UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 2000
Transaction Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transaction period from
to
Commission File Number 0-11204
USBANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1424278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Main & Franklin Streets, P.O. Box 430, Johnstown, PA 15907-0430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 533-5300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
X Yes No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 1, 2000
Common Stock, par value $2.50 13,328,741
per share
1
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
March 31, 2000, December 31, 1999,
and March 31, 1999 3
Consolidated Statement of Income -
Three Months Ended March 31, 2000,
and 1999 4
Consolidated Statement of Changes
in Stockholders' Equity -
Three Months Ended
March 31, 2000, and 1999 6
Consolidated Statement of Cash Flows -
Three Months Ended
March 31, 2000, and 1999 7
Notes to Consolidated Financial
Statements 8
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations 22
Part II. Other Information 35
2
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
March 31 December 31 March 31
2000 1999 1999
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 42,657 $ 54,676 $ 37,806
Interest bearing deposits with banks 230 758 110
Investment securities:
Available for sale 1,066,183 1,187,335 689,944
Held to maturity (market value
$497,839 on March 31, 1999) - - 492,297
Loans held for sale 17,704 21,753 62,022
Loans 1,089,583 1,082,459 1,024,960
Less: Unearned income 7,577 8,408 4,880
Allowance for loan losses 10,446 10,350 10,760
Net loans 1,071,560 1,063,701 1,009,320
Premises and equipment 18,802 18,937 18,346
Accrued income receivable 16,149 16,650 17,058
Mortgage servicing rights 13,118 13,510 16,127
Goodwill and core deposit intangibles 24,863 25,655 28,078
Bank owned life insurance 37,726 37,290 36,041
Other assets 28,470 27,214 10,223
TOTAL ASSETS $ 2,337,462 $ 2,467,479 $ 2,417,372
LIABILITIES
Non-interest bearing deposits $ 165,463 $ 160,253 $ 158,547
Interest bearing deposits 1,071,775 1,070,688 1,097,612
Total deposits 1,237,238 1,230,941 1,256,159
Federal funds purchased and securities
sold under agreements to repurchase 58,605 16,369 106,781
Other short-term borrowings 213,826 84,874 96,267
Advances from Federal Home Loan Bank 653,245 956,999 751,126
Guaranteed junior subordinated
deferrable interest debentures 34,500 34,500 34,500
Long-term debt 6,400 7,100 8,684
Total borrowed funds 966,576 1,099,842 997,358
Other liabilities 20,482 24,139 28,151
TOTAL LIABILITIES 2,224,296 2,354,922 2,281,668
STOCKHOLDERS' EQUITY
Preferred stock, no par value;
2,000,000 shares authorized;
there were no shares issued and
outstanding for the periods presented - - -
Common stock, par value $2.50 per
share; 24,000,000 shares authorized;
17,419,660 shares issued and 13,328,741
outstanding on March 31, 2000;
17,390,496 shares issued and
13,309,577 outstanding on December 31,
1999; 17,377,460 shares issued and
13,331,541 outstanding on
March 31, 1999 43,549 43,476 43,444
Treasury stock at cost, 4,090,919
shares on March 31,2000; 4,080,919
shares on December 31, 1999; and
4,045,919 shares on March 31, 1999 (65,824) (65,725) (65,155)
Surplus 65,838 65,686 65,648
Retained earnings 104,905 104,294 94,895
Accumulated other comprehensive income (35,302) (35,174) (3,128)
TOTAL STOCKHOLDERS' EQUITY 113,166 112,557 135,704
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,337,462 $ 2,467,479 $ 2,417,372
See accompanying notes to consolidated financial statements.
3
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
Three Months Ended
March 31
2000 1999
INTEREST INCOME
Interest and fees on loans and loans held for sale:
Taxable $ 21,677 $ 20,938
Tax exempt 656 557
Deposits with banks 33 32
Investment securities:
Available for sale 19,106 10,751
Held to maturity - 7,946
Total Interest Income 41,472 40,224
INTEREST EXPENSE
Deposits 10,838 10,116
Federal funds purchased and securities
sold under agreements to repurchase 840 1,204
Other short-term borrowings 1,790 1,589
Advances from Federal Home Loan Bank 11,823 10,329
Guaranteed junior subordinated deferrable
interest debentures 740 740
Long-term debt 82 101
Total Interest Expense 26,113 24,079
NET INTEREST INCOME 15,359 16,145
Provision for loan losses 249 375
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 15,110 15,770
NON-INTEREST INCOME
Trust fees 1,324 1,228
Net realized (losses) gains on investment
securities (889) 296
Net realized gains on loans held for sale 308 1,347
Wholesale cash processing fees 120 175
Service charges on deposit accounts 870 853
Net mortgage servicing fees 190 138
Bank owned life insurance 437 419
Other income 1,541 1,728
Total Non-Interest Income 3,901 6,184
NON-INTEREST EXPENSE
Salaries and employee benefits 8,184 7,983
Net occupancy expense 1,288 1,186
Equipment expense 1,154 1,022
Professional fees 865 700
Supplies, postage, and freight 663 694
Miscellaneous taxes and insurance 516 493
FDIC deposit insurance expense 62 68
Amortization of goodwill and core deposit
intangibles 792 712
Impairment charge (credit) for mortgage
servicing rights (55) -
Spin-off costs 593 -
Other expense 2,935 2,244
Total Non-Interest Expense $ 16,997 $ 15,102
CONTINUED ON NEXT PAGE
4
CONSOLIDATED STATEMENT OF INCOME
CONTINUED FROM PREVIOUS PAGE
(In thousands, except per share data)
Unaudited
Three Months Ended
March 31
2000 1999
INCOME BEFORE INCOME TAXES $ 2,014 $ 6,852
Provision (credit) for income taxes (597) 1,816
NET INCOME $ 2,611 $ 5,036
PER COMMON SHARE DATA:
Basic:
Net income $ 0.20 $ 0.37
Average shares outstanding 13,318,966 13,445,841
Diluted:
Net income $ 0.20 $ 0.37
Average shares outstanding 13,330,006 13,604,163
Cash dividends declared $ 0.15 $ 0.14
See accompanying notes to consolidated financial statements.
5
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Unaudited
March 31, 2000 March 31, 1999
PREFERRED STOCK
Balance at beginning of period $ - $ -
Balance at end of period - -
COMMON STOCK
Balance at beginning of period 43,476 43,375
Stock options exercised 73 69
Balance at end of period 43,549 43,444
TREASURY STOCK
Balance at beginning of period (65,725) (61,521)
Treasury stock, at cost (99) (3,634)
Balance at end of period (65,824) (65,155)
CAPITAL SURPLUS
Balance at beginning of period 65,686 65,495
Stock options exercised 152 153
Balance at end of period 65,838 65,648
RETAINED EARNINGS
Balance at beginning of period 104,294 91,737
Net income 2,611 5,036
Cash dividends declared (2,000) (1,878)
Balance at end of period 104,905 94,895
ACCUMULATED OTHER
COMPREHENSIVE INCOME
Balance at beginning of period (35,174) 2,584
Other comprehensive income
(loss), net of tax (128) (5,712)
Balance at end of period (35,302) (3,128)
TOTAL STOCKHOLDERS' EQUITY $ 113,166 $ 135,704
See accompanying notes to consolidated financial statements.
6
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
Three Months Ended
March 31
2000 1999
OPERATING ACTIVITIES
Net income $ 2,611 $ 5,036
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 249 375
Depreciation and amortization expense 724 628
Amortization expense of goodwill and core deposit
intangibles 792 712
Amortization expense of mortgage servicing rights 481 770
Net amortization of investment securities 55 378
Net realized losses (gains) on investment securities 889 (296)
Net realized gains on loans and loans held for sale (308) (1,347)
Origination of mortgage loans held for sale (51,729 (132,978)
Sales of mortgage loans held for sale 61,970 140,851
Decrease in accrued income receivable 501 92
Increase in accrued expense payable (2,062) (853)
Net cash provided by operating activities 14,173 13,368
INVESTING ACTIVITIES
Purchases of investment securities and other short-term
investments - available for sale (39,696) (248,182)
Purchases of investment securities and other short-term
investments - held to maturity - (13,843)
Proceeds from maturities of investment securities and
other short-term investments - available for sale 35,204 26,592
Proceeds from maturities of investment securities and
other short-term investments - held to maturity - 28,856
Proceeds from sales of investment securities and
other short-term investments - available for sale 124,507 184,830
Long-term loans originated (53,899) (78,976)
Loans held for sale (17,704) (62,022)
Principal collected on long-term loans 67,218 126,069
Loans purchased or participated (10,000) (9,734)
Loans sold or participated 1,329 -
Net (increase) decrease in credit card receivable and
other short-term loans (936) 2,016
Purchases of premises and equipment (711) (1,058)
Sale/retirement of premises and equipment 122 104
Net decrease in assets held in trust for collateralized
mortgage obligation 77 270
Net increase in mortgage servicing rights (89) (700)
Net increase in other assets (1,704) (10,434)
Net cash provided (used) by investing activities 103,718 (56,212)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit 158,558 101,032
Payments for maturing certificates of deposit (122,969) (35,947)
Net (decrease) increase in demand and savings deposits (29,292) 14,783
Net increase (decrease) in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings 171,188 (27,604)
Net principal paydowns of advances from Federal Home
Loan Bank (303,754) (1,265)
Repayments of long-term debt (700) (343)
Common stock cash dividends paid (2,000) (811)
Guaranteed junior subordinated deferrable interest
debenture dividends paid (729) (729)
Proceeds from dividend reinvestment, stock
purchase plan, and stock options exercised 225 222
Purchases of treasury stock (99) (3,634)
Net (decrease) increase in other liabilities (866) (3,884)
Net cash (used) provided by financing activities (130,438) 41,820
NET DECREASE IN CASH EQUIVALENTS (12,547) (1,024)
CASH EQUIVALENTS AT JANUARY 1 55,434 38,940
CASH EQUIVALENTS AT MARCH 31 $ 42,887 $ 37,916
See accompanying notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The consolidated financial statements include the accounts of
USBANCORP, Inc. (the "Company") and its wholly-owned subsidiaries,
U.S. Bank ("U.S. Bank"), Three Rivers Bank and Trust Company ("Three
Rivers Bank"), USBANCORP Trust and Financial Services Company
("Trust Company"), UBAN Associates, Inc., ("UBAN Associates") and
United Bancorp Life Insurance Company ("United Life"). In addition,
the Parent Company is an administrative group that provides support
in such areas as audit, finance, investments, loan review, general
services, loan policy, and marketing. Intercompany accounts and
transactions have been eliminated in preparing the consolidated
financial statements. On April 1, 2000, the Company successfully
completed the spin-off of its Pittsburgh based Three Rivers Bank
subsidiary to its shareholders.
2. Basis of Preparation
The unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information. In the opinion of management, all
adjustments that are of a normal recurring nature and are considered
necessary for a fair presentation have been included. They are not,
however, necessarily indicative of the results of consolidated
operations for a full year.
With respect to the unaudited consolidated financial
information of the Company for the three month periods ended March
31, 2000, and 1999, Arthur Andersen LLP, independent public
accountants, conducted reviews (based upon procedures established by
the American Institute of Certified Public Accountants) and not
audits, as set forth in their separate review report dated April 14,
2000, appearing herein. This report does not express an opinion on
the interim unaudited consolidated financial information. Arthur
Andersen LLP has not carried out any significant or additional audit
tests beyond those which would have been necessary if its report had
not been included. The December 31, 1999, numbers are derived from
audited financial statements.
For further information, refer to the consolidated financial
statements and accompanying notes included in the Company's "Annual
Report and Form 10-K" for the year ended December 31, 1999.
3. Earnings Per Common Share
Basic earnings per share includes only the weighted average
common shares outstanding. Diluted earnings per share includes the
weighted average common shares outstanding and any dilutive common
stock equivalent shares in the calculation. Treasury shares are
treated as retired for earnings per share purposes.
8
4. Comprehensive Income
In January 1998, the Company adopted SFAS #130, "Reporting
Comprehensive Income," which established standards for reporting and
displaying comprehensive income and its components in a financial
statement. For the Company, comprehensive income includes net
income and unrealized holding gains and losses from available for
sale investment securities. The changes in other comprehensive
income are reported net of income taxes, as follows (in millions):
Three Months Ended
March 31, March 31,
2000 1999
Net income $2,611 $5,036
Other comprehensive income, before tax:
Unrealized holding gains(losses) on
investment securities 1,071 (7,475)
Less: reclassification adjustment for losses
(gains) included in net income 889 (296)
Other comprehensive income(loss) before tax (182) (7,771)
Income tax expense(credit) related to items
of other comprehensive income (54) (2,059)
Other comprehensive income(loss), net of tax (128) (5,712)
Comprehensive income $ 2,483 $ (676)
5. Consolidated Statement of Cash Flows
On a consolidated basis, cash equivalents include cash and due
from banks, interest bearing deposits with banks, and federal funds
sold and securities purchased under agreements to resell. For the
Parent Company, cash equivalents also include short-term
investments. The Company made $3,477,000 in income tax payments in
the first three months of 2000 as compared to $4,930,000 for the
first three months of 1999. Total interest expense paid amounted to
$28,090,000 in 2000's first three months compared to $24,932,000 in
the same 1999 period.
6. Investment Securities
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. The mark-to-market of
the available for sale portfolio does inject more volatility in the
book value of equity, but has no impact on regulatory capital.
Realized gain or loss on securities sold was computed upon the
adjusted cost of the specific securities sold. The book and market
values of investment securities are summarized as follows (in
thousands):
9
Investment securities available for sale:
March 31, 2000
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 15,836 $ - $ (139) $ 15,697
U.S. Agency 43,704 - (2,479) 41,225
State and municipal 97,253 96 (6,367) 90,982
U.S. Agency mortgage-backed
securities 880,421 157 (44,658) 835,920
Other securities(1) 83,505 39 (1,185) 82,359
Total $1,120,719 $ 292 $ (54,828) $1,066,183
(1)Other investment securities include corporate notes and bonds,
asset-backed securities, and equity
securities.
Maintaining investment quality is a primary objective of the
Company's investment policy which, subject to certain limited
exceptions, prohibits the purchase of any investment security below
a Moody's Investor's Service or Standard & Poor's rating of "A." At
March 31, 2000, 97.2% of the portfolio was rated "AAA" compared to
97.6% at March 31, 1999. Approximately 1.7% of the portfolio was
rated below "A" or unrated on March 31, 2000.
7. Loans Held for Sale
At March 31, 2000, $17,704,000 of newly originated fixed-rate
residential mortgage loans were classified as "held for sale." It
is management's intent to sell these residential mortgage loans
during the next several months. The residential mortgage loans held
for sale are carried at the lower of aggregate cost or market value.
Net realized and unrealized gains and losses are included in "Net
gains (losses) on loans held for sale"; unrealized net valuation
adjustments (if any) are recorded in the same line item on the
Consolidated Statement of Income.
8. Loans
The loan portfolio of the Company consists of the following
(in thousands):
March 31 December 31 March 31
2000 1999 1999
Commercial $171,969 $152,042 $150,644
Commercial loans secured
by real estate 400,051 406,927 352,800
Real estate - mortgage 449,879 452,507 448,185
Consumer 67,684 70,983 73,331
Loans 1,089,583 1,082,459 1,024,960
Less: Unearned income 7,577 8,408 4,880
Loans, net of unearned income $1,082,006 $1,074,051 $1,020,080
Real estate-construction loans were not material at these
presented dates and comprised 4.7% of total loans net of unearned
income at March 31, 2000. The Company has no credit exposure to
foreign countries or highly leveraged transactions. Additionally,
the Company has no significant industry lending concentrations.
10
9. Allowance for Loan Losses and Charge-Off Procedures
As a financial institution which assumes lending and credit
risks as a principal element of its business, the Company
anticipates that credit losses will be experienced in the normal
course of business. Accordingly, the Company consistently applies
a comprehensive methodology and procedural discipline which is
updated on a quarterly basis at the subsidiary bank level to
determine both the adequacy of the allowance for loan losses and the
necessary provision for loan losses to be charged against earnings.
This methodology includes:
a detailed review of all criticized and impaired loans to
determine if any specific reserve allocations are required on an
individual loan basis. The specific reserve established for
these criticized and impaired loans is based on careful analysis
of the loan's performance, the related collateral value, cash
flow considerations and the financial capability of any
guarantor.
the application of formula driven reserve allocations for all
commercial and commercial real-estate loans are calculated by
using a three year migration analysis of net losses incurred
within each risk grade for the entire commercial loan portfolio.
The difference between estimated and actual losses is reconciled
through the dynamic nature of the migration analysis.
the application of formula driven reserve allocations to
installment and mortgage loans which are based upon historical
charge-off experience for those loan types. The residential
mortgage loan allocation is based upon the Company's five-year
historical average of actual loan charge-offs experienced in that
category. The same methodology is used to determine the
allocation for consumer loans except the allocation is based upon
an average of the most recent actual three-year historical
charge-off experience for consumer loans.
the application of formula driven reserve allocations to all
outstanding loans and certain unfunded commitments is based upon
review of historical losses and qualitative factors, which
include but are not limited to, economic trends, delinquencies,
concentrations of credit, trends in loan volume, experience and
depth of management, examination and audit results, effects of
any changes in lending policies and trends in policy exceptions.
The maintenance of a general unallocated reserve to accommodate
inherent risk in the Company's portfolio that is not identified
through the Company's specific loan and portfolio segment reviews
discussed above. Management recognizes that there may be events
or economic factors that have occurred effecting specific
borrowers or segments of borrowers that may not yet be fully
reflected in the information that the Company uses for arriving
at a specific loan or portfolio segment reserves. Therefore, the
company and its Board of Directors believe a general unallocated
reserve is needed to recognize the estimation risk associated
with the specific and formula driven allowances. In conjunction
with the establishment of the general unallocated reserve, the
Company also looks at the total allowance for loan losses in
relation to the size of the total loan portfolio, the level of
non-performing assets and its coverage of these items as compared
to peer banks.
11
After completion of this process, a formal meeting of the Loan
Loss Reserve Committee is held to evaluate the adequacy of the
reserve and establish the provision level for the next quarter. The
Company believes that the procedural discipline, systematic
methodology, and comprehensive documentation of this quarterly
process is in full compliance with all regulatory requirements and
provides appropriate support for accounting purposes.
When it is determined that the prospects for recovery of the
principal of a loan have significantly diminished, the loan is
immediately charged against the allowance account; subsequent
recoveries, if any, are credited to the allowance account. In
addition, non-accrual and large delinquent loans are reviewed
monthly to determine potential losses. Consumer loans are considered
losses when they are 90 days past due, except loans that are insured
for credit loss.
The Company's policy is to individually review, as
circumstances warrant, each of its commercial and commercial
mortgage loans to determine if a loan is impaired. At a minimum,
credit reviews are mandatory for all commercial and commercial
mortgage loans with balances in excess of $500,000 within an 12
month period. The Company has also identified two pools of small
dollar value homogeneous loans which are evaluated collectively for
impairment. These separate pools are for residential mortgage loans
and consumer loans. Individual loans within these pools are
reviewed and removed from the pool if factors such as significant
delinquency in payments of 90 days or more, bankruptcy, or other
negative economic concerns indicate impairment.
An analysis of the changes in the allowance for loan losses
follows (in thousands, except ratios):
Three Months Ended Year Ended
March 31, December 31,
2000 1999 1999
Balance at beginning of period $ 10,350 $ 10,725 $ 10,725
Charge-offs:
Commercial 171 168 1,802
Real estate-mortgage 269 210 625
Consumer 67 234 576
Total charge-offs 507 612 3,003
Recoveries:
Commercial 37 125 295
Real estate-mortgage 271 102 199
Consumer 46 45 234
Total recoveries 354 272 728
Net charge-offs 153 340 2,275
Provision for loan losses 249 375 1,900
Balance at end of period $ 10,446 $ 10,760 $ 10,350
As a percent of average loans and loans held
for sale, net of unearned income:
Annualized net charge-offs 0.06% 0.13% 0.21%
Annualized provision for loan losses 0.09 0.14 0.18
Allowance as a percent of loans and loans
held for sale, net of unearned income
at period end 0.95 0.99 0.94
Total classified loans $22,716 $25,339 $24,049
12
(For additional information, refer to the "Provision for Loan
Losses" and "Loan Quality" sections in the Management's Discussion
and Analysis of Consolidated Financial Condition and Results of
Operations on pages 26 and 28, respectively.)
10. Components of Allowance for Loan Losses
For impaired loans, the measurement of impairment may be based
upon: 1) the present value of expected future cash flows discounted
at the loan's effective interest rate; 2) the observable market
price of the impaired loan; or 3) the fair value of the collateral
of a collateral dependent loan.
The Company had loans totaling $2,491,000 and $1,690,000 being
specifically identified as impaired and a corresponding allocation
reserve of $500,000 and $969,000 at March 31, 2000, and March 31,
1999, respectively. The average outstanding balance for loans being
specifically identified as impaired was $2,330,000 for the first
three months of 2000 compared to $1,725,000 for the first three
months of 1999. All of the impaired loans are collateral dependent,
therefore the fair value of the collateral of the impaired loans is
evaluated in measuring the impairment. There was no interest income
recognized on impaired loans during the first three months of 2000
or 1999.
The following table sets forth the allocation of the allowance
for loan losses among various categories. This allocation is
determined by using the consistent quarterly procedural discipline
which was discussed above. This allocation, however, is not
necessarily indicative of the specific amount or specific loan
category in which future losses may ultimately occur (in thousands,
except percentages):
March 31, 2000 December 31, 1999 March 31, 1999
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
Amount to Loans Amount to Loans Amount to Loans
Commercial $ 1,829 15.6% $ 1,991 13.9% $ 1,870 13.9%
Commercial
loans secured
by real estate 3,226 36.4 2,928 37.1 2,098 32.6
Real Estate -
mortgage 829 42.5 791 43.3 991 47.2
Consumer 665 5.5 631 5.7 620 6.3
Allocation to
general risk 3,897 - 4,009 - 5,181 -
Total $10,446 100.0% $10,350 100.0% $10,760 100.0%
Even though real estate-mortgage loans comprise approximately
43% of the Company's total loan portfolio, only $829,000 or 7.9% 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 and other qualitative factors.
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, the Company's historical
loss experienced in these categories, and other qualitative factors.
13
The Company has strengthened its allocations to the commercial
segments of the loan portfolio over the past two quarters. Factors
considered by the Company that led to increased allocations to the
commercial segments of the portfolio included: the potential
adverse effects of rising interest rates which began in the second
half of 1999, continued growth of the commercial loan portfolio, the
continued increase in concentration risk in single borrowers, and
the overall growth in the average size associated with these
credits.
At March 31, 2000, management of the Company believes the
allowance for loan losses was adequate to cover potential yet
undetermined losses within the Company's loan portfolio. The
Company's management is unable to determine in what loan category
future charge-offs and recoveries may occur. (For a complete
discussion concerning the operations of the "Allowance for Loan
Losses" refer to Note 9.)
11. Non-performing Assets
Non-performing assets are comprised of (i) loans which are on
a non-accrual basis, (ii) loans which are contractually past due 90
days or more as to interest or principal payments some of which are
insured for credit loss, and (iii) other real estate owned (real
estate acquired through foreclosure and in-substance foreclosures).
All loans, except for loans that are insured for credit loss, are
placed on non-accrual status immediately upon becoming 90 days past
due in either principal or interest. In addition, if circumstances
warrant, the accrual of interest may be discontinued prior to 90
days. In all cases, payments received on non-accrual loans are
credited to principal until full recovery of principal has been
recognized; it is only after full recovery of principal that any
additional payments received are recognized as interest income. The
only exception to this policy is for residential mortgage loans
wherein interest income is recognized on a cash basis as payments
are received.
The following table presents information concerning non-
performing assets (in thousands, except percentages):
March 31 December 31 March 31
2000 1999 1999
Non-accrual loans $ 6,114 $ 4,928 $ 5,840
Loans past due 90 days or more 85 1,305 476
Other real estate owned 6,403 7,126 1,650
Total non-performing assets $ 12,602 $ 13,359 $ 7,966
Total non-performing assets as a
percent of loans and loans held
for sale, net of unearned income,
and other real estate owned 1.14% 1.21% 0.74%
14
The Company is unaware of any additional loans which are
required to either be charged-off or added to the non-performing
asset totals disclosed above. Other real estate owned is recorded
at the lower of 1)fair value minus estimated costs to sell, or
2)carrying cost.
The following table sets forth, for the periods indicated, (i)
the gross interest income that would have been recorded if non-
accrual loans had been current in accordance with their original
terms and had been outstanding throughout the period or since
origination if held for part of the period, (ii) the amount of
interest income actually recorded on such loans, and (iii) the net
reduction in interest income attributable to such loans (in
thousands).
Three Months Ended
March 31
2000 1999
Interest income due in accordance
with original terms $ 123 $ 87
Interest income recorded (67) (9)
Net reduction in interest income $ 56 $ 78
12. Off-Balance Sheet Hedge Instruments
Policies
The Company uses various interest rate contracts, such as
interest rate swaps, caps and floors, to help manage interest rate
and market valuation risk exposure, which is incurred in normal
recurrent banking activities. These interest rate contracts
function as hedges against specific assets or liabilities on the
Consolidated Balance Sheet. Unrealized gains or losses on these
hedge transactions are deferred. It is the Company's policy not to
terminate hedge transactions prior to their expiration date.
For interest rate swaps, the interest differential to be paid
or received is accrued by the Company and recognized as an
adjustment to interest income or interest expense of the underlying
assets or liabilities being hedged. Because only interest payments
are exchanged, the cash requirement and exposure to credit risk are
significantly less than the notional amount.
Any premium or transaction fee incurred to purchase interest
rate caps or floors is deferred and amortized to interest income or
interest expense over the term of the contract. Unamortized
premiums related to the purchase of caps and floors are included in
"Other assets" on the Consolidated Balance Sheet. A summary of the
off-balance sheet derivative transactions outstanding as of March
31, 2000, are as follows:
15
Borrowed Funds Hedges
The Company has entered into several interest rate swaps to
hedge short-term borrowings used to leverage the balance sheet.
Specifically, FHLB advances which reprice between 30 days and two
years are being used to fund fixed-rate agency mortgage-backed
securities with durations ranging from three to five years. Under
the swap agreements, the Company pays a fixed-rate of interest and
receives a floating-rate which resets either monthly or quarterly.
For the $120 million interest rate cap, the Company only receives
payment from the counter party if the federal funds rate goes above
the 5.00% strike rate. The following table summarizes the interest
rate swap transactions which impacted the Company's first three
months of 2000 performance:
Fixed Floating Impact
Notional Start Termination Rate Rate Repricing On Interest
Amount Date Date Paid Received Frequency Expense
$130,000,000 10-25-99 10-25-00 6.17% 6.08% Quarterly $ 26,493
90,000,000 10-25-99 10-25-01 6.41 6.08 Quarterly 73,658
50,000,000 10-25-99 10-25-01 6.42 6.08 Quarterly 41,583
120,000,000 5-01-99 4-30-00 5.00 5.75 Monthly (209,067)
(67,333)
The Company believes that its exposure to credit loss in the
event of non-performance by any of the counterparties (which include
Mellon Bank, PNC and First Union) in the interest rate swap
agreements is remote. The Company monitors and controls all off-
balance sheet derivative products with a comprehensive Board of
Director approved hedging policy. This policy permits a total
maximum notional amount outstanding of $500 million for interest
rate swaps, and interest rate caps/floors. The Company had no
interest rate floors outstanding at March 31, 2000, or March 31,
1999.
13. Goodwill and Core Deposit Intangible Assets
USBANCORP's balance sheet shows both tangible assets (such as
loans, buildings, and investments) and intangible assets (such as
goodwill). The Company now carries $12.1 million of goodwill and
$12.8 million of core deposit intangible assets on its balance
sheet. $10 million of this core deposit intangible was established
in the first quarter of 1999 with the purchase of the First Western
branches. A rollforward of the Company's intangible asset balances
is as follows (in thousands):
Balance at December 31, 1999 $ 25,655
Amortization expense (792)
Balance at March 31, 2000 $ 24,863
The Company is amortizing core deposit intangibles over
periods ranging from five to ten years while goodwill is being
amortized over a 15 year life. The straight-line method of
amortization is being used for both of these categories of
intangibles. It is important to note that this intangible
amortization expense is not a future cash outflow. The following
table reflects the future amortization expense of the intangible
assets (in thousands):
16
Remaining 2000 $ 2,485
2001 3,112
2002 3,112
2003 3,112
2004 2,684
2005 and after 10,358
14. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following at March 31,
2000, (in thousands, except percentages):
Type Maturing Amount Weighted
Average
Rate
Open Repo Plus Overnight $ 183,650 6.62%
Advances and 2000 405,000 5.53
wholesale 2001 110,126 6.17
repurchase 2002 8,500 7.06
agreements 2003 3,750 6.61
2004 and after 125,869 5.99
Total Advances and 653,245 5.75
wholesale repurchase
agreements
Total FHLB Borrowings $836,895 5.94%
All of the above borrowings bear a fixed rate of interest,
with the only exceptions being the Open Repo Plus advances whose
rate can change daily. All FHLB stock along with an interest in
unspecified mortgage loans and mortgage-backed securities, with an
aggregate statutory value equal to the amount of the advances, have
been pledged as collateral with the Federal Home Loan Bank of
Pittsburgh to support these borrowings.
15. Capital
The Company is subject to various capital
requirements administered by the federal banking agencies.
Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must
meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgements
by the regulators about components, risk weightings, and
other factors.
17
Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Company's financial statements.
Quantitative measures established by regulation to
ensure capital adequacy require the Company to maintain
minimum amounts and ratios(set forth in the table below) of
total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average assets. Management believes that
as of March 31, 2000, the Company meets all capital adequacy
requirements to which it is subject.
As of March 31, 2000, and 1999, as well as, December
31, 1999, the Federal Reserve categorized the Company as
"Well Capitalized" under the regulatory framework for prompt
corrective action. To be categorized as well capitalized,
the Company must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the
table. There are no conditions or events since notification
that management believes have changed the Company's
classification category.
To Be Well
Capitalized Under
For Capital Prompt Corrective
As of March 31, 2000 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk (In thousands, except ratios)
Weighted Assets)
Consolidated $ 167,736 14.09% $ 95,245 8.00% $ 119,057 10.00%
U.S. Bank 90,829 14.10 51,550 8.00 64,438 10.00
Three Rivers Bank 73,597 13.58 43,359 8.00 54,199 10.00
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated 157,290 13.21 47,623 4.00 71,434 6.00
U.S. Bank 85,508 13.27 25,775 4.00 38,663 6.00
Three Rivers Bank 68,472 12.63 21,680 4.00 32,519 6.00
Tier 1 Capital (to Average
Assets)
Consolidated 157,290 6.57 95,802 4.00 119,753 5.00
U.S. Bank 85,508 6.54 52,310 4.00 65,387 5.00
Three Rivers Bank 68,472 6.34 43,207 4.00 54,009 5.00
16. Segment Results
The financial performance of the Company is also
monitored by an internal funds transfer pricing
profitability measurement system which produces line of
business results and key performance measures. The
Company's major business units include community banking,
mortgage banking, trust, and investment/parent. The
reported results reflect the underlying economics of the
business segments. Expenses for centrally provided services
are allocated based upon the cost and estimated usage of
those services. Capital has been allocated among the
businesses on a risk-adjusted basis. The businesses are
match-funded and interest rate risk is centrally managed and
accounted for within the investment/parent business segment.
The key performance measures the Company focuses on for
each business segment are net income and risk-adjusted
return on equity.
18
Community banking includes the deposit-gathering
branch franchise along with lending to both individuals and
businesses. Lending activities include commercial and
commercial real-estate loans, residential mortgage loans and
direct consumer loans. Mortgage banking includes the
servicing of mortgage loans and the origination of
residential mortgage loans through a wholesale broker
network. The trust segment has two primary business
divisions, institutional trust and personal trust.
Institutional trust products and services include 401(k)
plans, defined benefit and defined contribution employee
benefit plans, individual retirement accounts, and
collective investment funds for trade union pension funds.
Personal trust products and services include personal
portfolio investment management, estate planning and
administration, custodial services and pre-need trusts. The
investment/parent includes the net results of investment
securities and borrowing activities, general corporate
expenses not allocated to the business segments, interest
expense on corporate debt, and centralized interest rate
risk management.
The contribution of the major business segments to
the consolidated results for the first three months of 2000
and 1999 were as follows (in thousands, except ratios):
March 31, 2000 Community Banking Mortgage Banking Trust Investment/Parent Total
Net Income $ 2,099 $ (267) $ 205 $ 574 $ 2,611
Risk adjusted
return on equity 11.7% (13.3)% 30.0% 6.9% 9.3%
Total assets $1,073,960 $44,068 $1,814 $1,217,620 $2,337,462
March 31, 1999 Community Banking Mortgage Banking Trust Investment/Parent Total
Net Income $ 1,925 $ 312 $ 180 $ 2,619 $ 5,036
Risk adjusted
return on equity 9.9% 15.0% 23.2% 21.1% 14.4%
Total assets $986,786 $70,058 $1,679 $1,358,849 $2,417,372
17. Tax-Free Spin-Off of Three Rivers Bancorp
On April 1, 2000, the Company executed its Board approved tax-
free spin-off of its Three Rivers Bank subsidiary. Shareholders
received one share of the new Three Rivers Bancorp (NASDAQ: TRBC)
common stock for every two shares of USBANCORP common stock that
they owned. The distribution of the Three Rivers Bancorp shares did
not change the number of USBANCORP common shares outstanding.
Standard Mortgage Company (SMC), a mortgage banking company,
previously a subsidiary of Three Rivers Bank, was internally spun-
off from Three Rivers Bank to the Company prior to consummation of
the Three Rivers Bank spin-off.
The accompanying USBANCORP Pro Forma Condensed Consolidated
Financial Statements should be read in conjunction with the
historical consolidated financial statements and notes thereto. The
USBANCORP pro forma condensed consolidated income statements assumes
that the dividend to shareholders occurred on January 1, 1999, and
the pro forma condensed consolidated balance sheet assumes that the
dividend occurred on March 31, 2000. The pro forma condensed
consolidated financial information is presented for informational
purposes only and does not purport to reflect the results of
operations or financial position of USBANCORP or Three Rivers
Bancorp or the results of operations or financial position that
would have occurred had USBANCORP or Three Rivers Bancorp been
operated as a separate, independent company. The pro forma
adjustments to the accompanying historical consolidated statements
of income and the consolidated balance sheets are set forth below.
19
Pro Forma Condensed Consolidated Statements of Income
Three Rivers
USBANCORP Bancorp USBANCORP
Historical Historical Pro Forma
Period Ended Period Ended Period Ended
March 31, March 31, March 31,
2000 2000 Adjustment 2000
(Unaudited in thousands, except per share data)
Total interest income $ 41,472 $ 18,100 $ - $ 23,372
Total interest expense 26,113 11,011 15,102
Net interest income 15,359 7,089 8,270
Provision for loan losses 249 150 99
Net interest income after
Provision for loan losses 15,110 6,939 8,171
Total non-interest income 3,901 623 3,278
Total non-interest expense 16,997 6,589 117(A) 10,525
Income before income taxes 2,014 973 (117) 924
Provision for income taxes (597) (477) (35)(B) (155)
Net income $ 2,611 $ 1,450 $ (82) $ 1,079
Diluted earnings per share $ 0.20 - $(0.12) $ 0.08
Average shares outstanding 13,330 - - 13,330
Three Rivers
USBANCORP Bancorp USBANCORP
Historical Historical Pro Forma
Year Ended Year Ended Year Ended
December 31,December 31, December 31,
1999 1999 Adjustment 1999
(Unaudited in thousands, except per share data)
Total interest income $ 165,188 $ 70,816 $ - $ 94,372
Total interest expense 99,504 41,082 58,422
Net interest income 65,684 29,734 35,950
Provision for loan losses 1,900 300 1,600
Net interest income after
Provision for loan losses 63,784 29,434 34,350
Total non-interest income 24,374 5,653 18,721
Total non-interest expense 60,815 21,027 469(A) 40,257
Income before income taxes 27,343 14,060 (469) 12,814
Provision for income taxes 6,922 4,090 (142)(B) 2,690
Net income $ 20,421 $ 9,970 $ (327) $ 10,124
Diluted earnings per share $ 1.52 - $ (0.77) $ 0.75
Average shares outstanding 13,451 - - 13,451
20
Pro Forma Condensed Consolidated Balance Sheet
Three Rivers
USBANCORP Bancorp USBANCORP
Historical Historical Pro Forma
Period Ended Period Ended Period Ended
March 31, March 31, March 31,
2000 2000 Adjustment 2000
(Unaudited in thousands)
ASSETS
Cash and due from banks $ 42,887 $ 16,979 $ (82)(A) $ 25,826
Investment securities 1,066,183 465,451 600,732
Loans 1,089,264 471,397 617,867
Other assets 139,128 55,276 10,159(C) 94,011
Total Assets $ 2,337,462 $ 1,009,103 $ 10,077 $ 1,338,436
LIABILITIES
Deposits $ 1,237,238 $ 569,898 $ - $ 667,340
Total borrowed funds 966,576 375,351 591,225
Other liabilities 20,482 8,520 11,962
Total Liabilities 2,224,296 953,769 1,270,527
Total stockholders' equity 113,166 55,334 10,077(A),(C) 67,909
Total Liabilities and
Stockholders' Equity $ 2,337,462 $ 1,009,103 $ 10,077 $ 1,338,436
Notes to unaudited pro forma condensed consolidated financial
statements:
(A) To record the additional incremental expenses USBANCORP expects
to incur that were previously allocated to and paid by Three
Rivers Bank.
(B) To record the income tax impact of the above expenses at the
Company's historical effective tax rate.
(C) To record the distribution by Three Rivers Bank of all of the
outstanding shares of the capital stock of Standard Mortgage
Corporation (SMC) to USBANCORP, so that SMC will be a wholly
owned subsidiary of USBANCORP.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
("M.D.& A.")
.....PERFORMANCE OVERVIEW..... The Company's net income for the
first quarter of 2000 totaled $2.6 million or $0.20 per share on a
diluted basis. These results include the consolidated results of
Three Rivers Bank because the spin-off did not occur until April 1,
2000. The Company's return on equity (ROE) for the first quarter of
2000 averaged 9.26%. This represents a decrease from the $5.0
million or $0.37 per diluted share earned in the first quarter of
1999. The Company's ROE in the first quarter of 1999 averaged
14.49%.
Factors that contributed to the lower earnings in the first
quarter of 2000 included a higher level of non-interest expense,
reduced non-interest income, and a lower level of net interest
income. The higher non-interest expense resulted primarily from a
$735,000 write-down of an other real estate owned property held at
Three Rivers Bank and $593,000 in costs associated with the Three
Rivers Bank spin-off. The lower non-interest income was due to a
$889,000 loss realized on the sale of $125 million of investment
securities as the Company used the proceeds from the sale to paydown
short-term borrowings and delever its balance sheet. Additionally,
a $1.0 million reduction in gains realized on mortgage loan sales
also contributed to the reduced non-interest income. A 20 basis
point reduction in the net interest margin caused net interest
income to decline by $786,000. These negative items were partially
offset by reduced income tax expense. During the first quarter of
2000, the Internal Revenue Service completed its examination of the
Company's tax returns through the 1997 tax year. As a result of the
successful conclusion of this examination, the Company was able to
reduce its first quarter tax expense by approximately $900,000. The
following table summarizes some of the Company's key performance
indicators (in thousands, except per share and ratios):
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
Net income $ 2,611 $ 5,036
Diluted earnings per share 0.20 0.37
Cash earnings per share 0.25 0.42
Return on average equity 9.26% 14.49%
Return on average assets 0.43 0.85
Average diluted common
shares outstanding 13,330 13,604
.....NET INTEREST INCOME AND MARGIN..... The Company's net interest
income represents the amount by which interest income on earning
assets exceeds interest paid on interest bearing liabilities. Net
interest income is a primary source of the Company's earnings; it is
affected by interest rate fluctuations as well as changes in the
amount and mix of earning assets and interest bearing liabilities.
It is the Company's philosophy to strive to optimize net interest
income performance in varying interest rate environments. The
following table compares the Company's net interest income
performance for the first quarter of 2000 to the first quarter of
1999 (in thousands, except percentages):
22
Three Months Ended
March 31,
2000 1999 $ Change % Change
Interest income $ 41,472 $ 40,224 1,248 3.1
Interest expense 26,113 24,079 2,034 8.4
Net interest income 15,359 16,145 (786) (4.9)
Tax-equivalent
adjustment 657 773 (116) (15.0)
Net tax-equivalent
interest income $ 16,016 $ 16,918 (902) (5.3)
Net interest margin 2.75% 2.95% (0.20)% N/M
N/M - Not meaningful
USBANCORP's net interest income on a tax-equivalent basis
decreased by $902,000 or 5.3% due to the negative impact of a 20
basis point decline in the net interest margin to 2.75%. This drop
in the net interest margin was caused by a 26 basis point increase
in the cost of funds due to higher costs for both borrowings and
deposits. This increase in the cost of funds more than offset the
benefit of a four basis point increase in the earning asset yield
due to a higher loan portfolio yield.
...COMPONENT CHANGES IN NET INTEREST INCOME... Regarding the
separate components of net interest income, the Company's total tax-
equivalent interest income for the first quarter of 2000 increased
by $1.1 million or 2.8% when compared to the same 1999 period. This
increase was due to the previously mentioned four basis point
increase in the earning asset yield and a higher level of earning
assets. Total average earning assets were $40 million higher in the
first quarter of 2000 due to an $18 million or 1.7% increase in
total loans and a similar $19 million increase in investment
securities. The Company was able to continue to achieve solid loan
growth in the commercial and commercial mortgage loan categories
which more than offset lower balances of residential mortgage loans
due to the higher interest rate environment. This shift within the
loan portfolio towards higher yielding commercial loans was a key
factor contributing to the 12 basis point improvement in the total
loan portfolio yield to 8.23%. The yield on total investment
securities decreased by three basis points to 6.46% as slower
prepayment speeds have extended the duration of the portfolio which
has limited repricing opportunities in the higher interest rate
environment experienced in the first quarter of 2000. The Company
did sell approximately $125 million of investment securities in
March of 2000 and used the proceeds from the sale to paydown short-
term borrowings. While this balance sheet repositioning strategy
had only limited impact on the average securities balances and
investment portfolio yield in the first quarter of 2000, it helped
reduce the Company's exposure to rising short-term interest rates in
the future.
23
The Company's total interest expense for the first quarter of
2000 increased by $2.0 million or 8.4% when compared to the same
1999 quarter. This higher interest expense was due primarily to a
26 basis point increase in the cost of funds to 4.96% which caused
interest expense to rise by $1.5 million. Interest rates,
particularly short rates such as fed funds and 90 day libor, were
125 basis points higher in the first quarter of 2000 as compared to
the first quarter of 1999. These higher interest rates contributed
to a 35 basis point increase in the cost of borrowings to 5.88% and
a 17 basis point increase in the cost of deposits to 4.07%. The
remainder of the increase in interest expense was due to a $39
million increase in average interest bearing liabilities which was
used to fund the earning asset growth. The growth in interest
bearing liabilities included an $18 million increase in interest
bearing deposits and a $21 million increase in borrowed funds. The
Company expects to continue to experience net interest margin
pressure in 2000 due to anticipated further interest rate increases
which will negatively impact the cost of funds.
It is recognized that interest rate risk does exist from the
Company's use of borrowed funds to leverage the balance sheet. To
neutralize a portion of this risk, the Company has executed a total
of $390 million of off-balance sheet hedging transactions which help
fix the variable funding costs associated with the use of short-term
borrowings to fund earning assets. (See further discussion under
Note 12.) Additionally, 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 ?7.5% and net income variability to
?15% over a twelve month period. (See further discussion under
Interest Rate Sensitivity). The Company also has asset liability
policy parameters which limit the maximum amount of total short-term
borrowings and FHLB advances to 40% of total assets. At March 31,
2000, the Company was in compliance with each of these internal
policy requirements.
The table that follows provides an analysis of net interest
income on a tax-equivalent basis setting forth (i) average assets,
liabilities, and stockholders' equity, (ii) interest income earned
on interest earning assets and interest expense paid on interest
bearing liabilities, (iii) average yields earned on interest earning
assets and average rates paid on interest bearing liabilities, (iv)
USBANCORP's interest rate spread (the difference between the average
yield earned on interest earning assets and the average rate paid on
interest bearing liabilities), and (v) USBANCORP's net interest
margin (net interest income as a percentage of average total
interest earning assets). For purposes of this table, loan balances
include non-accrual loans and interest income on loans includes loan
fees or amortization of such fees which have been deferred, as well
as, interest recorded on non-accrual loans as cash is received.
Additionally, a tax rate of approximately 35% is used to compute tax
equivalent yields.
24
Three Months Ended March 31 (In thousands, except percentages)
2000 1999
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Interest earning assets:
Loans and loans held
for sale, net of
unearned income $ 1,084,386 $ 22,520 8.23% $ 1,066,527 $ 21,682 8.11%
Deposits with banks 7,066 33 1.83 3,602 32 3.51
Total investment
securities 1,209,988 19,576 6.46 1,190,933 19,283 6.49
Total interest earning
assets/interest income 2,301,440 42,129 7.30 2,261,062 40,997 7.26
Non-interest earning assets:
Cash and due from banks 37,318 35,757
Premises and equipment 18,876 18,126
Other assets 72,709 103,074
Allowance for loan
losses (10,420) (10,829)
TOTAL ASSETS $2,419,923 $2,407,190
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 90,686 $ 212 0.94% $ 93,750 $ 230 0.99%
Savings 163,498 686 1.69 170,845 662 1.57
Money markets 179,651 1,804 4.04 176,350 1,439 3.31
Other time 635,968 8,136 5.15 611,209 7,785 5.17
Total interest bearing
deposits 1,069,803 10,838 4.07 1,052,154 10,116 3.90
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other short-term
borrowings 181,664 2,630 5.73 228,829 2,793 4.91
Advances from Federal
Home Loan Bank 822,331 11,823 5.78 751,655 10,329 5.57
Guaranteed junior subordinated
deferrable interest
debentures 34,500 740 8.58 34,500 740 8.58
Long-term debt 6,697 82 4.92 8,934 101 4.58
Total interest bearing
liabilities/interest expense 2,114,995 26,113 4.96 2,076,072 24,079 4.70
Non-interest bearing liabilities:
Demand deposits 167,278 165,010
Other liabilities 24,187 25,114
Stockholders' equity 113,463 140,994
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,419,923 $2,407,190
Interest rate spread 2.34 2.57
Net interest income/
net interest margin 16,016 2.75% 16,918 2.95%
Tax-equivalent adjustment (657) (773)
Net Interest Income $15,359 $16,145
25
..PROVISION FOR LOAN LOSSES..... The Company's provision for loan
losses for the first quarter of 2000 totaled $249,000 or 0.09% of
average total loans. This provision level exceeded net-charge-offs
for the quarter which amounted to $153,000 or 0.06% of average
loans. Both the provision and net charge-offs in the first quarter
of 2000 were lower than the prior year first quarter. The Company
applies a consistent methodology and procedural discipline to
evaluate the adequacy of the allowance for loan losses at each
subsidiary bank on a quarterly basis. (See further discussion in
Note 9 and the Allowance for Loan Losses section of the MD&A.) At
March 31, 2000, the allowance for loan losses totaled $10.4 million
or 0.95% of total loans and 83% of total non-performing assets. The
Company expects its provision level to at a minimum match and more
likely exceed net-charge-offs through the remainder of 2000. This
is due to the inherent risk in the loan portfolio resulting from
increased holdings of commercial and commercial real estate loans.
.....NON-INTEREST INCOME..... Non-interest income for the first
quarter of 2000 totaled $3.9 million which represented a $2.3
million or 37% decrease when compared to the first quarter of 1999.
This decrease was primarily due to the following items:
an $889,000 loss realized on the sale of $125 million of
investment securities in the first quarter of 2000. The
Company used the proceeds from the sale to paydown short-term
borrowings and delever its balance sheet. This balance sheet
repositioning strategy helped reduce the Company's exposure to
rising short-term interest rates. When compared to the
$296,000 gain realized in the first quarter of 1999, this
represents a net unfavorable change of $1.2 million.
a $1 million decrease in gains realized on loans held for sale
as a significant drop in mortgage refinancing activity has
reduced both the volume and spread on loan sales into the
secondary market in the first quarter of 2000.
a $96,000 or 7.8% increase in trust fees to $1.3 million in
the first quarter of 2000. This trust fee growth reflects
increased assets under management due to the profitable
expansion of the Company's trust operations.
.....NON-INTEREST EXPENSE..... Non-interest expense for the first
quarter of 2000 totaled $17.0 million which represented a $1.9
million or 12.5% increase when compared to the same 1999 quarter.
This increase was primarily due to the following items:
a $691,000 increase in other expense due entirely to a
$735,000 write-down of an other real estate owned property
held at Three Rivers Bank. The write-down of this non-
performing commercial asset was needed to better reflect its
anticipated net realizable value.
the recognition of $593,000 in costs related to the spin-off
of Three Rivers Bank. These costs related to severance and
personnel matters, certain investor relations costs, and
system and facility changes. The remaining costs associated
with the spin-off should approximate $1.8 million pre-tax and
will be expensed in the second quarter of 2000 in conjunction
with the April 1st distribution date of the Three Rivers
Bancorp stock to USBANCORP shareholders.
26
a $201,000 or 2.5% increase in salaries and employee benefits.
Approximately $100,000 of this increase related to severance
costs associated with a downsizing in the Company's mortgage
banking subsidiary due to reduced loan production volumes.
The remainder of the increase was caused by increased
incentive compensation and higher medical insurance premiums.
a $165,000 increase in professional fees due to higher legal
fees and other professional fees.
.....INCOME TAX EXPENSE..... The Company's recognized a net credit
for income taxes of $597,000 in the first quarter of 2000. During
the first quarter of 2000, the Internal Revenue Service completed
its examination of the Company's tax returns through the 1997 tax
year. As a result of the successful conclusion of this examination,
the Company was able to reduce its first quarter income tax expense
by $925,000 due to the reversal of a valuation allowance and accrued
income taxes. Excluding this item, the Company's first quarter tax
provision amounted to $328,000 or an effective rate of 16.3%. This
represented a decline from the $1.8 million provision or 26.5%
effective tax rate recognized in the first quarter of 1999 due to a
reduced level of pre-tax income and a comparable level of tax-free
income. Net deferred income taxes of $13.6 million have been
provided as of March 31, 2000, on the differences between taxable
income for financial and tax reporting purposes.
.....NET OVERHEAD BURDEN..... The Company's efficiency ratio (non-
interest expense divided by total revenue) increased significantly
to 85.3% in the first quarter of 2000 due to the previously
discussed unusually high non-interest expenses and reduced level of
non-interest income. The Company estimates that on a core basis the
efficiency ratio averaged approximately 74.8% which compared
unfavorably to the 65.4% efficiency ratio reported in the first
quarter of 1999. Factors contributing to the higher efficiency
ratio included lower net interest income and reduced revenue from
the mortgage banking operation. The amortization of intangible
assets also creates a $3.1 million annual non-cash charge that
negatively impacts the efficiency ratio. The efficiency ratio for
the first quarter of 2000, stated on a cash basis excluding the
intangible amortization, was 81.4% or approximately 4.0% lower than
the reported efficiency ratio of 85.3%.
.....BALANCE SHEET..... The Company's total consolidated assets were
$2.337 billion at March 31, 2000, compared with $2.467 billion at
December 31, 1999, which represents a decrease of $130 million or
5.3% due to deleveraging of the balance sheet. As previously
mentioned, the Company sold $125 million of investment securities
and used the proceeds to paydown short term borrowings. Total loans
and loans held for sale increased by approximately $4 million due to
continued growth in commercial loans which more than offset lower
balances of residential mortgage and consumer loans. Cash balances
dropped by $12 million as the Company maintained higher cash
balances at December 31, 1999, in anticipation of potential deposit
outflows due to Year 2000. No material deposit outflows
materialized.
Total deposits increased by $6.3 million since December 31,
1999, due to higher demand deposit account balances. The Company is
actively trying to grow deposit balances to enhance liquidity and
reduce its dependence on borrowings in 2000. Total borrowed funds
decreased by $133 million since December 31, 1999, as the Company
used the proceeds from security sales to paydown short-term
borrowings with the Federal Home Loan Bank. Total equity was up
27
slightly from year-end due to growth in retained earnings. The
negative balance in accumulated other comprehensive income resulting
from the mark-to-market of the available for sale securities
portfolio increased modestly from December 31,1999, and reduced
total equity by $35.3 million at March 31, 2000.
.....LOAN QUALITY.....The following table sets forth information
concerning USBANCORP's loan delinquency and other non-performing assets
(in thousands, except percentages):
March 31 December 31 March 31
2000 1999 1999
Total loan delinquency (past due
30 to 89 days) $ 10,928 $9,931 $ 13,419
Total non-accrual loans 6,114 4,928 5,840
Total non-performing assets* 12,602 13,359 7,966
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 0.99% 0.91% 1.24%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned income 0.56 0.45 0.54
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 1.14 1.21 0.74
*Non-performing assets are comprised of (i) loans that are on
a non-accrual basis, (ii) loans that are contractually past due 90
days or more as to interest and principal payments some of which are
insured for credit loss, and (iii) other real estate owned. All
loans, except for loans that are insured for credit loss, are placed
on non-accrual status upon becoming 90 days past due in either
principal or interest.
Between December 31, 1999, and March 31, 2000, total loan
delinquency increased by $1.0 million but the delinquency ratio
remained below 1.0% of total loans. Total non-performing assets
decreased by $757,000 since year-end 1999 due primarily to the
previously discussed write-down of an other real estate owned property
at Three Rivers Bank. The balance of this non-performing asset totaled
$5.3 million at March 31, 2000. At all dates presented, the Company
had no troubled debt restructurings which involve forgiving a portion
of interest or principal on any loans or making loans at a rate
materially less than that of market rates.
.....ALLOWANCE FOR LOAN LOSSES.....The following table sets forth
changes in the allowance for loan losses and certain ratios for the
periods ended (in thousands, except percentages):
March 31 December 31 March 31
2000 1999 1999
Allowance for loan losses $ 10,446 $ 10,350 $ 10,760
Allowance for loan losses as
a percentage of each of
the following:
total loans and loans
held for sale,
net of unearned income 0.95% 0.94% 0.99%
total delinquent loans
(past due 30 to 89 days) 95.59 104.22 80.18
total non-accrual loans 170.85 210.02 184.25
total non-performing assets 82.89 77.48 135.07
28
Since December 31, 1999, the balance in the allowance for loan
losses has increased by $96,000 due to the loan loss provision
exceeding net charge-offs in the first quarter of 2000. The Company's
allowance for loan losses at March 31, 2000, was 83% of non-performing
assets and 171% of non-accrual loans.
.....INTEREST RATE SENSITIVITY..... Asset/liability management involves
managing the risks associated with changing interest rates and the
resulting impact on the Company's net interest income, net income and
capital. The management and measurement of interest rate risk at
USBANCORP is performed by using the following tools: 1) simulation
modeling which analyzes the impact of interest rate changes on net
interest income, net income and capital levels over specific future
time periods. The simulation modeling forecasts earnings under a
variety of scenarios that incorporate changes in the absolute level of
interest rates, the shape of the yield curve, prepayments and changes
in the volumes and rates of various loan and deposit categories. The
simulation modeling also incorporates all off balance sheet hedging
activity as well as assumptions about reinvestment and the repricing
characteristics of certain assets and liabilities without stated
contractual maturities; 2)static "GAP" analysis which analyzes the
extent to which interest rate sensitive assets and interest rate
sensitive liabilities are matched at specific points in time; and 3)
market value of portfolio equity sensitivity analysis. The overall
interest rate risk position and strategies are reviewed by senior
management and Company's Board of Directors on an ongoing basis.
The following table presents a summary of the Company's static
GAP positions (in thousands, except for the GAP ratios):
March 31 December 31 March 31
2000 1999 1999
Six month cumulative GAP
RSA........................ $ 551,256 $ 574,913 $ 654,486
RSL....................... (1,103,216) (1,178,167) (910,144)
Off-balance sheet
hedges............... 270,000 270,000 -
GAP....................... $ (281,960) $ (333,254) $ (255,658)
GAP ratio.............. 0.66X 0.63X 0.72X
GAP as a % of total
assets................ (12.06)% (13.51)% (10.58)%
One year cumulative GAP
RSA...................... $ 769,595 $ 788,634 $ 899,896
RSL...................... (1,457,453) (1,474,606) (1,076,088)
Off-balance sheet
hedges.............. 270,000 140,000 -
GAP...................... $ (417,858) $ (545,972) $ (176,192)
GAP ratio.............. 0.65X 0.59X 0.84X
GAP as a % of total
assets............... (17.88)% (22.13)% (7.29)%
When March 31, 2000, is compared to December 31, 1999, both the
Company's six month and one year cumulative GAP ratios became less
negative due primarily to the deleverage strategy executed in the first
29
quarter which resulted in the paydown of $130 million of short-term
borrowings. The securities sold in the first quarter had durations
approximating 5 years.
Management places primary emphasis on simulation modeling to
manage and measure interest rate risk. The Company's asset liability
management policy seeks to limit net interest income variability over
the first twelve months of the forecast period to plus or minus 7.5% and net
income variability to plus or minus 15.0% based upon varied economic rate
forecasts which include interest rate movements of up to 200 basis points and
alterations of the shape of the yield curve. Additionally, the Company
also uses market value sensitivity measures to further evaluate the
balance sheet exposure to changes in interest rates. Market value of
portfolio equity sensitivity analysis captures the dynamic aspects of
long-term interest rate risk across all time periods by incorporating
the net present value of expected cash flows from the Company's assets
and liabilities. The Company monitors the trends in market value of
portfolio equity sensitivity analysis on a quarterly basis.
The following table presents an analysis of the sensitivity
inherent in the Company's net interest income, net income and market
value of portfolio equity. The interest rate scenarios in the table
compare the Company's base forecast or most likely rate scenario at
March 31, 2000, to scenarios which reflect ramped increases and
decreases in interest rates of 200 basis points along with performance
in a stagnant rate scenario with interest rates held flat at the March
31, 2000, levels. The Company's most likely rate scenario is based upon
published economic consensus estimates. Each rate scenario contains
unique prepayment and repricing assumptions which are applied to the
Company's expected balance sheet composition which was developed under
the most likely interest rate scenario.
Variability of Change In
Interest Rate Net Interest Variability of Market Value of
Scenario Income Net Income Portfolio Equity
Base 0% 0% 0%
Flat 2.0 6.2 10.5
200bp increase (3.5) (11.1) (35.5)
200bp decrease 1.6 8.7 67.0
As indicated in the table, the maximum negative variability of
USBANCORP's net interest income and net income over the next twelve
month period was (3.5%) and (11.1%) respectively, under an upward rate
shock forecast reflecting a 200 basis point increase in interest rates.
The variability of market value of portfolio equity was (35.5%) under
this interest rate scenario. The off-balance sheet borrowed funds
hedge transactions also helped reduce the variability of forecasted net
interest income, net income, and market value of portfolio equity in a
rising interest rate environment. Finally, this sensitivity analysis
is limited by the fact that it does not include all balance sheet
repositioning actions the Company may take should severe movements in
interest rates occur such as lengthening or shortening the duration of
the securities portfolio or entering into additional off-balance sheet
hedging transactions. These actions would likely reduce the variability
of each of the factors identified in the above table but the cost
associated with the repositioning would most likely negatively impact
net income.
.....LIQUIDITY...... Liquidity can be analyzed by utilizing the
Consolidated Statement of Cash Flows. Cash equivalents decreased by
$12.5 million from December 31, 1999, to March 31, 2000, due primarily
30
to $130 million of net cash used by financing activities. This more
than offset $14.2 million of net cash provided by operating activities
and $104 million of net cash provided by investing activities. Within
investing activities, cash proceeds from investment security maturities
and sales exceeded purchases of new investment securities by $120
million. Cash advanced for new loan fundings and purchases totaled $82
million and was approximately $13 million greater than the cash
received from loan principal payments. Within financing activities,
deposits increased by $6.3 million while net short-term borrowings and
Federal Home Loan Bank advances were paid down by $133 million. The
Company used $2.0 million of cash to pay common dividends to
shareholders and $729,000 of cash to service the dividend on the
guaranteed junior subordinated deferrable interest debentures.
.....CAPITAL RESOURCES..... As presented in Note 15, each of the
Company's regulatory capital ratios increased between December 31,
1999, and March 31, 2000, due to an increase in tangible equity and a
decline in total assets. The Company targets an operating range of
6.0% to 6.50% for the asset leverage ratio because management and the
Board of Directors believes that this level provides an optimal balance
between regulatory capital requirements and shareholder value needs.
Note that the impact of other comprehensive income(loss) is excluded
from the regulatory capital ratios. Strategies the Company uses to
manage its capital ratios include common dividend payments, treasury
stock repurchases, and earning asset growth. Additionally, the Company
will generate approximately $2.8 million of tangible capital in 2000
due to the amortization of intangible assets. Post spin-off, USBANCORP
will first focus on providing a high common dividend as a key means to
enhance shareholder value. Over the next six months, the Company does
not envision resuming the treasury stock repurchase program and will
continue to shrink the size of the balance sheet.
The Company exceeds all regulatory capital ratios for each of the
periods presented. Furthermore, each of the Company's subsidiary banks
are considered "well capitalized" under all applicable FDIC
regulations. It is the Company's intent to maintain the FDIC "well
capitalized" classification for each of its subsidiaries to ensure the
lowest deposit insurance premium.
The Company's declared Common Stock cash dividend per share was
$0.15 for the first quarter of 2000 which was a 7.1% increase over the
$0.14 per share dividend for the same 1999 period. Post spin-off,
USBANCORP anticipates paying a quarterly dividend of $0.09 per share.
On an annualized basis assuming a $5.25 market price, this equates to
a 6.9% dividend yield. The Company's Board of Directors believes that
a better than peer common dividend is a key component of total
shareholder return particularly for retail shareholders.
.....TAX-FREE SPIN-OFF.... As discussed in Note 17, The Company
successfully spun-off its Three Rivers Bank and Trust subsidiary on
April 1, 2000. Upon completion of the spin-off, the resulting
companies have the following corporate profiles based upon financial
data as of March 31, 2000. The financial data assumes that one share of
Three Rivers Bancorp was issued for every two shares of USBANCORP
common stock outstanding.
31
Pro Forma Financial Information
As of March 31, 2000
(Unaudited)
USBANCORP Three Rivers
Bancorp, Inc
Total Assets $1.3 billion $1.0 billion
Total Loans $ 623 million $ 476 million
Total Investments $ 601 million $ 465 million
Total Deposits $ 667 million $ 570 million
Total Equity $ 68.0 million $ 45.2 million
Allowance for Loan Losses $ 5.4 million $ 5.0 million
Non-performing Assets $ 3.9 million $ 8.7 million
Total Intangibles $ 22.1 million $ 2.7 million
Corporate Headquarters Johnstown Monroeville
1st Quarter 2000 Net Income $ 1,161,000 $ 1,450,000
1st Quarter 2000 EPS $ 0.09 $ 0.22
1st Quarter Return on Equity 6.89% 12.75%
Shares Outstanding 13,329,000 6,665,000
Book Value per Share $ 5.10 $ 6.78
.....FORWARD LOOKING STATEMENT..... This Form 10-Q contains various
forward-looking statements and includes assumptions concerning the
Company's beliefs, plans, objectives, goals, expectations,
anticipations estimates, intentions, operations, future results, and
prospects, including statements that include the words "may,"
"could," "should," "would," "believe," "expect," "anticipate,"
"estimate," "intend," "plan" or similar expressions. 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 (some of which are beyond the
Company's control) 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.
32
Such factors include the following: (i) risk resulting from
the Distribution and the operation of Three Rivers Bank as a
separate independent company, (ii) the effect of changing regional
and national economic conditions; (iii) the effects of trade,
monetary and fiscal policies and laws, including interest rate
policies of the Board of Governors of the Federal Reserve System;
(iv) significant changes in interest rates and prepayment speeds;
(v) inflation, stock and bond market, and monetary fluctuations;
(vi) credit risks of commercial, real estate, consumer, and other
lending activities; (vii) changes in federal and state banking and
financial services laws and regulations; (viii) the presence in the
Company's market area of competitors with greater financial
resources than the Company; (ix) the timely development of
competitive new products and services by the Company and the
acceptance of those products and services by customers and
regulators (when required); (x) the willingness of customers to
substitute competitors' products and services for those of the
Company and vice versa; (xi) changes in consumer spending and
savings habits; (xii) unanticipated regulatory or judicial
proceedings; and (xiii) other external developments which could
materially impact the Company's operational and financial
performance.
The foregoing list of important factors is not exclusive, and
neither such list nor any forward-looking statement takes into
account the impact that any future acquisition may have on the
Company and on any such forward-looking statement.
33
SERVICE AREA MAP
This page contains a service area map showing the Company's six county area.
34
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation, as amended (Incorporated
by reference to Exhibit III to Registration Statement
No. 2-79639 on Form S-14, Exhibits 4.2 and 4.3 to
Registration Statement No. 33-685 on Form S-2, Exhibit
4.1 to Registration Statement No. 33-56604 on Form S-3,
and Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994).
3.2 Bylaws, as amended and restated (Incorporated by
reference to Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1994).
10.1 Corporate separation and reorganization agreement among
USBANCORP, Inc., Three Rivers Bancorp, Inc. and Three Rivers
Bank and Trust Company, dated as of March 31, 2000,
incorporated herein by reference to exhibit 10.1 to the
Form 10 of Three Rivers Bancorp, Inc.
10.2 Tax separation agreement between USBANCORP, INc. and Three
Rivers BAncorp, Inc., dated as of April 1, 2000, incoprorated
herein by reference to exhibit 2.2 to the Current Report on
Form 8-K of USBANCORP, Inc. filed on April 14, 2000.
15.1 Letter re: unaudited interim financial information
27.1 Financial Data Schedule
(b) Reports on Form 8-K: There were no reports filed on Form
8-K for the period presented.
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
USBANCORP, Inc.
Registrant
Date: May 12, 2000 /s/Orlando B. Hanselman
Orlando B. Hanselman
President and
Chief Executive Officer
Date: May 12, 2000 /s/Jeffrey A. Stopko
Jeffrey A. Stopko
Senior Vice President and
Chief Financial Officer
35
STATEMENT OF MANAGEMENT RESPONSIBILITY
April 12, 2000
To the Stockholders and
Board of Directors of
USBANCORP, Inc.
Management of USBANCORP, Inc. and its subsidiaries have prepared
the consolidated financial statements and other information in
the Form 10-Q in accordance with generally accepted accounting
principles and are responsible for its accuracy.
In meeting its responsibilities, management relies on internal
accounting and related control systems, which include selection
and training of qualified personnel, establishment and
communication of accounting and administrative policies and
procedures, appropriate segregation of responsibilities, and
programs of internal audit. These systems are designed to
provide reasonable assurance that financial records are reliable
for preparing financial statements and maintaining accountability
for assets, and that assets are safeguarded against unauthorized
use or disposition. Such assurance cannot be absolute because of
inherent limitations in any internal control system.
Management also recognizes its responsibility to foster a climate
in which Company affairs are conducted with the highest ethical
standards. The Company's Code of Conduct, furnished to each
employee and director, addresses the importance of open internal
communications, potential conflicts of interest, compliance with
applicable laws, including those related to financial disclosure,
the confidentiality of propriety information, and other items.
There is an ongoing program to assess compliance with these
policies.
The Audit Committee of the Company's Board of Directors consists
solely of outside directors. The Audit Committee meets
periodically with management and the independent accountants to
discuss audit, financial reporting, and related matters. Arthur
Andersen LLP and the Company's internal auditors have direct
access to the Audit Committee.
/s/Terry K. Dunkle /s/Jeffrey A. Stopko
Terry K. Dunkle Jeffrey A. Stopko
Chairman, President & Senior Vice President &
Chief Executive Officer Chief Financial Officer
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
USBANCORP, Inc. :
We have reviewed the accompanying consolidated balance sheets
of USBANCORP, Inc. (a Pennsylvania corporation) and
subsidiaries as of March 31, 2000 and 1999, and the related
consolidated statements of income, changes in stockholders'
equity and cash flows for the three-month periods then ended.
These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with auditing standards
generally accepted in the United States, the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with accounting principles
generally accepted in the United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance sheet of
USBANCORP, Inc. as of December 31, 1999, and, in our report
dated January 23, 1998, except for the matter discussed in
Note 23, as to which the date is January 30, 1998, we expressed
an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated balance
sheet as of December 31, 1997, is fairly stated, in all
material respects, in relation to the balance sheet from which
it has been derived.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
April 14, 2000
April 14, 2000
To the Stockholders and Board of Directors of
USBANCORP, INC.:
We are aware that USBANCORP, Inc. has incorporated by reference
in its Registration Statements on Form S-3 (Registration No.
33-56604); Form S-8 (Registration No. 33-53935); Form S-8
(Registration No. 33-55845); Form S-8 (Registration No. 33-
55207); and Form S-8 (Registration No. 33-55211) its Form 10-Q
for the quarter ended June 30, 1998, which includes our report
dated April 16, 1998, covering the unaudited interim financial
statement information contained therein. Pursuant to
Regulation C of the Securities Act of 1933 (the Act), that
report is not considered a part of the registration statements
prepared or certified by our firm or a report prepared or
certified by our firm within the meaning of Sections 7 and 11
of the Act.
Very truly yours,
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP