UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 2000
Transaction Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transaction period from
to __
Commission File Number 0-11204
USBANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1424278
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Main & Franklin Streets, P.O. Box 430, Johnstown, PA 15907-0430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 533-5300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
X Yes No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 1, 2000
Common Stock, par value $2.50 13,442,845
per share
<PAGE>1
USBANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION: Page No.
Consolidated Balance Sheet -
September 30, 2000, December 31, 1999,
and September 30, 1999 4
Consolidated Statement of Income -
Three and Nine Months Ended September 30, 2000,
and 1999 5
Consolidated Statement of Changes
in Stockholders' Equity -
Nine Months Ended
September 30, 2000, and 1999 7
Consolidated Statement of Cash Flows -
Nine Months Ended
September 30, 2000, and 1999 8
Notes to Consolidated Financial
Statements 9
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations 24
Part II. Other Information 44
<PAGE>2
SERVICE AREA MAP
Presented on this page was a service area map depicting the States and
Counties service by all entities of the Company.
<PAGE>3
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
September 30 December 31 September 30
2000 1999 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 23,629 $ 54,676 $ 41,740
Interest bearing deposits with banks 100 758 266
Investment securities:
Available for sale 551,476 1,187,335 1,212,987
Loans held for sale 16,041 21,753 21,901
Loans 604,338 1,082,459 1,057,137
Less: Unearned income 8,410 8,408 7,391
Allowance for loan losses 5,358 10,350 10,911
Net loans 590,570 1,063,701 1,038,835
Premises and equipment 13,685 18,937 18,975
Accrued income receivable 8,715 16,650 17,379
Mortgage servicing rights 10,810 13,510 14,457
Goodwill and core deposit intangibles 20,741 25,655 26,447
Bank owned life insurance 25,757 37,290 36,869
Other assets 7,819 27,214 18,837
TOTAL ASSETS $ 1,269,343 $ 2,467,479 $ 2,448,693
LIABILITIES
Non-interest bearing deposits $ 80,208 $ 160,253 $ 178,430
Interest bearing deposits 573,678 1,070,688 1,035,962
Total deposits 653,886 1,230,941 1,214,392
Federal funds purchased and securities
sold underagreements to repurchase 10,463 16,369 52,748
Other short-term borrowings 44,661 84,874 145,103
Advances from Federal Home Loan Bank 438,356 956,999 852,008
Guaranteed junior subordinated
deferrable interest debentures 34,500 34,500 34,500
Long-term debt 3,174 7,100 7,841
Total borrowed funds 531,154 1,099,842 1,092,200
Other liabilities 10,949 24,139 24,292
TOTAL LIABILITIES 1,195,989 2,354,922 2,330,884
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000
shares authorized;there were no shares
issued and outstanding for the periods presented - - -
Common stock, par value $2.50 per share;
24,000,000 shares
authorized; 17,490,455 shares issued and 13,399,536
outstanding on September 30, 2000; 17,390,496 shares
issued and 13,309,577 outstanding on December 31,
1999; 17,384,524 shares issued and 13,303,605
outstanding on September 30, 1999 43,726 43,476 43,461
Treasury stock at cost, 4,090,919 shares on
September 30,
2000; 4,080,919 shares on December 31, 1999; and
4,080,919 shares on September 30, 1999 (65,824) (65,725) (65,725)
Surplus 65,936 65,686 65,662
Retained earnings 41,407 104,294 101,537
Accumulated other comprehensive income (loss) (11,891) (35,174) (27,126)
TOTAL STOCKHOLDERS' EQUITY 73,354 112,557 117,809
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,269,343 $ 2,467,479 $ 2,448,693
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>4
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans
and loans held for sale:
Taxable $ 11,938 $ 21,208 $ 45,694 $ 63,183
Tax exempt 572 557 1,761 1,669
Deposits with banks 56 31 135 89
Federal funds sold 10 - 10 -
Investment securities:
Available for sale 9,463 11,827 38,284 34,285
Held to maturity - 8,329 - 24,160
Total Interest Income 22,039 41,952 85,884 123,386
INTEREST EXPENSE
Deposits 6,203 10,153 22,916 30,692
Federal funds purchased and securities
sold under agreements to repurchase 142 776 1,560 2,693
Other short-term borrowings 941 1,504 4,711 5,118
Advances from Federal Home Loan Bank 6,651 11,921 23,911 32,777
Guaranteed junior subordinated
deferrable interest 740 740 2,220 2,220
Long-term debt 24 105 131 314
Total Interest Expense 14,701 25,199 55,449 73,814
NET INTEREST INCOME 7,338 16,753 30,435 49,572
Provision for loan losses 249 225 672 1,750
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,089 16,528 29,763 47,822
NON-INTEREST INCOME
Trust fees 1,257 1,217 3,813 3,694
Net realized (losses) gains
on investment securities (30) (3) (936) 431
Net realized gains on
loans held for sale 706 445 1,437 4,300
Wholesale cash processing fees - 159 120 477
Service charges on deposit accounts 436 910 1,761 2,654
Net mortgage servicing fees 251 216 684 536
Bank owned life insurance 299 415 1,025 1,247
Gain on sale of branch - - - 540
Other income 1,528 1,894 4,735 5,524
Total Non-Interest Income 4,447 5,253 12,639 19,403
NON-INTEREST EXPENSE
Salaries and employee benefits 4,932 8,044 18,189 24,203
Net occupancy expense 681 1,110 2,661 3,468
Equipment expense 777 1,016 2,726 3,116
Professional fees 607 919 2,054 2,522
Supplies, postage, and freight 402 677 1,446 2,041
Miscellaneous taxes and insurance 326 439 1,187 1,343
FDIC deposit insurance expense 33 69 129 204
Amortization of goodwill and
core deposit intangibles 690 792 2,175 2,343
Impairment charge (credit)
for mortgage servicing rights - (625) - (625)
Spin-off costs 327 - 2,552 -
Other expense 1,505 2,476 5,924 7,469
Total Non-Interest Expense $ 10,280 $ 14,917 $ 39,043 $ 46,084
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>5
CONSOLIDATED STATEMENT OF INCOME
CONTINUED FROM PREVIOUS PAGE
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAXES $ 1,256 $ 6,864 $ 3,359 $ 21,141
Provision (credit) for income taxes 203 1,772 (315) 5,473
NET INCOME $ 1,053 $ 5,092 $ 3,674 $ 15,668
PER COMMON SHARE DATA:
Basic:
Net income $ 0.08 $ 0.38 $ 0.28 $ 1.17
Average shares outstanding 13,387,576 13,302,997 13,346,303 13,351,855
Diluted:
Net income $ 0.08 $ 0.38 $ 0.28 $ 1.16
Average shares outstanding 13,387,923 13,404,177 13,347,939 13,477,277
Cash dividends declared $ 0.09 $ 0.15 $ 0.33 $ 0.44
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>6
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Unaudited
September 30, 2000 September 30, 1999
PREFERRED STOCK
Balance at beginning of period $ - $ -
Balance at end of period - -
COMMON STOCK
Balance at beginning of period 43,476 43,375
New shares issued 250 86
Balance at end of period 43,726 43,461
TREASURY STOCK
Balance at beginning of period (65,725) (61,521)
Treasury stock, at cost (99) (4,204)
Balance at end of period (65,824) (65,725)
CAPITAL SURPLUS
Balance at beginning of period 65,686 65,495
New shares issued 250 167
Balance at end of period 65,936 65,662
RETAINED EARNINGS
Balance at beginning of period 104,294 91,737
Net income 3,674 15,668
Spin-off of Three Rivers Bank (62,156) -
Cash dividends declared (4,405) (5,868)
Balance at end of period 41,407 101,537
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period (35,174) 2,584
Spin-off of Three Rivers Bank 17,176 -
Other comprehensive income
(loss), net of tax 6,107 (29,710)
Balance at end of period (11,891) (27,126)
TOTAL STOCKHOLDERS' EQUITY $ 73,354 $ 117,809
See accompanying notes to consolidated financial statements.
<PAGE>7
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION> Nine Months Ended
September 30
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,674 $ 15,668
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 672 1,750
Depreciation and amortization expense 1,710 1,943
Amortization expense of goodwill and
core deposit intangibles 2,175 2,343
Amortization expense of mortgage
servicing rights 1,384 2,111
Net amortization of investment securities 408 1,045
Net realized losses (gains) on
investment securities 936 (431)
Net realized gains on loans and
loans held for sale (1,437) (4,300)
Origination of mortgage loans held for sale (160,038) (333,973)
Sales of mortgage loans held for sale 182,959 359,657
Decrease (increase) in accrued income receivable 1,129 (229)
(Decrease) increase in accrued expense payable (255) 537
Net cash provided by operating activities 33,317 46,121
INVESTING ACTIVITIES
Purchases of investment securities and other
short-term investments - available for sale (48,155) (370,472)
Purchases of investment securities and other
short-term investments - held to maturity - (104,527)
Proceeds from maturities of investment securities and
other short-term investments -
available for sale 87,104 85,271
Proceeds from maturities of investment securities and
other short-term investments - held to maturity - 77,732
Proceeds from sales of investment securities and
other short-term investments -
available for sale 152,405 221,824
Long-term loans originated (95,313) (294,515)
Loans held for sale (16,041) (21,901)
Principal collected on long-term loans 98,084 277,627
Loans purchased or participated (17,655) (9,743)
Loans sold or participated 4,729 4,611
Net decrease in credit card receivable and
other short-term loans 6,531 15,647
Purchases of premises and equipment (3,190) (3,111)
Sale/retirement of premises and equipment 1,523 211
Net decrease in assets held in trust for
collateralized mortgage obligation 1,726 793
Net decrease (increase) in mortgage
servicing rights 1,316 (371)
Net increase in other assets (12,194) (7,250)
Net cash provided (used) by investing activities 160,870 (128,174)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit 209,139 343,612
Payments for maturing certificates of deposit (207,881) (329,873)
Net increase in demand and savings deposits 1,585 24,362
Net decrease in federal funds purchased, securities sold
under agreements to repurchase, and
other short-term borrowings (2,803) (33,279)
Net principal (repayments) borrowings of
advances from Federal Home Loan Bank (198,767) 99,617
Repayments of long-term debt (1,767) (708)
Common stock cash dividends paid (4,405) (4,681)
Guaranteed junior subordinated deferrable
interest debenture dividends paid (2,220) (2,187)
Proceeds from dividend reinvestment, stock
purchase plan, and stock options exercised 500 253
Purchases of treasury stock (99) (4,204)
Net decrease in other liabilities (2,195) (7,793)
Net cash (used) provided by financing activities(208,913) 85,119
Net transfer to Three Rivers Bancorp (16,979) -
NET (DECREASE) INCREASE IN CASH EQUIVALENTS (31,705) 3,066
CASH EQUIVALENTS AT JANUARY 1 55,434 38,940
CASH EQUIVALENTS AT SEPTEMBER 30 $ 23,729 $ 42,006
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The consolidated financial statements include the accounts of
USBANCORP, Inc. (the "Company") and its wholly-owned subsidiaries,
U.S. Bank ("U.S. Bank"), 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 24 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 14 states predominantly in the southeast. 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.
In addition, the Parent Company is an administrative group
that provides support in such areas as audit, finance, investments,
loan review, general services, and marketing. Intercompany accounts
and transactions have been eliminated in preparing the consolidated
financial statements. On April 1, 2000, the Company successfully
completed the spin-off of its Pittsburgh based Three Rivers Bank
("TRB") subsidiary to its shareholders. To facilitate an orderly
transition, the Company and Three Rivers Bank entered into a
Services Agreement whereby USBANCORP is continuing to provide
certain services such as auditing and 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.
2. Basis of Preparation
The unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information. In the opinion of management, all
adjustments that are of a normal recurring nature and are considered
necessary for a fair presentation have been included. They are not,
however, necessarily indicative of the results of consolidated
operations for a full-year. The financial results after April 1,
2000, do not include Three Rivers Bank.
With respect to the unaudited consolidated financial
information of the Company for the three and nine month periods
ended September 30, 2000, and 1999, Arthur Andersen LLP, independent
public accountants, conducted reviews (based upon procedures
established by the American Institute of Certified Public
Accountants) and not audits, as set forth in their separate review
report dated October 13, 2000, appearing herein. This report does
not express an opinion on the interim unaudited consolidated
financial information. Arthur Andersen LLP has not carried out any
significant or additional audit tests beyond those which would have
been necessary if its report had not been included. The December 31,
1999, numbers are derived from audited financial statements.
<PAGE>9
For further information, refer to the consolidated financial
statements and accompanying notes included in the Company's "Annual
Report and Form 10-K" for the year ended December 31, 1999.
3. Earnings Per Common Share
Basic earnings per share is based upon the weighted average
common shares outstanding. Diluted earnings per share is based upon
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.
4. Comprehensive Income
In January 1998, the Company adopted SFAS #130, "Reporting
Comprehensive Income," which established standards for reporting and
displaying comprehensive income and its components in a financial
statement. For the Company, comprehensive income includes net
income and unrealized holding gains and losses from available for
sale investment securities. The changes in other comprehensive
income are reported net of income taxes, as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Net income $ 1,053 $ 5,092 $ 3,674 $ 15,668
Other comprehensive income, before tax:
Unrealized holding gains(losses) on
investment securities 5,829 (12,388) 6,698 (39,658)
Less: reclassification adjustment for losses
(gains) included in net income 30 3 936 (431)
Other comprehensive income(loss) before tax 5,859 (12,385) 7,634 (40,089)
Income tax expense(credit) related to items
of other comprehensive income 1,172 (3,198) 1,527 (10,379)
Other comprehensive income(loss), net of tax 4,687 (9,187) 6,107 (29,710)
Comprehensive income $ 5,740 $ (4,095)$ 9,781 $ (14,042)
5. Consolidated Statement of Cash Flows
On a consolidated basis, cash equivalents include cash and due
from banks, interest bearing deposits with banks, and federal funds
sold and securities purchased under agreements to resell. For the
Parent Company, cash equivalents also include short-term
investments. The Company made $834,000 in income tax payments in
the first nine months of 2000 as compared to $3,477,000 for the
first nine months of 1999. Total interest expense paid amounted to
$62,565,000 in 2000's first nine months compared to $73,277,000 in
the same 1999 period.
<PAGE>10
6. Investment Securities
Securities classified as available for sale include securities
which may be sold to effectively manage interest rate risk
exposure, prepayment risk, and other factors (such as liquidity
requirements). These available for sale securities are reported at
fair value with unrealized aggregate appreciation/(depreciation)
excluded from income and credited/(charged) to a separate component
of shareholders' equity on a net of tax basis. The mark-to-market of
the available for sale portfolio does inject more volatility in the
book value of equity, but has no impact on regulatory capital.
Realized gain or loss on securities sold is computed upon the
adjusted cost of the specific securities sold. The book and market
values of investment securities are summarized as follows (in
thousands):
Investment securities available for sale:
September 30, 2000
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 11,377 $ - $ (59) $ 11,318
U.S. Agency 25,741 - (943) 24,798
State and municipal 39,645 5 (2,241) 37,409
U.S. Agency mortgage-backed
securities 443,090 396 (14,225) 429,261
Other securities(f1) 49,915 1 (1,226) 48,690
Total $ 569,768 $ 402 $ (18,694) $ 551,476
<F1>Other investment securities include corporate notes and bonds,
asset-backed securities, and equity securities.
Maintaining investment quality is a primary objective of the
Company's investment policy which, subject to certain limited
exceptions, prohibits the purchase of any investment security below
a Moody's Investor's Service or Standard & Poor's rating of "A." At
September 30, 2000, 97.0% of the portfolio was rated "AAA" compared
to 97.5% at September 30, 1999. Approximately 2.0% of the portfolio
was rated below "A" or unrated on September 30, 2000.
7. Loans Held for Sale
At September 30, 2000, $16,041,000 of newly originated fixed-
rate residential mortgage loans were classified as "held for sale."
It is management's intent to sell these residential mortgage loans
during the next several months. The residential mortgage loans held
for sale are carried at the lower of aggregate cost or market value.
Net realized and unrealized gains and losses are included in "Net
gains (losses) on loans held for sale"; unrealized net valuation
adjustments (if any) are recorded in the same line item on the
Consolidated Statement of Income.
<PAGE>11
8. Loans
The loan portfolio of the Company consists of the following
(in thousands):
September 30 December 31 September 30
2000 1999 1999
Commercial $ 122,340 $ 152,042 $ 169,891
Commercial loans secured
by real estate 201,278 406,927 366,604
Real estate - mortgage 245,156 452,507 451,853
Consumer 35,564 70,983 68,789
Loans 604,338 1,082,459 1,057,137
Less: Unearned income 8,410 8,408 7,391
Loans, net of unearned income $ 595,928 $ 1,074,051 $ 1,049,746
Real estate-construction loans comprised 3.8% of total loans
net of unearned income at September 30, 2000. The Company has no
credit exposure to foreign countries or highly leveraged
transactions. Additionally, the Company has no significant industry
lending concentrations.
9. Allowance for Loan Losses and Charge-Off Procedures
As a financial institution which assumes lending and credit
risks as a principal element of its business, the Company
anticipates that credit losses will be experienced in the normal
course of business. Accordingly, the Company consistently applies
a comprehensive methodology and procedural discipline which is
updated on a quarterly basis at the subsidiary bank level to
determine both the adequacy of the allowance for loan losses and the
necessary provision for loan losses to be charged against earnings.
This methodology includes:
a detailed review of all criticized and impaired loans to determine
if any specific reserve allocations are required on an individual
loan basis. The specific reserve established for these criticized
and impaired loans is based on careful analysis of the loan's
performance, the related collateral value, cash flow considerations
and the financial capability of any guarantor.
the application of formula driven reserve allocations for all
commercial and commercial real-estate loans are calculated by using
a three-year migration analysis of net losses incurred within each
risk grade for the entire commercial loan portfolio. The difference
between estimated and actual losses is reconciled through the
dynamic nature of the migration analysis.
the application of formula driven reserve allocations to consumer
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.
<PAGE>12
the application of formula driven reserve allocations to all
outstanding loans and certain unfunded commitments is based upon
review of historical losses and qualitative factors, which include
but are not limited to, economic trends, delinquencies,
concentrations of credit, trends in loan volume, experience and
depth of management, examination and audit results, effects of any
changes in lending policies and trends in policy exceptions.
The maintenance of a general unallocated reserve to accommodate
inherent risk in the Company's portfolio that is not identified
through the Company's specific loan and portfolio segment reviews
discussed above. Management recognizes that there may be events or
economic factors that have occurred effecting specific borrowers or
segments of borrowers that may not yet be fully reflected in the
information that the Company uses for arriving at a specific loan or
portfolio segment reserves. Therefore, the Company and its Board of
Directors believe a general unallocated reserve is needed to
recognize the estimation risk associated with the specific and
formula driven allowances. In conjunction with the establishment of
the general unallocated reserve, the Company also looks at the total
allowance for loan losses in relation to the size of the total loan
portfolio, the level of non-performing assets and its coverage of
these items as compared to peer banks.
After completion of this process, a formal meeting of the Loan
Loss Reserve Committee is held to evaluate the adequacy of the
reserve and establish the provision level for the next quarter. The
Company believes that the procedural discipline, systematic
methodology, and comprehensive documentation of this quarterly
process is in full compliance with all regulatory requirements and
provides appropriate support for accounting purposes.
When it is determined that the prospects for recovery of the
principal of a loan have significantly diminished, the loan is
immediately charged against the allowance account; subsequent
recoveries, if any, are credited to the allowance account. In
addition, non-accrual and large delinquent loans are reviewed
monthly to determine potential losses. Consumer loans are considered
losses when they are 90 days past due, except loans that are insured
for credit loss.
The Company's policy is to individually review, as
circumstances warrant, each of its commercial and commercial
mortgage loans to determine if a loan is impaired. At a minimum,
credit reviews are mandatory for all commercial and commercial
mortgage loans with balances in excess of $500,000 within 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.
<PAGE>13
An analysis of the changes in the allowance for loan losses
follows (in thousands, except ratios):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Balance at beginning of period $ 5,313 $ 10,891 $ 10,350 $ 10,725
Reduction due to spin-off of TRB - - (5,028) -
Charge-offs:
Commercial 2 5 186 1,133
Real estate-mortgage 167 131 836 555
Consumer 119 154 234 462
Total charge-offs 288 290 1,256 2,150
Recoveries:
Commercial 8 1 45 275
Real estate-mortgage 23 33 433 155
Consumer 53 51 142 156
Total recoveries 84 85 620 586
Net charge-offs 204 205 636 1,564
Provision for loan losses 249 225 672 1,750
Balance at end of period $ 5,358 $ 10,911 $ 5,358 $ 10,911
As a percent of average loans and loans held
for sale, net of unearned income:
Annualized net charge-offs 0.14% 0.08% 0.11% 0.20%
Annualized provision for
loan losses 0.16 0.08 0.12 0.22
Allowance as a percent of loans and loans
held for sale, net of unearned income
at period end 0.88 1.02 0.88 1.02
Total classified loans $11,748 $27,323 $11,748 $27,323
</TABLE>
(For additional information, refer to the "Provision for Loan
Losses" and "Loan Quality" sections in the Management's Discussion
and Analysis of Consolidated Financial Condition and Results of
Operations on pages 30 and 39, respectively.)
10. Components of Allowance for Loan Losses
For impaired loans, the measurement of impairment may be based
upon: 1) the present value of expected future cash flows discounted
at the loan's effective interest rate; 2) the observable market
price of the impaired loan; or 3) the fair value of the collateral
of a collateral dependent loan.
The Company had loans totaling $3,109,000 and $7,129,000 being
specifically identified as impaired and a corresponding allocation
reserve of $437,000 and $500,000 at September 30, 2000, and
September 30, 1999, respectively. The average outstanding balance
for loans being specifically identified as impaired was $2,384,000
for the first nine months of 2000 compared to $5,424,000 for the
first nine months of 1999. All of the impaired loans are collateral
dependent, therefore the fair value of the collateral of the
impaired loans is evaluated in measuring the impairment. There was
no interest income recognized on impaired loans during the first
nine months of 2000 or 1999.
<PAGE>14
The following table sets forth the allocation of the allowance
for loan losses among various categories. This allocation is
determined by using the consistent quarterly procedural discipline
which was discussed above. This allocation, however, is not
necessarily indicative of the specific amount or specific loan
category in which future losses may ultimately occur (in thousands,
except percentages):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999 September 30, 1999
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
Amount to Loans Amount to Loans Amount to Loans
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 1,298 20.0% $ 1,991 13.9% $ 535 15.9%
Commercial
loans secured
by real estate 1,500 32.9 2,928 37.1 2,344 34.2
Real Estate -
mortgage 414 42.7 791 43.3 824 44.2
Consumer 506 4.4 631 5.7 619 5.7
Allocation to
general risk 1,640 - 4,009 - 6,589 -
Total $5,358 100.0% $10,350 100.0% $10,911 100.0%
</TABLE>
Even though real estate-mortgage loans comprise approximately
43% of the Company's total loan portfolio, only $414,000 or 7.7% of
the total allowance for loan losses is allocated against this loan
category. The real estate-mortgage loan allocation is based upon
the Company's five-year historical average of actual loan charge-
offs experienced in that category and other qualitative factors.
The disproportionately higher allocations for commercial loans and
commercial loans secured by real estate reflect the increased credit
risk associated with this type of lending, the Company's historical
loss experience in these categories, and other qualitative factors.
The Company has strengthened its allocations to the commercial
segments of the loan portfolio during 2000. Factors considered by
the Company that led to increased allocations to the commercial
segments of the portfolio included: the potential adverse effects
of rising interest rates which began in the second half of 1999,
continued growth of the commercial loan portfolio, the 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.
At September 30, 2000, management of the Company believes the
allowance for loan losses was adequate to cover losses within the
Company's loan portfolio. The Company's management is unable to
determine in what loan category future charge-offs and recoveries
may occur. (For a complete discussion concerning the operations of
the "Allowance for Loan Losses" refer to Note 9.)
<PAGE>15
11. Non-performing Assets
Non-performing assets are comprised of (i) loans which are on
a non-accrual basis, (ii) loans which are contractually past due 90
days or more as to interest or principal payments some of which are
insured for credit loss, and (iii) other real estate owned (real
estate acquired through foreclosure and in-substance foreclosures).
All loans, except for loans that are insured for credit loss, are
placed on non-accrual status immediately upon becoming 90 days past
due in either principal or interest. In addition, if circumstances
warrant, the accrual of interest may be discontinued prior to 90
days. In all cases, payments received on non-accrual loans are
credited to principal until full recovery of principal has been
recognized; it is only after full recovery of principal that any
additional payments received are recognized as interest income. The
only exception to this policy is for residential mortgage loans
wherein interest income is recognized on a cash basis as payments
are received.
The following table presents information concerning non-
performing assets (in thousands, except percentages):
September 30 December 31 September 30
2000 1999 1999
Non-accrual loans $ 6,085 $ 4,928 $ 9,888
Loans past due 90
days or more 51 1,305 453
Other real estate owned 460 7,126 1,290
Total non-performing
assets $ 6,596 $ 13,359 $ 11,631
Total non-performing
assets as a percent
of loans and loans
held for sale, net
of unearned income,
and other real estate owned 1.08% 1.21% 1.08%
The Company is unaware of any additional loans which are
required to either be charged-off or added to the non-performing
asset totals disclosed above. Other real estate owned is recorded
at the lower of 1)fair value minus estimated costs to sell, or
2)carrying cost.
The following table sets forth, for the periods indicated, (i)
the gross interest income that would have been recorded if non-
accrual loans had been current in accordance with their original
terms and had been outstanding throughout the period or since
origination if held for part of the period, (ii) the amount of
interest income actually recorded on such loans, and (iii) the net
reduction in interest income attributable to such loans (in
thousands).
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
Interest income due in accordance
with original terms $ 112 $ 174 $ 256 $ 326
Interest income recorded - (5) (68) (19)
Net reduction in interest income $ 112 $ 169 $ 188 $ 307
<PAGE>16
12. Off-Balance Sheet Hedge Instruments
Policies
The Company uses various interest rate contracts, such as
interest rate swaps, caps and floors, to help manage interest rate
and market valuation risk exposure, which is incurred in normal
recurrent banking activities. These interest rate contracts
function as hedges against specific assets or liabilities on the
Consolidated Balance Sheet. Unrealized gains or losses on these
hedge transactions are deferred. It is the Company's policy not to
terminate hedge transactions prior to their expiration date.
For interest rate swaps, the interest differential to be paid
or received is accrued by the Company and recognized as an
adjustment to interest income or interest expense of the underlying
assets or liabilities being hedged. Because only interest payments
are exchanged, the cash requirement and exposure to credit risk are
significantly less than the notional amount.
Any premium or transaction fee incurred to purchase interest
rate caps or floors is deferred and amortized to interest income or
interest expense over the term of the contract. Unamortized
premiums related to the purchase of caps and floors are included in
"Other assets" on the Consolidated Balance Sheet.
Borrowed Funds Hedges
The Company has entered into several interest rate swaps to
hedge short-term borrowings used to leverage the balance sheet.
Specifically, FHLB advances which reprice between 30 days and two
years are being used to fund fixed-rate agency mortgage-backed
securities with durations ranging from three to five years. Under
the swap agreements, the Company pays a fixed-rate of interest and
receives a floating-rate which resets either monthly or quarterly.
For the $40 million interest rate cap, the Company receives payment
from the counter party when the federal funds rate goes above the
6.25% strike rate. The following table summarizes the interest rate
swap transactions which impacted the Company's first nine months of
2000 performance:
Fixed Floating Impact
Notional Start Termination Rate Rate Repricing On Interest
Amount Date Date Paid Received Frequency Expense
$100,000,000 10-25-99 10-25-00 6.17% 6.31% Quarterly $ (104,763)
50,000,000 10-25-99 10-25-01 6.41 6.31 Quarterly 66,276
50,000,000 10-25-99 10-25-01 6.42 6.31 Quarterly 38,743
120,000,000 5-01-99 4-30-00 5.00 5.75 Monthly (318,468)
80,000,000 4-13-00 4-15-02 6.93 6.48 Quarterly 164,881
40,000,000 4-11-00 4-30-01 6.25 6.50 Monthly 35,778
$ (117,553)
<PAGE>17
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 September 30, 2000, or September
30, 1999.
13. Goodwill and Core Deposit Intangible Assets
USBANCORP's balance sheet shows both tangible assets (such as
loans, buildings, and investments) and intangible assets (such as
goodwill). The Company now carries $11.4 million of goodwill and
$9.3 million of core deposit intangible assets on its balance sheet.
A rollforward of the Company's intangible asset balances is as
follows (in thousands):
Balance at December 31, 1999 $ 25,655
Reduction due to spin-off of TRB (2,739)
Amortization expense (2,175)
Balance at September 30, 2000 $ 20,741
The Company is amortizing core deposit intangibles over
periods ranging from five to ten years while goodwill is being
amortized over a 15 year life. The straight-line method of
amortization is being used for both of these categories of
intangibles. It is important to note that this intangible
amortization expense is not a future cash outflow. The following
table reflects the future amortization expense of the intangible
assets (in thousands):
Remaining 2000 $ 684
2001 2,731
2002 2,731
2003 2,731
2004 2,304
2005 and after 9,560
<PAGE>18
14. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following at September
30, 2000, (in thousands, except percentages):
Type Maturing Amount Weighted
Average
Rate
Open Repo Plus Overnight $ 27,804 6.77%
Advances and 2000 190,000 6.61
wholesale 2001 76,250 5.90
repurchase 2002 2,500 6.59
agreements 2003 53,750 6.14
2004 and after 115,856 6.19
Total Advances and 438,356 6.32
wholesale repurchase
agreements
Total FHLB Borrowings $ 466,160 6.34%
All of the above borrowings bear a fixed rate of interest,
with the only exceptions being the Open Repo Plus advances whose
rate can change daily. All FHLB stock along with an interest in
unspecified mortgage loans and mortgage-backed securities, with an
aggregate statutory value equal to the amount of the advances, have
been pledged as collateral with the Federal Home Loan Bank of
Pittsburgh to support these borrowings.
15. Capital
The Company is subject to various capital
requirements administered by the federal banking agencies.
Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must
meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgements
by the regulators about components, risk weightings, and
other factors. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Company's financial statements.
<PAGE>19
Quantitative measures established by regulation to
ensure capital adequacy require the Company to maintain
minimum amounts and ratios(set forth in the table below) of
total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average assets. Management believes that
as of September 30, 2000, the Company meets all capital
adequacy requirements to which it is subject.
As of September 30, 2000, and 1999, as well as,
December 31, 1999, the Federal Reserve categorized the
Company as "Well Capitalized" under the regulatory framework
for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum total risk-
based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table. There are no conditions or events since
notification that management believes have changed the
Company's classification category.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
As of September 30, 2000 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk (In thousands, except ratios)
Weighted Assets)
Consolidated $ 103,437 15.76% $ 52,520 8.00% $ 65,650 10.00%
U.S. Bank 88,703 14.06 50,481 8.00 63,101 10.00
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated 84,560 12.88 26,260 4.00 39,390 6.00
U.S. Bank 83,472 13.23 25,240 4.00 37,861 6.00
Tier 1 Capital (to Average
Assets)
Consolidated 84,560 6.67 50,687 4.00 63,359 5.00
U.S. Bank 83,472 6.79 49,142 4.00 61,428 5.00
</TABLE>
16. Segment Results
The financial performance of the Company is also
monitored by an internal funds transfer pricing
profitability measurement system which produces line of
business results and key performance measures. The
Company's major business units include 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.
<PAGE>20
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.
The contribution of the major business segments to
the consolidated results (the operating earnings exclude
spin-off expenses) for the first nine months of 2000 and
1999 were as follows (in thousands, except ratios):
<TABLE>
<CAPTION>
September 30, 2000 Net income Operating earnings Risk adjusted Total assets
return on equity
(Operating)
<S> <C> <C> <C> <C>
Retail banking $ 2,198 $ 2,198 13.5% $ 399,792
Commercial lending 2,819 2,819 17.1 282,130
Mortgage banking (382) (382) (6.7) 31,072
Trust 891 891 34.9 1,794
Other fee based 203 203 16.7 3,079
Investment/Parent (2,055) 89 0.4 551,476
Total $ 3,674 $ 5,818 9.3 $ 1,269,343
September 30, 1999 Net income Operating earnings Risk adjusted Total assets
return on equity
(Operating)
Retail banking $ 3,569 $ 3,569 12.1% $ 694,054
Commercial lending 3,607 3,607 13.4 475,041
Mortgage banking 200 200 3.2 51,585
Trust 799 799 36.0 1,716
Other fee based 131 131 12.1 2,854
Investment/Parent 7,362 7,362 21.6 1,223,443
Total $ 15,668 $ 15,668 15.7 $ 2,448,693
</TABLE>
17. Tax-Free Spin-Off of Three Rivers Bancorp
On April 1, 2000, the Company executed its Board approved tax-
free spin-off of its Three Rivers Bank subsidiary. Shareholders
received one share of the new Three Rivers Bancorp (NASDAQ: TRBC)
common stock for every two shares of USBANCORP common stock that
they owned. The distribution of the Three Rivers Bancorp shares did
not change the number of USBANCORP common shares outstanding.
Standard Mortgage Company (SMC), a mortgage banking company,
previously a subsidiary of Three Rivers Bank, was internally spun-
off from Three Rivers Bank to the Company prior to consummation of
the Three Rivers Bank spin-off.
<PAGE>21
The accompanying USBANCORP Pro Forma Condensed Consolidated
Financial Statements should be read in conjunction with the
historical consolidated financial statements and notes thereto. The
USBANCORP pro forma condensed consolidated income statements assume
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. The pro forma adjustments to the accompanying historical
consolidated statements of income are set forth below.
Pro Forma Condensed Consolidated Statements of Income
Three River
USBANCORP Bancorp USBANCORP
Historical Historical Pro Forma
Period Ended Period Ended Period Ended
September 30, March 31, September 30,
2000 2000 Adjustment 2000
(In thousands, except per share data)
Total interest income $ 85,884 $ 18,100 $ - $ 67,784
Total interest expense 55,449 11,011 44,438
Net interest income 30,435 7,089 23,346
Provision for loan losses 672 150 522
Net interest income after
Provision for loan losses 29,763 6,939 22,824
Total non-interest income 12,639 623 12,016
Total non-interest expense 39,043 6,589 117(A) 32,571
Income before income taxes 3,359 973 (117) 2,269
Provision for income taxes (315) (477) (35)(B) 127
Net income $ 3,674 $ 1,450 $ (82) $ 2,142
Diluted earnings per share $ 0.28 - $(0.11) $ 0.17
Average shares outstanding 13,348 - - 13,348
<PAGE>22
Three Rivers
USBANCORP Bancorp USBANCORP
Historical Historical Pro Forma
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1999 Adjustment 1999
(In thousands, except per share data)
Total interest income $ 165,188 $ 70,816 $ - $ 94,372
Total interest expense 99,504 41,082 58,422
Net interest income 65,684 29,734 35,950
Provision for loan losses 1,900 300 1,600
Net interest income after
Provision for loan losses 63,784 29,434 34,350
Total non-interest income 24,374 5,653 18,721
Total non-interest expense 60,815 21,027 469(A) 40,257
Income before income taxes 27,343 14,060 (469) 12,814
Provision for income taxes 6,922 4,090 (142)(B) 2,690
Net income $ 20,421 $ 9,970 $ (327) $ 10,124
Diluted earnings per share $ 1.52 - $ (0.77) $ 0.75
Average shares outstanding 13,451 - - 13,451
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
Company's historical effective tax rate.
<PAGE>23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
("M.D.& A.")
..ECONOMIC ENVIRONMENT IMPACT ON FINANCIAL PERFORMANCE.When both the
third quarter and first nine months of 2000 are compared to the same
1999 period, the most significant economic item that has impacted
the Company's financial performance has been the higher interest
rate environment. The Federal Reserve Board has 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 has 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 has 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 $360 million in the first nine months of 1999 to $183
million for the same 2000 period. This lower volume, combined with
a reduced spread earned on mortgage loan sales, has reduced non-
interest income by $1.2 million in 2000.(See more detailed
discussion under the Non-Interest Income section of the MD& A.)
Non-interest income was also negatively impacted by $936,000
in losses realized on the sale of $152 million of investment
securities in the first nine months of 2000. The Company used the
proceeds from these sales 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 $4.0 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. 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 1.08%
in the first nine months of 1999 to 0.50% in the first nine months
of 2000.(See more detailed discussion under Net Interest Income and
Margin and Component Changes in Net Interest Income later in this MD
& A.)
.....PERFORMANCE OVERVIEW..... The following table summarizes some
of the Company's key performance indicators (in thousands, except
per share and ratios). The Company successfully spun-off its Three
Rivers Bank subsidiary on April 1, 2000. Consequently, the
financial results after April 1st no longer include Three Rivers
Bank. The pro forma results for the third quarter of 1999 exclude
Three Rivers Bank to allow for more meaningful comparability with
the third quarter of 2000. Operating performance data excludes non-
recurring costs related to the spin-off of Three Rivers Bank.
<PAGE>24
<TABLE>
<CAPTION>
Pro Forma
Three Months Ended Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999 September 30, 1999
<S> <C> <C> <C>
Net income $ 1,053 $ 2,675 $ 5,092
Diluted earnings per share 0.08 0.20 0.38
Return on average equity 5.97% 14.57% 16.27%
Return on average assets 0.33 0.75 0.82
Operating Performance Data
Operating earnings $ 1,283 $ 2,675 $ 5,092
Operating earnings per
diluted share 0.10 0.20 0.38
Cash operating earnings
per diluted share 0.14 0.24 0.43
Return on average equity 7.27% 14.57% 16.27%
Return on average assets 0.40 0.75 0.82
</TABLE>
The Company's net income for the third quarter of 2000 totaled
$1.1 million or $0.08 per diluted share. Operating earnings,
excluding final Three Rivers Bank spin-off costs, totaled $1.3
million or $0.10 per diluted share. On an operating basis, the
Company's return on equity(ROE) averaged 7.27% in the third quarter
of 2000. The third quarter 2000 financial performance represents a
decrease from the $5.1 million or $0.38 per diluted share actual
performance or $2.7 million or $0.20 per diluted share pro forma
performance for the third quarter of 1999. The Company's pro forma
ROE in the third quarter of 1999 averaged 14.57%.
Factors that contributed to the lower operating earnings in
the third quarter of 2000 included reduced net interest income, an
increased provision for loan losses, and higher non-interest
expense. A 42 basis point reduction in the net interest margin and
a reduced level of earning assets caused net interest income to
decline by $2.0 million from the pro forma third quarter 1999 level.
The provision for loan losses was $99,000 higher and non-interest
expenses, excluding spin-off costs, were $330,000 higher than the
pro forma 1999 level. These negative items were partially offset by
a $564,000 increase in non-interest income due to increased trust
fees and gains generated on the sale of mortgage servicing rights.
<PAGE>25
Presented on this page was a graphic representation of net interest margin
vs cost of funds vs fed funds rate for the last nine quarters. The data
points were;
net interest margin cost of funds fed funds rate
2.54 5.22 6.60
2.54 5.10 6.27
2.75 4.96 5.65
2.90 4.78 5.31
2.99 4.64 5.10
3.00 4.62 4.73
2.95 4.70 4.73
3.01 4.77 4.91
3.15 4.88 5.54
.....NET INTEREST INCOME AND MARGIN..... The Company's net interest
income represents the amount by which interest income on earning
assets exceeds interest paid on interest bearing liabilities. Net
interest income is a primary source of the Company's earnings; it is
affected by interest rate fluctuations as well as changes in the
amount and mix of earning assets and interest bearing liabilities.
It is the Company's philosophy to strive to optimize net interest
income performance in varying interest rate environments. The
following table compares the Company's net interest income
performance for the third quarter of 2000 to the third quarter of
1999 on both an actual and pro forma basis (in thousands, except
percentages):
Three Months Ended
September 30,
2000 1999 1999
Actual Pro Forma Actual
Interest income $ 22,039 $ 23,969 $ 41,952
Interest expense 14,701 14,656 25,199
Net interest income 7,338 9,313 16,753
Tax-equivalent
adjustment 360 539 775
Net tax-equivalent
interest income $ 7,698 $ 9,852 $ 17,528
Net interest margin 2.54% 2.96% 2.99%
USBANCORP's net interest income on a tax-equivalent basis
decreased by $2.2 million or 21.9% from the pro forma 1999 third
quarter due to a combination of a reduced net interest margin and a
lower volume of earning assets. A 42 basis point drop in the net
interest margin was caused by a 55 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 six
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 the Company's
decision to delever the balance sheet in 2000.
<PAGE>26
...COMPONENT CHANGES IN NET INTEREST INCOME... Regarding the
separate components of net interest income, the Company's total tax-
equivalent interest income for the third quarter of 2000 decreased
by $2.1 million or 8.6% when compared to the same 1999 pro forma
quarter. This decrease was due to the previously mentioned decline
in the volume of earning assets. Total average earning assets were
$124 million lower in the third quarter of 2000 due to a $132
million or 18.3% decrease in investment securities which more than
offset an $8 million or 1.3% 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
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 solid 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 five basis point improvement in the total loan
portfolio yield to 8.20%. The yield on total investment securities
decreased by 17 basis points to 6.54% as slower prepayment speeds
have extended the duration of the portfolio which has limited
repricing opportunities in the higher interest rate environment
experienced in the third quarter of 2000. Also, the Company has not
been purchasing new higher yielding securities due to the decision
to use investment portfolio cash flow to pay down borrowings.
The Company's total interest expense for the third quarter of
2000 increased by $46,000 when compared to the same 1999 pro forma
quarter. This higher interest expense was due entirely to a 55
basis point increase in the cost of funds to 5.22% which caused
interest expense to rise by $1.7 million. Interest rates,
particularly short rates such as fed funds and 90 day libor, were
140 basis points higher in the third quarter of 2000 as compared to
the third quarter of 1999. These higher interest rates contributed
to a 70 basis point increase in the cost of borrowings to 6.07% and
a 58 basis point increase in the cost of interest bearing deposits
to 4.29%. This increased interest expense resulting from higher
rates more than offset a $1.5 million reduction in interest expense
resulting from a lower volume of interest bearing liabilities.
Specifically, total borrowed funds were $116 million lower in the
third quarter of 2000 due to the previously discussed balance sheet
deleverage strategy. The Company expects to continue to experience
net interest margin pressure in 2000 due to the anticipated upward
repricing of maturing deposits and borrowings which will negatively
impact the cost of funds.
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 tables
excludes Three Rivers Bank.
<PAGE>27
<TABLE>
<CAPTION>
Three Months Ended September 30 (In thousands, except percentages)
2000 Actual 1999 Actual
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans and loans held
for sale, net of
unearned income $ 607,092 $ 12,701 8.20% $ 1,061,789 $ 21,940 8.08%
Deposits with banks 3,391 56 6.50 4,779 31 2.56
Federal funds sold 600 10 6.39 - - -
Total investment
securities 589,228 9,632 6.54 1,268,414 20,756 6.55
Total interest earning
assets/interest income 1,200,311 22,399 7.41 2,334,982 42,727 7.27
Non-interest earning assets:
Cash and due from banks 19,412 38,259
Premises and equipment 13,593 19,199
Other assets 60,005 92,204
Allowance for loan losses (5,396) (10,947)
TOTAL ASSETS $1,287,925 $2,473,697
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 47,497 $ 119 1.00% $ 93,710 $ 233 0.99%
Savings 96,674 366 1.51 173,760 726 1.66
Money markets 130,398 1,630 4.97 185,809 1,634 3.49
Other time 300,841 4,089 5.41 609,678 7,560 4.92
Total interest bearing
deposits 575,410 6,204 4.29 1,062,957 10,153 3.79
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other
short-term borrowings 77,905 1,084 5.44 177,623 2,280 5.01
Advances from Federal
Home Loan Bank 427,403 6,651 6.19 867,555 11,921 5.45
Guaranteed junior subordinated
deferrable interest
debentures 34,500 740 8.58 34,500 740 8.58
Long-term debt 3,529 22 2.48 8,220 105 5.07
Total interest bearing
liabilities/interest
expense 1,118,747 14,701 5.22 2,150,855 25,199 4.64
Non-interest bearing liabilities:
Demand deposits 85,800 173,549
Other liabilities 13,205 25,135
Stockholders' equity 70,173 124,158
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,287,925 $2,473,697
Interest rate spread 2.19 2.63
Net interest income/
net interest margin 7,698 2.54% 17,528 2.99%
Tax-equivalent adjustment (360) (775)
Net Interest Income $ 7,338 $16,753
</TABLE>
<PAGE>28
<TABLE>
<CAPTION>
Three Months Ended September 30 (In thousands, except percentages)
2000 Actual 1999 Pro Forma
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans and loans held
for sale, net of
unearned income $ 607,092 $ 12,701 8.20% $ 599,319 $ 12,389 8.15%
Deposits with banks 3,391 56 6.50 3,922 25 2.47
Federal funds sold 600 10 6.39 - - -
Total investment
securities 589,228 9,632 6.54 721,262 12,093 6.71
Total interest earning
assets/interest income 1,200,311 22,399 7.41 1,324,503 24,507 7.35
Non-interest earning assets:
Cash and due from banks 19,412 20,965
Premises and equipment 13,593 13,837
Other assets 60,005 69,792
Allowance for loan losses (5,396) (5,359)
TOTAL ASSETS $1,287,925 $1,423,738
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 47,497 $ 119 1.00% $ 50,354 $ 127 1.00%
Savings 96,674 366 1.51 105,942 402 1.51
Money markets 130,398 1,630 4.97 127,613 1,202 3.74
Other time 300,841 4,089 5.41 301,292 3,741 4.93
Total interest bearing
deposits 575,410 6,204 4.29 585,201 5,472 3.71
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other
short-term borrowings 77,905 1,084 5.44 121,845 1,529 4.98
Advances from Federal
Home Loan Bank 427,403 6,651 6.19 499,641 6,882 5.46
Guaranteed junior subordinated
deferrable interest
debentures 34,500 740 8.58 34,500 740 8.58
Long-term debt 3,529 22 2.48 5,392 32 2.35
Total interest bearing
liabilities/interest
expense 1,118,747 14,701 5.22 1,246,579 14,655 4.67
Non-interest bearing liabilities:
Demand deposits 85,800 88,414
Other liabilities 13,205 15,694
Stockholders' equity 70,173 73,051
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,287,925 $1,423,738
Interest rate spread 2.19 2.69
Net interest income/
net interest margin 7,698 2.54% 9,852 2.96%
Tax-equivalent adjustment (360) (539)
Net Interest Income $ 7,338 $ 9,313
</TABLE>
<PAGE>29
...PROVISION FOR LOAN LOSSES..... The Company's provision for loan
losses for the third quarter of 2000 totaled $249,000 or 0.16% of
average total loans. This provision level was above net charge-offs
for the quarter which amounted to $204,000 or 0.14% of average
loans. Both the provision and net charge-offs in the third quarter
of 2000 were higher than the prior year third quarter. The Company
applies a consistent methodology and procedural discipline to
evaluate the adequacy of the allowance for loan losses on a
quarterly basis. (See further discussion in Note 9 and the Allowance
for Loan Losses section of the MD&A.) The Company expects its
provision level to at a minimum match and more likely exceed net
charge-offs through the remainder of 2000. This is due to the
inherent risk in the loan portfolio resulting from increased
holdings of commercial and commercial real estate loans and the
increased credit risk associated with the higher interest rate
environment in 2000.
.....NON-INTEREST INCOME..... Non-interest income for the third
quarter of 2000 totaled $4.4 million which represented an $806,000
decrease from the actual third quarter 1999 performance and a
$564,000 increase from the pro forma 1999 third quarter results.
This increase when compared to the pro forma 1999 third quarter was
primarily due to the following items:
a $251,000 increase in gains realized on loans held for
sale/mortgage servicing due entirely to a $300,000 increase in
income generated on the sale of mortgage servicing rights. This
gain generated on the sale of $2 million of mortgage servicing
rights more than offset reduced gains on loan sale income due to
lower wholesale mortgage loan production. The Company took
advantage of the improved value of mortgage servicing rights in the
higher interest rate environment to generate cash and pay down debt
in its mortgage banking operation in the third quarter of 2000.
a $291,000 increase in trust fees to $1.3 million in the third
quarter of 2000. This trust fee growth reflects increased
assets under management due to the profitable expansion of the
Company's trust operations.
Non-interest income as a percentage of total revenue averaged
37.7% in the third quarter of 2000. To provide a longer term
perspective for this comparison, the ratio of non-interest income to
total revenue averaged 28.3% for the full year 1997. 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 grown by 97% from $202,000 in the first
nine months of 1999 to $399,000 in the first nine months of 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 72% from $89,000 in the first
nine months of 1999 to $153,000 for the same 2000 period. 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 nine
months of operation these two entities generated approximately
$90,000 of non-interest revenue.
<PAGE>30
.....NON-INTEREST EXPENSE..... Non-interest expense for the third
quarter of 2000 totaled $10.3 million which represented a $4.6
million decrease from the actual third quarter 1999 performance and
a $657,000 increase from the pro forma 1999 third quarter results.
This increase when compared to the pro forma 1999 third quarter was
primarily due to the following items:
in the third quarter of 1999 the Company benefited from a $625,000
reversal of an impairment reserve on mortgage servicing rights that
had been established in 1998. This reserve reversal was due to the
improved value of the mortgage servicing portfolio and favorably
reduced non-interest expense. There was no such benefit in the
third quarter of 2000.
an $787,000 or 13.8% decrease in salaries and employee benefits due
to 23 fewer FTE employees and reduced incentive compensation and
pension/profit-sharing expense. The lower employee base resulted
from a downsizing of the mortgage banking operation, fewer employees
at the Parent Company, and the Company's ability to delay filling
certain open positions.
the recognition of $327,000 in final costs related to the April 1st
spin-off of Three Rivers Bank to USBANCORP shareholders.
a $153,000 increase in equipment expense due to higher technology
related expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999
.....PERFORMANCE OVERVIEW..... The following table summarizes some
of the Company's key performance indicators (in thousands, except
per share and ratios). The Company's actual performance results for
the first nine months of 2000 only include Three Rivers Bank for the
first quarter of the year while the actual performance results for
the first nine months of 1999 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.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Nine Months Ended Nine Months Ended Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
<S> <C> <C> <C> <C>
Net income $3,674 $15,668 $ 2,224 $8,188
Diluted earnings
per share 0.28 1.16 0.17 0.61
Return on average
equity 5.86% 15.66 % 4.34% 14.28%
Return on average
assets 0.29 0.86 0.22 0.77
Operating Performance Data:
Operating earnings $ 5,818 $15,668 $ 3,974 $8,188
Operating earnings
per diluted share 0.44 1.16 0.30 0.61
Cash operating earnings per
diluted share 0.57 1.31 0.42 0.73
Return on average
equity 9.28% 15.66% 7.75% 14.28%
Return on average
assets 0.46 0.86 0.40 0.77
</TABLE>
<PAGE>31
The Company's net income for the first nine months of 2000
totaled $3.7 million or $0.28 per diluted share. Operating
earnings, excluding spin-off costs, totaled $5.8 million or $0.44
per diluted share. USBANCORP expensed all costs incurred to complete
the Three Rivers Bank spin-off in the first nine months of 2000.
These non-recurring spin-off costs amounted to $2.1 million on an
after-tax basis. On a pro forma basis, the Company's operating
earnings totaled $4.0 million or $0.30 per diluted share for the
first nine months of 2000. The financial performance for the first
nine months of 2000 represents a decrease from the $15.7 million or
$1.16 per diluted share actual performance or $8.2 million or $0.61
per diluted share pro forma performance for the first nine months of
1999.
Factors that contributed to the lower operating earnings in
the first nine months of 2000 included reduced net interest income
and a lower level of non-interest income. 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 $4.0 million from the pro forma
1999 level. These negative items were partially offset by a lower
provision for loan losses and reduced income tax expense.
.....NET INTEREST INCOME AND MARGIN..... The following table
compares the Company's net interest income performance for the first
nine months of 2000 to the first nine months of 1999 on both an
actual and pro forma basis (in thousands, except percentages):
Pro Forma
Nine Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Interest income $ 85,884 $ 123,386 $ 67,784 $ 71,022
Interest expense 55,449 73,814 44,438 43,683
Net interest income 30,435 49,572 23,346 27,339
Tax-equivalent
adjustment 1,385 2,347 1,179 1,639
Net tax-equivalent
interest income $ 31,820 $ 51,919 $ 24,525 $ 28,978
Net interest margin 2.66% 2.98% 2.61% 2.90%
USBANCORP's pro forma net interest income on a tax-equivalent
basis decreased by $4.5 million or 15.4% from the first nine months
of 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 41 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 six
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.
<PAGE>32
...COMPONENT CHANGES IN NET INTEREST INCOME... Regarding the
separate components of net interest income, the Company's total pro
forma tax-equivalent interest income for the first nine months of
2000 decreased by $3.7 million or 5.1% when compared to the same
1999 period. This decrease was due to the previously mentioned
decline in the volume of earning assets. Total pro forma average
earning assets were $79 million lower in the first nine months of
2000 due to a $90 million or 12.5% decrease in investment securities
which more than offset a $9 million or 1.5% increase in total loans.
Beginning in the later part of the first quarter of 2000,
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 paydown short-term borrowings and reduce the Company's exposure
to rising short-term interest rates. Within the loan portfolio, the
shift towards higher yielding commercial loans was a key factor
contributing to the 13 basis point improvement in the total loan
portfolio yield to 8.26%. The yield on total investment securities
decreased by 13 basis points to 6.50% as slower prepayment speeds
have extended the duration of the portfolio which has limited
repricing opportunities in the higher interest rate environment
experienced in 2000.
The Company's total pro forma interest expense for the first
nine months of 2000 increased by $756,000 when compared to the same
1999 period. This higher interest expense was due entirely to a 41
basis point increase in the cost of funds to 5.09% due to the higher
interest rate environment in 2000. Higher interest rates,
particularly short term rates, contributed to a 56 basis point
increase in the cost of borrowings to 5.96% and a 41 basis point
increase in the cost of interest bearing deposits to 4.13%. This
increased interest expense resulting from higher rates more than
offset a $3.0 million reduction in interest expense resulting from
a lower volume of interest bearing liabilities. Specifically, total
borrowed funds were $77 million lower in the first nine months of
2000 due to the previously discussed balance sheet deleverage
strategy.
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 has executed a total of $320 million of off-balance
sheet hedging transactions which help fix the variable funding costs
associated with the use of short-term borrowings to fund earning
assets. (See further discussion under Note 12.) Additionally, the
maximum amount of leveraging the Company can 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 plus or
minus 7.5% and net income variability to plus or minus 20% over a
twelve month period. (See further discussion under Interest Rate
Sensitivity). 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 1.08% in the first nine months of 1999 to 0.50%
in the first nine months of 2000. The net interest income
contribution from the leveraged assets declined from $7.7 million or
14.8% of total net interest income in the first nine months of 1999
to $2.5 million or 7.8% of total net interest income in the first
nine months of 2000. On a pro forma basis, the decline in net
interest income on leveraged assets amounted to $3.2 million. The
Company expects to continue to reduce the size of both the
investment securities portfolio and borrowed funds through the
remainder of 2000.
The tables that follow provide an analysis of net interest
income for the nine month periods ended September 30, 2000 and
September 30, 1999 on both an actual and pro forma basis. For a
detailed discussion of the components and assumptions included in
the table, see the paragraph before the quarterly tables on page 28.
<PAGE>33
<TABLE>
<CAPTION>
Nine Months Ended September 30 (In thousands, except percentages)
2000 Actual 1999 Actual
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans and loans held
for sale, net of
unearned income $ 767,807 $ 48,010 8.23% $ 1,062,539 $ 65,376 8.11%
Deposits with banks 4,835 135 3.67 4,152 89 2.83
Federal funds sold 200 10 6.44 - - -
Total investment securities 804,419 39,114 6.48 1,235,344 60,268 6.50
Total interest earning
assets/interest income 1,577,261 87,269 7.35 2,302,035 125,733 7.26
Non-interest earning assets:
Cash and due from banks 25,929 37,132
Premises and equipment 15,352 18,804
Other assets 63,328 99,610
Allowance for loan losses (7,108) (11,033)
TOTAL ASSETS $1,674,762 $2,446,548
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 62,330 $ 452 0.97% $ 94,122 $ 698 0.99%
Savings 119,686 1,422 1.59 173,690 2,101 1.62
Money markets 146,187 4,957 4.53 183,194 4,630 3.38
Other time 411,991 16,086 5.22 617,771 23,263 5.03
Total interest bearing deposits 740,194 22,917 4.14 1,068,777 30,692 3.84
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other
short-term borrowings 143,704 6,272 5.83 210,104 7,811 4.97
Advances from Federal
Home Loan Bank 538,103 23,911 5.94 796,408 32,777 5.50
Guaranteed junior subordinated
deferrable interest debentures 34,500 2,220 8.58 34,500 2,220 8.58
Long-term debt 4,717 129 3.65 8,638 314 4.85
Total interest bearing
liabilities/interest expense 1,461,218 55,449 5.06 2,118,427 73,814 4.65
Non-interest bearing liabilities:
Demand deposits 112,953 169,078
Other liabilities 16,825 25,271
Stockholders' equity 83,766 133,772
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,674,762 $2,446,548
Interest rate spread 2.29 2.61
Net interest income/
net interest margin 31,820 2.66% 51,919 2.98%
Tax-equivalent adjustment (1,385) (2,347)
Net Interest Income $30,435 $49,572
</TABLE>
<PAGE>34
<TABLE>
<CAPTION>
Nine Months Ended September 30 (In thousands, except percentages)
2000 Pro Forma 1999 Pro Forma
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans and loans held
for sale, net of
unearned income $ 609,273 $ 38,256 8.26% $ 600,112 $ 36,979 8.13%
Deposits with banks 4,587 130 3.73 3,101 70 2.98
Federal funds sold 199 10 6.44 - - -
Total investment securities 626,663 30,567 6.50 716,564 35,654 6.63
Total interest earning
assets/interest income 1,240,722 68,963 7.38 1,319,777 72,703 7.32
Non-interest earning assets:
Cash and due from banks 20,698 20,629
Premises and equipment 13,552 13,815
Other assets 58,293 75,039
Allowance for loan losses (5,425) (5,135)
TOTAL ASSETS $1,327,840 $1,424,125
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 48,311 $ 362 1.00% $ 50,224 $ 378 1.01%
Savings 98,258 1,108 1.51 106,961 1,209 1.51
Money markets 129,063 4,589 4.77 124,265 3,321 3.57
Other time 301,971 11,783 5.21 303,221 11,391 5.01
Total interest bearing
deposits 577,603 17,842 4.13 584,671 16,299 3.72
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other
short-term borrowings 126,028 5,515 5.85 156,286 5,767 4.93
Advances from Federal
Home Loan Bank 418,643 18,786 5.99 463,903 19,292 5.56
Guaranteed junior subordinated
deferrable interest debentures 34,500 2,220 8.58 34,500 2,220 8.58
Long-term debt 3,955 75 2.53 5,882 104 2.36
Total interest bearing
liabilities/interest expense 1,160,729 44,438 5.09 1,245,242 43,682 4.68
Non-interest bearing liabilities:
Demand deposits 85,173 86,635
Other liabilities 13,413 15,577
Stockholders' equity 68,525 76,671
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,327,840 $1,424,125
Interest rate spread 2.28 2.64
Net interest income/
net interest margin 24,525 2.61% 29,021 2.90%
Tax-equivalent adjustment (1,179) (1,639)
Net Interest Income $23,346 $27,382
</TABLE>
<PAGE>35
...PROVISION FOR LOAN LOSSES..... The Company's provision for loan
losses for the first nine months of 2000 totaled $672,000 or 0.12%
of average total loans which was comparable with net charge-offs for
the period of $636,000 or 0.11% of average total loans. Both the
provision and net charge-offs in the first nine months of 2000 were
lower than the comparable 1999 period.
.....NON-INTEREST INCOME..... Non-interest income for the first nine
months of 2000 totaled $12.6 million which represented a $6.8
million decrease from the actual 1999 first nine months performance
of $19.4 million. On a pro forma basis, non-interest income for the
first nine months of 2000 totaled $12.0 million which represented a
$3.1 million decrease from the pro forma 1999 first nine months
performance of $15.1 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 has reduced both the
volume and spread on loan sales into the secondary market in
the first nine months of 2000. The following table reflects
the impact of these reductions:
2000 1999 Difference
Mortgage loans sold $183,000,000 $360,000,000 $(177,000,000)
Gain on mortgage loans sold 935,000 2,120,000 (1,185,000)
Spread earned on loans sold 51b.p. 59b.p. (8 b.p.)
the non-recurrence of a $540,000 gain recognized on the sale of a
marginally profitable branch office in the second quarter of 1999.
a $936,000 loss realized on the sale of $152 million of investment
securities in the first nine months of 2000. The Company used the
proceeds from the sale to paydown short-term borrowings and delever
its balance sheet. This balance sheet repositioning strategy helped
reduce the Company's exposure to rising short-term interest rates.
When compared to the $431,000 gain realized in the first nine
months of 1999, this represents a net unfavorable change of $1.4
million.
a $148,000 or 27.6% increase in net mortgage servicing fees in 2000
due to reduced amortization expense on mortgage servicing rights as
the higher interest rate environment has caused a slowdown in
mortgage prepayment speeds.
.....NON-INTEREST EXPENSE..... Non-interest expense for the first
nine months of 2000 totaled $39.0 million which represented a $7.1
million decrease from the actual 1999 first nine months performance
of $46.1 million. On a pro forma basis, non-interest expense for
the first nine months of 2000 totaled $32.5 million which
represented a $2.1 million increase from the pro forma 1999 first
nine months performance of $30.4 million. Factors significantly
impacting non-interest expenses in 2000 included:
<PAGE>36
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.
a $6.0 million decrease in salaries and employee benefits (a $1.6
million decline on a pro forma basis) in 2000. The pro forma
decline is due to 23 fewer FTE employees and reduced incentive
compensation and pension/profit-sharing expense. The lower employee
base resulted primarily from a downsizing of the mortgage banking
operation 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.
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 nine months of 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. There was also $570,000
less benefit from a reversal of an impairment reserve for mortgage
servicing rights in 2000 as compared to 1999.
.....INCOME TAX EXPENSE..... The Company recognized a net credit for
income taxes of $315,000 in the first nine months of 2000. During
the first quarter of 2000, the Internal Revenue Service completed
its examination of the Company's tax returns through the 1997 tax
year. As a result of the successful conclusion of this examination,
the Company was able to reduce its 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 the
first nine months of 2000 amounted to $610,000 or an effective rate
of 18.2%. This represented a decline from the $5.5 million
provision or 25.9% effective tax rate recognized in the first nine
months of 1999 as the level of pre-tax income has dropped to a
greater extent than tax-free income. Net deferred income taxes of
$2.0 million have been provided as of September 30, 2000, on the
differences between taxable income for financial and tax reporting
purposes.
.....NET OVERHEAD BURDEN..... The Company's efficiency ratio (non-
interest expense divided by total revenue) on an operating basis,
excluding spin-off costs, increased to 82.1% in the first nine
months of 2000 which compares unfavorably to the 64.6% efficiency
ratio reported for the first nine months of 1999. Factors
contributing to the higher efficiency ratio included lower net
interest income, reduced gains from asset sales, and reduced revenue
from the mortgage banking operation. 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
the first nine months of 2000, stated on a cash basis excluding the
intangible amortization, was 77.2% 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.
<PAGE>37
..SEGMENT RESULTS..Note 16 presents the operating performance
results of the Company's key business segments and identifies their
net income contribution and risk-adjusted return on equity
performance. When comparing the first nine months of 2000 to the
same 1999 period, the Trust segment again produced the highest ROE
averaging 34.9% in 2000 compared to 36.0% in 1999. Trust also grew
its net income by 11.5% in 2000 due to success in generating new
401(k) business and continued growth of collective investment funds
for trade union pension plans. Commercial Lending increased its ROE
from 13.4% for the first nine months of 1999 to 17.1% for the first
nine months of 2000 due to continued profitable loan growth
particularly in the commercial leasing operation. Retail banking
demonstrated an improvement in ROE to 13.5% due to reduced operating
expenses in the branch network. The Company has experienced
earnings pressure in mortgage banking as that division lost $382,000
in the first nine months of 2000 producing a ROE of -6.7%. The
reduced gains on loan sales due to lower refinance activity has had
a significant negative impact on the mortgage banking operation.
The Company is currently exploring it strategic options to improve
the earnings performance in mortgage banking. The operating ROE in
the investment/parent segment has declined from 21.6% in 1999 to
0.4% in 2000. The previously discussed $936,000 of securities
losses realized to delever the balance sheet 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 also 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.
.....BALANCE SHEET..... The Company's total consolidated assets were
$1.27 billion at September 30, 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 modestly from year-end as continued growth in
commercial loans was more than offset by lower balances of
residential mortgage and consumer loans. Cash balances dropped by
$8 million as the Company maintained higher cash balances at
December 31, 1999, in anticipation of potential deposit outflows due
to Year 2000. No material deposit outflows materialized.
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 $130 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 $6.5 million from year-end 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 $11.9 million at September 30, 2000.
<PAGE>38
.....LOAN QUALITY.....The following table sets forth information
concerning USBANCORP's loan delinquency and other non-performing
assets (in thousands, except percentages):
<TABLE>
<CAPTION>
Pro Forma
September 30 December 31 December 31 September 30
2000 1999 1999 1999
<S> <C> <C> <C> <C>
Total loan delinquency (past due
30 to 89 days) $ 4,575 $5,920 $9,931 $ 9,199
Total non-accrual loans 6,085 2,872 4,928 9,888
Total non-performing assets<F1> 6,596 4,283 13,359 11,631
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 0.75% 0.96% 0.91% 0.86%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned income 0.99 0.47 0.45 0.92
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 1.08 0.69 1.21 1.08
<F1>Non-performing assets are comprised of (i) loans that are
on a non-accrual basis, (ii) loans that are contractually past due
90 days or more as to interest and principal payments some of which
are insured for credit loss, and (iii) other real estate owned. All
loans, except for loans that are insured for credit loss, are placed
on non-accrual status upon becoming 90 days past due in either
principal or interest.
</TABLE>
Between December 31, 1999, and September 30, 2000, total loan
delinquency as a percentage of total loans declined to 0.75%. Non-
performing assets as a percentage of total loans declined from 1.21% to
1.08% on an actual basis but increased from the 0.69% December 31, 1999
pro forma ratio. During the third quarter of 2000, one commercial loan
relationship totaling $2.7 million was transferred into non-accrual
status. In total at September 30, 2000, $3.8 million or 58% of the
total non-performing assets related to two commercial loan
relationships for which specific allocations within the loan loss
reserve amounting to $450,000 had been established. The Company is
working diligently to try to successfully workout of both of these
problem credits prior to year-end. Additionally, $1.9 million or 29% of
the total non-performing assets are residential mortgages which have
historically experienced low levels of net charge-offs. At all dates
presented, the Company had no troubled debt restructurings which
involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates.
<PAGE>39
.....ALLOWANCE FOR LOAN LOSSES.....The following table sets forth
changes in the allowance for loan losses and certain ratios for the
periods ended (in thousands, except percentages):
<TABLE>
<CAPTION>
Pro Forma
September 30 December 31 December 31 September 30
2000 1999 1999 1999
<S> <C> <C> <C> <C>
Allowance for loan losses $ 5,358 $5,329 $ 10,350 $ 10,911
Allowance for loan losses as
a percentage of each of
the following:
total loans and loans
held for sale,
net of unearned income 0.88% 0.87% 0.94% 1.02%
total delinquent loans
(past due 30 to 89 days) 117.11 90.02 104.22 118.61
total non-accrual loans 88.05 185.55 210.02 110.35
total non-performing assets 81.23 124.42 77.48 93.81
</TABLE>
Since December 31, 1999, the balance in the allowance for loan
losses declined by $5.0 million due entirely to the spin-off of Three
Rivers Bank. On a pro forma basis, the allowance for loan losses has
grown modestly during 2000 as the loan loss provision has slightly
exceeded net charge-offs. Due to the previously discussed increase in
non-performing assets during the third quarter of 2000, the Company's
coverage of non-performing assets declined to 81% which is below the
minimum financial covenant requirement associated with the Parent
Company's unsecured line of credit. The Company had no borrowings
outstanding on this line of credit at September 30, 2000 and will not
draw on the line until the loan loss reserve coverage ratio of non-
performing assets is in compliance with the minimum financial covenant.
.....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.
Management places primary emphasis on simulation modeling to
manage and measure interest rate risk. The Company's asset liability
management policy seeks to limit net interest income variability over
the first twelve months of the forecast period to plus or minus 7.5%
and net income variability to plus or minus 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.
<PAGE>40
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 September 30, 2000,
levels. The Company's most likely rate scenario is based upon published
economic consensus estimates. Each rate scenario contains unique
prepayment and repricing assumptions which are applied to the Company's
expected balance sheet composition which was developed under the most
likely interest rate scenario.
Variability of Change In
Interest Rate Net Interest Variability of Market Value of
Scenario Income Net Income Portfolio Equity
Base 0% 0% 0%
Flat (0.1) (0.4) 1.0
200bp increase (5.9) (19.0) (22.8)
200bp decrease (0.1) 8.5 41.0
As indicated in the table, the maximum negative variability of
USBANCORP's net interest income and net income over the next twelve
month period was (5.9%) and (19.0%) respectively, under an upward
rate shock forecast reflecting a 200 basis point increase in
interest rates. The variability of market value of portfolio equity
was (22.8%) under this interest rate scenario. The off-balance
sheet borrowed funds hedge transactions also helped reduce the
variability of forecasted net interest income, net income, and
market value of portfolio equity in a rising interest rate
environment. Finally, this sensitivity analysis is limited by the
fact that it does not include all balance sheet repositioning
actions the Company may take should severe movements in interest
rates occur such as lengthening or shortening the duration of the
securities portfolio or entering into additional off-balance sheet
hedging transactions. These actions would likely reduce the
variability of each of the factors identified in the above table but
the cost associated with the repositioning would most likely
negatively impact net income.
.....LIQUIDITY...... Liquidity can be analyzed by utilizing the
Consolidated Statement of Cash Flows. Cash equivalents decreased by
$32 million from December 31, 1999, to September 30, 2000, due
primarily to $209 million of net cash used by financing activities.
This more than offset $33 million of net cash provided by operating
activities and $161 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 $191 million. Cash advanced for new loan
fundings and purchases totaled $111 million and was approximately $9
million greater than 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
$202 million. The Company used $4.4 million of cash to pay common
dividends to shareholders and $2.2 million of cash to service the
dividend on the guaranteed junior subordinated deferrable interest
debentures.
<PAGE>41
.....CAPITAL RESOURCES..... As presented in Note 15, the Company
continues to be considered well-capitalized after the spin-off of
Three Rivers Bank. The Company targets an operating range of 6.0%
to 6.50% for the asset leverage ratio because management and the
Board of Directors believes that this level provides an optimal
balance between regulatory capital requirements and shareholder
value needs. Note that the impact of other comprehensive
income(loss) is excluded from the regulatory capital ratios.
Additionally, the Company will generate approximately $2.8 million
of tangible capital in 2000 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 first nine months of 2000, the Company
has paid out in dividends 58% of its cash operating earnings per
share and 80% of its reported cash net income per share. The
Company currently does not envision resuming its treasury stock
repurchase program over the next twelve month period and will
continue to shrink the size of the balance sheet through deleverage
of the investment securities portfolio.
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's has declared two 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 $4.00 market price, this
equates to a 9.0% 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.
Presented on this page was a graphic representation of the dividends
paid by the Company over the past 10 years. The data points were:
0.36, 0.35, 0.36, 0.32, 0.28, 0.21, 0.19, 0.17, 0.15, 0.11, and 0.03.
<PAGE>42
.....FUTURE ACCOUNTING STANDARD.....In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement #133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS #133"), which is required to be adopted in years beginning
after June 15, 1999. The statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The statement
will require the Company to recognize all derivatives on the balance
sheet at 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. This statement has been
amended by SFAS #137, "Accounting for Derivative Instruments and
Hedging Activity - Deferral of the effective date of SFAS #133."
SFAS #137 will be effective for years beginning after June 15, 2000.
The ineffective portions of a derivative's change in fair value
will be immediately recognized in earnings. The Company does not
expect the initial adoption of SFAS #133 to have a material effect
on the Company's operations or financial position. The Company is
required to adopt SFAS #133 in the first quarter of fiscal 2001.
.....FORWARD LOOKING STATEMENT..... This Form 10-Q contains various
forward-looking statements and includes assumptions concerning the
Company's beliefs, plans, objectives, goals, expectations,
anticipations estimates, intentions, operations, future results, and
prospects, including statements that include the words "may,"
"could," "should," "would," "believe," "expect," "anticipate,"
"estimate," "intend," "plan" or similar expressions. These forward-
looking statements are based upon current expectations and are
subject to risk and uncertainties. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act
of 1995, the Company provides the following cautionary statement
identifying important factors (some of which are beyond the
Company's control) which could cause the actual results or events to
differ materially from those set forth in or implied by the forward-
looking statements and related assumptions.
Such factors include the following: (i) risk resulting from
the Distribution and the operation of Three Rivers Bank as a
separate independent company, (ii) the effect of changing regional
and national economic conditions; (iii) the effects of trade,
monetary and fiscal policies and laws, including interest rate
policies of the Board of Governors of the Federal Reserve System;
(iv) significant changes in interest rates and prepayment speeds;
(v) inflation, stock and bond market, and monetary fluctuations;
(vi) credit risks of commercial, real estate, consumer, and other
lending activities; (vii) changes in federal and state banking and
financial services laws and regulations; (viii) the presence in the
Company's market area of competitors with greater financial
resources than the Company; (ix) the timely development of
competitive new products and services by the Company and the
acceptance of those products and services by customers and
regulators (when required); (x) the willingness of customers to
substitute competitors' products and services for those of the
Company and vice versa; (xi) changes in consumer spending and
savings habits; (xii) unanticipated regulatory or judicial
proceedings; and (xiii) other external developments which could
materially impact the Company's operational and financial
performance.
The foregoing list of important factors is not exclusive, and
neither such list nor any forward-looking statement takes into
account the impact that any future acquisition may have on the
Company and on any such forward-looking statement.
<PAGE>43
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation, as amended (Incorporated
by reference to Exhibit III to Registration Statement
No. 2-79639 on Form S-14, Exhibits 4.2 and 4.3 to
Registration Statement No. 33-685 on Form S-2, Exhibit
4.1 to Registration Statement No. 33-56604 on Form S-3,
and Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994).
3.2 Bylaws, as amended and restated (Incorporated by
reference to Exhibit 3.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
2000).
10.1 Services agreement between the Company and Three Rivers
Bancorp(Incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000).
15.1 Letter re: unaudited interim financial information
27.1 Financial Data Schedule
(b) Reports on Form 8-K: On August 1, 2000, The Company
announced that at its July 28, 2000, meeting, the Board
of Directors approved reorganization of the USBANCORP
Board Committees.
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
USBANCORP, Inc.
Registrant
Date: November 13, 2000 \s\Orlando B. Hanselman
Orlando B. Hanselman
Chairman, President and
Chief Executive Officer
Date: November 13, 2000 \s\Jeffrey A. Stopko
Jeffrey A. Stopko
Senior Vice President and
Chief Financial Officer
<PAGE>44
STATEMENT OF MANAGEMENT RESPONSIBILITY
October 13, 2000
To the Stockholders and
Board of Directors of
USBANCORP, Inc.
Management of USBANCORP, Inc. and its subsidiaries have prepared
the consolidated financial statements and other information in
the Form 10-Q in accordance with generally accepted accounting
principles and are responsible for its accuracy.
In meeting its responsibilities, management relies on internal
accounting and related control systems, which include selection
and training of qualified personnel, establishment and
communication of accounting and administrative policies and
procedures, appropriate segregation of responsibilities, and
programs of internal audit. These systems are designed to
provide reasonable assurance that financial records are reliable
for preparing financial statements and maintaining accountability
for assets, and that assets are safeguarded against unauthorized
use or disposition. Such assurance cannot be absolute because of
inherent limitations in any internal control system.
Management also recognizes its responsibility to foster a climate
in which Company affairs are conducted with the highest ethical
standards. The Company's Code of Conduct, furnished to each
employee and director, addresses the importance of open internal
communications, potential conflicts of interest, compliance with
applicable laws, including those related to financial disclosure,
the confidentiality of propriety information, and other items.
There is an ongoing program to assess compliance with these
policies.
The Audit Committee of the Company's Board of Directors consists
solely of outside directors. The Audit Committee meets
periodically with management and the independent accountants to
discuss audit, financial reporting, and related matters. Arthur
Andersen LLP and the Company's internal auditors have direct
access to the Audit Committee.
\s\Orlando B. Hanselman \s\Jeffrey A. Stopko
Orlando B. Hanselman Jeffrey A. Stopko
Chairman, President & Senior Vice President &
Chief Executive Officer Chief Financial Officer
<PAGE>45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
USBANCORP, Inc. :
We have reviewed the accompanying consolidated balance sheets
of USBANCORP, Inc. (a Pennsylvania corporation) and
subsidiaries as of September 30, 2000 and 1999, and the related
consolidated statements of income for the three-month and nine-
month periods then ended and the related consolidated
statements of changes in stockholders' equity and cash flows
for the nine-month periods then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with auditing
standards generally accepted in the United States, the
objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with accounting
principles generally accepted in the United States.
We have previously audited, in accordance with auditing
standards generally accepted in the United States, the
consolidated balance sheet of USBANCORP, Inc. as of
December 31, 1999, and, in our report dated January 21, 2000,
we expressed an unqualified opinion on that statement. In our
opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1999, is fairly
stated, in all material respects, in relation to the balance
sheet from which it has been derived.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
October 13, 2000
<PAGE>46
October 13, 2000
To the Stockholders and Board of Directors of
USBANCORP, Inc.:
We are aware that USBANCORP, Inc. has incorporated by reference in
its Registration Statements on Form S-3 (Registration No. 33-
56604); Form S-8 (Registration No. 33-53935); Form S-8
(Registration No. 33-55845); Form S-8 (Registration No. 33-55207);
and Form S-8 (Registration No. 33-55211) its Form 10-Q for the
quarter ended September 30, 2000, which includes our report dated
October 13, 2000, covering the unaudited interim financial
statement information contained therein. Pursuant to Regulation C
of the Securities Act of 1933 (the Act), that report is not
considered a part of the registration statements prepared or
certified by our firm or a report prepared or certified by our
firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
<PAGE>47
