<PAGE> 1
DEFINITIVE INFORMATION STATEMENT
SCHEDULE 14(c) INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14c-5(d)(2))
[X] Definitive Information Statement
USBANCORP, INC.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies:
_________________________________________________________
2) Aggregate number of securities to which transaction applies:
_________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
_________________________________________________________
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
_________________________________________________________
[ ] Fee previously paid with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
_________________________________________________________
2) Form, Schedule or Registration Statement No.:
_________________________________________________________
3) Filing Party:
_________________________________________________________
4) Date Filed:
_________________________________________________________
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LOGO
Dear Fellow Shareholder:
In July 1999, we announced our intent to spin off our Three Rivers Bank
subsidiary to our shareholders. This decision was reached by your Board of
Directors and Management team after exploring a wide range of strategic options
to position USBANCORP for future profitable growth in the financial services
industry. We continue to believe that the separation of the banking subsidiaries
into two totally distinct companies has the potential to generate the greatest
near and long term value in their businesses by allowing each bank to focus on
its core strengths and pursue different future strategic directions.
Accordingly, this letter and the accompanying Information Statement are
being sent to you to inform you that your Board of Directors has approved a plan
for such spin off, under which you will become the owner of one share of common
stock of Three Rivers Bancorp, Inc. for every two shares of USBANCORP stock that
you owned on March 24, 2000. Three Rivers Bancorp is a newly formed holding
company that will own all of the outstanding stock of Three Rivers Bank. This
distribution to you of Three Rivers Bancorp common stock will not change the
number of shares of USBANCORP common stock you hold.
As discussed in more detail in the Information Statement, we are making
this distribution to you for several reasons. First, after the spin-off Three
Rivers Bancorp will be positioned to raise capital in a more cost effective
manner so that it can more meaningfully participate in the consolidation of the
banking industry. Second, the spin off will allow USBANCORP and Three Rivers
Bancorp to better focus on the businesses of their respective bank subsidiaries.
U.S. Bank and Three Rivers Bank each serve different geographic markets and have
unique strengths to capitalize on to achieve future growth. We believe the spin
off will enable both of these banks to profitably grow by pursuing their own
well defined business strategies.
On April 1, 2000, Three Rivers Bancorp, Inc. will become a separate
publicly held company listed on the Nasdaq National Market under the symbol
TRBC. It will be a $1 billion bank holding company headquartered in Monroeville,
Pennsylvania having 24 branches located in the Pennsylvania counties of
Allegheny, Washington and Westmoreland. Its subsidiaries will be Three Rivers
Bank, TRB Financial Services Corporation and Community First Capital Corp.
After the spin off, USBANCORP will be a $1.4 billion bank holding company
headquartered in Johnstown, Pennsylvania, with 22 branches conducting business
in the Pennsylvania counties of Cambria, Somerset, Westmoreland, Centre and
Clearfield. Its subsidiaries will include U.S. Bank, USBANCORP Trust and
Financial Services Company and Standard Mortgage Corporation of Georgia.
I encourage you to read the attached Information Statement carefully as it
provides more details on Three Rivers Bancorp and the spin off. This transaction
presents exciting opportunities for both companies and their shareholders. Both
USBANCORP and Three Rivers Bancorp will be in a strong position to grow and
prosper in the new millennium's changing landscape for financial services
companies. I thank you for your past support of USBANCORP and would encourage
you to continue to support USBANCORP and the new Three Rivers Bancorp as we move
forward.
Best regards,
/s/ Terry K. Dunkle
Terry K. Dunkle
Chairman and Chief Executive Officer
<PAGE> 3
LOGO
INFORMATION STATEMENT
PERTAINING TO THE
SPIN-OFF OF ITS
THREE RIVERS BANK AND TRUST
SUBSIDIARY
<PAGE> 4
LOGO
INFORMATION STATEMENT
THREE RIVERS BANCORP, INC.
COMMON STOCK
($0.01 PAR VALUE)
USBANCORP, INC. is furnishing this Information Statement to you, as a
holder of record of USBANCORP common stock at the close of business on March 24,
2000 (the "Record Date"). This Information Statement describes the distribution
of one share of common stock, $0.01 par value, of Three Rivers Bancorp, Inc. for
every two shares of USBANCORP common stock held of record as of that date (the
"Distribution"). See "The Distribution -- Manner of Effecting the Distribution."
We currently own all of the capital stock of Three Rivers Bancorp. As a
result of transactions entered into in connection with the Distribution, as of
11:59:59 E.S.T. on April 1, 2000 (the "Distribution Date"), Three Rivers Bancorp
will own all of the outstanding capital stock of Three Rivers Bank and Trust
Company.
We will make the Distribution on the Distribution Date. You will not have
to pay anything for the shares of Three Rivers Bancorp Common Stock that we
distribute to you. There is no public market for Three Rivers Bancorp Common
Stock, although we expect that a "when-issued" trading market will develop on or
after the Record Date. We have applied to list Three Rivers Bancorp Common Stock
on the Nasdaq National Market under the symbol "TRBC".
We do not need a vote of shareholders in order to make this Distribution.
WE ARE NOT ASKING YOU FOR A PROXY, AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
This information statement does not constitute an offer to sell or the
solicitation of an offer to buy any securities.
The date of this Information Statement is March 27, 2000.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
Summary..................................................... 1
Introduction................................................ 4
The Distribution............................................ 5
USBANCORP, Inc. Pro Forma Condensed Consolidated Financial
Statements................................................ 11
Three Rivers Bank Selected Consolidated Financial Data...... 13
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations of Three
Rivers Bank............................................... 15
Business.................................................... 31
Management of Three Rivers Bancorp.......................... 37
New-Stock Based and Incentive Plans of Three Rivers
Bancorp................................................... 43
USBANCORP Stock Option Conversion........................... 44
Certain Restrictions on Acquisition of Three Rivers
Bancorp................................................... 45
Description of Three Rivers Bancorp Common Stock............ 49
Indemnification of Directors and Officers................... 50
Transfer Agent and Registrar................................ 50
Listing and Trading of Three Rivers Common Stock............ 50
2001 Annual Meeting and Shareholder Proposals............... 51
Available Information....................................... 51
Index to Financial Statements............................... F-1
</TABLE>
ii
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INFORMATION STATEMENT
This Information Statement is being furnished solely to provide information
to shareholders of USBANCORP who will receive shares of Three Rivers Bancorp
Common Stock in the Distribution. It is not, and is not to be construed as, an
inducement or encouragement to buy or sell any securities of USBANCORP or Three
Rivers Bancorp. The information contained in this Information Statement is
believed to be accurate as of the date set forth on its cover. Changes may occur
after that date, and neither USBANCORP nor Three Rivers Bancorp will update the
information except in the normal course of their respective public disclosures.
FORWARD-LOOKING STATEMENTS
This Information Statement contains various forward-looking statements and
includes assumptions concerning Three Rivers' 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, Three Rivers provides the following cautionary statement
identifying important factors (some of which are beyond Three Rivers' control)
which could cause the actual results or events to differ materially from those
set forth in or implied by the forward-looking statements and related
assumptions.
Such factors include the following: (i) risk resulting from the
Distribution and the operation of Three Rivers Bank as a separate independent
company, (ii) the effect of changing regional and national economic conditions;
(iii) the effects of trade, monetary and fiscal policies and laws, including
interest rate policies of the Board of Governors of the Federal Reserve System;
(iv) significant changes in interest rates and prepayment speeds; (v) inflation,
stock and bond market, and monetary fluctuations; (vi) credit risks of
commercial, real estate, consumer, and other lending activities; (vii) changes
in federal and state banking and financial services laws and regulations; (viii)
the presence in Three Rivers' market area of competitors with greater financial
resources than Three Rivers; (ix) the timely development of competitive new
products and services by Three Rivers Bank 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 Three
Rivers Bank 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 Three Rivers Bank'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 Three Rivers and on any such forward-looking
statement.
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SUMMARY
This summary is qualified by the more detailed information set forth
elsewhere in this Information Statement, which should be read in its entirety.
Distributing Company................ USBANCORP, Inc.
Three Rivers Bancorp, Inc. ......... Three Rivers Bancorp, Inc., has
received regulatory permission to
become a bank holding company for Three
Rivers Bank. Three Rivers Bancorp and
Three Rivers Bank are headquartered in
Monroeville, Pennsylvania. At December
31, 1999, Three Rivers Bank had $1.07
billion in assets, $572.7 million in
deposits, $479.8 million in loans and
$45.4 million in shareholders' equity
(excluding net assets of discontinued
mortgage banking operations).
What USBANCORP Will Distribute to
You................................. You will receive one share of Three
Rivers Bancorp Common Stock for every
two shares of USBANCORP common stock
you own. See "The Distribution --
Manner of Effecting the Distribution."
Fractional shares, other than those
held by participants in certain
USBANCORP plans, will be aggregated
into whole shares of Three Rivers
common stock and sold on the open
market by the Distribution Agent, with
the proceeds distributed to holders who
would otherwise be entitled to receive
fractional shares. See "The
Distribution -- Manner of Effecting the
Distribution." You will not need to pay
for the shares of Three Rivers Bancorp
Common Stock you receive, nor will you
be required to surrender or exchange
USBANCORP common stock in order to
receive Three Rivers Bancorp Common
Stock.
Why USBANCORP is Making the
Distribution........................ USBANCORP's management and Board of
Directors have concluded that the
Distribution is in the best interests
of USBANCORP and its shareholders
because it will, among other things:
(i) enhance the ability of Three Rivers
Bank to raise equity capital on a
substantially more cost effective basis
and to facilitate potential
acquisitions, (ii) improve the ability
of both Three Rivers Bank and U.S.
Bank, USBANCORP's other bank
subsidiary, to focus on their
respective banking businesses, which
differ with respect to both union
representation of employees (certain of
U.S. Bank's employees are represented
by a labor union) and geographic market
area, and (iii) permit U.S. Bank to
negotiate with its union with respect
to the possible implementation of an
employee stock ownership plan.
The Number of Shares We Will
Distribute.......................... We will distribute to our shareholders
approximately 6.6 million shares of
Three Rivers Bancorp Common Stock,
based on the number of shares of
USBANCORP common stock outstanding as
of March 24, 2000. USBANCORP will
retain no owner-
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ship in Three Rivers. However,
immediately after the Distribution
Date, shares of Three Rivers Bancorp
Common Stock will be owned by the
Pension Plan, Profit Sharing Plan and
401(k) Plan of USBANCORP and U.S. Bank.
What Conditions Must be Satisfied
Before We Make the Distribution..... We will not make the Distribution
unless:
- the Three Rivers Bancorp Common Stock
is approved for listing on the Nasdaq
National Market, and
- our Board of Directors approves the
final terms of the Distribution,
including, without limitation, the
formal declaration of a dividend to
our shareholders and other specific
actions necessary to the
Distribution.
We may amend, modify or abandon the
Distribution at any time prior to the
Distribution Date.
Trading Market and Symbol........... There is currently no public market for
Three Rivers Bancorp Common Stock.
Three Rivers Bancorp has applied to
list its Common Stock on the Nasdaq
National Market under the symbol
"TRBC." We expect that Three Rivers
Bancorp Common Stock will be approved
for listing on the Nasdaq National
Market and that trading will commence
on a "when-issued" basis on or after
the Record Date.
Record Date......................... March 24, 2000.
Distribution Agent.................. Fleet National Bank.
Distribution Date................... April 1, 2000. We will transfer shares
of Three Rivers Bancorp Common Stock to
the Distribution Agent for the benefit
of the holders of our common stock of
record as of the close of business on
the record date.
Tax Consequences.................... We have received a ruling from the
Internal Revenue Service that the
Distribution will be tax free to us and
to you, our shareholders, for U.S.
Federal income tax purposes. See "The
Distribution -- U.S. Federal Income Tax
Consequences of the Distribution" for a
more detailed description of the
Federal income tax consequences of the
Distribution.
Relationship between USBANCORP and
Three Rivers after the
Distribution...................... After the Distribution, USBANCORP will
have no ownership interest in Three
Rivers Bancorp or Three Rivers Bank,
and Three Rivers Bancorp will be an
independent, publicly-held company
owning all of the outstanding capital
stock of Three Rivers Bank. However,
immediately after the Distribution
Date, approximately 49,600 shares of
Three Rivers Bancorp Common Stock
(0.75% of the estimated total
outstanding shares) will be owned by
the Pension Plan, Profit Sharing Plan
and 401(k) Plan of USBANCORP and
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U.S. Bank. Three Rivers Bancorp,
USBANCORP and their banking
subsidiaries will enter into agreements
governing their relationship after the
Distribution. The agreements will
provide for each party to make
identified services, records and
personnel available to the other. They
will also provide for allocation of
assets, liabilities and
responsibilities between them with
respect to employee benefits and
compensation and for allocation of tax
liabilities between them for periods
prior to and after the Distribution.
Spin-Off of Standard Mortgage
Corporation of Georgia to
USBANCORP......................... Standard Mortgage Corporation of
Georgia ("SMC") is currently a wholly
owned subsidiary of Three Rivers Bank
engaged in the mortgage banking
business. Prior to the Distribution,
Three Rivers Bank will distribute all
of the outstanding shares of the
capital stock of SMC to USBANCORP, so
that SMC will be a wholly owned
subsidiary of USBANCORP. At and for the
year ended December 31, 1999, SMC had
total assets of $55.1 million, total
liabilities of $44.6 million,
shareholders' equity of $10.4 million
and a net loss of $30,000.
Three Rivers Dividend Policy........ The payment and the amount of cash
dividends by Three Rivers Bancorp after
the Distribution will be subject to the
discretion of its Board of Directors.
Dividend decisions will be based on a
number of factors including Three
Rivers Bank's operating results and
financial requirements on a stand-alone
basis as well as legal restrictions.
See "Description of Three Rivers
Bancorp Capital Stock -- Dividends."
Principal Office of Three Rivers.... The executive offices of Three Rivers
Bancorp will be located at 2681 Mosside
Boulevard, Monroeville, Pennsylvania
15146.
SHAREHOLDERS WITH QUESTIONS MAY CALL:
For questions relating to the Distribution and delivery of Three Rivers
Bancorp Common Stock certificates, call Fleet National Bank at:
(800) 730-4001
For other questions, call USBANCORP's Chief Financial Officer at:
(814) 533-5310
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NO PERSON IS AUTHORIZED BY USBANCORP OR THREE RIVERS BANCORP TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
INFORMATION STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
INTRODUCTION
After careful review and analysis, the Board of Directors of USBANCORP has
concluded that the Distribution is in the best interests of USBANCORP and its
shareholders. To effect the Distribution, USBANCORP will:
- cause Three Rivers Bank to distribute to USBANCORP all of the outstanding
capital stock of Standard Mortgage Corporation of Georgia, a wholly owned
subsidiary of Three Rivers Bank;
- contribute all the outstanding capital stock of Three Rivers Bank to
Three Rivers Bancorp; and
- distribute all the outstanding Common Stock of Three Rivers Bancorp to
USBANCORP's shareholders.
After the Distribution, Three Rivers Bancorp will be a regional bank
holding company headquartered in Monroeville, Pennsylvania, having 24 branches
located in the Pennsylvania counties of Allegheny, Washington and Westmoreland.
On a pro forma basis, assuming that the Distribution was completed as of
December 31, 1999, Three Rivers Bancorp had total assets, loans and deposits of
$1.07 billion, $479.8 million and $572.7 million. Three Rivers Bancorp's pro
forma net income for the year ended December 31, 1999, was $10.0 million, and
its return on average total equity was 17.9%. See "Business of Three Rivers."
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THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
USBANCORP's management has proposed the Distribution to:
(i) enhance the ability of Three Rivers Bank to raise equity capital
on a substantially more cost effective basis and to facilitate potential
acquisitions;
(ii) improve the ability of both Three Rivers Bank and U.S. Bank to
focus on their respective banking businesses; and
(iii) permit U.S. Bank to negotiate with its labor union with respect
to the possible implementation of an employee stock ownership plan.
Each of these reasons for the Distribution stems primarily from the
incompatibility of U.S. Bank and Three Rivers Bank. This incompatibility is due
largely to the fact that U.S. Bank's non-management personnel are represented by
the United Steelworkers Union and are covered by a collective bargaining
agreement, while Three Rivers Bank employees are not covered by a union
agreement. Banking in the United States is generally a non-unionized industry.
We estimate that there are fewer than 20 unionized banks out of the 7,000
banking institutions in the United States. We believe that the presence of a
union at U.S. Bank prevents Three Rivers Bank and U.S. Bank from pursuing
separate strategies and achieving objectives appropriate to their specific
situations.
We believe, based on discussions with our investment bankers, that the
union presence creates market perceptions that have resulted in a discount in
USBANCORP's stock price compared to the stock price of its peers. This discount
in USBANCORP's stock price is, in effect, an elimination of the "acquisition
premium" that is inherent in the stock price of most financial institutions. The
"acquisition premium" is a significant component of the fair market value of
most financial institutions that relates to their potential to be acquired. It
exists even if there is no intention on the part of management to sell the
institution. The acquisition premium is caused by the virtually universal
expectation that the banking industry will continue to consolidate.
We believe, based on discussions with our investment bankers, that
USBANCORP's stock price contains little or no acquisition premium. The financial
markets do not perceive USBANCORP as a potential acquisition target because
investors believe that potential acquirers fear the risks associated with a
banking entity that has a unionized workforce. In turn, because of the lack of
acquisition premium, USBANCORP is not viewed as a potential acquirer because its
stock is less attractive to potential sellers. Potential targets typically
desire to be acquired by institutions that are themselves perceived favorably as
potential targets, so that their shareholders (a) can remain invested in banking
in a more efficient and competitive institution, and (b) have an opportunity to
receive a second acquisition premium in a subsequent sale. In addition,
potential targets also fear the spread of union representation to the target's
workforce.
With respect to the first business purpose, management of Three Rivers Bank
would like to take part in the consolidation of the banking industry by
acquiring other banks. Accordingly, management would like to position Three
Rivers Bank so that it can raise capital through a Three Rivers Bancorp stock
offering and make acquisitions with the proceeds of such an offering, or use its
stock as acquisition capital.
We believe, based on discussions with our investment bankers, that the
Distribution should enhance Three Rivers' ability to expand through
acquisitions. First, Three Rivers Bancorp and its subsidiaries will not be
parties to any collective bargaining agreements with unions and, therefore, any
target bank's concerns regarding union affiliation will be eliminated. Secondly,
as a nonunion affiliated group, the price/earnings ratio of Three Rivers
Bancorp's stock should ultimately be more closely aligned with peer ratios,
although no assurance can be given that it will do so. If such market valuation
occurs, the value of Three Rivers Bancorp Common Stock, as acquisition currency,
would be more competitive with its peers. As a result, Three Rivers Bancorp
would be better able to pursue its strategy of being an acquirer of target banks
or other financial service companies.
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Even if Three Rivers Bancorp is unable to expand through acquisitions,
management believes that the Distribution will allow Three Rivers Bancorp to
raise capital through a public offering at a per share price that is more
consistent with the stock price of its peers. This additional capital would also
alleviate the potential for regulatory constraints on Three Rivers Bank's
ability to make certain types of loans and loans within certain industries. The
strong loan demand from customers, coupled with the stock repurchases that
USBANCORP management has implemented in order to remain competitive, have caused
certain of Three Rivers Bank's loan concentrations, when tested by regulators as
a percentage of equity, to approach certain regulatory limitations.
For the foregoing reasons, our investment bankers have advised us that if
Three Rivers Bank is separated from USBANCORP through a spin off, Three Rivers
Bank (through Three Rivers Bancorp) should be better situated to participate in
the consolidation of the banking industry and to raise capital.
The second business purpose for the Distribution, which is related to the
first purpose, is to remedy the lack of fit and focus between Three Rivers Bank
and U.S. Bank. A separation of these banks would allow each bank to pursue
separate strategies that are necessary to enhance each bank's performance and to
allow each bank to remain competitive by eliminating the systemic management,
operational and financing issues that have arisen out of the fact that one bank
is unionized while the other is not. Most notably, U.S. Bank has not been able
to aggressively grow or directly promote its union connection because USBANCORP
has been reluctant to allocate additional capital to U.S. Bank for such
purposes.
The Distribution will allow U.S. Bank to aggressively pursue its own
business strategies including, among other things, marketing itself as a union
institution. This strategy will allow U.S. Bank to capitalize on its good
relationship with the United Steelworkers of America, which represents about 65%
of U.S. Bank's total work force. In 1998, U.S. Bank received the Pennsylvania
Governor's Award for outstanding labor-management cooperation. In October 1999,
a four-year collective bargaining agreement was signed, which was approved by
over 90% of the union's voting members. Management believes that this contract
will, among other things, allow it to expand customer convenience by providing
non-traditional hours of service, and to facilitate certain of its
post-Distribution strategies described below.
Management does not believe that, after the Distribution, USBANCORP will be
an acquisition target or likely acquiror of other banks. Rather, it anticipates
internal growth for the institution achieved through the successful
implementation of its business plan, which includes a plan to market the union
as a strength.
After the Distribution, U.S. Bank intends to, among other things:
- commit the capital resources necessary to expand its presence into the
demographically attractive Centre County, Pennsylvania market,
- actively advertise its union affiliation, including placing the United
Steelworkers logo on selected print and electronic media advertising, and
aggressively market its services to unions and union members in the
western Pennsylvania market,
- include union representation on its board of directors,
- more aggressively seek to attract union business in its trust department,
including the management of Taft-Hartley funds and other union pension
and health and welfare funds, and
- seek to attract union investment in USBANCORP stock.
By focusing its business plan on U.S. Bank's strengths and opportunities,
management of USBANCORP believes it will be able to significantly grow its
earnings stream to a level that, coupled with its capital management strategies,
will allow USBANCORP to be an attractive investment for its shareholders.
As further evidence of the lack of fit and focus between the two banks,
U.S. Bank is in a demographically older, slower growth market, while Three
Rivers Bank is in a younger, stronger growth market. U.S. Bank enjoys a dominant
market share in its slow growth market, whereas Three Rivers Bank has only a
small share of the market it serves. The different characteristics of each bank
have resulted in the evolution of two distinct business strategies. Three Rivers
Bank believes that it should focus on its core commercial banking
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competence and not attempt to be "all things to all people." In seeking new
commercial banking customers, Three Rivers Bank will aggressively pursue an
increased share of the greater Pittsburgh market. By contrast, U.S. Bank
believes that it must have a full menu of banking and investment products,
including trust services, to offer its older customer base. As a result, U.S.
Bank's corporate strategy is to develop its full menu of services and cross
market as many services as possible to a relatively stable customer base.
Finally, the Distribution would allow USBANCORP and U.S. Bank to position
themselves to negotiate and organize an employee stock ownership plan (an
"ESOP") for the benefit of employees of the USBANCORP affiliated group. In order
to assist U.S. Bank in its negotiations with the union, U.S. Bank has desired
for some time to offer an employee stock ownership plan ("ESOP") to its
employees. However, because of the requirements of the Employee Retirement
Income Security Act (ERISA), USBANCORP is unable to initiate an ESOP at U.S.
Bank unless employees of Three Rivers Bank are also eligible to participate. The
separation of Three Rivers Bank and U.S. Bank will enable U.S. Bank to offer the
creation of an ESOP to the union in exchange for modifications in other benefit
plans. Any implementation of the ESOP would be contingent on an agreement being
reached between U.S. Bank and the union with respect to the terms of the ESOP.
Accordingly, USBANCORP has concluded that the long-term interests of both
businesses are best served through the creation of two separate, independent
corporations which can each focus on pursuing its own defined business
strategies.
MANNER OF EFFECTING THE DISTRIBUTION
On or before the Distribution Date, USBANCORP will transfer to Fleet
National Bank, as Distribution Agent for the benefit of holders of record of
USBANCORP Common Stock at the close of business on March 24, 2000 (the "Record
Date"), certificates evidencing all shares of Three Rivers Bancorp Common Stock
then owned by USBANCORP.
The Distribution will be made to holders of record of USBANCORP Common
Stock at the close of business on the Record Date, without any consideration
being paid by such holders, on the basis of one share of Three Rivers Bancorp
Common Stock for every two shares of USBANCORP Common Stock held on the Record
Date. Commencing on or about the Distribution Date, the Distribution Agent will
begin mailing certificates evidencing ownership of shares of Three Rivers
Bancorp Common Stock to holders of record of USBANCORP Common Stock. The shares
of Three Rivers Bancorp Common Stock will be fully paid and nonassessable and
holders will not be entitled to preemptive rights. See "Description of Three
Rivers Capital Stock -- Three Rivers Bancorp Common Stock."
The Distribution Agent will aggregate all fractional shares, other than
those held by participants in certain USBANCORP plans described below, into
whole shares of Three Rivers Bancorp Common Stock and sell them on the open
market at prevailing prices on behalf of holders who would otherwise be entitled
to receive such fractional share interests. Any such persons entitled to receive
at least $0.01 will receive a cash payment for their portion of the total sale
proceeds. Any persons entitled to receive less than $0.01 will have their
fractional shares canceled.
Distribution of Three Rivers Bancorp Common Stock with respect to USBANCORP
Common Stock held in the USBANCORP and U.S. Bank Pension Plan, Profit Sharing
Plan, and 401(k) Plan will be credited to participants' accounts. Participants
in the USBANCORP Dividend Reinvestment Plan will automatically become
participants in the Three Rivers Bancorp Dividend Reinvestment Plan, and the
distribution of Three Rivers Bancorp Common Stock with respect to USBANCORP
Common Stock held in the USBANCORP Dividend Reinvestment Plan will be credited
to participants' accounts in the Three Rivers Bancorp Dividend Reinvestment
Plan. Fractional shares will be credited with respect to the USBANCORP and U.S.
Bank Pension Plan, Profit Sharing Plan, and 401(k) Plan and the Three Rivers
Bancorp Dividend Reinvestment Plan.
7
<PAGE> 14
The Distribution is subject to a number of conditions including:
(i) the Three Rivers Bancorp Common Stock being approved for listing
on the Nasdaq National Market; and
(ii) approval by USBANCORP's Board of Directors of the final terms of
the Distribution, including, without limitation, the formal declaration of
a dividend to USBANCORP's shareholders and other specific actions necessary
to the Distribution.
The USBANCORP Board of Directors may amend, modify or abandon the
Distribution at any time prior to the Distribution Date.
RESULTS OF THE DISTRIBUTION
Subsequent to the Distribution, which will be effective at 11:59:59 p.m.
E.D.T. on the Distribution Date, Three Rivers Bancorp, together with Three
Rivers Bank and its subsidiaries, will operate as an independent banking
company, principally in the Pennsylvania Counties of Allegheny, Washington and
Westmoreland. USBANCORP, together with its subsidiaries U.S. Bank, Standard
Mortgage Corporation of Georgia, USBANCORP Trust and Financial Services Company,
United Bancorp Life Insurance Company, USNB Financial Services Corporation, UBAN
Associates, Inc. and UBAN Mortgage Company, will continue to conduct business
principally in the Pennsylvania Counties of Cambria, Somerset, Westmoreland and
Centre.
RELATIONSHIP BETWEEN USBANCORP AND THREE RIVERS BANCORP AFTER THE DISTRIBUTION
After the Distribution, USBANCORP will have no ownership interest in Three
Rivers Bancorp or Three Rivers Bank, and Three Rivers Bancorp will be an
independent, publicly-owned company. However, immediately after the Distribution
Date, approximately 49,600 shares of Three Rivers Bancorp Common Stock (0.75% of
the estimated total outstanding shares) will be owned by USBANCORP's and U.S.
Bank's Pension Plan, Profit Sharing Plan and 401(k) Plan. Three Rivers Bancorp
and USBANCORP will enter into certain agreements, described below, governing
their relationship subsequent to the Distribution and providing for the
allocation of tax liabilities and obligations arising from periods prior to and
after the Distribution. Copies of the forms of such agreements are filed with
the Securities and Exchange Commission as exhibits to the Registration Statement
of which this Information Statement is a part. The following summarizes the
material terms of such agreements, but is qualified by reference to the text of
such agreements.
SPIN-OFF OF STANDARD MORTGAGE CORPORATION TO USBANCORP
Standard Mortgage Corporation of Georgia ("SMC") is currently a wholly
owned subsidiary of Three Rivers Bank engaged in the mortgage banking business.
Prior to the Distribution, Three Rivers Bank will distribute all of the
outstanding shares of the capital stock of SMC to USBANCORP, so that SMC will be
a wholly owned subsidiary of USBANCORP. This internal distribution is being
effected: (i) because the business of SMC will be more closely associated with
the business plan of USBANCORP than with that of Three Rivers Bancorp, and (ii)
in order to continue to provide USBANCORP with an income stream to partially
fund certain current debt service obligations that it will retain after the
Distribution. SMC was originally acquired by USBANCORP as part of its
acquisition of Johnstown Savings Bank in July 1994.
SEPARATION AGREEMENT
USBANCORP and Three Rivers Bancorp will enter into a Separation Agreement,
which will provide for, among other things, certain services, records and
personnel which USBANCORP and Three Rivers Bancorp will make available to each
other after the Distribution Date.
SERVICES AGREEMENT
To facilitate an orderly transition, USBANCORP and Three Rivers Bancorp may
enter into a Services Agreement pursuant to which USBANCORP may continue to
provide, upon annual review, certain services to Three Rivers, with the related
costs and expenses being paid by Three Rivers. Three Rivers will nonetheless
8
<PAGE> 15
have to utilize additional personnel to perform certain services previously
provided by USBANCORP, such as investor relations, credit review and analysis
and the chief financial officer function.
TAX SEPARATION AGREEMENT
USBANCORP and Three Rivers Bancorp will enter into a Tax Separation
Agreement (the "Tax Separation Agreement"), on behalf of themselves and their
respective consolidated groups, that reflects each party's rights and
obligations with respect to payments and refunds of taxes that are attributable
to periods beginning prior to and including the Distribution Date and taxes
resulting from transactions effected in connection with the Distribution. The
Tax Separation Agreement also expresses each party's intention with respect to
certain tax attributes of Three Rivers Bancorp after the Distribution. The Tax
Separation Agreement provides for payments between the two companies for certain
tax adjustments made after the Distribution that cover pre-Distribution tax
liabilities. Other provisions cover the handling of internal audits,
settlements, stock options, elections, accounting methods and return filing in
cases where both companies have an interest in the results of these activities.
Pursuant to the Tax Separation Agreement, Three Rivers Bancorp will agree
to refrain from engaging in certain transactions for two years following the
Distribution if such transactions would (i) result in any increased tax
liability or reduction of any tax asset of the USBANCORP group, or any member of
the USBANCORP group, or (ii) be inconsistent with the information and
representations furnished to the Internal Revenue Service in connection with
USBANCORP's request for the private letter ruling with respect to the
Distribution. Transactions subject to this agreement will include, among others,
certain liquidation, merger and consolidation transactions, certain transactions
involving the issuance or redemption of Three Rivers Bancorp Common Stock, the
sale, distribution or other disposition of assets in a manner that would
adversely affect the tax consequences of the Distribution or any transaction
effected in connection with the Distribution, and the discontinuation of certain
businesses or business activities. See "Certain U.S. Federal Income Tax
Consequences of the Distribution."
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
USBANCORP has received a ruling (the "Tax Ruling") from the Internal
Revenue Service (the "Service") to the effect that the Distribution will qualify
as a tax-free distribution under Sections 355 and 368 of the Internal Revenue
Code of 1986, as amended (the "Code"), and, accordingly, that: (i) USBANCORP's
shareholders will not recognize income, gain or loss upon the receipt of shares
of Three Rivers Bancorp Common Stock (including any fractional share interests
to which a shareholder is entitled); (ii) the aggregate tax basis of the shares
of USBANCORP Common Stock and Three Rivers Bancorp Common Stock (including any
fractional share interests to which a USBANCORP shareholder is entitled) held by
a USBANCORP shareholder after the Distribution will be the same as the tax basis
of the shares of USBANCORP Common Stock held by such shareholder immediately
before the Distribution, and will be allocated between the shares of Three
Rivers Bancorp Common Stock and USBANCORP Common Stock in proportion to their
relative fair market values on the Distribution Date; (iii) the holding period
of the shares of Three Rivers Bancorp Common Stock received by a USBANCORP
shareholder (including any fractional share interests to which a USBANCORP
shareholder is entitled) will include the holding period of the shares of
USBANCORP Common Stock with respect to which the Distribution was made, provided
that the shares of USBANCORP Common Stock are held as a capital asset by such
shareholder on the Distribution Date; and (iv) a holder of a fractional share
interest in Three Rivers Bancorp Common Stock will recognize gain or loss on the
sale of such fractional share interest equal to the difference between the cash
received and the holder's basis in such fractional share interest. Provided the
fractional share interest is a capital asset in the hands of such holder, such
gain or loss will be capital gain or loss, subject to the provisions and
limitations of subchapter P and Chapter 1 of the Code.
The Tax Ruling, while generally binding upon the Service, is subject to
certain factual representations and assumptions. If such factual representations
and assumptions were or become incorrect in a material respect, the Tax Ruling
could become invalid. USBANCORP is not aware of any facts or circumstances which
would cause such representations and assumptions to be untrue. In addition,
Three Rivers Bancorp has
9
<PAGE> 16
agreed to certain restrictions on its future actions, and the future actions of
its subsidiaries, to provide further assurance that the Distribution will not be
a taxable event to USBANCORP or its shareholders under Section 355 of the Code.
See "-- Tax Separation Agreement."
If the Distribution were not to qualify as a tax-free spin-off under
Section 355 of the Code, then, in general, a corporate tax would be payable by
the consolidated group of which USBANCORP is the common parent, based upon the
difference between (x) the fair market value of the Three Rivers Bancorp Common
Stock and (y) and the adjusted basis of such stock on the date of the
Distribution. In addition, under the consolidated return regulations, each
member of the USBANCORP consolidated group is jointly and severally liable for
such tax. If the Distribution were to occur and not qualify as a tax-free
spin-off under Section 355 of the Code, the resulting tax liability would have
an adverse effect on the financial position, results of operations and cash
flows of USBANCORP and its subsidiaries.
Furthermore, if the Distribution were not to qualify as a tax-free
spin-off, each USBANCORP shareholder receiving shares of Three Rivers Bancorp
Common Stock in the Distribution would be treated as if such shareholder had
received a taxable distribution in an amount equal to the fair market value of
the Three Rivers Bancorp Common Stock received by such shareholder in the
Distribution, which could result in (x) a dividend to the extent of such
shareholder's pro rata share of USBANCORP'S current and accumulated earnings and
profits, (y) a reduction in such shareholder's basis in USBANCORP Common Stock
to the extent the amount received exceeds such shareholder's share of such
earnings and profits, and (z) a gain from the exchange of USBANCORP Common Stock
to the extent the amount received exceeds both such shareholder's share of such
earnings and profits and such shareholder's basis in USBANCORP Common Stock.
Under the Tax Separation Agreement, Three Rivers Bancorp will agree to
indemnify USBANCORP against, and save USBANCORP harmless from, among other
things, any tax liability under Section 355(e) of the Code or under any related
state or local tax law, and any liability, damage, cost or expense which
USBANCORP may incur as a result an adverse tax determination under Section
355(e) of the Code caused by any action of Three Rivers Bancorp or its
subsidiaries. See "-- Tax Separation Agreement."
The foregoing is a summary of the material U.S. Federal income tax
consequences of the Distribution under the law in effect as of the date of this
Information Statement. IT DOES NOT PURPORT TO COVER ALL INCOME TAX CONSEQUENCES
AND MAY NOT APPLY TO SHAREHOLDERS WHO ACQUIRED THEIR USBANCORP SHARES IN
CONNECTION WITH A GRANT OF SHARES AS COMPENSATION, WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES, OR WHO ARE OTHERWISE SUBJECT TO SPECIAL
TREATMENT UNDER THE CODE. All USBANCORP shareholders should consult their own
tax advisors regarding the appropriate income tax treatment of their receipt of
Three Rivers Bancorp Common Stock, including the application of Federal, state,
local and foreign tax laws, and the effect of possible changes in tax law that
may affect the tax consequences described above.
10
<PAGE> 17
USBANCORP, INC.
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The USBANCORP Pro Forma Condensed Consolidated Financial Statements should
be read in conjunction with the historical consolidated financial statements and
the notes thereto of (i) USBANCORP, Inc., which are incorporated herein by
reference to USBANCORP's Annual Report on Form 10-K for the year ended December
31, 1999, and (ii) Three Rivers Bancorp, which are contained in this Information
Statement. The Three Rivers Bancorp Pro Forma Condensed Consolidated Financial
Statements are set forth in Note 22 to the Three Rivers Bancorp consolidated
financial statements. The USBANCORP pro forma condensed consolidated income
statement assumes that the Distribution occurred on January 1, 1999, and the pro
forma condensed consolidated balance sheet assumes that the Distribution
occurred on December 31, 1999. 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 consolidated balance sheets are set forth
below.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE RIVERS
USBANCORP BANCORP USBANCORP
HISTORICAL HISTORICAL PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 ADJUSTMENTS 1999
------------ ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<S> <C> <C> <C> <C>
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
</TABLE>
11
<PAGE> 18
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
THREE RIVERS
USBANCORP BANCORP USBANCORP
HISTORICAL AT HISTORICAL AT PRO FORMA AT
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 ADJUSTMENTS 1999
------------- ------------- ----------- ------------
(IN THOUSANDS)
UNAUDITED
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks................. $ 55,434 $ 24,228 $ (327)(A) $ 30,879
Investment securities................... 1,187,335 522,264 665,071
Loans................................... 1,085,454 474,741 610,713
Other assets............................ 139,256 54,929 10,426(C) 94,753
Total Assets............................ $2,467,479 $1,076,162 $10,099(C) $1,401,416
LIABILITIES
Deposits................................ $1,230,941 $ 572,695 $ 658,246
Total borrowed funds.................... 1,099,842 438,394 661,448
Other liabilities....................... 24,139 9,280 14,859
Total Liabilities....................... 2,354,922 1,020,369 1,334,553
Total stockholders equity............... 112,557 55,793 10,099(A,C) 66,863
Total Liabilities and Stockholders
Equity................................ $2,467,479 $1,076,162 $10,099 $1,401,416
</TABLE>
- ---------------
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 costs at the Company's
historical effective tax rate.
(C) To record the distribution by Three Rivers Bank (prior to the Distribution)
of all of the outstanding shares of the capital stock of SMC to USBANCORP,
so that SMC will be a wholly owned subsidiary of USBANCORP.
12
<PAGE> 19
[THREE RIVERS BANCORP, INC. LOGO]
THREE RIVERS BANK
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data includes the operations
of Three Rivers Bank on a consolidated basis, excluding the balance sheet data
and results of operations of Standard Mortgage Corporation of Georgia, its
wholly owned subsidiary which will be spun off to USBANCORP prior to the
Distribution. See "The Distribution -- Spin-Off of Standard Mortgage Corporation
to USBANCORP."
The following selected consolidated financial data of Three Rivers Bank
should be read in conjunction with, and is qualified in its entirety by
reference to, the audited Consolidated Financial Statements, the unaudited
Consolidated Financial Statements and the related notes thereto included on
pages F-2 to F-29.
The pro forma selected financial data of Three Rivers Bancorp set forth
below is derived from the unaudited Pro Forma Condensed Combined Financial
Information included on page F-29. The pro forma data does not purport to
represent what Three Rivers Bancorp's financial position or results of
operations would have been had it operated as a separate, independent company,
nor does it give effect to any events other than those discussed in the related
notes. The pro forma data also does not purport to project Three Rivers
Bancorp's financial position or results of operations as of any future date or
for any future period.
The capital structure that existed when Three Rivers Bank operated as part
of USBANCORP may not be representative of the expected future capital structure
as a separate, independent company. Accordingly, per share data for earnings and
cash dividends declared has not been presented except for pro forma earnings per
share for the year ended December 31, 1999, for which a distribution of one
share of Three Rivers Bancorp Common Stock for every two shares of USBANCORP
Common Stock outstanding was assumed.
<TABLE>
<CAPTION>
PRO FORMA YEAR ENDED DECEMBER 31,
YEAR ENDED -----------------------------------------------------------
DECEMBER 31, 1999 1999 1998 1997(1) 1996(1) 1995(1)
----------------- ----------- --------- --------- --------- ---------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF INCOME STATEMENT
DATA:
Total interest income....... $ 70,816 $ 70,816 $ 67,926 $ 65,103 $ 55,439 $ 50,812
Total interest expense...... 41,082 41,082 38,455 36,032 29,371 27,724
Net interest income......... 29,734 29,734 29,471 29,071 26,068 23,088
Provision for loan losses... 300 300 300 113 90 285
Net interest income after
provision for loan
losses.................... 29,434 29,434 29,171 28,958 25,978 22,803
Total non-interest income... 5,653 5,653 6,918 5,282 4,866 5,175
Total non-interest
expense................... 21,600 21,027 20,320 19,598 21,558 18,927
Income before income
taxes..................... 13,487 14,060 15,769 14,642 9,286 9,051
Provision for income
taxes.................. 3,917 4,090 4,762 4,522 2,523 2,513
Income from continuing
operations................ 9,570 9,940 11,007 10,120 6,763 6,538
PER COMMON SHARE DATA:
Basic and diluted
earnings.................. 1.44 NR NR NR NR NR
Book value at period
end(2).................... 8.32 NR NR NR NR NR
BALANCE SHEET AND OTHER
DATA:
Total assets................ 1,076,162 1,076,162 985,586 947,669 838,568 741,125
Loans and loans held for
sale, net of unearned
income.................... 479,762 479,762 468,194 466,615 431,928 367,940
Allowance for loan losses... 5,021 5,021 6,104 6,006 6,025 6,834
</TABLE>
13
<PAGE> 20
<TABLE>
<CAPTION>
PRO FORMA YEAR ENDED DECEMBER 31,
YEAR ENDED -----------------------------------------------------------
DECEMBER 31, 1999 1999 1998 1997(1) 1996(1) 1995(1)
----------------- ----------- --------- --------- --------- ---------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities
available for sale........ $ 522,264 $ 522,264 $327,669 $279,461 $182,793 $166,814
Investment securities held
to maturity............... -- -- 149,988 167,339 180,226 163,001
Deposits.................... 572,695 572,695 560,450 525,810 529,337 552,988
Total borrowings............ 438,394 438,394 354,272 360,844 253,529 133,783
Stockholders' equity........ 55,793 55,793 61,031 51,838 47,193 46,666
Full-time equivalent
employees................. 246 246 260 259 273 289
SELECTED FINANCIAL RATIOS:
Return on average total
equity.................... 17.20% 17.92% 18.58% 20.13% 14.49% 15.20%
Return on average assets.... 0.93 0.97 1.16 1.14 0.87 0.91
Loans and loans held for
sale, net of unearned
income, as a percent of
deposits, at period end... 83.77 83.77 85.31 83.36 71.46 69.84
Ratio of average total
equity to average
assets.................... 5.39 5.39 6.27 5.68 6.00 6.00
Interest rate spread(3)..... 2.56 2.56 2.74 2.96 3.19 2.93
Net interest margin(4)...... 3.07 3.07 3.31 3.50 3.71 3.50
Allowance for loan losses as
a percentage of loans and
loans held for sale, net
of unearned income, at
period end................ 1.05 1.05 1.30 1.34 1.69 1.75
Non-performing assets as a
percentage of loans and
loans held for sale and
other real estate owned,
at period end(5).......... 1.87 1.87 0.66 0.96 1.17 1.52
Net charge-offs as a
percentage of average
loans and loans held for
sale...................... 0.30 0.30 0.04 0.03 0.23 0.07
One year GAP ratio, at
period end(6)............. 0.57 0.57 1.02 0.64 0.84 0.78
</TABLE>
- ---------------
(1) Includes the results of operation of Community Savings Bank for the period
from January 1, 1995 until its merger with and into Three Rivers Bank on
July 18, 1997.
(2) Common stockholders' equity divided by outstanding common shares at period
end.
(3) Represents the difference between the average yield earned on interest
earning assets, computed on a tax-equivalent basis, and the average rate
paid on interest bearing liabilities.
(4) Represents net interest income, computed on a tax-equivalent basis, as a
percentage of average total interest earning assets.
(5) See Note 8 of the Notes to the Combined Financial Statements set forth
elsewhere herein.
(6) Represents rate sensitive assets (interest earning assets which will mature
or reprice within one year) divided by rate sensitive liabilities (interest
bearing liabilities which will mature or reprice within one year).
14
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THREE RIVERS BANK
Three Rivers Bancorp has only recently been formed and therefore, it has no
results of operations. As a result, this discussion relates to the financial
condition and results of operations of Three Rivers Bank and its subsidiaries
(excluding Standard Mortgage Corporation of Georgia, the stock of which will be
distributed to USBANCORP prior to the Distribution) on a combined basis.
The following discussion and analysis of financial condition and results of
operations of Three Rivers Bank should be read in conjunction with the combined
financial statements of Three Rivers Bank, including the related notes thereto,
included elsewhere herein.
The following table summarizes some of Three Rivers Bank's key performance
indicators for the three years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
Income from continuing operations........................... $9,970 $11,007 $10,120
Return on average equity.................................... 17.92% 18.58% 20.13%
Return on average assets.................................... 0.97 1.16% 1.14%
</TABLE>
RESULTS OF OPERATIONS
Performance Overview for Years Ended December 31, 1999 and 1998. Three
Rivers Bank's income from continuing operations ("net income") for the year
ending December 31, 1999 totaled $10.0 million. The 1999 results are $1.04
million or 9.4% lower than the $11.0 million reported for 1998. Three Rivers
Bank's return on equity (ROE) averaged 17.92% for year ending December 31, 1999
which represented a decrease from the 18.58% ROE reported in 1998. The Bank's
return on assets dropped by 19 basis points to 0.97% for year 1999.
Reduced non-interest income and higher non-interest expenses negatively
impacted both net income and ROE in 1999. Specifically, non-interest income
decreased by $1.3 million or 18.3%, while non-interest expense increased by
$707,000 or 3.5%. The Bank's ROE was favorably impacted by a reduced balance of
total equity. The Bank's equity base on average for the year declined by $6.4
million due to a drop in other comprehensive income caused by a decrease in the
Bank's available for sale securities portfolio.
Performance Overview for the Years Ended December 31, 1998 and 1997. Three
Rivers Bank's net income for 1998 was $11.0 million compared to net income of
$10.1 million for 1997. When 1998 is compared to 1997, the Bank's net income
increased by $887,000 or 8.8%. The Bank's return on equity averaged 18.58% for
1998 compared to 20.13% for 1997.
An increase in Three Rivers Bank's net interest margin and a higher level
of non-interest income more than offset an increased amount of non-interest
expense resulting in an earnings increase in 1998. Specifically, total
non-interest income increased by $1.6 million or 31.0% while net interest income
also increased by $400,000 or 1.4% from the prior year. This net $2.0 million
increase in total revenue more than offset higher non-interest expense and an
increase in the provision for loan losses. Total non-interest expense was
$722,000 or 3.7% higher in 1998 while the provision for loan losses increased by
$187,000.
Net Interest Income and Margin. Three Rivers Bank'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 Bank'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 Bank's philosophy to strive to optimize net interest
margin performance in varying interest rate environments.
15
<PAGE> 22
The following table summarizes Three Rivers' net interest income
performance for each of the past three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA
AND RATIOS)
<S> <C> <C> <C>
Interest Income............................................. $70,816 $67,926 $65,103
Interest expense............................................ $41,082 $38,455 $36,032
Net interest income......................................... $29,734 $29,471 $29,071
Tax-equivalent adjustment................................... 936 782 731
Net tax-equivalent interest income.......................... $30,670 $30,253 $29,802
Net interest margin......................................... 3.07% 3.31% 3.50%
</TABLE>
1999 Net Interest Performance Overview. Three Rivers Bank's net interest
income on a tax-equivalent basis increased by $417,000 or 1.4% due to a higher
level of earning assets. Total average earning assets were $85.1 million higher
in the year ending December 31, 1999 due to a $84.8 million or 19.2% increase in
investment securities. The higher amount of investment securities was funded
primarily by a $58.4 million increase in FHLB advances and $12.0 million in
deposits acquired in a branch acquisition completed in February 1999.
The income benefit from this growth in earning assets was partially offset
by a 24 basis point decline in the net interest margin to 3.07%. The drop in the
net interest margin reflects a 34 basis point decline in the earning asset yield
which more than offset the benefit of a 15 basis point reduction in the cost of
funds.
The overall growth in the earning asset base was one strategy used by the
Bank to leverage its capital. The maximum amount of leveraging the Bank can
perform is controlled by internal policy requirements to maintain a minimum
asset leverage ratio of no less than 6.0% (see further discussion under Capital
Resources) and to limit net interest income variability to plus or minus 7.5%
and net income variability to plus or minus 15% over a twelve month period. (See
further discussion under Interest Rate Sensitivity).
Component Changes in Net Interest Income: 1999 versus 1998. Regarding the
separate components of net interest income, Three Rivers Bank's total
tax-equivalent interest income for the year ending December 31, 1999, increased
by $3.0 million or 4.4% when compared to 1998. This increase was due to the
previously mentioned $85 million or 9.4% increase in total average earning
assets which caused interest income to rise by $6.1 million. This positive
factor was offset by a 34 basis point drop in the earning asset yield to 7.21%
that caused a $2.3 million reduction in interest income. Within the earning
asset base, the yield on the total loan portfolio declined by 35 basis points to
8.10% due to the downward repricing of floating rate assets and the reinvestment
of cash received on higher yielding prepaying assets into loans with lower
interest rates. The yield on total investment securities decreased by 22 basis
points to 6.34% due to accelerated mortgage prepayments and the reinvestment of
this cash into lower yielding securities. These heightened prepayments reflect
increased customer refinancing activity due to drops in intermediate- and
long-term interest rates on the treasury yield curve particularly in the fourth
quarter of 1998 and first quarter of 1999. This refinancing activity slowed
significantly beginning in the second quarter of 1999 when the treasury yield
curve began steepening again.
Three Rivers Bank's total interest expense for the year ending December 31,
1999, increased by $2.6 million or 6.8% when compared to the full year 1998.
This higher interest expense was due primarily to a $83 million increase in
average interest bearing liabilities. The growth in interest bearing liabilities
included a $14 million increase in interest bearing deposits due largely to the
deposits acquired with the February 1999 branch acquisition, net of certificate
of deposit run-off and the sale of one small branch office. The remainder of the
interest bearing liability increase occurred in FHLB advances which increased by
$58 million and were used to help fund the previously mentioned earning asset
growth. Short-term borrowings and FHLB advances had an average cost of 5.43% for
the year ending December 31, 1999 which was 20 basis points lower than their
cost in the prior year but 144 basis points greater than the average cost of
deposits which amounted to 3.99%. The Bank was able to reduce its cost of
deposits by 21 basis points due primarily to lower costs for
16
<PAGE> 23
certificates of deposit. Overall, the Bank's total cost of funds dropped by 15
basis points to 4.65% as the pricing declines for both deposits and borrowings
were partially offset by a greater use of borrowings to fund the earning asset
base.
Three Rivers Bank recognizes that interest rate risk does exist from this
use of borrowed funds to leverage the balance sheet. To neutralize a portion of
this risk, Three Rivers Bank has executed a total of $110 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 18 to the consolidated financial statements set forth
elsewhere herein.)
The Bank also has asset liability policy parameters which limit the maximum
amount of borrowings to 40% of total assets. Overall, the Company expects to
experience net interest margin pressure in 2000 due to the anticipated increases
in interest rates and the lengthening of the durations of the securities
portfolio which will further slow cash flows.
1998 Net Interest Performance Overview. Net interest income of Three
Rivers Bank on a tax-equivalent basis increased by $451,000 or 1.5%, due to a
$61 million or 7.2% increase in average earning assets in 1998 compared to 1997.
This increase in average earning assets more than offset the negative impact of
a 19 basis point decline in the net interest margin to 3.31%. The drop in the
net interest margin reflects a 20 basis point decline in the earning asset yield
due primarily to accelerated mortgage prepayments in both the securities and
loan portfolios resulting from the flat treasury yield curve and the
reinvestment of these cash flows in lower yielding assets. The cost of funds
remained relatively constant and only increased by one basis point.
Total average earning assets were $61 million higher in 1998 due primarily
to a $43 million or 10.9% increase in investment securities and a $17 million or
3.7% increase in average loans outstanding. Three Rivers Bank was able to
achieve 37% loan growth in commercial loans, and moderate loan growth in direct
consumer loans and residential mortgage and home equity loans, resulting in
0.34% net loan growth in 1998. The higher level of investment securities
resulted from more active buying of securities in the second half of 1998 due to
expected declines in interest rates and to position the balance sheet for the
inflow of deposits from a branch acquisition that occurred in February 1999.
Component Changes in Net Interest Income: 1998 versus 1997. Regarding the
separate components of net interest income, Three Rivers Bank's total interest
income for 1998 increased by $2.8 million or 4.3% when compared to 1997. This
increase was due primarily to a $61 million or 7.2% increase in total average
earning assets which caused interest income to rise by $4.1 million. This
positive factor was partially offset by a 20 basis point drop in the earning
asset yield to 7.55% that caused a $1.3 million reduction in interest income.
Within the earning asset base, the yield on total investment securities
decreased by 31 basis points to 6.56%, as accelerated mortgage prepayment speeds
caused increased amortization expense on mortgage-backed securities which had
been purchased at a premium. The yield on the total loan portfolio declined by
three basis points to 8.45% due to the downward repricing of floating rate
assets and the reinvestment of cash received on higher yielding prepaying assets
into loans with lower interest rates. These heightened prepayments reflect
increased customer refinancing activity due to drops in intermediate- and
long-term interest rates on the treasury yield curve in 1998. Note that the
decline in the loan portfolio yield was not as significant as the drop in the
investment securities portfolio yield, due partially to the collection of
prepayment penalties on certain commercial mortgage loan pay-offs and a
favorable shift in the loan portfolio mix away from lower yielding indirect auto
loans.
Continued improvement in the loan-to-deposit ratio contributed to the
earning asset growth. Three Rivers Bank's loan-to-deposit ratio averaged 85.31%
in 1998 compared to an average of 83.36% for 1997. This loan growth resulted
primarily from the Bank's ability to originate middle market commercial loans in
a market place dominated by a few large commercial lenders. The other
contributing factor to the loan growth was a stable economic environment.
Three Rivers Bank's total interest expense for 1998 increased by $2.4
million or 6.7% when compared to 1997. This higher interest expense was due
primarily to a $48.4 million increase in average interest bearing liabilities.
The growth in interest bearing liabilities came primarily from $10.2 million in
short-term and $36.5
17
<PAGE> 24
million in Federal Home Loan Bank borrowings. For 1998, the Bank's total level
of short-term borrowed funds and FHLB advances averaged $326.7 million or 34.6%
of total assets compared to an average of $280.0 million or 31.7% of total
assets for 1997. These borrowed funds had an average cost of 5.63% in 1998 which
was 143 basis points greater than the average cost of interest bearing deposits
of 4.20%. The greater dependence on borrowings to fund earning assets was the
primary factor responsible for the one basis point increase in the total cost of
interest bearing liabilities to 4.80% in 1998. This increase in the total cost
of funds occurred despite a six basis point drop in the cost of interest bearing
deposits to 4.20%, as management was able to reprice all major deposit
categories downward in 1998.
AVERAGE BALANCE SHEETS
The table that follows provides an analysis of net interest income on a
tax-equivalent basis setting forth (i) average assets, liabilities and
stockholders' equity, (ii) interest income earned on interest earning assets and
interest expense paid on interest bearing liabilities, (iii) average yields
earned on interest earning assets and average rates paid on interest bearing
liabilities, (iv) Three Rivers' 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) Three Rivers' net interest margin (net
interest income as a percentage of average total interest earning assets). For
purposes of this table, loan balances include non-accrual loans and interest
income on loans includes loan fees or amortization of such fees which have been
deferred, as well as interest recorded on non-accrual loans as cash is received.
Additionally, a tax rate of approximately 34% is used to compute tax equivalent
yields.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ --------------------------- ---------------------------
INTEREST INTEREST INTEREST
------------------------------ --------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------ -------- ------- ------ -------- ------- ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans, net of unearned
income..................... $ 464,317 $38,341 8.10% $464,015 $39,688 8.45% $447,295 $38,452 8.48%
Deposits with banks.......... 882 24 2.72 815 8 0.92 -- -- --
Federal funds sold and
Securities purchased under
agreements to resell......... -- -- -- 23 1 5.49 218 11 5.12
INVESTMENT SECURITIES AND
INVESTMENT SECURITIES
AVAILABLE FOR SALE:
Available for sale........... 386,677 24,418 6.31 283,785 18,510 6.52 211,322 14,590 6.90
Held to maturity............. 139,990 8,969 6.41 158,117 10,501 6.64 187,086 12,781 6.83
Total investment
securities............... 526,667 33,387 6.34 441,902 29,011 6.56 398,408 27,371 6.87
Total interest earning asset/
interest income.............. 991,866 71,752 7.21 906,755 68,708 7.55 845,921 65,834 7.75
NON-INTEREST EARNING ASSETS:
Cash and due from banks...... 17,003 14,523 15,883
Premises and equipment....... 5,092 4,532 4,825
Other assets................. 23,614 25,425 23,868
Allowance for loan
losses................... (5,810) (6,069) (6,040)
Total Assets................... 1,031,765 945,166 884,457
INTEREST BEARING LIABILITIES:
Interest bearing deposits:
Interest bearing demand.... 43,769 426 0.97 43,019 418 0.97 42,645 413 0.97
Savings.................... 66,505 1,210 1.82 65,399 1,042 1.59 66,633 1,218 1.83
Money Market Accts......... 57,235 1,693 2.96 50,963 1,449 2.84 48,173 1,284 2.67
Other time................. 316,227 15,953 5.04 310,109 16,805 5.42 309,220 16,986 5.49
Total interest bearing
deposits................. 483,736 19,282 3.99 469,490 19,714 4.20 466,671 19,901 4.26
</TABLE>
18
<PAGE> 25
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ --------------------------- ---------------------------
INTEREST INTEREST INTEREST
------------------------------ --------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------ -------- ------- ------ -------- ------- ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowings:
Federal funds purchased,
securities sold under
agreements to repurchase
and other short-term
borrowings............... $ 61,734 $ 3,237 5.17% $ 50,475 $ 2,772 5.49% $ 40,285 $ 2,253 5.59%
Advances from Federal Home
Loan Bank................ 334,707 18,284 5.46 276,261 15,633 5.66 239,748 13,447 5.61
Long-term debt............. 2,699 279 10.48 3,359 336 10.00 4,507 431 9.56
Total interest bearing
liabilities/interest
expense...................... 882,876 41,082 4.65 799,585 38,455 4.80 751,211 36,032 4.79
NON-INTEREST BEARING
LIABILITIES:
Demand Deposits.............. 83,442 77,561 73,660
Other liabilities............ 9,822 8,790 9,307
Stockholders' equity........... 55,625 59,230 50,279
Total Liabilities and
Stockholders' Equity......... 1,031,765 945,166 884,457
Interest rate spread........... 2.56 2.74 2.96
Net interest income/net
interest margin.............. 30,670 3.07 30,253 3.31 29,802 3.50
Tax-equivalent adjustment...... (936) (782) (731)
Net interest income............ 29,734 29,471 29,071
</TABLE>
The average balance and yield on taxable securities was $466.5 million and
6.35%, $399.4 million and 6.55%, and $356.1 million and 6.87%, for 1999, 1998,
and 1997, respectively. The average balance and tax-equivalent yield on
tax-exempt securities was $60.1 million and 6.25%, $42.5 million and 6.69%, and
$42.3 million and 6.86%, for 1999, 1998, and 1997, respectively.
19
<PAGE> 26
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The table below sets forth
an analysis of volume and rate changes in net interest income on a
tax-equivalent basis. For purposes of this table, changes in interest income and
interest expense are allocated to volume and rate categories based upon the
respective percentage changes in average balances and average rates. Changes in
net interest income that could not be specifically identified as either a rate
or volume change were allocated proportionately to changes in volume and changes
in rate.
<TABLE>
<CAPTION>
1999 VS. 1998 1998 VS. 1997
INCREASE(DECREASE) INCREASE(DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
----------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans, net of unearned income.......... $ 19 $(1,214) $(1,195) $1,283 $ (121) $1,162
Deposits with banks.................... 1 15 16 8 -- 8
Federal funds sold and securities
purchased under agreements to
resell............................... (1) -- (1) (11) 1 (10)
Investment securities.................. 6,067 (1,061) 5,006 2,835 (1,172) 1,663
------ ------- ------- ------ ------- ------
Total interest income.............. 6,086 (2,260) 3,826 4,115 (1,292) 2,823
------ ------- ------- ------ ------- ------
INTEREST PAID ON:
Interest bearing demand deposits....... 8 -- 8 5 0 5
Savings Deposits....................... 18 150 168 (22) (154) (176)
Money market........................... 182 62 244 79 86 165
Other time deposits.................... 334 (1,186) (852) 53 (234) (181)
Federal funds purchased, securities
sold under agreements to repurchase,
and other short-term borrowings...... 520 (55) 465 558 (39) 519
Advances from Federal Home Loan Bank... 3,183 (532) 2,651 2,065 121 2,186
Long-term debt......................... (75) 18 (57) (116) 21 (95)
------ ------- ------- ------ ------- ------
Total interest expense................. 4,170 (1,543) 2,627 2,622 (199) 2,423
------ ------- ------- ------ ------- ------
Change in net interest income.......... $1,916 $ (717) $ 1,199 $1,493 $(1,093) $ 400
====== ======= ======= ====== ======= ======
</TABLE>
20
<PAGE> 27
LOAN QUALITY
Three Rivers Bank's written lending policies require underwriting, loan
documentation, and credit analysis standards to be met prior to funding any
loan. After the loan has been approved and funded, continued periodic credit
review is required. Credit reviews are mandatory for all commercial loans and
for all commercial mortgages in excess of $500,000 within an 18-month period. In
addition, due to the secured nature of residential mortgages and the smaller
balances of individual installment loans, sampling techniques are used on a
continuing basis for credit reviews in these loan areas. The following table
sets forth information concerning Three Rivers Bank's loan delinquency and other
non-performing assets. At all dates presented, Three Rivers Bank 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.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Total loan delinquency (past due 30 to 89 days)............. $4,011 $5,473 $7,909
Total non-accrual loans..................................... 2,056 2,553 2,871
Total non-performing assets(1).............................. 9,076 3,116 4,508
Loan delinquency as a percentage of total loans and loans
held for sale, net of unearned income..................... 0.84% 1.17% 1.69%
Non-accrual loans as a percentage of total loans and loans
held for sale, net of unearned income..................... 0.43 0.55 0.62
Non-performing assets as a percentage of total loans and
loans held for sale, net of unearned income, and other
real estate owned......................................... 1.87 0.66 0.96
</TABLE>
- ---------------
(1) Non-performing assets are comprised of (i) loans that are on a non-accrual
basis, (ii) loans that are contractually past due 90 days or more as to
interest and principal payments of which some are insured for credit loss,
and (iii) other real estate owned. All loans, except for loans that are
insured for credit loss, are placed on non-accrual status immediately upon
becoming 90 days past due in either principal or interest.
Between December 31, 1998 and December 31, 1999, total loan delinquency
declined by $1.5 million causing the delinquency ratio to drop to 0.84%. Total
non-performing assets increased by $6.0 million since year-end 1998 causing the
non-performing assets to total loans ratio to increase to 1.87%. The increase in
non-performing assets and non-accrual loans is due to one $6.5 million
commercial mortgage loan on a construction project for which a $500,000
write-off occurred prior to such loan being reclassified as other real estate
owned in December 1999.
Between December 31, 1997 and December 31, 1998, each of the key asset
quality indicators demonstrated improvement. Total loan delinquency declined by
$2.4 million causing the delinquency ratio to drop to 1.17%. Total
non-performing assets decreased by $1.4 million since year-end 1997 causing the
non-performing assets to total loans ratio to drop to 0.66%. The overall
improvement in asset quality resulted from enhanced collection efforts on
residential mortgage loans and continued low levels of non-performing commercial
loans. These favorable asset quality trends coupled with recoveries on loans
previously charged-off of $224,000 were considered by management in determining
the amount of Three Rivers Bank's 1998 loan loss provision.
Allowance and Provision for Loan Losses. As described in more detail in
the accounting policy footnote of the consolidated financial statements set
forth elsewhere in this Information Statement, Three Rivers Bank uses a
comprehensive methodology and procedural discipline to maintain an allowance for
loan losses to absorb inherent losses in the loan portfolio. The allowance can
be summarized into three elements: 1) reserves established on specifically
identified problem loans, 2) formula driven general reserves established for
loan categories based upon historical loss experience and other qualitative
factors which include delinquency and non-performing loan trends, concentrations
of credit, trends in loan volume, experience and depth of management,
examination and audit results, effects of any changes in lending policies, and
trends in policy
21
<PAGE> 28
exceptions, and 3) a general unallocated reserve which provides conservative
positioning in the event of variance from our assessment of the previously
listed qualitative factors, provides protection against credit risks resulting
from other inherent risk factors contained in the Bank's loan portfolio, and
recognizes the model and estimation risk associated with the specific and
formula driven allowances. Note that the qualitative factors used in the formula
driven general reserves are evaluated quarterly (and revised if necessary) by
Three Rivers' management to establish allocations which accommodate each of the
listed risk factors. The following table sets forth changes in the allowance for
loan losses and certain ratios for the periods ended:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period:..... $ 6,104 $ 6,006 $ 6,025 $ 6,834 $ 7,290
Reduction due to disposition of
business line..................... -- -- -- -- (342)
Charge-offs:
Commercial........................ 1,236 86 81 801 298
Real estate-mortgage.............. 269 183 174 156 135
Consumer.......................... 123 157 183 142 207
-------- -------- -------- -------- --------
Total charge-offs................. 1,628 426 438 1,099 640
Recoveries:
Commercial........................ 201 73 175 123 123
Real estate-mortgage.............. 17 110 62 9 14
Consumer.......................... 27 41 69 68 104
-------- -------- -------- -------- --------
Total recoveries.................. 245 224 306 200 241
Net charge-offs..................... 1,383 202 132 899 399
Provision for loan losses........... 300 300 113 90 285
-------- -------- -------- -------- --------
Balance at end of period............ 5,021 6,104 6,006 6,025 6,834
======== ======== ======== ======== ========
Loans and loans held for sale, net
of unearned income:
Average for the year................ 464,317 464,015 447,295 385,912 395,018
At period end..................... 479,762 468,194 466,615 431,928 367,940
As a percent of average loans and
loans held for sale:
Net charge-offs................... 0.30% 0.04% 0.03% 0.23% 0.10%
Provision for loan losses......... 0.06 0.06 0.03 0.02 0.07
Allowance for loan losses......... 1.08 1.32 1.36 1.56 1.73
Allowance as a percent of each of
the following:
Total loans and loans held for
sale, net of unearned income... 1.05 1.30 1.29 1.39 1.86
Total delinquent loans (past due
30 to 89 days)................. 125.18 111.53 75.94 61.24 87.81
Total non-accrual loans........... 244.21 239.09 209.20 168.34 149.61
Total non-performing assets....... 55.32 195.89 133.23 119.24 121.75
Allowance as a multiple of net
charge-offs....................... 3.63x 30.22x 45.50x 6.70x 17.33x
Total classified assets........... $ 15,715 $ 17,555 $ 12,698 $ 11,113 $ 14,366
</TABLE>
Three Rivers Bank recorded provisions for loan losses of $300,000 in 1999,
$300,000 in 1998, and $113,000 in 1997. When expressed as a percentage of
average loans, the provision has increased from 0.02% to
22
<PAGE> 29
0.06% over this three-year period. The Bank's net charge-offs amounted to $1.4
million or 0.30% of average loans in 1999, $202,000 or 0.04% of average loans in
1998, and $132,000 or 0.03% of average loans in 1997.
The higher loan loss provision in 1998 was due to continued growth of
commercial and commercial real-estate loans. During 1998, commercial and
commercial real-estate loans grew by $10.3 million or 4.9% while the growth rate
for this higher risk loan category was $30 million or 16.5% in 1997. An
increased level of classified loans resulting from this loan growth also
supported the higher provision level. The bank maintained a $300,000 loan loss
provision in 1999 despite the higher net charge-offs due to the overall strength
of the loan loss reserve.
Since December 31, 1998, the balance in the allowance for loan losses has
decreased by $1.1 million due to the net charge-offs exceeding the loan loss
provision. Three Rivers Bank's allowance for loan losses at December 31, 1999
was 55.0% of non-performing assets and 244.0% of non-accrual loans. The
reduction in this coverage ratio since year end 1998 is due primarily to an
increased level of non-performing assets. As mentioned earlier, the increase in
non-performing assets is due entirely to a $6.0 million commercial mortgage loan
for which a $500,000 charge-down was recorded before the loan was transferred
into other real estate owned in December 1999. The allowance for loan losses of
Three Rivers Bank was 196.0% of non-performing assets and 239.0% of non-accrual
loans at December 31, 1998. Both of these coverage ratios were comparable with
the prior year. During 1998 and 1999, there were no changes in the estimation
methods or assumptions that affected the Bank's methodology for assessing the
appropriateness of the allowance for loan losses. The Bank does not weight the
unallocated general allowance among segments of the loan portfolio.
Three Rivers Bank management is unable to determine in what loan category
future charge-offs and recoveries may occur.
The following tables set forth the allocation of the allowance for loan
losses among various categories at December 31, 1999, 1998, and 1997. This
allocation is determined by using the consistent procedural discipline that was
previously discussed. The entire allowance for loan losses is available to
absorb future loan losses in any loan category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial............... $ 914 9.56% $ 279 11.44% $ 247 8.36% $ 378 7.49% $ 664 8.37%
Commercial loans secured
by real estate......... 1,285 43.16 1,339 35.69 1,465 36.73 1,526 34.32 1,024 20.49
Real estate-mortgage..... 519 40.41 213 45.51 216 48.22 286 50.12 193 63.36
Consumer................. 185 6.89 211 7.36 176 6.69 170 8.07 188 7.78
Allocation to general
risk................... 2,118 4,062 3,902 3,665 4,765
------ ------ ------ ------ ------
Total............ $5,021 100.00% $6,104 100.00% $6,006 100.00% $6,025 100.00% $6,834 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Real estate-mortgage loans comprise 40.0% of Three Rivers Bank's total loan
portfolio and $519,000 or 10.3% of the total allowance for loan losses is
allocated against this loan category at December 31, 1999. The real
estate-mortgage loan allocation is based primarily upon the Bank's five-year
historical average of actual loan charge-offs experienced in that category. The
higher allocations for commercial loans and commercial loans secured by real
estate reflect the increased credit risk associated with this type of lending.
The combined increase in allocated reserves to these two portfolio types at
December 31, 1999 versus December 31, 1998 is driven by the continued growth of
these portfolios and higher charge-offs experienced in fiscal 1999 versus 1998.
At December 31, 1999, the combined commercial and commercial real-estate loan
balances grew by 15% over the December 31, 1998 balances. The fiscal year over
year net charge-offs also increased by $1.0 million for the combined commercial
and commercial real-estate portfolio. Other factors considered by the Bank that
led to increased allocations to the commercial and commercial real-estate
portfolios are the potential adverse effects of the rising interest rate
environment experienced in the latter half of fiscal year
23
<PAGE> 30
1999, the continued increase in concentration risk in single borrowers and the
overall growth in the average size associated with these credits.
In addition to the specific and formula-driven reserve calculations, the
Bank has consistently established a general unallocated reserve to provide for
risk inherent in the loan portfolio as a whole. Management believes that its
judgment with respect to the establishment of the general unallocated reserve
has been validated by experience and prudently reflects the model and estimation
risk associated with the specific and formula driven allowances. The Bank
determines the unallocated reserve based on a variety of factors, some of which
also are components of the formula-driven methodology. These include, without
limitation, the previously mentioned qualitative factors along with general
economic data, management's assessment of the direction of interest rates, and
credit concentrations. In conjunction with the establishment of the general
unallocated reserve, the Bank also looks at the total allowance for loan losses
in relation to the size of the total loan portfolio, the level of non-performing
assets, and its coverage of these items as compared to peer comparable banking
companies.
Based on the Bank's loan loss reserves methodology and the related
assessment of the inherent risk factors contained within the Bank's loan
portfolio, management believes that the allowance for loan losses was adequate,
but not excessive, for each of the fiscal years presented in the table above.
Non-Interest Income: 1999 and 1998. Non-interest income for the year
ending December 31, 1999, totaled $5.7 million which represented a $1.3 million
or 18.3% decrease when compared to the same 1998 period. This decrease was
primarily due to the following items:
- a $1.0 million decrease in gains realized on investment security sales
because a steeper yield curve has limited investment portfolio
repositioning opportunities.
- a $270,000 decrease in gains realized on loans held for sale as a sharp
drop in mortgage refinancing activity has reduced both the volume and
spread on loan sales into the secondary market in 1999.
- a $44,000 or 4.8% increase in trust fees to $971,000 for the year ending
December 31, 1999. This trust fee growth reflects increased assets under
management due to the profitable expansion of trust relationships.
Non-Interest Income: 1998 and 1997. Non-interest income for 1998 totaled
$6.9 million which represented a $1.6 million or 31% increase when compared to
1997. This increase was primarily due to the following items:
- An $84,000 or 10.0% increase in trust fees to $927,000 in 1998.
- A $1.2 million increase in gains realized on investment security sales
caused by the Bank's decision to sell mortgage backed securities which
were experiencing rapid prepayments in 1998. These security sales were
part of an asset liability management strategy to extend the duration of
the portfolio while maintaining yield.
- A $507,000 or 59.1% increase in other income due in part to additional
income resulting from ATM surcharging, other processing fees, and revenue
generated from annuity and mutual fund sales in the Bank's financial
service subsidiary.
- A $270,000 or 27.7% decrease in wholesale cash processing fees due to a
loss of a significant wholesale cash processing customer.
Non-interest income as a percentage of total revenue increased from 15.10%
in 1997 to 15.97% in 1998. This diversification of the revenue stream will
continue to be a key strategic focal point for Three Rivers Bank in the future.
24
<PAGE> 31
Non-Interest Expense: 1999 and 1998. Non-interest expense for the year
ending December 31, 1999 totaled $21.0 million which represented a $707,000 or
3.5% increase when compared to 1998. This increase was primarily due to the
following items:
- A $246,000 or 2.7% increase in salaries and employee benefits due to
modest merit pay increases and increased medical insurance premiums.
- A $163,000 increase in goodwill and core deposit amortization expense due
to the amortization expense associated with the core deposit premium
resulting from the February 1999 branch acquisition and a full year of
amortization associated with the May 1998 acquisition of two National
City Bank branches.
- A $186,000 increase in equipment expense as a result of increased
depreciation on equipment purchased in early 1999, some of which was
associated with new branches and greater small equipment purchases.
- An $92,000 increase in miscellaneous taxes and insurance due to higher
shares tax expense.
Non-Interest Expense: 1998 and 1997. Non-interest expense for 1998 totaled
$20.3 million which represented a $722,000 or 3.7% increase when compared to
1997. This increase was primarily due to the following items:
- A $129,000 or 1.4% increase in salaries and employee benefits due to
merit pay increases, higher commission and incentive payments, and
increased pension expense.
- A $107,000 or 9.1% increase in professional fees due to increased legal,
investment advisory and other inter-company support fees.
- A $355,000 increase in other expense due to higher outside processing
fees, increased advertising expense, and costs associated with Year 2000
compliance.
Year 2000. During 1999 and 1998, Three Rivers Bank actively worked on the
Year 2000 computer issue to ensure that both its information technology and
non-information technology systems and applications were Y2K compliant. The Bank
completed the inventory, assessment, remediation, testing, and implementation
phases of its Year 2000 program. Mission critical systems which had maintenance
applied since their original Y2K test were retested. The organization practiced
"clean management" of all mission critical and critical systems.
The Y2K process required that Three Rivers Bank work with vendors,
third-party service providers, and customers to determine the extent to which
the Bank was vulnerable to these parties' failure to remediate their own Year
2000 issue. The Bank's business resumption plan was expanded to address the
potential problems of Y2K such as a loss of power, telecommunications, or the
failure of a mission critical vendor. An outside consulting firm was retained to
create a company wide business resumption plan. The firm used its considerable
experience with business resumption planning and the existing company
contingency plans to create a business resumption plan which supported our
continued operation in the face of external or internal Y2K caused disruptions.
No such disruptions occurred.
The Bank is not aware of any event that has occurred with respect to the
Y2K issue that has caused or is likely to cause a material adverse effect on the
business, financial condition or results of operations of Three Rivers Bank or
any credit customers of the Bank. The Bank did not suffer any system failures or
miscalculations causing disruptions of operations in connection with the
occurrence of Y2K and the Bank is not aware of any such system failures or
miscalculations causing material disruptions of the operations of any of its
customers.
The Bank did not incur any liquidity problems in connection with the
occurrence of Y2K. Outflow of deposits during the weeks prior to January 1,
2000, was only slightly above normal. From an asset/liability standpoint, during
1999 the Bank emphasized deposit products that encouraged extension of shorter
term maturities to products maturing after December 31, 1999 in order to limit
liquidity risk. Additionally, during the fourth quarter of 1999, the Bank had
maintained higher levels of non-earning cash balances and had used
25
<PAGE> 32
higher cost alternative funding sources, such as brokered certificates of
deposit to ensure liquidity reserves were in place.
Three Rivers Bank used both internal and external resources to complete its
comprehensive Y2K compliance program. Three Rivers Bank currently estimates that
the total cost to achieve Y2K compliance was approximately $400,000.
Approximately 66% of this total cost represents incremental expenses to Three
Rivers Bank while approximately 34% represents the internal cost of redeploying
existing information technology resources to the Y2K issue. Three Rivers Bank
does not believe that these expenditures had, or will have, a material impact on
its results of operation, liquidity, or capital resources.
Net Overhead Burden. Three Rivers Bank's efficiency ratio (non-interest
expense divided by total revenue) averaged 57.9% in 1999 compared to 54.6% in
1998 and 55.8% in 1997. Factors contributing to the higher efficiency ratio in
1999 included the compression experienced in the net interest margin and an
increased level of non-interest expenses which included Year 2000 costs. The
amortization of intangible assets also created a $377,000 non-cash charge that
negatively impacted the efficiency ratio. That charge was $163,000 greater than
1998.
Factors contributing to the better efficiency ratio in 1998 included the
increased net interest margin dollars and increased non-interest income. Total
assets per employee improved 8.6% from $3.3 million for 1997 to $3.6 million for
1998. Income from continuing operations per employee averaged $42,400 in 1998
compared to $38,300 in 1997.
Income Tax Expense. Three Rivers Bank's provision for income taxes for
1999 was $4.1 million reflecting an effective tax rate of 29.1%. Three Rivers
Bank's provision for income taxes for the year 1998 was $4.8 million reflecting
an effective tax rate of 30.2%. The Bank's 1997 income tax provision was $4.5
million reflecting an effective tax rate of 30.9%.
The lower effective tax rate in 1999 was due to a reduced level of pre-tax
income combined with increased total tax-free asset holdings in 1999. The
tax-free asset holdings consist primarily of municipal investment securities,
bank owned life insurance, and commercial loan tax anticipation notes. The
higher tax expense in 1998 was due to greater pre-tax income, as the effective
tax rate was relatively consistent between years.
Subsequent to December 31, 1999, the Internal Revenue Service completed its
examination of USBANCORP's 1995-1997 tax returns. Consequently, Three Rivers
Bank anticipates reversing its $200,000 valuation allowance and reducing its
income tax expense and accrued income taxes by approximately $500,000 during the
first quarter of 2000.
Balance Sheet. Three Rivers Bank's total consolidated assets (excluding
net assets of discontinued mortgage banking operations) were $1.076 billion at
December 31, 1999, compared with $996.0 million at December 31, 1998, which
represents an increase of $80.0 million or 8.0%. During the year ended December
31, 1999, total loans and loans held for sale increased by 2.86%. Total
investment securities increased by $44.6 million as increased borrowings were
used to purchase securities. Intangible assets increased by $1.1 million due to
the core deposit intangible resulting from a February 1999 branch acquisition.
Total deposits increased by $12.2 million or 2.2% since December 31, 1998,
due primarily to the use of $20 million of brokered deposits that were used for
Y2K contingency funding. The Bank's total borrowed funds position increased by
$84.0 million in order to fund the earning asset growth. Total equity declined
by $15.7 million due to a decline in accumulated other comprehensive income as a
result of a decrease in the market value of the available for sale securities
portfolio.
Three Rivers Bank's total consolidated assets (excluding net assets of
discontinued mortgage banking operations) were $985.6 million at December 31,
1998, compared with $947.7 million at December 31, 1997, which represents an
increase of 4% or $37.9 million. During 1998, total loans and loans held for
sale increased by approximately $1.6 million or less than 1%. Heightened
mortgage loan refinancing activity and competition led to an $11.9 million or
5.3% decrease in mortgage loans. Consumer loans continued to decline due to net
run-off experienced in the indirect auto loan portfolio, as Three Rivers Bank
has exited this low profit line of
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<PAGE> 33
business. The more profitable commercial loan portfolio saw growth of
approximately $14.6 million or 37% between December 31, 1997 and 1998. Total
investment securities increased by $31 million because the Bank more
aggressively purchased securities in the second half of 1998. These purchases
were made due to expected continuation of strong cashflow from prepaying
mortgage-backed securities and to position the balance sheet for the net in-flow
of approximately $12 million in cash from a branch acquisition which was
completed in February 1999.
Total deposits increased by $35 million or 6.6% since December 31, 1997,
due largely to the acquisition of $27 million of deposits in 1998 with the
purchase of two National City Bank branch offices located in Allegheny County.
Interest Rate Sensitivity. Asset/liability management involves managing
the risks associated with changing interest rates and the resulting impact on
Three Rivers Bank's net interest income, net income and capital. The overall
interest rate risk position and strategies are reviewed by senior management and
Three Rivers Bank's Board of Directors on an ongoing basis. The management and
measurement of interest rate risk at Three Rivers is performed by using the
following tools:
- 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.
- Static "GAP" analysis which analyzes the extent to which interest rate
sensitive assets and interest rate sensitive liabilities are matched at
specific points in time. For static GAP analysis, Three Rivers Bank
typically defines interest rate sensitive assets and liabilities as those
that reprice within six months or one year.
- Market value of portfolio equity sensitivity analysis.
27
<PAGE> 34
The overall interest rate risk position and strategies are reviewed by
senior management and the Bank's Board of Directors on an ongoing basis. The
following tables present a summary of Three Rivers Bank's static GAP position.
GAP positions at December 31, 1999:
<TABLE>
<CAPTION>
OVER OVER
3 MONTHS 6 MONTHS
3 MONTHS THROUGH THROUGH OVER
INTEREST SENSITIVITY PERIOD OR LESS 6 MONTHS 1 YEAR 1 YEAR TOTAL
- --------------------------- -------- --------- --------- -------- ----------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Loans................................ $119,668 $ 42,863 $ 38,523 $278,708 $ 479,762
Investment securities and assets held
in trust for collateralized
mortgage obligation................ 91,908 16,396 35,494 378,466 522,264
Other assets......................... -- -- 12,411 -- 12,411
Total rate sensitive
assets................... 211,576 59,259 86,428 657,174 1,014,437
Rate sensitive liabilities:
Deposits:
Non-interest bearing deposits...... -- -- -- 84,643 84,643
NOW and Super NOW.................. -- -- -- 41,590 41,590
Money market....................... 52,688 -- -- -- 52,688
Other savings...................... -- -- -- 63,830 63,830
Certificates of deposit of $100,000
or more......................... 45,791 2,991 -- 124 48,906
Other time deposits................ 49,557 44,976 96,355 90,150 281,038
Total deposits............. 148,036 47,967 96,355 280,337 572,695
Borrowings........................... 291,482 289 80,578 66,045 438,394
Total rate sensitive
liabilities.............. 439,518 48,256 176,933 346,382 1,011,089
Off-balance sheet hedges............. (110,000) 40,000 30,000 40,000 --
Interest sensitivity GAP:
Interval........................... (117,942) (28,997) (120,505) 270,792 --
Cumulative......................... (117,942) (146,939) (267,444) 3,348 3,348
Period GAP ratio..................... 0.64 0.67 0.42 1.70 --
Cumulative GAP ratio................. 0.64 0.65 0.57 1.00 --
Ratio of cumulative GAP to total
assets............................. -10.96% -13.65% -24.85% 0.31% --
</TABLE>
When December 31, 1999, is compared to December 31, 1998, both Three Rivers
Bank's six month and one year cumulative GAP ratios became more negative due
primarily to reduced asset sensitivity resulting from slowing prepayment speeds
on mortgage-backed securities. An increase in Three Rivers Bank's short-term
FHLB borrowings also contributed to increased rate sensitive liabilities.
A portion of the Bank's funding base is low cost core deposit accounts
which do not have a specific maturity date. The accounts that comprise these low
cost core deposits include passbook savings accounts, money market accounts, NOW
accounts, and daily interest savings accounts. At December 31, 1999, the balance
in these accounts totaled $243.0 million or 22.6% of total assets. Within the
above static GAP table, approximately $53.0 million or 22.0% of these core
deposits are assumed to be rate sensitive liabilities which reprice in one year
or less; this assumption is based upon historical experience in varying interest
rate environments and is reviewed annually for reasonableness. Three Rivers Bank
recognizes that the pricing of these accounts is somewhat inelastic when
compared to normal rate movements.
There are some inherent limitations in using static GAP analysis to measure
and manage interest rate risk. For instance, certain assets and liabilities may
have similar maturities or periods to repricing but the magnitude or degree of
the repricing may vary significantly with changes in market interest rates. As a
result
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<PAGE> 35
of these GAP limitations, management places primary emphasis on simulation
modeling to manage and measure interest rate risk. Three Rivers Bank's asset
liability management policy seeks to limit net interest income variability over
a twelve month period to 6 7.5% and net income variability to 6 15.0% based upon
varied economic rate forecasts which include interest rate movements of up to
200 basis points and alterations of the shape of the yield curve. Additionally,
Three Rivers Bank in 1998 began using market value sensitivity measures to
further evaluate the balance sheet exposure to changes in interest rates. Market
value of portfolio equity sensitivity analysis captures the dynamic aspects of
long-term interest rate risk across all time periods by incorporating the net
present value of expected cash flows from Three Rivers Bank's assets and
liabilities. Three Rivers Bank 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
Three Rivers Bank's net interest income, net income and market value of
portfolio equity. The interest rate scenarios in the table compare Three Rivers
Bank's base forecast or most likely rate scenario at December 31, 1999, to
scenarios which reflect ramped increases and decreases in interest rates of 200
basis points along with performance in a stagnant rate scenario with interest
rates held flat at the December 31, 1999, levels. Three Rivers Bank'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 Three Rivers Bank's expected balance sheet composition which was
developed under the most likely interest rate scenario.
<TABLE>
<CAPTION>
VARIABILITY OF CHANGE IN
NET INTEREST VARIABILITY OF MARKET VALUE OF
INTEREST RATE SCENARIO INCOME NET INCOME PORTFOLIO EQUITY
- ---------------------- -------------- -------------- ----------------
<S> <C> <C> <C>
Base............................................... 0% 0% 0%
Flat............................................... 0.66 1.53 (15.2)
200 bp increase.................................... (3.6) (8.5) (52.2)
200 bp decrease.................................... 1.02 2.6 43.8
</TABLE>
As indicated in the table, the maximum negative variability of Three Rivers
Bank's net interest income and net income over the next twelve month period was
(3.6%) and a (8.5%) 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 (52.2%) under this interest rate scenario. The off-balance
sheet borrowed funds hedges 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 any balance sheet repositioning actions Three
Rivers Bank 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 in the more extreme interest rate shock forecasts.
Within the investment portfolio at December 31, 1999, 100.0% of the
portfolio is currently classified as available for sale. This compares to a
portfolio composition breakdown of 68.6% available for sale and 31.4% held to
maturity at December 31, 1998. The available for sale classification provides
management with greater flexibility to manage the securities portfolio to better
achieve overall balance sheet rate sensitivity goals and provide liquidity to
fund loan growth if needed. The mark to market of the available for sale
securities does inject more volatility in the book value of equity but has no
impact on regulatory capital. Furthermore, it is Three Rivers Bank's intent to
continue to diversify its loan portfolio to increase liquidity and rate
sensitivity and to better manage Three Rivers Bank's long-term interest rate
risk by continuing to sell newly originated fixed-rate mortgage loans.
LIQUIDITY
Financial institutions must maintain liquidity to meet day-to-day
requirements of depositor and borrower customers, take advantage of market
opportunities, and provide a cushion against unforeseen needs. Liquidity needs
can be met by either reducing assets or increasing liabilities. Sources of asset
liquidity are provided by short-term investment securities, time deposits with
banks, federal funds sold, banker's acceptances, and
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<PAGE> 36
commercial paper. For Three Rivers Bank, these assets totaled $53.0 million at
December 31, 1999, compared to $154.0 million and $84.0 million at December 31,
1998 and December 31, 1997, respectively. Maturing and repaying loans, as well
as the monthly cash flow associated with mortgage-backed securities are other
significant sources of asset liquidity for Three Rivers Bank.
Liability liquidity can be met by attracting deposits with competitive
rates, using repurchase agreements, buying federal funds, or utilizing the
facilities of the Federal Reserve or the Federal Home Loan Bank systems. Three
Rivers' utilizes a variety of these methods of liability liquidity. At December
31, 1999, Three Rivers had approximately $85.0 million of unused lines of credit
available under informal arrangements with correspondent banks compared to $125
million at December 31, 1998. These lines of credit enable Three Rivers Bank to
purchase funds for short-term needs at current market rates. Additionally, Three
Rivers Bank is a member of the Federal Home Loan Bank which provides
intermediate to longer term advances to its members for up to approximately 80%
of their investment in assets secured by one- to four-family residential real
estate. This would suggest a remaining current total available Federal Home Loan
Bank aggregate borrowing capacity at December 31, 1999 of approximately $72.0
million.
Liquidity can be further analyzed by utilizing the Consolidated Statement
of Cash Flows. Cash equivalents increased by $5.6 million from December 31, 1998
to December 31, 1999, due primarily to an increase of $60.7 million of net cash
provided by financing activities, as offset by an increase of $56.3 million in
net cash used by investing activities. Within investing activities, purchases of
investment securities exceeded cash proceeds from investment security maturities
and sales by $73.4 million. Cash advanced for new loan fundings totaled $197.7
million and was approximately $13.0 million greater than the cash received from
loan principal payments. Advances from the Federal Home Loan Bank provided
$100.0 million of cash.
Cash equivalents increased by $1.8 million between December 31, 1998 and
December 31, 1997. Within investing activities, purchases of investment
securities exceeded the cash proceeds from investment security maturities and
sales by approximately $30 million. Cash advanced for new loan fundings totaled
$154 million and was approximately $2.6 million greater than the cash received
from loan principal payments. Within financing activities, cash generated from
the sale of new certificates of deposit exceeded the cash payments for maturing
certificates of deposit by $38 million.
Capital Resources. As presented in Note 19 to the consolidated financial
statements set forth elsewhere herein, each of Three Rivers Bank's regulatory
capital ratios decreased between December 31, 1998 and December 31, 1999, due to
a reduction in tangible equity resulting from the $1.4 million core deposit
premium associated with the 1999 branch acquisition. Each of Three Rivers Bank's
regulatory capital ratios increased between December 31, 1997 and December 31,
1998. This was primarily due to a capital infusion of $7,000,000. The Bank
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. Strategies that the Bank could use to manage its capital include common
dividend payments and earning asset growth. Within one year after the
Distribution, Three Rivers Bancorp intends to raise some form of common equity
capital in order to satisfy one of the conditions of the favorable IRS private
letter ruling which granted tax-free treatment of the Distribution to both
USBANCORP and its shareholders. See "The Distribution -- Certain U.S. Federal
Income Tax Consequences of the Distribution."
The Bank exceeds all regulatory capital ratios for each of the periods
presented. Furthermore, the Bank is considered "well capitalized" under all
applicable FDIC regulations. It is the Bank's ongoing intent to continue to
prudently leverage the capital base in an effort to increase return on equity
performance while maintaining necessary capital requirements. It is, however,
the Bank's intent to maintain the FDIC "well capitalized" classification to
ensure the lowest deposit insurance premium and to maintain an asset leverage
ratio of no less than 6.0%.
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<PAGE> 37
BUSINESS
GENERAL
Three Rivers Bancorp is a company organized under the Pennsylvania Business
Corporation Law of 1988 that has received approval under the Bank Holding
Company Act of 1956 (the "BHCA") to become a holding company upon acquiring all
of the outstanding capital stock of Three Rivers Bank contemporaneously with the
Distribution.
THREE RIVERS BANK
Three Rivers Bank is a state bank chartered under the Pennsylvania Banking
Code of 1965, as amended. Through 24 locations in Allegheny, Washington and
Westmoreland Counties, Pennsylvania, Three Rivers Bank conducts a general retail
banking business consisting of granting commercial, consumer, construction,
mortgage and student loans, and offering checking, interest bearing demand,
savings and time deposit services. It also operates 23 ATMs that are affiliated
with MAC, a regional ATM network, and Plus System, a national ATM network.
Three Rivers Bank also offers wholesale banking services to other banks,
merchants, governmental units, and other large commercial accounts. Such
services include balancing services, lock box accounts, and providing coin and
currency. Additionally, TRB Financial Services Corporation, a wholly owned
subsidiary of Three Rivers Bank, was formed on August 5, 1997. TRB Financial
Services Corporation engages in the sale of annuities and mutual funds.
Three Rivers Bank also has a wholly owned mortgage banking
subsidiary -- Standard Mortgage Corporation of Georgia. Standard Mortgage
Corporation, based in Atlanta, Georgia, is a mortgage banking company that
originates, sells, and services residential mortgage loans. All of the
outstanding capital stock of Standard Mortgage will be internally distributed by
Three Rivers to USBANCORP prior to the Distribution, so that Standard Mortgage
will become a direct subsidiary of USBANCORP. Therefore, upon completion of the
Distribution, Standard Mortgage will no longer be affiliated with Three Rivers
Bank. See "The Distribution -- Spin-Off of Standard Mortgage Corporation to
USBANCORP."
Three Rivers Bank's deposit base is such that loss of one depositor or a
related group of depositors would not have a materially adverse effect on its
business. In addition, the loan portfolio is also diversified so that one
industry or group of related industries does not comprise a material portion of
the loan portfolio. Three Rivers Bank's business is not seasonal nor does it
have any risks attendant to foreign sources. As a state chartered,
federally-insured bank and trust company which is not a member of the Federal
Reserve System, Three Rivers Bank is subject to supervision and regular
examination by the Pennsylvania Department of Banking and the Federal Deposit
Insurance Corporation. Various federal and state laws and regulations govern
many aspects of its banking operations.
MONETARY POLICIES
Commercial banks are affected by policies of various regulatory authorities
including the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national supply of bank credit. Among the
instruments of monetary policy used by the Board of Governors are: open market
operations in U.S. Government securities, changes in the discount rate on member
bank borrowings, and changes in reserve requirements on bank deposits. These
means are used in varying combinations to influence overall growth of bank
loans, investments, and deposits, and may also affect interest rate charges on
loans or interest paid for deposits. The monetary policies of the Board of
Governors have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future.
COMPETITION
Three Rivers Bank and its subsidiary entities face strong competition from
other commercial banks, savings banks, savings and loan associations, and
several other financial or investment service institutions for
31
<PAGE> 38
business in the communities they serve. Several of these institutions are
affiliated with major banking and financial institutions, such as Mellon Bank
Corporation and PNC Financial Corporation, which are substantially larger and
have greater financial resources than the subsidiary entities. As the financial
services industry continues to consolidate, the scope of potential competition
affecting the subsidiary entities will also increase. For most of the services
that the subsidiary entities perform, there is also competition from credit
unions and issuers of commercial paper and money market funds. Such
institutions, as well as brokerage houses, consumer finance companies, insurance
companies, and pension trusts, are important competitors for various types of
financial services. In addition, personal and corporate trust investment
counseling services are offered by insurance companies, other firms, and
individuals.
NEW LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "GLB Act"). The GLB Act makes significant changes in
U.S. banking law, principally by overturning the 1933 Glass-Steagall Act. Under
the GLB Act, banks and other financial companies, such as securities firms and
insurance companies, will be able to combine and be commonly owned. The GLB Act
also permits bank holding companies and banks to engage in a broader range of
financially related activities than was available to them before. The GLB Act
does not authorize banks or their affiliates to engage in commercial activities
that are not financial in nature.
The GLB Act also contains a number of provisions that will affect the
operations of all financial institutions. One of the new provisions relates to
the financial privacy of consumers, authorizing the federal banking regulators
to adopt rules that would limit the ability of banks and other financial
entities to disclose non-public information about consumers to entities that are
not affiliates. These limitations will likely require more disclosure to
consumers, and in some circumstances will require consent by the consumer before
information is allowed to be provided to a third party. We do not expect that
any of the regulatory provisions of the GLB Act will materially affect our
operations or significantly increase our costs.
MARKET AREA
The Pittsburgh, Pennsylvania area enjoys a strong and growing economy.
Recent unemployment data for the six-county area in and around Pittsburgh (the
"Pittsburgh Metro Area") improved to 4.2%, down approximately 0.4% from the same
period in 1998. Similar to national statistics, the Pittsburgh Metro Area
continues to run brisk as a result of consumer spending, strong employment,
greater hours worked, and little or no inflationary pressures. Recent economic
trend reports show a highly confident Pittsburgh consumer spending freely on new
automobiles, large one-time items, and general goods, pushing retail sales to
record levels. Local businesses and manufacturers are working hard to keep up
with demand.
Economic expectations remain favorable for the Pittsburgh Metro Area. While
higher interest rates are beginning to slow the housing industry in the region,
the tone of the economy remains strong but slowing. The recent Federal Reserve
Board increase in rates is beginning to take hold; most economists suggest
additional increases during the first quarter of 2000. Economic expansion is
expected to slow to a more reasonable rate between 2% and 3% over the Year 2000.
As long as unemployment and inflation remain at record low levels, the
Pittsburgh Metro Area is expected to fare quite well.
EMPLOYEES
Three Rivers Bank had approximately 291 full- and part-time employees as of
December 31, 1999.
COMMITMENTS AND LINES OF CREDIT
Three Rivers Bank is obligated under commercial, standby, and trade-related
irrevocable letters of credit aggregating $7.6 million at December 31, 1999. In
addition, the Bank has issued lines of credit to customers generally for periods
of up to one year. Borrowings under such lines of credit are for the working
capital needs of the borrower. At December 31, 1999, the Bank had unused loan
commitments of approximately $101 million.
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<PAGE> 39
INVESTMENT PORTFOLIO
Investment securities held to maturity are carried at amortized cost while
investment securities classified as available for sale are reported at fair
value. At December 31, 1999, all of the portfolio was categorized as available
for sale and none as held to maturity.
The following table sets forth the book and market value of Three Rivers
Bank's investment portfolio as of the periods indicated:
INVESTMENT SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Book Value:
U.S. Treasury............................................ $ 5,033 $ -- $ --
U.S. Agency.............................................. 17,838 16,025 1,020
State and municipal...................................... 60,480 2,326 4,476
Mortgage-backed securities............................... 431,008 290,703 254,907
Other securities......................................... 34,561 17,169 16,844
-------- -------- --------
Total book value of investment securities available for
sale..................................................... 548,920 326,223 277,247
Total market value of investment securities available for
sale..................................................... 522,264 327,669 279,461
</TABLE>
During the second half of 1999, the Bank, in preparation for liquidity
needs for Year 2000, sold $2.5 million of mortgage backed securities that had
been purchased during the period from 1993 through 1995 and classified as held
to maturity. The Bank believed the sales were allowable under the provision of
SFAS No. 115 which permits the sale of held to maturity mortgage backed
securities after a substantial portion (85%) of the principal had been collected
through prepayments. The Bank, however, misinterpreted this provision and
computed the 85% paydown factor against the principal outstanding at issuance as
opposed to using the principal outstanding at the point the Bank purchased the
securities in the secondary market. As a result of this interpretation error,
the Bank tainted its held to maturity portfolio and transferred all securities
classified as held to maturity to available for sale. The time period for the
taint will be two years. At the time of the transfer, these securities had an
amortized cost of $131.9 million and a market value of $128.2 million. Prior to
the transfer, approximately 60% of the Bank's investment securities were already
classified as available for sale. With the entire portfolio now being classified
as available for sale, the Bank will have greater flexibility to manage the
securities portfolio to better achieve overall balance sheet rate sensitivity
goals and provide liquidity to fund loan growth if needed. The mark to market of
the available for sale portfolio does inject more volatility in the book value
of equity but has no impact on regulatory capital.
INVESTMENT SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Book Value:
U.S. Treasury............................................ $ -- $ 5,089 $ 4,008
U.S. Agency.............................................. -- -- --
State and municipal...................................... -- 51,718 36,569
Mortgage-backed securities............................... -- 93,181 126,762
Other securities......................................... -- -- --
-------- -------- --------
Total book value of investment securities held to
maturity................................................. -- 149,988 167,339
Total market value of investment securities held to
maturity................................................. -- 151,398 168,926
</TABLE>
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<PAGE> 40
Three Rivers Bank and its subsidiaries, collectively, did not hold
securities of any single issuer, excluding U.S. Treasury and U.S. Agencies, that
exceeded 10% of shareholders' equity at December 31, 1999. Maintaining
investment quality is a primary objective of Three Rivers Bank's investment
policy which, subject to certain minor exceptions, prohibits the purchase of any
investment security below a Moody's Investor Service or Standard & Poor's rating
of "A." At December 31, 1999 and 1998, 98.1% and 98.2% of the portfolio
respectively, was rated "AAA." Less than 1.0% was rated below "A" or unrated at
December 31, 1999.
LOAN PORTFOLIO
The principal lending activity of the Bank is the origination of commercial
loans secured by real estate, commercial business loans, mortgage loans and, to
a lesser extent, consumer loans. The vast majority of the Bank's loans are
originated in its primary market area.
Commercial Loans. This category includes credit extensions to commercial
and industrial borrowers. These credits are typically secured by business
assets, including accounts receivable, inventory and equipment. Advance rates on
accounts are limited to 80% of eligible receivables and 50% of raw materials and
finished goods inventory. Overall balance sheet strength and profitability are
considered when analyzing these credits, with special attention given to current
and historical cash flow coverage. Policy permits flexibility in determining
acceptable coverage ratios, but they seldom fall below 1.1 to 1. Personal
guarantees are frequently required; however, as the strength of the borrower
increases our ability to obtain personal guarantees decreases. In addition to
economic risk, this category is subject to risk of weak borrower management and
industry risk, all of which are considered at underwriting.
Commercial Real Estate Loans. The primary focus of the Bank's commercial
lending operations is on the origination of commercial loans secured by real
estate. This category includes various types of loans, including acquisition and
construction of investment property, owner-occupied and operating property.
Maximum term, minimum cash flow coverage, leasing requirements, maximum
amortization and maximum loan to value ratios are controlled by credit policy
and follow industry guidelines and norms and regulatory limitations. Personal
guarantees are always required during the construction phase on construction
credits and are frequently obtained on mid to smaller commercial real estate
loans.
Loans secured by commercial properties generally involve a greater degree
of risk than residential mortgage loans and carry larger loan balances. This
increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income-producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Residential Real Estate Loans. This category includes mortgages that are
secured by residential property. Underwriting of loans within this category is
pursuant to Freddie Mac underwriting guidelines, with the exception of CRA
loans, which have more liberal standards. The major risk in this category is
that a significant downward economic trend would increase unemployment and cause
payment defaults.
Consumer Loans. This category includes consumer installment loans and
revolving credit plans. Underwriting standards identify undesirable loans,
repayment terms and debt coverage ratios. Loans with debt to income coverage of
45% or less are considered satisfactory. Loans between 46% and 50% require
special approval, and loans over 50% are exceptions to policy. The major risk in
this are major risk in this category is significant economic downturn.
Consumer loans generally have shorter terms to maturity, which reduces
Three Rivers Bank's exposure to changes in interest rates, and carry higher
rates of interest than do one- to four-family residential mortgage loans. In
addition, management believes that offering consumer loan products helps to
expand and create stronger ties to our existing customer base by increasing the
number of customer relationships and providing cross-marketing opportunities.
Loan Solicitation and Processing. Loan originations are derived from a
number of sources such as loan officers, customers, borrowers and referrals from
real estate brokers, accountants, attorneys and regional advisory boards.
34
<PAGE> 41
The following table sets forth Three Rivers Bank's loans by major category
as of the dates set forth below:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial.......................... $ 45,861 $ 53,563 $ 39,003 $ 32,352 $ 30,788
Commercial loans secured by real
estate............................ 207,067 167,091 171,377 148,231 75,396
Real estate -- mortgage(1).......... 193,850 213,067 225,008 216,483 233,113
Consumer............................ 33,042 34,565 31,396 35,162 29,342
-------- -------- -------- -------- --------
Gross loans......................... 479,820 468,286 466,784 432,228 368,639
Less: unearned income............... (58) (92) (169) (300) (699)
Loans, net of unearned income....... $479,762 $468,194 $466,615 $431,928 $367,940
</TABLE>
- ---------------
(1) At December 31, 1999, 1998 and 1997, real estate-construction loans
constituted 2.4%, 4.2% and 2.1% of Three Rivers' total loans, net of
unearned income, respectively.
The amount of loans outstanding by category as of December 31, 1999, which
are due in (i) one year or less, (ii) more than one year through five years, and
(iii) over five years, are shown in the following table. Loan balances are also
categorized according to their sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
MORE THAN
ONE YEAR
ONE YEAR THROUGH OVER TOTAL
OR LESS FIVE YEARS FIVE YEARS LOANS
-------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
Commercial...................................... $20,617 $ 8,145 $ 17,099 $ 45,861
Commercial loans secured by real estate......... 30,662 45,824 130,581 207,067
Real estate -- mortgage......................... 14,671 35,260 143,919 193,850
Consumer........................................ 14,837 13,520 4,627 32,984
Total........................................... 80,787 102,749 296,226 479,762
Loans with fixed-rate........................... 20,759 69,143 197,403 287,305
Loans with floating-rate........................ 60,028 33,606 98,823 192,457
Total........................................... 80,787 102,749 296,226 479,762
Percent composition of maturity................. 16.8% 21.4% 61.7% 100.0%
Fixed-rate loans as a percentage of total
loans......................................... 4.3 14.4 41.1 59.9
Floating-rate loans as a percentage of total
loans......................................... 12.5 7.0 20.6 40.1
</TABLE>
The loan maturity information is based upon original loan terms and is not
adjusted for principal paydowns and "rollovers." In the ordinary course of
business, loans maturing within one year may be renewed, in whole or in part, as
to principal amount at interest rates prevailing at the date of renewal. At
December 31, 1999, 59.9% of total loans were fixed-rate, which was comparable
with the prior year. The stability in the fixed-rate percentage between years
reflects continued customer preference for fixed-rate loans. Also, a good
portion of the commercial real estate loan growth has occurred in the five year
fixed-rate area. For additional information regarding interest rate sensitivity,
see "Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations -- Interest Rate Sensitivity."
35
<PAGE> 42
DEPOSITS
The following table sets forth the average balance of Three Rivers Bank's
deposits and the average rates paid thereon:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
(IN THOUSANDS, EXCEPT RATES)
<S> <C> <C> <C> <C> <C> <C>
Demand -- non-interest bearing....... $ 83,442 -- $ 77,561 -- $ 73,660 --
Demand -- interest bearing........... 43,769 0.9% 43,019 0.97% 42,645 0.97%
Savings.............................. 66,505 1.82 65,399 1.59 66,633 1.83
Money markets........................ 57,235 2.96 50,963 2.84 48,173 2.67
Other time........................... 316,227 5.04 310,109 5.42 309,220 5.49
-------- ---- -------- ---- -------- ----
Total deposits....................... $567,178 3.99% $547,051 4.20% $540,331 4.26%
======== ==== ======== ==== ======== ====
</TABLE>
The following table indicates the maturities and amounts of certificates of
deposit issued in denominations of $100,000 or more as of December 31, 1999:
<TABLE>
<CAPTION>
MATURING IN: (IN THOUSANDS)
- ------------ --------------
<S> <C>
Three months or less........................................ $45,792
Over three through six months............................... 2,991
Over six through twelve months.............................. --
Over twelve months.......................................... 123
-------
Total....................................................... $48,906
=======
</TABLE>
PROPERTIES
The principal office of Three Rivers Bancorp is located at 2681 Mosside
Boulevard in Monroeville, Pennsylvania. As of the Distribution Date, Three
Rivers Bancorp will own 13 locations, with an additional 12 locations leased
with terms expiring from November 30, 1999 to November 30, 2009.
LEGAL PROCEEDINGS
Three Rivers is subject to a number of asserted and unasserted potential
legal claims encountered in the normal course of business. In the opinion of
both management and legal counsel, there is no present basis to conclude that
the resolution of these claims will have a material adverse effect on Three
Rivers' consolidated financial position or results of operations.
36
<PAGE> 43
MANAGEMENT OF THREE RIVERS BANCORP
DIRECTORS
Three Rivers Bancorp's Articles of Incorporation provide that the number of
directors may not be less than five nor more than twenty-five, provided that the
number of directors may be altered from time to time, by resolution adopted by
the Three Rivers Bancorp's Board of Directors.
The Board of Directors will be divided into three classes, each to serve
respectively until the annual meetings of shareholders in 2001, 2002 and 2003,
and until their successors shall be elected and shall qualify. Thereafter, their
successors shall be elected for three year terms and until their successors
shall be elected and shall qualify.
The following sets forth certain information concerning the individuals who
have agreed to serve as directors of Three Rivers Bancorp following the
Distribution.
<TABLE>
<CAPTION>
DIRECTOR
NAME(1) AGE SINCE(2)
- ------- --- --------
<S> <C> <C>
CLASS I DIRECTORS TO SERVE UNTIL 2001
Clifford A. Barton 71 1966
Retired; Former Chairman, President and Chief Executive
Officer of USBANCORP; Member of Board of Directors of
Crown American Realty Trust
Terry K. Dunkle 58 1988
Chairman, President and Chief Executive Officer of
USBANCORP until the Distribution Date and of Three Rivers
Bancorp
J. Terrence Farrell 52 1983
Attorney-at-Law
Marylouise Fennell, Ed.D. 60 1994
Higher Education Consultant
Jack Sevy 69 1984
Retired; Former Owner and Operator, New Stanton West
Auto/Truck Plaza
CLASS II DIRECTORS TO SERVE UNTIL 2002
Jerome M. Adams 68 1973
Senior Partner, Adams, Myers and Baczkowski,
Attorneys-at-Law
I. N. Rendall Harper, Jr. 61 1999
President and CEO American Micrographics Company, Inc.
Richard W. Kappel 68 1967
Retired CEO, Secretary and Treasurer of Wm. J. Kappel
Wholesale Co.
W. Harrison Vail 59 1991
President and Chief Executive Officer of Three Rivers Bank
Charles R. Zappala 51 2000
Chairman Russell, Rea, Zappala & Gomulka, Holding Company
CLASS III DIRECTORS TO SERVE UNTIL 2003
Michael F. Butler 64 1993
Business Consultant and Attorney-at-Law
James R. Ferry 61 1991
President of Ferry Electric Company, Electrical Contractor
Steven J. Guy 40 1999
CFO and Vice President of Finance Oxford Development
Company
Stephen I. Richman 66 1991
Senior Partner, Richman & Smith Law Firm
Edward W. Seifert 61 1967
Attorney-at-Law, Partner, Reed, Smith, Shaw & McClay
</TABLE>
- ---------------
(1) Except for positions with Three Rivers Bancorp, all directors and nominees
have held the positions indicated or another senior executive position with
the same entity or one of its affiliates or predecessors for the past five
years.
37
<PAGE> 44
(2) Reflects the earlier of the first year as a director of USBANCORP, U.S.
Bank, Three Rivers Bank or predecessor institutions Community Bancorp, Inc.
or Johnstown Savings Bank.
BOARD COMPENSATION AND BENEFITS
Employee Directors will not receive additional compensation for serving on
the Board of Directors of Three Rivers Bancorp. Non-employee Directors of Three
Rivers Bancorp will receive an annual retainer of $6,000, payable in Three
Rivers Bancorp Common Stock. Three Rivers Bancorp will also pay the premiums on
directors' and officers' liability and business travel accident insurance
policies covering the Directors. In addition, non-employee directors will
receive cash compensation of $550 per meeting for attendance at Three Rivers
Bancorp Board of Directors meetings. A fee of $400 per meeting will be paid for
attendance at each meeting of any committee of such Board.
COMMITTEES OF THE BOARD
It is anticipated that Three Rivers Bancorp will establish Audit,
Compensation and Nominating Committees of the Board. It is also anticipated that
all members of such committees will be non-employee Directors.
Audit Committee. The Audit Committee will: (i) recommend to the Board the
selection, retention or termination of Three Rivers Bancorp's independent
auditors; (ii) approve the level of non-audit services provided by the
independent auditors; (iii) review the scope and results of the work of Three
Rivers' internal audit service providers; (iv) review the scope and approve the
estimated cost of the annual audit; (v) review the annual financial statements
and the results of the audit with management and the independent auditors; (vi)
review with management and the independent auditors the adequacy of Three
Rivers' system of internal accounting controls; (vii) review with management and
the independent auditors the significant recommendations made by the auditors
with respect to changes in accounting procedures and internal accounting
controls; and (viii) report to the Board on the results of its review and make
such recommendations as it may deem appropriate. The Audit Committee consists of
directors Butler (Chairman), Fennell, Guy, Kappel, Adams and Sevy.
Compensation Committee. The Compensation Committee will review and approve
the compensation of the senior executives of Three Rivers. This committee will
also administer Three Rivers Bancorp's Long-Term Incentive Plan and its Stock
Option Plan. See "New Stock-Based and Incentive Plans of Three Rivers." The
Compensation Committee will consist of Directors Barton (Chairman), Fennell,
Harper and Zappala.
Nominating Committee. The Nominating Committee will: (i) identify suitable
candidates for Board membership and in such capacity will consider nominees
recommended by shareholders; (ii) propose to the Board a slate of directors for
election by the shareholders at each annual meeting; and (iii) propose
candidates to fill vacancies on the Board based on qualifications it determines
to be appropriate. The Board of Directors has not yet elected the members of the
Nominating Committee.
EXECUTIVE OFFICERS
The following persons are expected to serve as executive officers of Three
Rivers as of the Distribution Date:
<TABLE>
<CAPTION>
NAME TITLE
- ---- -----
<S> <C>
Terry K. Dunkle......................... Chairman and Chief Executive Officer
W. Harrison Vail........................ Vice Chairman, President and COO
Harry G. King........................... Senior Vice President, Support Services
Vincent Locher.......................... Senior Vice President and Chief Commercial Loan Officer
Gary McKeown............................ Senior Vice President and Chief Credit Officer
Anthony M. V. Eramo..................... Vice President and Chief Financial Officer
</TABLE>
38
<PAGE> 45
STOCK OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning Three Rivers Bancorp
Common Stock that is expected to be beneficially owned by each of Three Rivers
Bancorp's directors, by each of Three Rivers Bancorp's executive officers and by
all directors and executive officers as a group. The projections are based upon
the number of shares of USBANCORP Common Stock held by the individuals and the
group at March 24, 2000. Except for Mr. Barton, who will own 1.4% of the Three
Rivers Bancorp Common Stock issued and outstanding on the Distribution Date,
none of the following persons will hold in excess of 1% of such stock. The
directors and officers as a group will hold 2.8% of the Three Rivers Bancorp
Common Stock issued and outstanding on the Distribution Date.
<TABLE>
<CAPTION>
PROJECTED NUMBER
BENEFICIAL OWNER(1)(2) OF SHARES(3)
- ---------------------- ----------------
<S> <C>
Clifford A. Barton.......................................... 95,476
Terry K. Dunkle............................................. 25,986
Richard W. Kappel........................................... 16,006
Michael F. Butler........................................... 15,243
W. Harrison Vail............................................ 10,379
Jerome M. Adams............................................. 8,934
Jack Sevy................................................... 3,701
Edward W. Seifert........................................... 3,454
J. Terrence Farrell......................................... 820
Stephen I. Richman.......................................... 729
Marylouise Fennell.......................................... 0
James R. Ferry.............................................. 450
Steven J. Guy............................................... 0
I.N. Rendall Harper, Jr..................................... 0
Charles R. Zappala.......................................... 0
Vincent Locher.............................................. 1,311
Harry G. King............................................... 1,282
All Directors and Executive Officers as a Group (19
persons).................................................. 185,868
</TABLE>
- ---------------
(1) Amounts are based on information furnished to the Securities and Exchange
Commission or USBANCORP by the respective individuals, and on the books and
records of USBANCORP. For the purposes of this Information Statement, shares
are deemed to be beneficially owned by a person if he or she directly or
indirectly has or shares the power to vote or dispose of the shares, whether
or not he or she has any economic interest in the shares. For purposes of
this Information Statement, a person is deemed to beneficially own shares of
Three Rivers Bancorp Common Stock which may be received upon the exercise of
outstanding stock options granted under USBANCORP's 1991 Stock Option Plan
if the option is exercisable within 60 days. As of the Distribution Date,
these options will be converted into options to acquire Three Rivers Bancorp
Common Stock. See "USBANCORP Stock Option Conversion."
(2) Except as noted below, each of the identified beneficial owners, including
the officers and directors as a group, has sole investment and voting power
as to all the shares shown as beneficially owned with the exception of those
held by certain officers and directors jointly with their spouses or
directly by their spouses or other relatives.
(3) Includes shares of Three Rivers Bancorp Common Stock that may be acquired
within sixty (60) days of the Record Date upon the exercise of presently
exercisable stock options as follows: 33,428, 22,170, 910, 1,200 and 68,582
held by Messrs. Dunkle, Vail, Locher, King and the group, respectively. Also
includes 1,500 and 1,000 shares of Three Rivers Bancorp Common Stock subject
to restriction held by Messrs. Dunkle and Vail, respectively, pursuant to
restricted stock awards made in January 1998 that vest ratably over a three
year period.
39
<PAGE> 46
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------ --------------------------------------
AWARDS PAYOUTS
----------------------- ------------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
STOCK OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION(1) YEAR SALARY($) BONUS($)(2) AWARDS(3) (#)(4) ($)(5)(6)(7)
- ------------------------------ ---- --------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Terry K. Dunkle 1999 340,042 58,837 -- -- 27,050
Chairman of the Board and 1998 330,060 65,649 109,477 -- 26,159
Chief Executive Officer 1997 294,833 113,107 -- 30,000 29,809
W. Harrison Vail 1999 181,500 27,951 -- -- 14,647
Vice Chairman of the Board 1998 165,000 29,172 72,984 -- 10,547
and President 1997 145,000 50,263 -- 18,000 9,701
Vincent Locher 1999 93,500 15,766 -- -- 11,230
Senior Vice President and 1998 85,000 8,426 -- -- 4,878
Chief Commercial Loan Officer 1997 65,000 14,935 -- 1,000 2,808
Harry G. King 1999 94,050 14,919 -- -- 10,366
Senior Vice President, 1998 90,000 8,021 -- -- 6,225
Support Services 1997 79,125 17,189 -- -- 5,624
</TABLE>
- ---------------
(1) Includes the cash and cash value of stock awards made to executive officers
of USBANCORP and its subsidiaries under USBANCORP's Executive Annual
Incentive Plan.
(2) Unless otherwise indicated, no executive officer named in the Summary
Compensation Table received personal benefits or perquisites in excess of
the lesser of $50,000 or 10% of the officer's total compensation (salary and
bonus).
(3) At the end of 1999, Messrs. Dunkle and Vail held 4,500 and 3,000 restricted
shares of USBANCORP Common Stock worth $54,000 and $36,000, respectively.
The restrictions on such shares lapse in three equal annual increments on
the anniversaries of the award. Dividends are accrued and distributed when
restrictions lapse on the corresponding shares. Amounts have been adjusted
to reflect USBANCORP's July 1998 three-for-one stock split.
(4) Options were granted during 1997 under the 1991 Stock Option Plan to the
Named Officers. The options granted in 1997 were cancelled effective
November 23, 1999.
(5) Includes amounts awarded under the Profit Sharing Plan of USBANCORP and U.S.
Bank. All full-time employees of USBANCORP and U.S. Bank are entitled to
participate in the Profit Sharing Plan. A contribution during any plan year
is based on both net income and capital as defined in the Plan.
(6) Includes (a) the value of the premium paid by USBANCORP of $10,000 for a
split dollar life insurance policy for Mr. Dunkle, (b) the premiums paid by
USBANCORP and its subsidiaries for life insurance policies with cover-age
limits above $50,000 to Messrs. Dunkle, Vail, Locher and King, and (c)
country club dues for Messrs. Dunkle, Vail, Locher and King.
(7) Includes amounts contributed under the 401(k) Plan of USBANCORP to Messrs.
Vail, Locher and King. Under the USBANCORP sponsored 401(k) plan, employees
of Three Rivers Bank are allowed to contribute up to 20% of their
compensation to the plan with an employer match of $.50 on each $1.00 of
employee contribution up to a maximum of 6% of an employee's compensation.
40
<PAGE> 47
USBANCORP OPTION GRANTS IN LAST FISCAL YEAR
No grants of stock options were made in 1999 by USBANCORP to the named
executive officers.
AGGREGATED USBANCORP OPTION EXERCISES
IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FY-END(3)
ACQUIRED ON VALUE ------------------------------ ------------------------------
NAME EXERCISE(#)(1) REALIZED(2) EXERCISABLE(1) UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE
- ---- -------------- ----------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Terry K. Dunkle 6,302 $53,463 $66,856 $0 $143,397 $0
W. Harrison Vail 2,100 21,143 44,340 0 117,621 0
Vincent Locher 180 595 1,821 0 0 0
Harry G. King 0 0 2,400 0 3,856 0
</TABLE>
- ---------------
(1) Reflects shares of USBANCORP Common Stock received or receivable upon the
exercise of outstanding options. These options will be converted into
options to acquire Three Rivers Bancorp Common Stock. See "USBANCORP Stock
Option Conversion."
(2) Represents the aggregate market value of the underlying shares of USBANCORP
Common Stock at the date of exercise minus the aggregate exercise prices for
options exercised.
(3) "In the money options" are stock options with respect to which the market
value of the underlying shares of USBANCORP Common Stock exceeded the
exercise price at December 31, 1999. The value of such options is determined
by subtracting the aggregate exercise price for such options from the
aggregate fair market value of the underlying shares of USBANCORP Common
Stock on December 31, 1999. Fair market value was determined by reference to
the average of the high and low sale prices of USBANCORP Common Stock as
quoted on the Nasdaq Stock Market.
PENSION PLAN
Three Rivers Bank maintains a qualified defined benefit retirement plan for
its employees (the "TRB Pension Plan"). Remuneration for pension benefit
purposes is base pay, excluding overtime, bonus or reimbursement of business
expense. An employee's benefit under the TRB Pension Plan is determined on the
basis of "Final Average Pay," which means the highest average annual base salary
received by an employee for any five consecutive year period during the ten-year
period ending on the date of his or her termination of employment.
Three Rivers Bank expects to make a contribution of $865,000 in 2000 for
the 1999 plan year.
41
<PAGE> 48
Estimated annual benefits payable upon retirement at age 65 after 15 years
of service with respect to the specified remuneration are as follows:
PENSION TABLE
<TABLE>
<CAPTION>
FIVE CALENDAR YEAR
AVERAGE SALARY ANNUAL BENEFIT AT
PRECEDING RETIREMENT NORMAL RETIREMENT DATE
- -------------------- ----------------------
<S> <C>
$ 15,000 $ 5,550
25,000 9,250
40,000 14,800
60,000 22,200
90,000 33,300
100,000 37,000
120,000 44,400
140,000 51,800
150,000(1) 55,500
</TABLE>
- ---------------
(1) Effective for retirements on or after January 1, 1994, annual compensation
for Plan purposes may not exceed $150,000 plus any increases applicable to
cost of living adjustments. Employees with compensation exceeding $150,000
in years before 1994 may have larger "preserved benefits."
The above benefits are paid for the life of the employee with a right of
survivorship with respect to ten years of post-retirement benefits. Other
optional forms of benefit are available in actuarially equivalent amounts.
Current remuneration covered by the TRB Pension Plan in 1999 for Messrs. Vail,
Locher and King was $181,500, $93,500 and $94,050, respectively, subject to the
$150,000 limitation. Under the TRB Pension Plan, Messrs. Vail, Locher and King
had 15, 11 and 27 years of credited service, respectively, as of December 31,
1999.
Mr. Dunkle is currently a participant in USBANCORP's Pension Plan, rather
than the TRB Pension Plan. As of the Distribution Date, Mr. Dunkle will become a
participant in the TRB Pension Plan. Current remuneration in 1999 which was
covered by the USBANCORP Pension Plan for Mr. Dunkle was $340,042, subject to
the $150,000 limitation. Under such plan, Mr. Dunkle had 12 years of credited
service as of December 31, 1999.
CHANGE IN CONTROL AGREEMENTS
Three Rivers Bancorp intends to enter into Change in Control Agreements
with Messrs. Dunkle, Vail and Locher under which Three Rivers Bancorp will agree
to provide the executives with severance benefits upon the occurrence of certain
enumerated events ("Triggering Events") following a change in control of Three
Rivers Bancorp ("Change in Control") (as defined in the Agreements). The initial
term of the Agreements is expected to be three years, subject to an automatic
one year extension on each anniversary date thereof, unless either party gives
notice to the other of an intention not to renew. Under the Agreements, upon the
occurrence of a Triggering Event following a Change in Control, Mr. Dunkle will
be entitled to receive approximately 2.99 times his combined salary and bonus
which will be determined (a) during the initial three year term of the Agreement
by reference to his highest salary and bonus paid in the year in which he is
terminated or in any one of the last five fiscal years preceding such
termination, and (b) after the expiration of the initial term, by reference to
the average of the executive's combined salary and bonus in the preceding five
years. Under the Change in Control Agreement for Mr. Vail, Mr. Vail will be
entitled to receive 1.5 times his annual combined base salary and bonus. Under
the Change in Control Agreement for Mr. Locher, Mr. Locher will be entitled to
receive an amount equal to an amount equal to his annual combined salary and
bonus. The executives, in their discretion, may receive these payments in a lump
sum or on a monthly installment basis. The Change in Control Agreements will
also entitle the executives to continued participation in the employee benefits
plans of Three Rivers Bancorp for a period of three years with respect to Mr.
Dunkle, eighteen months with respect
42
<PAGE> 49
to Mr. Vail and one year with respect to Mr. Locher. In addition, the Agreements
will provide that options held by the executives to acquire Three Rivers Bancorp
Common Stock, to the extent not currently exercisable, will become immediately
exercisable upon the occurrence of a Triggering Event following a Change in
Control, and may be exercised by the executives at any time prior to the earlier
of the expiration date of the options or 90 days after the executive's
termination. The Agreements will also require Three Rivers Bancorp to make
additional payments to the executives in the event that the severance payments
described above result in the imposition of an excise tax, pursuant to Section
4999 of the Internal Revenue Code of 1986 on the payment of such amounts.
TRANSACTIONS WITH MANAGEMENT
Certain directors, nominees and executive officers and/or their associates
were customers of and had transactions with Three Rivers Bank or its
subsidiaries during 1999. Transactions that involved loans or commitments by the
Bank were made in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and did not involve more than
the normal risk of collectability or present other unfavorable features. These
loans represented in the aggregate less than 2.0% of the Bank's shareholders'
equity as of December 31, 1999.
Mr. Adams, a director of Three Rivers Bancorp and Three Rivers Bank, is a
partner in a law firm that rendered services to Three Rivers Bank during 1999
and will render such services in 2000.
NEW STOCK-BASED AND INCENTIVE PLANS OF THREE RIVERS BANCORP
THREE RIVERS BANCORP LONG-TERM INCENTIVE PLAN
Generally. The Three Rivers Bancorp Long-Term Incentive Plan (the "Three
Rivers LTIP") is expected to be approved prior to the Distribution Date by the
Three Rivers Bancorp Board of Directors and by USBANCORP as the sole shareholder
of Three Rivers Bancorp. The Three Rivers LTIP is expected to provide for the
grant of various types of long-term incentive awards to key employees,
consistent with the objectives and limitations of Three Rivers LTIP. These
awards may include non-qualified options to purchase shares of Three Rivers
Common Stock, incentive stock options, stock appreciation rights and restricted
stock grants.
Administration. The Three Rivers LTIP is expected to vest broad powers in
the Compensation Committee (the "Compensation Committee") of Three Rivers
Bancorp Board of Directors to administer and interpret the Three Rivers LTIP.
The Compensation Committee's powers are expected to include authority, within
the limitations set forth in the Three Rivers LTIP, to select the persons to be
granted awards, to determine terms and conditions of awards, including but not
limited to the type, size and term of awards, to determine the time when awards
will be granted and any conditions for receiving awards, to establish objectives
and conditions for earning awards, to determine whether such conditions have
been met and whether payment of an award will be made at the end of an award
period, or at the time of exercise, or deferred, to determine whether payment of
an award should be reduced or eliminated, and to determine whether such awards
should be intended to qualify, regardless of their amount, as deductible for
U.S. Federal income tax purposes. The Three Rivers LTIP is also expected to
generally vest broad powers in the Compensation Committee to amend and terminate
the Three Rivers LTIP.
Eligibility. Key employees of Three Rivers Bancorp and its divisions,
subsidiaries and affiliates are expected to be eligible to be granted awards
under the Three Rivers LTIP. The Compensation Committee may also grant awards to
employees of a joint venture or other business in which Three Rivers Bancorp has
a substantial investment, and may make awards to non-executive employees who are
in a position to contribute to the success of Three Rivers Bancorp.
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THREE RIVERS EXECUTIVE INCENTIVE COMPENSATION PLAN
Generally. The Three Rivers' Executive Incentive Compensation Plan (the
"Three Rivers Incentive Plan") is expected to be approved prior to the
Distribution Date by the Three Rivers Bancorp Board of Directors and by
USBANCORP as the sole shareholder of Three Rivers Bancorp. The Three Rivers
Incentive Plan is expected to provide for officers of Three Rivers and its
divisions and subsidiaries to be granted annual cash or stock incentive awards
consistent with the objectives and limitations of the Three Rivers Incentive
Plan.
Administration. The Three Rivers Incentive Plan is expected to vest broad
powers in the Compensation Committee to administer and interpret the Three
Rivers Incentive Plan. The Compensation Committee's powers are expected to
include authority, within the limitations set forth in the Three Rivers
Incentive Plan, to select the persons to be granted awards, to determine the
time when awards will be granted, to determine and certify whether objectives
and conditions for earning awards have been met, to determine whether payment of
an award will be made at the end of an award period or deferred, and to
determine whether an award or payment of an award should be reduced or
eliminated. The Three Rivers Incentive Plan is also expected to generally vest
broad powers in the Compensation Committee to amend and terminate the Three
Rivers Incentive Plan.
Eligibility. At the discretion of the Compensation Committee, executive
officers of Three Rivers are expected to be granted, and other officers of Three
Rivers, its divisions and subsidiaries may be granted, annual incentive awards
under the Three Rivers Incentive Plan.
SUCCESSOR PLANS
On or prior to the Distribution Date, the Company intends to adopt a stock
option plan with terms substantially similar to the USBANCORP 1991 Stock Option
Plan (the "USBANCORP SOP") for the purpose of continuing the stock options which
were granted under the USBANCORP SOP. These options will be converted into
options to purchase Three Rivers Bancorp Common Stock. See "USBANCORP Stock
Option Conversion." It has not yet been determined whether any new grants will
be made under this new plan.
USBANCORP STOCK OPTION CONVERSION
Effective on the Distribution Date, holders of outstanding options to
purchase USBANCORP Common Stock will have their interests adjusted as described
below. The Compensation Committee of USBANCORP's Board of Directors has approved
formulas to adjust the exercise price and award size of USBANCORP stock options
pursuant to the terms and provisions of each such grant and the relevant plan.
The adjustment formulas are intended to maintain the value of the outstanding
USBANCORP stock options at the time of adjustment.
Employees of Three Rivers who received USBANCORP stock options shall have
such USBANCORP stock options entirely converted into options to purchase Three
Rivers Bancorp Common Stock pursuant to one of two methods to be selected by the
employee. Under the first method, the exercise price of each such Three Rivers
stock option shall equal the exercise price of the corresponding USBANCORP stock
option prior to the Distribution, multiplied by a factor (the "Three Rivers
Stock Conversion Ratio") in which the numerator is the composite volume weighted
average price of Three Rivers Bancorp Common Stock (trading on a "when issued"
basis) for the trading days during a pricing period to be determined at a future
date by the USBANCORP Board of Directors (the "Per Share Three Rivers Stock
Price") and the denominator is the composite volume weighted average price of
USBANCORP Common Stock trading with Three Rivers for the trading days during the
pricing period (the "Per Share Pre-Split USBANCORP Stock Price"). The pricing
period will occur prior to the Distribution, except that if Three Rivers Bancorp
Common Stock does not trade on a "when issued" basis, the pricing period for
determining the numerator of the above-described fraction will be soon after the
Distribution Date. The number of shares of Three Rivers Bancorp Common Stock
subject to each such Three Rivers stock option shall equal the number of shares
subject to the corresponding USBANCORP stock option prior to the Distribution
divided by the Three Rivers Stock
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Conversion Ratio. All other terms of such Three Rivers stock options shall be
the same as the terms of the USBANCORP stock options from which they were
converted.
Employees of Three Rivers who have received USBANCORP stock options and who
have elected the alternative method of conversion will have their options (in
whole or in part) converted by the following method. The exercise price of each
such Three Rivers Bancorp stock option shall equal the composite volume weighted
average price of Three Rivers Bancorp Common Stock (trading on a "when issues"
basis). The pricing period will occur prior to the Distribution, except that if
Three Rivers Bancorp Common Stock does not trade on a "when issued" basis, the
pricing period for determining the exercise price will be soon after the
Distribution Date. The number of shares of Three Rivers Bancorp Common Stock
subject to each such Three Rivers Bancorp stock option shall equal the number of
shares required to keep the total fair value of the converted options equal to
the total fair value of the options on a pre-Distribution basis.
Employees of USBANCORP who will continue to be employed by USBANCORP after
the Distribution Date and hold any USBANCORP stock options, and holders of any
USBANCORP stock options who retire or have retired from USBANCORP on or during
the three months prior to the Distribution Date, shall retain such options to
purchase USBANCORP Common Stock, subject to the adjustments to the exercise
price and number of shares subject to each such option under one of two methods.
Under the first method, the exercise price of each adjusted USBANCORP Stock
Option shall be determined by multiplying the USBANCORP stock option exercise
price prior to the Distribution by a factor (the "USBANCORP Stock Conversion
Ratio") where the numerator is the composite volume weighted average price of
USBANCORP Common Stock trading without Three Rivers for the trading days during
the pricing period (the "Per Share Post-Split USBANCORP Stock Price") and the
denominator is the Per Share Pre-Split USBANCORP Stock Price. The number of
shares of USBANCORP Common Stock subject to each adjusted USBANCORP stock option
shall equal the number of shares subject to such USBANCORP stock option prior to
the Distribution divided by the USBANCORP Stock Conversion Ratio.
Under the second method, the exercise price of outstanding USBANCORP
options will be adjusted by the USBANCORP Stock Conversion Ratio. The number of
USBANCORP options will remain the same. Options to purchase Three Rivers Bancorp
Common Stock will be issued -- one for every two USBANCORP shares covered by the
option. The exercise price of the Three Rivers Bancorp options will be set by
multiplying the Three Rivers Stock Conversion Ratio by the corresponding
USBANCORP option exercise price.
Either of these methods will preserve (and not increase) the intrinsic
value of outstanding USBANCORP stock options. All other terms of the adjusted
USBANCORP options shall be the same as the terms of the pre-adjusted USBANCORP
options.
CERTAIN RESTRICTIONS ON ACQUISITION OF THREE RIVERS BANCORP
PENNSYLVANIA LAW
The Pennsylvania Business Corporation Law contains certain provisions
applicable to Three Rivers Bancorp that may have the effect of impeding a change
in control of Three Rivers Bancorp.
Chapter 25 of the Pennsylvania Business Corporation Law contains certain
"anti-takeover" provisions which apply to a "registered corporation," unless the
registered corporation elects not to be governed by such provisions. Three
Rivers Bancorp will be a "registered corporation" within the meaning of Chapter
25 of the Pennsylvania Business Corporation Law because the Three Rivers Bancorp
Common Stock is entitled to vote generally in the election of directors and will
be registered under the Securities Exchange Act of 1934, as amended. The
relevant provisions are contained in Subchapters 25E through 25H of the
Pennsylvania Business Corporation Law.
Subchapter 25E of the Pennsylvania Business Corporation Law (relating to
control transactions) provides that if any person or group acquires 20% or more
of the voting power of a covered corporation, the
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remaining shareholders may demand from such person or group the fair value of
their shares, including a proportionate amount of any control premium.
Subchapter 25F of the Pennsylvania Business Corporation Law (relating to
business combinations) delays for five years and imposes conditions upon
"business combinations" between an "interested shareholder" and the corporation.
The term "business combination" is defined broadly to include various
transactions utilizing a corporation's assets for purchase price amortization or
refinancing purposes. For this purpose, an "interested shareholder" is defined
generally as the beneficial owner of at least 20% of a corporation's voting
shares.
Subchapter 25G of the Pennsylvania Business Corporation Law (relating to
control-share acquisitions) prevents a person who has acquired 20% or more of
the voting power of a covered corporation from voting such shares unless the
"disinterested" shareholders approve such voting rights. Failure to obtain such
approval exposes the owner to the risk of a forced sale of the shares to the
issuer.
Subchapter 25H of the Pennsylvania Business Corporation Law (relating to
disgorgement) applies in the event that (i) any person or group publicly
discloses that the person or group may acquire control of the corporation or
(ii) a person or group acquires (or publicly discloses an offer or intent to
acquire) 20% or more of the voting power of the corporation and, in either case,
sells shares within 18 months thereafter. Any profits from sales of equity
securities of the corporation received by the person or group during such
18-month period belong to the corporation if the securities that were sold were
acquired during the 18-month period or within 24 months prior thereto.
Subchapter 25I of the Pennsylvania Business Corporation Law (relating to
severance payments) provides for a minimum severance payment to certain
employees terminated within two years of the approval of a control-share
acquisition under Subchapter 25G of the Pennsylvania Business Corporation Law.
Subchapter 25J of the Pennsylvania Business Corporation Law (relating to labor
contracts) prohibits, in connection with a control-share acquisition under
Subchapter 25G of the Pennsylvania Business Corporation Law, the abrogation of
certain labor contracts, if any, prior to their stated date of expiration.
Three Rivers Bancorp has elected not to "opt out" of coverage under
Subchapter 25 of the Pennsylvania Business Corporation Law, and therefore, the
foregoing provisions of Subchapter 25 will be applicable to Three Rivers
Bancorp. Subchapters 25E through 25H of the Pennsylvania Business Corporation
Law contain a wide variety of transactional and status exemptions, exclusions
and safe harbors.
In addition to the foregoing, the Pennsylvania Business Corporation Law (a)
provides that the Board of Directors can consider the effects of any action upon
any or all groups affected by such action, including shareholders, employees,
suppliers, customers, creditors and local communities, in determining whether a
certain action is in the best interests of the corporation; (b) provides that
the Board of Directors need not consider the interests of any particular group
as dominant or controlling; (c) provides that directors, in order to satisfy the
presumption that they have acted in the best interests of the corporation, need
not satisfy any greater obligation or higher burden of proof with respect to
actions relating to an acquisition or potential acquisition of control; (d)
provides that actions relating to acquisitions of control that are approved by a
majority of "disinterested directors" are presumed to satisfy the directors'
standard unless it is proven by clear and convincing evidence that the directors
did not assent to such action in good faith after reasonable investigation; and
(e) provides that the fiduciary duty of directors is solely to the corporation
and may be enforced by the corporation or by a shareholder in a derivative
action, but not by a shareholder directly.
The Pennsylvania Business Corporation Law also explicitly provides that the
fiduciary duty of directors shall not be deemed to require directors (a) to
redeem any rights under, or to modify or render inapplicable, any shareholder
rights plan; (b) to render inapplicable, or make determinations under,
provisions of the Pennsylvania Business Corporation Law relating to control
transactions, business combinations, control-share acquisitions or disgorgement
by certain controlling shareholders following attempts to acquire control; or
(c) to act as the board of directors, a committee of the board or an individual
director solely because of the effect such action might have on an acquisition
or potential or proposed acquisition of control of the corporation or the
consideration that might be offered or paid to shareholders in such an
acquisition. One of
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the effects of these fiduciary duty provisions may be to make it more difficult
for a shareholder to successfully challenge the actions of the Three Rivers
Bancorp Board of Directors in a potential change in control context.
Pennsylvania case law appears to provide that the fiduciary duty standard under
the Pennsylvania Business Corporation Law grants directors the statutory
authority to reject or refuse to consider any potential or proposed acquisition
of the corporation.
CERTAIN ANTI-TAKEOVER PROVISIONS IN THE ARTICLES OF INCORPORATION AND BYLAWS
While the Board of Directors of Three Rivers Bancorp is not aware of any
effort that might be made to obtain control of Three Rivers after the
Distribution, the Board believes that it is appropriate to include certain
provisions as part of Three Rivers' Articles of Incorporation to protect the
interests of Three Rivers and its shareholders from hostile takeovers that the
Board might conclude are not in the best interests of Three Rivers or its
shareholders. These provisions may have the effect of discouraging a future
takeover attempt that is not approved by the Board but which individual
shareholders may deem to be in their best interests or in which shareholders may
receive a substantial premium for their shares over the then current market
price. As a result, shareholders who might desire to participate in such a
transaction may not have an opportunity to do so. Such provisions will also
render the removal of Three Rivers' Board of Directors or management more
difficult.
The following discussion is a general summary of certain provisions of the
Articles of Incorporation and the Bylaws of Three Rivers Bancorp that may be
deemed to have such an "anti-takeover" effect. The description of these
provisions is necessarily general and reference should be made in each case to
the Articles of Incorporation and Bylaws of Three Rivers Bancorp. For
information regarding how to obtain a copy of these documents without charge,
see "Available Information."
Classified Board of Directors and Related Provisions:
The Three Rivers Bancorp Articles of Incorporation provide that the Board
of Directors is to be divided into three classes which shall be as nearly equal
in number as possible. The directors in each class will hold office following
their initial appointment to office for terms of one year, two years and three
years, respectively, and, upon reelection, will serve for terms of three years
thereafter. Each director will serve until his or her successor is elected and
qualified. The Articles provide that a director may be removed by shareholders
only upon the affirmative vote of at least a majority of the votes which all
shareholders would be entitled to cast. The Articles further provide that any
vacancy occurring in the Board of Directors, including a vacancy created by an
increase in the number of directors, may be filled for the remainder of the
unexpired term by a majority vote of the directors then in office.
A classified board of directors could make it more difficult for
shareholders, including those holding a majority of the outstanding shares of
Three Rivers Bancorp Common Stock, to force an immediate change in the
composition of a majority of the Board of Directors. Because the terms of only
one-third of the incumbent directors expire each year, it requires at least two
annual elections for the shareholders to change a majority, whereas a majority
of a non-classified board may be changed in one year. In the absence of the
provisions of the Articles classifying the Board, all of the directors would be
elected each year.
Management of the Three Rivers Bancorp believes that the staggered election
of directors tends to promote continuity of management because only one-third of
the Board of Directors is subject to election each year. Staggered terms
guarantee that in the ordinary course approximately two-thirds of the Directors,
or more, at any one time have had at least one year's experience as directors of
Three Rivers, and moderate the pace of change in the composition of the Board of
Directors by extending the minimum time required to elect a majority of
Directors from one to two years.
OTHER ANTITAKEOVER PROVISIONS
The Articles of Incorporation and Bylaws of Three Rivers Bancorp contain
certain other provisions that may also have the effect of deterring or
discouraging, among other things, a non-negotiated tender or exchange offer for
the Three Rivers Bancorp Common Stock, a proxy contest for control of Three
Rivers Bancorp, the
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assumption of control of Three Rivers Bancorp by a holder of a large block of
the Three Rivers Bancorp Common Stock and the removal of Three Rivers
management. These provisions: (1) empower the Board of Directors, without
shareholder approval, to issue preferred stock, the terms of which, including
voting power, are set by the Board; (2) restrict the ability of shareholders to
remove directors; (3) require that shares with at least 80% of total voting
power approve mergers and other similar transactions if the transaction is not
approved, in advance, by the Board of Directors; (4) prohibit shareholders'
actions without a meeting; (5) eliminate the right of shareholders to call a
special meeting; (6) require that shares with at least 80%, or in certain
instances a majority, of total voting power approve the repeal or amendment of
Three Rivers' Articles of Incorporation; (7) require any person who acquires
stock of Three Rivers Bancorp with voting power of 25% or more to offer to
purchase for cash all remaining shares of Three Rivers Bancorp voting stock at
the highest price paid by such person for shares of Three Rivers Bancorp voting
stock during the preceding year; (8) limit the right of a person or entity to
vote more than 10% of the outstanding voting stock of Three Rivers Bancorp; and
(9) require that shares with at least 66 2/3% of the total voting power of Three
Rivers Bancorp voting stock approve any repeal or amendment of Three Rivers'
Bylaws.
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DESCRIPTION OF THREE RIVERS BANCORP CAPITAL STOCK
Under Three Rivers Bancorp's Articles of Incorporation, which have been
filed as an exhibit to the Registration Statement of which this Information
Statement forms a part, Three Rivers' authorized capital stock consists of
25,000,000 shares, of which 20,000,000 shall be Common Stock and 5,000,000 shall
be preferred stock ("Preferred Stock"). Based on 13,307,474 shares of USBANCORP
Common Stock outstanding as of March 6, 2000, and a distribution ratio of one
share of Three Rivers Bancorp Common Stock for every two shares of USBANCORP
Common Stock outstanding, it is expected that approximately 6,653,737 shares of
Three Rivers Bancorp Common Stock will be distributed to holders of USBANCORP
Common Stock. No Preferred Stock will be distributed to USBANCORP shareholders
in connection with the Distribution.
COMMON STOCK
Voting Rights:
Each share of the Three Rivers Bancorp Common Stock will have the same
relative rights and will be identical in all respects with every other share of
Three Rivers Bancorp Common Stock. The holders of Three Rivers Bancorp Common
Stock will possess exclusive voting rights in the Company, except to the extent
that shares of preferred stock issued in the future may have voting rights, if
any. Each holder of shares of Three Rivers Bancorp Common Stock will be entitled
to one vote for each share held of record on all matters submitted to a vote of
holders of shares of Three Rivers Bancorp Common Stock. Holders of Three Rivers
Bancorp Common Stock will not be entitled to cumulate their votes for election
of directors.
Dividends:
The payment and amount of cash dividends declared by Three Rivers Bancorp
after the Distribution will be subject to the discretion of the Three Rivers
Bancorp Board of Directors. Dividend decisions will be based on a number of
factors, including Three Rivers' consolidated operating results and financial
condition, tax considerations, industry standards, economic conditions,
regulatory restrictions, general business practices and other factors.
We do not presently anticipate that Three Rivers Bancorp will conduct
significant operations independent of those of Three Rivers Bank for a
substantial period of time following the Distribution. Therefore, we do not
expect Three Rivers Bancorp to have any significant source of income other than
dividends from Three Rivers Bank, if any. Consequently, Three Rivers Bancorp's
ability to pay cash dividends to its shareholders will be dependent upon the
ability of Three Rivers Bank to pay dividends to Three Rivers Bancorp.
The Pennsylvania Banking Code provides that cash dividends may be declared
and paid only out of accumulated net earnings and that, prior to the declaration
of any dividend, if the surplus of a bank is less than the amount of its
capital, the bank shall, until its surplus is equal to its capital, transfer to
its surplus an amount that is at least ten percent (10%) of the net earnings of
the bank for the period since the end of its last fiscal year or for any shorter
period since the bank's most recent declaration of a dividend. The Pennsylvania
Banking Code further provides that if the surplus of a bank is less than fifty
percent (50%) of the amount of its capital, no dividends may be declared or paid
by the bank without the prior approval of the Pennsylvania Banking Department
until the bank's surplus is equal to or greater than fifty percent (50%) of the
bank's capital.
Three Rivers Bancorp is subject to the Pennsylvania Business Corporation
Law which permits dividends or distributions to be paid as long as the
corporation will be able to pay its debts in the ordinary course of business
after making the dividend or distribution.
Liquidation:
In the event of any liquidation, dissolution or winding up of Three Rivers
Bank, Three Rivers Bancorp, as holder of all of the capital stock of Three
Rivers Bank, would be entitled to receive all of the assets of Three Rivers Bank
after payment of all debts and liabilities of Three Rivers Bank. In the event of
a liquidation,
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dissolution or winding up of Three Rivers Bancorp, each holder of shares of
Three Rivers Bancorp Common Stock would be entitled to receive, after payment of
all debts and liabilities of Three Rivers Bancorp, a pro rata portion of all
assets of Three Rivers Bancorp available for distribution to holders of Three
Rivers Bancorp Common Stock. If any preferred stock is issued, the holders
thereof may have a priority in liquidation or dissolution over the holders of
the Three Rivers Bancorp Common Stock.
Other Characteristics:
Holders of the Three Rivers Bancorp Common Stock will not have preemptive
rights with respect to any additional shares of Three Rivers Bancorp Common
Stock that may be issued. The Three Rivers Bancorp Common Stock is not subject
to call for redemption, and the outstanding shares of Three Rivers Bancorp
Common Stock, when issued and upon receipt by Three Rivers Bancorp of the full
purchase price therefor, will be fully paid and nonassessable.
PREFERRED STOCK
None of the 5,000,000 authorized shares of preferred stock of Three Rivers
Bancorp will be issued in the Distribution. After the Distribution is completed,
the Board of Directors of Three Rivers Bancorp will be authorized, without
shareholder approval, to issue preferred stock and to fix and state voting
powers, designations, preferences or other special rights of such shares and the
qualifications, limitations and restrictions thereof. The preferred stock may
rank prior to the Three Rivers Bancorp Common Stock as to dividend rights or
liquidation preferences, or both, and may have full or limited voting rights.
Should the Board of Directors of Three Rivers Bancorp issue preferred stock, no
holder of any such stock will have any preemptive right to subscribe for or
purchase any stock or any other securities of Three Rivers Bancorp other than
such, if any, as the Board of Directors, in its sole discretion, may determine
and at such price or prices and upon such other terms as the Board of Directors,
in its sole discretion, may fix.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws of Three Rivers Bancorp provide for (1) the indemnification of
directors, officers, employees, and agents of Three Rivers Bancorp and its
subsidiaries and (2) the elimination of a director's liability for monetary
damages, in each case to the fullest extent permitted by Pennsylvania law.
Pennsylvania law provides that a Pennsylvania corporation may indemnify
directors, officers, employees, and agents of the corporation against
liabilities they may incur in such capacities for any action taken or any
failure to act, whether or not the corporation would have the power to indemnify
the person under any provision of law, unless such action or failure to act is
determined by a court to have constituted recklessness or willful misconduct.
Pennsylvania law also permits the adoption of a Bylaw amendment, approved by
shareholders, providing for the elimination of a director's liability for
monetary damages for any action taken or any failure to take any action unless
(1) the director has breached or failed to perform the duties of his/her office;
and (2) the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
Directors and officers of Three Rivers Bancorp will also be insured against
certain liabilities for their actions as such by an insurance policy obtained by
Three Rivers Bancorp.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Three Rivers Bancorp Common Stock will
be Fleet National Bank, Boston, Massachusetts.
LISTING AND TRADING OF THREE RIVERS COMMON STOCK
Prior to the date hereof, there has not been any established trading market
for Three Rivers Bancorp Common Stock. Application has been made to list the
Three Rivers Bancorp Common Stock on the Nasdaq National Market under the symbol
"TRBC." It is presently anticipated that Three Rivers Bancorp Common
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Stock will be approved for listing on the Nasdaq National Market prior to the
Distribution Date, and trading is expected to commence on a "when-issued" basis
on or after the Record Date. The term "when issued" indicates a conditional
transaction in a security authorized for issuance but not as yet actually
issued. All "when issued" transactions are on an "if" basis, to be settled if
and when the actual security is issued and the NASDAQ Stock Market directs that
the transactions are to be settled.
There can be no assurance as to the prices at which Three Rivers Bancorp
Common Stock will trade before, on or after the Distribution Date. Until Three
Rivers Bancorp Common Stock is fully distributed and an orderly trading market
develops in Three Rivers Bancorp Common Stock, the price at which such stock
trades may fluctuate significantly and may be lower or higher than the
respective price that would be expected for a fully distributed issue. Prices
for Three Rivers Bancorp Common Stock will be determined in the marketplace and
may be influenced by many factors, including (i) the depth and liquidity of the
market for Three Rivers Bancorp Common Stock, (ii) developments affecting the
business of Three Rivers Bancorp, (iii) investor perception of Three Rivers
Bancorp, and (iv) general economic and market conditions. As of March 6, 2000,
there were 5,186 holders of USBANCORP Common Stock, which approximates the
number of prospective record holders of Three Rivers Bancorp Common Stock.
Shares of Three Rivers Bancorp Common Stock distributed in the Distribution
will be freely transferable, except for securities received by persons who may
be deemed to be affiliates of Three Rivers Bancorp ("Affiliates") under the
Securities Act of 1933, as amended (the "Securities Act"). Affiliates would
generally include individuals or entities that control, are controlled by, or
are under common control with Three Rivers Bancorp and will include all
Directors and certain officers of Three Rivers. Persons who are Affiliates of
Three Rivers will be permitted to sell their shares of Three Rivers Bancorp
Common Stock only pursuant to an effective registration statement under the
Securities Act or an exemption from the registration requirements of the
Securities Act.
2001 ANNUAL MEETING AND SHAREHOLDER PROPOSALS
Three Rivers' first annual shareholders meeting after the Distribution is
expected to be held on May 3, 2001. If a shareholder wishes to have a proposal
considered at the 2001 meeting and included in the Proxy Statement for that
meeting, the proposal must be received by Three Rivers in writing on or before
December 14, 2000.
AVAILABLE INFORMATION
When the Registration Statement on Form 10, of which this Information
Statement forms a part, becomes effective, Three Rivers Bancorp will be subject
to the reporting requirements of the Securities Exchange Act of 1934, as
amended, and, in accordance therewith, will file reports, and proxy materials
with the SEC. USBANCORP currently is subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended, and, in accordance therewith,
files reports, and proxy materials with the SEC. Copies of the Form 10,
including the exhibits thereto, and the reports, proxy statements and other
information filed by Three Rivers Bancorp and USBANCORP with the SEC can then be
inspected and copied at the public reference facilities of the SEC, 450 Fifth
Street N.W., Room 1024, Washington D.C. 20549 and at the SEC's Regional Offices
at 7 World Trade Center, 13th floor, New York, NY 10048 and at 500 West Madison
Street, Suite 1400, Chicago, IL 60661. Copies of such material can be obtained
at prescribed rates from the Public Reference Section of the SEC, 450 Fifth
Street N.W., Room 1024, Washington D.C. 20549. Copies may also be obtained from
the SEC's Web Site (http://www.sec.gov).
Copies of USBANCORP's Annual Report and Form 10-K for the year ended
December 31, 1999 can be obtained free of charge from USBANCORP. Requests should
be directed to Jeffrey A. Stopko, Senior Vice President and Chief Financial
Officer, USBANCORP, Inc., P.O. Box 430, Johnstown, PA 15907-0430, telephone
(814) 533-5310.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet -- December 31, 1999 and December
31, 1998.................................................. F-2
Consolidated Statement of Income -- Fiscal years ended
December 31, 1999, December 31, 1998 and December 31,
1997...................................................... F-3
Consolidated Statement of Comprehensive Income -- Fiscal
years ended December 31, 1999, December 31, 1998 and
December 31, 1997......................................... F-4
Consolidated Statement of Stockholders' Equity -- Fiscal
years ended December 31, 1999, December 31, 1998 and
December 31, 1997......................................... F-5
Consolidated Statement of Cash Flows -- Fiscal years ended
December 31, 1999, December 31, 1998 and December 31,
1997...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Report of Independent Auditors.............................. F-30
</TABLE>
All other financial statements and schedules have been omitted since the
required information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the above listed financial statements or the notes thereto.
F-1
<PAGE> 59
THREE RIVERS BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 24,228 $ 16,169
Interest bearing deposits with banks........................ -- 2,447
Investment securities:
Available for sale........................................ 522,264 327,669
Held to maturity (market value $151,398 on December 31,
1998).................................................. -- 149,988
Loans held for sale......................................... 59 1,873
Loans....................................................... 479,761 466,413
Less: Unearned income..................................... 58 92
Allowance for loan losses................................. 5,021 6,104
Net loans................................................. 474,682 460,217
Premises and equipment...................................... 5,495 4,489
Accrued income receivable................................... 7,504 7,030
Goodwill and core deposit intangibles....................... 2,838 1,772
Bank owned life insurance................................... 12,411 11,859
Other assets................................................ 16,255 2,073
Net assets of discontinued mortgage banking operations...... 10,426 10,455
Total Assets...................................... $1,076,162 $996,041
LIABILITIES
Non-interest bearing deposits............................... $ 84,643 $ 84,969
Interest bearing deposits................................... 488,052 475,481
Total deposits.................................... 572,695 560,450
Federal funds purchased and securities sold under agreements
to repurchase............................................. 10,000 18,305
Other short-term borrowings................................. 16,150 23,500
Advances from Federal Home Loan Bank........................ 409,876 309,891
Long-term debt.............................................. 2,368 2,576
Total borrowed funds........................................ 438,394 354,272
Other liabilities........................................... 9,280 9,833
Total Liabilities................................. 1,020,369 924,555
Commitments and contingent liabilities (Note #17)...........
STOCKHOLDERS' EQUITY
Subsidiary Equity........................................... 72,969 70,396
Accumulated other comprehensive income...................... (17,176) 1,090
Total Stockholders' Equity........................ 55,793 71,486
Total Liabilities and Stockholders' Equity........ $1,076,162 $996,041
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 60
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable................................................... $37,714 $38,923 $38,047
Tax exempt................................................ 506 613 315
Deposits with banks......................................... 24 8 12
Federal funds sold.......................................... -- 1 11
Investment securities:
Available for sale........................................ 24,309 18,480 14,560
Held to maturity.......................................... 8,263 9,901 12,158
Total Interest Income............................. 70,816 67,926 65,103
INTEREST EXPENSE
Deposits.................................................... 19,282 19,714 19,901
Federal funds purchased and securities sold under agreements
to repurchase............................................. 1,015 1,004 754
Other short-term borrowings................................. 2,222 1,768 1,499
Advances from Federal Home Loan Bank........................ 18,284 15,633 13,447
Long-term debt.............................................. 279 336 431
Total Interest Expense............................ 41,082 38,455 36,032
NET INTEREST INCOME......................................... 29,734 29,471 29,071
Provision for loan losses................................. 300 300 113
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 29,434 29,171 28,958
NON-INTEREST INCOME
Trust fees.................................................. 971 927 843
Net realized gains on investment securities................. 273 1,316 112
Net realized (losses) gains on loans held for sale.......... (35) 235 244
Wholesale cash processing fees.............................. 603 706 976
Service charges on deposit accounts......................... 1,861 1,813 1,725
Bank owned life insurance................................... 551 556 524
Other income................................................ 1,429 1,365 858
Total Non-Interest Income......................... 5,653 6,918 5,282
NON-INTEREST EXPENSE
Salaries and employee benefits.............................. 9,371 9,125 8,996
Net occupancy expense....................................... 1,831 1,807 1,823
Equipment expense........................................... 1,522 1,336 1,309
Professional fees........................................... 1,350 1,277 1,170
Supplies, postage, and freight.............................. 975 1,028 1,090
Miscellaneous taxes and insurance........................... 567 475 398
FDIC deposit insurance expense.............................. 197 196 42
Amortization of goodwill and core deposit intangibles....... 377 214 263
Other expense............................................... 4,837 4,862 4,507
Total Non-Interest Expense........................ 21,027 20,320 19,598
INCOME BEFORE INCOME TAXES.................................. 14,060 15,769 14,642
Provision for income taxes................................ 4,090 4,762 4,522
INCOME FROM CONTINUING OPERATIONS........................... 9,970 11,007 10,120
Income (loss) from Discontinued Mortgage Banking Operations,
Provision for income taxes................................ (30) 252 1,286
Net Income........................................ 9,940 11,259 11,406
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 61
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
COMPREHENSIVE INCOME
Net income.................................................. $ 9,940 $11,259 $11,406
Other comprehensive income, before tax:
Unrealized holding (losses) gains arising during period... (25,486) 826 1,730
Less: Reclassification adjustment for gains included in net
income.................................................... (273) (1,316) (112)
-------- ------- -------
Other comprehensive (loss) income, before tax............... (25,759) (490) 1,618
Income tax (credit) expense related to items of other
comprehensive income...................................... (7,493) (148) 500
-------- ------- -------
Other comprehensive (loss) income, net of tax............... (18,266) (342) 1,118
-------- ------- -------
Comprehensive (loss) income................................. $ (8,326) $10,917 $12,524
======== ======= =======
</TABLE>
F-4
<PAGE> 62
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
PREFERRED STOCK
Balance at beginning of period.............................. $ -- $ -- $ --
Balance at end of period.................................... -- -- --
COMMON STOCK
Balance at beginning of period.............................. 2,015 2,015 2,015
Balance at end of period.................................... 2,015 2,015 2,015
CAPITAL SURPLUS
Balance at beginning of period.............................. 20,454 13,454 13,454
Downstream dividends........................................ -- 7,000 --
Balance at end of period.................................... 20,454 20,454 13,454
RETAINED EARNINGS
Balance at beginning of period.............................. 37,472 34,937 31,410
Income from continuing operations........................... 9,970 11,007 10,120
Equity from discontinued mortgage banking operations........ 10,426 10,455 10,712
Dividends paid.............................................. (7,368) (8,981) (6,841)
Dividends received.......................................... -- 509 248
Balance at end of period.................................... 50,500 47,927 45,649
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period.............................. 1,090 1,432 314
Net change in fair value of securities available for sale... (18,266) (342) 1,118
Balance at end of period.................................... (17,176) 1,090 1,432
Total Stockholders' Equity........................ $ 55,793 $71,486 $62,550
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 63
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations........................... $ 9,970 $ 11,007 $ 10,120
Adjustments to reconcile net income to net cash provided by
operating activities:
Income (loss) provided by discontinued mortgage banking
operations............................................. (30) 252 1,286
Provision for loan losses................................. 300 300 113
Depreciation and amortization expense..................... 891 790 855
Amortization expense of good-will and core deposit
intangibles............................................ 377 214 263
Net amortization of investment securities................. (156) 756 51
Net realized gains on investment securities............... (273) (1,316) (112)
Net realized losses (gains) on loans held for sale........ 35 (235) (244)
Increase in accrued income receivable..................... (474) (65) (667)
Increase in accrued expense payable....................... 489 22 1,223
Net cash provided by operating activities................... 11,129 11,725 12,888
INVESTING ACTIVITIES
Purchase of investment securities and other short-term
investments -- available for sale......................... (263,781) (359,128) (328,827)
Purchase of investment securities and other short-term
investments -- held to maturity........................... (13,720) (21,950) (20,098)
Proceeds from maturities of investment securities and other
short-term investments -- available for sale.............. 41,710 56,014 80,012
Proceeds from maturities of investment securities and other
short-term investments -- held to maturity................ 28,399 37,663 56,225
Proceeds from sales of investment securities and other
short-term investments -- available for sale.............. 131,484 257,104 128,968
Proceeds from sales of investment securities and other
short-term investments -- held to maturity................ 2,503 -- --
Long-term loans originated.................................. (197,659) (154,285) (162,541)
Loans held for sale......................................... (59) (1,873) (2,541)
Principal collected on long-term loans...................... 184,143 153,601 130,410
Net decrease (increase) in other short-term loans........... 589 1,011 97
Purchases of premises and equipment......................... (2,021) (815) (383)
Sale/retirement of premises and equipment................... 124 53 54
Net (increase) decrease in other assets..................... (5,186) (4,588) 3,592
Net cash used by investing activities....................... (93,474) (37,193) (115,032)
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit.............. 355,191 293,679 186,407
Payments for maturing certificates of deposit............... (373,145) (255,579) (200,612)
Net increase (decrease) in demand and savings deposits...... 30,199 (3,460) 10,679
Net increase (decrease) in federal funds purchased,
securities sold under agreements to repurchase, and other
short-term borrowings..................................... (16,584) (7,131) 12,914
Net principal borrowings on advances from Federal Home Loan
Bank...................................................... 99,985 1,946 95,446
Borrowing (repayments) of long-term debt.................... 721 (1,387) (1,045)
Common stock dividends paid................................. (7,368) (8,981) (6,841)
Dividends received from subsidiaries........................ -- 509 248
Contributions from Parent................................... -- 7,000 --
Net (decrease) increase in other liabilities................ (1,042) 633 (556)
Net cash provided by financing activities................... 87,957 27,229 96,640
Net Increase (Decrease) in Cash Equivalents................. 5,612 1,761 (5,504)
Cash Equivalents at Beginning of Period..................... 18,616 16,855 22,359
Cash Equivalents at End of Period........................... $ 24,228 $ 18,616 $ 16,855
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
On July 12, 1999, USBANCORP, Inc., the Bank's holding company parent,
announced that its Board of Directors approved a plan to split USBANCORP's
banking subsidiaries into two separate publicly traded companies. Under the
proposed tax-free spin-off plan, 100% of the shares of the holding company to be
formed for Three Rivers Bank, to be known as Three Rivers Bancorp, Inc., would
be distributed as a dividend to the shareholders of USBANCORP in proportion to
their existing USBANCORP ownership. Shareholders would retain their existing
USBANCORP shares. Standard Mortgage Company of Georgia, a mortgage banking
company that is currently a subsidiary of Three Rivers Bank, will be internally
spun-off from Three Rivers Bank to USBANCORP prior to consummation of the
proposed Three Rivers Bank spin-off.
The Consolidated Financial Statements included herein may not necessarily
be indicative of the results of operations, financial position and cash flows of
Three Rivers Bancorp, Inc. in the future or had it operated as a separate,
independent company during the periods presented. The Consolidated Financial
Statements included herein do not reflect any changes that may occur in the
financial condition and operations of the Bank as a result of the Distribution.
The Spin-Off will result in the division of certain of Parent's existing
corporate support functions between the two resulting entities. Corporate
expenses included in Three Rivers Bancorp, Inc.'s financial results represent an
allocation of Parent's consolidated corporate expense to the entities comprising
Three Rivers Bancorp, Inc. The allocation of corporate expense is based on a
specific review to identify costs incurred for the benefit of the banking
business and in management's judgment results in a reasonable allocation of such
costs. Three Rivers Bancorp was allocated $2.0 million, $1.9 million, and $1.9
million of overhead costs related to USBANCORP's shared administrative and
support functions for the years 1999, 1998, and 1997, respectively. The
allocation was largely based upon Three Rivers Bancorp's total assets as a
percentage of USBANCORP's total assets during such prior periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include accounts of Three Rivers
Bancorp, Inc. and its wholly-owned subsidiary, Three Rivers Bank and Trust
Company, including its subsidiaries TRB Financial Services Company and Community
First Capital Corporation.
Business and Nature of Operations:
Three Rivers Bancorp, Inc. (the "Bank") is a Pennsylvania-chartered bank
holding company headquartered in Monroeville, Pennsylvania. The Bank operates 24
banking offices in three southwestern Pennsylvania counties. These offices
provide a full range of consumer, mortgage, commercial, and trust financial
products. The information contained in the financial statements and these
accompanying notes relates only to the Bank on a stand-alone basis.
As discussed above, Standard Mortgage Company of Georgia ("SMC"), a
mortgage banking company that historically was a subsidiary of TRB, will be
internally spun-off from TRB to the Parent prior to the consummation of the
proposed TRB spin-off. Accordingly, results of operations and cash flows of SMC
have been reported as discontinued operations for all periods presented in the
consolidated financial statements of
F-7
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TRB. The consolidated balance sheets for all periods presented also reflects SMC
as a discontinued operation. Summarized financial information of the
discontinued operations is presented in the following tables:
Net assets of discontinued mortgage banking operations:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 415 $ 30
Interest bearing deposits banks............................. 215
Loans held for sale......................................... 21,244 47,880
Net loans................................................... 16,252 10,387
Premises and equipment...................................... 766 514
Mortgage servicing rights................................... 13,911 16,536
Goodwill and core deposit intangibles....................... 252 278
Other assets................................................ 2,019 1,562
Total Assets...................................... $55,074 $77,187
LIABILITIES
Other short-term borrowings................................. $35,999 $57,203
Long-term debt.............................................. 4,688 6,563
Total borrowed funds........................................ 40,687 63,766
Other liabilities........................................... 3,961 2,966
Total Liabilities................................. $44,648 $66,732
Net Assets........................................ $10,426 $10,455
</TABLE>
Income from discontinued mortgage banking operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
ASSETS
Interest income............................................. $3,211 $2,846 $1,883
Interest expense............................................ 2,048 1,398 455
Net interest income......................................... 1,163 1,448 1,428
Provision for loan losses................................... 75 -- --
Non-interest income......................................... 5,725 6,417 6,163
Non-interest expense........................................ 6,831 7,445 5,495
Income before income taxes.................................. (18) 420 2,096
Provision for income taxes.................................. 12 168 810
Income from discontinued mortgage banking operations........ $ (30) $ 252 $1,286
</TABLE>
Investment Securities:
Securities are classified at the time of purchase as investment securities
held to maturity if it is management's intent and the Bank has the ability to
hold the securities until maturity. These held to maturity securities are
carried on the Bank's books at cost, adjusted for amortization of premium and
accretion of discount which is computed using the level yield method which
approximates the effective interest method. Alternatively, securities are
classified as available for sale if it is management's intent at the time of
purchase to hold the securities for an indefinite period of time and/or to use
the securities as part of the Bank's asset/liability management strategy.
Securities classified as available for sale include securities which may be sold
to effectively manage interest rate risk exposure, prepayment risk, and other
factors (such as liquidity requirements). These available for sale securities
are reported at fair value with unrealized aggregate
F-8
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
appreciation (depreciation) excluded from income and credited (charged) to a
separate component of shareholders' equity on a net of tax basis. Any security
classified as trading assets are reported at fair value with unrealized
aggregate appreciation (depreciation) included in current income on a net of tax
basis. The Bank presently does not engage in trading activity. Realized gain or
loss on securities sold was computed upon the adjusted cost of the specific
securities sold.
Loans:
Interest income is recognized using methods which approximate a level yield
related to principal amounts outstanding. The Bank discontinues the accrual of
interest income when loans, except for loans that are insured for credit loss,
become 90 days past due in either principal or interest. In addition, if
circumstances warrant, the accrual of interest may be discontinued prior to 90
days. In all cases, payments received on non-accrual loans are credited to
principal until full recovery of principal has been recognized; it is only after
full recovery of principal that any additional payments received are recognized
as interest income. The only exception to this policy is for residential
mortgage loans wherein interest income is recognized on a cash basis as payments
are received. A non-accrual loan is placed on accrual status after becoming
current and remaining current for twelve consecutive payments (except for
residential mortgage loans which only have to become current).
Loan Fees:
Loan origination and commitment fees, net of associated direct costs, are
deferred and amortized into interest and fees on loans over the loan or
commitment period. Fee amortization is determined by either the straight-line
method, or the effective interest method, which do not differ materially.
Mortgage Loans Held For Sale:
Newly originated fixed-rate residential mortgage loans are classified as
"held for sale," if it is management's intent to sell these residential mortgage
loans. The residential mortgage loans held for sale are carried at the lower of
aggregate cost or market value.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to operations over the estimated useful
lives of the premises and equipment using the straight-line method. Useful lives
of up to 45 years for buildings and up to 12 years for equipment are utilized.
Leasehold improvements are amortized using the straight-line method over the
terms of the respective leases or useful lives of the improvements, whichever is
shorter. Maintenance, repairs, and minor alterations are charged to current
operations as expenditures are incurred.
Allowance for Loan Losses and Charge-off Procedures:
As a financial institution which assumes lending and credit risks as a
principal element of its business, the Bank anticipates that credit losses will
be experienced in the normal course of business. Accordingly, the Bank
consistently applies a comprehensive methodology and procedural discipline which
is updated on a quarterly basis 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.
F-9
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- The application of formula driven reserve allocations for all commercial
and commercial real-estate loans are calculated by using a three-year
migration analysis of net losses incurred within each risk grade for the
entire commercial loan portfolio. The difference between estimated and
actual losses is reconciled through the dynamic nature of the migration
analysis.
- The application of formula driven reserve allocations to installment and
mortgage loans which are based upon historical charge-off experience for
those loan types. The residential mortgage loan allocation is based upon
the Bank's five-year historical average of actual loan charge-offs
experienced in that category. The same methodology is used to determine
the allocation for consumer loans except the allocation is based upon an
average of the most recent actual three-year historical charge-off
experience for consumer loans.
- The application of formula driven reserve allocations to all outstanding
loans and certain unfunded commitments is based upon review of historical
losses and qualitative factors, which include but are not limited to,
economic trends, delinquencies, concentrations of credit, trends in loan
volume, experience and depth of management, examination and audit
results, effects of any changes in lending policies and trends in policy
exceptions.
The maintenance of a general unallocated reserve to accommodate inherent
risk in the Bank's portfolio that is not identified through the Bank'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 yet be fully reflected in the
information that the Bank uses for arriving at specific loan or portfolio
segment reserves. Therefore, the Bank and its Board of Directors believe a
strong 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 Bank 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 and industry.
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 Bank 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 Bank's policy is to individually review, as circumstances warrant, each
of its commercial and commercial mortgage loans to determine if a loan is
impaired. At a minimum, credit reviews are mandatory for all commercial and
commercial mortgage loans with balances in excess of $500,000 within an 18 month
period. The Bank 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.
Comprehensive Income:
In January 1998, the Bank adopted SFAS #130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in a financial statement. For the Bank, comprehensive
income includes net income and unrealized holding gains and losses from
available
F-10
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for sale investment securities. The balances of other accumulated comprehensive
(loss) income were $(17,176,000) and $1,090,000 at December 31, 1999 and 1998,
respectively.
Segment Reporting:
In June, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("FAS No. 131") which is effective for financial statements for
periods beginning after December 15, 1997. FAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about a company's operating segments. Under current
conditions the Bank is reporting one business segment.
Statement of Cash Flows:
Cash equivalents include cash and due from banks, interest bearing deposits
with banks, federal funds sold and securities purchased under agreements to
resell, and short-term investments. The Bank made $3,269,000 in income tax
payments in 1999; $4,599,000 in 1998; and $3,819,000 in 1997. The Bank made
total interest expense payments of $40,593,000 in 1999; $38,433,000 in 1998; and
$34,809,000 in 1997.
Income Taxes:
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
Interest Rate Contracts:
The Bank 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 Balance Sheet. Unrealized gains or losses on these hedge
transactions are deferred. It is the Bank's policy not to terminate hedge
transactions prior to expiration date. For interest rate swaps, the interest
differential to be paid or received is accrued by the Bank 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 Balance Sheet.
Risk Management Overview:
Risk identification and management are essential elements for the
successful management of the Bank. In the normal course of business, the Bank is
subject to various types of risk, including interest rate, credit, and liquidity
risk. The Bank controls and monitors these risks with policies, procedures, and
various levels of managerial and Board oversight. The Bank's objective is to
optimize profitability while managing and controlling risk within Board approved
policy limits. Interest rate risk is the sensitivity of net interest income and
the market value of financial instruments to the magnitude, direction, and
frequency of changes in interest rates. Interest rate risk results from various
repricing frequencies and the maturity structure of assets, liabilities, and
off-balance sheet positions. The Bank uses its asset liability management policy
and hedging policy to control and manage interest rate risk.
Credit risk represents the possibility that a customer may not perform in
accordance with contractual terms. Credit risk results from extending credit to
customers, purchasing securities, and entering into certain off-balance sheet
financial instruments. The Bank's primary credit risk occurs in the loan
portfolio. The Bank uses its credit policy and disciplined approach to
evaluating the adequacy of the allowance for loan losses to
F-11
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
control and manage credit risk. The Bank's investment policy and hedging policy
strictly limit the amount of credit risk that may be assumed in the investment
portfolio and through off-balance sheet activities.
Liquidity risk represents the inability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers, as well
as, the obligations to depositors and debtholders. The Bank uses its asset
liability management policy and contingency funding plan to control and manage
liquidity risk.
Future Accounting Standards:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement #133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS #133"), which is required to be adopted in years beginning after June 15,
1999. The statement permits early adoption as of the beginning of any fiscal
quarter after its issuance. The statement will require the Bank to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
asset, liability, or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portions of a derivative's change in fair value will be immediately
recognized in earnings. This statement has been amended by SFAS #137 "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the effective date
of SFAS #133." SFAS #137 will be effective for years beginning after June 15,
2000. The Bank has not yet quantified the impact of adopting SFAS #133 on its
financial statements and has not determined the timing of, or method of adoption
of SFAS #133. However, SFAS #133 could increase volatility in earnings and other
comprehensive income.
3. CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 1999, and 1998, included $9,044,000
and $8,600,000, respectively, of reserves required to be maintained under
Federal Reserve Bank regulations.
4. INTEREST BEARING DEPOSITS WITH BANKS
The book value of interest bearing deposits with domestic banks are as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1999 1998
----- -------
(IN THOUSANDS)
<S> <C> <C>
Total....................................................... $-- $2,447
</TABLE>
All interest bearing deposits with domestic banks mature within three
months. The Bank had no deposits in foreign banks nor in foreign branches of
United States banks.
F-12
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENT SECURITIES
The book and market values of investment securities are summarized as
follows:
Investment securities available for sale:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury................................... $ 5,033 $ -- $ (46) $ 4,987
U.S. Agency..................................... 17,838 -- (1,232) 16,606
State and municipal............................. 60,480 207 (3,614) 57,073
U.S. Agency mortgage-backed securities.......... 431,008 233 (21,269) 409,972
Other securities(1)............................. 34,561 -- (935) 33,626
-------- ---- -------- --------
Total................................. $548,920 $440 $(27,096) $522,264
</TABLE>
- ---------------
(1) Other investment securities include corporate notes and bonds, asset-backed
securities, and equity securities.
During the second half of 1999, the Bank, in preparation for liquidity
needs for Year 2000, sold $2.5 million of mortgage backed securities that had
been purchased during the period from 1993 through 1995 and classified as held
to maturity. The Bank believed the sales were allowable under the provision of
SFAS No. 115 which permits the sale of held to maturity mortgage backed
securities after a substantial portion (85%) of the principal had been collected
through prepayments. The Bank, however, misinterpreted this provision and
computed the 85% paydown factor against the principal outstanding at issuance as
opposed to using the principal outstanding at the point the Bank purchased the
securities in the secondary market. As a result of this interpretation error,
the Bank tainted its held to maturity portfolio and transferred all securities
classified as held to maturity to available for sale. The time period for the
taint will be two years. At the time of the transfer, these securities had an
amortized cost of $131.9 million and a market value of $128.2 million. Prior to
the transfer, approximately 60% of the Bank's investment securities were already
classified as available for sale. With the entire portfolio now being classified
as available for sale, the Bank will have greater flexibility to manage the
securities portfolio to better achieve overall balance sheet rate sensitivity
goals and provide liquidity to fund loan growth if needed. The mark to market of
the available for sale portfolio does inject more volatility in the book value
of equity but has no impact on regulatory capital.
Investment securities available for sale:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury................................... $ -- $ -- $ -- $ --
U.S. Agency..................................... 16,025 39 -- 16,064
State and municipal............................. 2,326 37 -- 2,363
U.S. Agency mortgage-backed securities.......... 290,703 1,947 (577) 292,073
Other securities(1)............................. 17,169 -- -- 17,169
-------- ------ ----- --------
Total................................. $326,223 $2,023 $(577) $327,669
</TABLE>
F-13
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment securities held to maturity:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury................................... $ 5,089 $ -- $ (33) $ 5,056
U.S. Agency..................................... -- -- -- --
State and municipal............................. 51,718 799 (524) 51,993
U.S. Agency mortgage-backed securities.......... 93,181 1,348 (180) 94,349
Other securities(1)............................. -- -- -- --
-------- ------ ----- --------
Total................................. $149,988 $2,147 $(737) $151,398
</TABLE>
- ---------------
(1) Other investment securities include corporate notes and bonds, asset-backed
securities, and equity securities.
All purchased investment securities are recorded on settlement date which
is not materially different from the trade date. Realized gains and losses are
calculated by the specific identification method.
Maintaining investment quality is a primary objective of the Bank's
investment policy which, subject to certain limited exceptions, prohibits the
purchase of any investment security below a Moody's Investors Service or
Standard & Poor's rating of "A." At December 31, 1999, 98.1% of the portfolio
was rated "AAA" as compared to 98.2% at December 31, 1998. Less than 1.0% of the
portfolio was rated below "A" or unrated on December 31, 1999. The book value of
securities pledged to secure public and trust deposits, as required by law, was
$346,829,000 at December 31, 1999 and $208,932,000 at December 31, 1998. The
Bank realized $371,000 and $1,584,000 of gross investment security gains and
$123,000 and $268,000 of gross investment security losses on available for sale
securities in the years ended December 31, 1999 and 1998, respectively. The Bank
realized $26,000 of gross security gains and $1,000 of gross security losses on
sales of held to maturity securities in 1999. The following table sets forth the
contractual maturity distribution of the investment securities, book and market
values, and the weighted average yield for each type and range of maturity as of
December 31, 1999. Yields are not presented on a tax-equivalent basis, but are
based upon book value and are weighted for the scheduled maturity. Average
maturities are based upon the original contractual
F-14
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maturity dates with the exception of mortgage-backed securities and asset-backed
securities for which the average lives were used.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE AT DECEMBER 31, 1999
----------------------------------------------------------------------------------------------
WITHIN 1 AFTER 1 WITHIN 5 AFTER 5 WITHIN 10 AFTER 10
--------------- ----------------- ------------------ ---------------- TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- -------- ------ --------- ------ -------- ----- -------- -----
(IN THOUSANDS, EXCEPT YIELDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BOOK VALUE
US Treasury.................. $ 5,033 4.20% $ -- --% $ -- --% $ -- --% $ 5,033 4.20%
US Agency.................... -- -- 7,944 5.62 9,894 6.40 -- -- 17,838 6.05
State and Municipals......... -- -- 7,172 4.67 5,876 5.59 47,432 4.88 60,480 4.93
Collateralized Mortgage
Oblig...................... 6,821 6.27 35,014 6.41 192,961 6.44 196,212 6.57 431,008 6.49
Other Securities............. 24,316 6.00 -- -- 2,000 5.17 8,245 7.83 34,561 6.35
------- ---- ------- ---- -------- ---- -------- ---- -------- ----
Total............... $36,170 5.80% $50,130 6.04% $210,731 6.40% $251,889 6.29% $548,920 6.27%
MARKET VALUE
US Treasury.................. $ 4,987 $ -- $ -- $ -- $ 4,987
US Agency.................... -- 7,525 9,081 -- 16,606
State and Municipals......... -- 7,151 5,924 43,998 57,073
Collateralized Mortgage
Oblig...................... 6,797 34,557 183,288 185,330 409,972
Other Securities............. 24,316 -- 1,966 7,344 33,626
------- ------- -------- -------- --------
Total............... $36,100 $49,233 $200,259 $236,672 $522,264
</TABLE>
6. LOANS AND LOANS HELD FOR SALE
The loan portfolio of the Bank consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Commercial.................................................. $ 45,861 $ 53,563
Commercial loans secured by real estate..................... 207,067 167,091
Real estate -- mortgage..................................... 193,850 213,067
Consumer.................................................... 33,042 34,565
Loans....................................................... 479,820 468,286
-------- --------
Less: Unearned income....................................... (58) (92)
-------- --------
Loans, net of unearned income............................... $479,762 $468,194
</TABLE>
Real estate construction loans were not material at these presented dates
and comprised 2.4% and 4.2% of total loans net of unearned income at December
31, 1999 and 1998, respectively. The Bank has no direct credit exposure to
foreign countries. Most of the Bank's loan activity is with customers located in
the southwestern Pennsylvania geographic area. As of December 31, 1999, loans to
customers engaged in similar activities and having similar economic
characteristics, as defined by standard industrial classifications, did not
exceed 10% of total loans. In the ordinary course of business, the subsidiaries
have transactions, including loans, with their officers, directors, and their
affiliated companies. These transactions were on substantially the same terms as
those prevailing at the time for comparable transactions with unaffiliated
parties and do not
F-15
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
involve more than the normal credit risk. These loans totaled $588,000 and
$512,000 at December 31, 1999 and 1998, respectively. An analysis of these
related party loans follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1999 1998
----- -----
(IN THOUSANDS)
<S> <C> <C>
Balance beginning of period................................. $512 $617
New loans................................................... 893 209
Payments.................................................... 817 314
---- ----
Balance end of period....................................... $588 $512
</TABLE>
7. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period............................. $6,104 $6,006 $6,025
Provision for loan losses................................ 300 300 113
Recoveries on loans Previously charged-off............... 245 224 306
Loans charged-off........................................ 1,628 426 438
------ ------ ------
Balance, end of period................................... $5,021 $6,104 $6,006
</TABLE>
8. NON-PERFORMING ASSETS
Non-performing assets are comprised of (i) loans which are on a non-accrual
basis, (ii) loans which are contractually past due 90 days or more as to
interest or principal payments some of which are insured for credit loss, and
(iii) other real estate owned (real estate acquired through foreclosure and
in-substance foreclosures).
The following table presents information concerning non-performing assets:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Non-accrual loans............................. $2,056 $2,553 $2,871 $3,579 $4,568
Loans past due 90 days or more................ 154 37 956 1,252 433
Other real estate owned....................... 6,866 526 681 222 612
------ ------ ------ ------ ------
Total non-performing assets................... $9,076 $3,116 $4,508 $5,053 $5,613
Total non-performing assets as a percent of
loans and loans held for sale, net of
unearned income, and other real estate
owned....................................... 1.87% 0.66% 0.96% 1.17% 1.52%
</TABLE>
The Bank 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.
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 Bank had loans totaling $385,000 and $842,000 being specifically
identified as impaired at December 31, 1999 and 1998, respectively. The average
outstanding balance for loans being specifically
F-16
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
identified as impaired was $3,817,000 for 1999 and $560,000 for 1998. 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 1999 or 1998.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income due in accordance with original
terms............................................... $176 $42 $ 71 $101 $ 87
Interest income recorded............................ (7) (6) (40) (3) (30)
---- --- ---- ---- ----
Net reduction in interest income...................... $169 $36 $ 31 $ 98 $ 57
==== === ==== ==== ====
</TABLE>
9. PREMISES AND EQUIPMENT
An analysis of premises and equipment follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 417 $ 417
Premises.................................................... 7,260 5,461
Furniture and equipment..................................... 6,491 6,921
Leasehold improvements...................................... 2,066 2,055
------- -------
Total at cost............................................... 16,234 14,854
Less: Accumulated Depreciation.............................. 10,739 10,365
------- -------
Net book value.............................................. $ 5,495 $ 4,489
======= =======
</TABLE>
10. FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, AND
OTHER SHORT-TERM BORROWINGS
The outstanding balances and related information for federal funds
purchased, securities sold under agreements to repurchase, and other short-term
borrowings are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
----------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS TO SHORT-TERM
PURCHASED REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
<S> <C> <C> <C>
Balance.......................................... $10,000 $ -- $16,150
Maximum indebtedness at any month end............ 20,800 786 85,450
Average balance during year...................... 19,287 395 42,053
Average rate paid for the year................... 5.11% 3.50% 5.20%
Average rate on period end balance............... 4.75 -- 4.06
</TABLE>
F-17
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS TO SHORT-TERM
PURCHASED REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
<S> <C> <C> <C>
Balance.......................................... $17,355 $ 950 $ 23,500
Maximum indebtedness at any month end............ 22,500 1,406 115,000
Average balance during year...................... 17,151 934 32,389
Average rate paid for the year................... 5.55% 4.13% 5.38%
Average rate on period end balance............... 5.58 5.16 4.31
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS TO SHORT-TERM
PURCHASED REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
<S> <C> <C> <C>
Balance.......................................... $19,100 $ 836 $29,000
Maximum indebtedness at any month end............ 22,845 1,272 48,000
Average balance during year...................... 12,430 1,071 26,785
Average rate paid for the year................... 5.63% 4.14% 5.52%
Average rate on period end balance............... 6.43 5.54 5.35
</TABLE>
Average amounts outstanding during the year represent daily averages.
Average interest rates represent interest expense divided by the related average
balances. Collateral related to securities sold under agreements to repurchase
are maintained within the Bank's investment portfolio.
11. DEPOSITS
The following table sets forth the balance of the Bank's deposits:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Demand:
Non-interest bearing............................. $ 84,643 $ 84,969 $ 71,338
Interest bearing................................. 41,590 45,602 42,203
Savings............................................ 63,830 64,649 65,356
Money market....................................... 52,685 53,443 46,592
Certificates of deposit in denominations of
$100,000 or more................................. 48,906 16,647 23,974
Other time......................................... 281,037 295,140 276,347
-------- -------- --------
Total deposits..................................... $572,695 $560,450 $525,810
</TABLE>
F-18
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest bearing demand............................... $ 426 $ 418 $ 413
Savings............................................... 1,210 1,042 1,218
Money market.......................................... 1,693 1,449 1,284
Certificates of deposit in denominations of $100,000
or more............................................. 1,320 1,194 1,505
Other time............................................ 14,633 15,611 15,481
------- ------- -------
Total interest expense................................ $19,282 $19,714 $19,901
</TABLE>
The following table sets forth the balance at December 31, 1999 of other
time deposits maturing in the periods presented:
<TABLE>
<CAPTION>
YEAR (IN THOUSANDS)
---- --------------
<S> <C>
2000................................................... $190,888
2001................................................... 42,279
2002................................................... 27,370
2003................................................... 20,500
</TABLE>
12. FEDERAL HOME LOAN BANK BORROWINGS AND LONG-TERM DEBT
Federal Home Loan Bank Borrowings:
Federal Home Loan Bank borrowings consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-----------------------------------
WEIGHTED
AVERAGE
TYPE MATURING AMOUNT RATE
- ---- ----------- ---------- ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Open Repo Plus........................................ Overnight $ 16,150 4.06%
Advances and wholesale................................ 2000 333,000 5.28
Repurchase agreements............................... 2001 8,876 8.46
2002 71,000 5.79
Total Advances and Wholesale repurchase Agreements.... 409,876 5.44
-------- ----
Total FHLB Borrowings....................... $426,026 5.38%
</TABLE>
F-19
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
----------------------------------
WEIGHTED
AVERAGE
TYPE MATURING AMOUNT RATE
- ---- -------------- -------- ----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Flexline.......................................... Overnight $ 23,500 4.96%
Advances and Wholesale Repurchase Agreements...... 1999 90,010 5.33
2000 5 6.15
2001 8,876 8.46
2002 71,000 5.79
2003 and after 140,000 4.99
-------- ----
Total Advances and Wholesale Repurchase
Agreements...................................... 309,891 5.37
-------- ----
Total FHLB Borrowings................... $333,391 5.34%
</TABLE>
Total Federal Home Loan Bank borrowings consist of $264,876,000 and
$309,891,000 of term advances and $161,150,000 and $23,500,000 of repo plus
advances with maturities of less than 90 days for 1999 and 1998, respectively.
All Federal Home Loan Bank stock, along with an interest in unspecified mortgage
loans and mortgage-backed securities, with an aggregate statutory value equal to
the amount of the advances, have been pledged as collateral to the Federal Home
Loan Bank of Pittsburgh.
Long-Term Debt:
The Bank's long-term debt consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Collateralized mortgage obligation.......................... $1,582 $2,511
Other....................................................... 786 65
------ ------
Total long-term debt........................................ $2,368 $2,576
</TABLE>
The collateralized mortgage obligation was issued through Community First
Capital Corporation ("CFCC"), a wholly-owned, single-purpose finance subsidiary
of the Bank. In 1988, the Bank transferred Federal Home Loan Mortgage
Corporation ("FHLMC") securities with a book value of approximately $31,500,000
to CFCC which then collateralized the issuance of bonds with a par value of
$27,787,000. Scheduled maturities of long-term debt for the years subsequent to
December 31, 1999, are $149,000 in 2000; $162,000 in 2001; $100,000 in 2002;
$110,000 in 2003; and $1.8 million in 2004 and thereafter.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS #107, "Disclosures about Fair Value of Financial Instruments,"
requires all entities to disclose the estimated fair value of its financial
instrument assets and liabilities. For the Bank, as for most financial
institutions, approximately 95.0% of its assets and liabilities are considered
financial instruments. Many of the Bank's financial instruments, however, lack
an available trading market characterized by a willing buyer and willing seller
engaging in an exchange transaction. Therefore, significant estimations and
present value calculations were used by the Bank for the purpose of this
disclosure.
Estimated fair values have been determined by the Bank using the best
available data and an estimation methodology suitable for each category of
financial instruments. Management believes that cash, cash equivalents, and
loans and deposits with floating interest rates have estimated fair values which
approximate
F-20
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the recorded book balances. The estimation methodologies used, the estimated
fair values, and recorded book balances at December 31, 1999 and 1998, were as
follows:
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR BOOK FAIR BOOK
VALUE BALANCE VALUE BALANCE
--------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities........................... $522,264 $522,264 $479,067 $477,657
</TABLE>
Financial instruments with stated maturities have been valued using a
present value discounted cash flow with a discount rate approximating current
market for similar assets and liabilities.
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR BOOK FAIR BOOK
VALUE BALANCE VALUE BALANCE
--------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits with stated maturities................. $330,261 $329,944 $314,111 $311,787
Short-term borrowings........................... 275,997 276,150 191,743 191,815
All other borrowings............................ 161,732 162,244 162,100 162,457
</TABLE>
Financial instrument liabilities with no stated maturities have an
estimated fair value equal to both the amount payable on demand and the recorded
book balance.
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR BOOK FAIR BOOK
VALUE BALANCE VALUE BALANCE
--------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits with no stated maturities.............. $242,751 $242,751 $233,506 $248,663
</TABLE>
The net loan portfolio has been valued using a present value discounted
cash flow. The discount rate used in these calculations is based upon the
treasury yield curve adjusted for non-interest operating costs, credit loss, and
assumed prepayment risk.
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR BOOK FAIR BOOK
VALUE BALANCE VALUE BALANCE
--------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loans (including loans held for sale)....... $477,095 $479,762 $460,434 $460,217
</TABLE>
Changes in assumptions or estimation methodologies may have a material
effect on these estimated fair values. The Bank's remaining assets and
liabilities which are not considered financial instruments have not been valued
differently than has been customary with historical cost accounting. No
disclosure of the relationship value of the Bank's deposits is required by SFAS
#107, however, management believes the relationship value of these core deposits
is significant. Based upon the Bank's most recent acquisitions and other limited
secondary market transactions involving similar deposits, management estimates
the relationship value of these funding liabilities to range between $28 million
to $56 million less than their estimated fair value shown at December 31, 1999.
The estimated fair value of off-balance sheet financial instruments, used for
hedging purposes, is estimated by obtaining quotes from brokers. These values
represent the estimated amount the Bank would receive or pay, to terminate the
agreements, considering current interest rates, as well as, the creditworthiness
of the counterparties. At December 31, 1999, the notional value of the Bank's
off-balance sheet financial instruments (interest rate swaps and cap) totaled
$110 million with an estimated fair
F-21
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of approximately $265,000. There is no material difference between the
notional amount and the estimated fair value of the remaining off-balance sheet
items which total $101.0 million and are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding.
Management believes that reasonable comparability of these disclosed fair
values between financial institutions may not be likely due to the wide range of
permitted valuation techniques and numerous estimates which must be made given
the absence of active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a greater degree of
subjectivity to these estimated fair values.
14. INCOME TAXES
The provision for federal income taxes is summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current.................................................. $3,401 $4,983 $4,579
Deferred................................................. 689 (221) (57)
------ ------ ------
Income tax provision..................................... $4,090 $4,762 $4,522
</TABLE>
The reconciliation between the federal statutory tax rate and the Bank's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
-------------- -------------- -------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ---- ------- ---- ------ ----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Tax expense based on federal statutory
rate................................ $ 4,921 35.0% $ 5,519 35.0% $5,125 35.0%
Tax exempt income..................... (1,209) (8.6) (1,043) (6.6) (948) (6.5)
Other................................. 378 2.7 286 1.8 345 2.4
------- ------- ------
Total provision for income
taxes..................... $ 4,090 29.1% $ 4,762 30.2% $4,522 30.9%
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of revenue and expense for tax and financial reporting purposes. The following
table presents the impact on income tax expense of the principal timing
differences and the tax effect of each:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for possible loan losses........................ $353 $ (34) $(1,192)
Accretion of discounts on securities, net................. 276 77 373
Investment write-downs.................................... -- (265) 648
Deferred loan fees........................................ 52 52 (175)
Other, net................................................ 8 (50) 289
---- ----- -------
Total........................................... $689 $(220) $ (57)
</TABLE>
F-22
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999 and 1998, deferred taxes are included in the
accompanying consolidated balance sheet. The following table highlights the
major components comprising the deferred tax assets and liabilities for each of
the periods presented:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Assets:
Investment security write-downs due to SFAS #115.......... $ 9,330 $ --
Provision for loan losses.............................. 1,784 2,137
Accumulated depreciation............................... 65 25
Deferred loan fees..................................... 209 260
Other.................................................. 44 44
------- -------
Total assets...................................... 11,432 2,466
Deferred Liabilities:
Investment security write-ups due to SFAS #115............ -- (509)
Accretion of discount..................................... (1,440) (1,164)
Other..................................................... (466) (418)
------- -------
Total liabilities................................. (1,906) (2,091)
Valuation allowance......................................... (200) (200)
------- -------
Net deferred asset.......................................... $ 9,326 $ 175
</TABLE>
The change in the net deferred asset during 1999 and 1998 was attributed to
the following:
<TABLE>
<CAPTION>
1999 1998
------ ----
<S> <C> <C>
Investment write-downs due to SFAS #115, charge to equity... $9,840 $265
Deferred provision for income taxes......................... (689) (44)
------ ----
Net increase in deferred asset.............................. $9,151 $221
</TABLE>
15. PENSION AND 401(k) PLANS
The Bank has a trusteed, noncontributory defined benefit pension plan
covering all employees who work at least 1,000 hours per year and who have not
yet reached age 60 at their employment date. The benefits of the plan are based
upon the employee's years of service and average annual earnings for the highest
five consecutive calendar years during the final ten-year period of employment.
The Bank's funding policy has been to contribute annually an amount within the
statutory range of allowable minimum and maximum actuarially determined
tax-deductible contributions. Plan assets are primarily debt securities
(including U.S. Agency and Treasury securities, corporate notes and bonds),
listed common stocks (including shares of the common stock of USBANCORP), mutual
funds, and short-term cash equivalent instruments.
F-23
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension Benefits:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1999 1998
------- -------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at Beginning of year..................... $6,476 $5,689
Service cost................................................ 658 598
Interest cost............................................... 448 405
Deferred asset (loss) gain.................................. (597) 421
Benefits paid............................................... (552) (600)
Expenses paid............................................... (40) (37)
Benefit obligation at end of year........................... $6,393 $6,476
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $5,626 $4,919
Actual return on plan assets................................ 12 454
Employer contributions...................................... 848 890
Benefits paid............................................... (552) (600)
Expenses paid............................................... (40) (37)
Fair value of plan assets at end of year.................... 5,894 5,626
Funded status of the plan (underfunded)..................... (499) (850)
Unrecognized transition asset............................... 8 12
Unrecognized prior service cost............................. 503 560
Unrecognized actuarial loss................................. 368 499
Accrued benefit cost........................................ $ 380 $ 221
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost................................................ $ 658 $ 598
Interest cost............................................... 448 405
Expected return on plan assets.............................. (480) (411)
Amortization of prior year service cost..................... 3 3
Amortization of transition asset............................ 57 57
Recognized net actuarial loss............................... 2 --
Net periodic benefit cost................................... $ 688 $ 652
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate............................................... 7.50% 6.75%
Expected return on plan assets.............................. 8.00 8.00
Rate of compensation increase............................... 3.50 3.50
</TABLE>
Three Rivers Bank also has a trusteed 401(k) plan with contributions made
by Three Rivers Bank matching those by eligible employees up to a maximum of 50%
of the first 6% of their annual salary. All employees of Three Rivers Bank who
work over 1,000 hours per year are eligible to participate in the plan on
January 1 following six months of service. Three Rivers Bank's contribution to
this 401(k) plan was $145,000 in 1999 and $143,000 in 1998.
Except for the above pension benefits, the Bank has no significant
additional exposure for any other post-retirement benefits.
F-24
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. LEASE COMMITMENTS
The Bank's obligation for future minimum lease payments on operating leases
at December 31, 1999 is as follows:
YEAR FUTURE MINIMUM LEASE PAYMENTS
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000................................................... $ 930
2001................................................... 904
2002................................................... 826
2003................................................... 658
2004 and thereafter (in total)......................... 1,763
</TABLE>
In addition to the amounts set forth above, certain of the leases require
payments by the Bank for taxes, insurance, and maintenance. Rent expense
included in total non-interest expense amounted to $474,000, $452,000, and
$425,000 in 1999, 1998 and 1997, respectively.
17. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank incurs off-balance sheet risks in the normal course of business in
order to meet the financing needs of their customers. These risks derive from
commitments to extend credit and standby letters of credit. Such commitments and
standby letters of credit involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the consolidated financial statements.
Commitments to extend credit are obligations to lend to a customer as long
as there is no violation of any condition established in the loan agreement.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Because many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. Collateral which secures these types of commitments is the same as for
other types of secured lending such as accounts receivable, inventory, and fixed
assets.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
normal business activities, bond financings, and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. Letters of credit are issued both
on an unsecured and secured basis. Collateral securing these types of
transactions is similar to collateral securing the Bank's commercial loans.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to these commitments to extend credit and standby letters of credit
is represented by their contractual amounts. The Bank uses the same credit and
collateral policies in making commitments and conditional obligations as for all
other lending. The Bank had outstanding various commitments to extend credit
approximating $101.0 million and standby letters of credit of $7.6 million as of
December 31, 1999.
Additionally, the Bank is also subject to a number of asserted and
unasserted potential claims encountered in the normal course of business. In the
opinion of management and legal counsel, neither the resolution of these claims
nor the funding of these credit commitments will have a material adverse effect
on the Bank's financial position or results of operation.
F-25
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. OFF-BALANCE SHEET HEDGE INSTRUMENTS
The Bank uses various interest rate contracts, such as interest rate swaps,
caps and floors, to help manage interest rate and market valuation risk
exposure, which is incurred in normal recurrent banking activities. A summary of
the Bank's off-balance sheet derivative transactions are as follows:
Borrowed Funds Hedges:
The Bank had entered into several interest rate swaps to hedge short-term
borrowings used to leverage the balance sheet. Specifically, FHLB advances which
reprice between 30 days and one year are being used to fund fixed-rate agency
mortgage-backed securities with durations ranging from two to three years. Under
these swap agreements, the Bank pays a fixed-rate of interest and receives a
floating-rate which resets either monthly, quarterly, or annually. The following
table summarizes the interest rate swap transactions which impacted the Bank's
performance for the year ended December 31, 1999:
<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>
25,000,000 9-25-97 9-25-99 5.80% 4.85% Expired $177,417
40,000,000 5-01-99 4-30-00 5.00 5.25 Monthly (14,955)
30,000,000 10-25-99 10-25-00 6.17 6.22 Quarterly 2,868
40,000,000 10-25-99 10-25-01 6.41 6.22 Quarterly 14,334
--------
$179,664
</TABLE>
The impact on interest expense was $113,000 and $20,000 for the years ended
December 31, 1998 and 1997, respectively.
The Bank believes that its exposure to credit loss in the event of
non-performance by any of the counterparties (which include Mellon Bank and
First Union) in the interest rate swap agreements is remote.
The Bank 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 $300 million for interest
rate swaps, and interest rate caps/floors. The Bank had no interest rate floors
outstanding at any time during the years ended December 31, 1999, or December
31, 1998.
19. CAPITAL
The Bank 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 Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments 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 Bank's financial
statements.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes that as of December 31, 1999, the
Bank meets all capital adequacy requirements to which it is subject. As of
December 31, 1999 and 1998, the FDIC categorized the Bank as "Well Capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's classification category.
F-26
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the Bank's actual capital ratios at the
dates indicated, and the minimum ratios required by bank regulators in order for
the Bank to be adequately capitalized and well capitalized. The assets and
capital measured for purposes of this table do not include the assets and
capital of the Bank's discontinued mortgage banking operations.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)... $64,726 12.14% $43,503 8.00% $54,378 10.00%
Tier 1 Capital (to Risk Weighted
Assets)................................. 59,705 11.19 21,751 4.00 32,627 6.00
Tier 1 Capital (to Average Assets)........ 59,705 5.80 41,157 4.00 51,446 5.00
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)... $64,193 13.32% $43,375 8.00% $54,218 10.00%
Tier 1 Capital (to Risk Weighted
Assets)................................. 58,169 12.07 21,687 4.00 32,531 6.00
Tier 1 Capital (to Average Assets)........ 58,169 6.02 38,749 4.00 48,437 5.00
</TABLE>
20. 1999 BRANCH ACQUISITION
On February 12, 1999, the Bank acquired the Kiski Valley Office of First
Western Bancorp, Inc. ("First Western") located in Westmoreland County in
exchange for cash and Three Rivers Bank's Moon Township Office which is located
in Allegheny County. On a net basis, the Bank acquired $13.5 million in
deposits, $1.2 million in consumer loans and the related fixed assets, leases,
safe deposit box business and other agreements at the Kiski Valley branch
office. The Bank paid a core deposit premium of approximately ten percent for
the acquired deposits and purchased the consumer loans and fixed assets.
F-27
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA OF THREE RIVERS BANK
The following table sets forth certain unaudited quarterly consolidated
financial data regarding Three Rivers Bank.
<TABLE>
<CAPTION>
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1999 QUARTER ENDED
Interest income.................................... $18,451 $17,983 $17,544 $16,837
Non-interest income................................ 1,312 1,366 1,497 1,477
------- ------- ------- -------
Total operating income............................. 19,763 19,349 19,041 18,314
------- ------- ------- -------
Interest expense................................... 10,950 10,543 10,017 9,571
Provision for loan losses.......................... 75 75 75 75
Non-interest expense............................... 5,327 5,291 5,265 5,144
------- ------- ------- -------
Income before income taxes......................... 3,411 3,440 3,684 3,524
Provision for income taxes......................... 922 1,023 1,095 1,050
------- ------- ------- -------
Income from continuing operations.................. $ 2,490 $ 2,417 $ 2,589 $ 2,474
======= ======= ======= =======
1998 QUARTER ENDED
Interest income.................................... $16,858 $17,148 $16,633 $17,287
Non-interest income................................ 1,837 1,842 1,787 1,452
------- ------- ------- -------
Total operating income............................. 18,695 18,990 18,420 18,739
------- ------- ------- -------
Interest expense................................... 9,655 9,717 9,210 9,873
Provision for loan losses.......................... 75 75 75 75
Non-interest expense............................... 5,085 5,100 5,102 5,033
------- ------- ------- -------
Income before income taxes......................... 3,880 4,098 4,033 3,758
Provision for income taxes......................... 1,171 1,234 1,218 1,139
------- ------- ------- -------
Income from continuing operations.................. $ 2,709 $ 2,864 $ 2,815 $ 2,619
======= ======= ======= =======
</TABLE>
22. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Pro Forma Condensed Consolidated Financial Statements should be read in
conjunction with the historical consolidated financial statements of Three
Rivers Bancorp and the notes thereto contained in this information statement.
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 Three Rivers Bancorp or the results of
operations or financial position that would have occurred had Three Rivers
Bancorp been operated as a separate, independent company. The pro forma
adjustments to the accompanying historical consolidated statements of income and
consolidated balance sheets are set forth below.
F-28
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE RIVERS BANCORP
-------------------------------------------------------
HISTORICAL PRO FORMA
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1999 ADJUSTMENTS DECEMBER 31, 1999
------------------ ----------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<S> <C> <C> <C>
Total Interest Income.......................... $70,816 $70,816
Total Interest Expense............... 41,082 41,082
Net Interest Income............................ 29,734 29,734
Provision for loan losses...................... 300 300
Net Interest Income After Provision for Loan
Losses....................................... 29,434 29,434
Total Non-Interest Income............ 5,653 5,653
Total Non-Interest Expense........... 21,027 $ 573(A) 21,600
Income Before Income Taxes..................... 14,060 (573) 13,487
Provision for income taxes..................... 4,090 (173)(B) 3,917
Net Income..................................... $ 9,979 $ (400) $ 9,570
Basic and diluted earnings per share........... -- $(0.06) $ 1.44
Average shares outstanding..................... -- 6,655(C) 6,655
</TABLE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
THREE RIVERS BANCORP
-----------------------------------------------------
HISTORICAL PRO FORMA
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1999 ADJUSTMENTS DECEMBER 31, 1999
----------------- ----------- -----------------
(IN THOUSANDS)
UNAUDITED
<S> <C> <C> <C>
ASSETS
Cash and due from banks........................ $ 24,228 $(400)(A) $ 23,828
Investment securities.......................... 522,264 522,264
Loans.......................................... 474,741 474,741
Other assets................................... 54,929 54,929
Total Assets................................... $1,076,162 $(400) $1,075,762
LIABILITIES
Deposits....................................... $ 572,695 $ 572,695
Total borrowed funds........................... 438,394 438,394
Other liabilities.............................. 9,280 9,280
Total Liabilities.............................. 1,020,369 1,020,369
Total stockholders equity...................... 55,793 (400)(A) 55,393
Total Liabilities and Stockholders Equity...... $1,076,162 $(400) $1,075,762
</TABLE>
- ---------------
Notes to unaudited pro forma condensed consolidated financial statements:
(A) To record the additional incremental expenses Three Rivers Bancorp expects
to incur as a separate publicly traded company. Examples of such expenses
include: legal fees, investor relations costs, audit fees, shareholder
services costs, personnel costs, directors fees and other.
(B) To record the income tax impact of the above costs at the Company's
historical effective tax rate.
(C) Average shares presented assume a distribution of one share of Three Rivers
Bancorp common stock for every two shares of USBANCORP common stock
outstanding as of December 31, 1999.
F-29
<PAGE> 87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Three Rivers Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Three
Rivers Bancorp, Inc. (a Pennsylvania corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related statements of income, comprehensive
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Three Rivers
Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Anderson LLP
Pittsburgh, Pennsylvania
January 21, 2000
F-30
