eisenhower Boulevard Johnstown, PA 15904-3280 (814) 266-9691 X East Hills Office 1219 Scalp Avenue Johnstown, PA 15904-3182 (814) 266-3181 X Eighth Ward Office 1059 Franklin Street Johnstown, PA 15905-4303 (814) 535-8317 West End Office 163 Fairfield Avenue Johnstown, PA 15906-2392 (814) 533-5436 X Carrolltown Office 101 S. Main Street Carrolltown, PA 15722-0507 (814) 344-6501 Ebensburg Office 101 W. High Street Ebensburg, PA 15931-0209 (814) 472-8706 X Lovell Park Office 179 Lovell Ave. Ebensburg, PA 15931-0418 (814) 472-5200 Nanty Glo Office 928 Roberts Street Nanty Glo, PA 15943-1303 (814) 749-9227 Nanty Glo Drive-In 1383 Shoemaker Street Nanty Glo, PA 15943-1252 (814) 749-0955 Loretto Office 180 St. Mary's Street P.O. Box 116 Loretto, PA 15940-0116 (814) 472-8452 X Galleria Mall Office 500 Galleria Drive Suite 100 Johnstown, PA 15904-8911 (814) 266-5969 X St. Michael Office 900 Locust Street St. Michael, PA 15951-0393 (814) 495-5514 Coalport Office Main Street, P.O. Box 356 Coalport, PA 16627-0356 (814) 672-5303 X Seward Office 1, Roadway Plaza Seward, PA 15954-9501 (814) 446-5655 X Windber Office 1501 Somerset Avenue Windber, PA 15963-1745 (814) 467-4591 Central City Office 104 Sunshine Avenue Central City, PA 15926-1129 (814) 754-4141 X Somerset Office 108 W. Main Street Somerset, PA 15501-2035 (814) 445-4193 X Derry Office 112 South Chestnut Street Derry, PA 15627-1938 (412) 694-8887 THREE RIVERS BANK OFFICE LOCATIONS X Boston Office 1701 Boston Hollow Road McKeesport, PA 15135-1217 (412) 754-2014 X Century III Office 269 Clairton Boulevard Pittsburgh, PA 15236-1499 (412) 653-7199 X Franklin Mall Office 1500 W. Chestnut Street Washington, PA 15301-5871 (412) 228-0065 X Glassport Office 600 Monongahela Avenue Glassport, PA 15045-1608 (412) 664-8760 X Jefferson Borough Office Route 51, South P.O. Box 10915 Pittsburgh, PA 15236-0915 (412) 382-1000 X Liberty Boro Office 3107 Liberty Way McKeesport, PA 15133-2198 (412) 664-8707 X McKeesport Office 500 Fifth Avenue McKeesport, PA 15132-2500 (412) 664-8715 X Motor Bank 1415 Fifth Avenue McKeesport, PA 15132-2427 (412) 664-8755 X Port Vue Office 1194 Romine Avenue McKeesport, PA 15133-3596 (412) 664-8975 X Rainbow Village Office 1 Rainbow Village Shopping Center White Oak, PA 15131-2415 (412) 664-8771 X South Strabane Office 590 Washington Road Washington, PA 15301-9621 (412) 225-9800 X University Office 2016 Eden Park Boulevard McKeesport, PA 15132-7619 (412) 664-8780 X Remote 24-Hour Banking Locations X Main Office, Main & Franklin Streets, Johnstown X Richland Mall, Elton Road, Johnstown X Lee Hospital, Main Street, Johnstown X The Galleria, Johnstown X BiLo Supermarket, Scalp Avenue, Johnstown X Derry BP-Pit Stop Quick Shop, Derry X Robyn's Shoppe, Nanty Glo X Gogas Service Station, Cairnbrook X Community College of Allegheny County, North Campus, Pittsburgh X Shop & Save, Ohio Avenue, Glassport X Wal-Mart, Oak Spring Road, Washington X Washington Mall, Oak Springs Road, Washington COMMUNITY SAVINGS BANK OFFICE LOCATIONS X Lawrenceville 4319 Butler Street Pittsburgh, PA 15201-3094 (412) 681-8390 X New Kensington 2 Feldarelli Square 2300 Freeport Road New Kensington, PA 15068-4669 (412) 335-9811 X North Side 401 East Ohio Street Pittsburgh, PA 15212-5588 (412) 231-4300 X Northway Mall 1002 Northway Mall Pittsburgh, PA 15237-3098 (412) 364-8692 X Moon Township 914 Narrows Run Road Coraopolis, PA 15108-2306 (412) 262-2210 X Monroeville 2681 Moss Side Boulevard Monroeville, PA 15146-3394 (412) 856-8410 X North Versailles Great Valley Shopping Center 500 Lincoln Highway North Versailles, PA 15137-1524 (412) 829-1360 X Baldwin Brownsville Plaza 5253 Brownsville Road Pittsburgh, PA 15236-2796 (412) 655-2217 X Carrick 1817 Brownsville Road Pittsburgh, PA 15210-3999 (412) 881-3500 X Bethel Park 2739 South Park Road Bethel Park, PA 15102-3805 (412) 835-2100 X Finleyville 3576 Sheridan Avenue Finleyville, PA 15332-1018 (412) 348-6626 X Jeannette 401 Clay Avenue Jeannette, PA 15644-2124 (412) 527-1501 X 24-Hour Banking Available 96 USBANCORP, INC. SHAREHOLDER INFORMATION Securities Markets USBANCORP, Inc. Common Stock is publicly traded and quoted on the NASDAQ National Market System. The common stock is traded under the symbol of "UBAN." The listed market makers for the stock are: Boenning & Scattergood, Inc. 200 Four Falls Corporate Center Suite 212 West Conshohocken, PA 19428 Telephone: (800) 883-8383 Ferris Baker Watts, Inc. 6 Bird Cage Walk Hollidaysburg, PA 16648 Telephone: (800) 343-5149 Herzog, Heine, Geduld, Inc. 525 Washington Boulevard Jersey City, NJ 07310 Telephone: (212) 908-4156 Janney Montgomery Scott, Inc. 1801 Market Street - 10th Floor Philadelphia, PA 19103 Telephone: (215) 665-6500 Legg Mason Wood Walker, Inc. 969 Eisenhower Boulevard Oak Ridge East Johnstown, PA 15904 Telephone: (814) 266-7900 Merrill Lynch Equity Markets Group North Tower World Financial Center New York, NY 10281-1305 Telephone: (212) 449-4162 F. J. Morrissey & Co., Inc. 1700 Market Street Suite 1420 Philadelphia, PA 19103-3913 Telephone: (215) 563-8500 Oppenheimer & Co., Inc. Oppenheimer Tower 200 Liberty Street One World Financial Center New York, NY 10281 Telephone: (212) 667-7000 Parker/Hunter, Inc. 416 Main Street Johnstown, PA 15901 Telephone: (814) 535-8403 Sandler O'Neill & Partners, L.P. 2 World Trade Center 104th Floor New York, NY 10048 Telephone: (800) 635-6860 Wheat First Butcher Singer 100 Pasquerilla Plaza P.O. Box 96 Johnstown, PA 15907 Telephone: (814) 535-1516 Form 10-K USBANCORP, Inc.'s Annual Report to the Securities and Exchange Commission on Form 10-K is integrated within this Annual Report. Corporate Offices The corporate offices of USBANCORP, Inc. are located in the United States National Bank Building at Main and Franklin Streets, Johnstown, PA 15901. Mailing address: P.O. Box 430 Johnstown, PA 15907-0430 (814) 533-5300 Agents The transfer agent and registrar for USBANCORP, Inc.'s common stock is: Boston EquiServe Investor Relations Department P.O. Box 644 Mail Stop 45-02-09 Boston, MA 02102-0644 (617) 575-3170 Shareholder Data As of January 31, 1997, there were 6,242 shareholders of common stock and 5,081,337 shares outstanding. Of the total shares outstanding, approximately 269,000 or 5% are held by insiders (directors and executive officers) while approximately 1,645,807 or 32% are held by institutional investors (mutual funds, employee benefit plans, etc.). Dividend Reinvestment Shareholders seeking information about USBANCORP, Inc.'s dividend reinvestment plan should contact Betty L. Jakell, Executive Office, at (814) 533-5158. Information Analysts, investors, shareholders, and others seeking financial data about USBANCORP, Inc. or any of its subsidiaries annual and quarterly reports, proxy statements, 10-K, 10-Q, 8-K, and call reports-are asked to contact Jeffrey A. Stopko, Senior Vice President & Chief Financial Officer at (814) 533-5310. Inside back cover Exhibit 24.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 23, 1997 included in this Form 10-K, into USBANCORP, Inc.'s previously filed 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). /s/Arthur Andersen LLP ARTHUR ANDERSEN LLP Pittsburgh, Pennsylvania March 17, 1997 Annex A USBANCORP, INC. 1996 ANNUAL REPORT & FORM 10-K The following is a listing of the graphs presented in USBANCORP, Inc.'s 1996 Annual Report & Form 10-K. Page 2: The following six graphs present Financial Highlights-At A Glance: The top left graph is an area graph showing non- performing assets as a percentage of loans and OREO at December 31 for the periods presented: 1992 1993 1994 1995 1996 1.58% 0.89% 0.91% 1.13% 0.92% Asset quality is critical to a bank's safety and ongoing earnings power. Non-performing assets are those loans and foreclosed properties that are not generating income and represent high collection risk. USBANCORP's non-performing assets are lower than peer. The middle left graph is an bar graph showing the allowance for loan losses as a percentage of total non- accrual loans at December 31 for the periods presented: 1992 1993 1994 1995 1996 245.75% 287.71% 286.27% 198.40% 209.41% The allowance for loan losses help protect a bank's future earnings from losses due to credit risk. USBANCORP's allowance reflects a reserve of $2.09 for each $1.00 of non-accrual loans. The bottom left graph is a bar graph showing the Company's efficiency ratio excluding SAIF charge: 1992 1993 1994 1995 1996 67.63% 67.44% 67.53% 66.97% 61.06% The efficiency ratio reflects the Company's ability to generate revenue and control its non-interest expenses. USBANCORP's significantly improved its performance in this key area of profitability in 1996 by generating increasing revenue from its core banking business. The top right graph is a bar graph showing the Company's net income per employee for the periods presented: 1992 1993 1994 1995 1996 $13,983 $18,788 $15,429 $20,915 $26,604 USBANCORP has aggressively captured the financial benefits from each of its past acquisitions. Improved employee productivity is one such integral benefit from these acquisitions. USBANCORP has nearly doubled its net income per employee over the past five years. The middle right graph is a bar graph showing the Company's return on equity for the periods presented: 1992 1993 1994 1995 1996 $11.41 $11.46 $8.92 $11.03 $13.36 The return on equity (ROE) is a standard measurement of a bank's profitability. USBANCORP exceeded its intermediate 13% ROE target by achieving a 13.36% ROE for the full year 1996, for the fourth quarter 1996 the Company's ROE improved to 14.38%. The bottom right graph is a area graph showing net interest income (in thousands): 1992 1993 1994 1995 1996 $44,441 $49,485 $55,818 $56,147 $61,138 As a result of prudent acquisitions, balance sheet leveraging, and effective asset/liability management practices. USBANCORP has increased net interest income for each of the past five years. Page 4: The following six graphs present Shareholder Information-At A Glance: The top left graph is a bar graph showing net income (in thousands): 1992 1993 1994 1995 1996 $8,883 $12,488 $11,320 $15,803 $20,019 USBANCORP 1996 net income was $20 million which represented a 27% increase over the 1995 results. Such income is a key determinant of shareholder value and the Company's ongoing financial soundness. The middle left graph is a bar graph showing dividends per common share: 1992 1993 1994 1995 1996 $0.75 $0.86 $0.97 $1.06 $1.37 Common dividends per share represent a payment by the company from its accumulated shareholder wealth. USBANCORP's dividends paid to shareholders have increased at an average annual rate of 16.5% over the past five years. The Company declared a special dividend of $0.20 per share in 1996 to further share its record success with its shareholders. The bottom left graph is a bar graph showing common stock price per share at December 31: 1992 1993 1994 1995 1996 $22.00 $23.75 $21.00 $33.00 $41.75 A second key element of shareholder return is the price appreciation of each common share. USBANCORP's common stock price per share has appreciated 27% in 1996. The top right graph is a pie graph showing the distribution of 1996 net income: Common dividend payout 35% Treasury stock repurchases 43% Retained for internal capital growth 22% In 1996, USBANCORP distributed 78% of its net income back to its shareholders through treasury stock repurchases and common dividend payments. The middle right graph is a bar graph showing book value per common share at December 31: 1992 1993 1994 1995 1996 $23.08 $24.67 $24.57 $28.34 $29.90 A company's book value per common share represents the accumulated and undistributed shareholder wealth. This wealth is used by the company to finance profitable growth and to fund shareholder dividends. USBANCORP has increased this shareholder wealth by 30% over the past five years to $29.90 at December 31, 1996. The bottom left graph is an area graph showing asset leverage ratio compared to the management minimum target of 6% and the regulatory requirement of 5%: 1992 1993 1994 1995 1996 7.08% 9.18% 6.64% 6.63% 6.51% Fundamental to shareholder and depositor safety is the capital strength of the financial institution. It is USBANCORP's intent to optimally leverage the capital base in order to enhance shareholder value while maintaining necessary regulatory requirements. Page 5: Appearing in the margin is a "call out" reflecting the quote: Your Company exceeded its 13% ROE target and grew EPS by 32.8%... The graph at the bottom left is area graph graph showing market capitalization at December 31 (in thousands): 1992 1993 1994 1995 1996 $65,607 $101,559 $117,225 $175,246 $212,132 Page 6: Appearing in the margin is a "call out" reflecting the quote: Timely response to customer needs encourages more customers to select us as their "Bank of Choice"... The bottom left graph is a pie chart showing 1996 gross revenue contribution by product segment (percentage): Investments 41%, Trust 2%, Commercial 20%, Wholesale 1%, Consumer 36%, Page 7: The graph at the top left is a pie chart showing loan portfolio composition at December 31, 1996, by loan type: Commercial 15% Commercial secured by real estate 29% Real estate - mortgage 44% Consumer 12% Appearing in the margin is a "call out" reflecting the quote: Alternative delivery systems provide customers with more banking options... Page 8: The top left graph is a bar graph showing average loan to average deposit ratio for the periods presented: 1995 1Q96 2Q96 3Q96 4Q96 68.67% 70.78% 71.42% 73.76% 79.40% Appearing in the margin is a "call out" reflecting the quote: Technology brings new convenience and improves customer service... Page 9: Appearing in the margin at the top of the page is a "call out" reflecting the quote: Our Five Year Technology Plan introduces new technologies which complement our "high-touch" service... Appearing in the margin at the bottom of the page is a "call out" reflecting the quote: Preparing employees for the challenges ahead... Page 10: The top left graph is a bar graph showing the Company's net income per employee for the periods presented: 1992 1993 1994 1995 1996 $13,983 $18,788 $15,429 $20,915 $26,604 The bottom left graph is a bar graph showing the Company's SMC residential mortgage loans originated (in thousands) for the periods presented: 1994 1995 1996 $85,469 $147,254 $211,198 Page 11: Appearing in the margin at the top of the page is a "call out" reflecting the quote: Improving sales volume and fee income by adding new products and services... Appearing in the margin at the bottom of the page is a "call out" reflecting the quote: Three Rivers Mortgage Company begins operations in 1997... Page 12: Appearing in the margin at the middle of the page is a "call out" reflecting the quote: UBAN Associates, Inc., will leverage existing organizational strengths to attract an entirely new customer base... Page 13: Appearing in the margin at the top of the page is a "call out" reflecting the quote: Improving value for shareholders, customers, and employees remains our goal... The graph at the bottom left is a bar graph showing net income per common share before SFAS #109 benefit, acquisition charge, and SAIF charge (fully diluted basis) for the periods presented: 1992 1993 1994 1995 1996 $2.53 $2.41 $2.54 $2.87 $4.07 Page 14: Shows a service area map of USBANCORP, Inc.'s six southwestern Pennsylvania counties. The map shows a closeup of the six counties identifying branch locations by subsidiary. Page 48: The left graph is a bar graph showing dividends per common share: 1992 1993 1994 1995 1996 $0.75 $0.86 $0.97 $1.06 $1.37 The right graph is a bar graph showing common stock price per share at December 31: 1992 1993 1994 1995 1996 $22.00 $23.75 $21.00 $33.00 $41.75 Page 50: The top left graph is a bar graph showing pre- tax income (in thousands): 1992 1993 1994 1995 1996 $14,323 $16,520 $17,251 $21,848 $27,263 Page 51: The graph at the bottom of the page is a bar graph showing total assets at December 31 for the periods presented (in thousands): 1992 $1,139,855 1993 $1,241,521 1994 $1,788,890 1995 $1,885,372 1996 $2,087,112 The bottom left graph is a bar graph showing net income (in thousands): 1992 1993 1994 1995 1996 $8,883 $12,488 $13,320 $15,803 $20,019 Page 52: The top left graph is a bar graph showing the Company's return on equity before SFAS #109 benefit, acquisition charge, and SAIF charge for the periods presented: 1992 1993 1994 1995 1996 $11.41 $10.13 $10.41 $11.03 $14.28 The graph at the bottom left is an area graph showing total common shares outstanding at December 31: 1992 1993 1994 1995 2,982,124 4,726,181 5,582,155 5,310,489 1996 5,081,004 Page 53: The graph at the top left is a bar graph showing tax equivalent net interest income (NII) in thousands and data points showing the net interest margin (NIM) percentage: 1992 1993 1994 1995 1996 NII $45,249 $50,225 $57,564 $58,954 $64,092 NIM 4.58% 4.34% 4.03% 3.45% 3.52% The bottom left graph is a pie chart showing the liability funding mix at December 31, 1996: Deposits 55% Borrowing 37% Equity 8% Page 54: The top left graph is a bar graph showing average loans to average deposits for the periods presented: 1992 1993 1994 1995 1996 68.23% 69.01% 71.82% 68.67% 73.80% The graph at the bottom left is a pie chart showing loan portfolio composition at December 31, 1996, by loan type: Commercial 15% Commercial secured by real estate 29% Real estate - mortgage 44% Consumer 12% Page 55: The graph at the top left is a pie chart showing the deposit composition as of December 31, 1996: DDA 13%, CD's 50% Savings & NOW 24%, Money market 13% The bottom left graph is a pie chart showing the investment portfolio liquidity(scheduled maturities) as of December 31, 1996: Less than 1 year is 3% Greater than 1 year but less than 5 years is 23% Greater than 5 year but less than 10 years is 32% Greater than 10 years is 42% Page 56: The top left graph is a pie chart showing the liability funding mix at December 31, 1995: Deposits 63% Borrowing 29% Equity 8% The graph at the bottom left is a pie chart showing the deposit composition as of December 31, 1995: DDA 12%, CD's 50% Savings & NOW 27%, Money market 11% Page 58: The bottom left graph is a area graph showing net interest income (in thousands): 1992 1993 1994 1995 1996 $44,441 $49,485 $55,818 $56,147 $61,138 The bottom right graph is a area graph showing net interest margin percentage: 1992 1993 1994 1995 1996 4.58% 4.34% 4.03% 3.45% 3.52% Page 59: The top left graph is an bar graph showing non- performing assets as a percentage of loans and OREO at December 31 for the periods presented: 1992 1993 1994 1995 1996 1.58% 0.89% 0.91% 1.13% 0.92% The bottom left graph is an bar graph showing the allowance for loan losses as a percentage of total non-accrual loans at December 31 for the periods presented: 1992 1993 1994 1995 1996 245.75% 287.71% 286.27% 198.40% 209.41% The bottom right graph is a bar graph showing the allowance for loan losses as a percentage of loans at December 31 for the periods presented: 1992 1993 1994 1995 1996 2.12% 2.10% 1.80% 1.79% 1.42% Page 61: The top left graph is a bar graph showing the loan loss provision as a percentage of average loans: 1992 1993 1994 1995 1996 0.36% 0.34% (0.34%) 0.03% 0.01% Page 62: The top left graph is a bar graph showing the net charge-offs as a percentage of average loans: 1992 1993 1994 1995 1996 0.58% 0.13% 0.04% 0.08% 0.20% The bottom left graph is an bar graph showing non-interest income excluding investment security gains and losses (in thousands): 1992 1993 1994 1995 1996 $7,953 $9,567 $12,159 $15,841 $18,051 Page 63: The top left graph is an bar graph showing the components of non-interest income (in thousands): 1992 1993 1994 1995 1996 All other $3,187 $3,520 $1,148 $9,057 $10,632 Deposit service charges $1,916 $2,771 $2,779 $2,937 $3,264 Cash pro- cessing fees $1,189 $1,281 $1,237 $1,154 $1,086 Trust fees $2,054 $2,578 $3,023 $3,395 $3,708 The bottom left graph is a bar graph showing trust fee income (in thousands): 1992 1993 1994 1995 1996 $2,054 $2,578 $3,023 $3,395 $3708 The average annual growth rate in trust fee income is 16.1%. Page 64: The top left graph is a bar graph showing non- interest expense excluding acquisition charge and SAIF charge (in thousands): 1992 1993 1994 1995 1996 $36,248 $40,715 $47,082 50,557 $50,549 The bottom left graph is an bar graph showing the components of non-interest expense (in thousands): 1992 1993 1994 1995 1996 All other $11,083 $12,605 $13,973 $16,017 $25,483 FDIC Ins. $ 2,040 $ 2,157 $ 2,576 $1,728 $639 Occupancy Equipment $ 5,087 $ 6,001 $ 7,222 $ 7,507 $7,574 Salaries & benefits $18,038 $19,952 $23,311 $25,305 $25,483 Page 65: The top left graph is a bar graph showing net overhead expense as a percentage of net interest income (excluding net security gains and losses): 1992 1993 1994 1995 1996 62.53% 62.02% 60.67% 60.58% 53.71% The bottom left graph is a bar graph showing the Company's efficiency ratio excluding SAIF charge: 1992 1993 1994 1995 1996 67.63% 67.44% 67.53% 66.97% 61.06% Page 66: The top left graph is a bar graph showing assets per full time equivalent employee at December 31 for the periods presented (in thousands): 1992 1993 1994 1995 1996 $1,641 $1,829 $2,070 $2,419 $2,588 The graph at the bottom left is a bar graph showing total assets at December 31 for the periods presented (in thousands): 1992 $1,139,855 1993 $1,241,521 1994 $1,788,890 1995 $1,885,372 1996 $2,087,112 Page 67: The top left graph is a pie chart showing the liability funding mix at December 31, 1996: Deposits 55% Borrowing 37% Equity 8% The bottom left graph is a pie chart showing the liability funding mix at December 31, 1995: Deposits 63% Borrowing 29% Equity 8% Page 68: The bottom left graph is an bar graph showing the Company's one year GAP ratio compared to a neutral one year GAP of 1.00x at December 31 for the periods presented: 1992 1993 1994 1995 1996 1.14x 1.10x 0.79x 0.86x 0.79x Page 69: The top left graph is a pie chart showing the investment portfolio liquidity (scheduled maturities) as of December 31, 1996: Less than 1 year is 3% Greater than 1 year but less than 5 years is 23% Greater than 5 year but less than 10 years is 32% Greater than 10 years is 42% The bottom left graph is a pie chart showing the investment portfolio liquidity(scheduled maturities) as of December 31, 1995: Less than 1 year is 5% Greater than 1 year but less than 5 years is 45% Greater than 5 year but less than 10 years is 26% Greater than 10 years is 24% Page 70: The top left graph is a bar graph showing the Company's total risk based capital at December 31 compared to a regulatory requirement of 8.00%: 1992 1993 1994 1995 1996 12.54 15.97 13.70 14.88 14.16 The bottom left graph is an area graph showing asset leverage ratio compared to the management minimum target of 6% and the regulatory requirement of 5%: 1992 1993 1994 1995 1996 7.08% 9.18% 6.64% 6.63% 6.51% Page 71: The top left graph is a bar graph showing the common dividend yield (based upon dividends declared and purchase at average market price each year) for the periods presented: 1992 1993 1994 1995 1996 3.70% 3.50% 4.20% 4.13% 3.88% The graph at the bottom left is a pie chart showing the distribution of 1996 net income: Common dividend payout 35% Treasury stock repurchases 43% Retained for internal capital 22% growth The graph at the bottom left is a pie chart showing the distribution of 1995 net income: Common dividend payout 37% Treasury stock repurchases 50% Retained for internal capital 13% growth Page 74: The top left graph is a pie chart showing 1996 gross revenue contribution by product segment (in thousands): Investments $63,538, Trust $3,708, Commercial $30,606, Wholesale $1,085, Consumer $57,085, The bottom left graph is a pie chart showing 1996 gross revenue contribution by product segment (percentage): Investments 41%, Trust 2%, Commercial 20%, Wholesale 1%, Consumer 36%, Page 75: The top left graph is a pie chart showing 1995 gross revenue contribution by product segment (in thousands): Investments $59,264, Trust $3,395, Commercial $27,583, Wholesale $1,154, Consumer $54,862, The bottom left graph is a pie chart showing 1995 gross revenue contribution by product segment (percentage): Investments 40%, Trust 2%, Commercial 19%, Wholesale 1%, Consumer 38%, Page 76: The top left graph is a bar graph showing net income before SFAS #109 benefit, acquisition charge, and SAIF charge (in thousands): 1992 1993 1994 1995 1996 $8,883 $11,036 $13,202 $15,803 $21,387 The graph at the bottom left is an bar graph showing return on average assets before SFAS #109 benefit, acquisition charge, and SAIF charge: 1992 1993 1994 1995 1996 0.85% 0.91% 0.87% 0.87% $1.10 Page 77: The left graph is a bar graph showing the Company's SMC residential mortgage loans originated (in thousands) for the periods presented: 1994 1995 1996 $85,469 $147,254 $211,198 Page 78: The graph at the top left is a bar graph showing trust assets. The graph presents the book value of client assets which is discretionary and non- discretionary at December 31 (in millions): 1992 1993 1994 1995 1996 $650 $943 $1,027 $1,043 $1,157 Note: 78% growth rate from 1992 to 1996. Page 79: The top left graph is a pie chart showing the composition of 1996 trust assets (dollars in thousands and percentages): Corporate trust $321,229 28% Employee benefits $430,656 37% Personal trust $347,657 30% Pathroad $57,530 5% Page 81: The left graph is a bar graph showing the Company's net income per employee for the periods presented: 1992 1993 1994 1995 1996 $13,983 $18,788 $15,429 $20,915 $26,604 Page 82: The top left graph is a pie chart showing the investment portfolio liquidity (scheduled maturities) as of December 31, 1996: Less than 1 year is 3% Greater than 1 year but less than 5 years is 23% Greater than 5 year but less than 10 years is 32% Greater than 10 years is 42% The bottom left graph is a pie chart showing the investment portfolio liquidity (scheduled maturities) as of December 31, 1995: Less than 1 year is 5% Greater than 1 year but less than 5 years is 45% Greater than 5 year but less than 10 years is 26% Greater than 10 years is 24% Page 83: The top left graph is a pie chart showing loan portfolio composition at December 31, 1996 by loan type: Commercial 15% Commercial secured by real estate 29% Real estate - mortgage 44% Consumer 12% Page 84: The top left graph is a pie chart showing loan portfolio composition at December 31, 1995 by loan type: Commercial 12% Commercial secured by real estate 22% Real estate - mortgage 50% Consumer 16% Page 85: The graph at the top left is a pie chart showing the deposit composition as of December 31, 1996: DDA 13%, CD's 50% Savings & NOW 24%, Money market 13% Inside back cover: The graph at the bottom right is a bar graph showing common stock price to book value at December 31: 1992 1993 1994 1995 1996 95.32% 96.27% 85.47% 116.44% 139.63% The graph at the bottom right is a bar graph showing common stock price earnings ratio (calculated on a fully diluted basis before SFAS #109 benefit and acquisition charge). Based upon December 31 stock prices for the periods presented): 1992 1993 1994 1995 1996 8.70x 9.85x 8.27x 11.50x 10.96x EX-27 2
9 12-MOS DEC-31-1996 DEC-31-1996 43,183 1,218 0 0 455,890 546,318 549,427 939,726 13,329 2,087,112 1,138,738 155,740 636,545 4,172 0 0 14,356 137,561 2,087,112 74,433 62,262 638 137,333 42,060 34,135 61,138 90 638 52,474 27,263 27,263 0 0 20,019 3.83 3.81 7.72 6,365 2,043 0 0 14,914 2,607 932 13,329 13,329 0 6,984
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