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 June 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 (I.R.S. Employer Identification No.)
incorporation or organization)
Main & Franklin Streets, P.O. Box 430, Johnstown, PA 15907-0430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 533-5300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
X Yes No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 1, 2000
Common Stock, par value $2.50 13,385,026
per share
<PAGE>1
USBANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Consolidated Balance Sheet -
June 30, 2000, December 31, 1999,
and June 30, 1999 4
Consolidated Statement of Income -
Three and Six Months Ended June 30, 2000,
and 1999 5
Consolidated Statement of Changes
in Stockholders' Equity -
Six Months Ended
June 30, 2000, and 1999 7
Consolidated Statement of Cash Flows -
Six Months Ended
June 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 continental
U.S. map of all USBANCORP service areas by state.
U.S. Bank - Pennsylvania
Standard Mortgage Corporation of Georgia - AL, FL, LA, MS, GA, TN,
KY, WV, VA, MD, DE, NJ,
OH, and the District of
Columbia
Erect Fund - Ohio and Pennsylvania
Build Fund - Michigan and Indiana
United Bancorp Life Insurance Company of Arizona - Arizona and Pennsylvania
Also depicted were the five county area of Pennsylvania serviced by the Branches
of U.S. Bank. The counties are Cambria, Centre, Clearfield, Somerset and
Westmoreland.
<PAGE>3
USBANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
June 30 December 31 June 30
2000 1999 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 20,844 $ 54,676 $ 41,248
Interest bearing deposits with banks 100 758 424
Investment securities:
Available for sale 577,911 1,187,335 729,719
Held to maturity (market value
$519,539 on June 30, 1999) - - 525,478
Loans held for sale 17,310 21,753 37,873
Loans 605,808 1,082,459 1,039,736
Less: Unearned income 8,613 8,408 5,286
Allowance for loan losses 5,313 10,350 10,891
Net loans 591,882 1,063,701 1,023,559
Premises and equipment 13,669 18,937 19,188
Accrued income receivable 9,268 16,650 18,030
Mortgage servicing rights 12,706 13,510 16,254
Goodwill and core deposit intangibles 21,431 25,655 27,239
Bank owned life insurance 25,460 37,290 36,454
Other assets 9,217 27,214 13,296
TOTAL ASSETS $ 1,299,798 $ 2,467,479 $ 2,488,762
LIABILITIES
Non-interest bearing deposits $ 93,901 $ 160,253 $ 163,446
Interest bearing deposits 573,151 1,070,688 1,077,986
Total deposits 667,052 1,230,941 1,241,432
Federal funds purchased and securities
sold under agreements to repurchase 22,894 16,369 59,348
Other short-term borrowings 98,045 84,874 142,337
Advances from Federal Home Loan Bank 398,362 956,999 851,126
Guaranteed junior subordinated deferrable
interest debentures 34,500 34,500 34,500
Long-term debt 3,764 7,100 8,678
Total borrowed funds 557,565 1,099,842 1,095,989
Other liabilities 6,637 24,139 27,440
TOTAL LIABILITIES 1,231,254 2,354,922 2,364,861
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; 17,428,784
shares issued and 13,337,865
outstanding on June 30, 2000; 17,390,496 shares
issued and 13,309,577 outstanding on December 31,
1999; 17,382,349 shares issued and 13,301,430
outstanding on June 30, 1999 43,549 43,476 43,456
Treasury stock at cost, 4,090,919 shares on
June 30, 2000; 4,080,919 shares on
December 31, 1999; and
4,080,919 shares on June 30, 1999 (65,824) (65,725) (65,725)
Surplus 65,838 65,686 65,668
Retained earnings 41,559 104,294 98,441
Accumulated other comprehensive income (loss) (16,578) (35,174) (17,939)
TOTAL STOCKHOLDERS' EQUITY 68,544 112,557 123,901
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,299,798 $ 2,467,479 $ 2,488,762
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>4
USBANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans
and loans held for sale:
Taxable $ 12,079 $ 21,037 $ 33,756 $ 41,975
Tax exempt 533 555 1,189 1,112
Deposits with banks 46 26 79 58
Investment securities:
Available for sale 9,715 11,425 28,821 22,176
Held to maturity - 8,167 - 16,113
Total Interest Income 22,373 41,210 63,845 81,434
INTEREST EXPENSE
Deposits 5,875 10,423 16,713 20,539
Federal funds purchased and
securities sold under
agreements to repurchase 578 713 1,418 1,917
Other short-term borrowings 1,980 2,025 3,770 3,614
Advances from Federal Home
Loan Bank 5,437 10,527 17,260 20,856
Guaranteed junior subordinated
deferrable interest 740 740 1,480 1,480
Long-term debt 25 108 107 209
Total Interest Expense 14,635 24,536 40,748 48,615
NET INTEREST INCOME 7,738 16,674 23,097 32,819
Provision for loan losses 174 1,150 423 1,525
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,564 15,524 22,674 31,294
NON-INTEREST INCOME
Trust fees 1,232 1,249 2,556 2,477
Net realized (losses) gains
on investment securities (17) 138 (906) 434
Net realized gains on
loans held for sale 423 2,508 731 3,855
Wholesale cash processing fees - 143 120 318
Service charges on deposit account 455 891 1,325 1,744
Net mortgage servicing fees 243 182 433 320
Bank owned life insurance 289 413 726 832
Gain on sale of branch - 540 - 540
Other income 1,666 1,902 3,207 3,630
Total Non-Interest Income 4,291 7,966 8,192 14,150
NON-INTEREST EXPENSE
Salaries and employee benefits 5,073 8,176 13,257 16,159
Net occupancy expense 692 1,172 1,980 2,358
Equipment expense 795 1,078 1,949 2,100
Professional fees 582 903 1,447 1,603
Supplies, postage, and freight 381 670 1,044 1,364
Miscellaneous taxes and insurance 345 411 861 904
FDIC deposit insurance expense 34 67 96 135
Amortization of goodwill and
core deposit intangibles 693 839 1,485 1,551
Spin-off costs 1,632 - 2,225 -
Other expense 1,539 2,749 4,419 4,993
Total Non-Interest Expense $ 11,766 $ 16,065 $ 28,763 $ 31,167
</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 Six Months Ended
June 30 June 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAXES $ 89 $ 7,425 $ 2,103 $ 14,277
Provision for income taxes 79 1,885 (518) 3,701
NET INCOME $ 10 $ 5,540 $ 2,621 $ 10,576
PER COMMON SHARE DATA:
Basic:
Net income $ - $ 0.42 $ 0.20 $ 0.79
Average shares outstanding 13,331,915 13,308,296 13,325,441 13,376,689
Diluted:
Net income $ - $ 0.41 $ 0.20 $ 0.78
Average shares outstanding 13,333,903 13,423,813 13,327,922 13,513,949
Cash dividends declared $ 0.09 $ 0.15 $ 0.24 $ 0.29
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>6
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Unaudited
June 30, 2000 June 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
Stock options exercised 73 81
Balance at end of period 43,549 43,456
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
Stock options exercised 152 173
Balance at end of period 65,838 65,668
RETAINED EARNINGS
Balance at beginning of period 104,294 91,737
Net income 2,621 10,576
Spin-off of Three Rivers Bank (62,156) -
Cash dividends declared (3,200) (3,872)
Balance at end of period 41,559 98,441
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 1,420 (20,523)
Balance at end of period (16,578) (17,939)
TOTAL STOCKHOLDERS' EQUITY $ 68,544 $ 123,901
See accompanying notes to consolidated financial statements.
<PAGE>7
USBANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Unaudited
Six Months Ended
June 30
2000 1999
OPERATING ACTIVITIES
Net income $ 2,621 $ 10,576
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 423 1,525
Depreciation and amortization expense 1,165 1,299
Amortization expense of goodwill and
core deposit intangibles 1,485 1,551
Amortization expense of mortgage servicing rights 941 1,482
Net amortization of investment securities 264 1,045
Net realized losses (gains) on investment securities 906 (434)
Net realized gains on loans and loans held for sale (731) (3,855)
Origination of mortgage loans held for sale (118,009) (253,703)
Sales of mortgage loans held for sale 134,890 266,682
Decrease (increase) in accrued income receivable 577 (880)
Decrease in accrued expense payable (1,836) (890)
Net cash provided by operating activities 22,696 24,398
INVESTING ACTIVITIES
Purchases of investment securities and
other short-term investments -
available for sale (40,696) (330,206)
Purchases of investment securities and
other short-term investments -
held to maturity - (84,879)
Proceeds from maturities of investment securities and
other short-term investments - available for sale 85,039 45,021
Proceeds from maturities of investment securities and
other short-term investments - held to maturity - 66,082
Proceeds from sales of investment securities and
other short-term investments - available for sale 125,646 185,767
Long-term loans originated (85,136) (203,615)
Loans held for sale (17,310) (37,873)
Principal collected on long-term loans 82,582 214,298
Loans purchased or participated (12,550) (9,734)
Loans sold or participated 4,429 4,600
Net (increase) decrease in credit card receivable
and other short-term loans (705) 15,839
Purchases of premises and equipment (2,715) (2,624)
Sale/retirement of premises and equipment 1,523 156
Net decrease in assets held in trust for
collateralized mortgage obligation 1,726 468
Net increase in mortgage servicing rights (137) (1,539)
Net increase in other assets (10,765) (5,947)
Net cash provided (used) by investing activities 130,931 (144,186)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit 187,912 206,216
Payments for maturing certificates of deposit (190,247) (163,178)
Net increase in demand and savings deposits 18,291 22,103
Net increase (decrease) in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings 63,012 (29,148)
Net principal (repayments) borrowings of advances
from Federal Home Loan Bank (238,761) 98,735
Repayments of long-term debt (1,177) (168)
Common stock cash dividends paid (3,200) (3,872)
Guaranteed junior subordinated deferrable
interest debenture dividends paid (1,480) (1,458)
Proceeds from dividend reinvestment, stock
purchase plan, and stock options exercised 225 254
Purchases of treasury stock (99) (4,204)
Net decrease in other liabilities (5,614) (2,760)
Net cash (used) provided by financing activities (171,138) 122,520
Net transfer to Three Rivers Bancorp (16,979) -
NET (DECREASE) INCREASE IN CASH EQUIVALENTS (34,490) 2,732
CASH EQUIVALENTS AT JANUARY 1 55,434 38,940
CASH EQUIVALENTS AT JUNE 30 $ 20,944 $ 41,672
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 23 locations in west-central
Pennsylvania. The Trust Company offers a complete range of trust
and financial services and has $1.4 billion in assets under
management. The Trust Company also offers the ERECT Fund 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.
With respect to the unaudited consolidated financial
information of the Company for the three and six month periods ended
June 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 July 14,
2000, appearing herein. This report does not express an opinion on
the interim unaudited consolidated financial information. Arthur
Andersen LLP has not carried out any significant or additional audit
tests beyond those which would have been necessary if its report had
not been included. The December 31, 1999, numbers are derived from
audited financial statements.
<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 Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
Net income $ 10 $5,540 $ 2,621 $10,576
Other comprehensive income, before tax:
Unrealized holding gains(losses) on
investment securities 2,047 (19,713) 987 (27,270)
Less: reclassification adjustment for
losses (gains) included in net income 17 (138) 906 (434)
Other comprehensive income(loss)
before tax 2,064 (19,851) 1,893 (27,704)
Income tax expense(credit) related to
items of other comprehensive income 516 (5,040) 473 (7,181)
Other comprehensive income(loss),
net of tax 1,548 (14,811) 1,420 (20,523)
Comprehensive income $ 1,558 $(9,271) $ 4,041 $ (9,947)
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 $815,000 in income tax payments in
the first six months of 2000 as compared to $1,812,000 for the first
six months of 1999. Total interest expense paid amounted to
$48,500,000 in 2000's first six months compared to $49,505,000 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:
June 30, 2000
Gross Gross
Book Unrealized Unrealized Market
Value Gains Losses Value
U.S. Treasury $ 11,305 $ - $ (90) $ 11,215
U.S. Agency 25,749 - (1,361) 24,388
State and municipal 59,972 70 (3,107) 56,935
U.S. Agency mortgage-backed
securities 457,975 316 (19,922) 438,369
Other securities(f1) 48,416 - (1,412) 47,004
Total $ 603,417 $ 386 $ (25,892) $ 577,911
(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
June 30, 2000, 96.3% of the portfolio was rated "AAA" compared to
95.8% at June 30, 1999. Approximately 2.6% of the portfolio was
rated below "A" or unrated on June 30, 2000.
7. Loans Held for Sale
At June 30, 2000, $17,310,000 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):
June 30 December 31 June 30
2000 1999 1999
Commercial $ 118,650 $ 152,042 $ 158,506
Commercial loans secured
by real estate 205,143 406,927 359,542
Real estate - mortgage 247,275 452,507 449,523
Consumer 34,740 70,983 72,165
Loans 605,808 1,082,459 1,039,736
Less: Unearned income 8,613 8,408 5,286
Loans, net of unearned income $ 597,195 $ 1,074,051 $ 1,034,450
Real estate-construction loans comprised 6.8% of total loans
net of unearned income at June 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):
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
Balance at beginning of period $ 10,446 $ 10,760 $ 10,350 $ 10,725
Reduction due to spin-off of TRB (5,028) - (5,028) -
Charge-offs:
Commercial 13 960 184 1,128
Real estate-mortgage 400 214 669 424
Consumer 48 74 115 308
Total charge-offs 461 1,248 968 1,860
Recoveries:
Commercial - 149 37 274
Real estate-mortgage 139 20 410 122
Consumer 43 60 89 105
Total recoveries 182 229 536 501
Net charge-offs 279 1,019 432 1,359
Provision for loan losses 174 1,150 423 1,525
Balance at end of period $ 5,313 $ 10,891 $ 5,313 $ 10,891
As a percent of average loans and loans held
for sale, net of unearned income:
Annualized net charge-offs 0.18% 0.39% 0.10% 0.26%
Annualized provision for
loan losses 0.11 0.44 0.10 0.29
Allowance as a percent of loans and loans
held for sale, net of unearned income
at period end 0.86 1.02 0.86 1.02
Total classified loans $10,506 $24,224 $10,506 $24,224
(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 $1,916,000 and $7,452,000 being
specifically identified as impaired and a corresponding allocation
reserve of $125,000 and zero at June 30, 2000, and June 30, 1999,
respectively. The average outstanding balance for loans being
specifically identified as impaired was $2,203,000 for the first six
months of 2000 compared to $4,571,000 for the first six 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 six 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):
June 30, 2000 December 31, 1999 June 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
Commercial $ 846 19.3% $ 1,991 13.9% $ 1,046 14.8%
Commercial
loans secured
by real estate 1,577 33.4 2,928 37.1 2,145 33.5
Real Estate -
mortgage 405 43.1 791 43.3 791 45.5
Consumer 496 4.2 631 5.7 616 6.2
Allocation to
general risk 1,989 - 4,009 - 6,293 -
Total $5,313 100.0% $10,350 100.0% $10,891 100.0%
Even though real estate-mortgage loans comprise approximately
43% of the Company's total loan portfolio, only $405,000 or 7.6% of
the total allowance for loan losses is allocated against this loan
category. The real estate-mortgage loan allocation is based upon
the Company's five-year historical average of actual loan charge-
offs experienced in that category 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 over the past two quarters. Factors
considered by the Company that led to increased allocations to the
commercial segments of the portfolio included: the potential
adverse effects of rising interest rates which began in the second
half of 1999, continued growth of the commercial loan portfolio, the
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 June 30, 2000, management of the Company believes the
allowance for loan losses was adequate to cover potential yet
undetermined losses within the Company's loan portfolio. The
Company's management is unable to determine in what loan category
future charge-offs and recoveries may occur. (For a complete
discussion concerning the operations of the "Allowance for Loan
Losses" refer to Note 9.)
11. Non-performing Assets
Non-performing assets are comprised of (i) loans which are on
a non-accrual basis, (ii) loans which are contractually past due 90
days or more as to interest or principal payments some of which are
insured for credit loss, and (iii) other real estate owned (real
estate acquired through foreclosure and in-substance foreclosures).
<PAGE>15
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):
June 30 December 31 June 30
2000 1999 1999
Non-accrual loans $ 3,601 $ 4,928 $ 10,247
Loans past due 90
days or more 19 1,305 435
Other real estate owned 477 7,126 1,170
Total non-performing
assets $ 4,097 $ 13,359 $ 11,852
Total non-performing
assets as a percent
of loans and loans
held for sale, net
of unearned income,
and other real estate owned 0.67% 1.21% 1.10%
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 Six Months Ended
June 30 June 30
2000 1999 2000 1999
Interest income due in accordance
with original terms $ 21 $ 65 $ 144 $ 152
Interest income recorded (1) (5) (68) (14)
Net reduction in interest income $ 20 $ 60 $ 76 $ 138
<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 six months of
2000 performance:
<TABLE>
<CAPTION>
Fixed Floating Impact
Notional Start Termination Rate Rate Repricing On Interest
Amount Date Date Paid Received Frequency Expense
<S> <C> <C> <C> <C> <C> <C>
$100,000,000 10-25-99 10-25-00 6.17% 6.16% Quarterly $ 8,709
50,000,000 10-25-99 10-25-01 6.41 6.16 Quarterly 91,743
50,000,000 10-25-99 10-25-01 6.42 6.16 Quarterly 63,854
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 6.28 Quarterly 113,233
40,000,000 4-11-00 4-30-01 6.25 6.50 Monthly 18,022
$(22,907)
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 June 30, 2000, or June 30, 1999.
<PAGE>17
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 $11.7 million of goodwill and
$9.7 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 (1,485)
Balance at June 30, 2000 $ 21,431
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 $ 1,294
2001 2,731
2002 2,731
2003 2,731
2004 2,304
2005 and after 9,640
<PAGE>18
14. Federal Home Loan Bank Borrowings
Total FHLB borrowings consist of the following at June 30,
2000, (in thousands, except percentages):
Type Maturing Amount Weighted
Average
Rate
Open Repo Plus Overnight $ 74,825 7.08%
Advances and 2000 200,000 5.98
wholesale 2001 51,250 5.90
repurchase 2002 27,500 5.88
agreements 2003 3,750 6.61
2004 and after 115,862 6.10
Total Advances and 398,362 6.01
wholesale repurchase
agreements
Total FHLB Borrowings $ 473,187 6.18%
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 June 30, 2000, the Company meets all capital adequacy
requirements to which it is subject.
As of June 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.
To Be Well
Capitalized Under
For Capital Prompt Corrective
As of June 30, 2000 Actu al Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk (In thousands, except ratios)
Weighted Assets)
Consolidated $ 102,854 15.53% $ 53,987 8.00% $ 66,234 10.00%
U.S. Bank 90,306 14.24 50,741 8.00 63,426 10.00
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated 83,845 12.66 26,494 4.00 39,740 6.00
U.S. Bank 85,115 13.42 25,370 4.00 38,056 6.00
Tier 1 Capital (to Average
Assets)
Consolidated 83,845 6.47 51,800 4.00 64,740 5.00
U.S. Bank 85,115 6.83 49,847 4.00 62,308 5.00
16. Segment Results
The financial performance of the Company is also
monitored by an internal funds transfer pricing
profitability measurement system which produces line of
business results and key performance measures. The
Company's major business units include retail banking,
commercial lending, mortgage banking, trust and financial
services, other fee based businesses and investment/parent.
The reported results reflect the underlying economics of
the business segments. Expenses for centrally provided
services are allocated based upon the cost and estimated
usage of those services. Capital has been allocated among
the businesses on a risk-adjusted basis. The businesses are
match-funded and interest rate risk is centrally managed and
accounted for within the investment/parent business segment.
The key performance measures the Company focuses on for
each business segment are net income and risk-adjusted
return on equity.
Retail banking includes the deposit-gathering branch
franchise along with lending to both individuals and small
businesses. Lending activities include residential mortgage
loans, direct consumer loans, and small business commercial
loans. Commercial lending to businesses includes
commercial loans, commercial real-estate loans, and
commercial leasing (excluding certain small business lending
<PAGE>20
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 six months of 2000 and 1999
were as follows (in thousands, except ratios):
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000 Net income Operating earnings Risk adjusted Total assets
return on equity
(Operating)
<S> <C> <C> <C> <C>
Retail banking $ 1,335 $ 1,335 10.8% $ 394,627
Commercial lending 2,189 2,189 16.5 285,184
Mortgage banking (434) (434) (11.3) 36,962
Trust 495 495 32.3 1,775
Other fee based 156 156 19.8 3,339
Investment/Parent (1,120) 794 6.0 577,911
Total $ 2,621 $ 4,535 10.1 $1,299,798
June 30, 1999 Net income Operating earnings Risk adjusted Total assets
return on equity
(Operating)
Retail banking $ 2,222 $ 2,222 11.3% $ 691,430
Commercial lending 2,291 2,291 12.7 472,506
Mortgage banking 197 197 4.7 64,696
Trust 473 473 30.7 1,731
Other fee based 55 55 7.7 3,202
Investment/Parent 5,338 5,338 21.5 1,255,197
Total $ 10,576 $ 10,576 15.4 $2,488,762
</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 assumes
that the dividend to shareholders occurred on January 1, 1999, and
the pro forma condensed consolidated balance sheet assumes that the
dividend
occurred on June 30, 2000. The pro forma condensed consolidated
financial information is presented for informational purposes only
and does not purport to reflect the results of operations or
financial position of USBANCORP or Three Rivers Bancorp or the
results of operations or financial position that would have occurred
had USBANCORP or Three Rivers Bancorp been operated as a separate,
independent company. The pro forma adjustments to the accompanying
historical consolidated statements of income and the consolidated
balance sheets are set forth below.
Pro Forma Condensed Consolidated Statements of Income
Three Rivers
USBANCORP Bancorp USBANCORP
Historical Historical Pro Forma
Period Ended Period Ended Period Ended
June 30, March 31, June 30,
2000 2000 Adjustment 2000
(In thousands, except per share data)
Total interest income $ 63,845 $ 18,100 $ - $ 45,745
Total interest expense 40,748 11,011 29,737
Net interest income 23,097 7,089 16,008
Provision for loan losses 423 150 273
Net interest income after
Provision for loan losses 22,674 6,939 15,735
Total non-interest income 8,192 623 7,569
Total non-interest expense 28,763 6,589 117(A) 22,291
Income before income taxes 2,103 973 (117) 1,013
Provision for income taxes (518) (477) (35)(B) (76)
Net income $ 2,621 $ 1,450 $ (82) $ 1,089
Diluted earnings per share $ 0.20 - $(0.12) $ 0.08
Average shares outstanding 13,328 - - 13,328
<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 expects
to incur that were previously allocated to and paid by Three
Rivers Bank.
(B) To record the income tax impact of the above expenses at the
Company's historical effective tax rate.
<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
second quarter and first six months of 2000 are compared to the same
1999 period, the most significant 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 $267 million in the first six months of 1999 to $135
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 M D& A.)
Non-interest income was also negatively impacted by $906,000
in losses realized on the sale of $125 million of investment
securities in the first six months of 2000. The Company used the
proceeds from this sale 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 $2.0 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 1.06% in the
first six months of 1999 to 0.57% in the first six months of
2000.(See more detailed discussion under Net Interest Income and
Margin and Component Changes in Net Interest Income later in this M
D & 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 second
quarter 2000 financial results no longer include Three Rivers Bank.
The pro forma results for the second quarter of 1999 exclude Three
Rivers Bank to allow for more meaningful comparability with the
second quarter of 2000. Operating performance data excludes non-
recurring costs related to the spin-off of Three Rivers Bank.
<PAGE>24
Pro Forma
Three Months Ended Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999 June 30, 1999
Net income $ 10 $ 2,952 $ 5,540
Diluted
earnings per share - 0.22 0.41
Return on
average equity 0.06% 15.29% 16.32%
Return on
average assets - 0.83 0.90
Operating Performance Data
Operating earnings $ 1,414 $ 2,952 $ 5,540
Operating earnings
per diluted share 0.11 0.22 0.41
Cash operating earnings
per diluted share 0.15 0.27 0.47
Return on
average equity 8.41% 15.29% 16.32%
Return on
average assets 0.43 0.83 0.90
The Company's net income for the second quarter of 2000
totaled $10,000 or $0.0 per diluted share. Operating earnings,
excluding spin-off costs, totaled $1.4 million or $0.11 per diluted
share. USBANCORP expensed costs incurred to complete the Three
Rivers Bank spin-off in the second quarter of 2000. These non-
recurring second quarter spin-off costs amounted to $1.4 million on
an after-tax basis. On an operating basis, the Company's return on
equity(ROE) averaged 8.41% in the second quarter of 2000. The
second quarter 2000 financial performance represents a decrease from
the $5.5 million or $0.41 per diluted share actual performance or
$3.0 million or $0.22 per diluted share pro forma performance for
the second quarter of 1999. The Company's pro forma ROE in the
second quarter of 1999 averaged 15.29%.
Factors that contributed to the lower operating earnings in
the second quarter of 2000 included reduced non-interest income and
a lower level of net 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 the second quarter of 1999. A 30 basis
point reduction in the net interest margin caused net interest
income to decline by $1.4 million from the pro forma second quarter
1999 level. These negative items were partially offset by a
$901,000 reduction in the provision for loan losses and a $665,000
reduction in non-interest expense, excluding the spin-off costs,
from the pro forma second quarter 1999 level.
<PAGE>25
Presented on this page was a graph depicting the trends of three
rates for the past nine quarters. The data points were:
Federal Funds Rate Cost of Funds Net Interest Margin
2qtr 00 6.27 5.10 2.60
1qtr 00 5.65 4.96 2.75
4qtr 99 5.31 4.78 2.90
3qtr 99 5.10 4.64 2.99
2qtr 99 4.73 4.62 3.00
1qtr 99 4.73 4.70 2.95
4qtr 98 4.91 4.77 3.01
3qtr 98 5.54 4.88 3.15
2qtr 98 5.55 4.84 3.25
.....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 second quarter of 2000 to the second quarter of
1999 on both an actual and pro forma basis (in thousands, except
percentages):
Three Months Ended
June 30,
2000 1999 1999
Actual Pro Forma Actual
Interest income $ 22,373 $ 23,666 $ 41,210
Interest expense 14,635 14,519 24,536
Net interest income 7,738 9,147 16,674
Tax-equivalent
adjustment 368 553 799
Net tax-equivalent
interest income $ 8,106 $ 9,700 $ 17,473
Net interest margin 2.60% 2.90% 3.00%
USBANCORP's net interest income on a tax-equivalent basis
decreased by $1.6 million or 16.4% from the pro forma 1999 second
quarter due to a combination of a reduced net interest margin and a
lower volume of earning assets. A 30 basis point drop in the net
interest margin was caused by a 45 basis point increase in the cost
of funds due to higher costs for both borrowings and deposits. This
increase in the cost of funds more than offset the benefit of an
eight 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.
<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 second quarter of 2000 decreased
by $1.5 million or 6.1% 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
$95 million lower in the second quarter of 2000 due to a $110
million or 15.2% decrease in investment securities which more than
offset a $14 million or 2.3% 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 the15 basis point improvement in the total loan
portfolio yield to 8.28%. The yield on total investment securities
decreased by 15 basis points to 6.44% 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 second quarter of 2000.
The Company's total interest expense for the second quarter of
2000 increased by $117,000 when compared to the same 1999 pro forma
quarter. This higher interest expense was due entirely to a 45
basis point increase in the cost of funds to 5.10% which caused
interest expense to rise by $1.3 million. Interest rates,
particularly short rates such as fed funds and 90 day libor, were
150 basis points higher in the second quarter of 2000 as compared to
the second quarter of 1999. These higher interest rates contributed
to a 61 basis point increase in the cost of borrowings to 6.12% and
a 40 basis point increase in the cost of deposits to 4.11%. This
increased interest expense resulting from higher rates more than
offset a $1.2 million reduction in interest expense resulting from
a lower volume of interest bearing liabilities. Specifically, total
borrowed funds were $79 million lower in the second 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 this table, loan balances
include non-accrual loans and interest income on loans includes loan
fees or amortization of such fees which have been deferred, as well
as, interest recorded on non-accrual loans as cash is received.
Additionally, a tax rate of approximately 35% is used to compute tax
equivalent yields.
<PAGE>27
Three Months Ended June 30 (In thousands, except percentages)
<TABLE>
<CAPTION>
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 $ 611,941 $ 12,789 8.28% $ 1,059,303 $ 21,754 8.15%
Deposits with banks 4,048 46 4.49 4,076 26 2.54
Total investment
securities 614,042 9,906 6.44 1,246,683 20,229 6.47
Total interest earning
assets/interest income 1,230,031 22,741 7.38 2,310,062 42,009 7.26
Non-interest earning assets:
Cash and due from banks 21,057 37,380
Premises and equipment 13,587 19,087
Other assets 57,272 103,552
Allowance for loan losses (5,508) (11,322)
TOTAL ASSETS $1,316,439 $2,458,759
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 48,808 $ 121 1.00% $ 95,353 $ 235 0.99%
Savings 98,885 370 1.50 176,464 713 1.62
Money markets 128,512 1,523 4.77 186,981 1,557 3.34
Other time 299,165 3,861 5.19 632,423 7,918 5.02
Total interest bearing
deposits 575,370 5,875 4.11 1,091,221 10,423 3.83
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other
short-term borrowings 171,546 2,558 5.90 223,856 2,738 4.91
Advances from Federal
Home Loan Bank 364,576 5,437 6.00 770,015 10,527 5.48
Guaranteed junior subordinated
deferrable interest
debentures 34,500 740 8.58 34,500 740 8.58
Long-term debt 3,922 25 2.56 8,762 108 4.94
Total interest bearing
liabilities/interest expense 1,149,914 14,635 5.10 2,128,354 24,536 4.62
Non-interest bearing liabilities:
Demand deposits 85,781 168,674
Other liabilities 13,080 25,567
Stockholders' equity 67,664 136,164
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,316,439 $2,458,759
Interest rate spread 2.27 2.64
Net interest income/
net interest margin 8,106 2.60% 17,473 3.00%
Tax-equivalent adjustment (368) (799)
Net Interest Income $ 7,738 $16,674
</TABLE>
<PAGE>28
<TABLE>
Three Months Ended June 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 $ 611,941 $ 12,789 8.28% $ 597,919 $ 12,239 8.13%
Deposits with banks 4,048 46 4.49 2,669 22 3.31
Total investment
securities 614,042 9,906 6.44 724,278 11,957 6.59
Total interest earning
assets/interest income 1,230,031 22,741 7.38 1,324,866 24,218 7.30
Non-interest earning assets:
Cash and due from banks 21,057 21,110
Premises and equipment 13,587 13,941
Other assets 57,272 78,436
Allowance for loan losses (5,508) (5,393)
TOTAL ASSETS $1,316,439 $1,432,960
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 48,808 $ 121 1.00% $ 51,787 $ 130 1.01%
Savings 98,885 370 1.50 109,089 409 1.50
Money markets 128,512 1,523 4.77 124,457 1,081 3.48
Other time 299,165 3,861 5.19 314,993 3,929 5.00
Total interest bearing
deposits 575,370 5,875 4.11 600,326 5,549 3.71
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other short-term
borrowings 171,546 2,558 5.90 162,654 1,979 4.88
Advances from Federal
Home Loan Bank 364,576 5,437 6.00 450,028 6,215 5.54
Guaranteed junior subordinated
deferrable interest
debentures 34,500 740 8.58 34,500 740 8.58
Long-term debt 3,922 25 2.56 5,882 35 2.39
Total interest bearing
liabilities/interest
expense 1,149,914 14,635 5.10 1,253,390 14,518 4.65
Non-interest bearing liabilities:
Demand deposits 85,781 86,125
Other liabilities 13,080 15,995
Stockholders' equity 67,664 77,450
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,316,439 $1,432,960
Interest rate spread 2.27 2.65
Net interest income/
net interest margin 8,106 2.60% 9,700 2.90%
Tax-equivalent adjustment (368) (553)
Net Interest Income $ 7,738 $ 9,147
</TABLE>
<PAGE>29
...PROVISION FOR LOAN LOSSES..... The Company's provision for loan
losses for the second quarter of 2000 totaled $174,000 or 0.11% of
average total loans. This provision level was below net-charge-offs
for the quarter which amounted to $279,000 or 0.18% of average
loans. Both the provision and net charge-offs in the second quarter
of 2000 were lower than the prior year second quarter. On a year-
to-date basis, the provision level has matched net charge-offs as
both have averaged 0.10% of total loans. 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.) At June 30, 2000, the allowance for loan
losses totaled $5.3 million or 0.86% of total loans and 130% of
total non-performing assets. The Company expects its provision
level to at a minimum match and more likely exceed net-charge-offs
through the remainder of 2000. This is due to the inherent risk in
the loan portfolio resulting from increased holdings of commercial
and commercial real estate loans and the increased credit risk
associated with the higher interest rate environment in 2000.
.....NON-INTEREST INCOME..... Non-interest income for the second
quarter of 2000 totaled $4.3 million which represented a $3.7
million decrease from the actual second quarter 1999 performance and
a $2.2 million decrease from the pro forma 1999 second quarter
results. This decrease when compared to the pro forma 1999 second
quarter was primarily due to the following items:
a $2.1 million decrease in gains realized on loans held for
sale due primarily to the non-recurrence of a $1.6 million
gain on the sale of the Company's credit card portfolio in the
second quarter of 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 second quarter of 2000.
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 $238,000 increase in trust fees to $1.2 million in the
second quarter of 2000. This trust fee growth reflects
increased assets under management due to the profitable
expansion of the Company's trust operations.
a $124,000 increase in other fee income to $1.7 million due to
increased consulting fees from UBAN Associates and increased
fees generated from the sale of mutual funds and annuities.
Non-interest income as a percentage of total revenue averaged
35.7% in the second quarter of 2000. 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 123% from $131,000 in the first half of 1999 to
$293,000 in the first half 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 89% from $49,000 in the first six months of 1999 to
$94,000 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.
<PAGE>30
In just their first six months of operation these two entities
generated approximately $40,000 of non-interest revenue.
.....NON-INTEREST EXPENSE..... Non-interest expense for the second
quarter of 2000 totaled $11.8 million which represented a $4.3
million decrease from the actual second quarter 1999 performance and
a $1.0 million increase from the pro forma 1999 second quarter
results. This increase when compared to the pro forma 1999 second
quarter was primarily due to the following items:
the recognition of $1.6 million in costs related to the April
1st 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.
an $815,000 or 13.8% decrease in salaries and employee
benefits due to 35 fewer FTE employees and reduced incentive
compensation and 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.
a $114,000 increase in equipment expense due to higher
technology related expenses.
SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 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 six months of 2000 only include Three Rivers Bank for the
first quarter of the year while the actual performance results for
the first six 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
Six Months Ended Six Months Ended Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
<S> <C> <C> <C> <C>
Net income $2,621 $10,576 $ 1,089 $5,349
Diluted earnings per share 0.20 0.78 0.08 0.40
Return on average equity 5.82% 15.39 % 3.23% 13.74%
Return on average assets 0.28 0.88 0.16 0.76
Operating Performance Data:
Operating earnings $ 4,535 $10,576 $ 2,609 $5,349
Operating earnings per
diluted share 0.34 0.78 0.20 0.40
Cash operating earnings per
diluted share 0.44 0.88 0.28 0.49
Return on average equity 10.07% 15.39% 7.75% 13.74%
Return on average assets 0.49 0.88 0.39 0.76
</TABLE>
<PAGE>31
The Company's net income for the first six months of 2000
totaled $2.6 million or $0.20 per diluted share. Operating
earnings, excluding spin-off costs, totaled $4.5 million or $0.34
per diluted share. The non-recurring spin-off costs amounted to
$1.9 million on an after-tax basis. On a pro forma basis, the
Company's operating earnings totaled $2.6 million or $0.20 per
diluted share for the first six months of 2000. The financial
performance for the first six months of 2000 represents a decrease
from the $10.6 million or $0.78 per diluted share actual performance
or $5.3 million or $0.40 per diluted share pro forma performance for
the first six months of 1999.
Factors that contributed to the lower operating earnings in
the first six months of 2000 included reduced non-interest income
and a lower level of net interest income. The lower non-interest
income resulted primarily from reduced gains on asset sales while
the decline in net interest income reflects compression in the
Company's net interest margin. 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
six months of 2000 to the first six months of 1999 on both an actual
and pro forma basis (in thousands, except percentages):
Pro Forma
Six Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Interest income $ 63,845 $ 81,434 $ 45,745 $ 47,053
Interest expense 40,748 48,615 29,737 29,027
Net interest income 23,097 32,819 16,008 18,026
Tax-equivalent
adjustment 1,025 1,572 818 1,100
Net tax-equivalent
interest income $ 24,122 $ 34,391 $ 16,826 $ 19,126
Net interest margin 2.70% 2.98% 2.63% 2.87%
USBANCORP's pro forma net interest income on a tax-equivalent
basis decreased by $2.3 million or 12.0% from the first six months
of 1999 due to a combination of a reduced net interest margin and a
lower volume of earning assets. A 24 basis point drop in the net
interest margin was caused by a 36 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
seven 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.
...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 six months of
2000 decreased by $1.6 million or 3.3% 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 $56 million lower in the first six months of
2000 due to a $69 million or 9.6% decrease in investment securities
which more than offset a $10 million increase in total loans.
Beginning in the later part of the first quarter of 2000, management
delevered the securities portfolio through a combination of
<PAGE>32
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 16 basis point improvement in the total loan
portfolio yield to 8.28%. The yield on total investment securities
decreased by nine 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
six months of 2000 increased by $710,000 when compared to the same
1999 period. This higher interest expense was due entirely to a 36
basis point increase in the cost of funds to 5.05% due to the higher
interest rate environment in 2000. Higher interest rates,
particularly short term rates, contributed to a 49 basis point
increase in the cost of borrowings to 6.00% and a 31 basis point
increase in the cost of deposits to 4.04%. This increased interest
expense resulting from higher rates more than offset a $1.6 million
reduction in interest expense resulting from a lower volume of
interest bearing liabilities. Specifically, total borrowed funds
were $57 million lower in the second quarter 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 +\-7.5%
and net income variability to +\-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 1.06%
in the first six months of 1999 to 0.57% in the first six months of
2000. The net interest income contribution from the leveraged
assets declined from $4.9 million or 14.3% of total net interest
income in the first six months of 1999 to $2.1 million or 8.8% of
total net interest income in the first six months of 2000. 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 six month periods ended June 30, 2000 and June 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 26.
<PAGE>33
Six Months Ended June 30 (In thousands, except percentages)
<TABLE>
<CAPTION>
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 $ 848,163 $ 35,309 8.25% $ 1,062,914 $ 43,436 8.13%
Deposits with banks 5,557 79 2.80 3,839 58 2.99
Total investment
securities 912,015 29,482 6.46 1,218,809 39,512 6.48
Total interest earning
assets/interest income 1,765,735 64,870 7.33 2,285,562 83,006 7.26
Non-interest earning assets:
Cash and due from banks 29,187 36,569
Premises and equipment 16,232 18,606
Other assets 64,991 103,313
Allowance for loan
losses (7,964) (11,076)
TOTAL ASSETS $1,868,181 $2,432,974
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 69,747 $ 333 0.96% $ 94,328 $ 465 0.99%
Savings 131,191 1,056 1.62 173,654 1,375 1.58
Money markets 154,081 3,327 4.35 181,888 2,996 3.29
Other time 467,568 11,997 5.10 621,817 15,703 5.09
Total interest bearing
deposits 822,587 16,713 4.06 1,071,687 20,539 3.86
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other short-term
borrowings 176,604 5,188 5.91 226,344 5,531 4.87
Advances from Federal
Home Loan Bank 593,453 17,260 5.85 760,834 20,856 5.47
Guaranteed junior subordinated
deferrable interest
debentures 34,500 1,480 8.58 34,500 1,480 8.58
Long-term debt 5,310 107 4.03 8,848 209 4.72
Total interest bearing
liabilities/interest expense 1,632,454 40,748 5.01 2,102,213 48,615 4.66
Non-interest bearing liabilities:
Demand deposits 126,529 166,842
Other liabilities 18,635 25,340
Stockholders' equity 90,563 138,579
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,868,181 $2,432,974
Interest rate spread 2.32 2.60
Net interest income/
net interest margin 24,122 2.70% 34,391 2.98%
Tax-equivalent adjustment (1,025) (1,572)
Net Interest Income $23,097 $32,819
</TABLE>
<PAGE>34
Six Months Ended June 30 (In thousands, except percentages)
<TABLE>
<CAPTION>
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 $ 610,363 $ 25,553 8.28% $ 600,511 $ 24,565 8.12%
Deposits with banks 5,185 74 2.82 2,690 46 3.35
Total investment
securities 645,380 20,936 6.50 714,214 23,541 6.59
Total interest earning
assets/interest income 1,260,928 46,563 7.37 1,317,415 48,152 7.30
Non-interest earning assets:
Cash and due from banks 21,341 20,461
Premises and equipment 13,532 13,804
Other assets 57,436 77,662
Allowance for loan
losses (5,439) (5,023)
TOTAL ASSETS $1,347,798 $1,424,319
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 48,717 $ 242 1.00% $ 50,159 $ 251 1.01%
Savings 99,050 742 1.51 107,472 806 1.51
Money markets 128,395 2,959 4.63 122,592 2,119 3.49
Other time 302,538 7,696 5.12 304,183 7,651 5.06
Total interest bearing
deposits 578,700 11,639 4.04 584,406 10,827 3.73
Short term borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other short-term
borrowings 150,091 4,431 5.94 173,506 4,238 4.93
Advances from Federal
Home Loan Bank 414,262 12,135 5.89 446,033 12,409 5.61
Guaranteed junior subordinated
deferrable interest debentures 34,500 1,480 8.58 34,500 1,480 8.58
Long-term debt 4,167 52 2.50 6,128 72 2.35
Total interest bearing
liabilities/interest expense 1,181,720 29,737 5.05 1,244,573 29,026 4.69
Non-interest bearing liabilities:
Demand deposits 84,860 85,745
Other liabilities 13,518 15,520
Stockholders' equity 67,700 78,481
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,347,798 $1,424,319
Interest rate spread 2.32 2.61
Net interest income/
net interest margin 16,826 2.63% 19,126 2.87%
Tax-equivalent adjustment (818) (1,100)
Net Interest Income $16,008 $18,026
</TABLE>
<PAGE>35
...PROVISION FOR LOAN LOSSES..... The Company's provision for loan
losses for the first six months of 2000 totaled $423,000 or 0.10% of
average total loans which was comparable with net-charge-offs for
the period of $432,000 or 0.10% of average total loans. Both the
provision and net charge-offs in the first six months of 2000 were
lower than the comparable 1999 period due to stable asset quality.
.....NON-INTEREST INCOME..... Non-interest income for the first six
months of 2000 totaled $8.2 million which represented a $6.0 million
decrease from the actual 1999 first six months performance of $14.2
million. On a pro forma basis, non-interest income for the first
six months of 2000 totaled $7.6 million which represented a $3.6
million decrease from the pro forma 1999 first six months
performance of $11.2 million. Factors contributing to the reduced
non-interest income in 2000 included:
a $3.1 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 six months of 2000. The following table reflects the
impact of these reductions:
2000 1999 Difference
Mortgage loans sold 135,000,000 267,000,000 (132,000,000)
Gain on mortgage loans sold 723,000 1,890,000 (1,167,000)
Spread earned on loans sold 54b.p. 71b.p. (17b.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 $906,000 loss realized on the sale of $125 million of
investment securities in the first quarter of 2000. The
Company used the proceeds from the sale to paydown short-term
borrowings and delever its balance sheet. This balance sheet
repositioning strategy helped reduce the Company's exposure to
rising short-term interest rates. When compared to the
$434,000 gain realized in the first quarter of 1999, this
represents a net unfavorable change of $1.3 million.
.....NON-INTEREST EXPENSE..... Non-interest expense for the first
six months of 2000 totaled $28.8 million which represented a $2.4
million decrease from the actual 1999 first six months performance
of $31.2 million. On a pro forma basis, non-interest expense for
the first six months of 2000 totaled $22.3 million which represented
a $1.5 million increase from the pro forma 1999 first six months
performance of $20.8 million. Factors significantly impacting non-
interest expenses in 2000 included:
the recognition of $2.2 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.
<PAGE>36
a $2.9 million decrease in salaries and employee benefits (an
$812,000 decline on a pro forma basis) in 2000. The pro forma
decline is due to 35 fewer FTE employees and reduced incentive
compensation and 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 six 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.
.....INCOME TAX EXPENSE..... The Company recognized a net credit for
income taxes of $518,000 in the first six 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 six months of 2000 amounted to $407,000 or an effective rate
of 19.4%. This represented a decline from the $3.7 million
provision or 25.9% effective tax rate recognized in the first six
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 June 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 six months
of 2000 which compares unfavorably to the 64.2% efficiency ratio
reported for the first six 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 six
months of 2000, stated on a cash basis excluding the intangible
amortization, was 77.5% or approximately 4.6% lower than the
reported efficiency ratio. The Company's efficiency ratio was also
negatively impacted by the Three Rivers Bank spin-off as all
interest costs associated with the guaranteed junior subordinated
deferrable interest debentures ($2.9 million annually) remained with
USBANCORP.
..SEGMENT RESULTS..Footnote 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 six months of 2000 to the
same 1999 period, the Trust segment again produced the highest ROE
averaging 32.3% in 2000 compared to 30.8% in 1999. Commercial
Lending also increased their ROE from 12.7% for the first six months
of 1999 to 16.5% for the first six months of 2000 due to continued
profitable loan growth in that segment. Retail banking demonstrated
a modest reduction in ROE performance to 10.8% due to deposit cost
of funds pressure and modest consumer loan run-off. The Company has
experienced earnings pressure in mortgage banking as that division
lost $434,000 in the first six months of 2000 producing a ROE of -
<PAGE>37
11.3%. 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
21.5% in 1999 to 6.0% in 2000. The previously discussed $906,000 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.
.....BALANCE SHEET..... The Company's total consolidated assets were
$1.30 billion at June 30, 2000, compared with $2.47 billion at
December 31, 1999, which represents a decrease of $1.17 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 demonstrated little overall change from year-end as
continued growth in commercial loans was offset by lower balances of
residential mortgage and consumer loans. Cash balances dropped by
$10 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 is focusing on growing deposit balances to enhance
liquidity and reduce its dependence on borrowings in 2000. The
Company has achieved this deposit growth by actively marketing its
convenience oriented preferred money market account and selectively
targeting certain certificate of deposit categories with more
aggressive pricing. On a pro forma basis, both of these strategies
contributed to total deposits increasing by $8.8 million since
December 31, 1999. Total borrowed funds decreased by $104 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 was up
modestly 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 $16.6 million at June
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):
Pro Forma
June 30 December 31 December 31 June 30
2000 1999 1999 1999
Total loan delinquency
(past due 30 to 89 days) $ 7,046 $5,920 $9,931 $ 10,600
Total non-accrual loans 3,601 2,872 4,928 10,247
Total non-performing assets(f1) 4,097 4,283 13,359 11,852
Loan delinquency, as a percentage
of total loans and loans held
for sale, net of unearned income 1.15% 0.96% 0.91% 0.99%
Non-accrual loans, as a percentage
of total loans and loans held
for sale, net of unearned income 0.59 0.47 0.45 0.96
Non-performing assets, as a
percentage of total loans and
loans held for sale, net of
unearned income, and other
real estate owned 0.67 0.69 1.21 1.10
(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.
Between December 31, 1999, and June 30, 2000, total loan
delinquency as a percentage of total loans increased modestly but still
remained at a low 1.15%. Non-performing assets as a percentage of
total loans declined significantly from 1.21% to 0.67% on an actual
basis and were relatively stable on a pro forma basis. The December
31, 1999 non-performing assets were materially impacted by one large
($6 million) other real estate owned property at Three Rivers Bank. At
all dates presented, the Company had no troubled debt restructurings
which involve forgiving a portion of interest or principal on any loans
or making loans at a rate materially less than that of market rates.
.....ALLOWANCE FOR LOAN LOSSES.....The following table sets forth
changes in the allowance for loan losses and certain ratios for the
periods ended (in thousands, except percentages):
Pro Forma
June 30 December 31 December 31 June 30
2000 1999 1999 1999
Allowance for loan losses $ 5,313 $5,329 $ 10,350 $ 10,891
Allowance for loan losses as
a percentage of each of
the following:
total loans and loans
held for sale,
net of unearned income 0.86% 0.87% 0.94% 1.02%
total delinquent loans
(past due 30 to 89 days) 75.40 90.02 104.22 102.75
total non-accrual loans 147.54 185.55 210.02 106.28
total non-performing assets 129.68 124.42 77.48 91.89
<PAGE>39
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. The Company's coverage of non-performing assets improved
from 77% at year-end 1999 to 130% at June 30, 2000 and is now in
compliance with the minimum financial covenant requirement associated
with the Parent Company's unsecured line of credit.
.....INTEREST RATE SENSITIVITY..... Asset/liability management involves
managing the risks associated with changing interest rates and the
resulting impact on the Company's net interest income, net income and
capital. The management and measurement of interest rate risk at
USBANCORP is performed by using the following tools: 1) simulation
modeling which analyzes the impact of interest rate changes on net
interest income, net income and capital levels over specific future
time periods. The simulation modeling forecasts earnings under a
variety of scenarios that incorporate changes in the absolute level of
interest rates, the shape of the yield curve, prepayments and changes
in the volumes and rates of various loan and deposit categories. The
simulation modeling also incorporates all off balance sheet hedging
activity as well as assumptions about reinvestment and the repricing
characteristics of certain assets and liabilities without stated
contractual maturities; 2)static "GAP" analysis which analyzes the
extent to which interest rate sensitive assets and interest rate
sensitive liabilities are matched at specific points in time; and 3)
market value of portfolio equity sensitivity analysis. The overall
interest rate risk position and strategies are reviewed by senior
management and the Company's Board of Directors on an ongoing basis.
The following table presents a summary of the Company's static
GAP positions (in thousands, except for the GAP ratios):
June 30 December 31 June 30
2000 1999 1999
Six month cumulative GAP
RSA........................ $ 267,871 $ 574,913 $ 671,545
RSL....................... (175,181) (1,178,167) (863,192)
Off-balance sheet
hedges............... 220,000 (270,000) -
GAP....................... $ (127,310) $ (333,254) $ (191,647)
GAP ratio.............. 0.68X 0.63X 0.78X
GAP as a % of total
assets................ (9.79)% (13.51)% (7.70)%
One year cumulative GAP
RSA...................... $ 410,869 $ 788,634 $ 938,788
RSL...................... (345,143) (1,474,606) (1,157,627)
Off-balance sheet
hedges.............. 220,000 (140,000) -
GAP...................... $ (154,274) $ (545,972) $ (218,839)
GAP ratio.............. 0.73X 0.59X 0.81X
GAP as a % of total
assets............... (11.87)% (22.13)% (8.79)%
<PAGE>40
When June 30, 2000, is compared to December 31, 1999, both the
Company's six month and one year cumulative GAP ratios became less
negative due primarily to the deleverage strategy where cash flow from
securities with durations approximating five years was used to pay-down
short-term borrowings with maturities of less than one year.
Management places primary emphasis on simulation modeling to
manage and measure interest rate risk. The Company's asset liability
management policy seeks to limit net interest income variability over
the first twelve months of the forecast period to +/- 7.5% and net
income variability to +/-20.0% based upon varied economic rate
forecasts which include interest rate movements of up to 200 basis
points and alterations of the shape of the yield curve. Additionally,
the Company also uses market value sensitivity measures to further
evaluate the balance sheet exposure to changes in interest rates. The
Company monitors the trends in market value of portfolio equity
sensitivity analysis on a quarterly basis.
The following table presents an analysis of the sensitivity
inherent in the Company's net interest income, net income and market
value of portfolio equity. The interest rate scenarios in the table
compare the Company's base forecast or most likely rate scenario at
June 30, 2000, to scenarios which reflect ramped increases and
decreases in interest rates of 200 basis points along with performance
in a stagnant rate scenario with interest rates held flat at the June
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 1.2 4.5 13.0
200bp increase (5.9) (18.7) (33.8)
200bp decrease 2.0 16.0 55.1
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 (18.7%) 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 (33.8%) 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.
<PAGE>41
.....LIQUIDITY...... Liquidity can be analyzed by utilizing the
Consolidated Statement of Cash Flows. Cash equivalents decreased by
$34.5 million from December 31, 1999, to June 30, 2000, due
primarily to $171 million of net cash used by financing activities.
This more than offset $22.7 million of net cash provided by
operating activities and $131 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 $170 million. Cash advanced for new
loan fundings and purchases totaled $98 million and was
approximately $16 million greater than the cash received from loan
principal payments. Within financing activities net short-term
borrowings and Federal Home Loan Bank advances were paid down by
$176 million. The Company used $3.2 million of cash to pay common
dividends to shareholders and $1.5 million of cash to service the
dividend on the guaranteed junior subordinated deferrable interest
debentures.
.....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. Over the remainder of 2000, the Company does not
envision resuming its treasury stock repurchase program 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 declared Common Stock cash dividend per share
was $0.09 for the second quarter of 2000. This first post spin-off
quarterly dividend was consistent with the amount previously
disclosed in the Information Statement which described the spin-off
transaction in detail. On an annualized basis assuming a $4.75
market price, this equates to a 7.6% 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.
.....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
<PAGE>42
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 4. Submission of matters to a Vote of Security Holders
The annual meeting of shareholders of USBANCORP, Inc.
was held on April 25, 2000. The result of the item
submitted for a vote was as follows:
The following five directors, whose term will expire in
2003, were elected:
Number of Votes % of total
Cast for Class I outstanding
Director Shares Voted
J. Michael Adams, Jr. 10,961,398 82%
Edward J. Cernic, Sr. 10,962,793 82%
Margaret A. O'Malley 10,973,783 82%
Mark E. Pasquerilla 10,970,895 82%
Thomas C. Slater 10,957,569 82%
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 April 14 The Company filed an 8-
K announcing the successful completion of the spin-off of
its Three Rivers Bank subsidiary.
<PAGE>44
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: August 14, 2000 /s/Orlando B. Hanselman
Orlando B. Hanselman
Chairman, President and
Chief Executive Officer
Date: August 14, 2000 /s/Jeffrey A. Stopko
Jeffrey A. Stopko
Senior Vice President and
Chief Financial Officer
<PAGE>45
STATEMENT OF MANAGEMENT RESPONSIBILITY
July 14, 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>46
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 June 30, 2000 and 1999, and the related
consolidated statements of income for the three-month and six-
month periods then ended and the related consolidated
statements of changes in stockholders' equity and cash flows
for the six-month period 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,
July 14, 2000
<PAGE>47
July 14, 2000
To the Stockholders and Board of Directors of
USBANCORP, Inc.:
We are aware that USBANCORP, Inc. has incorporated by reference in
its Registration Statements on Form S-3 (Registration No. 33-
56604); Form S-8 (Registration No. 33-53935); Form S-8
(Registration No. 33-55845); Form S-8 (Registration No. 33-55207);
and Form S-8 (Registration No. 33-55211) its Form 10-Q for the
quarter ended June 30, 2000, which includes our report dated
July 14, 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>48
Exhibit 3.2
BYLAWS OF USBANCORP, INC.
ADOPTED February 24, 1995
REVISED May 26, 2000
ARTICLE I
Meetings of Shareholders
Section 1.1. Annual Meeting. The regular annual meeting of the
shareholders for the election of directors and the transaction of
whatever other business may properly come before the meeting, shall
be held at the Main Office of the Corporation, Main and Franklin
Streets, City of Johnstown, Commonwealth of Pennsylvania, at 1:30
p.m., on the 4th Tuesday of April of each year, or at such other
place on such date and at such time as the Board of Directors may in
their discretion determine. Written notice stating the place, day,
and hour of the meeting and, in case of special meeting, the general
nature of the business to be transacted, shall be delivered not less
than five (5) nor more than forty (40) days before the date of the
meeting, or in case of a merger or consolidation not less than ten
(10) nor more than forty (40) days before the date of the meeting,
either personally or by mail, by or at the direction of the
President, or the Secretary, or the officer or persons calling the
meeting, to each shareholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail addressed to the shareholder at
his address as it appears on the books of the Corporation or as
supplied by him to the Corporation for the purpose of notice, with
postage thereon prepaid.
Section 1.2. Special Meetings. Special meetings of the
shareholders may be called at any time by the Chairman of the Board,
President, the Chief Executive Officer or by the Board of Directors,
or by any two (2) or more directors. The Secretary shall fix the
date of such meeting, to be held not more than sixty (60) days after
receipt of the request, and shall give due notice thereof.
<PAGE>49
Section 1.3. Nominations for Director. Nominations for election
to the Board of Directors may be made by the Board of Directors or by
any shareholder of any outstanding class of capital stock of the
Corporation entitled to vote for the election of directors.
Nominations, other than those made by or on behalf of the existing
management of the Corporation, shall be made in writing and shall be
delivered or mailed to the President of the Corporation not less than
60 days nor more than 90 days prior to any meeting of shareholders
called for the election of directors. Such notification shall
contain the following information to the extent known to the
notifying shareholder: (a) the name and address of each proposed
nominee; (b) the principal occupation of each proposed nominee; (c)
the total number of shares of capital stock of the Corporation that
will be voted; (d) the total number of shares of capital stock of the
Corporation that will be voted for each proposed nominee; (e) the
name and residence address of the notifying shareholder; and (f) the
number of shares of capital stock of the Corporation owned by the
notifying shareholder. Nominations not made in accordance herewith
may, in his discretion, be disregarded by the Chairperson of the
meeting, and upon his instructions, the vote tellers may disregard
all votes cast for each such nominee.
Section 1.4. Judges of Election. Every election of directors
shall be managed by one or three judges, who shall be appointed from
among the shareholders by the Board of Directors. The judges of
election shall hold and conduct the election at which they are
appointed to serve; and, after the election, they shall file with the
Secretary a certificate under their hands, certifying the result
thereof and the names of the directors elected. The judges of
election, at the request of the Board of Directors or the Chairperson
of the meeting, shall act as tellers of any other vote by proxy or
ballot taken at such meeting, and shall certify the results thereof.
No person who is a candidate for office, or an officer or an employee
of this corporation or a subsidiary thereof, shall act as a judge of
election.
<PAGE>50
Section 1.5. Proxies. Shareholders may vote at any meeting of
the shareholders in person or by proxies duly authorized in writing.
Proxies, unless otherwise provided, shall be valid for only one
meeting to be specified therein, and any adjournments of such
meeting. No proxy shall be valid after eleven (11) months from the
date of its execution unless otherwise provided in the proxy.
Proxies shall be dated and shall be filed with the records of the
meeting.
Section 1.6. Quorum. A majority of the outstanding capital
stock, represented in person or by proxy, shall constitute a quorum
at any meeting of shareholders, unless otherwise provided by law; but
less than a quorum may adjourn any meeting, from time to time, and
the meeting may be held, as adjourned, without further notice. A
majority of the votes cast shall decide every question or matter
submitted to the shareholders at any meeting, at which a quorum is
present, unless otherwise provided by law or by the Articles of
Incorporation.
Section 1.7. Voting. Only persons in whose names shares appear
on the share transfer books of the Corporation on the date on which
notice of the meeting is mailed shall be entitled to vote at such
meeting, unless some other day is fixed by the Board of Directors for
the determination of shareholders of record, but such date shall not
be less than ten (10) nor more than fifty (50) days before the date
of the meeting, or in the case of a merger or consolidation not less
than twenty (20) nor more than fifty (50) days before the date of the
meeting. Each outstanding share, regardless of class, shall be
entitled to one vote on each matter submitted to a vote, except that
in all elections for directors every shareholder shall have the right
to vote, in person or by proxy, for the number of shares owned by
him, for as many persons as there are directors to be elected, or to
cumulate said shares, and give one candidate as many votes as the
number of directors multiplied by the number of his shares shall
equal, or to distribute them on the same principle among as many
candidates as he shall think fit.
Section 1.8. Subchapters G and H of Business Corporation Law.
The provisions of Subchapter G of Chapter 25 (Section 2561 et seq.)
and the provisions of Subchapter H of Chapter 25 (Section 2571 et
seq.) of the Pennsylvania Business Corporation Law of 1988, as
amended (effected by the Act of April 27, 1990 (No. 36)) shall not be
applicable to the Corporation.
<PAGE>51
ARTICLE II
Directors
Section 2.1. Board of Directors. The Board of Directors shall
have the power to manage and administer the business and affairs of
the Corporation. Except as expressly limited by law or required or
directed by these Bylaws or by the Articles of Incorporation to be
exercised or done by the shareholders, all corporate powers of the
Corporation shall be vested in and may be exercised by the Board of
Directors.
Section 2.2. Number; Term; Vacancies. The number,
classification, election and appointment, term of office and removal
from office of directors shall be in accordance with and governed by
the provisions of Article Seventh of the Articles of Incorporation of
this Corporation which provisions are incorporated herein with the
same effect as if fully set forth. The Board of Directors may
appoint each year such number of advisory directors or directors
emeritus as the Board of Directors may from time to time determine.
Section 2.3. Organization Meeting. The Secretary, upon
receiving the certificate of the judges, of the result of any
election, shall notify the directors-elect of their election and of
the time at which they are required to meet at the Main Office of the
Corporation for the purpose of organizing the new Board and electing
and appointing officers of the Corporation for the succeeding year.
Such meeting shall be held on the day of the election or as soon
thereafter as practicable, and, in any event, within thirty days
thereof. If, at the time fixed for such meeting, there shall not be
a quorum present, the directors present may adjourn the meeting, from
time to time, until a quorum is obtained.
Section 2.4. Regular Meetings. The regular meetings of the
Board of Directors shall be held quarterly at a time and place
determined by the Board of Directors. No notice of regular meetings
need be given.
Section 2.5. Special Meetings. Special meetings of the Board
of Directors may be called by the Chairman of the Board, the
President, the Chief Executive Officer or at the request of three (3)
or more directors to be held at the principal place of business of
the Corporation or such other place as designated by the person or
persons calling the meeting. Each member of the Board of Directors
shall be given notice stating the time and place, by telephone,
telegram, facsimile transmission, letter, or in person, of each such
special meeting.
<PAGE>52
Section 2.6. Quorum. A majority of the directors shall
constitute a quorum at any meeting, except when otherwise provided by
law; but a less number may adjourn any meeting, from time to time,
and the meeting may be held, as adjourned, without further notice.
Section 2.7. Remuneration. No stated fee shall be paid to
directors, as such, for their service, but by resolution of the Board
of Directors, a fixed sum and expenses of attendance, if any, may be
allowed for attendance at each regular or special meeting of the
Board of Directors; provided, that nothing herein contained shall be
construed to preclude any director from serving the Corporation in
any other capacity and receiving compensation therefor. Members of
standing or special committees may be allowed like compensation for
attending committee meetings.
Section 2.8. Action by Directors Without a Meeting. Any action
which may be taken at a meeting of the directors, or of a committee
thereof, may be taken without a meeting if a consent in writing
setting forth the action so taken or to be taken, shall be signed by
all of the directors, or all of the members of the committee, as the
case may be. Such consent shall have the same effect as a unanimous
vote.
Section 2.9. Action of Directors by Communications Equipment.
Any action which may be taken at a meeting of directors, or of a
committee thereof, may be taken by means of a conference telephone or
similar communications equipment by means of which all persons
participating in the meeting can hear each other at the same time.
Section 2.10. Age Limitation. No person shall be eligible
for election, re-election, appointment or re-appointment to the Board
of Directors if such person shall have attained the age of seventy
(70) years, at the time of any such action.
Section 2.11. Share Ownership. Each director shall own in
his or her own right unencumbered shares of common stock in the
Corporation having a par value of not less than $1,000.
Section 2.12. Minutes. The Board of Directors and each
committee hereinafter provided for shall keep minutes of its
meetings. Minutes of the committees shall be submitted at the next
regular meeting of the Board of Directors, and any action taken with
respect thereto shall be entered as the minutes of the Board of
Directors.
<PAGE>53
ARTICLE III
Committees of the Board
Section 3.1. Special Committees. The Board of Directors may
appoint from time to time, from its own members, special committees
of two or more persons, for such purposes and with such powers as the
Board may authorize.
Section 3.2. Executive Committee. The Committee shall consist
of not less than three (3) members of the Board of Directors (who are
not officers of the Corporation or a subsidiary or affiliate of the
Corporation) appointed by the Chairman of the Board, who, together
with the Chairman of the Board, the President and the Chief Executive
Officer, shall constitute the Executive Committee, which may exercise
all of the powers of the Board of Directors except where action of
the Board of Directors is by law specifically required. It shall act
by the concurrent vote of not less than three members thereof. The
Secretary shall keep a record of its proceedings and report the same
at each regular meeting of the Board of Directors.
It shall have general supervision of, and direct the affairs and
practical operation of the subsidiaries. It shall meet weekly or
monthly, as it shall determine, on such day as it may designate and
at such times as it shall appoint, and at other times upon the call
of the Chairman of the Board, the Chief Executive Officer and the
President, upon the call of the Chairman of the Committee, and upon
call of any two members thereof. The Board of Directors shall accept
or decline the report of the Executive Committee, such action to be
recorded in the minutes of the meeting.
Section 3.3. Audit Committee. The Audit Commitee shall
include six or more USBANCORP, Inc. Board Members, with two or more
Board Members from each banking affiliate, none being officers or
employees of any banking affiliate or the Corporation.
<PAGE>54
One member shall be rotating, serving for a period of one year so
that the Audit Committee will annually include a new member. Members
shall be elected annually to serve a term of one year. One of the
members shall be appointed chairman by the Chairman of the Board.
The Committee shall appoint a secretary who shall keep minutes of all
meetings. Three members of the Committee shall constitute a
quorum. The Committee shall meet six times per year.
In discharging its duty, the Audit Committee may rely on the
evaluations and conclusions of regulatory examiners as well as
internal and/or external auditors utilized by the Committee in the
performance or review of audit functions.
The Corporation's auditors shall report directly to the Audit
Committee. The Committee shall meet with the internal auditors and
review internal audit reports, independent auditor findings, and all
official reports from regulatory authorities along with management's
responses to these reports.
The Corporation's chief auditor, chief loan review and chief
compliance officers shall functionally report directly to the Audit
Committee and also provide their findings to the subsidiaries of the
Corporation. The loan review and compliance function will report
administratively to the chief auditor. Administratively, the chief
auditor reports to the Chairman of the Board.
<PAGE>55
The Committee shall, annually, report formally, in writing,
to the Board of Directors the performance of its supervisory and
audit functions. The report must set forth the Committee's
evaluations, conclusions, and recommendations with respect to the
condition of the Corporation and the effectiveness of its
policies, practices and controls.
The Committee shall recommend to the Board of Directors for
its action the appointment or discharge of the Corporation's -
ndependent auditors. The Committee shall consider the auditor's
independence, audit and non-audit fees and the quality of their
work. If the auditors are to be replaced, the Committee shall
document the reason for replacement along with a recommendation
for the appointment of new auditors.
The Committee shall meet with the independent auditors
periodically and review, among other things, the Scope and Audit
Plan, report or opinion on the Corporation's financial statements,
the effectiveness of the subsidiaries' internal controls, along
with any recommendations for improvement and any major problems
encountered.
The Committee shall insure that an internal audit department
and loan review and compliance department are adequately staffed
and independent from the management of the subsidiaries. In
fulfilling this role, the Committee shall review the content and
completeness of the audit, loan review and compliance programs and
procedures, appraise the audit staff and loan review and
compliance staff and approve salaries and insure that the audit
staff and loan review and compliance staff are maintaining their
technical proficiency through continuing education programs.
It is also the responsibility of the Audit Committee to
ascertain on the basis of observation and audit, whether the trust
function is being administered in accordance with law, regulations
and sound fiduciary principles. It shall evaluate the policies,
practices and controls employed by the trust function to effect
compliance and enforce correction of any violations, deficiencies
or weaknesses. In discharging its duty, the Audit Committee may
rely on the evaluations and conclusions of internal and/or
external auditors utilized by the Committee in the performance or
review of audit functions.
<PAGE>56
The Audit Committee must ensure that the responsible parties
have before them the last report of examination of the trust
functions by the Pennsylvania Department of Banking and the
Federal Reserve System and any letters to or from the such
agencies in order to verify correction of exceptions, weaknesses
or deficiencies. The Committee also should confirm the correction
of all exceptions, weaknesses or deficiencies which may be brought
to the Corporation's attention by internal and external auditors.
The Audit Committee is required to report formally in
writing to the Board of Directors the performance of its trust
supervisory and audit functions. The report must set forth the
Committee's evaluations, conclusions and recommendations with
respect to the condition of the trust function, and the
effectiveness of its policies, practices and controls. It also
must include a specific
statement of the Committee's conclusion as to whether that
function is being administered in accordance with all applicable
laws and sound fiduciary principles.
The Committee shall have such other duties as may be
lawfully delegated to it from time to time by the Board of
Directors.
Section 3.4. Nominating Committee. There shall be a
Nominating Committee of at least three (3) members of the Board of
Directors who shall be nominated by the Chairman of the Board and
appointed at least annually by the Board of Directors. It shall
be the duty of this Committee to nominate directors for
consideration at the annual meeting of the shareholders.
Section 3.5. Management Compensation Committee. There shall
be a Management Compensation Committee of at least three (3)
members of the Board of Directors who shall be the three (3)
directors (who are not officers of the Corporation or a subsidiary
or affiliate of the Corporation) appointed by the Chairman of the
Board to the Executive Committee. It shall be the duty of the
Committee to review and make recommendations to the Board of
Directors concerning officers' compensation.
Section 3.6 Stock Option Plan Committee. There shall be a
Stock Option Plan Committee of at least three (3) members of the
Board of Directors appointed from time to time by the Board of
Directors of the Corporation to administer the 1991 Stock Option
Plan in accordance with the provisions thereof.
<PAGE>57
ARTICLE IV
Officers and Employees
Section 4.1. Designations. The officers of the Corporation
shall be the Chairman of the Board, President, Chief Executive
Officer, Secretary and Treasurer who shall be elected for one year
by the Board of Directors at their first meeting after the annual
meeting of shareholders and who shall hold office until their
successors are elected and qualify. Any two or more offices may
be held by the same person, except the offices of President and
Treasurer.
Section 4.2. Chairman of the Board. The Chairman of the
Board shall preside at all meetings of the Board of Directors and
in general shall perform such duties as are incident to his office
and as prescribed by the Board of Directors. The Chairman of the
Board shall perform the duties and have the powers of the Chief
Executive Officer in his absence or his inability or refusal to
act.
Section 4.3. President. The Board of Directors shall appoint
one of its members to be President of the Corporation. He shall
be an ex officio member of all committees except the Stock Option,
Management Compensation and Audit Committees. The President shall
have and may exercise any and all other powers and duties
pertaining by law, regulation, or practice to the office of
President or imposed by these Bylaws. He shall also have and may
exercise such further powers and duties as from time to time may
be
conferred upon or assigned to him by the Board of Directors. In
the absence of the Chairman of the Board and the Chief Executive
Officer, or their inability or refusal to act, he shall preside at
all meetings of the Board of Directors.
Section 4.4. The Chief Executive Officer. The Chief
Executive Officer shall have general supervision of all
departments and business of the Corporation, he shall prescribe
the duties of other officers and see to the performance thereof.
He shall be an ex officio member of all committees except the
Stock Option, Management Compensation and Audit Committees. In
the absence of the Chairman of the Board or his inability or
refusal to act, he shall preside at all meetings of the Board of
Directors.
<PAGE>58
Section 4.5. Secretary. The Board of Directors shall appoint
a Secretary, who shall be Secretary of the Board and of the
Corporation, and shall keep accurate minutes of meetings. He
shall attend to the giving of all notices required by these Bylaws
to be given. He shall be custodian of the corporate seal,
records, documents and papers of the Corporation. He shall have
and may exercise any and all other powers and duties pertaining by
law, regulation or practice to the office of Secretary or imposed
by these Bylaws. He shall perform such other duties as may be
assigned to him from time to time by the Board of Directors.
Section 4.6. Treasurer. The Board of Directors shall appoint
a Treasurer, who shall be the Treasurer of the Corporation. He
shall have and may exercise any and all powers and duties
pertaining by law, regulation or practice to the office of
Treasurer or imposed by these Bylaws. He shall perform such other
duties as may be assigned to him from time to time by the Board of
Directors.
Section 4.7. Other Officers. The Board of Directors may
appoint one or more Executive Vice Presidents, one or more Senior
Vice Presidents, one or more Vice Presidents, one or more
Assistant Vice Presidents, one or more Assistant Secretaries, one
or more Assistant Treasurers, a Chief Auditor, and such other
officers, officers emeritus and Attorneys-in-fact found necessary
for the orderly transaction of business. Such officers shall
respectively exercise such powers and perform such duties as
pertain to the respective offices or as may be conferred upon or
assigned to them by the Board of Directors, the Chief Executive
Officer or the President.
Section 4.8. Clerks and Agents. The Board of Directors may
appoint, from time to time, such agents or employees as it may
deem advisable for the prompt and orderly transaction of the
business of the Corporation, define their duties, fix salaries to
be paid them and dismiss them. Subject to the authority of the
Board of Directors, the President or any other officer of the
Corporation
<PAGE>59
authorized by him, may appoint and dismiss all or any agents or
employees, prescribe their duties and the conditions of their
employment, and from time to time, fix their compensation.
Section 4.9. Tenure of Office. All officers shall hold
office for the current year for which the Board of Directors was
elected, unless they shall resign, become disqualified, or be
removed; and any vacancy occurring in the office of President
shall be filled promptly by the Board of Directors.
ARTICLE V
Authority of Officers
Section 5.1. Corporate Seal. The Chairman of the Board, the
President, the Chief Executive Officer, any Vice President
(excluding the Chief Auditor), the Secretary, and the Treasurer,
shall each have authority to affix and attest the corporate seal
of the Corporation.
Section 5.2. Other Powers. The Chairman of the Board, the
President, the Chief Executive Officer or any Vice President
(excluding the Chief Auditor), acting in conjunction with the
Secretary or Treasurer or Assistant Secretary or Assistant
Treasurer are authorized to perform such corporate and official
acts as are necessary to carry on the business of the Corporation,
subject to the directions of the Board of Directors and the
Executive Committee.
The above-named officers are fully empowered, subject to
policies and established committee approvals:
a. To sell, assign and transfer any and all shares of
stock, bonds or other personal property standing in
the name of the Corporation or held by the Corporation
either in its own name or as agent;
b. To assign and transfer any and all registered bonds
and to execute requests for payment or reissue of any
such bonds that may be issued now or hereafter and
held by the Corporation in its own right or as agent;
c. To sell at public or private sale, lease, mortgage or
otherwise dispose of any real estate or interest
therein held or acquired by the Corporation in its own
right or as agent, except the real estate and
buildings occupied by the Corporation in the
transaction of its business, and to execute and
deliver any instrument necessary to completion of the
transaction;
<PAGE>60
d. To receive and receipt for any sums of money or
property due or owing to the Corporation in its own
right or as agent and to execute any instrument of
satisfaction therefor for any lien of record;
e. To execute and deliver any deeds, contracts,
agreements, leases, conveyances, bills of sale,
petitions, writings, instruments, releases,
acquittance and obligations necessary in the exercise
of the corporate powers of the Corporation.
Section 5.3. Checks and Drafts. Such of the officers and
other employees as may from time to time be designated by the
Board of Directors or Executive Committee, shall have the
authority to sign checks, drafts, letters of credit, orders,
receipts, and to endorse checks, bills of exchange, orders,
drafts, and vouchers made payable or endorsed to the Corporation.
Section 5.4. Loans. Each of the Chairman of the Board,
President, the Chief Executive Officer, any Vice President
(excluding the Chief Auditor), the Secretary or the Treasurer,
acting in conjunction with any other of these designated officers
may effect loans on behalf of the Corporation from any banking
institution, executing notes or obligations and pledging assets of
the Corporation therefor.
ARTICLE VI
Section 6.1. Limitation of Liability. To the fullest extent
permitted by the Law of the Commonwealth of Pennsylvania, a
director of the Corporation shall not be personally liable to the
Corporation or others for monetary damages for any action taken or
any failure to take any action, unless the director has breached
or failed to perform the duties of his or her office and such
breach or failure constitutes self-dealing, willful misconduct or
recklessness. The provisions of this Section 6.1 shall not apply
with respect to the responsibility or liability of a director
under any criminal statute or the liability of a director for the
payment of taxes pursuant to local, state or federal law.
<PAGE>61
Section 6.2. Indemnification. (a) The Corporation shall
indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investi-
gative, by reason of the fact that such person is or was a direc-
tor, officer, employee or agent of the Corporation, or is or was
serving, at the request of the Corporation, as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses
(including attorneys' fees), amounts paid in settlement,
judgments, and fines actually and reasonably incurred by such
person in connection with
such action, suit, or proceeding; provided, however, that no
indemnification shall be made in any case where the act or failure
to act giving rise to the claim for indemnification is determined
by a court to have constituted willful misconduct or recklessness.
(b) Advance of Expenses. Expenses (including attorneys'
fees) incurred in defending a civil or criminal action, suit, or
proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit, or proceeding, upon
receipt of a written statement by or on behalf of the director,
officer, employee, or agent to repay such amount if it shall be
ultimately determined that he or she is not entitled to be
indemnified by the Corporation as authorized in this Article VI.
(c) Indemnification not Exclusive. The indemnification
and advancement of expenses provided by this Article VI shall not
be deemed exclusive of any other right to which persons seeking
indemnification and advancement of expenses may be entitled under
any agreement, vote of disinterested directors or otherwise, both
as to actions in such persons' official capacity and as to their
actions in another capacity while holding office, and shall
continue as to a person who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such person.
<PAGE>62
(d) Insurance, Contracts, Security. The Corporation may
purchase and maintain insurance on behalf of any person, may enter
into contracts of indemnification with any person, and may create
a fund of any nature which may, but need not be, under the control
of a trustee for the benefit of any person, and may otherwise
secure in any manner its obligations with respect to
indemnification and advancement of expenses, whether arising under
this Article VI or otherwise, whether or not the Corporation would
have the power to indemnify such person against such liability
under the provisions of this Article VI.
Section 6.3. Effect of Amendment. Any repeal or modification
of this Article VI shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a
director of the Corporation or any right of any person to
indemnification from the Corporation with respect to any action or
failure to take any action occurring prior to the time of such
repeal or modification.
Section 6.4. Severability. If, for any reason, any provision
of this Article VI shall be held invalid, such invalidity shall
not affect any other provision not held so invalid, and each such
other provision shall, to the full extent consistent with law,
continue in full force and effect. If any provision of this
Article VI shall be held invalid in part, such invalidity shall in
no way affect the remainder of such provision, and the remainder
of such provision, together with all other provisions of this
Article VI, shall, to the full extent consistent with law,
continue in full force and effect.
ARTICLE VII
Stock and Stock Certificates
Section 7.1. Transfers. Shares of stock shall be
transferable on the books of the Corporation, and a transfer book
shall be kept in which all transfers of stock shall be recorded.
Every person becoming a shareholder by such transfer shall, in
proportion to his shares, succeed to all rights of the prior
holder of such shares.
<PAGE>63
Section 7.2. Share Certificates. Every share certificate
shall be signed by the President, or any Vice President, or by any
one of their facsimile signatures, or by the Secretary, or any
Assistant Secretary or by any one of their facsimile signatures,
and shall be signed by a transfer agent. Every shareholder of
record shall be entitled to a share certificate representing the
shares owned by him or her and, when stock is transferred, the
certificates representing such stock shall be returned to the
Corporation and new certificates issued. The corporate seal shall
appear on each share certificate and may be a facsimile, engraved
or printed. Each certificate shall recite on its face that the
stock represented thereby is transferable only upon the books of
the Corporation, properly endorsed.
Section 7.3. Shares of Another Corporation. Shares owned by
the Corporation in another corporation, domestic or foreign, shall
be voted by the President or such other officer, agent or proxy as
the Board of Directors may determine.
ARTICLE VIII
Miscellaneous Provisions
Section 8.1. Fiscal Year. The Fiscal Year of the Corporation
shall be the calendar year. The Corporation shall be subject to
an annual audit as of the end of its fiscal year by independent
public accountants appointed by and responsible to the Board of
Directors through the Audit Committee.
Section 8.2. Records. The Articles of Incorporation, the
Bylaws and the proceedings of all meetings of the shareholders,
the Board of Directors, and standing committees of the Board,
shall be recorded in appropriate minute books provided for the
purpose. The minutes of each meeting shall be signed by the
Secretary or other officer appointed to act as secretary of the
meeting.
Section 8.3. Gender and Number. Where the context permits,
words in any gender shall include any other gender, words in the
singular shall include the plural and the plural shall include the
singular.
ARTICLE IX
Bylaws
<PAGE>64
Section 9.1. Inspection. A copy of the Bylaws, with all
amendments thereto, shall at all times be kept in a convenient
place at the Main Office of the Corporation, and shall be open for
inspection to all shareholders during normal business hours.
Section 9.2. Amendments. These Bylaws may be altered,
amended, added to or repealed by a vote of the majority of the
Board of Directors at any regular meeting of the Board, or at any
special meeting of the Board called for that purpose, except they
shall not make or alter any Bylaw fixing their qualifications,
classification or term of office. Such action by the Board of
Directors is subject, however, to the general right of the
shareholders to change such action.
<PAGE>65
Exhibit 10.1
SERVICES AGREEMENT
This Agreement made this 1st day of June, 2000 by and
between USBANCORP, INC., a Pennsylvania corporation having its
principal place of business at Main and Franklin Streets,
Johnstown, Pennsylvania 15907 ("UBAN"), and THREE RIVERS
BANCORP., INC., a Pennsylvania corporation having its principal
place of business at 2681 Moss Side Boulevard, Monroeville,
Pennsylvania 15146 ("TRB").
Background
UBAN is a bank holding company that was organized in 1984
and holds all the capital stock of U. S. Bank in Johnstown,
Pennsylvania.
TRB is a bank holding company formed on April 1, 2000 and
holds all the capital stock of Three Rivers Bank and Trust
Company, Monroeville, Pennsylvania ("Three Rivers Bank").
Prior to April 1, 2000, Three Rivers Bank was a wholly
owned subsidiary of UBAN together with U.S. Bank. On April 1,
2000, TRB was formed and spun-off as a separate company to
UBAN's shareholders in a tax-free distribution.
Because a number of administrative services were
previously performed by UBAN for Three Rivers Bank, and TRB
will not have established the infrastructure necessary to
perform certain of these services independently as of the spin-
off date, the parties are entering into this Services Agreement
to permit UBAN to continue to provide certain enumerated
services to TRB and Three Rivers Bank.
NOW, THEREFORE, the parties hereto, intending to be
legally bound, hereby agree as follows:
Agreement
1. Services Provided by UBAN. UBAN shall provide to
TRB, for its benefit or the benefit of Three Rivers Bank, and
TRB shall purchase from UBAN, the accounting/data processing
services, and audit and loan review services more particularly
described on Exhibit A. In providing such services, UBAN shall
report to the Chief Executive Officer, Chief Operating Officer,
and Chief Financial Officer of TRB and/or Three Rivers Bank
exclusively (the "Specified Officers"). UBAN shall be
obligated to perform all of the services as are set forth on
Exhibit A, but shall only perform such services to the extent
they are requested, and in the manner and time frames as
requested, by such Specified Officers. In order to permit UBAN
to provide such services to TRB, TRB shall cause appropriate
information to be provided to UBAN, in a format accessible by
UBAN and on a mutually agreed upon timeframe, as may permit
UBAN to adequately provide the specific services requested by
the Specified Officers.
<PAGE>66
2. Confidentiality; Limited Providers. Due to the
potentially sensitive nature of the services to be provided
hereunder, UBAN and TRB agree to the following protocols in
connection with the provision of services as provided herein:
(a) UBAN shall identify to TRB the specific UBAN
personnel capable and available to perform the services
requested hereunder.
(b) Except for the specific designated UBAN personnel,
no other employee, director, or committees of UBAN or any
affiliate of UBAN shall (i) perform any services to TRB
hereunder, or (ii) have access to any information of TRB's
provided to UBAN for the purposes of this Agreement, or any of
the reports produced by UBAN for TRB as contemplated by this
Agreement.
(c) Consistent with the foregoing, all information
provided to UBAN for the purposes of this Agreement shall be
directed solely to the designated persons, and UBAN shall cause
such persons to utilize such information solely for the
purposes of this Agreement in generating reports for TRB. UBAN
will take all appropriate measures to insure that data and
reports generated for TRB pursuant hereto shall not be
accessible by non-designated persons within UBAN or any of its
affiliates, whether by electronic means or otherwise. Hard
copy reports generated pursuant hereto shall be maintained and
marked as "Confidential" while in the possession of UBAN and
shall not be accessible by other than the designated persons.
UBAN hereby agrees that none of such designated persons will
suffer any consequences for refusing to reveal the contents of
the TRB information to the superiors of such designated
persons.
(d) Notwithstanding any of the foregoing, whenever a
UBAN employee determines in good faith that he or she has an
obligation to report any suspected criminal activity to a
government agency or a superior, such disclosure shall not
violate the terms of this Agreement.
3. Compensation for Services. UBAN shall be
compensated at the following monthly amounts for the services
provided and listed in attachment A. These amounts reflect a
15% mark-up from UBAN's cost to ensure that a reasonable profit
margin is built in and the transaction is arms length. This
mark-up is consistent with the prior inter-entity billing
arrangement. The start date for the contract is April 1, 2000.
<PAGE>67
Service Monthly Charge Expiration Date
Accounting/data processing $ 51,500 3/31/01
Administration $ 5,000 12/31/00
Loan Review $ 11,000 12/31/00
Audit $ 30,000 12/31/00
Marketing $ 10,500 12/31/00
Total Monthly Charge $ 108,000
(a) In rare instances, a "Specific Item" charge may
be levied by UBAN to TRB for "extraordinary services" rendered.
To qualify as extraordinary, these services must be considered
unusual, non-recurring, and related to a specific service or
project not customarily provided by UBAN to TRB hereunder. Any
"Specific Item" charge must be separately invoiced at an amount
that is reasonable and consistent with the fair market value of
the service and must be approved in writing, in advance, by a
Specified Officer of TRB.
(b) One such specific item included in this contract
is a reimbursement for the remaining fixed assets that were
capitalized on the Parent Company's books that related to
purchase accounting adjustments that were required to be pushed
up to the Parent at the time of the original acquisition of
TRB. The one time amount due to UBAN from TRB for these fixed
assets totals $62,000.
4. Billing and Payment. UBAN shall deliver to TRB an
invoice for services provided not less frequently than five (5)
business days after the end of each month. Payment is due to
UBAN within ten days of receipt of the invoice.
5. Dispute Resolution. In the event that TRB
disputes the amount of any invoice, it shall give written
notice to UBAN within ten days of receipt of the invoice. In
the event the parties are unable to resolve the dispute within
thirty (30) days, the dispute shall be submitted to arbitration
under the rules of the American Arbitration Association. Any
arbitration proceeding will be held in Pittsburgh, Pennsylvania
and any decision of the arbitrator will be final and binding
upon the parties.
<PAGE>68
6. Termination. As stated in item 3 above, the term
of this agreement will be through March 31, 2001 for the
accounting/data processing services and through December 31,
2000 for all other services. After this initial term, either
party has the right to terminate this Agreement, without
penalty, with respect to any service, or all services, upon
sixty (60) days written notice to the other party. UBAN, and
TRB shall have the right to continue the Agreement for
additional one month terms, not exceeding in the aggregate a
maximum period of two years from the date hereof for the
accounting/data processing services and one year for the
audit/loan review services. Upon termination of any service
listed in Item 3 above, UBAN will provide TRB with mapping
information and other applicable supporting documentation, as
well as provide reasonable assistance, to facilitate the
conversion to TRB's designated system or service provider, of
TRB's electronic and physical records maintained by UBAN. The
cost associated with providing this deconversion support will
be viewed as a "specific item" and TRB will be charged
according to the provisions of paragraph 3a. of this agreement.
7. Miscellaneous. This Agreement shall be construed
in accordance with Pennsylvania law and all applicable federal
banking regulations. This Agreement contains the entire
agreement between the parties relating to the subject hereof,
and no amendment may be made to this Agreement except by a
writing signed by both parties. Nothing in this Agreement
shall be construed to require any party to violate any
requirement of federal or state banking law or regulation, as
such may be in effect as of the date hereof or may be hereafter
enacted or adopted. Any notices required under this Agreement
shall be made in any commercially reasonable manner appropriate
for the subject matter of the notice, and directed to the CFO
of the party receiving the notice. Nothing in this Agreement
shall be construed as making the parties partners in any
endeavor, or agents of each other with power to bind the other.
This is a contract for services only, and any tax
ramifications of this Agreement shall be the obligation of each
party individually, and no adjustment shall be made to any fees
due hereunder as a result of any tax effect or change in the
tax laws.
USBANCORP, INC.
By: /s/Jeffrey A. Stopko
Jeffrey A. Stopko,
Senior Vice President & CFO
THREE RIVERS BANCORP, INC.
By:/s/Terry K. Dunkle
Terry K. Dunkle
Chairman & CEO
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Audit
Annual Risk Assessment of each functional unit or
subsidiary.
Allocation of Audit resources based on risk by utilizing
internal and external resources as appropriate.
Performance of integrated audits combining operational,
financial, compliance and information systems testing into
comprehensive audits.
Performance of branch examinations.
Issue reports to and solicit responses from Management for
presentation to the Three Rivers Bancorp (TRBC) Board of
Directors Audit Committee.
Meet with Audit Committee of TRBC in 2000 at least 4 times
to review Internal Audit reports, external Audit
Recommendations, regulatory reports and litigation risk
issues.
Provide Risk Management facilitation services for training,
implementation and ongoing risk monitoring efforts.
Develop and facilitate a Board of Directors Audit Committee
training session.
Provide reports to the Board of Directors as specified by
the Corporate Bylaws and Audit Committee charter.
Issue functional and organization wide opinions on the
reliability and integrity of financial and operating
information as well as the effectiveness of internal
controls.
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Loan Review
Loan Review services will also continue which shall include:
Review all loans within the prescribed scope and assign
independent risk rating scores.
Annually evaluate the scope threshold and make
recommendations to the Audit Committee for their approval.
Provide quarterly Commercial Lending and Commercial Mortgage
portfolio assessment reports to Management.
Provide status of loan portfolio reports, portfolio
assessment reports and graphics of weighted average risk
ratings to the Senior Officers Loan Committee and the Board
Loan Committee.
Annual assessment of the Small Business Portfolio.
Annual assessment of 2 or 3 Consumer Loan portfolio types
i.e. Prestige Line of Credit.
Periodic speculative lending portfolio assessments.
Provide consultation in the quarterly completion of the
Credit Risk Matrix as part of the organization risk
management monitoring efforts.
The provider of consolation services for the Loan Loss
Reserve Committee including the performance of Federal
Reserve provided stress testing methods.
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Report to the Board Audit Committee at least 4 times
annually.
Monitor delinquency and watch list loan reporting.
Accounts Payable Services:
1. The payment of all invoices, and expense reports after they
have been properly approved by a member of TRBC's authorized
management.
2. Preparation and transmittal of entries to TRBC's data center
for input into the general ledger.
3. Preparation of year end 1099's for all applicable vendors.
4. Preparation of informational reports to human resources
regarding income tax for reimbursed expenses.
5. Answer all inquiries from vendors regarding payment of
invoices.
6. Provide information to management on request for vender
histories, general ledger variance analysis and payment
information regarding CRA contributions.
7. Calculation and submission of sales and use tax for both
county and state.
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Provide Profitability Accounting Services:
1. Process monthly FTP files and input into OPS and PPS for
production of center profitability reports, RAROE and Product
Profitability reports.
2. Provide FTP, OPS and PPS Output files to TRBC in the format
required for input into TRBC's executive CPS and Executive
Insight systems.
FTP - Funds Transfer Pricing
OPS - Organization Profitability System
PPS - Product Profitability System
RAROE - Risk Adjusted Return on Equity
Historical Financial Reporting Systems and Budget:
1. Preparation of Key Historical Financial Reports and which
assist management and the Board in monitoring the bank's
financial performance trends and comparatives against
budget.
2. Assistance in developing the annual budget on the Sendero
System.
Investment Accounting Services:
1. This service will include security set up in the master
file, monthly accrued interest accretion and amortization
based on the constant yield method, additions and deletions
of monthly purchases, sales, maturities and prepayments by
security, and maintaining safekeeping, daily file extracts
provided for general ledger input and pledge information.
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2. TRBC will receive reports monthly from the investment system
as follows: Interest accrual Report, Amortization/Accretion
Report, Portfolio Accounting Statement, Trial Balance
Report, Transaction Activity Recap Report, Projected Payment
Report, Security Inventory Report for Safekeeping, FASB 115
Market Changes, Maturity Distribution, Pledged Securities
Inventory Report, Schedule RC-B (Quarterly), and RC-R Risk
Based Capital (Quarterly).
Regulatory Accounting and Tax Compliance Services:
1. Preparation of the TRB Call report and other FRY reports for
the new TRB Holding Company on a quarterly basis as
required.
2. Preparation of the necessary accounting schedules from the
Call report documentation and Sendero system which will be
used by the TRB Finance staff in their quarterly SEC
filings.
3. Provide TRB with income tax compliance services which could
include assistance in determining the quarterly tax payment,
preparing schedules to be used in preparation of the annual
tax return, deferred tax and effective tax rate analysis,
and assistance with the Pa. Shares tax return if needed.
4. Maintain the TRB Fixed Asset Accounting System and provide
the required reports to TRB management.
Asset/Liability and Interest Rate Risk Management Reporting
Services
1. Monthly Interest Rate Risk Management Reporting through
preparation of a rolling 24-month reforecast which is used
to create net interest income simulations. These
simulations compare a base case to performance in different
interest rate environments to measure and identify
compliance against policy guidelines for net interest income
and net income variability.
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2. Preparation of an ALCO Guideline Summary exception report
which monitors actual performance against key TRB ALCO
policy guidelines.
3. Preparation of Static Gap Reports on a monthly basis.
4. Preparation of Market Value of Portfolio Equity Analysis
Reports on a quarterly basis.
5. Preparation of special simulation reports as needed to
execute off balance sheet derivative transactions or other
special asset/liability management strategies. The ability
to perform this modeling in an efficient manner is critical
to proactively managing TRB's leverage position which
includes $400 million of borrowed funds.
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