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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
MAIN & FRANKLIN STREETS, P.O. BOX 430, JOHNSTOWN, 15907-0430
PENNSYLVANIA
(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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $2.50 PAR VALUE SHARE PURCHASE RIGHTS
(TITLE OF CLASS) (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.) $59,024,271.25 as of January 31,
2001.
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. 13,491,262 shares were outstanding as of January 31,
2001.
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,
2000, 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 (229.405 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 74.
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FORM 10-K INDEX
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 10
Item 6. Selected Consolidated Financial Data........................ 11
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations............... 14
Item 7A Quantitative and Qualitative Disclosures about Market
Risk........................................................ 34
Item 8. Consolidated Financial Statements and Supplementary Data.... 34
Item 9. Changes In and Disagreements With Accountants On Accounting
and Financial Disclosure.................................... 73
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 73
Item 11. Executive Compensation...................................... 73
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 73
Item 13. Certain Relationships and Related Transactions.............. 73
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules, and
Reports on Form 8-K......................................... 73
Signatures.................................................. 76
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PART I
ITEM 1. BUSINESS
GENERAL
USBANCORP, Inc. (the "Company") is a financial holding company (pursuant to
the Gramm-Leach-Bliley Act), organized under the Pennsylvania Business
Corporation Law. The Company became a holding company upon acquiring all of the
outstanding shares of U.S. Bank ("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. in March 1992 (which was also subsequently
merged into Three Rivers Bank in July 1997), 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 services
residential mortgage loans. In addition, the Company formed United Bancorp Life
Insurance Company ("United Life") in October 1987, USBANCORP Trust and Financial
Services 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 management services
to small and mid-sized financial institutions.
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 the Company's common shares
outstanding. Standard Mortgage Corporation, 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. For more detailed pro forma
information see Note #25.
The Company's principal activities consist of owning and operating its five
wholly owned subsidiary entities. At December 31, 2000, the Company had, on a
consolidated basis, total assets, deposits, and shareholders' equity of $1.25
billion, $659 million and $78 million, respectively. The Company and the
subsidiary entities derive substantially all of 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, accounting and
taxes, loan review, auditing, investment accounting, compliance, marketing,
insurance risk management, general corporate services, and financial and
strategic planning.
USBANCORP BANKING SUBSIDIARY
U.S. Bank
U.S. Bank is a state bank chartered under the Pennsylvania Banking code of
1965, as amended. Through 23 locations in Cambria, Centre, Clearfield, Somerset,
and Westmoreland Counties, Pennsylvania, U.S. Bank conducts a general banking
business. 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, commercial equipment lease financing, real
estate-construction loans, business savings accounts, certificates of deposit,
wire transfers, night depository, and lock box services;
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U.S. Bank also operates 27 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 also has a wholly owned mortgage
banking subsidiary -- UBAN Mortgage Company. UBAN Mortgage Company was formed in
January 1997 for the purpose of originating and selling retail mortgage loans
primarily in west-central Pennsylvania. 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.
In October 1998, U.S. Bank changed its charter from a national bank to a
state bank. Under the new charter U.S. Bank is subject to supervision and
regular examination by the Federal Reserve and the Pennsylvania Department of
Banking. 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, 2000:
Headquarters................................................ Johnstown, PA
Chartered................................................... 1933
Total Assets................................................ $1,222,235
Total Investment Securities................................. $ 545,311
Total Loans (net of unearned income)........................ $ 577,588
Total Deposits.............................................. $ 659,064
Total Net Income............................................ $ 6,007
Asset Leverage Ratio........................................ 6.92%
2000 Return on Average Assets............................... 0.48%
2000 Return on Average Equity............................... 6.63%
Total Full-time Equivalent Employees........................ 380
USBANCORP NON-BANKING SUBSIDIARIES:
USBANCORP Trust and Financial Services Company
USBANCORP Trust and Financial Services Company is a trust company organized
under Pennsylvania law in October 1992. The Trust Company offers a complete
range of trust and financial services and has $1.4 billion in assets under
management. The Trust Company also offers the ERECT Funds and BUILD Fund which
are collective investment funds for trade union controlled pension fund assets.
Additionally, USNB Financial Services Corporation was formed on May 23, 1997 and
engages in the sale of annuities, mutual funds, and insurance.
Standard Mortgage Corporation
Standard Mortgage Corporation ("SMC") is a mortgage banking company
organized under the laws of the State of Georgia. SMC's business includes the
servicing of mortgage loans and the origination of residential mortgage loans
through a wholesale broker network. In the fourth quarter of 2000 the Company
announced its plan to exit the wholesale mortgage production business. The exit
plan should be completed by the end of the first quarter of 2001. At December
31, 2000, SMC had total assets of $25.4 million and total shareholders' equity
of $8.4 million.
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 market area. Operations of
United Life are conducted in each office of the Company's banking subsidiary.
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, 2000, United
Life had total assets of $2.8 million and total shareholder's equity of $1.5
million.
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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.
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 Financial 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, 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
While significant diversification of the Company's local economy has
occurred over the past ten years, the economy in Cambria and Somerset counties
continues to perform below the expansion conditions experienced nationally and
on a state wide level. The housing market in the area has slowed, particularly
purchases of homes in the higher end of the market. Overall, economic conditions
in Johnstown Metro are expected to experience little change in 2001 and may
experience some modest slowdown.
Economic conditions are better in the State College area which comprises
Centre County. The unemployment rate is below the national average. The State
College market presents the Company with new challenges of greater demand and a
different demographic. The 18 to 34 year old age group makes up much greater
percentage of the population in State College than in the Cambria/Somerset
market, while the population of people 50 years of age or older is significantly
less in State College. Overall, the opportunities presented in the State College
market are different, challenging and provide a promising source of business to
profitably grow the Company.
Nationally, consumer confidence dropped in the fourth quarter of 2000 and
echoed a plunge in technology stocks, which suggests the consumer is backing
away from spending. Rising energy costs, low stock values and sinking
manufacturing and technology sectors contribute to the deterioration of consumer
confidence. The national unemployment rate is still at its lowest level since
1970 but is expected to climb in 2001 but remain near what is believed to be
"full employment." The rate of inflation, outside energy, remains modest and the
Federal Reserve will continue to take action to re-energize the economy.
The bank's loan growth declined in the fourth quarter. Based upon current
economic conditions, loan growth is anticipated to be supplemented with
re-financing. Customer deposits began growing in the fourth quarter of 2000 and
are expected to continue to grow through 2001. This growth is reflective of the
drop in consumer confidence and the corresponding economic slowdown.
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EMPLOYEES
The Company employed approximately 538 persons as of December 31, 2000, in
full- and part-time positions. Approximately 293 non-supervisory employees of
U.S. Bank are represented by the United Steelworkers of America, AFL-CIO-CLC,
Local Union 2635-06/07. 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, 2003.
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, 1999. Key provisions of the most
recent contract include: A modernized profit sharing formula, 2% contribution to
the 401(k) account for each union employee, increased staffing flexibility and
wage increases of 3% in each of the first three years and 4% in the fourth year.
COMMITMENTS AND LINES OF CREDIT
The Company's subsidiaries are obligated under commercial, standby, and
trade-related irrevocable letters of credit aggregating $12.9 million at
December 31, 2000. In addition, the Company's U.S. Bank subsidiary has 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, 2000, U.S. Bank had unused loan commitments of
approximately $112.0 million.
STATISTICAL DISCLOSURES FOR BANK HOLDING COMPANIES
The following 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. Information required by this section is
presented on pages 19-21 and 27-31.
II. Investment Portfolio
Information required by this section is presented on pages
5, 6, 45, 46 and 47.
III. Loan Portfolio
Information required by this section appears on pages 7, 8,
47, 48 and 49.
IV. Summary of Loan Loss Experience
Information required by this section is presented on pages
21-25 and 48.
V. Deposits
Information required by this section follows on pages 9 and
51.
VI. Return on Equity and Assets
Information required by this section is presented on page
12.
VII. Short-Term Borrowings
Information required by this section is presented on pages
50 and 51.
INVESTMENT PORTFOLIO
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, 2000, 100% of the securities portfolio was classified as
available for sale.
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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,
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2000 1999 1998
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(IN THOUSANDS)
Book Value:
U.S. Treasury........................................... $ 10,820 $ 15,855 $ 442
U.S. Agency............................................. 35,507 43,599 21,524
State and municipal..................................... 39,398 156,256 11,166
Mortgage-backed securities.............................. 419,669 943,474 577,241
Other securities........................................ 50,793 82,568 47,409
Total book value of investment securities available for
sale.................................................... $556,187 $1,241,752 $657,782
Total market value of investment securities available for
sale.................................................... $550,232 $1,187,335 $661,491
Investment Securities Held to Maturity at:
DECEMBER 31,
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2000 1999 1998
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(IN THOUSANDS)
Book Value:
U.S. Treasury............................................ $-- $-- $ 17,207
U.S. Agency.............................................. -- -- 23,928
State and municipal...................................... -- -- 147,628
Mortgage-backed securities............................... -- -- 315,171
Other securities......................................... -- -- 4,208
Total book value of investment securities held to
maturity................................................. $-- $-- $508,142
Total market value of investment securities held to
maturity................................................. $-- $-- $516,452
The total securities portfolio decreased by approximately $637 million
between December 31, 1999 and December 31, 2000. $465 million of this decline
was due to the spin-off of Three Rivers Bank. The remainder of the decrease was
due to management's decision to deliver the securities portfolio through a
combination of securities sales and cash flow from mortgage-backed securities
pay-downs. The Company used this cash from the securities portfolio to primarily
paydown short-term borrowings and reduce the Company's exposure to rising
short-term interest rates. The total securities portfolio increased by
approximately $17.7 million between December 31, 1999, and December 31, 1998.
The growth in 1999 is attributed to the use of the acquired deposits from the
First Western Branch acquisition to purchase securities.
At December 31, 2000, investment securities having a book value of $316.6
million were pledged as collateral for public funds, and FHLB borrowings.
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, 2000.
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, 2000, 96.5% of the portfolio was rated
"AAA" compared to 97.3% at December 31, 1999. Less than 3.1% was rated below "A"
or unrated at December 31, 2000.
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LOAN PORTFOLIO
The following table sets forth the Company's loans by major category as of
the dates set forth below:
AT DECEMBER 31
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2000 1999 1998 1997 1996
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(IN THOUSANDS)
Commercial....................... $116,615 $ 152,042 $ 139,751 $143,113 $138,008
Commercial loans secured by real
estate......................... 193,912 406,927 341,842 302,620 266,700
Real estate-mortgage(1).......... 242,370 452,507 449,875 440,734 414,003
Consumer......................... 35,749 70,983 88,812 95,272 111,025
Loans.......................... 588,646 1,082,459 1,020,280 981,739 929,736
Less: Unearned income.......... 8,012 8,408 5,276 5,327 4,819
Loans, net of unearned
income...................... $580,634 $1,074,051 $1,015,004 $976,412 $924,917
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(1) At December 31, 2000 and 1999, real estate-construction loans constituted
3.0% and 4.5% of the Company's total loans, net of unearned income,
respectively.
Total loans, net of unearned income, decreased by $493 million between
December 31, 1999, and December 31, 2000. Approximately $476 million of this
decline resulted from the spin-off of Three Rivers Bank. The remainder of the
decline was due primarily to lower balances of residential mortgage and consumer
loans as new loan production was lower in 2000 as a result of the higher
interest rate environment. Total loans, net of unearned income, increased by
$59.1 million, or 5.8%, between December 31, 1998, and December 31, 1999. This
growth occurred in commercial mortgage loans which increased by $65.1 million,
or 19.0%, and commercial loans which grew by 12.3 million, or a 8.8%. The higher
loan totals in commercial mortgages 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. Other factors contributing to the loan growth were
a stable economic environment and results from two loan production offices in
the higher growth markets of Westmoreland and Centre counties. Total consumer
loans declined by $17.8 million or 20.0% in 1999 due to the sale of the
company's $14 million credit card portfolio and continued net run-off in the
indirect auto loan portfolio.
The amount of loans outstanding by category as of December 31, 2000, 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 ONE YEAR
YEAR THROUGH OVER TOTAL
OR LESS FIVE YEARS FIVE YEARS LOANS
------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT RATIOS)
COMMERCIAL...................................... $30,223 $ 74,696 $ 11,696 $116,615
COMMERCIAL LOANS SECURED BY REAL ESTATE......... 29,888 72,497 91,527 193,912
REAL ESTATE-MORTGAGE............................ 18,586 29,483 194,301 242,370
CONSUMER........................................ 1,048 11,410 23,291 35,749
TOTAL........................................... 79,745 188,086 320,815 588,646
LOANS WITH FIXED-RATE........................... 44,439 166,517 199,135 410,093
LOANS WITH FLOATING-RATE........................ 35,306 21,567 121,680 178,553
TOTAL........................................... 79,745 188,086 320,815 588,646
PERCENT COMPOSITION OF MATURITY................. 13.5% 32.0% 54.5% 100.0%
FIXED-RATE LOANS AS A PERCENTAGE OF TOTAL
LOANS......................................... 69.7%
FLOATING-RATE LOANS AS A PERCENTAGE OF TOTAL
LOANS......................................... 30.3%
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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.
At December 31, 2000, 69.7% of total loans were fixed-rate which was
comparable with the prior year. The stability in the fixed-rate percentage
between years reflects continued customer preference for fixed-rate loans. Also,
a good portion of the commercial real estate loan growth has occurred in the
five year fixed-rate area. For additional information regarding interest rate
sensitivity, see "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations -- Interest Rate Sensitivity."
COMMERCIAL
This category includes credit extensions and leases to commercial and
industrial borrowers. These credits are typically secured by business assets,
including accounts receivable, inventory and/or equipment. In appropriate
instances, extensions of credit in this category are subject to advance
formulas. Overall balance sheet strength and profitability are considered when
analyzing these credits, with special attention given to current and historical
cash flow coverage. Policy permits flexibility in determining acceptable
coverage ratios, but they seldom fall below 1.1 to 1. Personal guarantees are
frequently required, however, as the strength of the borrower increases our
ability to obtain personal guarantees decreases. In addition to economic risk,
this category is subject to risk of weak borrower management and industry risk,
all of which are considered at underwriting.
COMMERCIAL LOANS SECURED BY REAL ESTATE
This category includes various types of loans, including acquisition and
construction of investment property, owner-occupied and operating property.
Maximum term, minimum cash flow coverage, leasing requirements, maximum
amortization and maximum loan to value ratios are controlled by Credit Policy
and follow industry guidelines and norms and regulatory limitations. Personal
guarantees are normally required during the construction phase on construction
credits and are frequently obtained on mid to smaller commercial real estate
loans. In addition to economic risk, this category is subject to geographic and
portfolio concentration risk, which are monitored and considered at
underwriting.
REAL ESTATE -- MORTGAGE
This category includes mortgages that are secured by residential property.
Underwriting of loans within this category is pursuant to Freddie Mac
underwriting guidelines, with the exception of CRA loans, which have more
liberal standards. The major risk in this category is that a significant
downward economic trend would increase unemployment and cause payment defaults.
CONSUMER
This category includes consumer installment loans and revolving credit
plans. Underwriting standards identify undesirable loans, repayment terms and
debt coverage ratios. Loans with debt to income coverage of 45% or less are
considered satisfactory. Loans between 46% and 50% require special approval, and
loans over 50% are exceptions to policy. The major risk in this category is a
significant economic downturn.
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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:
2000 1999 1998
---------------- ------------------ ------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- ---------- ---- ---------- ----
(IN THOUSANDS, EXCEPT RATES)
Demand -- non-interest bearing....... $105,824 --% $ 170,891 --% $ 159,515 --%
Demand -- interest bearing........... 58,424 0.97 93,399 0.99 89,890 0.99
Savings.............................. 112,829 1.57 171,783 1.63 171,769 1.52
Money markets........................ 142,903 4.65 182,395 3.60 167,758 3.60
Other time........................... 383,657 5.28 619,392 5.03 581,351 5.39
Total deposits....................... $803,637 4.19% $1,237,860 3.86% $1,170,283 4.05%
Total average deposits decreased by $434 million in 2000 due to the
spin-off of Three Rivers Bank. Total deposits increased by $55 million or 4.6%
in 1999 due to the acquisition of the deposits associated with the acquired
First Western Branches. Deposits were negatively impacted by the sale of a $6.0
million marginally profitable branch office and runoff of certificates of
deposit.
The following table indicates the maturities and amounts of certificates of
deposit issued in denominations of $100,000 or more as of December 31, 2000:
MATURING IN:
(IN THOUSANDS)
--------------
Three months or less........................................ $15,634
Over three through six months............................... 1,130
Over six through twelve months.............................. 1,630
Over twelve months.......................................... 2,616
Total....................................................... $21,010
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 17 other locations which are owned in fee. Ten
additional locations are leased with terms expiring from May 31, 2001 to August
31, 2011.
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.
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11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
As of January 31, 2001, the Company had 5,110 shareholders of its Common
Stock. Other information required by this section is presented on pages 58 and
59.
COMMON STOCK
USBANCORP's Common Stock is traded on the NASDAQ National Market System
under the symbol "UBAN." The following table sets forth the actual 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, 2000:
FIRST QUARTER........................................... $12.61 $ 8.25 $0.15
SECOND QUARTER.......................................... 7.00 3.38 0.09
THIRD QUARTER........................................... 5.00 3.56 0.09
FOURTH QUARTER.......................................... 4.50 3.78 0.09
Year ended December 31, 1999:
First Quarter........................................... $21.88 $14.63 $0.14
Second Quarter.......................................... 17.06 14.44 0.15
Third Quarter........................................... 16.00 13.19 0.15
Fourth Quarter.......................................... 13.75 11.25 0.15
The following table sets forth the high and low closing prices and the cash
dividends declared per share for the periods indicated with the First Quarter of
2000 and all of 1999 adjusted for the spin-off of Three Rivers Bank:
CLOSING PRICES
---------------- CASH DIVIDENDS
HIGH LOW DECLARED
------ ------ --------------
YEAR ENDED DECEMBER 31, 2000:
FIRST QUARTER........................................... $ 6.45 $ 4.21 $0.09
SECOND QUARTER.......................................... 7.00 3.38 0.09
THIRD QUARTER........................................... 5.00 3.56 0.09
FOURTH QUARTER.......................................... 4.50 3.78 0.09
Year ended December 31, 1999:
First Quarter........................................... $11.18 $ 7.48 $0.08
Second Quarter.......................................... 8.72 7.38 0.09
Third Quarter........................................... 8.18 6.74 0.09
Fourth Quarter.......................................... 7.03 5.75 0.09
10
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED TEN-YEAR CONSOLIDATED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SUMMARY OF INCOME STATEMENT DATA:
Total interest income.............. $ 107,298 $ 165,188 $ 158,958 $ 154,788 $ 137,333
Total interest expense............. 69,839 99,504 93,728 87,929 76,195
---------- ---------- ---------- ---------- ----------
Net interest income................ 37,459 65,684 65,230 66,859 61,138
Provision for loan losses........ 2,096 1,900 600 158 90
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses.................. 35,363 63,784 64,630 66,701 61,048
Total non-interest income.......... 16,609 24,374 23,689 20,203 18,689
Total non-interest expense......... 51,734 60,815 59,520 54,104 52,474
---------- ---------- ---------- ---------- ----------
Income before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................ 238 27,343 28,799 32,800 27,263
Provision (benefit) for income
taxes.......................... (1,478) 6,922 7,655 9,303 7,244
---------- ---------- ---------- ---------- ----------
Income before extraordinary item,
cumulative effect of change in
accounting principle............. 1,716 20,421 21,144 23,497 20,019
Extraordinary item -- utilization
of tax loss carry forward...... -- -- -- -- --
Cumulative effect of change in
accounting principle........... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income......................... $ 1,716 $ 20,421 $ 21,144 $ 23,497 $ 20,019
========== ========== ========== ========== ==========
Net income applicable to common
stock............................ $ 1,716 $ 20,421 $ 21,144 $ 23,497 $ 20,019
========== ========== ========== ========== ==========
PER COMMON SHARE DATA:(1)
Basic earnings per share........... $ 0.13 $ 1.53 $ 1.51 $ 1.56 $ 1.28
Diluted earnings per share......... 0.13 1.52 1.48 1.54 1.28
Cash dividends declared............ 0.42 0.59 0.60 0.53 0.46
Book value at period end........... 5.83 8.46 10.48 10.77 9.97
========== ========== ========== ========== ==========
BALANCE SHEET AND OTHER DATA:
Total assets....................... $1,254,261 $2,467,479 $2,377,081 $2,239,110 $2,087,112
Loans and loans held for sale, net
of unearned income............... 590,271 1,095,804 1,066,321 989,575 939,726
Allowance for loan losses.......... 5,936 10,350 10,725 12,113 13,329
Investment securities available for
sale............................. 550,232 1,187,335 661,491 580,115 455,890
Investment securities held to
maturity......................... -- -- 508,142 536,608 546,318
Deposits........................... 659,064 1,230,941 1,176,291 1,139,527 1,138,738
Total borrowings................... 500,580 1,099,842 1,026,570 913,056 770,102
Stockholders' equity............... 78,407 112,557 141,670 158,180 151,917
Full-time equivalent employees..... 477 745 762 765 759
========== ========== ========== ========== ==========
AT OR FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SUMMARY OF INCOME STATEMENT DATA:
Total interest income.............. $ 129,715 $ 102,811 $ 85,735 $ 82,790 $ 66,446
Total interest expense............. 73,568 46,993 36,250 38,349 33,538
---------- ---------- ---------- ---------- --------
Net interest income................ 56,147 55,818 49,485 44,441 32,908
Provision for loan losses........ 285 (2,765) 2,400 2,216 900
---------- ---------- ---------- ---------- --------
Net interest income after provision
for loan losses.................. 55,862 58,583 47,085 42,225 32,008
Total non-interest income.......... 16,543 8,187 10,150 8,346 6,035
Total non-interest expense......... 50,557 49,519 40,715 36,248 28,862
---------- ---------- ---------- ---------- --------
Income before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................ 21,848 17,251 16,520 14,323 9,181
Provision (benefit) for income
taxes.......................... 6,045 5,931 5,484 5,440 2,873
---------- ---------- ---------- ---------- --------
Income before extraordinary item,
cumulative effect of change in
accounting principle............. 15,803 11,320 11,036 8,883 6,308
Extraordinary item -- utilization
of tax loss carry forward...... -- -- -- -- 1,004
Cumulative effect of change in
accounting principle........... -- -- 1,452 -- --
---------- ---------- ---------- ---------- --------
Net income......................... $ 15,803 $ 11,320 $ 12,488 $ 8,883 $ 7,312
========== ========== ========== ========== ========
Net income applicable to common
stock............................ $ 15,803 $ 11,320 $ 12,385 $ 7,710 $ 6,139
========== ========== ========== ========== ========
PER COMMON SHARE DATA:(1)
Basic earnings per share........... $ 0.96 $ 0.73 $ 0.93 $ 0.89 $ 0.80
Diluted earnings per share......... 0.96 0.73 0.91 0.84 0.76
Cash dividends declared............ 0.35 0.32 0.29 0.25 0.18
Book value at period end........... 9.45 8.19 8.22 7.69 7.24
========== ========== ========== ========== ========
BALANCE SHEET AND OTHER DATA:
Total assets....................... $1,885,372 $1,788,890 $1,241,521 $1,139,855 $784,036
Loans and loans held for sale, net
of unearned income............... 834,634 868,004 727,186 648,915 430,151
Allowance for loan losses.......... 14,914 15,590 15,260 13,752 13,003
Investment securities available for
sale............................. 427,112 259,462 428,712 366,888 --
Investment securities held to
maturity......................... 463,951 524,638 -- -- 289,772
Deposits........................... 1,177,858 1,196,246 1,048,866 997,591 676,698
Total borrowings................... 534,182 432,735 60,322 48,461 27,564
Stockholders' equity............... 150,492 137,136 116,615 82,971 70,023
Full-time equivalent employees..... 742 780 665 644 523
========== ========== ========== ========== ========
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13
AT OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SELECTED FINANCIAL RATIOS:
Return on average total equity..... 2.11% 15.48% 14.13% 15.00% 13.36%
Return on average assets........... 0.11 0.83 0.93 1.09 1.03
Loans and loans held for sale, net
of unearned income, as a percent
of deposits, at period end....... 89.56 89.02 87.09 86.84 82.52
Ratio of average total equity to
average assets................... 5.20 5.39 6.58 7.28 7.69
Common stock cash dividends as a
percent of net income applicable
to common stock.................. 327.27 38.51 41.00 34.00 35.28
Common and preferred stock cash
dividends as a percent of net
income........................... 327.27 38.51 41.00 34.00 35.28
Interest rate spread............... 2.26 2.59 2.58 2.97 3.06
Net interest margin................ 2.63 2.96 3.17 3.43 3.52
Allowance for loan losses as a
percentage of loans and loans
held for sale, net of unearned
income, at period end............ 1.01 0.94 1.01 1.22 1.42
Non-performing assets as a
percentage of loans and loans
held for sale and other real
estate owned, at period end...... 1.01 1.21 0.77 0.89 0.92
Net charge-offs as a percentage of
average loans and loans held for
sale............................. 0.21 0.21 0.19 0.14 0.20
Ratio of earnings to fixed charges
and preferred dividends:(2)
Excluding interest on deposits... 1.01X 1.47x 1.54x 1.72x 1.79x
Including interest on deposits... 1.00 1.27 1.31 1.37 1.36
One year GAP ratio, at period
end.............................. 1.01 0.59 1.03 0.88 0.79
========== ========== ========== ========== ==========
AT OR FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SELECTED FINANCIAL RATIOS:
Return on average total equity..... 11.03% 8.92% 11.46% 11.41% 10.88%
Return on average assets........... 0.87 0.75 1.03 0.85 0.96
Loans and loans held for sale, net
of unearned income, as a percent
of deposits, at period end....... 70.86 72.56 69.33 65.05 63.57
Ratio of average total equity to
average assets................... 7.85 8.39 8.96 7.48 8.85
Common stock cash dividends as a
percent of net income applicable
to common stock.................. 36.43 44.57 32.28 27.16 22.94
Common and preferred stock cash
dividends as a percent of net
income........................... 36.43 44.57 32.84 37.64 35.30
Interest rate spread............... 2.94 3.47 3.72 3.93 3.69
Net interest margin................ 3.45 4.03 4.34 4.58 4.69
Allowance for loan losses as a
percentage of loans and loans
held for sale, net of unearned
income, at period end............ 1.79 1.80 2.10 2.12 3.02
Non-performing assets as a
percentage of loans and loans
held for sale and other real
estate owned, at period end...... 1.13 0.91 0.89 1.58 1.10
Net charge-offs as a percentage of
average loans and loans held for
sale............................. 0.08 0.04 0.13 0.58 0.08
Ratio of earnings to fixed charges
and preferred dividends:(2)
Excluding interest on deposits... 1.77x 2.34x 5.26x 4.05x 4.54x
Including interest on deposits... 1.30 1.37 1.45 1.36 1.26
One year GAP ratio, at period
end.............................. 0.86 0.79 1.10 1.14 1.06
========== ========== ========== ========== ========
- ---------------
(1) All per share and share data have been adjusted to reflect a 3 for 1 stock
split in the form of a 200% stock dividend which was distributed on July 31,
1998, to shareholders of record on July 16, 1998.
(2) 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.
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14
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited quarterly consolidated
financial data regarding the Company:
2000 QUARTER ENDED
----------------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
-------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME............................... $21,414 $22,039 $22,373 $41,472
NON-INTEREST INCOME........................... 3,970 4,447 4,291 3,901
------- ------- ------- -------
TOTAL OPERATING INCOME........................ 25,384 26,486 26,664 45,373
------- ------- ------- -------
INTEREST EXPENSE.............................. 14,390 14,701 14,635 26,113
PROVISION FOR LOAN LOSSES..................... 1,424 249 174 249
NON-INTEREST EXPENSE.......................... 12,691 10,280 11,766 16,997
------- ------- ------- -------
INCOME BEFORE INCOME TAXES.................... (3,121) 1,256 89 2,014
PROVISION (BENEFIT) FOR INCOME TAXES........ (1,163) 203 79 (597)
------- ------- ------- -------
NET INCOME (LOSS)............................. $(1,958) $ 1,053 $ 10 $ 2,611
------- ------- ------- -------
BASIC EARNINGS PER COMMON SHARE:.............. $ (0.15) $ 0.08 $ -- $ 0.20
DILUTED EARNINGS PER COMMON SHARE:............ (0.15) 0.08 -- 0.20
CASH DIVIDENDS DECLARED PER COMMON SHARE...... 0.09 0.09 0.09 0.15
======= ======= ======= =======
1999 QUARTER ENDED
----------------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
-------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income............................... $41,802 $41,952 $41,210 $40,224
Non-interest income........................... 4,971 5,253 7,966 6,184
------- ------- ------- -------
Total operating income........................ 46,773 47,205 49,176 46,408
------- ------- ------- -------
Interest expense.............................. 25,690 25,199 24,536 24,079
Provision for loan losses..................... 150 225 1,150 375
Non-interest expense.......................... 14,731 14,917 16,065 15,102
------- ------- ------- -------
Income before income taxes.................... 6,202 6,864 7,425 6,852
Provision for income taxes.................. 1,449 1,772 1,885 1,816
------- ------- ------- -------
Net income.................................... $ 4,753 $ 5,092 $ 5,540 $ 5,036
------- ------- ------- -------
Basic earnings per common share:.............. $ 0.36 $ 0.38 $ 0.42 $ 0.37
Diluted earnings per common share:............ 0.36 0.38 0.41 0.37
Cash dividends declared per common share...... 0.15 0.15 0.15 0.14
======= ======= ======= =======
13
15
ITEM 7. 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.
ECONOMIC ENVIRONMENT IMPACT ON 2000 FINANCIAL PERFORMANCE. . .When the year
2000 is compared to 1999, the most significant economic item that impacted the
Company's financial performance was the higher interest rate environment. The
Federal Reserve Board significantly increased the federal funds rate by 150
basis points over this period in an effort to slow the growth rate of the
economy. This higher interest rate environment negatively impacted the Company's
financial performance in several key areas specifically reducing non-interest
income generated in the mortgage banking operation and lowering the Company's
net interest margin performance, particularly the net interest income earned on
leveraged assets. Additionally, the Company's pro-active decision to deleverage
its balance sheet in response to the higher interest rate environment also
resulted in the realization of investment security losses in 2000.
The higher interest rate environment caused a significant slowdown in
mortgage refinancing activity in 2000 causing the Company's volume of mortgage
loans sold into the secondary market to decline from $426 million in 1999 to
$220 million in 2000. This lower volume, combined with a reduced spread earned
on mortgage loan sales, reduced non-interest income by $1.2 million in 2000.(See
more detailed discussion under the Non-Interest Income section of the M.D. & A.)
Non-interest income was also negatively impacted by $952,000 in losses
realized on the sale of $242 million of investment securities in 2000. The
Company used the proceeds from these sales primarily to paydown short-term
borrowings and delever its balance sheet. This balance sheet repositioning
strategy helped reduce the Company's future exposure to rising short-term
interest rates. However, this reduction in the volume of earning assets,
combined with contraction in the net interest margin due to a higher cost of
funds, caused a $5.6 million pro forma reduction in net interest income in 2000.
The contraction in the net interest margin was most evident on the Company's
leveraged assets. The net spread earned on the Company's leveraged assets
declined from 1.04% in 1999 to 0.45% in 2000. (See more detailed discussion
under Net Interest Income and Margin and Component Changes in Net Interest
Income later in this M.D. & A.)
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
PERFORMANCE OVERVIEW. . .The following tables summarize some of the
Company's key performance indicators for each of the past three years. The
Company successfully spun-off its Three Rivers Bank subsidiary on April 1, 2000.
Consequently, the Company's actual performance results for 2000 only include
Three Rivers Bank for the first quarter of the year while the actual performance
results for 1999 and 1998 include Three Rivers Bank for the entire period. The
pro forma results exclude Three Rivers Bank from all financial data. Operating
performance data excludes non-recurring costs related to the spin-off of Three
Rivers Bank.
14
16
YEAR ENDED DECEMBER 31
-------------------------------
2000 1999 1998
------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA AND RATIOS)
Net income.................................................. $1,716 $20,421 $21,144
Diluted earnings per share.................................. 0.13 1.52 1.48
Return on average equity.................................... 2.11% 15.48% 14.13%
Return on average assets.................................... 0.11 0.83 0.93
OPERATING PERFORMANCE DATA:
Operating earnings.......................................... $3,860 $20,421 $21,144
Operating earnings per diluted share........................ 0.29 1.52 1.48
Cash operating earnings per diluted share................... 0.47 1.72 1.63
Return on average equity.................................... 4.74% 15.48% 14.13%
Return on average assets.................................... 0.25 0.83 0.93
PRO FORMA
YEAR ENDED DECEMBER 31
-------------------------------
2000 1999 1998
------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA AND RATIOS)
Net income.................................................. $ 184 $10,451 $10,137
Diluted earnings per share.................................. 0.02 0.78 0.71
Return on average equity.................................... 0.26% 13.70% 11.21%
Return on average assets.................................... 0.01 0.74 0.76
OPERATING PERFORMANCE DATA:
Operating earnings.......................................... $2,016 $10,451 $10,137
Operating earnings per diluted share........................ 0.15 0.78 0.71
Cash operating earnings per diluted share................... 0.32 0.96 0.85
Return on average equity.................................... 2.88% 13.70% 11.21%
Return on average assets.................................... 0.15 0.74 0.76
The Company's net income for 2000 totaled $1.7 million or $0.13 per diluted
share. Operating earnings, excluding spin-off costs, totaled $3.9 million or
$0.29 per diluted share. USBANCORP expensed all costs incurred to complete the
Three Rivers Bank spin-off in the year 2000. These non-recurring spin-off costs
amounted to $2.1 million on an after-tax basis. The Company's 2000 financial
performance was also negatively impacted by a $1.0 million after-tax charge
recorded in the fourth quarter to exit the wholesale mortgage production
business. This charge was recorded in the fourth quarter due to the December
20th receipt of a favorable supplemental private letter ruling from the IRS
which ensures that the tax-free treatment of the Three Rivers Bank spin-off
would not be jeopardized by this action. (See further discussion under Non-
Interest Expense in this M.D. & A.) On a pro forma basis, the Company's
operating earnings totaled $2.0 million or $0.15 per diluted share for the year
2000. The Company's financial performance for the year 2000 on both an actual
and pro forma basis represents a decrease from the $20.4 million or $1.52 per
diluted share actual performance or $10.5 million or $0.78 per diluted share pro
forma performance for 1999.
Factors that contributed to the lower operating earnings in 2000 included
reduced net interest income, an increased loan loss provision, a lower level of
non-interest income and higher non-interest expense. The lower non-interest
income resulted primarily from reduced gains on asset sales as the Company
benefited from a $1.6 million gain on the sale of its credit card portfolio and
a $540,000 gain on the sale of a small marginally profitable branch office in
1999. A 29 basis point reduction in the net interest margin and a reduced level
of earning assets caused net interest income to decline by $5.6 million from the
pro forma 1999 level. Actions taken by the Company to strengthen its allowance
for loan losses in the fourth quarter of 2000 contributed to the higher loan
loss provision. These negative items were partially offset by reduced income tax
expense.
The Company's net income for 1999 was $20.4 million or $1.52 on a diluted
per share basis compared to net income of $21.1 million or $1.48 per diluted
share for 1998. When 1999 is compared to 1998, the
15
17
Company's diluted earnings per share increased by $0.04 or 2.7% while net income
dropped by $723,000 or 3.4%. The Company's return on equity averaged 15.48% for
1999 compared to 14.13% for 1998.
Growth in total revenue was a key factor that contributed positively to the
Company's financial performance in 1999. Specifically, total non-interest income
increased by $685,000 or 2.9% while net interest income increased by $454,000 or
0.7% when compared to 1998. This $1.1 million increase in total revenue was
offset by higher non-interest expense and an increase in the provision for loan
losses. Total non-interest expense was $1.3 million or 2.2% higher in 1999 while
the provision for loan losses increased by $1.3 million. Even though net income
decreased in 1999, diluted earnings per share and return on equity increased due
to the success of the Company's common stock repurchase program. As a result of
this program, there were 806,000 fewer average diluted shares outstanding in
1999 compared to 1998. The Company's equity base was also reduced by a drop in
other comprehensive income due to a decline in value of the Company's available
for sale securities portfolio.
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. The following tables summarize the Company's net interest income
performance for each of the past three years on both an actual and pro forma
basis:
YEAR ENDED DECEMBER 31
--------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS)
Interest income............................................ $107,298 $165,188 $158,958
Interest expense........................................... 69,839 99,504 93,728
-------- -------- --------
Net interest income........................................ 37,459 65,684 65,230
Tax-equivalent adjustment.................................. 1,688 3,079 2,876
-------- -------- --------
Net tax-equivalent interest income......................... $ 39,147 $ 68,763 $ 68,106
Net interest margin........................................ 2.63% 2.96% 3.17%
PRO FORMA
YEAR ENDED DECEMBER 31
-----------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
Interest income............................................. $89,198 $94,371 $91,032
Interest expense............................................ 58,828 58,422 55,272
------- ------- -------
Net interest income......................................... 30,370 35,949 35,760
Tax-equivalent adjustment................................... 1,481 2,138 2,089
------- ------- -------
Net tax-equivalent interest income.......................... $31,851 $38,087 $37,849
Net interest margin......................................... 2.59% 2.88% 3.06%
2000 NET INTEREST PERFORMANCE OVERVIEW. . .USBANCORP's pro forma net
interest income on a tax-equivalent basis decreased by $6.2 million or 16.4%
from 1999 due to a combination of a reduced net interest margin and a lower
volume of earning assets. A 29 basis point drop in the net interest margin was
caused by a 45 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 10 basis point increase in the earning asset yield due
to a higher loan portfolio yield. The lower volume of earning assets resulted
from a reduced volume of investment securities due to management's decision to
delever the balance sheet in 2000. The same trends noted on a pro forma basis
were also experienced on an actual basis with the volume of earning asset
shrinkage magnified due to the spin-off of Three Rivers Bank. On an actual basis
tax-equivalent net interest income declined by $29.6 million or 43%.
16
18
COMPONENT CHANGES IN NET INTEREST INCOME: 2000 VERSUS 1999. . .Regarding
the separate components of net interest income, the Company's total pro forma
tax-equivalent interest income for 2000 decreased by $5.8 million or 6.0% when
compared to 1999. This decrease was due to the previously mentioned decline in
the volume of earning assets. Total average earning assets were $96 million
lower in 2000 due to a $104 million or 14.6% decrease in investment securities
which more than offset a $5 million or 0.8% increase in total loans. Management
delevered the securities portfolio through a combination of securities sales and
cash flow from mortgage-backed securities pay-downs. The Company used this cash
from the securities portfolio to primarily paydown short-term borrowings and
reduce the Company's exposure to rising short-term interest rates. Within the
loan portfolio, the Company was able to continue to achieve modest loan growth
in the commercial and commercial mortgage loan categories which more than offset
lower balances of residential mortgage and consumer 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 16 basis point
improvement in the total loan portfolio yield to 8.28%. The yield on total
investment securities decreased by 11 basis points to 6.52% as during the
majority of 2000 slower prepayment speeds extended the duration of the portfolio
and limited opportunities to purchase new higher yielding securities. The
Company, however, was able to execute some investment portfolio repositioning
strategies late in the fourth quarter which will shorten the duration of the
portfolio in 2001. The same factors causing the pro forma decrease in interest
income also contributed to a $57.9 million or 35% decrease in actual interest
income. The main factor causing the decrease in actual interest income, however,
was a lower earning asset base due to the TRB spin-off.
The Company's actual interest expense for 2000 declined by $29.7 million or
30% due to the TRB spin-off. The Company's total pro forma interest expense for
2000 increased by $406,000 when compared to 1999. This higher pro forma interest
expense was due primarily to a 45 basis point increase in the cost of funds to
5.16% which caused interest expense to rise by $5.6 million. Interest rates,
particularly short rates such as fed funds and 90 day libor, were 125 basis
points higher in 2000 as compared to 1999. These higher interest rates
contributed to a 58 basis point increase in the cost of borrowings to 6.02% and
a 44 basis point increase in the cost of interest bearing deposits to 4.19%.
This increased interest expense resulting from higher rates more than offset a
$5.2 million reduction in interest expense resulting from a lower volume of
interest bearing liabilities. Specifically, total borrowed funds were $90
million lower in 2000 due to the previously discussed balance sheet deleverage
strategy. The Company, however, expects to experience net interest margin
expansion in 2001 as the recent Federal Reserve interest rate cuts should allow
the Company to reduce its cost of funds to a greater extent than the anticipated
decline in the earning asset yield.
It is recognized that interest rate risk does exist from the Company's use
of borrowed funds to purchase investment securities to leverage the balance
sheet. To neutralize a portion of this risk, the Company currently has
outstanding a total of $220 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 #21.)
Additionally, the maximum amount of leveraging the Company can execute 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 +/-20% over a twelve month period. (See further discussion under Interest
Rate Sensitivity). At December 31, 2000, the Company was in compliance with all
of these internal policy limits.
Despite the increased use of off-balance sheet products to hedge borrowing
costs and the deleverage of the borrowed funds position, the net spread earned
on the Company's leveraged assets declined from 1.04% in 1999 to 0.45% in 2000.
The net interest income contribution from the leveraged assets declined from
$10.0 million or 14.5% of total net interest income in 1999 to $2.8 million or
7.1% of total net interest income in 2000. On a pro forma basis, the decline in
net interest income on leveraged assets amounted to $4.4 million. The Company
expects that the net spread earned on leveraged assets bottomed in 2000. Given
the Federal Reserve's recent moves to decrease short term interest rates by 100
basis in the first quarter of 2001, the Company expects to see improvement in
the net spread earned on leveraged assets in future periods.
1999 NET INTEREST PERFORMANCE OVERVIEW. . .The Company's net interest
income on a tax-equivalent basis increased by $657,000 or 1.0% due to growth in
earning assets. Total average earning assets were $172 million higher in 1999
due to a $44 million or 4.3% increase in total loans and a $128 million
17
19
or 11.5% increase in investment securities. The Company was able to achieve
solid loan growth in commercial loans, commercial mortgage loans, and home
equity loans throughout 1999. The higher level of investment securities resulted
in part from the use of funds provided with the First Western Branches
Acquisition which closed in the first quarter of 1999. As part of this
acquisition, the Company acquired approximately $91 million of deposits and $10
million of consumer loans.
The income benefit from this growth in earning assets was partially offset
by a 21 basis point decline in the net interest margin to 2.96%. The drop in the
net interest margin reflects a 29 basis point decline in the earning asset yield
due primarily to accelerated prepayments in both the securities and loan
portfolios in the first half of 1999 and the reinvestment of these cash flows in
lower yielding assets. Prepayments slowed considerably in the second half of the
year. The decline in the earning asset yield more than offset a 14 basis point
drop in the cost of funds due to lower deposit and borrowing costs.
COMPONENT CHANGES IN NET INTEREST INCOME: 1999 VERSUS 1998. . .Regarding
the separate components of net interest income, the Company's total
tax-equivalent interest income for 1999 increased by $6.4 million or 4.0% when
compared to 1998. This increase was due primarily to the previously mentioned
$172 million or 8.1% increase in total average earning assets which caused
interest income to rise by $12.6 million. This positive factor was partially
offset by a 29 basis point drop in the earning asset yield to 7.27% which caused
a $6.2 million reduction in interest income. Within the earning asset base, the
yield on total investment securities decreased by 16 basis points to 6.50% while
the yield on the total loan portfolio declined by 39 basis points to 8.12%.
Accelerated prepayments of mortgage related assets and the reinvestment of this
cash into lower yielding assets was the primary factor causing the compression
in the earning asset yield.
Continued growth of the loan portfolio was an important component of the
earning asset growth. This loan growth resulted from the Company's ability to
take market share from its competitors through strategies which emphasize
convenient customer service, niche products and hard work. Other factors
contributing to the loan growth in 1999 were a stable economic environment and
increased loan volumes from two loan production offices in the higher growth
markets of Westmoreland and Centre Counties.
The Company's total interest expense for 1999 increased by $5.8 million or
6.2% when compared to 1998. This higher interest expense was due primarily to a
$184 million increase in average interest bearing liabilities which caused
interest expense to rise by $10.6 million. The growth in interest earning
liabilities included a $56 million increase in interest bearing deposits due
largely to the deposits acquired with the First Western Branches Acquisition net
of certificate of deposit run-off and the sale of one small branch office. The
remainder of the interest bearing liability increase occurred in FHLB advances
which were used to help fund the previously mentioned earning asset growth. A
reduction in the cost of funds caused a $4.8 million decrease in interest
expense. Short-term borrowings and FHLB advances had an average cost of 5.44% in
1999 which was 19 basis points lower than their cost in the prior year but 158
basis points greater than the average cost of deposits which amounted to 3.86%.
The Company was able to reduce its cost of deposits by 19 basis points due
primarily to lower costs for certificates of deposit. Overall, the Company's
total cost of funds dropped by 14 basis points to 4.69% as the pricing declines
for both deposits and borrowings were partially offset by a greater use of
borrowings to fund the earning asset base.
The tables that follow provide 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 these tables, 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. The pro forma data in the table excludes Three Rivers
Bank.
18
20
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
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................. $ 722,663 $ 60,517 8.25% $1,063,409 $ 87,544 8.12% $1,019,215 $ 87,783 8.51%
Deposits with banks...... 5,729 212 3.64 4,115 121 2.91 3,874 120 3.07
Federal funds sold and
securities purchased
under agreements to
resell................. 1,056 70 6.54 -- -- -- 41 2 5.29
Investment securities:
Available for sale..... 741,335 48,187 6.50 736,221 47,113 6.40 604,872 38,890 6.43
Held to maturity....... -- -- -- 502,239 33,489 6.67 505,861 35,039 6.93
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total investment
securities............. 741,335 48,187 6.50 1,238,460 80,602 6.50 1,110,733 73,929 6.66
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
TOTAL INTEREST EARNING
ASSETS/INTEREST
INCOME................... 1,470,783 108,986 7.37 2,305,984 168,267 7.27 2,133,863 161,834 7.56
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Non-interest earning
assets:
Cash and due from
banks.................. 24,725 38,585 34,009
Premises and equipment... 14,918 18,835 17,946
Other assets............. 63,191 96,675 99,452
Allowance for loan
losses................. (6,705) (10,998) (11,715)
---------- ---------- ----------
TOTAL ASSETS............... $1,566,912 $2,449,081 $2,273,555
========== ========== ==========
Interest bearing
liabilities:
Interest bearing
deposits:
Interest bearing
demand............... $ 58,424 $ 569 0.97% $ 93,399 $ 925 0.99% $ 89,890 $ 892 0.99%
Savings................ 112,829 1,775 1.57 171,783 2,802 1.63 171,769 2,615 1.52
Money market........... 142,903 6,650 4.65 182,395 6,305 3.46 167,758 6,040 3.60
Other time............. 383,657 20,275 5.28 619,392 31,118 5.03 581,351 31,344 5.39
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest bearing
deposits............. 697,813 29,269 4.19 1,066,969 41,150 3.86 1,010,768 40,891 4.05
Federal funds purchased,
securities sold under
agreements to repurchase,
and other short-term
borrowings............... 119,184 6,858 5.67 215,613 11,037 5.12 189,324 9,906 5.23
Advances from Federal Home
Loan Bank................ 508,503 30,608 6.02 795,720 43,946 5.52 705,507 40,483 5.74
Guaranteed junior
subordinated deferrable
interest debentures...... 34,500 2,960 8.58 34,500 2,960 8.58 23,096 1,981 8.58
Long-term debt............. 4,037 144 3.57 8,336 411 4.93 8,788 467 5.31
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
TOTAL INTEREST BEARING
LIABILITIES/INTEREST
EXPENSE.................. 1,364,037 69,839 5.11 2,121,138 99,504 4.69 1,937,483 93,728 4.83
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Non-interest bearing
liabilities:
Demand deposits.......... 105,824 170,891 159,515
Other liabilities........ 15,628 25,125 26,893
Stockholders' equity..... 81,423 131,927 149,664
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY..... $1,566,912 $2,449,081 $2,273,555
========== ========== ==========
Interest rate spread....... 2.26 2.59 2.73
Net interest income/net
interest margin.......... 39,147 2.63% 68,763 2.96% 68,106 3.17%
Tax-equivalent
adjustment............... (1,688) (3,079) (2,876)
-------- -------- --------
Net interest income........ $ 37,459 $ 65,684 $ 65,230
======== ======== ========
19
21
PRO FORMA
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
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.................... $ 603,761 $50,743 8.28% $ 599,093 $49,208 8.12% $ 555,200 $48,093 8.55%
Deposits with banks......... 5,543 207 3.68 3,232 97 2.95 3,059 113 3.64
Federal funds sold and
securities purchased under
agreements to resell...... 1,055 70 6.54 -- -- -- 18 1 5.02
Investment securities:
Available for sale........ 608,018 39,659 6.52 711,793 47,204 6.63 668,830 44,914 6.71
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total investment
securities................ 608,018 39,659 6.52 711,793 47,204 6.63 668,830 44,914 6.71
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
TOTAL INTEREST EARNING ASSETS/
INTEREST INCOME............. 1,218,377 90,679 7.41 1,314,118 96,509 7.31 1,227,107 93,121 7.56
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Non-interest earning assets:
Cash and due from banks..... 20,802 21,582 19,487
Premises and equipment...... 13,568 13,743 13,414
Other assets................ 59,415 73,061 74,028
Allowance for loan losses... (5,442) ( 5,187) ( 5,646)
---------- ---------- ----------
TOTAL ASSETS.................. $1,306,720 $1,417,317 $1,328,390
========== ========== ==========
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand... $ 47,909 $ 479 1.00% $ 49,630 $ 497 1.00% $ 46,394 $ 464 1.00%
Savings................... 96,758 1,461 1.51 105,278 1,589 1.51 106,371 1,575 1.48
Money market.............. 130,060 6,282 4.83 124,848 4,609 3.69 116,795 4,592 3.93
Other time................ 301,143 15,972 5.27 303,478 15,175 5.00 271,718 14,546 5.35
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest bearing
deposits................ 575,870 24,194 4.19 583,234 21,870 3.75 541,278 21,177 3.91
Federal funds purchased,
securities sold under
agreements to repurchase,
and other short-term
borrowings.................. 105,927 6,100 5.76 153,878 7,798 5.07 138,848 7,107 5.12
Advances from Federal Home
Loan Bank................... 418,907 25,484 6.08 461,013 25,661 5.57 429,246 24,853 5.79
Guaranteed junior subordinated
deferrable interest
debentures.................. 34,500 2,960 8.58 34,500 2,960 8.58 23,096 1,982 8.58
Long-term debt................ 3,466 90 2.60 5,637 133 2.36 5,430 153 2.82
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
TOTAL INTEREST BEARING
LIABILITIES/INTEREST
EXPENSE..................... 1,138,670 58,828 5.16 1,238,262 58,422 4.71 1,137,898 55,272 4.85
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Non-interest bearing
liabilities:
Demand deposits............. 84,989 87,449 81,954
Other liabilities........... 13,069 15,304 18,104
Stockholders' equity........ 69,992 76,302 90,434
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........ $1,306,720 $1,417,317 $1,328,390
========== ========== ==========
Interest rate spread.......... 2.25 2.60 2.71
Net interest income/net
interest margin............. 31,851 2.59% 38,087 2.88% 37,849 3.06%
Tax-equivalent adjustment..... (1,481) (2,138) (2,089)
------- ------- -------
Net interest income........... $30,370 $35,949 $35,760
======= ======= =======
20
22
The average balance and yield on taxable securities was $666 million and
6.53%, $1,075 million and 6.49%, and $975 million and 6.61% for 2000, 1999, and
1998, respectively. The average balance and tax-equivalent yield on tax-exempt
securities was $74 million and 6.21%, $163 million and 6.57%, and $133 million
and 6.94% for 2000, 1999, and 1998, 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.
2000 VS. 1999 1999 VS. 1998
----------------------------- ---------------------------
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.................... $(28,448) $ 1,421 $(27,027) $ 4,200 $(4,439) $ (239)
Deposits with banks.............................. 56 35 91 6 (5) 1
Federal funds sold and securities purchased under
agreements to resell........................... 70 -- 70 (1) (1) (2)
Investment securities............................ (32,415) -- (32,415) 8,435 (1,762) 6,673
-------- ------- -------- ------- ------- -------
TOTAL INTEREST INCOME............................ (60,737) 1,456 (59,281) 12,640 (6,207) 6,433
-------- ------- -------- ------- ------- -------
INTEREST PAID ON:
Interest bearing demand deposits................. (338) (18) (356) 33 -- 33
Savings deposits................................. (928) (99) (1,027) -- 187 187
Money market..................................... (586) 931 345 478 (213) 265
Other time deposits.............................. (12,623) 1,780 (10,843) 2,919 (3,145) (226)
Federal funds purchased, securities sold under
agreements to repurchase, and other short-term
borrowings..................................... (5,407) 1,228 (4,179) 1,271 (140) 1,131
Advances from Federal Home Loan Bank............. (17,806) 4,468 (13,338) 4,945 (1,482) 3,463
Guaranteed junior subordinated deferrable
interest debentures............................ -- -- -- 979 -- 979
Long-term debt................................... (174) (93) (267) (23) (33) (56)
-------- ------- -------- ------- ------- -------
TOTAL INTEREST EXPENSE........................... (37,862) 8,197 (29,665) 10,602 (4,826) 5,776
-------- ------- -------- ------- ------- -------
CHANGE IN NET INTEREST INCOME.................... $(22,875) $(6,741) $(29,616) $ 2,038 $(1,381) $ 657
======== ======= ======== ======= ======= =======
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 $500,000 within a 12-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 tables
set forth information concerning USBANCORP's loan delinquency and other
non-performing assets. At all dates
21
23
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:
AT DECEMBER 31
----------------------------------
2000 1999 1998
-------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Total loan delinquency (past due 30 to 89 days)............. $6,424 $ 9,931 $15,427
Total non-accrual loans..................................... 5,803 4,928 5,206
Total non-performing assets(1).............................. 5,961 13,359 8,236
Loan delinquency as a percentage of total loans and loans
held for sale, net of unearned income..................... 1.09% 0.91% 1.45%
Non-accrual loans as a percentage of total loans and loans
held for sale, net of unearned income..................... 0.98 0.45 0.49
Non-performing assets as a percentage of total loans and
loans held for sale, net of unearned income, and other
real estate owned......................................... 1.01 1.21 0.77
PRO FORMA
AT DECEMBER 31
-----------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Total loan delinquency (past due 30 to 89 days)............. $6,424 $5,920 $9,954
Total non-accrual loans..................................... 5,803 2,872 2,653
Total non-performing assets(1).............................. 5,961 4,283 5,120
Loan delinquency as a percentage of total loans and loans
held for sale, net of unearned income..................... 1.09% 1.02% 1.69%
Non-accrual loans as a percentage of total loans and loans
held for sale, net of unearned income..................... 0.98 0.50 0.45
Non-performing assets as a percentage of total loans and
loans held for sale, net of unearned income, and other
real estate owned......................................... 1.01 0.74 0.87
- ---------------
(1) Non-performing assets are comprised of (i) loans that are on a non-accrual
basis, (ii) loans that are contractually past due 90 days or more as to
interest and principal payments 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, 1999, and December 31, 2000, total loan delinquency as
a percentage of total loans increased modestly to 1.09%. Non-performing assets
as a percentage of total loans declined from 1.21% to 1.01% on an actual basis
but increased from the 0.74% December 31, 1999 pro forma ratio. The pro forma
increase is due to a higher level of non-accrual loans. During the fourth
quarter of 2000, one problem commercial lease with a balance of $3.2 million was
transferred to non-accrual status. This commercial lease is to a trucking
company which ceased business operations near year-end 2000; the lease is
secured by titles to 52 Mack tractors and 26 flatbed trailers. The Company
recorded a charge-off of $600,000 on this lease in the fourth quarter of 2000
and established approximately $800,000 of specific allocations within the loan
loss reserve on this credit. The remaining non-performing assets at December 31,
2000 are predominantly residential mortgage loans that have historically
experienced low net charge-offs.
Between December 31, 1998, and December 31, 1999, total loan delinquency
declined by $5.5 million causing the delinquency ratio to drop to 0.91%. Total
non-accrual loans were relatively consistent between years. The $5.1 million
increase in non-performing assets was due entirely to a $6 million construction
loan on a completed assisted living facility which Three Rivers Bank took
possession of in the fourth quarter of 1999. A $500,000 charge-off on this
property was recorded when it was moved into other real estate owned. This
problem asset remained with Three Rivers Bank after the April 1, 2000, spin-off.
ALLOWANCE AND PROVISION FOR LOAN LOSSES. . .As described in more detail in
Note #1, the Company uses a comprehensive methodology and procedural discipline
to maintain an allowance for loan
22
24
losses to absorb inherent losses in the loan portfolio. The allowance can be
summarized into three elements; 1) reserves established on specifically
identified problem loans, 2) formula driven general reserves established for
loan categories based upon historical loss experience and other qualitative
factors which include delinquency and non-performing loan trends, 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, and 3) a general unallocated reserve which provides
conservative positioning in the event of variance from our assessment of the
previously listed qualitative factors, provides protection against credit risks
resulting from other inherent risk factors contained in the bank's loan
portfolio, and recognizes the model and estimation risk associated with the
specific and formula driven allowances. Note that the qualitative factors used
in the formula driven general reserves are evaluated quarterly (and revised if
necessary) by the Company's management to establish allocations which
accommodate each of the listed risk factors. The following table sets forth
changes in the allowance for loan losses and certain ratios for the periods
ended:
YEAR ENDED DECEMBER 31
------------------------------------------------------------
2000 1999 1998 1997 1996
-------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Balance at beginning of year:.... $ 10,350 $ 10,725 $ 12,113 $ 13,329 $ 14,914
-------- ---------- ---------- -------- --------
Reduction due to spin-off of
TRB............................ (5,028) -- -- -- --
-------- ---------- ---------- -------- --------
Charge-offs:
Commercial.................. 792 1,802 899 1,040 1,705
Real estate-mortgage........ 1,038 625 359 202 156
Consumer.................... 332 576 1,260 1,255 746
-------- ---------- ---------- -------- --------
Total charge-offs...... 2,162 3,003 2,518 2,497 2,607
-------- ---------- ---------- -------- --------
Recoveries:
Commercial.................. 53 295 113 529 527
Real estate-mortgage........ 451 199 132 262 108
Consumer.................... 176 234 285 332 297
-------- ---------- ---------- -------- --------
Total recoveries....... 680 728 530 1,123 932
-------- ---------- ---------- -------- --------
Net charge-offs.................. 1,482 2,275 1,988 1,374 1,675
Provision for loan losses........ 2,096 1,900 600 158 90
-------- ---------- ---------- -------- --------
Balance at end of year........... $ 5,936 $ 10,350 $ 10,725 $ 12,113 $ 13,329
======== ========== ========== ======== ========
Loans and loans held for sale,
net of unearned income:
Average for the year........... $722,633 $1,063,409 $1,019,215 $960,673 $857,921
At December 31................. 590,271 1,095,804 1,066,321 989,575 939,726
As a percent of average loans and
loans held for sale:
Net charge-offs................ 0.21% 0.21% 0.19% 0.14% 0.20%
Provision for loan losses...... 0.29 0.18 0.06 0.02 0.01
Allowance for loan losses...... 0.82 0.97 1.05 1.26 1.55
23
25
YEAR ENDED DECEMBER 31
------------------------------------------------------------
2000 1999 1998 1997 1996
-------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Allowance as a percent of each of
the following:
Total loans and loans held for
sale, net of unearned
income...................... 1.01% 0.94% 1.01% 1.22% 1.42%
Total delinquent loans (past
due 30 to 89 days).......... 92.40 104.22 69.52 60.90 65.71
Total non-accrual loans........ 102.29 210.02 206.01 187.80 209.41
Total non-performing assets.... 99.58 77.48 130.22 136.75 153.72
Allowance as a multiple of net
charge-offs.................... 4.01X 4.55x 5.39x 8.82x 7.96x
Total classified loans........... $ 11,544 $ 24,049 $ 28,307 $ 26,184 $ 24,027
======== ========== ========== ======== ========
The Company recorded a provision for loan losses of $2.1 million in 2000,
$1.9 million in 1999, and $600,000 in 1998. When expressed as a percentage of
average loans, the provision has increased from 0.06% to 0.29% over this
three-year period. The Company's net charge-offs amounted to $1.5 million or
0.21% of average loans in 2000, $2.3 million or 0.21% of average loans in 1999,
and $2.0 million or 0.19% in 1998. The Company strengthened its allowance for
loan losses in the year 2000. Factors contributing to the increased loan loss
provision included funding for the specific allocations on the previously
discussed problem commercial lease in the fourth quarter of 2000 and continued
growth of commercial and commercial real-estate loans which are considered to be
higher in risk than consumer or residential mortgage loans. Overall, the
Company's allowance for loan losses provided 100% coverage of non-performing
assets at December 31, 2000, compared to 77% coverage of non-performing assets
at December 31, 1999. The Company expects its provision level to at a minimum
match net charge-offs in 2001. 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 that was previously discussed. The
entire allowance for loan losses is available to absorb future loan losses in
any loan category.
AT DECEMBER 31
-----------------------------------------------------------------
2000 1999 1998
------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY CATEGORY CATEGORY
AMOUNT TO LOANS AMOUNT TO LOANS AMOUNT TO LOANS
------ ---------- ------- ---------- ------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Commercial........... $1,390 19.8% $ 1,991 13.9% $ 1,379 13.1%
Commercial loans
secured by real
estate............. 1,465 32.8 2,928 37.1 2,082 32.1
Real
estate-mortgage.... 390 42.7 791 43.3 1,038 47.0
Consumer............. 506 4.7 631 5.7 1,563 7.8
Allocation to general
risk............... 2,185 4,009 4,663
------ ------- -------
Total................ $5,936 $10,350 $10,725
====== ======= =======
AT DECEMBER 31
-------------------------------------------
1997 1996
-------------------- --------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
EACH EACH
CATEGORY CATEGORY
AMOUNT TO LOANS AMOUNT TO LOANS
------- ---------- ------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Commercial........... $ 1,670 14.4% $ 2,118 14.7%
Commercial loans
secured by real
estate............. 2,543 30.6 2,796 28.4
Real
estate-mortgage.... 414 45.9 472 45.6
Consumer............. 1,506 9.1 959 11.3
Allocation to general
risk............... 5,980 6,984
------- -------
Total................ $12,113 $13,329
======= =======
Even though real estate-mortgage loans comprise 43% of the Company's total
loan portfolio, only $390,000 or 6.6% of the total allowance for loan losses is
allocated against this loan category. The real estate-mortgage loan allocation
is based primarily 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 experience in these categories,
and other
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qualitative factors. The Company strengthened its allocations to the commercial
segments of the loan portfolio during 2000. Factors considered by the Company
that led to increased qualitative allocations to the commercial segments of the
portfolio included: the slowing of the economy that resulted from the adverse
effects of rising interest rates which began in the second half of 1999,
continued growth of the commercial loan portfolio, the increase in concentration
risk among our 25 largest borrowers compared to total loans, and the overall
growth in the average size associated with these credits. These factors along
with higher net charge-offs experienced in fiscal 1999 caused the increased
allocations between 1998 and 1999.
In addition to the specific and formula-driven reserve calculations, the
Company has consistently established a general unallocated reserve to provide
for risk inherent in the loan portfolio as a whole. Management believes that its
judgment with respect to the establishment of the general unallocated reserve
has been validated by experience and prudently reflects the model and estimation
risk associated with the specific and formula driven allowances. The Company
determines the unallocated reserve based on a variety of factors, some of which
also are components of the formula-driven methodology. These include, without
limitation, the previously mentioned qualitative factors along with general
economic data, management's assessment of the direction of interest rates, and
credit concentrations. 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
comparable banking companies.
Based on the Company's loan loss reserves methodology and the related
assessment of the inherent risk factors contained within the Company's loan
portfolio, management believes that the allowance for loan losses was adequate
for each of the fiscal years presented in the table above.
NON-INTEREST INCOME. . .Non-interest income for 2000 totaled $16.6 million
which represented a $7.8 million decrease from the actual 1999 performance of
$24.4 million. On a pro forma basis, non-interest income for 2000 totaled $16.0
million which represented a $2.7 million decrease from the pro forma 1999
performance of $18.7 million. Factors contributing to the reduced non-interest
income in 2000 included:
- a $2.9 million decrease in gains realized on loans held for sale due in
part to the non-recurrence of a $1.6 million gain on the sale of the
Company's credit card portfolio in 1999. The remainder of the decrease
was caused by a significant drop in mortgage refinancing activity which
reduced both the volume and spread on loan sales into the secondary
market in 2000. The following table reflects the impact of these
reductions:
2000 1999 DIFFERENCE
------------ ------------ -------------
Mortgage loans sold............. $220,000,000 $426,000,000 $(206,000,000)
Gain on mortgage loans sold..... 1,157,000 2,373,000 (1,216,000)
Spread earned on loans sold..... 53b.p....... 56b.p. (3 b.p.)
- the non-recurrence of a $540,000 gain recognized on the sale of a
marginally profitable branch office in 1999.
- a $952,000 loss realized on the sale of $242 million of investment
securities in 2000. The Company used the proceeds from the sale primarily
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 $436,000 gain
realized in 1999, this represents a net unfavorable change of $1.4
million.
- a $175,000 increase in trust fees to $5.1 million due to the continued
profitable expansion of the trust company's business.
- a $65,000 or 8.2% increase in net mortgage servicing fees in 2000 due to
reduced amortization expense on mortgage servicing rights as the higher
interest rate environment caused a slowdown in mortgage prepayment
speeds. The following chart highlights some of the key information
related to SMC's mortgage servicing portfolio.
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AT DECEMBER 31
----------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PERCENTAGES AND
PREPAYMENT DATA)
MSR portfolio balance....................................... $655,403 $922,042
Fair value of MSRs based upon discounted cash flow of
servicing portfolio....................................... 9,969 14,190
Fair value as a percentage of MSR balance................... 1.52% 1.54%
PSA prepayment speed........................................ 216 189
Weighted average portfolio interest rate.................... 7.53% 7.55%
A rollforward of the MSRs is as follows:
(IN THOUSANDS)
Balance as of December 31, 1999............................. $13,510
Acquisition of servicing rights............................. 1,980
Impairment charge net of reversals.......................... (339)
Sale of servicing rights.................................... (3,493)
Amortization of servicing rights............................ (1,747)
-------
Balance as of December 31, 2000............................. $ 9,911
=======
Non-interest income as a percentage of total revenue averaged 30.7% for
2000 and 34.5% on a pro forma basis excluding TRB. To provide a longer term
perspective for this comparison, the ratio of non-interest income to total
revenue on a pro forma basis averaged 25.6% for 1995. The continued growth and
diversification of non-interest income is a key post spin-off strategic goal of
USBANCORP. UBAN Associates, is a registered investment advisory firm based in
State College that provides investment management and asset/liability consulting
services to small and mid-sized financial institutions. UBAN Associates total
revenue has more than doubled from $264,000 in 1999 to $531,000 in 2000. USNB
Financial Services has also experienced strong revenue growth from the sale of
annuities, mutual funds, and insurance products as its total revenue has
increased by 48% from $126,000 in 1999 to $187,000 in 2000. The Company is also
excited about the revenue potential from two new companies formed in
2000 -- Mount Nittany Mortgage -- a retail mortgage origination office that is
aligned with the largest residential real-estate agency based in State College
and Red Eagle Associates -- a debt collection agency. In just their first year
of operation these two entities generated approximately $50,000 of non-interest
revenue.
Non-interest income for 1999 totaled $24.4 million which represented a
$685,000 or 2.9% increase when compared to 1998. This increase was primarily due
to the following items:
- a $453,000 or 10.2% increase in trust fees to $4.9 million in 1999. This
trust fee growth reflects increased assets under management due to the
profitable expansion of the Company's trust operations.
- a $948,000 or 25.6% increase in gains realized on loans held for sale due
to a $1.6 million gain realized on the sale of the Company's $14 million
credit card portfolio. As a result of the 16% premium recognized on the
sale, the Company was able to profitably exit a line of business where it
did not have the scale to effectively compete on a long-term basis. This
item was partially offset by reduced gains on mortgage loan sales as a
drop in mortgage refinancing activity reduced both the volume and spread
on loan sales into the secondary market.
- a $1.8 million decrease in gains realized on investment security sales as
the steeper yield curve limited investment portfolio repositioning
opportunities in 1999.
- a $402,000 or 5.9% increase in other income due in part to additional
income resulting from ATM surcharging, commercial leasing fees, and
revenue generated from annuity and mutual fund sales in the Company's
financial service subsidiaries.
- a $540,000 gain on the sale of a small marginally profitable branch
office with approximately $6 million in deposits. The Company received an
8.5% premium for the core deposits in that branch office.
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NON-INTEREST EXPENSE. . .Non-interest expense for 2000 totaled $50.2
million which represented a $10.6 million decrease from the actual 1999
performance of $60.8 million. On a pro forma basis, non-interest expense for
2000 totaled $45.2 million which represented a $5.4 million increase from the
pro forma 1999 performance of $39.8 million. Factors significantly impacting
non-interest expenses in 2000 included:
- the recognition of $2.6 million in costs related to the spin-off of Three
Rivers Bank to USBANCORP shareholders. These costs included investment
banking fees, legal and accounting fees, severance and personnel costs,
certain investor relations and shareholder costs, and system and facility
changes.
- the recognition of a $1.5 million charge in the fourth quarter of 2000 to
exit the wholesale mortgage production business. This charge reflects
costs for employee severance, fixed asset disposal, lease termination,
professional fees, and other items associated with exiting the wholesale
mortgage production business. A total of 25 employees or 5.2% of the
Company's total workforce will be released as a result of this strategic
decision. The continued consolidation of the wholesale mortgage
production industry has enabled the larger players to use technology
advances to reduce their costs of operations and achieve pricing
advantages in a more competitive market. The Company's mortgage banking
subsidiary, Standard Mortgage Corporation, lacked the scale necessary to
profitably compete in this line of business. The exit charge was recorded
in the fourth quarter due to the December 20th receipt of a favorable
supplemental private letter ruling from the IRS which ensures that the
tax-free treatment of the Three Rivers Bank spin-off would not be
jeopardized by this action.
- a $8.8 million decrease in salaries and employee benefits (a $2.0 million
decline on a pro forma basis) in 2000. The pro forma decline is due to 23
fewer full-time equivalent employees ("FTE") and reduced incentive
compensation and pension/profit-sharing expense. The lower employee base
resulted primarily from a downsizing of the mortgage banking
operation(prior to the announced decision to exit wholesale mortgage
production) due to reduced production volumes, fewer employees at the
Parent Company, and the Company's ability to defer new hires scheduled to
fill certain open positions. Salary and benefits expense was negatively
impacted by $322,000 due to the severance costs associated with
downsizing several divisions within the Parent Company and the
nonrecurring signing bonus paid to the CEO in conjunction with his
voluntary four year base salary freeze.
- a net unfavorable shift of $1.1 million on the Company's impairment
reserve for mortgage servicing rights. In 2000, the Company recorded an
impairment charge of $339,000 on mortgage serving rights compared to a
benefit of $776,000 in 1999.
The remainder of the decline in actual non-interest expense is due to Three
Rivers Bank expenses being included for only one quarter of 2000 compared to the
full year in 1999. On a pro forma basis, equipment expense did increase due to
higher technology related expenses while professional fees also increased due to
higher legal and other professional fees.
Non-interest expense for 1999 totaled $60.8 million which represented a
$1.3 million or 2.2% increase when compared to 1998. This increase was primarily
due to the following items:
- a $1.7 million or 5.5% increase in salaries and employee benefits due to
merit pay increases, higher incentive pay, increased medical insurance
premiums and the additional FTE employees resulting from the First
Western Branches Acquisition.
- a $574,000 increase in equipment expense due to higher technology related
expenses such as system cost associated with wide area networks and
optical disk imaging of customer statements.
- a $827,000 increase in goodwill and core deposit amortization expense due
to the amortization expense associated with the $10 million core deposit
premium resulting from the First Western Branches Acquisition. The
amortization expense of intangible assets reduced diluted earnings per
share by $0.20 in 1999 and $0.18 in 2000.
- slower mortgage prepayment speeds and the steeper yield curve caused the
value of the Company's mortgage servicing rights to increase in 1999. As
a result of this improved valuation, the Company
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reversed $776,000 of the impairment reserve on mortgage servicing rights
that had been established in 1998. This partial reversal of the
impairment reserve favorably reduced non-interest expense in 1999.
INCOME TAX EXPENSE . . .The Company recognized a benefit for income taxes
of $1.5 million in 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 income tax expense by $925,000 due to the
reversal of a valuation allowance and accrued income taxes. Excluding this item,
the Company's tax provision for 2000 amounted to a benefit of $553,000. This
benefit resulted from the fact that the Company's level of tax-free income
exceeded its taxable income for the year. As a result of this, the Company
anticipates paying an alternative minimum tax of approximately $50,000 for the
year 2000. The Company expects to return to a normal tax position in future
periods and will be able to utilize the alternative minimum tax paid in 2000 to
reduce future tax expense.
The Company's provision for income taxes for 1999 was $6.9 million
reflecting an effective tax rate of 25.3%. The Company's income tax provision
and effective tax rate were $7.7 million or 26.6% in 1998. The lower income tax
expense and effective tax rate in 1999 was due to a reduced level of pre-tax
income combined with an increased level of tax-free income. Tax-free asset
holdings consist primarily of municipal investment securities, bank owned life
insurance, and commercial loan tax anticipation notes.
NET OVERHEAD BURDEN . . . The Company's efficiency ratio (non-interest
expense divided by total revenue) on an operating basis, excluding spin-off
costs, increased to 88.2% in 2000 which compares unfavorably to the 65.4%
efficiency ratio reported for 1999. Factors contributing to the higher
efficiency ratio included lower net interest income, reduced gains from asset
sales, reduced revenue from the mortgage banking operation, and higher
non-interest expenses including costs to exit the wholesale mortgage production
business. The amortization of intangible assets also creates a $2.8 million
annual non-cash charge that negatively impacts the efficiency ratio. The
efficiency ratio for 2000, stated on a cash basis excluding the intangible
amortization, was 83.1% or approximately 5.0% lower than the reported efficiency
ratio. The Company's efficiency ratio was also negatively impacted by the Three
Rivers Bank spin-off as all interest costs associated with the guaranteed junior
subordinated deferrable interest debentures ($2.9 million annually) remained
with USBANCORP.
SEGMENT RESULTS . . . Note #22 presents the results of the Company's key
business segments and identifies their net income contribution and risk-adjusted
return on equity performance. When comparing 2000 to 1999 period, the Trust
segment again produced the highest ROE averaging 35.2% in 2000. Trust also grew
its net income by 9.7% in 2000 due to success in generating new 401(k) business
and continued growth of collective investment funds for trade union pension
plans. Retail banking demonstrated an improvement in ROE to 14.8% due to reduced
operating expenses in the branch network. Commercial lending ROE decreased from
18.8% in 1999 to 11.7% in 2000 due to an increased loan loss provision within
the leasing division.
The Company has experienced earnings pressure in mortgage banking as that
division lost $1.8 million in 2000 producing a ROE of (24.1)%. Included in the
loss for 2000 is a $1.0 after-tax charge to exit the wholesale mortgage
production business. Even if that charge is excluded, the mortgage banking
operation still experienced a net loss in 2000 due to reduced gains on loan
sales due to lower refinance activity. The ROE in the investment/parent segment
has declined from 21.8% in 1999 to (10.2)% in 2000 due in part to the costs
associated with the TRB spin-off. The previously discussed $952,000 of
securities losses realized to delever the balance sheet also had a significant
negative impact on the investment segment performance. Additionally, the decline
in the net spread earned on leveraged assets due to the higher interest rate
environment in 2000 has also negatively impacted the investment performance.
Finally, the TRB spin-off negatively impacted the investment/parent performance
as all interest costs associated with the Company's guaranteed junior
subordinated deferrable interest debentures remained with USBANCORP while this
segment lost the net interest income benefit provided from TRB's investment
portfolio. The other fee based businesses demonstrated an improving net income
and ROE trend in 2000. Improved performance at UBAN Associates was a key factor
contributing to the 16.1% ROE for this segment.
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BALANCE SHEET . . . The Company's total consolidated assets were $1.25
billion at December 31, 2000, compared with $2.47 billion at December 31, 1999,
which represents a decrease of $1.2 billion due primarily to the spin-off of
Three Rivers Bank which reduced total assets by slightly more than $1.0 billion.
The remainder of the decline is due to lower investment security balances due to
the previously discussed deleveraging of the balance sheet. On a pro forma basis
excluding Three Rivers Bank, total loans and loans held for sale declined by $26
million from 1999 due primarily to lower balances of residential mortgage and
consumer loans. The balance of mortgage servicing rights declined by $4 million
due to the amortization and sale of servicing rights during the year 2000.
The Company has focused on growing deposit balances to enhance liquidity
and reduce its dependence on borrowings in 2000. The Company has achieved modest
core deposit growth by actively marketing its convenience oriented preferred
money market account and selectively targeting certain certificate of deposit
categories with more aggressive pricing. The Company also expanded its hours of
operation at five select branches to seven days a week to further emphasize its
convenience positioning. Additionally, the Company recently opened its first
full service branch facility in Centre County. This geographic expansion into
the demographically attractive State College Market (home of Penn State
University) will allow the Company to aggressively pursue new deposit growth by
capitalizing on previously established commercial loan relationships.
On a pro forma basis, total borrowed funds decreased by $161 million since
December 31, 1999, as the Company used the cash generated from investment
security sales and paydowns to reduce short-term borrowings with the Federal
Home Loan Bank. Total equity on a pro forma basis increased by $11 million from
year-end 1999 due to improvement in other comprehensive income. The negative
balance in accumulated other comprehensive income resulting from the
mark-to-market of the available for sale securities portfolio reduced total
equity by $3.9 million at December 31, 2000.
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) market value of portfolio equity
sensitivity analysis, and 3) 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. The overall interest rate risk position and
strategies are reviewed by senior management and the Company's Board of
Directors on an ongoing basis.
The following table presents a summary of the Company's static GAP
positions at December 31, 2000:
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............................. $102,656 $ 44,228 $ 79,768 $357,683 $ 584,335
INVESTMENT SECURITIES............. 138,226 19,090 18,236 380,649 556,201
OTHER ASSETS...................... -- -- 26,042 -- 26,042
-------- -------- --------- -------- ----------
TOTAL RATE SENSITIVE ASSETS..... $240,882 $ 63,318 $ 124,046 $738,332 $1,166,578
======== ======== ========= ======== ==========
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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 LIABILITIES:
DEPOSITS:
NON-INTEREST BEARING DEPOSITS... $ -- $ -- $ -- $ 89,057 $ 89,057
NOW AND SUPER NOW............... -- -- -- 46,440 46,440
MONEY MARKET.................... 135,151 -- -- -- 135,151
OTHER SAVINGS................... -- -- -- 90,886 90,886
CERTIFICATES OF DEPOSIT OF
$100,000 OR MORE............. 15,634 1,130 1,630 2,616 21,010
OTHER TIME DEPOSITS............. 65,985 44,332 39,973 126,230 276,520
-------- -------- --------- -------- ----------
TOTAL DEPOSITS............... 216,770 45,462 41,603 355,229 659,064
BORROWINGS........................ 198,985 6 12 301,577 500,580
======== ======== ========= ======== ==========
TOTAL RATE SENSITIVE
LIABILITIES................ $415,755 $ 45,468 $ 41,615 $656,806 $1,159,644
OFF-BALANCE SHEET HEDGES.......... 220,000 (40,000) (100,000) (80,000) --
======== ======== ========= ======== ==========
INTEREST SENSITIVITY GAP:
INTERVAL........................ 45,127 (22,150) (17,569) 1,526 --
CUMULATIVE...................... $ 45,127 $ 22,977 $ 5,408 $ 6,934 $ 6,934
======== ======== ========= ======== ==========
PERIOD GAP RATIO.................. 1.23X 0.74X 0.88X 1.00X
CUMULATIVE GAP RATIO.............. 1.23 1.08 1.01 1.01
RATIO OF CUMULATIVE GAP TO TOTAL
ASSETS.......................... 3.60% 1.83% 0.43% 0.55%
======== ======== ========= ========
When December 31, 2000, is compared to December 31, 1999, both the
Company's six month and one year cumulative GAP ratios shifted from a negative
position to a modest positive position due to a reduction in short-term interest
rate sensitive liabilities. This reduction resulted from the Company's ability
to successfully deleverage the balance sheet with cash flow from the investment
securities portfolio in the year 2000. As separately disclosed in the above
table, the off-balance sheet hedge transactions (described in detail in Note
#21) reduced the negativity of the cumulative one-year GAP position by $80
million.
A portion of the Company's funding base is low cost core deposit accounts
which do not have a specific maturity date. The accounts that comprise these low
cost core deposits include passbook savings accounts, money market accounts, NOW
accounts, and daily interest savings accounts. At December 31, 2000, the balance
in these accounts totaled $272 million or 21.7% of total assets. Within the
above static GAP table, approximately $135 million or 50% of these 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 reviewed annually for reasonableness. The Company recognizes
that the pricing of these accounts is somewhat inelastic when compared to normal
rate movements.
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 +/-7.5% and net income variability to +/-20.0% 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. 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 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
December 31, 2000, levels. The
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Company's most likely rate scenario is based upon published economic consensus
estimates which currently project a declining interest rate scenario over the
next twelve month period. 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.
MARKET
VARIABILITY OF VALUE OF
NET INTEREST VARIABILITY OF PORTFOLIO
INTEREST RATE SCENARIO INCOME NET INCOME EQUITY
- ---------------------- -------------- -------------- ---------
BASE..................................................... 0% 0% 0%
FLAT..................................................... (3.0) (12.6) (1.2)
200 BP INCREASE.......................................... (2.9) (5.9) (24.3)
200 BP DECREASE.......................................... 1.9 (8.9) 28.6
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 (3.0%)
and (12.6%) respectively. The balance sheet repositioning actions that the
Company executed in 2000 helped reduce the volatility of net interest income,
net income, and capital under more extreme interest rate movements. 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.
Within the investment portfolio at December 31, 2000, 100% of the portfolio
is classified as available for sale. 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. The mark to market of the available for
sale securities does inject more volatility in the book value of equity but has
no impact on regulatory capital. 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 fixed-rate 30-year mortgage loans.
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 totaled $67 million at December 31, 2000, compared to $111 million
at December 31, 1999. Maturing and repaying loans, as well as the monthly cash
flow associated with mortgage-backed securities are other significant sources of
asset liquidity for the Company.
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, 2000, the Company's subsidiaries had approximately
$55 million of unused lines of credit available under informal arrangements with
correspondent banks. These lines of credit enable USBANCORP's subsidiaries to
purchase funds for short-term needs at current market rates. Additionally, the
Company's subsidiary bank is a member of the Federal Home Loan Bank which
provides the opportunity to obtain intermediate to longer term advances up to
approximately 80% of its investment in assets secured by one- to four-family
residential real estate. This would suggest a remaining current total available
Federal Home Loan Bank aggregate borrowing capacity of approximately $196
million.
Liquidity can be also be analyzed by utilizing the Consolidated Statement
of Cash Flows. Excluding $17 million of cash equivalents transferred to TRB as
part of the spin-off, cash equivalents decreased by
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$3 million from December 31, 1999, to December 31, 2000, due primarily to $230
million of net cash used by financing activities. This more than offset $40
million of net cash provided by operating activities and $187 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 $205 million. Cash advanced for new loan fundings and
purchases totaled $150 million and was approximately equal to the cash received
from loan principal payments and loans sold. Within financing activities net
short-term borrowings and Federal Home Loan Bank advances were paid down by $231
million. The Company used $5.6 million of cash to pay common dividends to
shareholders and $2.9 million of cash to service the dividend on the guaranteed
junior subordinated deferrable interest debentures.
CAPITAL RESOURCES. . .As presented in Note #23, the Company continues to be
considered well-capitalized after the spin-off of Three Rivers Bank as the asset
leverage ratio was 6.66% and the tier 1 capital ratio was 12.80% at December 31,
2000. 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. Note that the impact of other comprehensive
income(loss) is excluded from the regulatory capital ratios. Additionally, the
Company generates approximately $2.8 million of tangible capital annually due to
the amortization of intangible assets. The post spin-off USBANCORP will first
focus on providing a better than peer common dividend as a key means to enhance
shareholder value. For the year 2000, the Company paid out in dividends 89% of
its cash operating earnings per share. This payout was higher than typical due
in part to the losses incurred to exit the wholesale mortgage production
business. The Company normally targets a payout range of 65% to 75% of cash
earnings per share. The Company currently does not envision resuming its
treasury stock repurchase program over the next twelve month period and expects
to experience modest expansion of its earning asset base in 2001.
The Company exceeds all regulatory capital ratios for each of the periods
presented. Furthermore, both the Company and its subsidiary bank are considered
"well capitalized" under all applicable FDIC regulations. It is the Company's
intent to maintain the FDIC "well capitalized" classification to ensure the
lowest deposit insurance premium.
The Company has declared three quarterly $0.09 Common Stock cash dividends
per share since the April 1, 2000 spin-off of Three Rivers Bank. On an
annualized basis assuming a $4.25 market price, this equates to an 8.5% 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. The Company intends to maintain its quarterly common stock cash
dividend at the current $0.09 per share.
As previously disclosed in a January 12, 2001, Form 8-K and press release,
the Company projects a range of $0.32 to $0.36 for net income per share and a
range of $0.48 to $0.52 for cash earnings per share for the year 2001. These
ranges include additional estimated pre-tax losses of approximately $400,000 to
complete the exit from the wholesale mortgage production business in the first
quarter of 2001.
FORWARD LOOKING STATEMENT. . .This Form 10-K 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.
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
32
34
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
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial
instruments, see "Interest Rate Sensitivity" in the MD&A presented on pages 28
to 30. The Company's principal market risk exposure is to interest rates.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31
------------------------
2000 1999
---------- ----------
(IN THOUSANDS)
ASSETS
Cash and due from banks..................................... $ 35,109 $ 54,676
Interest bearing deposits................................... 763 758
Investment securities:
Available for sale........................................ 550,232 1,187,335
Loans held for sale......................................... 9,637 21,753
Loans....................................................... 588,646 1,082,459
Less: Unearned income..................................... 8,012 8,408
Allowance for loan losses........................... 5,936 10,350
---------- ----------
Net loans................................................... 574,698 1,063,701
---------- ----------
Premises and equipment...................................... 13,530 18,937
Accrued income receivable................................... 8,593 16,650
Mortgage servicing rights................................... 9,911 13,510
Goodwill and core deposit intangibles....................... 20,058 25,655
Bank owned life insurance................................... 26,042 37,290
Other assets................................................ 5,688 27,214
---------- ----------
TOTAL ASSETS................................................ $1,254,261 $2,467,479
========== ==========
LIABILITIES
Non-interest bearing deposits............................... $ 89,057 $ 160,253
Interest bearing deposits................................... 570,007 1,070,688
---------- ----------
Total deposits.............................................. 659,064 1,230,941
---------- ----------
Federal funds purchased and securities sold under agreements
to repurchase............................................. 8,096 16,369
Other short-term borrowings................................. 42,989 84,874
Advances from Federal Home Loan Bank........................ 413,351 956,999
Guaranteed junior subordinated deferrable interest
debentures................................................ 34,500 34,500
Long-term debt.............................................. 1,644 7,100
---------- ----------
Total borrowed funds........................................ 500,580 1,099,842
---------- ----------
Other liabilities........................................... 16,210 24,139
---------- ----------
TOTAL LIABILITIES........................................... 1,175,854 2,354,922
---------- ----------
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, 2000, and 1999........................................ -- --
Common stock, par value $2.50 per share; 24,000,000 shares
authorized; 17,542,724 shares issued and 13,451,805
outstanding on December 31, 2000; 17,390,496 shares issued
and 13,309,577 shares outstanding on December 31, 1999.... 43,857 43,476
Treasury stock at cost, 4,090,919 shares on December 31,
2000, and 4,080,919 shares on December 31, 1999........... (65,824) (65,725)
Surplus..................................................... 66,016 65,686
Retained earnings........................................... 38,238 104,294
Accumulated other comprehensive (loss) income............... (3,880) (35,174)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY.................................. 78,407 112,557
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $1,254,261 $2,467,479
========== ==========
See accompanying notes to consolidated financial statements.
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36
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans:
Taxable................................................... $ 57,434 $ 84,585 $ 84,510
Tax exempt................................................ 2,339 2,250 2,469
Deposits with banks......................................... 212 121 120
Federal funds sold and securities purchased under agreements
to resell................................................. 70 -- 2
Investment securities:
Available for sale........................................ 47,243 46,506 38,139
Held to maturity.......................................... -- 31,726 33,718
----------- ----------- -----------
Total Interest Income....................................... 107,298 165,188 158,958
----------- ----------- -----------
INTEREST EXPENSE
Deposits.................................................... 29,269 41,150 40,891
Federal funds purchased and securities sold under agreements
to repurchase............................................. 1,600 3,438 4,603
Other short-term borrowings................................. 5,258 7,599 5,303
Advances from Federal Home Loan Bank........................ 30,608 43,946 40,483
Guaranteed junior subordinated deferrable interest
debentures................................................ 2,960 2,960 1,944
Long-term debt.............................................. 144 411 504
----------- ----------- -----------
Total Interest Expense...................................... 69,839 99,504 93,728
----------- ----------- -----------
Net Interest Income......................................... 37,459 65,684 65,230
Provision for loan losses................................. 2,096 1,900 600
----------- ----------- -----------
Net Interest Income after Provision for Loan Losses......... 35,363 63,784 64,630
----------- ----------- -----------
NON-INTEREST INCOME
Trust fees.................................................. 5,058 4,883 4,430
Net gains on loans held for sale............................ 1,764 4,645 3,697
Net realized (losses) gains on investment securities........ (952) 436 2,267
Wholesale cash processing fees.............................. 120 603 706
Service charges on deposit accounts......................... 2,222 3,563 3,409
Net mortgage servicing fees................................. 854 789 692
Bank owned life insurance................................... 1,308 1,668 1,643
Gain on sale of branch...................................... -- 540 --
Other income................................................ 6,235 7,247 6,845
----------- ----------- -----------
Total Non-Interest Income................................... 16,609 24,374 23,689
----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits.............................. 23,305 32,091 30,427
Net occupancy expense....................................... 3,415 4,602 4,474
Equipment expense........................................... 3,549 4,211 3,637
Professional fees........................................... 2,831 3,332 3,373
Supplies, postage, and freight.............................. 1,856 2,718 2,674
Miscellaneous taxes and insurance........................... 1,545 1,810 1,568
FDIC deposit insurance expense.............................. 162 272 272
Amortization of goodwill and core deposit intangibles....... 2,858 3,135 2,308
Impairment charge (credit) for mortgage servicing rights.... 339 (776) 831
Spin-off costs.............................................. 2,552 -- --
Wholesale mortgage production exit costs.................... 1,498 -- --
Other expense............................................... 7,824 9,420 9,956
----------- ----------- -----------
Total Non-Interest Expense.................................. 51,734 60,815 59,520
----------- ----------- -----------
INCOME
BEFORE INCOME TAXES......................................... 238 27,343 28,799
Provision (benefit) for income taxes...................... (1,478) 6,922 7,655
----------- ----------- -----------
NET INCOME.................................................. $ 1,716 $ 20,421 $ 21,144
=========== =========== ===========
PER COMMON SHARE DATA:(1)
Basic:
Net income.............................................. $ 0.13 $ 1.53 $ 1.51
Average number of shares outstanding.................... 13,370,426 13,340,204 14,011,893
Diluted:
Net income.............................................. $ 0.13 $ 1.52 $ 1.48
Average number of shares outstanding.................... 13,373,560 13,451,166 14,257,557
Cash dividends declared..................................... $ 0.42 $ 0.59 $ 0.60
=========== =========== ===========
- ---------------
(1) All per share and share data have been adjusted to reflect a 3 for 1 stock
split effected in the form of a 200% stock dividend which was distributed on
July 31, 1998, to shareholders of record on July 16, 1998.
See accompanying notes to consolidated financial statements.
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37
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
------- -------- -------
(IN THOUSANDS)
COMPREHENSIVE INCOME
Net income.................................................. $ 1,716 $ 20,421 $21,144
Other comprehensive income, before tax:
Unrealized holding gains (losses) arising during period... 18,933 (50,124) 3,029
Less: reclassification adjustment for losses (gains)
included in net income................................. 952 (436) (2,267)
------- -------- -------
Other comprehensive income (loss), before tax:.............. 19,885 (50,560) 762
Income tax expense (credit) related to items of other
comprehensive income...................................... 5,767 (12,802) 331
------- -------- -------
Other comprehensive income (loss), net of tax............... 14,118 (37,758) 431
------- -------- -------
Comprehensive income (loss)................................. $15,834 $(17,337) $21,575
======= ======== =======
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31
--------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
PREFERRED STOCK
Balance at beginning of period............................. $ -- $ -- $ --
Balance at end of period................................... -- -- --
-------- -------- --------
COMMON STOCK
Balance at beginning of period............................. 43,476 43,375 14,402
Stock options exercised/new shares issued.................. 381 101 75
Effect of 3 for 1 split in the form of a 200% stock
dividend................................................. -- -- 28,898
-------- -------- --------
Balance at end of period................................... 43,857 43,476 43,375
-------- -------- --------
TREASURY STOCK
Balance at beginning of period............................. (65,725) (61,521) (31,175)
Treasury stock, at cost.................................... (99) (4,204) (30,346)
-------- -------- --------
Balance at end of period................................... (65,824) (65,725) (61,521)
-------- -------- --------
CAPITAL SURPLUS
Balance at beginning of period............................. 65,686 65,495 93,934
Stock options exercised/new shares issued.................. 330 191 459
Effect of 3 for 1 split in the form of a 200% stock
dividend................................................. -- -- (28,898)
-------- -------- --------
Balance at end of period................................... 66,016 65,686 65,495
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............................. 104,294 91,737 78,866
Net income................................................. 1,716 20,421 21,144
Spin-off of Three Rivers Bank.............................. (62,156) -- --
Cash dividends declared.................................... (5,616) (7,864) (8,273)
-------- -------- --------
Balance at end of period................................... 38,238 104,294 91,737
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period............................. (35,174) 2,584 2,153
Spin-off of Three Rivers Bank.............................. 17,176 -- --
Other comprehensive income(loss), net of tax............... 14,118 (37,758) 431
-------- -------- --------
Balance at end of period................................... (3,880) (35,174) 2,584
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY................................. $ 78,407 $112,557 $141,670
======== ======== ========
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
-----------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.............................................. $ 1,716 $ 20,421 $ 21,144
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................. 2,096 1,900 600
Depreciation and amortization expense................. 2,248 2,656 2,483
Amortization expense of goodwill and core deposit
intangibles........................................ 2,858 3,135 2,308
Amortization expense of mortgage servicing rights..... 1,747 2,618 2,861
Net amortization of investment securities............. 527 152 1,038
Net realized losses (gains) on investment
securities......................................... 952 (436) (2,267)
Net realized gains on loans held for sale............. (1,764) (4,645) (3,697)
Origination of mortgage loans held for sale........... (191,749) (403,673) (450,639)
Sales of mortgage loans held for sale................. 220,346 426,240 414,023
Decrease in accrued income receivable................. 1,251 500 167
Increase (decrease) in accrued expense payable........ (112) 1,918 (262)
--------- --------- ---------
Net cash provided (used) by operating activities........ 40,116 50,786 (12,241)
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of investment securities and other short-term
investments -- available for sale..................... (142,560) (394,195) (704,113)
Purchase of investment securities and other short-term
investments -- held to maturity....................... -- (104,527) (114,967)
Proceeds from maturities of investment securities and
other short-term investments -- available for sale.... 104,682 93,650 115,247
Proceeds from maturities of investment securities and
other short-term investments -- held to maturity...... -- 99,949 141,826
Proceeds from sales of investment securities and other
short-term investments -- available for sale.......... 242,664 212,461 509,383
Proceeds from sales of investment securities and other
short-term investments -- held to maturity............ -- 15,959 --
Long-term loans originated.............................. (129,016) (414,016) (336,815)
Loans held for sale..................................... (9,637) (21,753) (51,317)
Principal collected on long-term loans.................. 145,087 362,168 347,180
Loans purchased or participated......................... (21,441) (9,743) --
Loans sold or participated.............................. 4,729 18,366 44
Net decrease in credit card receivables and other
short-term loans...................................... 6,116 15,298 2,487
Purchases of premises and equipment..................... (3,610) (3,861) (2,947)
Sale/retirement of premises and equipment............... 1,559 288 74
Net decrease in assets held in trust for collateralized
mortgage obligation................................... 1,726 1,117 1,424
Decrease (increase) in mortgage servicing rights........ 1,852 69 (4,098)
Net increase in other assets............................ (14,659) (11,341) (5,775)
--------- --------- ---------
Net cash provided (used) by investing activities........ $ 187,492 $(140,111) $(102,367)
========= ========= =========
See accompanying notes to consolidated financial statements.
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YEAR ENDED DECEMBER 31
-----------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit.......... $ 225,346 $ 487,877 $ 483,384
Payments for maturing certificates of deposit........... (228,771) (467,790) (471,829)
Net increase in demand and savings deposits............. 11,446 34,563 25,209
Net (decrease) increase in federal funds purchased,
securities sold under agreements to repurchase, and
other short-term borrowings........................... (6,842) (129,165) 81,382
Net principal (repayments) borrowings on advances from
Federal Home Loan Bank................................ (223,772) 204,608 (1,804)
Principal borrowings of long-term debt.................. -- -- 11,123
Repayments of long-term debt............................ (3,297) (2,171) (11,687)
Common stock dividends paid............................. (5,616) (8,673) (8,688)
Guaranteed junior subordinated deferrable interest
debenture dividends paid.............................. (2,916) (2,916) (1,944)
Proceeds from sale of guaranteed junior subordinated
deferrable interest debentures, net of expenses....... -- -- 33,172
Proceeds from dividend reinvestment and stock purchase
plan and stock options exercised...................... 711 292 534
Purchases of treasury stock............................. (99) (4,204) (30,346)
Net increase (decrease) in other liabilities............ 3,619 (6,602) 6,823
--------- --------- ---------
Net cash (used) provided by financing activities........ (230,191) 105,819 115,329
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH EQUIVALENTS............. (2,583) 16,494 721
NET TRANSFER TO THREE RIVERS BANK....................... (16,979) -- --
CASH EQUIVALENTS AT JANUARY 1........................... 55,434 38,940 38,219
--------- --------- ---------
CASH EQUIVALENTS AT DECEMBER 31......................... $ 35,872 $ 55,434 $ 38,940
========= ========= =========
See accompanying notes to consolidated financial statements.
39
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USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND NATURE OF OPERATIONS:
USBANCORP, Inc. (the "Company") is a financial holding company (pursuant to
the Gramm-Leach-Bliley Act), headquartered in Johnstown, Pennsylvania. Through
its banking subsidiary the Company operates 23 banking locations in six
west-central Pennsylvania counties. These offices provide a full range of
consumer, mortgage, commercial, and trust financial products.
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"),
USBANCORP Trust and Financial Services Company ("Trust Company"), Standard
Mortgage Corporation of Georgia (SMC), UBAN Associates, Inc., ("UBAN
Associates") and United Bancorp Life Insurance Company ("United Life"). U.S.
Bank is a state-chartered full service bank with 23 locations in west-central
Pennsylvania. The Trust Company offers a complete range of trust and financial
services and has $1.4 billion in assets under management. The Trust Company also
offers the ERECT Funds and BUILD Fund which are collective investment funds for
trade union controlled pension fund assets. SMC is a mortgage banking company
whose business includes the servicing of mortgage loans and the origination of
residential mortgage loans through a wholesale broker network. In the fourth
quarter of 2000 the Company announced its plan to exit the wholesale mortgage
production business. The exit plan should be completed near the end of the first
quarter of 2001. UBAN Associates, based in State College, is a registered
investment advisory firm that provides investment portfolio and asset/liability
management services to small and mid-sized financial institutions. United Life
is a captive insurance company that engages in underwriting as a reinsurer of
credit life and disability insurance.
On April 1, 2000, the Company successfully completed the spin-off of its
Pittsburgh based Three Rivers Bank ("TRB") subsidiary to its shareholders. To
facilitate an orderly transition, the Company and Three Rivers Bank entered into
a Services Agreement whereby the Company is continuing to provide certain
services such as asset/liability management on an outsourced basis to Three
Rivers Bank. The cost and related expense associated with providing these
services is being paid by Three Rivers Bank at a fair market value rate.
Intercompany accounts and transactions have been eliminated in preparing
the consolidated financial statements. The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
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:
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
40
42
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate appreciation (depreciation) excluded from income and credited
(charged) to a separate component of stockholders' 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. The
Company currently has all securities classified as available for sale due to a
prior year tainting of its held to maturity ("htm") portfolio. The Company
expects the time period restriction for the htm portfolio to end in the third
quarter of 2001. 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 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
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).
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 fixed-rate residential mortgage loans are classified as
"held for sale," if it is management's intent to sell these residential mortgage
loans. The residential mortgage loans held for sale are carried at the lower of
aggregate cost or market value.
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 specific reserve established for these criticized and impaired
41
43
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 affecting specific borrowers or segments of borrowers that
may not yet be fully reflected in the information that the Company uses
for arriving at reserves for a specific loan or portfolio segment.
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.
After completion of this process, a formal meeting of the Loan Loss Reserve
Committee is held to evaluate the adequacy of the reserve. 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 a 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.
42
44
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PURCHASED AND ORIGINATED 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. This writedown is recorded in the line item on the Consolidated
Statement of Income titled "Impairment charge for mortgage servicing rights".
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 likely that the
value of these assets will decrease if prepayments occur at greater than the
expected rate.
TRUST FEES:
All trust fees are recorded on the cash basis which approximates the
accrual basis for such income.
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.
COMPREHENSIVE INCOME:
In January 1998, the Company adopted SFAS #130, "Reporting Comprehensive
Income," which establishes 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 balances of other accumulated
comprehensive (loss) income were $(3,880,000), $(35,174,000) and $2,584,000 at
December 31, 2000, 1999 and 1998, respectively.
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 $787,000 in income tax
payments in 2000; $4,927,000 in 1999; and $6,695,000 in 1998. The Company made
total interest expense payments of $75,867,000 in 2000; $97,586,000 in 1999; and
$93,990,000 in 1998.
INCOME TAXES:
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.
43
45
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
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.
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 STANDARDS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards #133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS #133) which establishes accounting and
reporting standards requiring all derivative instruments be recorded in the
balance sheet as either an asset or liability measured at their fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. SFAS #133 also requires that a company must formally document,
44
46
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
designate and assess the effectiveness of transactions that receive hedge
accounting. SFAS #133 will eliminate hedge accounting for the Company's interest
rate cap agreement, requiring the Company to account for the interest rate cap
agreement at its fair value with all prospective changes reported in earnings.
SFAS #133 provides that the Company report a transition adjustment as part of a
cumulative effect type of adjustment of accumulated other comprehensive income.
SFAS #133 was adopted on January 1, 2001, resulting in the recording of current
liabilities of $1,270,000, long-term liabilities of $290,000, and a decrease in
other comprehensive income of $1,000,000, net of tax. The Company expects to
recognize net current liabilities of $10,000 into earnings in the next 12
months.
The FASB has also issued SFAS #140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities -- A Replacement of FASB
Statement #125." It revises criteria for accounting for securitizations, other
financial-asset transfers, and collateral and introduces new disclosures, but
otherwise carries forward most of SFAS #125's provisions without amendment. This
statement is effective for reporting periods beginning after March 31, 2001.
However, the disclosure provisions are currently effective for fiscal years
ending after December 15, 2000. Adoption of SFAS #140 will have no impact on the
Company's financial position or results of operations.
2. CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 2000, and 1999, included $5,710,000
and $18,448,000, 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
--------------
2000 1999
----- -----
(IN THOUSANDS)
Total....................................................... $763 $758
==== ====
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:
AT DECEMBER 31, 2000
---------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- --------
(IN THOUSANDS)
U.S. TREASURY...................................... $ 10,820 $ 3 $ (11) $ 10,812
U.S. AGENCY........................................ 35,507 4 (219) 35,292
STATE AND MUNICIPAL................................ 39,398 14 (1,052) 38,360
U.S. AGENCY MORTGAGE-BACKED SECURITIES............. 419,669 1,014 (4,618) 416,065
OTHER SECURITIES(1)................................ 50,793 5 (1,095) 49,703
-------- ------ ------- --------
TOTAL.............................................. $556,187 $1,040 $(6,995) $550,232
======== ====== ======= ========
45
47
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment securities available for sale:
AT DECEMBER 31, 1999
-------------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
U.S. Treasury................................... $ 15,855 $ 2 $ (135) $ 15,722
U.S. Agency..................................... 43,599 -- (2,917) 40,682
State and municipal............................. 156,256 745 (7,529) 149,472
U.S. Agency mortgage-backed securities.......... 943,474 637 (43,401) 900,710
Other securities(1)............................. 82,568 48 (1,867) 80,749
---------- ------ -------- ----------
Total........................................... $1,241,752 $1,432 $(55,849) $1,187,335
========== ====== ======== ==========
(1) Other investment securities include corporate notes and bonds, asset-backed
securities, and equity securities.
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.
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, 2000, 96.5% of the portfolio
was rated "AAA" as compared to 97.3% at December 31, 1999. Less than 3.1% of the
portfolio was rated below "A" or unrated on December 31, 2000.
The book value of securities pledged to secure public and trust deposits,
as required by law, was $313,602,000 at December 31, 2000, and $788,622,000 at
December 31, 1999. The Company realized $914,000 and $624,000 of gross
investment security gains and $1,866,000 and $525,000 of gross investment
security losses on available for sale securities in 2000 and 1999, respectively.
The Company realized $355,000 of gross investment security gains and $18,000 of
gross investment security losses on held to maturity securities in 1999.
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, 2000. 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, 2000, the Company's consolidated investment securities portfolio
had a modified duration of approximately 3.16 years.
46
48
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment securities available for sale:
AT DECEMBER 31, 2000
-------------------------------------------------------------------------------------
AFTER 1 YEAR AFTER 5 YEARS
BUT WITHIN BUT WITHIN
WITHIN 1 YEAR 5 YEARS 10 YEARS AFTER 10 YEARS TOTAL
-------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------------- -------------- --------------- --------------- ---------------
(IN THOUSANDS, EXCEPT YIELDS)
BOOK VALUE
U.S. TREASURY......................... $10,820 5.63% $ -- --% $ -- --% $ -- --% $ 10,820 5.63%
U.S. AGENCY........................... -- -- 500 6.10 34,315 6.75 692 6.47 35,507 6.73
STATE AND MUNICIPAL................... 250 5.03 2,673 4.68 5,696 5.10 30,779 4.49 39,398 4.60
U.S. AGENCY MORTGAGE-BACKED
SECURITIES.......................... 1,682 5.53 26,912 7.15 259,269 6.58 131,806 6.94 419,669 6.73
OTHER SECURITIES(1)................... 34,782 7.12 3,053 7.06 12,958 7.34 -- -- 50,793 7.17
------- ---- ------- ---- -------- ---- -------- ---- -------- ----
TOTAL INVESTMENT SECURITIES AVAILABLE
FOR SALE............................ $47,534 6.71% $33,138 6.92% $312,238 6.60% $163,277 6.47% $556,187 6.60%
======= ==== ======= ==== ======== ==== ======== ==== ======== ====
MARKET VALUE
U.S. TREASURY......................... $10,812 $ -- $ -- $ -- $ 10,812
U.S. AGENCY........................... -- 499 34,096 697 35,292
STATE AND MUNICIPAL................... 251 2,679 5,632 29,798 38,360
U.S. AGENCY MORTGAGE-BACKED
SECURITIES.......................... 1,672 27,257 256,217 130,919 416,065
OTHER SECURITIES(1)................... 34,782 3,029 11,892 -- 49,703
------- ------- -------- -------- --------
TOTAL INVESTMENT SECURITIES AVAILABLE
FOR SALE............................ $47,517 $33,464 $307,837 $161,414 $550,232
======= ======= ======== ======== ========
- ---------------
(1) Other investment securities include corporate notes and bonds, asset-backed
securities, and equity securities.
5. LOANS
The loan portfolio of the Company consisted of the following:
AT DECEMBER 31
----------------------
2000 1999
-------- ----------
(IN THOUSANDS)
Commercial.................................................. $116,615 $ 152,042
Commercial loans secured by real estate..................... 193,912 406,927
Real estate-mortgage........................................ 242,370 452,507
Consumer.................................................... 35,749 70,983
-------- ----------
Loans....................................................... 588,646 1,082,459
Less: Unearned income....................................... 8,012 8,408
-------- ----------
Loans, net of unearned income............................... $580,634 $1,074,051
======== ==========
Real estate construction loans comprised 3.0% and 4.5% of total loans net
of unearned income at December 31, 2000 and 1999, respectively. The Company has
no direct credit exposure to foreign countries. Most of the Company's loan
activity is with customers located in the western Pennsylvania geographic area.
As of December 31, 2000, 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
47
49
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
risk. These loans totaled $2,671,000 and $4,779,000 at December 31, 2000 and
1999, respectively. An analysis of these related party loans follows:
YEAR ENDED DECEMBER 31
----------------------
2000 1999
--------- ---------
(IN THOUSANDS)
Balance January 1........................................... $ 4,779 $ 2,285
New loans................................................... 13,507 16,178
Payments.................................................... (15,615) (13,684)
-------- --------
Balance December 31......................................... $ 2,671 $ 4,779
======== ========
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses follows:
YEAR ENDED DECEMBER 31
-----------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Balance January 1........................................... $10,350 $10,725 $12,113
Reduction due to spin-off of TRB............................ (5,028) -- --
Provision for loan losses................................... 2,096 1,900 600
Recoveries on loans previously charged-off.................. 680 728 530
Loans charged-off........................................... (2,162) (3,003) (2,518)
------- ------- -------
Balance December 31......................................... $ 5,936 $10,350 $10,725
======= ======= =======
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).
The following table presents information concerning non-performing assets:
AT DECEMBER 31
-------------------------------------------
2000 1999 1998 1997 1996
------ ------- ------ ------ ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Non-accrual loans................................ $5,803 $ 4,928 $5,206 $6,450 $6,365
Loans past due 90 days or more................... -- 1,305 1,579 1,601 2,043
Other real estate owned.......................... 158 7,126 1,451 807 263
------ ------- ------ ------ ------
Total non-performing assets...................... $5,961 $13,359 $8,236 $8,858 $8,671
====== ======= ====== ====== ======
Total non-performing assets as a percent of loans
and loans held for sale, net of unearned
income, and other real estate owned............ 1.01% 1.21% 0.77% 0.89% 0.92%
====== ======= ====== ====== ======
The Company is unaware of any additional potential problem 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.
48
50
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For impaired loans, the measurement of impairment may be based upon: 1) the
present value of expected future cash flows discounted at the loan's effective
interest rate; 2) the observable market price of the impaired loan; or 3) the
fair value of the collateral of a collateral dependent loan.
The Company had loans totalling $3,165,000 and $2,169,000 being
specifically identified as impaired and a corresponding allocation reserve of
$600,000 and $49,000 at December 31, 2000 and 1999, respectively. The average
outstanding balance for loans being specifically identified as impaired was
$2,580,000 for 2000 and $4,610,000 for 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 2000 or 1999.
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,
---------------------------------------
2000 1998 1998 1997 1996
----- ---- ----- ----- ----
(IN THOUSANDS)
Interest income due in accordance with original
terms............................................ $ 464 $494 $ 367 $ 472 $560
Interest income recorded........................... (139) (20) (134) (132) (75)
----- ---- ----- ----- ----
Net reduction in interest income................... $ 325 $474 $ 233 $ 340 $485
===== ==== ===== ===== ====
8. PREMISES AND EQUIPMENT
An analysis of premises and equipment follows:
AT DECEMBER 31,
------------------
2000 1999
------- -------
(IN THOUSANDS)
Land........................................................ $ 1,714 $ 2,131
Premises.................................................... 19,913 26,730
Furniture and equipment..................................... 15,531 22,052
Leasehold improvements...................................... 650 2,709
------- -------
Total at cost............................................... 37,808 53,622
Less: Accumulated depreciation.............................. 24,278 34,685
------- -------
Net book value.............................................. $13,530 $18,937
======= =======
49
51
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
AT DECEMBER 31, 2000
----------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
BALANCE.................................................. $ 7,765 $ 331 $ 42,989
MAXIMUM INDEBTEDNESS AT ANY MONTH END.................... 59,715 1,113 213,826
AVERAGE BALANCE DURING YEAR.............................. 25,453 627 93,104
AVERAGE RATE PAID FOR THE YEAR........................... 6.10% 3.38% 5.57%
AVERAGE RATE ON YEAR END BALANCE......................... 6.56 3.00 5.10
AT DECEMBER 31, 1999
----------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
Balance.................................................. $15,300 $ 1,069 $ 84,874
Maximum indebtedness at any month end.................... 65,600 37,087 218,204
Average balance during year.............................. 56,396 10,548 148,668
Average rate paid for the year........................... 5.13% 4.69% 4.99%
Average rate on year end balance......................... 4.75 3.00 3.07
AT DECEMBER 31, 1998
----------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
Balance.................................................. $63,705 $37,700 $129,003
Maximum indebtedness at any month end.................... 65,900 41,602 191,835
Average balance during year.............................. 51,112 39,224 98,988
Average rate paid for the year........................... 5.51% 5.41% 4.84%
Average rate on year end balance......................... 5.58 5.16 3.44
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 $7,784,000 outstanding balance on a $20 million mortgage
warehouse line of credit at Standard Mortgage Corporation. 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 May 31,
2001, is secured by Standard Mortgage Corporation's inventory, servicing rights,
and commitments.
Compensating balances held by the lender are used in determining the
interest rates charged on the mortgage warehouse line 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
50
52
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 92 days at the end of 2000, 89 days at the end of 1999
and 62 days at the end of 1998.
10. DEPOSITS
The following table sets forth the balance of the Company's deposits:
AT DECEMBER 31
------------------------------------
2000 1999 1998
-------- ---------- ----------
(IN THOUSANDS)
Demand:
Non-interest bearing.................................... $ 89,057 $ 160,253 $ 166,701
Interest bearing........................................ 46,440 88,661 92,060
Savings................................................. 90,886 162,653 167,167
Money market............................................ 135,151 177,935 172,807
Certificates of deposit in denominations of $100,000 or
more.................................................. 21,010 90,921 39,443
Other time.............................................. 276,520 550,518 538,113
-------- ---------- ----------
Total deposits.......................................... $659,064 $1,230,941 $1,176,291
======== ========== ==========
Interest expense on deposits consisted of the following:
YEAR ENDED DECEMBER 31
-----------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Interest bearing demand..................................... $ 570 $ 928 $ 889
Savings..................................................... 1,775 2,799 2,617
Money market................................................ 6,650 6,302 6,041
Certificates of deposit in denominations of $100,000 or
more...................................................... 2,223 2,596 2,323
Other time.................................................. 18,051 28,525 29,021
------- ------- -------
Total interest expense...................................... $29,269 $41,150 $40,891
======= ======= =======
The following table sets forth the balance of other time deposits maturing
in the periods presented:
YEAR
- ---- (IN THOUSANDS)
2001........................................................ $150,290
2002........................................................ 69,932
2003........................................................ 33,858
2004........................................................ 6,400
2005 and after.............................................. 16,040
51
53
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. ADVANCES FROM FEDERAL HOME LOAN BANK, GUARANTEED JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES AND LONG-TERM DEBT
Advances from the Federal Home Loan Bank consist of the following:
AT DECEMBER 31, 2000
-------------------------
WEIGHTED
MATURING AVERAGE YIELD BALANCE
- -------- ------------- --------
(IN THOUSANDS)
Overnight................................................... 6.64% $ 29,365
2001........................................................ 6.39 171,250
2002........................................................ 6.14 12,500
2003........................................................ 6.14 53,750
2004........................................................ -- --
2005 and after.............................................. 6.18 175,851
---- --------
Total advances.............................................. 6.29 413,351
---- --------
Total FHLB Borrowings....................................... 6.31% $442,716
==== ========
AT DECEMBER 31, 1999
---------------------------
WEIGHTED
MATURING AVERAGE YIELD BALANCE
- -------- ------------- ----------
(IN THOUSANDS)
Overnight................................................... 4.06% $ 45,375
2000........................................................ 5.25 758,750
2001........................................................ 8.22 10,126
2002........................................................ 5.84 183,500
2003........................................................ 6.61 3,750
2004 and after.............................................. 6.71 873
---- ----------
Total advances.............................................. 5.40 956,999
---- ----------
Total FHLB borrowings....................................... 5.34% $1,002,374
==== ==========
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 to the
Federal Home Loan Bank of Pittsburgh.
GUARANTEED JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES:
On April 28, 1998, the Company completed a $34.5 million public offering of
8.45% Trust Preferred Securities, which represent undivided beneficial interests
in the assets of a Delaware business trust, USBANCORP Capital Trust I. The Trust
Preferred Securities will mature on September 30, 2028, and are callable at par
at the option of the Company after September 30, 2003. Proceeds of the issue
were invested by USBANCORP Capital Trust I in Junior Subordinated Debentures
issued by USBANCORP, Inc. Net proceeds from the $34.5 million offering were used
for general corporate purposes, including the repayment of debt, the repurchase
of USBANCORP common stock, and investments in and advances to the Company's
subsidiaries. Unamortized deferred issuance costs associated with the Trust
Preferred Securities amounted to $1.2 million as of December 31, 2000, and are
being amortized on a straight line basis over the term of the issue. The Trust
Preferred securities are listed on NASDAQ under the symbol "UBANP."
Upon the occurrence of certain events, specifically a tax event or a
capital treatment event, the Company may redeem in whole, but not in part, the
Guaranteed Junior Subordinated Deferrable Interest Debentures
52
54
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prior to September 30, 2028. A tax event basically means that the interest paid
by the Company on the subordinated debentures will no longer be deductible for
federal income tax purposes. A capital treatment event means that the Trust
Preferred Securities no longer qualify as Tier 1 capital for purposes of the
capital adequacy guidelines of the Federal Reserve. Proceeds from any redemption
of the subordinated debentures would cause mandatory redemption of the Trust
Preferred Securities.
LONG-TERM DEBT:
The Company's long-term debt consisted of the following:
AT DECEMBER 31
----------------
2000 1999
------ ------
(IN THOUSANDS)
Bank note................................................... $1,644 $4,688
Collateralized mortgage obligation.......................... -- 1,582
Other....................................................... -- 830
------ ------
Total long-term debt........................................ $1,644 $7,100
====== ======
The bank note payable by Standard Mortgage Corporation is a $7.5 million
non-revolving commercial loan commitment which is payable monthly in fixed
principal installments of $156,250 through November 25, 2001. This note replaces
all previous loans incurred by Standard Mortgage Corporation of Georgia.
The collateralized mortgage obligation was issued through Community First
Capital Corporation ("CFCC"), a wholly-owned, single-purpose finance subsidiary
of Three Rivers Bank. In 1988, Three Rivers Bank transferred Federal Home Loan
Mortgage Corporation ("FHLMC") securities with a book value of approximately
$31,500,000 to CFCC which then collateralized the issuance of bonds with a par
value of $27,787,000.
All debt will mature in 2001.
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. Many of the Company's financial instruments, however,
lack an available trading market 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, 2000 and 1999,
were as follows:
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
2000 1999
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
Investment securities..................... $550,232 $550,232 $1,187,335 $1,187,335
======== ======== ========== ==========
53
55
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
2000 1999
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
Deposits with stated maturities............. $302,575 $297,531 $596,678 $641,439
Short-term borrowings....................... 292,461 292,461 846,744 646,744
All other borrowings........................ 212,045 208,119 452,909 453,098
======== ======== ======== ========
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.
2000 1999
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
Deposits with no stated maturities.......... $361,533 $361,533 $589,502 $589,502
======== ======== ======== ========
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.
2000 1999
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
Net loans (including loans held for
sale)................................... $600,796 $590,271 $1,091,552 $1,095,804
======== ======== ========== ==========
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. For further discussion see Note #1.
2000 1999
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
Purchased and originated mortgage servicing
rights.................................... $9,969 $9,911 $14,190 $13,510
====== ====== ======= =======
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, however, management believes the relationship value of these core
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 $39 million to $72 million less than their estimated fair value
shown at December 31, 2000. The estimated fair value of off-balance sheet
financial instruments, used for hedging purposes, is estimated by financial
modeling performed by an independent third party. These values represent the
estimated amount the Company would receive or pay, to terminate the agreements,
54
56
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
considering current interest rates, as well as the creditworthiness of the
counterparties. At December 31, 2000, the notional value of the Company's
off-balance sheet financial instruments (interest rate swaps and interest rate
cap) totalled $220 million with an estimated fair value liability of
approximately $(1,556,000). There is no material difference between the notional
amount and the estimated fair value of the remaining off-balance sheet items
which total $112.0 million at December 31, 2000, and are primarily comprised of
unfunded loan commitments which are generally priced at market at the time of
funding.
Management believes that the disclosed fair values between financial
institutions may not be comparable due to the wide range of assumptions,
methodologies and other uncertainties in estimating fair values, 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
---------------------------
2000 1999 1998
------- ------ ------
(IN THOUSANDS)
Current..................................................... $ (535) $5,403 $6,023
Deferred.................................................... (943) 1,519 1,632
------- ------ ------
Income tax (benefit) provision.............................. $(1,478) $6,922 $7,655
======= ====== ======
The reconciliation between the federal statutory tax rate and the Company's
effective consolidated income tax rate is as follows:
YEAR ENDED DECEMBER 31
-------------------------------------------------------
2000 1999 1998
--------------- ---------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ---- ------- ----- ------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
Tax expense based on federal
statutory rate..................... $ 84 N/M $ 9,570 35.0% $10,079 35.0%
State income taxes................... -- " 13 0.1 39 0.1
Tax exempt income.................... (1,717) " (3,359) (12.3) (3,069) (10.7)
Goodwill and acquisition related
costs.............................. 469 " 469 1.7 469 1.6
Non-deductible spin-off charges...... 455 " -- -- -- --
Reversal of tax liability............ (600) " -- -- -- --
Reversal of valuation allowance...... (325) " -- -- -- --
Other................................ 156 " 229 0.8 137 0.6
------- --- ------- ----- ------- -----
Total (benefit) provision for income
taxes.............................. $(1,478) N/M $ 6,922 25.3% $ 7,655 26.6%
======= === ======= ===== ======= =====
- ---------------
N/M -- not meaningful.
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 the income tax provision of
55
57
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the principal timing differences and the tax effect of each (bracketed amounts
represent future income tax return deductions):
YEAR ENDED DECEMBER 31
---------------------------
2000 1999 1998
------- ------ ------
(IN THOUSANDS)
Provision (benefit) for possible loan losses................ $ (178) $ 131 $ 486
Net operating loss and wholesale exit charge................ (1,773) -- --
Lease accounting............................................ 1,380 1,356 769
Accretion (amortization) of discounts on securities, net.... (126) 506 299
Core deposit and mortgage servicing intangibles............. (106) (351) 106
Deferred loan fees.......................................... 42 89 82
Other, net.................................................. (182) (212) (110)
------- ------ ------
Total............................................. $ (943) $1,519 $1,632
======= ====== ======
At December 31, 2000 and 1999, 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
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
Deferred Assets:
Provision for loan losses................................. $ 2,042 $ 3,623
Net operating loss and wholesale exit charge.............. 1,773 --
Unrealized investment security losses..................... 2,087 19,046
Deferred loan fees........................................ 82 320
Other..................................................... 798 603
-------- --------
Total assets...................................... 6,782 23,592
Deferred Liabilities:
Accumulated depreciation.................................. (595) (534)
Accretion of discount..................................... (1,898) (3,418)
Lease accounting.......................................... (6,080) (4,700)
Core deposit and mortgage servicing intangibles........... (1,791) (1,897)
Other..................................................... (4) (405)
-------- --------
Total liabilities................................. (10,368) (10,954)
Valuation allowance......................................... -- (325)
-------- --------
Net deferred (liability) asset.............................. $ (3,586) $ 12,313
======== ========
56
58
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The change in the net deferred asset (liability) during 2000 and 1999 was
attributed to the following:
YEAR ENDED DECEMBER 31
-----------------------
2000 1999
---------- ---------
(IN THOUSANDS)
Investment write-downs (ups) due to SFAS #115, charge to
equity.................................................... $ (7,737) $20,353
Transfer to TRB............................................. (9,430) --
Reversal of valuation allowances............................ 325 --
Deferred benefit (provision) for income taxes............... 943 (1,519)
-------- -------
Net (decrease) increase..................................... $(15,899) $18,834
======== =======
14. PENSION AND PROFIT SHARING PLANS
The Company has 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 plans 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 Company's 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. Note that the 2000 data
contains no information on the Three Rivers Bank Pension Plan due to the April
1, 2000, spin-off of Three Rivers Bank from the Company.
Pension Benefits:
YEAR ENDED DECEMBER 31
-----------------------
2000 1999
--------- ---------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
Change in benefit obligation:
Benefit obligation at beginning of year..................... $ 7,641 $14,661
Service cost................................................ 458 1,283
Interest cost............................................... 635 1,023
Additional liabilities due to transfer between U.S. Bank and
TRB....................................................... 151 --
Deferred asset gain (loss).................................. 1,266 (1,376)
Benefits paid............................................... (653) (1,484)
Expenses paid............................................... (67) (73)
------- -------
Benefit obligation at end of year........................... $ 9,431 $14,034
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year.............. $ 8,548 $14,323
Additional assets due to transfer between U.S. Bank and
TRB....................................................... 298 --
Actual return on plan assets................................ (370) 142
Employer contributions...................................... 739 1,534
Benefits paid............................................... (653) (1,484)
Expenses paid............................................... (67) (73)
------- -------
Fair value of plan assets at end of year.................... $ 8,495 $14,442
======= =======
57
59
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31
-----------------------
2000 1999
--------- ---------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
Funded status of the plan (underfunded) overfunded.......... $ (936) $ 408
Unrecognized transition obligation.......................... (360) (219)
Unrecognized prior service cost............................. (210) 113
Unrecognized actuarial loss (gain).......................... 1,672 (151)
------- -------
Net prepaid benefit cost.................................... $ 166 $ 151
======= =======
Components of net periodic benefit cost
Service cost................................................ $ 458 $ 1,283
Interest cost............................................... 635 1,023
Expected return on plan assets.............................. (702) (1,194)
Amortization of prior year service cost..................... (17) (14)
Amortization of transition (asset) obligation............... (30) 27
Recognized net actuarial losses............................. -- 2
------- -------
Net periodic benefit cost................................... $ 344 $ 1,127
======= =======
Weighted-average assumptions
Discount rate............................................... 7.25% 7.50%
Expected return on plan assets.............................. 8.00 8.00
Rate of compensation increase............................... 3.50 3.50
In addition, U.S. Bank has a trusteed, deferred profit sharing plan with
contributions made by U.S. Bank based upon income as defined by 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 $111,000 in 2000 and $1,122,000
in 1999. 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.
Except for the above pension benefits, 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, 2000, is as follows:
FUTURE MINIMUM
YEAR LEASE PAYMENTS
- ---- --------------
(IN THOUSANDS)
2001........................................................ $1,397
2002........................................................ 1,420
2003........................................................ 1,060
2004........................................................ 578
2005 and thereafter (in total).............................. 2,165
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 $577,000,
$634,000 and $868,000, in 2000, 1999, and 1998, respectively.
58
60
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Because 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 $111,966,000 and standby letters of
credit of $12,938,000 as of December 31, 2000.
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. STOCK COMPENSATION PLANS
In 1991, the Company's Board of Directors adopted an Incentive Stock Option
Plan authorizing the grant of options covering 384,000 shares of common stock.
In April 1995 and in April 1998, the Company amended the Plan to increase the
number of shares available for issuance thereunder which presently stands at
1,455,000 shares. 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." 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.
Generally, under the Plan 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.
Had compensation cost
59
61
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for these plans been determined consistent with SFAS #123, "Accounting for
Stock-Based Compensation," the Company's net income and earnings per share would
have changed to the following pro forma amounts:
YEAR ENDED DECEMBER 31
-------------------------------------
2000 1999 1998
--------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income:
As reported............................................... $1,716 $20,421 $21,144
Pro forma................................................. 1,657 20,381 20,468
Basic earnings per share:
As reported............................................... 0.13 1.53 1.51
Pro forma................................................. 0.12 1.53 1.46
Diluted earnings per share:
As reported............................................... 0.13 1.52 1.48
Pro forma................................................. 0.12 1.52 1.44
====== ======= =======
Because the 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.
A summary of the status of the Company's Stock Option Plan at December 31,
2000, 1999, and 1998, and changes during the years then ended is presented in
the table and narrative following:
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
2000 1999 1998
----------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- ----- -------- ------ -------- ------
Outstanding at beginning of
year............................ 369,331 $6.43 445,903 $11.09 559,038 $11.35
Granted........................... 389,687 4.86 9,100 17.22 15,600 26.30
Exercised......................... (25,147) 4.91 (56,170) 7.85 (70,232) 8.35
Forfeited......................... (202,493) 5.86 (29,502) 10.21 -- 20.89
Outstanding at end of year........ 531,378 5.54 369,331 10.71 445,903 11.09
Exercisable at end of year........ 148,524 7.66 347,034 10.05 349,303 10.44
Weighted average fair value of
options granted since 1-1-95.... $5.56 $ 7.03 $ 7.86
===== ====== ======
A total of 148,524 of the 531,378 options outstanding at December 31, 2000,
have exercise prices between $4.39 and $15.69, with a weighted average exercise
price of $7.66 and a weighted average remaining contractual life of 5.0 years.
All of these options are exercisable. The remaining 382,854 options have
exercise prices between $4.02 and $15.69, with a weighted average exercise price
of $5.08 and a weighted average remaining contractual life of 9.5 years. During
2000 nine option grants totalling 389,687 shares were issued, in 1999 two option
grants totalling 9,100 shares were issued, compared to two option grant
totalling 15,600 shares in 1998. 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 2000, 1999, and 1998, respectively:
risk-free interest rates ranging from 5.69% to 6.61% for 2000 options, 5.29% and
4.49% for 1999 options, and 5.53% and 5.43% for the 1998 options; expected
dividend yields of 8.50% for 2000 options, 3.75% and 3.00% for 1999 options, and
2.50% for the 1998 options: expected lives of 7.0 years for all the 2000, 1999,
and 1998 options; expected volatility ranging from 23.09% to 29.20% for 2000
options, 23.00% and 21.69% for 1999 options, and 18.81% and 18.85% for the 1998
options.
60
62
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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) make optional cash payments of not less
than $10 and up to a maximum of $2,000 per month and continue to receive regular
dividend payments on his or her other shares. A participant may withdraw from
the Plan at any time.
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, 2000, the Company had 666,080 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
$13.33, 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. 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
$0.0033 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
Agreement 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 newly authorized Series C Junior Participating Preferred Stock at an
exercise price of $21.67. The rights attached to shares of USBANCORP Common
Stock outstanding on March 15, 1995, and will expire in ten years.
20. 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 $11.0 million of goodwill and $9.0 million of core deposit
intangible assets on its balance sheet. The majority of these intangible assets
came from the 1994 Johnstown Savings Bank acquisition, and the 1999 acquisition
of two First Western Branches.
61
63
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is amortizing core deposit intangibles over periods ranging
from five to ten years while goodwill is being amortized over a 15 year life.
The straight-line method of amortization is being used for both of these
categories of intangibles. The amortization expense of these intangible assets
reduced 2000 diluted earnings per share by $0.18. 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)
2001........................................................ $2,731
2002........................................................ 2,731
2003........................................................ 2,731
2004........................................................ 2,306
2005 and after.............................................. 9,559
======
A reconciliation of the Company's intangible asset balances for 2000 and
1999 is as follows:
AT DECEMBER 31
------------------
2000 1999
------- -------
(IN THOUSANDS)
Balance January 1........................................... $25,655 $18,697
Reduction due to spin-off of TRB............................ (2,739) --
Additions due to branch acquisitions........................ -- 10,093
Amortization expense........................................ (2,858) (3,135)
------- -------
Balance December 31......................................... $20,058 $25,655
======= =======
Goodwill and other intangible assets are reviewed for possible impairment
if events or changed circumstances may affect the underlying basis of the asset.
The Company uses an estimate of the undiscounted future earnings over the
remaining life of the goodwill and other intangibles in measuring whether these
assets are recoverable.
21. 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 Company's off-balance sheet derivative transactions are as follows:
BORROWED FUNDS HEDGES:
The Company had 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 90 days are being used to fund
fixed-rate agency mortgage-backed securities with durations ranging from three
to five years. Under these swap agreements, the Company pays a fixed-rate of
interest and receives a floating-rate which resets either monthly or quarterly.
For the $40 million interest rate cap, the Company only receives
62
64
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payment from the counterparty if the federal funds rate goes above the 6.25%
strike rate. The following table summarizes the interest rate swap and cap
transactions which impacted the Company's 2000 performance:
INCREASE
FIXED FLOATING (DECREASE)
NOTIONAL START TERMINATION RATE RATE REPRICING OF INTEREST
AMOUNT DATE DATE PAID RECEIVED FREQUENCY EXPENSE
- ------------ -------- ----------- ----- -------- --------- -----------
$120,000,000 5-1-99 4-30-00 5.00% 5.75% Expired $(318,468)
100,000,000 10-25-99 10-25-00 6.17 6.22 Expired (146,744)
40,000,000 4-11-00 4-13-01 6.25 6.48 Monthly 50,590
50,000,000 10-25-99 10-25-01 6.41 6.42 Quarterly 27,072
50,000,000 10-25-99 10-25-01 6.42 6.42 Quarterly (3,752)
80,000,000 4-13-00 4-15-02 6.93 6.60 Quarterly 192,363
---------
$(198,939)
=========
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 December 31, 2000, or December 31, 1999.
22. 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 retail banking, commercial lending, mortgage banking, trust and
financial services, other fee based businesses 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.
Retail banking includes the deposit-gathering branch franchise along with
lending to both individuals and small businesses. Lending activities include
residential mortgage loans, direct consumer loans, and small business commercial
loans. Commercial lending to businesses includes commercial loans, commercial
real-estate loans, and commercial leasing (excluding certain small business
lending through the branch network). Mortgage banking includes the servicing of
mortgage loans and the origination of residential mortgage loans through a
wholesale broker network. The trust segment has three primary business
divisions, institutional trust, personal trust, and financial services.
Institutional trust products and services include 401(k) plans, defined benefit
and defined contribution employee benefit plans, individual retirement accounts,
and collective investment funds for trade union pension funds. Personal trust
products and services include personal portfolio investment management, estate
planning and administration, custodial services and pre-need trusts. Financial
services includes the sale of mutual funds, annuities, and insurance products.
Other fee based businesses include UBAN Associates, United Life, and several
other smaller fee generating business lines such as a debt collection agency.
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.
63
65
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The contribution of the major business segments to the consolidated results
for the full years of 2000 and 1999 were as follows:
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE
RETAIL BANKING LENDING BANKING TRUST INVESTMENT/PARENT
------------------- ------------------- ----------------- --------------- ---------------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- ------- ------- ------ ------ -------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
Net interest
income............. $ 25,206 $ 35,273 $ 7,421 $ 12,725 $ 937 $ 1,163 $ 252 $ 126 $ 1,410 $ 14,400
Non-interest
income............. 5,153 10,686 820 784 4,095 5,865 5,313 5,271 218 633
Non-interest
expense............ 26,824 40,095 5,800 6,627 8,063 7,045 4,106 4,004 6,195 2,051
-------- -------- -------- -------- ------- ------- ------ ------ -------- ----------
Income (loss) before
income taxes....... 3,535 5,864 2,441 6,882 (3,031) (17) 1,459 1,393 (4,567) 12,982
Income taxes......... 715 1,504 215 1,809 (1,213) 13 308 344 (1,636) 3,186
-------- -------- -------- -------- ------- ------- ------ ------ -------- ----------
Net income (loss).... $ 2,820 $ 4,360 $ 2,226 $ 5,073 $(1,818) $ (30) $1,151 $1,049 $ (2,931) $ 9,796
======== ======== ======== ======== ======= ======= ====== ====== ======== ==========
Average common
equity............. $ 19,065 $ 46,511 $ 21,240 $ 26,943 $ 7,542 $ 8,320 $3,274 $3,650 $ 28,643 $ 45,042
Risk-adjusted return
on equity.......... 14.8% 9.4% 10.5% 18.8% (24.1)% (0.4)% 35.2% 28.7% (10.2)% 21.7%
Total assets......... $409,786 $723,926 $263,828 $498,288 $25,524 $53,312 $1,795 $1,693 $550,232 $1,187,335
======== ======== ======== ======== ======= ======= ====== ====== ======== ==========
YEAR ENDED DECEMBER 31
-----------------------------------------
OTHER FEE
BASED TOTAL
--------------- -----------------------
2000 1999 2000 1999
------ ------ ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
Net interest
income............. $ 137 $ 97 $ 35,363 $ 63,784
Non-interest
income............. 1,010 1,135 16,609 24,374
Non-interest
expense............ 746 993 51,734 60,815
------ ------ ---------- ----------
Income (loss) before
income taxes....... 401 239 238 27,343
Income taxes......... 133 66 (1,478) 6,922
------ ------ ---------- ----------
Net income (loss).... $ 268 $ 173 $ 1,716 $ 20,421
====== ====== ========== ==========
Average common
equity............. $1,660 $1,462 $ 81,424 $ 131,928
Risk-adjusted return
on equity.......... 16.1% 11.8% 2.1% 15.5%
Total assets......... $3,096 $2,925 $1,254,261 $2,467,479
====== ====== ========== ==========
64
66
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. As of December 31, 2000, the Company met all capital
adequacy requirements to which it was subject. As of December 31, 2000 and 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 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.
AS OF DECEMBER 31, 2000
--------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- -------- ------
(IN THOUSANDS, EXCEPT RATIOS)
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
CONSOLIDATED......................... $101,726 15.97% $50,958 8.00% $63,698 10.00%
U.S. BANK............................ 88,128 14.31 49,278 8.00 61,597 10.00
TIER 1 CAPITAL (TO RISK WEIGHTED
ASSETS) CONSOLIDATED................. 81,516 12.80 25,479 4.00 38,219 6.00
U.S. BANK............................ 82,293 13.36 24,639 4.00 36,958 6.00
TIER 1 CAPITAL (TO AVERAGE ASSETS)
CONSOLIDATED......................... 81,516 6.66 48,932 4.00 61,165 5.00
U.S. BANK............................ 82,293 6.92 47,602 4.00 59,503 5.00
======== ===== ======= ==== ======= =====
65
67
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1999
-------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------- --------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- --------- ------
(IN THOUSANDS, EXCEPT RATIOS)
Total Capital (to Risk Weighted Assets)
Consolidated.......................... $166,187 13.72% $96,872 8.00% $121,090 10.00%
U.S. Bank............................. 89,868 14.11 50,966 8.00 63,707 10.00
Three Rivers Bank..................... 73,836 12.97 45,540 8.00 56,925 10.00
Tier 1 Capital (to Risk Weighted Assets)
Consolidated.......................... 155,837 12.87 48,436 4.00 72,654 6.00
U.S. Bank............................. 84,614 13.28 25,483 4.00 38,224 6.00
Three Rivers Bank..................... 68,740 12.08 22,770 4.00 34,155 6.00
Tier 1 Capital (to Average Assets)
Consolidated.......................... 155,837 6.41 97,241 4.00 121,551 5.00
U.S. Bank............................. 84,614 6.42 52,681 4.00 65,851 5.00
Three Rivers Bank..................... 68,740 6.21 44,280 4.00 55,350 5.00
======== ===== ======= ==== ======== =====
24. BRANCH ACQUISITION
On February 12, 1999, the Company and First Western Bancorp, Inc. (First
Western), completed an agreement for the Company to purchase three branch
offices in western Pennsylvania from First Western in exchange for cash and one
branch from the Company. The Company's U.S. Bank subsidiary acquired the
Ebensburg and Barnesboro offices of First Western which are located in Cambria
County. Three Rivers Bank acquired the Kiski Valley office of First Western
located in Westmoreland County in exchange for Three Rivers Bank's Moon Township
office which was located in Allegheny County. On a net basis, the Company
acquired $91 million in deposits, $10 million in consumer loans and the related
fixed assets, leases, safe deposit box business and other agreements at the
branch offices. The Company paid a core deposit premium of approximately $10
million for the acquired deposits and purchased the consumer loans and fixed
assets.
25. TAX-FREE SPIN-OFF OF THREE RIVERS BANK
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 Corporation (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
Statement should be read in conjunction with the historical consolidated
financial statements and notes thereto. The USBANCORP pro forma condensed
consolidated income statement assumes that the dividend to shareholders occurred
on January 1, 1999. The pro forma condensed consolidated financial information
is presented for informational purposes only and does not purport to reflect the
results of operations of USBANCORP or Three Rivers Bancorp or the results of
operations that would have occurred had USBANCORP or Three Rivers Bancorp been
operated as a separate, independent company. No pro forma balance sheet as of
December 31, 2000, is presented since the spin-off transaction is reflected in
the Company's accompanying
66
68
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidated Balance Sheet. The pro forma adjustments to the accompanying
historical consolidated statements of income are set forth below.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE RIVERS
USBANCORP BANCORP USBANCORP
HISTORICAL HISTORICAL PRO FORMA
PERIOD ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2000 ADJUSTMENT 2000
------------ ------------ ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total interest income..................... $107,298 $18,100 $ -- $89,198
Total interest expense.................... 69,839 11,011 -- 58,828
-------- ------- ------ -------
Net interest income....................... 37,459 7,089 -- 30,370
Provision for loan losses................. 2,096 150 -- 1,946
-------- ------- ------ -------
Net interest income after provision for
loan losses............................. 35,363 6,939 -- 28,424
Total non-interest income................. 16,609 623 -- 15,986
Total non-interest expense................ 51,734 6,589 117(A) 45,262
-------- ------- ------ -------
Income before income taxes................ 238 973 (117) (852)
Provision for income taxes................ (1,478) (477) (35)(B) (1,036)
-------- ------- ------ -------
Net income................................ $ 1,716 $ 1,450 $ (82) $ 184
======== ======= ====== =======
Diluted earnings per share................ $ 0.13 -- $(0.11) $ 0.02
Average diluted shares outstanding........ 13,374 -- -- 13,374
Notes to unaudited pro forma condensed consolidated financial statements:
(A) To record the additional incremental expenses USBANCORP incurred
that were previously allocated to and paid by Three Rivers Bank.
(B) To record the income tax impact of the above expenses at the
statutory tax rate.
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69
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
26. PARENT COMPANY FINANCIAL INFORMATION
The Parent Company functions primarily as a coordinating and servicing unit
for all subsidiary entities. Provided services include general management,
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
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 651 $ 286
Equity investment in banking subsidiaries................... 98,249 145,110
Equity investment in non-banking subsidiaries............... 11,492 2,785
Guaranteed junior subordinated deferrable interest debenture
issuance costs............................................ 1,237 1,283
Other assets................................................ 1,716 1,481
-------- --------
TOTAL ASSETS................................................ $113,345 $150,945
======== ========
LIABILITIES
Short-term borrowings....................................... $ -- $ 3,500
Guaranteed junior subordinated deferrable interest
debentures................................................ 34,500 34,500
Other liabilities........................................... 438 141
-------- --------
TOTAL LIABILITIES........................................... 34,938 38,141
-------- --------
STOCKHOLDERS' EQUITY
Total stockholders' equity.................................. 78,407 112,804
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $113,345 $150,945
======== ========
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
-------------------------------
2000 1999 1998
------- -------- --------
(IN THOUSANDS)
INCOME
Inter-entity management and other fees...................... $ 3,223 $ 4,035 $ 3,961
Dividends from subsidiaries................................. 12,897 17,061 16,819
Interest and dividend income................................ 58 20 68
------- -------- --------
TOTAL INCOME................................................ 16,178 21,116 20,848
------- -------- --------
EXPENSE
Interest expense............................................ 3,101 3,304 2,348
Salaries and employee benefits.............................. 2,355 2,968 2,796
Other expense............................................... 3,617 1,397 1,462
------- -------- --------
TOTAL EXPENSE............................................... $ 9,073 $ 7,669 $ 6,606
------- -------- --------
(CONTINUED ON NEXT PAGE)
68
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USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31
-------------------------------
2000 1999 1998
------- -------- --------
(IN THOUSANDS)
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES.................................... $ 7,105 $ 13,447 $ 14,242
Benefit for income taxes.................................... 1,615 1,299 979
Equity in undistributed (losses) income of subsidiaries..... (7,004) 5,713 5,967
------- -------- --------
NET INCOME.................................................. $ 1,716 $ 20,459 $ 21,188
======= ======== ========
STATEMENT OF CASH FLOWS OPERATING ACTIVITIES
Net income.................................................. $ 1,716 $ 20,459 $ 21,188
Adjustment to reconcile net income to net cash provided by
operating activities:
Equity in undistributed losses (income) of subsidiaries..... 7,004 (5,713) (5,967)
------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 8,720 14,746 15,221
------- -------- --------
INVESTING AND FINANCING ACTIVITIES
Common stock cash dividends paid............................ (5,616) (11,586) (10,638)
Proceeds from issuance of common stock...................... 883 292 534
Guaranteed junior subordinated deferrable interest
debentures, net of expenses............................... -- -- 33,172
Guaranteed junior subordinated deferrable interest
debentures dividends paid................................. (2,916) (2,916) (1,944)
Purchases of treasury stock................................. (99) (4,204) (30,346)
Net decrease in borrowings.................................. (3,500) (1,300) (2,800)
Investment in subsidiaries.................................. (75) (50) (7,000)
Other -- net................................................ 2,968 5,009 3,514
------- -------- --------
NET CASH USED BY INVESTING AND FINANCING ACTIVITIES......... (8,355) (14,755) (15,508)
------- -------- --------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS................. 365 (9) (287)
CASH EQUIVALENTS AT JANUARY 1............................... 286 295 582
------- -------- --------
CASH EQUIVALENTS AT DECEMBER 31............................. $ 651 $ 286 $ 295
======= ======== ========
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 subsidiaries as
an inter-entity management fee. At December 31, 2000, the subsidiary bank was
permitted to upstream an additional $2,173,000 in cash dividends to the Parent
Company. The subsidiary bank also had a combined $97,310,000 of restricted
surplus and retained earnings at December 31, 2000.
The Parent Company renewed a $3 million unsecured line of credit on May 30,
2000. This line of credit is subject to annual review on May 29, 2001. Future
drawdowns on this line would be either at an "As Offered Rate" or at a
"Euro-Rate" Option, a rate equal to the LIBOR plus two hundred (200) basis
points (2%) per annum. The agreement for this line of credit requires the
Company to maintain compliance with certain financial covenants. The Company had
no borrowings outstanding on this line of credit at December 31, 2000,
69
71
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and will not draw on the line until the coverage ratio of loan loss reserve to
non-performing assets is in compliance with the minimum financial covenant of
125% contained in the loan agreement. The Company's coverage ratio at year end
2000 was 100%.
To facilitate an orderly spin-off transition, the Company and TRB entered
into a Services Agreement whereby USBANCORP has provided certain services such
as audit, loan review and asset/liability management on an outsourced basis to
TRB. The Company received $985,000 in the year 2000 for these services.
70
72
STATEMENT OF MANAGEMENT RESPONSIBILITY
January 22, 2001
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/ Orlando B. Hanselman /s/ Jeffery A. Stopko
Orlando B. Hanselman Jeffrey A. Stopko
Chairman, Senior Vice President &
President & CEO Chief Financial Officer
71
73
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
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, 2000 and
1999, and the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. 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 auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the financial position of USBANCORP, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania
January 22, 2001
72
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable for the years presented.
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.
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 2000 Form
10-K and Part II -- Item 8. Page references are to said Form 10-K.
CONSOLIDATED FINANCIAL STATEMENTS:
USBANCORP, Inc. and Subsidiaries
Consolidated Balance Sheet, 34
Consolidated Statement of Income, 35
Consolidated Statement of Comprehensive Income, 36
Consolidated Statement of Changes in Stockholders' Equity, 37
Consolidated Statement of Cash Flows, 38-39
Notes to Consolidated Financial Statements, 40
Statement of Management Responsibility, 71
Report of Independent Public Accountants, 72
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:
The Company filed a Form 8-K on November 21, 2000, announcing that its
Chairman, Chief Executive Officer and President, Orlando B. Hanselman, is
voluntarily freezing his base salary for four years through January 1, 2005.
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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 Exhibit III, Part II to Form
24, 1995 and further amended on June 10, 1998. 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
Exhibit 3.1 to 2000 Form 10-K
Filed on March 21, 2001
3.2 Bylaws, as amended and restated on February 24, 1995 Exhibit IV, Part II to Form
and further amended on November 17, 2000. S-14
File No. 2-79639
Exhibit 3.2 to 2000 Form 10-K
Filed on March 21, 2001
4.1 Rights Agreement, dated as of February 24, 1995, Exhibit 4.1 to 2000 Form 10-K
between USBANCORP, Inc. and USBANCORP Trust Company, Dated March 21, 2001
as Rights Agent.
10.1 Corporate Separation Agreement between USBANCORP, Exhibit 2.1 to Form 8-K
Inc. and Three Rivers Bancorp. Filed on April 14, 2000
10.2 Tax Separation Agreement between USBANCORP, Inc. and Exhibit 2.2 to Form 8-K
Three Rivers Bancorp. Filed on April 14, 2000
10.3 Services Agreement between USBANCORP, Inc. and Three Exhibit 10.1 to Form 10-Q
Rivers Bancorp. Filed on November 13, 2000
10.4 Agreement, dated October 25, 1994, between Exhibit 10.4 to 2000 Form 10-K
USBANCORP, Inc. and Orlando B. Hanselman. Filed March 21, 2001
10.5 1991 Stock Option Plan, dated August 23, 1991, as Exhibit 10.5 to 2000 Form 10-K
amended and restated on February 24, 1995. Filed March 21, 2001
10.6 Agreement, dated December 1, 1994, between Exhibit 10.6 to 2000 Form 10-K
USBANCORP, Inc. and Ronald W. Virag. Filed March 21, 2001
10.7 Agreement, dated July 15, 1994, between USBANCORP, Exhibit 10.7 to 2000 Form 10-K
Inc. and Kevin J. O'Neil. Filed March 21, 2001
22 Subsidiaries of the Registrant. Below
24.1 Consent of Arthur Andersen LLP
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EXHIBIT A
(22) SUBSIDIARIES OF THE REGISTRANT
PERCENT OF JURISDICTION
NAME OWNERSHIP OF ORGANIZATION
- ---- ---------- ---------------
U.S. Bank.......................................... 100% Commonwealth of Pennsylvania
Main and Franklin Streets
P.O. Box 520
Johnstown, PA 15907
United Bancorp Life Insurance Company.............. 100% State of Arizona
101 N. First Avenue #2460
Phoenix, AZ 85003
USBANCORP Trust and Financial Services Company..... 100% Commonwealth of Pennsylvania
Main and Franklin Streets
P.O. Box 520
Johnstown, PA 15907
UBAN Associates, Inc. ............................. 100% Commonwealth of Pennsylvania
120 Regent Court, Suite 102
State College, PA 16801
Standard Mortgage Corporation...................... 100% State of Georgia
5775 Peachtree-Dunwoody Road
Atlanta, GA 30342
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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)
By: /s/ ORLANDO B. HANSELMAN
-------------------------------------
Orlando B. Hanselman
Chairman, President
and Chief Executive Officer
Date: February 23, 2001
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 23, 2001:
/s/ ORLANDO B. HANSELMAN Chairman, President and Chief Executive Officer; Director
- ------------------------------------------------
Orlando B. Hanselman
/s/ JEFFREY A. STOPKO Senior Vice President and Chief Financial Officer
- ------------------------------------------------
Jeffrey A. Stopko
/s/ J. MICHAEL ADAMS, JR. Director
- ------------------------------------------------
J. Michael Adams, Jr.
/s/ EDWARD J. CERNIC, SR. Director
- ------------------------------------------------
Edward J. Cernic, Sr.
/s/ DANIEL R. DEVOS Director
- ------------------------------------------------
Daniel R. DeVos
/s/ JAMES C. DEWAR Director
- ------------------------------------------------
James C. Dewar
/s/ BRUCE E. DUKE, III, M.D. Director
- ------------------------------------------------
Bruce E. Duke, III, M.D.
/s/ JAMES M. EDWARDS, SR. Director
- ------------------------------------------------
James M. Edwards, Sr.
/s/ KIM W. KUNKLE Director
- ------------------------------------------------
Kim W. Kunkle
/s/ MARGARET A. O'MALLEY Director
- ------------------------------------------------
Margaret A. O'Malley
/s/ REV. CHRISTIAN R. ORAVEC Director
- ------------------------------------------------
Rev. Christian R. Oravec
/s/ MARK E. PASQUERILLA Director
- ------------------------------------------------
Mark E. Pasquerilla
Director
- ------------------------------------------------
Howard M. Picking, III
/s/ SARA A. SARGENT Director
- ------------------------------------------------
Sara A. Sargent
/s/ THOMAS C. SLATER Director
- ------------------------------------------------
Thomas C. Slater
/s/ ROBERT L. WISE Director
- ------------------------------------------------
Robert L. Wise
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U.S. BANK
OFFICE LOCATIONS
* Main Office Downtown
216 Franklin Street
P.O. Box 520
Johnstown, PA 15907-0520
1-800-837-BANK(2265)
+* Westmont Office
110 Plaza Drive
Johnstown, PA 15905-1286
+* University Heights Office
1404 Eisenhower Boulevard
Johnstown, PA 15904-3280
* East Hills Office
1219 Scalp Avenue
Johnstown, PA 15904-3182
* Eighth Ward Office
1059 Franklin Street
Johnstown, PA 15905-4303
* West End Office
163 Fairfield Avenue
Johnstown, PA 15906-2392
* Carrolltown Office
101 Main Street
Carrolltown, PA 15722-0507
* Northern Cambria Office
4206 Crawford Avenue Suite 1
Northern Cambria, PA
15714-1342
* Ebensburg Office
104 S. Center Street
Ebensburg, PA 15931-0209
+* Lovell Park Office
179 Lovell Avenue
Ebensburg, PA 15931-0418
Nanty Glo Office
928 Roberts Street
Nanty Glo, PA 15943-1303
(814) 749-9227
Nanty Glo Drive-In
1383 Shoemaker Street
Nanty Glo, PA 15943-1255
+* Galleria Mall Office
500 Galleria Drive Suite 100
Johnstown, PA 15904-8911
* St. Michael Office
900 Locust Street
St. Michael, PA 15951-9998
* Coalport Office
Main Street, P.O. Box 356
Coalport, PA 16627-0356
* Seward Office
#1, Roadway Plaza
Seward, PA 15954-9501
* Windber Office
1501 Somerset Avenue
Windber, PA 15963-1745
(814) 467-4591
Central City Office
104 Sunshine Avenue
Central City, PA 15926-1129
+* Somerset Office
108 W. Main Street
Somerset, PA 15501-2035
* Derry Office
112 South Chestnut Street
Derry, PA 15627-1938
+ State College Office
722 South Atherton Street
State College, PA 16801-4628
* State College Loan Production Office
120 Regent Court, Suite 102
State College, PA 16801-7966
* US Bank Leasing
Williamsburg Place Office Building
244 Center Road, Suite 304-20
Monroeville, PA 15146-1710
* Greensburg Branch
Oakley Park II, Route 30 East
Greensburg, PA 15601-9560
* = 24-Hour ATM Banking Available
+ = Seven Day a Week Banking Available
REMOTE ATM
BANKING LOCATIONS
Main Office, Main & Franklin
Streets, Johnstown
Lee Hospital, Main Street,
Johnstown
The Galleria, Johnstown
Johnstown Cambria County
Airport
Robyn's Shoppe, Nanty Glo
Gogas Service Station, Cairnbrook
U.S. BANK MORTGAGE
COMPANY LOCATIONS
Greensburg Office
Oakley Park II, Route 30 East
Greensburg, PA 15601-9560
Mt. Nittany Mortgage Company
2300 South Atherton Street
State College, PA 16801-7613
Altoona Office
87 Logan Boulevard
Altoona, PA 16602-3123
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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:
Herzog, Heine, Geduld, Inc.
525 Washington Boulevard
Jersey City, NJ 07310
Telephone: (212) 908-4156
Legg Mason Wood Walker, Inc.
969 Eisenhower Boulevard
Oak Ridge East
Johnstown, PA 15904
Telephone: (814) 266-7900
F. J. Morrissey & Co., Inc.
1700 Market Street
Suite 1420
Philadelphia, PA 19103-3913
Telephone: (215) 563-8500
Keefe Bruyette & Woods, Inc.
Two World Trade Center
89th Floor
New York, NY 10048
Telephone: (800) 342-5529
CIBC World Markets
Oppenheimer Tower
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
Weeden & Co. L.P.
145 Mason Street
Greenwich, CT 06830
Telephone: (203) 861-7600
CORPORATE OFFICES
The corporate offices of USBANCORP, Inc. are located at 216 Franklin
Street, 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:
Fleet National Bank
c/o EquiServe
150 Royall Street
Canton, MA 02021
Investor Relations Number: 1-800-730-4001
Internet Address: http://www.EquiServe.com
SHAREHOLDER DATA
As of January 31, 2001, there were 5,110 shareholders of common stock and
13,491,262 shares outstanding. Of the total shares outstanding, approximately
657,472 or 5% are held by insiders (directors and executive officers) while
approximately 3,969,918 or 29% 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 or by
e-mail at JStopko@USBANCORPPA.com.
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