-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PR/Ur/KpaPNx5o5yaYk6uJhvzxD2ixoKjB2EgW6EbFk+UdRHK+mLvdtvCMUbsCqJ qYoj+S7poeBd0R6LabewlQ== 0000893220-00-000264.txt : 20000314 0000893220-00-000264.hdr.sgml : 20000314 ACCESSION NUMBER: 0000893220-00-000264 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USBANCORP INC /PA/ CENTRAL INDEX KEY: 0000707605 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251424278 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-11204 FILM NUMBER: 567173 BUSINESS ADDRESS: STREET 1: MAIN & FRANKLIN STS STREET 2: PO BOX 430 CITY: JOHNSTOWN STATE: PA ZIP: 15901 BUSINESS PHONE: 8145335300 10-K405 1 USBANCORP 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-11204 USBANCORP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) PENNSYLVANIA 25-1424278 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) MAIN & FRANKLIN STREETS, P.O. BOX 430, JOHNSTOWN, 15907-0430 PENNSYLVANIA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (814)533-5300 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- -----------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $2.50 PAR VALUE SHARE PURCHASE RIGHTS (TITLE OF CLASS) (TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405.) $139,822,977.00 as of January 31, 2000. NOTE -- If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form. Applicable only to registrants involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No (Applicable only to corporate registrants) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 13,316,474 shares were outstanding as of January 31, 2000. DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). Portions of the annual shareholders' report for the year ended December 31, 1999, are incorporated by reference into Parts I and II. Portions of the proxy statement for the annual shareholders' meeting are incorporated by reference in Part III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Exhibit Index is located on page 70. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FORM 10-K INDEX PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 10 Item 3. Legal Proceedings........................................... 10 Item 4. Submission of Matters to a Vote of Security Holders......... 10 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters......................................... 11 Item 6. Selected Consolidated Financial Data........................ 12 Item 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations............... 14 Item 7A Quantitative and Qualitative Disclosures about Market Risk........................................................ 30 Item 8. Consolidated Financial Statements and Supplementary Data.... 31 Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure.................................... 69 PART III Item 10. Directors and Executive Officers of the Registrant.......... 69 Item 11. Executive Compensation...................................... 69 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 69 Item 13. Certain Relationships and Related Transactions.............. 69 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K......................................... 69 Signatures.................................................. 72
1 3 PART I ITEM 1. BUSINESS GENERAL USBANCORP, Inc. (the "Company") is a registered bank holding company organized under the Pennsylvania Business Corporation Law and is registered under the Bank Holding Company Act of 1956, as amended (the "BHCA.") The Company became a holding company upon acquiring all of the outstanding shares of U.S. Bank ("U.S. Bank") on January 5, 1983. The Company also acquired all of the outstanding shares of Three Rivers Bank and Trust Company ("Three Rivers Bank") in June 1984, McKeesport National Bank ("McKeesport Bank") in December 1985 (which was subsequently merged into Three Rivers Bank), Community Bancorp, Inc. in March 1992 (which was also subsequently merged into Three Rivers Bank in July 1997), and Johnstown Savings Bank ("JSB") in June 1994 (which was immediately merged into U.S. Bank). Immediately following the acquisition of JSB, U.S. Bank caused the intracompany transfer by Standard Mortgage Corporation of Georgia, a wholly-owned subsidiary of JSB, of all its assets, subject to all of its liabilities, to SMC Acquisition Corporation, an indirect subsidiary of Community. SMC Acquisition Corporation was renamed Standard Mortgage Corporation of Georgia and is a mortgage banking company organized under the laws of the State of Georgia that originates, sells, and services residential mortgage loans. In addition, the Company formed United Bancorp Life Insurance Company ("United Life") in October 1987, USBANCORP Trust and Financial Services Company (the "Trust Company") in October 1992, and UBAN Associates, Inc. ("UBAN Associates"), in January 1997. UBAN Associates is a registered investment advisory firm that administers investment portfolios, offers operational support systems and provides asset and liability management services to small and mid-sized community banks. The Company's principal activities consist of owning and operating its five wholly-owned subsidiary entities. At December 31, 1999, the Company had, on a consolidated basis, total assets, deposits, and shareholders' equity of $2.47 billion, $1.23 billion and $113 million, respectively. The Company and the subsidiary entities derive substantially all of their income from banking and bank-related services. The Company functions primarily as a coordinating and servicing unit for its subsidiary entities in general management, credit policies and procedures, accounting and taxes, loan review, auditing, investment advisory, compliance, marketing, insurance risk management, general corporate services, and financial and strategic planning. The Company, as a bank holding company, is regulated under the BHCA, and is supervised by the Board of Governors of the Federal Reserve System (the "Board"). As discussed in Note #25, on July 12, 1999, the Company announced that its Board of Directors has approved a plan to split the Company's banking subsidiaries into two separate publicly traded companies. The plan would be effected through a tax-free spin-off, and is expected to become effective April 1, 2000. USBANCORP BANKING SUBSIDIARIES: U.S. Bank U.S. Bank is a state bank chartered under the Pennsylvania Banking code of 1965, as amended. Through 23 locations in Cambria, Centre, Clearfield, Somerset, and Westmoreland Counties, Pennsylvania, U.S. Bank conducts a general banking business. It is a full-service bank offering (i) retail banking services, such as demand, savings and time deposits, money market accounts, secured and unsecured loans, mortgage loans, safe deposit boxes, holiday club accounts, collection services, money orders, and traveler's checks; (ii) lending, depository and related financial services to commercial, industrial, financial, and governmental customers, such as real estate-mortgage loans, short- and medium-term loans, revolving credit arrangements, lines of credit, inventory and accounts receivable financing, commercial equipment lease financing, real estate-construction loans, business savings accounts, certificates of deposit, wire transfers, night depository, and lock box services; U.S. Bank also operates 27 automated bank teller machines ("ATM"s) through its 24-Hour Banking Network which is linked with MAC, a regional ATM network and CIRRUS, a national ATM network. U.S. Bank also has a wholly owned mortgage banking subsidiary -- UBAN Mortgage Company. UBAN Mortgage Company was formed in January 1997 for the purpose of originating and selling mortgage loans primarily in 2 4 Western Pennsylvania. Additionally, USNB Financial Services Corporation, a wholly owned subsidiary of U.S. Bank, was formed on May 23, 1997. USNB Financial Services Corporation engages in the sale of annuities, mutual funds, and insurance. U.S. Bank's deposit base is such that loss of one depositor or a related group of depositors would not have a materially adverse effect on its business. In addition, the loan portfolio is also diversified so that one industry or group of related industries does not comprise a material portion of the loan portfolio. U.S. Bank's business is not seasonal nor does it have any risks attendant to foreign sources. In October 1998, U.S. Bank changed its charter from a national bank to a state bank. Under the new charter U.S. Bank is subject to supervision and regular examination by the Federal Reserve and the Pennsylvania Department of Banking. Various federal and state laws and regulations govern many aspects of its banking operations. The following is a summary of key data (dollars in thousands) and ratios at December 31, 1999: Headquarters................................................ Johnstown, PA Chartered................................................... 1933 Total Assets................................................ $1,339,870 (54.3% of the Company's total) Total Investment Securities................................. $ 660,851 (55.7% of Company's total) Total Loans (net of unearned income)........................ $ 578,472 (52.8% of the Company's total) Total Deposits.............................................. $ 658,246 (53.5% of the Company's total) Total Net Income............................................ $ 12,901 (63.2% of the Company's total) Asset Leverage Ratio........................................ 6.42% 1999 Return on Average Assets............................... 0.96% 1999 Return on Average Equity............................... 12.83% Total Full-time Equivalent Employees........................ 370 (49.7% of the Company's total) Number of Offices........................................... 23 (47.7% of the Company's total)
Three Rivers Bank Three Rivers Bank is a state bank chartered under the Pennsylvania Banking Code of 1965, as amended. Through 23 locations in Allegheny, Westmoreland and Washington 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 24 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. Three Rivers Bank also has a wholly owned mortgage banking subsidiary -- Standard Mortgage Corporation. Standard Mortgage Corporation, based in Atlanta, Georgia, is a mortgage banking company that originates, sells, and services residential mortgage loans. 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. Under a 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 the Company in proportion to their existing Company ownership. Shareholders would retain their existing 3 5 Company shares. Standard Mortgage Company (SMC), a mortgage banking company, currently a subsidiary of Three Rivers Bank, will be internally spun-off from Three Rivers Bank to the Company prior to consummation of the proposed Three Rivers Bank spin-off. For more information on the proposed spin-off, see "Proposed Tax-Free Spin-Off Plan" in the MD&A. 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. The following is a summary of key data (dollars in thousands) and ratios at December 31, 1999: Headquarters............................................... McKeesport, PA Chartered.................................................. 1965 Total Assets............................................... $1,120,809 (45.4% of the Company's total) Total Investment Securities................................ $ 522,264 (44.0% of Company's total) Total Loans (net of unearned income)....................... $ 517,332 (47.2% of the Company's total) Total Deposits............................................. $ 572,695 (46.5% of the Company's total) Total Net Income........................................... $ 9,940 (48.7% of the Company's total) Asset Leverage Ratio....................................... 6.21% 1999 Return on Average Assets.............................. 0.91% 1999 Return on Average Equity.............................. 15.01% Total Full-time Equivalent Employees....................... 324 (43.6% of the Company's total) Number of Offices.......................................... 23 (52.3% of the Company's total)
USBANCORP NON-BANKING SUBSIDIARIES: United Life United Life is a captive insurance company organized under the laws of the State of Arizona. United Life engages in underwriting as reinsurer of credit life and disability insurance within the Company's six county market area. Operations of United Life are conducted in each office of the Company's banking subsidiaries. United Life is subject to supervision and regulation by the Arizona Department of Insurance, the Insurance Department of the Commonwealth of Pennsylvania, and the Board of Governors of the Federal Reserve Bank. At December 31, 1999, United Life had total assets of $2.7 million and total shareholder's equity of $1.4 million. USBANCORP Trust and Financial Services Company USBANCORP Trust and Financial Services Company is a trust company organized under Pennsylvania law in October 1992. USBANCORP Trust and Financial Services Company was formed to consolidate the trust functions of U.S. Bank and Three Rivers Bank and to increase market presence. As a result of this formation, the Trust Company now offers a complete range of trust services through each of the Company's 4 6 subsidiary banks. At December 31, 1999, USBANCORP Trust and Financial Services Company had $1.43 billion in assets under management which included both discretionary and non-discretionary assets. EXECUTIVE OFFICERS Information relative to current executive officers of the Company or its subsidiaries is listed in the following table:
NAME AGE OFFICE WITH USBANCORP, INC. AND/OR SUBSIDIARY - ---- --- --------------------------------------------- Terry K. Dunkle...................... 58 Chairman, President & Chief Executive Officer of USBANCORP, Inc., and Chairman of U.S. Bank, Three Rivers Bank, and USBANCORP Trust and Financial Services Company Orlando B. Hanselman................. 40 Executive Vice President of USBANCORP, Inc., and President & Chief Executive Officer of U.S. Bank. W. Harrison Vail..................... 59 President & Chief Executive Officer of Three Rivers Bank Ronald W. Virag, CFTA................ 54 President & Chief Executive Officer, USBANCORP Trust and Financial Services Company Kevin J. O'Neil...................... 62 President & Chief Executive Officer, Standard Mortgage Corporation of Georgia
Mr. Dunkle succeeded Clifford A. Barton in February 1994, as Chairman, President and Chief Executive Officer of USBANCORP. In April 1988, Mr. Dunkle was appointed as President and Chief Executive Officer of U.S. Bank and Executive Vice President and Secretary of USBANCORP. Mr. Dunkle served the five previous years as Executive Vice President of Commonwealth National Bank in Harrisburg, Pennsylvania. Mr. Hanselman joined U.S. Bank in January 1987 as Vice President and Chief Financial Officer and was appointed Executive Vice President in February 1994. In May 1995, Mr. Hanselman was awarded the expanded responsibility of President and Chief Executive Officer of U.S. Bank. Mr. Vail has been President and Chief Executive Officer of Three Rivers Bank since January 1985. Mr. Virag was appointed as President and Chief Executive Officer of USBANCORP Trust and Financial Services Company in November 1994. Prior to joining the Trust Company, Mr. Virag served as Senior Vice President and head of trust group for Bank One in Charleston, West Virginia. Mr. O'Neil is President and Chief Executive Officer of Standard Mortgage Corporation of Georgia, a wholly-owned mortgage banking subsidiary of Three Rivers Bank. Mr. O'Neil joined the Company through the acquisition of JSB, and has 30 years of mortgage banking experience. MONETARY POLICIES Commercial banks are affected by policies of various regulatory authorities including the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Board of Governors are: open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements on bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments, and deposits, and may also affect interest rate charges on loans or interest paid for deposits. The monetary policies of the Board of Governors have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. COMPETITION The subsidiary entities face strong competition from other commercial banks, savings banks, savings and loan associations, and several other financial or investment service institutions for business in the communities they serve. Several of these institutions are affiliated with major banking and financial institutions, such as Mellon 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 5 7 the subsidiary entities perform, there is also competition from credit unions and issuers of commercial paper and money market funds. Such institutions, as well as brokerage houses, consumer finance companies, insurance companies, and pension trusts, are important competitors for various types of financial services. In addition, personal and corporate trust investment counseling services are offered by insurance companies, other firms, and individuals. MARKET AREA The Western Pennsylvania market experienced positive economic performance in 1999. Labor markets throughout the region have remained tight and unemployment at record low levels. Greater diversity into the service sector with specialization in "high tech" has allowed the region some insulation from the once dominant manufacturing sector. Not unlike the national trend, the region has been experiencing economic growth through strong consumer spending and business expansion. Consumer confidence remains high, business inventories remain low and require replacement, and commercial building remains brisk in the region. The region is experiencing positive annual economic expansion estimated between three and five percent, only slightly less than national performance. Inflation has remained fairly benign and has only recently appeared in energy prices. While expectations remain bright, we expect the regional economy to slow slightly over the first half 2000 before settling into a more stable pace over the later part of the year. This projection results from expectations that the Federal Reserve will raise short interest rates several times in order to slow economic growth to a more reasonable, non-inflationary pace between two and three percent. The Western Pennsylvania market should experience moderate growth in 2000. An emphasis on technologically oriented growth has resulted in a more diversified economy, but overall growth will continue to be hindered by demographic trends. Job growth is expected to be behind the national pace, but our unemployment rate will remain low in comparison to that experienced in recent past. Building activity is expected to slow. This slowdown from the hot pace experienced in 1999 will result primarily from higher interest rates. Economic conditions in the region are better today than they have been in a long time. We believe that economic stability is important for the region and the Federal Reserve will provide the discipline to allow future positive expansion for a sustained period of time. EMPLOYEES The Company employed approximately 832 persons as of December 31, 1999, in full- and part-time positions. Approximately 275 non-supervisory employees of U.S. Bank are represented by the United Steelworkers of America, AFL-CIO-CLC, Local Union 8204. U.S. Bank and such employees are parties to a labor contract pursuant to which employees have agreed not to engage in any work stoppage during the term of the contract which will expire on October 15, 2003. U.S. Bank has not experienced a work stoppage since 1979. The Company successfully negotiated a four-year collective bargaining agreement with the local union which took effect October 16, 1999. Key provisions of the new contract include: A modernized profit sharing formula, 2% contribution to the 401(k) account for each employee, increased staffing flexibility and wage increases of 3% in each of the first three years and 4% in the fourth year. COMMITMENTS AND LINES OF CREDIT The Company's banking subsidiaries are obligated under commercial, standby, and trade-related irrevocable letters of credit aggregating $22.7 million at December 31, 1999. In addition, the subsidiary banks have issued lines of credit to customers generally for periods of up to one year. Borrowings under such lines of credit are usually for the working capital needs of the borrower. At December 31, 1999, the Company's banking subsidiaries had unused loan commitments of approximately $240.3 million. 6 8 STATISTICAL DISCLOSURES FOR BANK HOLDING COMPANIES The following Guide 3 information is included in this Form 10-K as listed below: I. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential Information. Information required by this section is presented on pages 18, 19, 25, 26, 27, 28 and 29. II. Investment Portfolio Information required by this section is presented on pages 7, 8, 43, 44 and 45. III. Loan Portfolio Information required by this section appears on pages 8, 9, 45, 46 and 47. IV. Summary of Loan Loss Experience Information required by this section is presented on pages 20, 21, 22 and 46. V. Deposits Information required by this section follows on pages 9, 10 and 49. VI. Return on Equity and Assets Information required by this section is presented on page 12. VII. Short-Term Borrowings Information required by this section is presented on pages 48 and 49.
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, 100% of the securities portfolio was classified as available for sale. The following table sets forth the book and market value of USBANCORP's investment portfolio as of the periods indicated: Investment Securities Available for Sale at:
DECEMBER 31, ---------------------------------- 1999 1998 1997 ---------- -------- -------- (IN THOUSANDS) Book Value: U.S. Treasury........................................... $ 15,855 $ 442 $ 2,496 U.S. Agency............................................. 43,599 21,524 1,769 State and municipal..................................... 156,256 11,166 13,516 Mortgage-backed securities.............................. 943,474 577,241 516,476 Other securities........................................ 82,568 47,409 42,370 Total book value of investment securities available for sale.................................................... $1,241,752 $657,782 $576,627 Total market value of investment securities available for sale.................................................... $1,187,335 $661,491 $580,115
During the second half of 1999, the Company in preparation for liquidity needs for Year 2000 sold $16 million of mortgage backed securities that had been purchased in 1993 through 1995 and classified as held to maturity. The Company believed the sales were allowable under the provision of SFAS #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 Company, 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 Company purchased the securities in the secondary market. As a result of this interpretation error, the Company 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 $495.8 million and a market value of $485.4 million. Prior to the transfer, 7 9 approximately 60% of the Company's investment securities were already classified as available for sale. With the entire portfolio now being classified as available for sale, the Company 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 at:
DECEMBER 31, ---------------------------------- 1999 1998 1997 ---------- -------- -------- (IN THOUSANDS) Book Value: U.S. Treasury........................................... $-- $ 17,207 $ 16,320 U.S. Agency............................................. -- 23,928 17,512 State and municipal..................................... -- 147,628 114,733 Mortgage-backed securities.............................. -- 315,171 380,825 Other securities........................................ -- 4,208 2,951 Total book value of investment securities held to maturity................................................ $-- $508,142 $532,341 Total market value of investment securities held to maturity................................................ $-- $516,452 $541,093
The total securities portfolio increased by approximately $17.7 million between December 31, 1999, and December 31, 1998, and by $53 million between year ended 1998 and 1997. The growth in 1999 is attributed to the use of the acquired deposits from the First Western Branch acquisition to purchase securities. The growth in 1998 resulted from the Company aggressively purchasing securities due to expected continuation of strong cashflow from mortgage-backed securities. At December 31, 1999, investment securities having a book value of $788.6 million were pledged as collateral for public funds, and FHLB borrowings. The Company and its subsidiaries, collectively, did not hold securities of any single issuer, excluding U.S. Treasury and U.S. Agencies, that exceeded 10% of shareholders' equity at December 31, 1999. Maintaining investment quality is a primary objective of the Company's investment policy which, subject to certain minor exceptions, prohibits the purchase of any investment security below a Moody's Investor Service or Standard & Poor's rating of "A." At December 31, 1999, 97.3% of the portfolio was rated "AAA" compared to 98.1% at December 31, 1998. Less than 1.5% was rated below "A" or unrated at December 31, 1999. LOAN PORTFOLIO The following table sets forth the Company's loans by major category as of the dates set forth below:
AT DECEMBER 31 ------------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- ---------- -------- -------- -------- (IN THOUSANDS) Commercial....................... $ 152,042 $ 139,751 $143,113 $138,008 $103,546 Commercial loans secured by real estate......................... 406,927 341,842 302,620 266,700 179,793 Real estate-mortgage(1).......... 452,507 449,875 440,734 414,003 414,967 Consumer......................... 70,983 88,812 95,272 111,025 133,820 Loans.......................... 1,082,459 1,020,280 981,739 929,736 832,126 Less: Unearned income.......... 8,408 5,276 5,327 4,819 2,716 Loans, net of unearned income...................... $1,074,057 $1,015,004 $976,412 $924,917 $829,410
- --------------- (1) At December 31, 1999 and 1998, real estate-construction loans constituted 4.5% and 4.9% of the Company's total loans, net of unearned income, respectively. 8 10 Total loans, net of unearned income, increased by $59.1 million, or 5.8%, between December 31, 1998, and December 31, 1999. This growth occurred in commercial mortgage loans which increased by $65.1 million, or 19.0%, and commercial loans which grew by 12.3 million, or 8.8%. The higher loan totals in commercial mortgages resulted from increased production from both middle market and small business lending (loans less than $250,000). This improved new loan production was due primarily to more effective sales efforts which have included an intensive customer calling program and canvassing of small commercial businesses. Other factors contributing to the loan growth were a stable economic environment and results from two loan production offices in the higher growth markets of Westmoreland and Centre counties. Total residential mortgage loans were relatively flat between 1999 and 1998 as growth in adjustable-rate mortgage loans was offset by principal amortization in the existing fixed-rate mortgage loan portfolio. The Company is also selling the majority of new fixed-rate mortgage product to assist in asset/liability positioning and to reduce the Company's overall dependence on residential mortgage loans. Total consumer loans declined by $17.8 million or 20.0% in 1999, $6.5 million or 6.8% in 1998, and $15.8 million, or 14.2% in 1997. The drop in 1999 was due to the sale of the Company's $14 million credit card portfolio and continued net run-off in the indirect auto loan portfolio. The amount of loans outstanding by category as of December 31, 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.
MORE THAN ONE YEAR ONE YEAR THROUGH OVER TOTAL OR LESS FIVE YEARS FIVE YEARS LOANS -------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT RATIOS) Commercial.................................... $ 43,757 $ 77,641 $ 30,644 $ 152,042 Commercial loans secured by real estate....... 59,334 125,673 221,920 406,927 Real estate-mortgage.......................... 32,505 72,387 347,615 452,507 Consumer...................................... 18,479 28,046 24,458 70,983 Total......................................... $154,075 $303,747 $624,637 $1,082,459 Loans with fixed-rate......................... $ 44,126 $242,246 $414,621 $ 700,993 Loans with floating-rate...................... 109,949 61,501 210,016 381,466 Total......................................... $154,075 $303,747 $624,637 $1,082,459 Percent composition of maturity............... 14.2% 28.1% 57.7% 100.0% Fixed-rate loans as a percentage of total loans....................................... 64.8% Floating-rate loans as a percentage of total loans....................................... 35.2%
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, 64.8% 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 in this overall low interest rate environment. Also, a good portion of the commercial real estate loan growth has occurred in the five year fixed-rate area. For additional information regarding interest rate sensitivity, see "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations -- Interest Rate Sensitivity." COMMERCIAL This category includes credit extensions 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 9 11 attention given to current and historical cash flow coverage. Policy permits flexibility in determining acceptable coverage ratios, but they seldom fall below 1.1 to 1. Personal guarantees are frequently required, however, as the strength of the borrower increases our ability to obtain personal guarantees decreases. In addition to economic risk, this category is subject to risk of weak borrower management and industry risk, all of which are considered at underwriting. COMMERCIAL LOANS SECURED BY REAL ESTATE This category includes various types of loans, including acquisition and construction of investment property, owner-occupied and operating property. Maximum term, minimum cash flow coverage, leasing requirements, maximum amortization and maximum loan to value ratios are controlled by Credit Policy and follow industry guidelines and norms and regulatory limitations. Personal guarantees are always required during the construction phase on construction credits and are frequently obtained on mid to smaller commercial real estate loans. In addition to economic risk, this category is subject to geographic and portfolio concentration risk, which are monitored and considered at underwriting. REAL ESTATE -- MORTGAGE This category includes mortgages that are secured by residential property. Underwriting of loans within this category is pursuant to Freddie Mac underwriting guidelines, with the exception of CRA loans, which have more liberal standards. The major risk in this category is that a significant downward economic trend would increase unemployment and cause payment defaults. CONSUMER This category includes consumer installment loans and revolving credit plans. Underwriting standards identify undesirable loans, repayment terms and debt coverage ratios. Loans with debt to income coverage of 45% or less are considered satisfactory. Loans between 46% and 50% require special approval, and loans over 50% are exceptions to policy. The major risk in this category is significant economic downturn. DEPOSITS The following table sets forth the average balance of the Company's deposits and the average rates paid thereon for the past three calendar years:
1999 1998 1997 ------------------ ------------------ ------------------ AMOUNT RATE AMOUNT RATE AMOUNT RATE ---------- ---- ---------- ---- ---------- ---- (IN THOUSANDS, EXCEPT RATES) Demand -- non-interest bearing..... $ 170,891 --% $ 159,515 --% $ 143,767 --% Demand -- interest bearing......... 93,399 0.99 89,890 0.99 90,179 0.99 Savings............................ 171,783 1.63 171,769 1.52 185,959 1.69 Money markets...................... 182,395 3.46 167,758 3.60 153,345 3.71 Other time......................... 619,392 5.03 581,351 5.39 580,720 5.66 Total deposits..................... $1,237,860 3.86% $1,170,283 4.05% $1,153,970 4.21%
Total deposits increased by $55 million or 4.6% in 1999 due to the acquisition of the deposits associated with the acquired First Western Branches. Deposits were negatively impacted by the sale of a $6.0 million marginally profitable branch office and runoff of certificates of deposit. The growth in demand deposits over each of the past two years reflects the success of new business generated in conjunction with the increased commercial lending activity. 10 12 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: MATURING IN:
(IN THOUSANDS) Three months or less........................................ $77,541 Over three through six months............................... 4,416 Over six through twelve months.............................. 5,764 Over twelve months.......................................... 3,200 Total....................................................... $90,921
ITEM 2. PROPERTIES The principal offices of the Company and U.S. Bank occupy a five-story building at the corner of Main and Franklin Streets in Johnstown plus several floors of the building adjacent thereto. The Company occupies the main office and its subsidiary entities have 32 other locations which are owned in fee. Sixteen additional locations are leased with terms expiring from March 31, 2000, to November 30, 2009. ITEM 3. LEGAL PROCEEDINGS The Company is subject to a number of asserted and unasserted potential legal claims encountered in the normal course of business. In the opinion of both management and legal counsel, there is no present basis to conclude that the resolution of these claims will have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted by the Company to its shareholders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report. 11 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS As of January 31, 2000, the Company had 5,321 shareholders of its Common Stock. Other information required by this section is presented on pages 58 and 59. COMMON STOCK USBANCORP's Common Stock is traded on the NASDAQ National Market System under the symbol "UBAN." The following table sets forth the high and low closing prices and the cash dividends declared per share for the periods indicated:
CLOSING PRICES ---------------- CASH DIVIDENDS HIGH LOW DECLARED ------ ------ -------------- YEAR ENDED DECEMBER 31, 1999: $21.88 $14.63 $0.14 FIRST QUARTER........................................... 17.06 14.44 0.15 SECOND QUARTER.......................................... 16.00 13.19 0.15 THIRD QUARTER........................................... 13.75 11.25 0.15 FOURTH QUARTER.......................................... Year ended December 31, 1998: $25.71 $20.50 $0.12 First Quarter........................................... 27.50 25.77 0.14 Second Quarter.......................................... 26.67 19.00 0.14 Third Quarter........................................... 21.00 14.38 0.20 Fourth Quarter..........................................
12 14 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA SELECTED TEN-YEAR CONSOLIDATED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31 -------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) SUMMARY OF INCOME STATEMENT DATA: Total interest income.............. $ 165,188 $ 158,958 $ 154,788 $ 137,333 $ 129,715 Total interest expense............. 99,504 93,728 87,929 76,195 73,568 ---------- ---------- ---------- ---------- ---------- Net interest income................ 65,684 65,230 66,859 61,138 56,147 Provision for loan losses........ 1,900 600 158 90 285 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses.................. 63,784 64,630 66,701 61,048 55,862 Total non-interest income.......... 24,374 23,689 20,203 18,689 16,543 Total non-interest expense......... 60,815 59,520 54,104 52,474 50,557 ---------- ---------- ---------- ---------- ---------- Income before income taxes, extraordinary item and cumulative effect of change in accounting principle........................ 27,343 28,799 32,800 27,263 21,848 Provision for income taxes....... 6,922 7,655 9,303 7,244 6,045 ---------- ---------- ---------- ---------- ---------- Income before extraordinary item, cumulative effect of change in accounting principle............. 20,421 21,144 23,497 20,019 15,803 Extraordinary item -- utilization of tax loss carry forward...... -- -- -- -- -- Cumulative effect of change in accounting principle........... -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income......................... $ 20,421 $ 21,144 $ 23,497 $ 20,019 $ 15,803 ========== ========== ========== ========== ========== Net income applicable to common stock............................ $ 20,421 $ 21,144 $ 23,497 $ 20,019 $ 15,803 ========== ========== ========== ========== ========== PER COMMON SHARE DATA:(1) Basic earnings per share........... $ 1.53 $ 1.51 $ 1.56 $ 1.28 $ 0.96 Diluted earnings per share......... 1.52 1.48 1.54 1.28 0.96 Cash dividends declared............ 0.59 0.60 0.53 0.46 0.35 Book value at period end........... 8.46 10.48 10.77 9.97 9.45 ========== ========== ========== ========== ========== BALANCE SHEET AND OTHER DATA: Total assets....................... $2,467,479 $2,377,081 $2,239,110 $2,087,112 $1,885,372 Loans and loans held for sale, net of unearned income............... 1,095,804 1,066,321 989,575 939,726 834,634 Allowance for loan losses.......... 10,350 10,725 12,113 13,329 14,914 Investment securities available for sale............................. 1,187,335 661,491 580,115 455,890 427,112 Investment securities held to maturity......................... -- 508,142 536,608 546,318 463,951 Deposits........................... 1,230,941 1,176,291 1,139,527 1,138,738 1,177,858 Total borrowings................... 1,099,842 1,026,570 913,056 770,102 534,182 Stockholders' equity............... 112,557 141,670 158,180 151,917 150,492 Full-time equivalent employees..... 745 762 765 759 742 ========== ========== ========== ========== ========== AT OR FOR THE YEAR ENDED DECEMBER 31 ---------------------------------------------------------- 1994 1993 1992 1991 1990 ---------- ---------- ---------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) SUMMARY OF INCOME STATEMENT DATA: Total interest income.............. $ 102,811 $ 85,735 $ 82,790 $ 66,446 $ 70,469 Total interest expense............. 46,993 36,250 38,349 33,538 38,763 ---------- ---------- ---------- -------- -------- Net interest income................ 55,818 49,485 44,441 32,908 31,706 Provision for loan losses........ (2,765) 2,400 2,216 900 915 ---------- ---------- ---------- -------- -------- Net interest income after provision for loan losses.................. 58,583 47,085 42,225 32,008 30,791 Total non-interest income.......... 8,187 10,150 8,346 6,035 5,340 Total non-interest expense......... 49,519 40,715 36,248 28,862 27,198 ---------- ---------- ---------- -------- -------- Income before income taxes, extraordinary item and cumulative effect of change in accounting principle........................ 17,251 16,520 14,323 9,181 8,933 Provision for income taxes....... 5,931 5,484 5,440 2,873 2,745 ---------- ---------- ---------- -------- -------- Income before extraordinary item, cumulative effect of change in accounting principle............. 11,320 11,036 8,883 6,308 6,188 Extraordinary item -- utilization of tax loss carry forward...... -- -- -- 1,004 1,474 Cumulative effect of change in accounting principle........... -- 1,452 -- -- -- ---------- ---------- ---------- -------- -------- Net income......................... $ 11,320 $ 12,488 $ 8,883 $ 7,312 $ 7,662 ========== ========== ========== ======== ======== Net income applicable to common stock............................ $ 11,320 $ 12,385 $ 7,710 $ 6,139 $ 6,489 ========== ========== ========== ======== ======== PER COMMON SHARE DATA:(1) Basic earnings per share........... $ 0.73 $ 0.93 $ 0.89 $ 0.80 $ 0.85 Diluted earnings per share......... 0.73 0.91 0.84 0.76 0.80 Cash dividends declared............ 0.32 0.29 0.25 0.18 0.05 Book value at period end........... 8.19 8.22 7.69 7.24 6.62 ========== ========== ========== ======== ======== BALANCE SHEET AND OTHER DATA: Total assets....................... $1,788,890 $1,241,521 $1,139,855 $784,036 $774,403 Loans and loans held for sale, net of unearned income............... 868,004 727,186 648,915 430,151 445,814 Allowance for loan losses.......... 15,590 15,260 13,752 13,003 12,470 Investment securities available for sale............................. 259,462 428,712 366,888 -- -- Investment securities held to maturity......................... 524,638 -- -- 289,772 235,722 Deposits........................... 1,196,246 1,048,866 997,591 676,698 674,176 Total borrowings................... 432,735 60,322 48,461 27,564 26,573 Stockholders' equity............... 137,136 116,615 82,971 70,023 65,050 Full-time equivalent employees..... 780 665 644 523 535 ========== ========== ========== ======== ========
13 15
AT OR FOR THE YEAR ENDED DECEMBER 31 -------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) SELECTED FINANCIAL RATIOS: Return on average total equity..... 15.48% 14.13% 15.00% 13.36% 11.03% Return on average assets........... 0.83 0.93 1.09 1.03 0.87 Loans and loans held for sale, net of unearned income, as a percent of deposits, at period end....... 89.02 87.09 86.84 82.52 70.86 Ratio of average total equity to average assets................... 5.39 6.58 7.28 7.69 7.85 Common stock cash dividends as a percent of net income applicable to common stock.................. 38.51 41.00 34.00 35.28 36.43 Common and preferred stock cash dividends as a percent of net income........................... 38.51 41.00 34.00 35.28 36.43 Interest rate spread............... 2.59 2.58 2.97 3.06 2.94 Net interest margin................ 2.96 3.17 3.43 3.52 3.45 Allowance for loan losses as a percentage of loans and loans held for sale, net of unearned income, at period end............ 0.94 1.01 1.22 1.42 1.79 Non-performing assets as a percentage of loans and loans held for sale and other real estate owned, at period end...... 1.21 0.77 0.89 0.92 1.13 Net charge-offs as a percentage of average loans and loans held for sale............................. 0.21 0.19 0.14 0.20 0.08 Ratio of earnings to fixed charges and preferred dividends:(2) Excluding interest on deposits... 1.47X 1.54x 1.72x 1.79x 1.77x Including interest on deposits... 1.27 1.31 1.37 1.36 1.30 One year GAP ratio, at period end.............................. 0.59 1.03 0.88 0.79 0.86 ========== ========== ========== ========== ========== AT OR FOR THE YEAR ENDED DECEMBER 31 ---------------------------------------------------------- 1994 1993 1992 1991 1990 ---------- ---------- ---------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) SELECTED FINANCIAL RATIOS: Return on average total equity..... 8.92% 11.46% 11.41% 10.88% 12.38% Return on average assets........... 0.75 1.03 0.85 0.96 1.01 Loans and loans held for sale, net of unearned income, as a percent of deposits, at period end....... 72.56 69.33 65.05 63.57 66.13 Ratio of average total equity to average assets................... 8.39 8.96 7.48 8.85 8.18 Common stock cash dividends as a percent of net income applicable to common stock.................. 44.57 32.28 28.16 22.94 5.90 Common and preferred stock cash dividends as a percent of net income........................... 44.57 32.84 37.64 35.30 20.31 Interest rate spread............... 3.47 3.72 3.93 3.69 3.46 Net interest margin................ 4.03 4.34 4.58 4.69 4.56 Allowance for loan losses as a percentage of loans and loans held for sale, net of unearned income, at period end............ 1.80 2.10 2.12 3.02 2.80 Non-performing assets as a percentage of loans and loans held for sale and other real estate owned, at period end...... 0.91 0.89 1.58 1.10 0.87 Net charge-offs as a percentage of average loans and loans held for sale............................. 0.04 0.13 0.58 0.08 0.17 Ratio of earnings to fixed charges and preferred dividends:(2) Excluding interest on deposits... 2.34x 5.26x 4.05x 4.54x 3.87x Including interest on deposits... 1.37 1.45 1.36 1.26 1.22 One year GAP ratio, at period end.............................. 0.79 1.10 1.14 1.06 0.97 ========== ========== ========== ======== ========
- --------------- (1) All per share and share data have been adjusted to reflect a 3 for 1 stock split in the form of a 200% stock dividend which was distributed on July 31, 1998, to shareholders of record on July 16, 1998. (2) The ratio of earnings to fixed charges and preferred dividends is computed by dividing the sum of income before taxes, fixed charges, and preferred dividends by the sum of fixed charges and preferred dividends. Fixed charges represent interest expense and are shown as both excluding and including interest on deposits. 14 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("M. D. & A.") The following discussion and analysis of financial condition and results of operations of USBANCORP should be read in conjunction with the consolidated financial statements of USBANCORP, including the related notes thereto, included elsewhere herein. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 PERFORMANCE OVERVIEW. . .The Company's net income for 1999 was $20.4 million or $1.52 on a diluted per share basis compared to net income of $21.1 million or $1.48 per diluted share for 1998 and net income of $23.5 million or $1.54 per diluted share for 1997. When 1999 is compared to 1998, the Company's diluted earnings per share increased by $0.04 or 2.7% while net income dropped by $723,000 or 3.4%. When 1998 is compared to 1997, the Company's diluted earnings per share decreased by $0.06 or 3.9% while net income dropped by $2.4 million or 10.0%. The Company's return on equity increased to 15.48% for 1999 compared to 14.13% for 1998 and 15.0% for 1997. Growth in total revenue, which includes both net interest income and non-interest income, was a key factor that contributed positively to the Company's financial performance in 1999. Specifically, total non-interest income increased by $685,000 or 2.9% while net interest income increased by $454,000 or 0.7% when compared to 1998. This $1.1 million increase in total revenue was offset by higher non-interest expense and an increase in the provision for loan losses. Total non-interest expense was $1.3 million or 2.2% higher in 1999 while the provision for loan losses increased by $1.3 million. Even though net income decreased in 1999, diluted earnings per share and return on equity increased due to the success of the Company's common stock repurchase program. The Company used its treasury stock repurchase program throughout 1998 and the first quarter of 1999 to actively manage its capital and reduce both total equity and common shares outstanding. As a result of this program, there were 806,000 fewer average diluted shares outstanding in 1999 compared to 1998. The Company's equity base was also reduced by a drop in other comprehensive income due to a decline in value of the Company's available for sale securities portfolio. Compression in the Company's net interest margin and a higher level of non-interest expense offset the benefit of an increased amount of non-interest income to cause the drop in earnings in 1998 compared to 1997. Specifically, total non-interest income increased by $3.5 million or 17.3% while net interest income declined by $1.6 million or 2.4% from the prior year. This net $1.9 million increase in total revenue was more than offset by higher non-interest expense and an increase in the provision for loan losses. Total non-interest expense was $5.4 million or 10.0% higher in 1998 while the provision for loan losses increased by $442,000. The Company's earnings per share, however, were enhanced by the repurchase of its common stock because there were one million fewer average diluted shares outstanding in 1998. The following table summarizes some of the Company's key performance indicators for each of the past three years.
YEAR ENDED DECEMBER 31 -------------------------------- 1999 1998 1997 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) Net income.................................................. $20,421 $21,144 $23,497 Diluted earnings per share.................................. 1.52 1.48 1.54 Return on average equity.................................... 15.48% 14.13% 15.00% Return on average assets.................................... 0.83 0.93 1.09 Average diluted common shares outstanding................... 13,451 14,258 15,274
NET INTEREST INCOME AND MARGIN. . . The Company's net interest income represents the amount by which interest income on earning assets exceeds interest paid on interest bearing liabilities. Net interest income is a primary source of the Company's earnings; it is affected by interest rate fluctuations as well as changes in the amount and mix of earning assets and interest bearing liabilities. It is the Company's 15 17 philosophy to strive to optimize net interest margin performance in varying interest rate environments. The following table summarizes the Company's net interest income performance for each of the past three years:
YEAR ENDED DECEMBER 31 -------------------------------- 1999 1998 1997 -------- -------- -------- (IN THOUSANDS, EXCEPT RATIOS) Interest income............................................ $165,188 $158,958 $154,788 Interest expense........................................... 99,504 93,728 87,929 -------- -------- -------- Net interest income........................................ 65,684 65,230 66,859 Tax-equivalent adjustment.................................. 3,079 2,876 2,939 -------- -------- -------- Net tax-equivalent interest income......................... $ 68,763 $ 68,106 $ 69,798 Net interest margin........................................ 2.96% 3.17% 3.43%
1999 NET INTEREST PERFORMANCE OVERVIEW. . . USBANCORP's net interest income on a tax-equivalent basis increased by $657,000 or 1.0% due to growth in earning assets. Total average earning assets were $172 million higher in 1999 due to a $44 million or 4.3% increase in total loans and a $128 million or 11.5% increase in investment securities. The Company was able to achieve solid loan growth in commercial loans, commercial mortgage loans, and home equity loans throughout 1999. The higher level of investment securities resulted in part from the use of funds provided with the First Western Branches Acquisition which closed in the first quarter of 1999. As part of this acquisition, the Company acquired approximately $91 million of deposits and $10 million of consumer loans. The income benefit from this growth in earning assets was partially offset by a 21 basis point decline in the net interest margin to 2.96%. The drop in the net interest margin reflects a 29 basis point decline in the earning asset yield due primarily to accelerated prepayments in both the securities and loan portfolios in the first half of 1999 and the reinvestment of these cash flows in lower yielding assets. Prepayments slowed considerably in the second half of the year. The decline in the earning asset yield more than offset a 14 basis point drop in the cost of funds due to lower deposit and borrowing costs. The overall growth in the earning asset base was one strategy used by the Company to leverage its capital. The maximum amount of leveraging the Company can perform is controlled by internal policy requirements to maintain a minimum asset leverage ratio of no less than 6.0% (see further discussion under Capital Resources) and to limit net interest income variability to P7.5% and net income variability to P15% 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, the Company's total tax-equivalent interest income for 1999 increased by $6.4 million or 4.0% when compared to 1998. This increase was due primarily to the previously mentioned $172 million or 8.1% increase in total average earning assets which caused interest income to rise by $12.6 million. This positive factor was partially offset by a 29 basis point drop in the earning asset yield to 7.27% which caused a $6.2 million reduction in interest income. Within the earning asset base, the yield on total investment securities decreased by 16 basis points to 6.50% while the yield on the total loan portfolio declined by 39 basis points to 8.12%. Accelerated prepayments of mortgage related assets and the reinvestment of this cash into lower yielding assets was the primary factor causing the compression in the earning asset yield. Continued growth of the loan portfolio was an important component of the earning asset growth. The Company's loan-to-deposit ratio averaged 86.9% for 1999. This loan growth resulted from the Company's ability to take market share from its competitors through strategies which emphasize convenient customer service, niche products and hard work. Other factors contributing to the loan growth were a stable economic environment and increased loan volumes from two loan production offices in the higher growth markets of Westmoreland and Centre Counties. The Company's total interest expense for 1999 increased by $5.8 million or 6.2% when compared to 1998. This higher interest expense was due primarily to a $184 million increase in average interest bearing liabilities 16 18 which caused interest expense to rise by $10.6 million. The growth in interest bearing liabilities included a $56 million increase in interest bearing deposits due largely to the deposits acquired with the First Western Branches Acquisition net of certificate of deposit run-off and the sale of one small branch office. The remainder of the interest bearing liability increase occurred in FHLB advances which were used to help fund the previously mentioned earning asset growth. A reduction in the cost of funds caused a $4.8 million decrease in interest expense. Short-term borrowings and FHLB advances had an average cost of 5.44% in 1999 which was 19 basis points lower than their cost in the prior year but 158 basis points greater than the average cost of deposits which amounted to 3.86%. The Company was able to reduce its cost of deposits by 19 basis points due primarily to lower costs for certificates of deposit. Overall, the Company's total cost of funds dropped by 14 basis points to 4.69% as the pricing declines for both deposits and borrowings were partially offset by a greater use of borrowings to fund the earning asset base. It is recognized that interest rate risk does exist from this use of borrowed funds to leverage the balance sheet. To neutralize a portion of this risk, the Company has executed a total of $390 million of off-balance sheet hedging transactions which help fix the variable funding costs associated with the use of short-term borrowings to fund earning assets. (See further discussion under Note #21.) The Company also has asset liability policy parameters which limit the maximum amount of borrowings to 40% of total assets. For 1999, the level of short-term borrowed funds and FHLB advances to total assets averaged 41.3%. The Company plans to use cash flow from mortgage-backed securities to pay down borrowings to bring the ratio back within policy guidelines during the next several quarters. The Company also plans to be more aggressive in deposit pricing in 2000 in order to help raise deposits to fund anticipated loan growth and to paydown borrowings. 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. . . USBANCORP's net interest income on a tax-equivalent basis decreased by $1.7 million or 2.4% due to the negative impact of a 26 basis point decline in the net interest margin to 3.17%. The drop in the net interest margin reflects a 22 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 increased by two basis points due in part to the interest cost associated with the $34.5 million of guaranteed junior subordinated deferrable interest debentures issued on April 30, 1998, and an increased use of borrowings to fund earning asset growth. This margin compression offset the benefits resulting from growth in the earning asset base. Total average earning assets were $117 million higher in 1998 due primarily to a $59 million or 6.1% increase in total loans and a $59 million or 5.6% increase in investment securities. COMPONENT CHANGES IN NET INTEREST INCOME: 1998 VERSUS 1997. . . Regarding the separate components of net interest income, the Company's total interest income for 1998 increased by $4.2 million or 2.7% when compared to 1997. This increase was due primarily to a $117 million or 5.8% increase in total average earning assets which caused interest income to rise by $7.8 million. This positive factor was partially offset by a 22 basis point drop in the earning asset yield to 7.56% that caused a $3.7 million reduction in interest income. Within the earning asset base, the yield on total investment securities decreased by 29 basis points to 6.65% 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 15 basis points to 8.51% 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. The Company's total interest expense for 1998 increased by $5.8 million or 6.6% when compared to 1997. This higher interest expense was due primarily to a $112 million increase in average interest bearing liabilities. 17 19 The growth in interest bearing liabilities included the issuance of $34.5 million of 8.45% guaranteed junior subordinated deferrable interest debentures which increased interest expense by $2 million in 1998. The proceeds from this retail offering of trust preferred securities provided the Company with the necessary capital to continue to execute an active treasury stock repurchase program and complete the acquisition of two National City Branch Offices in Allegheny County with $27 million in deposits. The remainder of the interest bearing liability increase occurred in short-term borrowings and FHLB advances which were used to fund the previously mentioned earning asset growth. For 1998, the Company's total level of short-term borrowed funds and FHLB advances averaged $895 million or 39.4% of total assets compared to an average of $806 million or 37.4% of total assets for 1997. This greater dependence on borrowings to fund the earning asset base, along with the interest costs associated with the guaranteed junior subordinated deferrable interest debentures, were the factors responsible for the two basis point increase in the total cost of interest bearing liabilities to 4.83% in 1998. This increase in the total cost of funds occurred despite a 16 basis point drop in the cost of interest bearing deposits to 4.05% as management was able to reprice all major deposit categories downward in 1998. The table that follows provides an analysis of net interest income on a tax-equivalent basis setting forth (i) average assets, liabilities and stockholders' equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) USBANCORP's interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) USBANCORP's net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of this table, loan balances include non-accrual loans and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as, interest recorded on non-accrual loans as cash is received. Additionally, a tax rate of approximately 35% is used to compute tax equivalent yields. 18 20
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) Interest earning assets: Loans, net of unearned income..................... $1,063,409 $ 87,544 8.12% $1,019,215 $87,783 8.51% $ 960,673 $84,309 8.66% Deposits with banks.......... 4,115 121 2.91 3,874 120 3.07 3,792 190 4.97 Federal funds sold and securities purchased under agreements to resell....... -- -- -- 41 2 5.29 36 2 5.20 Investment securities: Available for sale......... 736,221 47,113 6.40 604,872 38,890 6.43 479,383 32,806 6.84 Held to maturity........... 502,239 33,489 6.67 505,861 35,039 6.93 573,350 40,420 7.05 ---------- -------- ---- ---------- ------- ---- ---------- ------- ---- Total investment securities................. 1,238,460 80,602 6.50 1,110,733 73,929 6.66 1,052,733 73,226 6.95 ---------- -------- ---- ---------- ------- ---- ---------- ------- ---- TOTAL INTEREST EARNING ASSETS/INTEREST INCOME....... 2,305,984 168,267 7.27 2,133,863 161,834 7.56 2,017,234 157,727 7.78 ---------- -------- ---- ---------- ------- ---- ---------- ------- ---- Non-interest earning assets: Cash and due from banks...... 38,585 34,009 32,743 Premises and equipment....... 18,835 17,946 17,952 Other assets................. 96,675.... 99,452 97,514 Allowance for loan losses.... (10,998) (11,715) (13,057) ---------- ---------- ---------- TOTAL ASSETS................... $2,449,081 $2,273,555 $2,152,386 ========== ========== ========== Interest bearing liabilities: Interest bearing deposits: Interest bearing demand.... $ 93,399 $ 925 0.99% $ 89,890 $ 892 0.99% $ 90,179 $ 895 0.99% Savings.................... 171,783 2,802 1.63 171,769 2,615 1.52 185,959 3,140 1.69 Money market............... 182,395 6,305 3.46 167,758 6,040 3.60 153,345 5,688 3.71 Other time................. 619,392 31,118 5.03 581,351 31,344 5.39 580,720 32,849 5.66 ---------- -------- ---- ---------- ------- ---- ---------- ------- ---- Total interest bearing deposits................. 1,066,969 41,150 3.86 1,010,768 40,891 4.05 1,010,203 42,572 4.21 Federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings................... 215,613 11,037 5.12 189,324 9,906 5.23 156,499 8,183 5.23 Advances from Federal Home Loan Bank......................... 795,720 43,946 5.52 705,507 40,483 5.74 649,235 36,648 5.64 Guaranteed junior subordinated deferrable interest debentures................... 34,500 2,960 8.58 23,096 1,981 8.58 -- -- -- Long-term debt................. 8,336 411 4.93 8,788 467 5.31 9,329 526 5.64 ---------- -------- ---- ---------- ------- ---- ---------- ------- ---- TOTAL INTEREST BEARING LIABILITIES/INTEREST EXPENSE...................... 2,121,138 99,504 4.69 1,937,483 93,728 4.83 1,825,266 87,929 4.81 ---------- -------- ---- ---------- ------- ---- ---------- ------- ---- Non-interest bearing liabilities: Demand deposits.............. 170,891 159,515 143,767 Other liabilities............ 25,125 26,893 26,722 Stockholders' equity......... 131,927 149,664 156,631 ---------- ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $2,449,081 $2,273,555 $2,152,386 ========== ========== ========== Interest rate spread........... 2.59 2.73 2.97 Net interest income/net interest margin.............. 68,763 2.96% 68,106 3.17% 69,798 3.43% Tax-equivalent adjustment...... (3,079) (2,876) (2,939) -------- ------- ------- Net interest income............ $ 65,684 $65,230 $66,859 ======== ======= =======
19 21 The average balance and yield on taxable securities was $1,075 million and 6.49%, $975 million and 6.61%, and $916 million and 6.94% for 1999, 1998, and 1997, respectively. The average balance and tax-equivalent yield on tax-exempt securities was $163 million and 6.57%, $133 million and 6.94%, and $132 million and 6.92% for 1999, 1998, and 1997, respectively. Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The table below sets forth an analysis of volume and rate changes in net interest income on a tax-equivalent basis. For purposes of this table, changes in interest income and interest expense are allocated to volume and rate categories based upon the respective percentage changes in average balances and average rates. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.
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) INTEREST EARNED ON: Loans, net of unearned income.... $ 4,200 $(4,439) $ (239) $4,854 $(1,380) $ 3,474 Deposits with banks.............. 6 (5) 1 4 (74) (70) Federal funds sold and securities purchased under agreements to resell......................... (1) (1) (2) -- -- -- Investment securities............ 8,435 (1,762) 6,673 2,900 (2,197) 703 ------- ------- ------ ------ ------- ------- TOTAL INTEREST INCOME............ 12,640 (6,207) 6,433 7,758 (3,651) 4,107 ------- ------- ------ ------ ------- ------- INTEREST PAID ON: Interest bearing demand deposits....................... 33 -- 33 (3) -- (3) Savings deposits................. -- 187 187 (226) (299) (525) Money market..................... 478 (213) 265 514 (162) 352 Other time deposits.............. 2,919 (3,145) (226) 35 (1,540) (1,505) Federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings.... 1,271 (140) 1,131 1,723 -- 1,723 Advances from Federal Home Loan Bank........................... 4,945 (1,482) 3,463 3,184 651 3,835 Guaranteed junior subordinated deferrable interest debentures..................... 979 -- 979 1,981 -- 1,981 Long-term debt................... (23) (33) (56) (91) 32 (59) ------- ------- ------ ------ ------- ------- TOTAL INTEREST EXPENSE........... 10,602 (4,826) 5,776 7,117 (1,318) 5,799 ------- ------- ------ ------ ------- ------- CHANGE IN NET INTEREST INCOME.... $ 2,038 $(1,381) $ 657 $ 641 $(2,333) $(1,692) ======= ======= ====== ====== ======= =======
LOAN QUALITY. . .USBANCORP's written lending policies require underwriting, loan documentation, and credit analysis standards to be met prior to funding any loan. After the loan has been approved and funded, continued periodic credit review is required. Credit reviews are mandatory for all commercial loans and for all commercial mortgages in excess of $500,000 within an 18-month period. In addition, due to the secured nature of residential mortgages and the smaller balances of individual installment loans, sampling techniques 20 22 are used on a continuing basis for credit reviews in these loan areas. The following table sets forth information concerning USBANCORP's loan delinquency and other non-performing assets. At all dates presented, the Company had no troubled debt restructurings which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates:
AT DECEMBER 31 ----------------------------------- 1999 1998 1997 --------- --------- --------- (IN THOUSANDS, EXCEPT PERCENTAGES) Total loan delinquency (past due 30 to 89 days)............. $ 9,931 $15,427 $19,890 Total non-accrual loans..................................... 4,928 5,206 6,450 Total non-performing assets(1).............................. 13,359 8,236 8,858 Loan delinquency as a percentage of total loans and loans held for sale, net of unearned income..................... 0.91% 1.45% 2.01% Non-accrual loans as a percentage of total loans and loans held for sale, net of unearned income..................... 0.45 0.49 0.65 Non-performing assets as a percentage of total loans and loans held for sale, net of unearned income, and other real estate owned......................................... 1.21 0.77 0.89
- --------------- (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 $5.5 million causing the delinquency ratio to drop to 0.91%. Total non-accrual loans were relatively consistent between years. The $5.1 million increase in non-performing assets is due entirely to a $6 million construction loan on a completed assisted living facility which the Company took possession of in the fourth quarter of 1999. The Company recorded a $500,000 charge-off on this property when it was moved into other real estate owned. Between December 31, 1997, and December 31, 1998, each of the key asset quality indicators demonstrated improvement. Total loan delinquency declined by $4.5 million causing the delinquency ratio to drop to 1.45%. Total non-performing assets decreased by $622,000 since year-end 1997 causing the non- performing assets to total loans ratio to drop to 0.77%. 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 supported the Company's ability to fund the loan loss provision at a level lower than the net-charge off experience in 1998. ALLOWANCE AND PROVISION FOR LOAN LOSSES. . .As described in more detail in the accounting policy footnote, the Company 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 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 21 23 quarterly (and revised if necessary) by the Company's management to establish allocations which accommodate each of the listed risk factors. The following table sets forth changes in the allowance for loan losses and certain ratios for the periods ended:
YEAR ENDED DECEMBER 31 ------------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- ---------- -------- -------- -------- (IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES) Balance at beginning of year:.............. $ 10,725 $ 12,113 $ 13,329 $ 14,914 $ 15,590 ---------- ---------- -------- -------- -------- Reduction due to disposition of business line..................................... -- -- -- -- (342) ---------- ---------- -------- -------- -------- Charge-offs: Commercial............................. 1,802 899 1,040 1,705 576 Real estate-mortgage................... 625 359 202 156 135 Consumer............................... 576 1,260 1,255 746 589 ---------- ---------- -------- -------- -------- Total charge-offs...................... 3,003 2,518 2,497 2,607 1,300 ---------- ---------- -------- -------- -------- Recoveries: Commercial............................. 295 113 529 527 183 Real estate-mortgage................... 199 132 262 108 41 Consumer............................... 234 285 332 297 457 ---------- ---------- -------- -------- -------- Total recoveries....................... 728 530 1,123 932 681 ---------- ---------- -------- -------- -------- Net charge-offs............................ 2,275 1,988 1,374 1,675 619 Provision for loan losses.................. 1,900 600 158 90 285 ---------- ---------- -------- -------- -------- Balance at end of year..................... $ 10,350 $ 10,725 $ 12,113 $ 13,329 $ 14,914 ========== ========== ======== ======== ======== Loans and loans held for sale, net of unearned income: Average for the year..................... $1,063,409 $1,019,215 $960,673 $857,921 $823,807 At December 31........................... 1,095,804 1,066,321 989,575 939,726 834,634 As a percent of average loans and loans held for sale: Net charge-offs.......................... 0.21% 0.19% 0.14% 0.20% 0.08% Provision for loan losses................ 0.18 0.06 0.02 0.01 0.03 Allowance for loan losses................ 0.97 1.05 1.26 1.55 1.81 Allowance as a percent of each of the following: Total loans and loans held for sale, net of unearned income..................... 0.94 1.01 1.22 1.42 1.79 Total delinquent loans (past due 30 to 89 days).................................. 104.22 69.52 60.90 65.71 104.12 Total non-accrual loans.................. 210.02 206.01 187.80 209.41 198.40 Total non-performing assets.............. 77.48 130.22 136.75 153.72 158.22 Allowance as a multiple of net charge-offs.............................. 4.55X 5.39x 8.82x 7.96x 24.09x Total classified loans..................... $ 24,049 $ 28,307 $ 26,184 $ 24,027 $ 28,355 ========== ========== ======== ======== ========
The Company recorded a provision for loan losses of $1.9 million in 1999, $600,000 in 1998, and $158,000 in 1997. When expressed as a percentage of average loans, the provision has increased from 0.02% to 0.18% over this three-year period. Factors contributing to the increased loan loss provision in 1999 included higher net-charge-offs and continued growth of higher risk commercial and commercial real-estate loans. The Company's net charge-offs amounted to $2.3 million or 0.21% of average loans in 1999, $2.0 million or 0.19% of average loans in 1998, and $1.4 million or 0.14% in 1997. Overall, the Company's allowance for loan losses was 77% of non-performing assets and 210% of non-accrual loans at December 31, 1999. The reduction in the non-performing assets coverage ratio is due to the previously mentioned increase in other real estate owned. The Company expects its provision level to at a minimum match and more likely exceed net-charge-offs in 2000. This is due to the inherent risk in the loan portfolio resulting from increased holdings of commercial and commercial real estate loans. USBANCORP management is unable to determine in what loan category future charge-offs and recoveries may occur. 22 24 The following schedule sets forth the allocation of the allowance for loan losses among various categories. This allocation is determined by using the consistent quarterly procedural discipline that was previously discussed. The entire allowance for loan losses is available to absorb future loan losses in any loan category.
AT DECEMBER 31 ------------------------------------------------------------------ 1999 1998 1997 -------------------- -------------------- -------------------- PERCENT OF PERCENT OF PERCENT OF LOANS IN LOANS IN LOANS IN EACH EACH EACH CATEGORY CATEGORY CATEGORY AMOUNT TO LOANS AMOUNT TO LOANS AMOUNT TO LOANS ------- ---------- ------- ---------- ------- ---------- (IN THOUSANDS, EXCEPT PERCENTAGES) Commercial.............. $ 1,991 13.9% $ 1,379 13.1% $ 1,670 14.4% Commercial loans secured by real estate........ 2,928 37.1 2,082 32.1 2,543 30.6 Real estate-mortgage.... 791 43.3 1,038 47.0 414 45.9 Consumer................ 631 5.7 1,563 7.8 1,506 9.1 Allocation to general risk.................. 4,009 4,663 5,980 ------- ------- ------- Total................... $10,350 $10,725 $12,113 ======= ======= ======= AT DECEMBER 31 ------------------------------------------- 1996 1995 -------------------- -------------------- PERCENT OF PERCENT OF LOANS IN LOANS IN EACH EACH CATEGORY CATEGORY AMOUNT TO LOANS AMOUNT TO LOANS ------- ---------- ------- ---------- (IN THOUSANDS, EXCEPT PERCENTAGES) Commercial.............. $ 2,118 14.7% $ 3,212 12.3% Commercial loans secured by real estate........ 2,796 28.4 3,286 21.5 Real estate-mortgage.... 472 45.6 345 50.2 Consumer................ 959 11.3 600 16.0 Allocation to general risk.................. 6,984 7,471 ------- ------- Total................... $13,329 $14,914 ======= =======
Even though real estate-mortgage loans comprise 43% of the Company's total loan portfolio, only $791,000 or 7.6% of the total allowance for loan losses is allocated against this loan category. The real estate-mortgage loan allocation is based primarily upon the Company's five-year historical average of actual loan charge-offs experienced in that category and other qualitative factors. The disproportionately higher allocations for commercial loans and commercial loans secured by real estate reflect the increased credit risk associated with this type of lending. The 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 commercial and commercial real-estate loan balances grew by 9% and 19% over the December 31, 1998, balances. The fiscal year over year net charge-offs also increased by $721,000 for the commercial portfolio and $199,000 for the commercial real-estate portfolio. Other factors considered by the Company 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 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 Company has consistently established a general unallocated reserve to provide for risk inherent in the loan portfolio as a whole. Management believes that its judgment with respect to the establishment of the general unallocated reserve has been validated by experience and prudently reflects the model and estimation risk associated with the specific and formula driven allowances. The Company determines the unallocated reserve based on a variety of factors, some of which also are components of the formula-driven methodology. These include, without limitation, the previously mentioned qualitative factors along with general economic data, management's assessment of the direction of interest rates, and credit concentrations. In conjunction with the establishment of the general unallocated reserve, the Company also looks at the total allowance for loan losses in relation to the size of the total loan portfolio, the level of non-performing assets, and its coverage of these items as compared to peer comparable banking companies. Based on the Company's loan loss reserves methodology and the related assessment of the inherent risk factors contained within the Company's loan portfolio, management believes that the allowance for loan losses was adequate for each of the fiscal years presented in the table above. NON-INTEREST INCOME. . .Non-interest income for 1999 totaled $24.4 million which represented a $685,000 or 2.9% increase when compared to 1998. This increase was primarily due to the following items: - a $453,000 or 10.2% increase in trust fees to $4.9 million in 1999. This trust fee growth reflects increased assets under management due to the profitable expansion of the Company's trust operations. 23 25 - a $948,000 or 25.6% increase in gains realized on loans held for sale due to a $1.6 million gain realized on the sale of the Company's $14 million credit card portfolio. As a result of the 16% premium recognized on the sale, the Company was able to profitably exit a line of business where it did not have the scale to effectively compete on a long-term basis. This item was partially offset by reduced gains on mortgage loan sales as a drop in mortgage refinancing activity reduced both the volume and spread on loan sales into the secondary market. - a $1.8 million decrease in gains realized on investment security sales as the steeper yield curve limited investment portfolio repositioning opportunities in 1999. - a $402,000 or 5.9% increase in other income due in part to additional income resulting from ATM surcharging, commercial leasing fees, and revenue generated from annuity and mutual fund sales in the Company's financial service subsidiaries. - a $540,000 gain on the sale of a small marginally profitable branch office with approximately $6 million in deposits. The Company received an 8.5% premium for the core deposits in that branch office. - a $97,000 increase in net mortgage servicing fees due to reduced amortization expense on mortgage servicing rights due to slower prepayment fees. The following chart highlights some of the key information related to SMC's mortgage servicing portfolio:
AT DECEMBER 31 ---------------------- 1999 1998 -------- ---------- (IN THOUSANDS, EXCEPT PERCENTAGES AND PREPAYMENT DATA) MSR portfolio balance....................................... $922,042 $1,175,138 Fair value of MSRs based upon discounted cash flow of servicing portfolio....................................... 14,190 16,447 Fair value as a percentage of MSR balance................... 1.54% 1.40% PSA prepayment speed........................................ 187 289 Weighted average portfolio interest rate.................... 7.55% 7.58%
A rollforward of the MSRs is as follows:
(IN THOUSANDS) Balance as of December 31, 1998............................. $ 16,197 Acquisition of servicing rights............................. 9,618 Impairment charge reversal.................................. 776 Sale of servicing rights.................................... (10,463) Amortization of servicing rights............................ (2,618) -------- Balance as of December 31, 1999............................. $ 13,510 ========
Non-interest income as a percentage of total revenue increased from 26.6% in 1998 to 27.1% in 1999. The diversification of the revenue stream will continue to be a key strategic focal point for the Company in the future. Non-interest income for 1998 totaled $23.7 million which represented a $3.5 million or 17.3% increase when compared to 1997. This increase was primarily due to the following items: - a $408,000 or 10.1% increase in trust fees to $4.4 million in 1998. This trust fee growth reflects increased assets under management due to the profitable expansion of the Trust Company's business. - a $1.7 million increase in gains realized on loans held for sale to $3.7 million due to heightened residential mortgage refinancing and origination activity at the Company's mortgage banking subsidiary. Total mortgage loans closed amounted to $450 million in 1998 compared to $253 million in 1997. 24 26 Reflected in this increase the Company generated $681,000 in gains on the sale of mortgage servicing rights. - a $1.5 million increase in gains realized on investment security sales as the Company focused on selling 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 $1.5 million or 28% increase in other income due in part to additional income resulting from ATM surcharging, other mortgage banking processing fees, credit card merchant income, and revenue generated from annuity and mutual fund sales in the Company's financial service subsidiaries. - a $1.4 million or 67% decrease in net mortgage servicing fee income to $692,000 due to greater amortization expense on mortgage servicing rights as a result of faster mortgage prepayment speeds in 1998. Non-interest income as a percentage of total revenue increased from 23.2% in 1997 to 26.6% in 1998. NON-INTEREST EXPENSE. . .Non-interest expense for 1999 totaled $60.8 million which represented a $1.3 million or 2.2% increase when compared to 1998. This increase was primarily due to the following items: - a $1.7 million or 5.5% increase in salaries and employee benefits due to merit pay increases, higher incentive pay, increased medical insurance premiums and the additional full-time equivalent employees ("FTE") resulting from the First Western Branches Acquisition and the acquisition of the Republic Bank Wholesale Mortgage Banking Department. - a $574,000 increase in equipment expense due to higher technology related expenses such as system cost associated with wide area networks and optical disk imaging of customer statements. - a $827,000 increase in goodwill and core deposit amortization expense due to the amortization expense associated with the $10 million core deposit premium resulting from the First Western Branches Acquisition. The amortization expense of intangible assets reduced diluted earnings per share by $0.20. - slower mortgage prepayment speeds and the steeper yield curve caused the value of the Company's mortgage servicing rights to increase in 1999. As a result of this improved valuation, the Company reversed $776,000 of the impairment reserve on mortgage servicing rights that had been established in 1998. This partial reversal of the impairment reserve favorably reduced non-interest expense in 1999. Non-interest expense for 1998 totaled $59.5 million which represented a $5.4 million or 10.0% increase when compared to 1997. This increase was primarily due to the following items: - a $2.2 million or 7.9% increase in salaries and employee benefits due to merit pay increases, higher commission and incentive payments, increased pension expense and higher medical insurance premiums. The Company also incurred $350,000 of severance costs resulting from a realignment of the Company's retail banking division and human resources function. - a $377,000 or 11.6% increase in equipment expense due to increased technology related expenses. - an $831,000 expense related to the establishment of an impairment reserve on the mortgage servicing portfolio. This reserve was needed on certain tranches of mortgage servicing rights whose market value had fallen below cost due to accelerated prepayment speeds and low long-term interest rates. - a $1.4 million increase in other expense due to higher outside processing fees, increased advertising expense, heightened foreclosure losses and costs associated with Year 2000 compliance. YEAR 2000. . .During the past two years, the Company 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 25 27 Y2K test were retested. The organization practiced "clean management" of all mission critical and critical systems. The Y2K process has required that the Company 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. Prior to December 31, 1999, all mission critical vendors affirmed their Year 2000 compliance, and no mission critical system vendor changes occurred. 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. As of the date of this filing, the Company 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 the Company. The Company did not suffer any system failures or miscalculations causing disruptions of operations in connection with the occurrence of Y2K. Notwithstanding the foregoing, the Company recognizes the serious risks it faces regarding credit customers not properly remediating their automated systems to conform with Year 2000 related problems. The failure of a loan customer to prepare adequately to conform with Year 2000 could have an adverse effect on such customer's operations and profitability, in turn limiting their ability to repay loans in accordance with scheduled terms. The Company completed a detailed analysis of its major loan customer's compliance with Year 2000. The focus of the analysis was on commercial credit exposures with balances in excess of $250,000 and included discussions between loan officers, customers, and information system representatives in select cases. As a result of this analysis and follow-up after January 1, 2000, the Company currently believes that the potential customer credit risk with Year 2000 is minimal and will not have a material adverse effect on the Bank's business, financial condition or results of operations. The Company did not incur any liquidity problems in connection with the occurrence of Y2K. From an asset/liability standpoint, throughout 1999 the Company 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 Company had maintained higher levels of non-earning cash balances and had used higher cost alternative funding sources such as brokered CDs to ensure adequate liquidity reserves were in place. The actual outflow of deposits during the weeks prior to January 1, 2000, was only slightly above normal. The Company used both internal and external resources to complete its comprehensive Y2K compliance program. The Company estimates that the total cost to achieve Y2K compliance was approximately $1.7 million which was at the high end of its earlier estimate of $1.4 to $1.7 million. Approximately 66% of this total cost represents incremental expenses to the Company while approximately 34% represents the internal cost of redeploying existing information technology resources to the Y2K issue. The Company 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. . .The Company's efficiency ratio (non-interest expense divided by total revenue) increased to 65.4% in 1999 compared to 64.8% for 1998. Factors contributing to the higher efficiency ratio in 1999 included the compression experienced in the net interest margin, reduced revenue at the mortgage banking subsidiary, and an increased level of non-interest expenses which included Year 2000 costs. Additionally, the repurchase of the Company's stock has a favorable impact on return on equity but a negative impact on the efficiency ratio due to the interest cost associated with borrowings which provide funds to repurchase the stock (i.e. the $2.9 million of interest expense on the $34.5 million of guaranteed junior subordinated deferrable interest debentures). The amortization of intangible assets also creates a $3.1 million annual non-cash charge that negatively impacts the efficiency ratio. The efficiency ratio for 1999, stated on a 26 28 cash basis excluding the intangible amortization, was 62.0% or 3.4% lower than the reported efficiency ratio of 65.4%. Net overhead expense as a percentage of tax equivalent net interest income was relatively consistent between periods at 53.0%. Total assets per employee improved 7.6% from $3.0 million for 1998 to $3.2 million for 1999. INCOME TAX EXPENSE. . .The Company's provision for income taxes for 1999 was $6.9 million reflecting an effective tax rate of 25.3%. The Company's income tax provision and effective tax rate were $7.7 million or 26.6% in 1998 and $9.3 million or 28.4% in 1997. The lower income tax expense and effective tax rate in both 1999 and 1998 was due to a reduced level of pre-tax income combined with an increased level of tax-free income. Tax-free asset holdings consist primarily of municipal investment securities, bank owned life insurance, and commercial loan tax anticipation notes. 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 $325,000 valuation allowance and reducing its income tax expense and accrued income taxes by approximately $600,000 during the first quarter of 2000. BALANCE SHEET. . .The Company's total consolidated assets were $2.467 billion at December 31, 1999, compared with $2.377 billion at December 31, 1998, which represents an increase of $90 million or 3.8% due largely to the funds provided from the First Western Branches Acquisition. During 1999, total loans and loans held for sale increased by approximately $33 million or 3.0% due to continued growth in commercial and commercial mortgage loans and the consumer loans acquired from First Western. This loan portfolio growth occurred despite the sale of the Company's $14 million credit card portfolio and a $30 million reduction in loans held for sale due to a slow down in mortgage refinance activity. Total investment securities increased by $18 million as the acquired deposits were used to purchase securities. Cash balances at December 31, 1999 were $20 million higher than the prior year-end due to a build up of cash in anticipation of potential deposit outflows due to Year 2000. No material deposit outflows materialized. Intangible assets increased by $7 million due to the core deposit intangible resulting from the First Western Branches Acquisition. Total deposits increased by $55 million or 4.6% since December 31, 1998, due to the acquisition of the First Western Branches. Deposit totals were negatively impacted by the sale of a $6.0 million marginally profitable branch office and run-off of certificates of deposit. The Company's total borrowed funds position increased by $73 million in order to fund the earning asset growth. Growth in Advances from the Federal Home Loan Bank more than offset reduced short term borrowings and fed funds purchased. Total equity declined by $29 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 and increased holdings of treasury stock. INTEREST RATE SENSITIVITY. . .Asset/liability management involves managing the risks associated with changing interest rates and the resulting impact on the Company's net interest income, net income and capital. The management and measurement of interest rate risk at USBANCORP is performed by using the following tools: 1) Simulation modeling which analyzes the impact of interest rate changes on net interest income, net income and capital levels over specific future time periods. The simulation modeling forecasts earnings under a variety of scenarios that incorporate changes in the absolute level of interest rates, the shape of the yield curve, prepayments and changes in the volumes and rates of various loan and deposit categories. The simulation modeling also incorporates all off balance sheet hedging activity as well as assumptions about reinvestment and the repricing characteristics of certain assets and liabilities without stated contractual maturities. 2) Static "GAP" analysis which analyzes the extent to which interest rate sensitive assets and interest rate sensitive liabilities are matched at specific points in time. 3) Market value of portfolio equity sensitivity analysis. The overall interest rate risk position and strategies are reviewed by senior management and the Company's Board of Directors on an ongoing basis. 27 29 The following table presents a summary of the Company's static GAP positions at December 31, 1999:
OVER OVER 3 MONTHS 6 MONTHS 3 MONTHS THROUGH THROUGH OVER INTEREST SENSITIVITY PERIOD OR LESS 6 MONTHS 1 YEAR 1 YEAR TOTAL - --------------------------- ---------- --------- --------- ---------- ---------- (IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES) Rate sensitive assets: Loans......................... $ 274,558 $ 80,875 $ 102,066 $ 627,955 $1,085,454 Investment securities......... 175,591 43,131 74,365 894,248 1,187,335 Short-term assets............. 758 -- -- -- 758 Other assets.................. -- -- 37,290 -- 37,290 ---------- --------- --------- ---------- ---------- Total rate sensitive assets................... $ 450,907 $ 124,006 $ 213,721 $1,522,203 $2,310,837 ========== ========= ========= ========== ========== Rate sensitive liabilities: Deposits: Non-interest bearing deposits................. $ -- $ -- $ -- $ 160,253 $ 160,253 NOW and Super NOW........... -- -- -- 88,661 88,661 Money market................ 177,935 -- -- -- 177,935 Other savings............... -- -- -- 162,653 162,653 Certificates of deposit of $100,000 or more......... 37,542 4,416 5,764 3,200 50,922 Other time deposits......... 141,784 90,954 150,077 207,702 590,517 ---------- --------- --------- ---------- ---------- Total deposits........... 357,261 95,370 155,841 622,469 1,230,941 Borrowings.................... 725,223 313 140,598 233,708 1,099,842 ========== ========= ========= ========== ========== Total rate sensitive liabilities............ $1,082,484 $ 95,683 $ 296,439 $ 856,177 $2,330,783 Off-balance sheet hedges...... (390,000) 120,000 130,000 140,000 -- ========== ========= ========= ========== ========== Interest sensitivity GAP: Interval.................... (241,577) (91,677) (212,718) 526,026 Cumulative.................. $ (241,577) $(333,254) $(545,972) $ (19,946) $ (19,946) ========== ========= ========= ========== ========== Period GAP ratio.............. 0.65x 0.57x 0.50x 1.53x Cumulative GAP ratio.......... 0.65 0.63 0.59 0.99 Ratio of cumulative GAP to total assets................ (9.79)% (13.51)% (22.13)% (0.81)% ========== ========= ========= ==========
When December 31, 1999, is compared to December 31, 1998, both the Company's six month and one year cumulative GAP ratios became more negative due largely to reduced asset sensitivity resulting from slower prepayment speeds on mortgage-backed securities. An increase in the Company's short-term FHLB borrowings combined with the anticipated call of certain FHLB advances also contributed to increased rate sensitive liabilities. As separately disclosed in the above table, the off-balance sheet hedge transactions (described in detail in Note #21) reduced the negativity of the cumulative one-year GAP position by $140 million. A portion of the Company's funding base is low cost core deposit accounts which do not have a specific maturity date. The accounts that comprise these low cost core deposits include passbook savings accounts, money market accounts, NOW accounts, and daily interest savings accounts. At December 31, 1999, the balance in these accounts totaled $429 million or 17.4% of total assets. Within the above static GAP table, approximately $178 million or 41% of these core deposits are assumed to be rate sensitive liabilities which reprice in one year or less; this assumption is based upon historical experience in varying interest rate environments and is reviewed annually for reasonableness. The Company recognizes that the pricing of these accounts is somewhat inelastic when compared to normal rate movements. 28 30 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 of these GAP limitations, management places primary emphasis on simulation modeling to manage and measure interest rate risk. The Company's asset liability management policy seeks to limit net interest income variability over a twelve month period to P7.5% and net income variability to P15.0% based upon varied economic rate forecasts which include interest rate movements of up to 200 basis points and alterations of the shape of the yield curve. Additionally, the Company also uses market value sensitivity measures to further evaluate the balance sheet exposure to changes in interest rates. Market value of portfolio equity sensitivity analysis captures the dynamic aspects of long-term interest rate risk across all time periods by incorporating the net present value of expected cash flows from the Company's assets and liabilities. The Company monitors the trends in market value of portfolio equity sensitivity analysis on a quarterly basis. The following table presents an analysis of the sensitivity inherent in the Company's net interest income, net income and market value of portfolio equity. The interest rate scenarios in the table compare the Company's base forecast or most likely rate scenario at 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. The Company's most likely rate scenario is based upon published economic consensus estimates which currently forecast an increase in interest rates over the next twelve-month period. Each rate scenario contains unique prepayment and repricing assumptions which are applied to the Company's expected balance sheet composition which was developed under the most likely interest rate scenario.
CHANGE IN MARKET VARIABILITY OF VALUE OF INTEREST RATE NET INTEREST VARIABILITY OF PORTFOLIO SCENARIO INCOME NET INCOME EQUITY ------------- -------------- -------------- --------- Base..................................................... 0% 0% 0% Flat..................................................... 1.7 4.2 (17.47) 200 bp increase.......................................... (4.3) (13.1) (62.08) 200 bp decrease.......................................... 1.9 0.4 49.81
As indicated in the table, the maximum negative variability of USBANCORP's net interest income and net income over the next twelve month period was (4.3%) and a (13.1%) respectively, under an upward rate shock forecast reflecting a 200 basis point increase in interest rates. The noted variability under this forecast was within the Company's ALCO policy limits. The variability of market value of portfolio equity was (62%) 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 the Company may take should severe movements in interest rates occur such as lengthening or shortening the duration of the securities portfolio or entering into additional off-balance sheet hedging transactions. These actions would likely reduce the variability of each of the factors identified in the above table in the more extreme interest rate shock forecasts. Within the investment portfolio at December 31, 1999, 100% of the portfolio is classified as available for sale. The available for sale classification provides management with greater flexibility to manage the securities portfolio to better achieve overall balance sheet rate sensitivity goals and provide liquidity to fund loan growth if needed. The mark to market of the available for sale securities does inject more volatility in the book value of equity but has no impact on regulatory capital. Furthermore, it is the Company's intent to continue to diversify its loan portfolio to increase liquidity and rate sensitivity and to better manage USBANCORP's long-term interest rate risk by continuing to sell newly originated fixed-rate 30-year mortgage loans. LIQUIDITY. . .Financial institutions must maintain liquidity to meet day-to-day requirements of depositor and borrower customers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. Sources of 29 31 asset liquidity are provided by short-term investment securities, time deposits with banks, federal funds sold, banker's acceptances, and commercial paper. These assets totaled $111 million at December 31, 1999, compared to $382 million at December 31, 1998. Maturing and repaying loans, as well as the monthly cash flow associated with mortgage-backed securities are other significant sources of asset liquidity for the Company. Liability liquidity can be met by attracting deposits with competitive rates, using repurchase agreements, buying federal funds, or utilizing the facilities of the Federal Reserve or the Federal Home Loan Bank systems. USBANCORP's subsidiaries utilize a variety of these methods of liability liquidity. At December 31, 1999, USBANCORP's subsidiaries had approximately $100 million of unused lines of credit available under informal arrangements with correspondent banks compared to $115 million at December 31, 1998. These lines of credit enable USBANCORP's subsidiaries to purchase funds for short-term needs at current market rates. Additionally, each of the Company's subsidiary banks are members of the Federal Home Loan Bank which provides the opportunity to obtain intermediate to longer term advances 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 of approximately $169 million. Furthermore, the Parent Company had available at December 31, 1999, $13.5 million of a total $17.0 million unsecured line of credit. Liquidity can be analyzed by utilizing the Consolidated Statement of Cash Flows. Cash equivalents increased by $16 million from December 31, 1998, to December 31, 1999, due primarily to $106 million of net cash provided by financing activities and $51 million of net cash provided by operating activities. This more than offset $140 million of net cash used by investing activities. Within investing activities, purchases of investment securities exceeded cash proceeds from investment security maturities and sales by $77 million. Cash advanced for new loan fundings totaled a record $414 million and was approximately $52 million greater than the cash received from loan principal payments. Within financing activities, net deposits increased by $55 million due primarily to the First Western Branches Acquisition. Advances from the Federal Home Loan Bank provided $205 million of cash which was used to paydown $129 million of short-term borrowings and fund overall earning asset growth. The Company used $8.7 million of cash to pay common dividends to shareholders and $2.9 million of cash to service the dividend on the guaranteed junior subordinated deferrable interest debentures. CAPITAL RESOURCES. . .As presented in Note #23, each of the Company's regulatory capital ratios decreased between December 31, 1998, and December 31, 1999, due to a reduction in tangible equity resulting from the $10 million core deposit premium associated with the First Western Branches Acquisition. Specifically, the Tier 1 capital and asset leverage ratio decreased modestly from 13.57% and 6.62% at December 31, 1998, to 12.87% and 6.41% at December 31, 1999. The Company targets an operating range of 6.0% to 6.50% for the asset leverage ratio because management and the Board of Directors believes that this level provides an optimal balance between regulatory capital requirements and shareholder value needs. Strategies the Company uses to manage its capital ratios include common dividend payments, treasury stock repurchases, and earning asset growth. The Company repurchased 243,000 shares or $4.2 million of its common stock during 1999. Through December 31, 1999, the Company has repurchased a total of 4.1 million shares of its common stock at a total cost of $65.7 million. The Company has suspended its treasury stock repurchase program in order to build capital ratios in anticipation of the planned spin-off of its' Three Rivers Bank subsidiary at the end of the first quarter of 2000. The Company plans to resume its treasury stock repurchase program post spin-off. The Company exceeds all regulatory capital ratios for each of the periods presented. Furthermore, each of the Company's subsidiary banks are considered "well capitalized" under all applicable FDIC regulations. It is the Company's intent to maintain the FDIC "well capitalized" classification for each of its subsidiaries to ensure the lowest deposit insurance premium. The Company's declared Common Stock cash dividend per share was $0.59 for 1999 which was comparable with the $0.60 in dividends paid in 1998. Note that the 1998 dividends included a special dividend of $0.06 per share. There were no special dividends declared in 1999. The current dividend yield on 30 32 the Company's common stock approximates 5.7%. The Company's Board of Directors believes that a better than peer common dividend is a key component of total shareholder return particularly for retail shareholders. PROPOSED TAX-FREE SPIN-OFF PLAN. . .As discussed in Note #20, The Company plans to spin-off its Three Rivers Bank and Trust subsidiary on April 1, 2000 pending regulatory approvals. Upon consummation of the proposed spin-off, the resulting companies will have the following corporate profiles based upon financial data as of December 31, 1999. PRO FORMA FINANCIAL INFORMATION AS OF DECEMBER 31, 1999 (UNAUDITED)
USBANCORP THREE RIVERS BANCORP, INC. ------------ ---------------------------- Total Assets........................................... $1.4 billion $1.1 billion Total Loans............................................ $616 million $480 million Total Deposits......................................... $658 million $573 million Corporate Headquarters................................. Johnstown Monroeville Deposit Market Share in Primary County................. 25% 2% 1999 Net Income........................................ $10,451,000 $9,970,000 1999 EPS Contribution.................................. $0.78 $0.74 Return on Equity....................................... 13.7% 17.9%
FORWARD-LOOKING STATEMENT. . .This annual report 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 the Company's market area of competitors with greater financial resources than the Company; (ix) the timely development of competitive new products and services by the Company and the acceptance of those products and services by customers and regulators (when required); (x) the willingness of customers to substitute competitors' products and services for those of the Company and vice versa; (xi) changes in consumer spending and savings habits; (xii) unanticipated regulatory or judicial proceedings; and (xiii) other external developments which could materially impact the Company's operational and financial performance. The foregoing list of important factors is not exclusive, and neither such list nor any forward-looking statement takes into account the impact that any future acquisition may have on the Company and on any such forward-looking statement. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding the market risk of the Company's financial instruments, see "Interest Rate Sensitivity" in the MD&A presented on pages 26 to 28. The Company's principal market risk exposure is to interest rates. 31 33 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEET
AT DECEMBER 31 ------------------------ 1999 1998 ---------- ---------- (IN THOUSANDS) ASSETS Cash and due from banks..................................... $ 54,676 $ 35,085 Interest bearing deposits................................... 758 3,855 Investment securities: Available for sale........................................ 1,187,335 661,491 Held to maturity (market value $516,452 on December 31, 1998).................................................. -- 508,142 Loans held for sale......................................... 21,753 51,317 Loans....................................................... 1,082,459 1,020,280 Less: Unearned income..................................... 8,408 5,276 Allowance for loan losses........................... 10,350 10,725 ---------- ---------- Net loans................................................... 1,063,701 1,004,279 ---------- ---------- Premises and equipment...................................... 18,937 18,020 Accrued income receivable................................... 16,650 17,150 Mortgage servicing rights................................... 13,510 16,197 Goodwill and core deposit intangibles....................... 25,655 18,697 Bank owned life insurance................................... 37,290 35,622 Other assets................................................ 27,214 7,226 ---------- ---------- TOTAL ASSETS................................................ $2,467,479 $2,377,081 ========== ========== LIABILITIES Non-interest bearing deposits............................... $ 160,253 $ 166,701 Interest bearing deposits................................... 1,070,688 1,009,590 ---------- ---------- Total deposits.............................................. 1,230,941 1,176,291 ---------- ---------- Federal funds purchased and securities sold under agreements to repurchase............................................. 16,369 101,405 Other short-term borrowings................................. 84,874 129,003 Advances from Federal Home Loan Bank........................ 956,999 752,391 Guaranteed junior subordinated deferrable interest debentures................................................ 34,500 34,500 Long-term debt.............................................. 7,100 9,271 ---------- ---------- Total borrowed funds........................................ 1,099,842 1,026,570 ---------- ---------- Other liabilities........................................... 24,139 32,550 ---------- ---------- TOTAL LIABILITIES........................................... 2,354,922 2,235,411 ---------- ---------- Commitments and contingent liabilities (Note #16) STOCKHOLDERS' EQUITY Preferred stock, no par value; 2,000,000 shares authorized; there were no shares issued and outstanding on December 31, 1999, and 1998........................................ -- -- Common stock, par value $2.50 per share; 24,000,000 shares authorized; 17,390,496 shares issued and 13,309,577 outstanding on December 31, 1999; 17,350,136 shares issued and 13,512,317 shares outstanding on December 31, 1998.... 43,476 43,375 Treasury stock at cost, 4,080,919 shares on December 31, 1999, and 3,837,819 shares on December 31, 1998........... (65,725) (61,521) Surplus..................................................... 65,686 65,495 Retained earnings........................................... 104,294 91,737 Accumulated other comprehensive income...................... (35,174) 2,584 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY.................................. 112,557 141,670 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $2,467,479 $2,377,081 ========== ==========
- --------------- (1) All share data has been adjusted to reflect a 3 for 1 stock split effected in the form of a 200% stock dividend which was distributed on July 31, 1998, to shareholders of record on July 16, 1998. See accompanying notes to consolidated financial statements. 32 34 CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 ---------------------------------------- 1999 1998 1997 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME Interest and fees on loans: Taxable............................................. $ 84,585 $ 84,510 $ 81,105 Tax exempt.......................................... 2,250 2,469 2,400 Deposits with banks................................... 121 120 190 Federal funds sold and securities purchased under agreements to resell................................ -- 2 2 Investment securities: Available for sale.................................. 46,506 38,139 31,769 Held to maturity.................................... 31,726 33,718 39,322 ----------- ----------- ----------- Total Interest Income................................. 165,188 158,958 154,788 ----------- ----------- ----------- INTEREST EXPENSE Deposits.............................................. 41,150 40,891 42,572 Federal funds purchased and securities sold under agreements to repurchase............................ 3,438 4,603 5,060 Other short-term borrowings........................... 7,599 5,303 3,123 Advances from Federal Home Loan Bank.................. 43,946 40,483 36,648 Guaranteed junior subordinated deferrable interest debentures.......................................... 2,960 1,944 -- Long-term debt........................................ 411 504 526 ----------- ----------- ----------- Total Interest Expense................................ 99,504 93,728 87,929 ----------- ----------- ----------- Net Interest Income................................... 65,684 65,230 66,859 Provision for loan losses........................... 1,900 600 158 ----------- ----------- ----------- Net Interest Income after Provision for Loan Losses... 63,784 64,630 66,701 ----------- ----------- ----------- NON-INTEREST INCOME Trust fees............................................ 4,883 4,430 4,022 Net gains on loans held for sale...................... 4,645 3,697 2,008 Net realized gains on investment securities........... 436 2,267 792 Wholesale cash processing fees........................ 603 706 976 Service charges on deposit accounts................... 3,563 3,409 3,323 Net mortgage servicing fees........................... 789 692 2,104 Bank owned life insurance............................. 1,668 1,643 1,644 Gain on sale of branch................................ 540 -- -- Other income.......................................... 7,247 6,845 5,334 ----------- ----------- ----------- Total Non-Interest Income............................. 24,374 23,689 20,203 ----------- ----------- ----------- NON-INTEREST EXPENSE Salaries and employee benefits........................ 32,091 30,427 28,197 Net occupancy expense................................. 4,602 4,474 4,431 Equipment expense..................................... 4,211 3,637 3,260 Professional fees..................................... 3,332 3,373 2,928 Supplies, postage, and freight........................ 2,718 2,674 2,766 Miscellaneous taxes and insurance..................... 1,810 1,568 1,483 FDIC deposit insurance expense........................ 272 272 119 Amortization of goodwill and core deposit intangibles......................................... 3,135 2,308 2,356
33 35
YEAR ENDED DECEMBER 31 ---------------------------------------- 1999 1998 1997 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Impairment (credit) charge for mortgage servicing rights.............................................. (776) 831 -- Other expense......................................... 9,420 9,956 8,564 ----------- ----------- ----------- Total Non-Interest Expense............................ 60,815 59,520 54,104 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES................................... 27,343 28,799 32,800 Provision for income taxes.......................... 6,922 7,655 9,303 ----------- ----------- ----------- NET INCOME............................................ $ 20,421 $ 21,144 $ 23,497 =========== =========== =========== PER COMMON SHARE DATA:(1) Basic: Net income....................................... $ 1.53 $ 1.51 $ 1.56 Average number of shares outstanding............. 13,340,204 14,011,893 15,043,128 Diluted: Net income....................................... $ 1.52 $ 1.48 $ 1.54 Average number of shares outstanding............. 13,451,166 14,257,557 15,274,272 Cash dividends declared............................... $ 0.59 $ 0.60 $ 0.53 =========== =========== ===========
- --------------- (1) All per share and share data have been adjusted to reflect a 3 for 1 stock split effected in the form of a 200% stock dividend which was distributed on July 31, 1998, to shareholders of record on July 16, 1998. See accompanying notes to consolidated financial statements. 34 36 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- ------- ------- (IN THOUSANDS) COMPREHENSIVE INCOME Net income.................................................. $ 20,421 $21,144 $23,497 Other comprehensive income, before tax: Unrealized holding (losses) gains arising during period... (50,124) 3,029 3,858 Less: reclassification adjustment for gains included in net income............................................. (436) (2,267) (792) -------- ------- ------- Other comprehensive (loss) income, before tax:.............. (50,560) 762 3,066 Income tax (credit) expense related to items of other comprehensive income...................................... (12,802) 331 1,127 -------- ------- ------- Other comprehensive (loss) income, net of tax............... (37,758) 431 1,939 -------- ------- ------- Comprehensive (loss) income................................. $(17,337) $21,575 $25,436 ======== ======= =======
35 37 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31 -------------------------------- 1999 1998 1997 -------- -------- -------- PREFERRED STOCK Balance at beginning of period............................. $ -- $ -- $ -- Balance at end of period................................... -- -- -- -------- -------- -------- COMMON STOCK Balance at beginning of period............................. 43,375 14,402 14,356 Stock options exercised.................................... 101 75 46 Effect of 3 for 1 split in the form of a 200% stock dividend................................................. -- 28,898 -- -------- -------- -------- Balance at end of period................................... 43,476 43,375 14,402 -------- -------- -------- TREASURY STOCK Balance at beginning of period............................. (61,521) (31,175) (19,538) Treasury stock, at cost.................................... (4,204) (30,346) (11,637) -------- -------- -------- Balance at end of period................................... (65,725) (61,521) (31,175) -------- -------- -------- CAPITAL SURPLUS Balance at beginning of period............................. 65,495 93,934 93,527 Stock options exercised.................................... 191 459 407 Effect of 3 for 1 split in the form of a 200% stock dividend................................................. -- (28,898) -- -------- -------- -------- Balance at end of period................................... 65,686 65,495 93,934 -------- -------- -------- RETAINED EARNINGS Balance at beginning of period............................. 91,737 78,866 63,358 Net income................................................. 20,421 21,144 23,497 Cash dividends declared.................................... (7,864) (8,273) (7,989) -------- -------- -------- Balance at end of period................................... 104,294 91,737 78,866 -------- -------- -------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period............................. 2,584 2,153 214 Other comprehensive (loss)income, net of tax............... (37,758) 431 1,939 -------- -------- -------- Balance at end of period................................... (35,174) 2,584 2,153 -------- -------- -------- TOTAL STOCKHOLDERS' EQUITY................................. $112,557 $141,670 $158,180 ======== ======== ========
See accompanying notes to consolidated financial statements. 36 38 CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 ----------------------------------- 1999 1998 1997 --------- --------- --------- (IN THOUSANDS) OPERATING ACTIVITIES Net income.............................................. $ 20,421 $ 21,144 $ 23,497 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses............................. 1,900 600 158 Depreciation and amortization expense................. 2,656 2,483 2,430 Amortization expense of goodwill and core deposit intangibles........................................ 3,135 2,308 2,356 Amortization expense of mortgage servicing rights..... 2,618 2,861 1,806 Net amortization of investment securities............. 152 1,038 218 Net realized gains on investment securities........... (436) (2,267) (792) Net realized gains on loans held for sale............. (4,645) (3,697) (2,008) Origination of mortgage loans held for sale........... (403,673) (450,639) (260,984) Sales of mortgage loans held for sale................. 426,240 414,023 258,261 Decrease in accrued income receivable................. 500 167 45 Increase (decrease) in accrued expense payable........ 1,918 (262) 1,385 --------- --------- --------- Net cash provided (used) by operating activities........ 50,786 (12,241) 26,372 --------- --------- --------- INVESTING ACTIVITIES Purchase of investment securities and other short-term investments -- available for sale..................... (394,195) (704,113) (589,787) Purchase of investment securities and other short-term investments -- held to maturity....................... (104,527) (114,967) (96,300) Proceeds from maturities of investment securities and other short-term investments -- available for sale.... 93,650 115,247 73,845 Proceeds from maturities of investment securities and other short-term investments -- held to maturity...... 99,949 141,826 90,876 Proceeds from sales of investment securities and other short-term investments -- available for sale.......... 212,461 509,383 414,682 Proceeds from sales of investment securities and other short-term investments -- held to maturity............ 15,969 -- -- Long-term loans originated.............................. (414,016) (336,815) (322,491) Loans held for sale..................................... (21,753) (51,317) (13,163) Principal collected on long-term loans.................. 362,168 347,180 288,669 Loans purchased or participated......................... (9,743) -- (2) Loans sold or participated.............................. 18,366 44 234 Net decrease in credit card receivables and other short-term loans...................................... 15,298 2,487 261 Purchases of premises and equipment..................... (3,861) (2,947) (1,913) Sale/retirement of premises and equipment............... 288 74 54 Net decrease in assets held in trust for collateralized mortgage obligation................................... 1,117 1,424 992 Decrease (increase) in mortgage servicing rights........ 69 (4,098) (4,272) Net (increase) decrease in other assets................. (11,341) (5,775) 583 --------- --------- --------- Net cash used by investing activities................... $(140,111) $(102,367) $(157,732) ========= ========= =========
See accompanying notes to consolidated financial statements. 37 39
YEAR ENDED DECEMBER 31 1999 1998 1997 --------- --------- --------- (IN THOUSANDS) FINANCING ACTIVITIES Proceeds from sales of certificates of deposit.......... $ 487,877 $ 483,384 $ 270,064 Payments for maturing certificates of deposit........... (467,790) (471,829) (258,653) Net increase (decrease) in demand and savings deposits.............................................. 34,563 25,209 (10,622) Net (decrease) increase in federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings........................... (129,165) 81,382 (5,931) Net principal borrowings (repayments) on advances from Federal Home Loan Bank................................ 204,608 (1,804) 148,696 Principal borrowings of long-term debt.................. -- 11,123 5,068 Repayments of long-term debt............................ (2,171) (11,687) (4,879) Common stock dividends paid............................. (8,673) (8,688) (9,305) Guaranteed junior subordinated deferrable interest debenture dividends paid.............................. (2,916) (1,944) -- Proceeds from sale of guaranteed junior Subordinated deferrable interest debentures, net of expenses.............................................. -- 33,172 -- Proceeds from dividend reinvestment and stock purchase plan and stock options exercised...................... 292 534 453 Purchases of treasury stock............................. (4,204) (30,346) (11,637) Net (decrease) increase in other liabilities............ (6,602) 6,823 1,924 --------- --------- --------- Net cash provided by financing activities............... 105,819 115,329 125,178 --------- --------- --------- NET INCREASE (DECREASE) IN CASH EQUIVALENTS............. 16,494 721 (6,182) CASH EQUIVALENTS AT JANUARY 1........................... 38,940 38,219 44,401 --------- --------- --------- CASH EQUIVALENTS AT DECEMBER 31......................... $ 55,434 $ 38,940 $ 38,219 ========= ========= =========
See accompanying notes to consolidated financial statements. 38 40 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AT AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND NATURE OF OPERATIONS: USBANCORP, Inc. (the "Company") is a multi-bank holding company headquartered in Johnstown, Pennsylvania. Through its banking subsidiaries the Company operates 44 banking offices in six southwestern Pennsylvania counties. These offices provide a full range of consumer, mortgage, commercial, and trust financial products. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, U.S. Bank ("U.S. Bank"), Three Rivers Bank and Trust Company ("Three Rivers Bank"), including its principal subsidiary, Standard Mortgage Corporation of Georgia, USBANCORP Trust and Financial Services Company ("Trust Company"), United Bancorp Life Insurance Company ("United Life"), and UBAN Associates, Inc. Intercompany accounts and transactions have been eliminated in preparing the consolidated financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from these estimates. INVESTMENT SECURITIES: Securities are classified at the time of purchase as investment securities held to maturity if it is management's intent and the Company has the ability to hold the securities until maturity. These held to maturity securities are carried on the Company's books at cost, adjusted for amortization of premium and accretion of discount which is computed using the level yield method which approximates the effective interest method. Alternatively, securities are classified as available for sale if it is management's intent at the time of purchase to hold the securities for an indefinite period of time and/or to use the securities as part of the Company's asset/liability management strategy. Securities classified as available for sale include securities which may be sold to effectively manage interest rate risk exposure, prepayment risk, and other factors (such as liquidity requirements). These available for sale securities are reported at fair value with unrealized aggregate 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 Company 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 Company's subsidiaries discontinue the accrual of interest income when loans, except for loans that are insured for credit loss, become 90 days past due in either principal or interest. In addition, if circumstances warrant, the accrual of interest may be discontinued prior to 90 days. In all cases, payments received on non-accrual loans are credited to principal until full recovery of principal has been recognized; it is only after full recovery of principal that any additional payments received are recognized as interest income. The only exception to this policy is for residential mortgage loans wherein interest income is recognized on a cash basis as payments are received. A non-accrual loan is placed on accrual status after becoming current and remaining current for twelve consecutive payments (except for residential mortgage loans which only have to become current). 39 41 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LOAN FEES: Loan origination and commitment fees, net of associated direct costs, are deferred and amortized into interest and fees on loans over the loan or commitment period. Fee amortization is determined by either the straight-line method, or the effective interest method, which do not differ materially. MORTGAGE LOANS HELD FOR SALE: Newly originated fixed-rate residential mortgage loans are classified as "held for sale," if it is management's intent to sell these residential mortgage loans. The residential mortgage loans held for sale are carried at the lower of aggregate cost or market value. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is charged to operations over the estimated useful lives of the premises and equipment using the straight-line method. Useful lives of up to 45 years for buildings and up to 12 years for equipment are utilized. Leasehold improvements are amortized using the straight-line method over the terms of the respective leases or useful lives of the improvements, whichever is shorter. Maintenance, repairs, and minor alterations are charged to current operations as expenditures are incurred. ALLOWANCE FOR LOAN LOSSES AND CHARGE-OFF PROCEDURES: As a financial institution which assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, the Company consistently applies a comprehensive methodology and procedural discipline which is updated on a quarterly basis at the subsidiary bank level to determine both the adequacy of the allowance for loan losses and the necessary provision for loan losses to be charged against earnings. This methodology includes: - A detailed review of all criticized and impaired loans to determine if any specific reserve allocations are required on an individual loan basis. The specific reserve established for these criticized and impaired loans is based on careful analysis of the loan's performance, the related collateral value, cash flow considerations and the financial capability of any guarantor. - The application of formula driven reserve allocations for all commercial and commercial real-estate loans are calculated by using a three-year migration analysis of net losses incurred within each risk grade for the entire commercial loan portfolio. The difference between estimated and actual losses is reconciled through the dynamic nature of the migration analysis. - The application of formula driven reserve allocations to installment and mortgage loans which are based upon historical charge-off experience for those loan types. The residential mortgage loan allocation is based upon the Company's five-year historical average of actual loan charge-offs experienced in that category. The same methodology is used to determine the allocation for consumer loans except the allocation is based upon an average of the most recent actual three-year historical charge-off experience for consumer loans. - The application of formula driven reserve allocations to all outstanding loans and certain unfunded commitments is based upon review of historical losses and qualitative factors, which include but are not limited to, economic trends, delinquencies, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies and trends in policy exceptions. - The maintenance of a general unallocated reserve to accommodate inherent risk in the Company's portfolio that is not identified through the Company's specific loan and portfolio segment reviews 40 42 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 Company uses for arriving at a specific loan or portfolio segment reserves. Therefore, the Company and its Board of Directors believe a general unallocated reserve is needed to recognize the estimation risk associated with the specific and formula driven allowances. In conjunction with the establishment of the general unallocated reserve, the Company also looks at the total allowance for loan losses in relation to the size of the total loan portfolio, the level of non-performing assets and its coverage of these items as compared to peer banks. After completion of this process, a formal meeting of the Loan Loss Reserve Committee is held to evaluate the adequacy of the reserve and establish the provision level for the next quarter. The Company believes that the procedural discipline, systematic methodology, and comprehensive documentation of this quarterly process is in full compliance with all regulatory requirements and provides appropriate support for accounting purposes. When it is determined that the prospects for recovery of the principal of a loan have significantly diminished, the loan is immediately charged against the allowance account; subsequent recoveries, if any, are credited to the allowance account. In addition, non-accrual and large delinquent loans are reviewed monthly to determine potential losses. Consumer loans are considered losses when they are 90 days past due, except loans that are insured for credit loss. The Company's policy is to individually review, as circumstances warrant, each of its commercial and commercial mortgage loans to determine if a loan is impaired. At a minimum, credit reviews are mandatory for all commercial and commercial mortgage loans with balances in excess of $500,000 within an 18 month period. The Company has also identified two pools of small dollar value homogeneous loans which are evaluated collectively for impairment. These separate pools are for residential mortgage loans and consumer loans. Individual loans within these pools are reviewed and removed from the pool if factors such as significant delinquency in payments of 90 days or more, bankruptcy, or other negative economic concerns indicate impairment. PURCHASED AND ORIGINATED MORTGAGE SERVICING RIGHTS: The Company recognizes as assets the rights to service mortgage loans for others whether the servicing rights are acquired through purchases or originations. Purchased mortgage servicing rights are capitalized at cost. For loans originated and sold where servicing rights have been retained, the Company allocates the cost of originating the loan to the loan (without the servicing rights) and the servicing rights retained based on their relative fair market values if it is practicable to estimate those fair values. Where it is not practicable to estimate the fair values, the entire cost of originating the loan is allocated to the loan without the servicing rights. For purposes of evaluating and measuring impairment, the Company stratifies the rights based on risk characteristics. If the discounted projected net cash flows of a stratum are less than the carrying amount of the stratum, the stratum is written down to the amount of the discounted projected net cash flows through a valuation account. This writedown is recorded in the line item on the Consolidated Statement of Income titled "Impairment charge for mortgage servicing rights". The Company has determined that the predominant risk characteristics of its portfolio are loan type and interest rate. For the purposes of evaluating impairment, the Company has stratified its portfolio in 200 basis point tranches by loan type. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income. The value of mortgage servicing rights is subject to interest rate and prepayment risk. It is likely that the value of these assets will decrease if prepayments occur at greater than the expected rate. TRUST FEES: All trust fees are recorded on the cash basis which approximates the accrual basis for such income. 41 43 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EARNINGS PER COMMON SHARE: Basic earnings per share includes only the weighted average common shares outstanding. Diluted earnings per share includes the weighted average common shares outstanding and any dilutive common stock equivalent shares in the calculation. Treasury shares are treated as retired for earnings per share purposes. COMPREHENSIVE INCOME: In January 1998, the Company adopted SFAS #130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a financial statement. For the Company, comprehensive income includes net income and unrealized holding gains and losses from available for sale investment securities. The balances of other accumulated comprehensive (loss) income were $(35,174,000), $2,584,000 and $2,153,000 at December 31, 1999, 1998 and 1997, respectively. CONSOLIDATED STATEMENT OF CASH FLOWS: On a consolidated basis, cash equivalents include cash and due from banks, interest bearing deposits with banks, and federal funds sold and securities purchased under agreements to resell. For the Parent Company, cash equivalents also include short-term investments. The Company made $4,927,000 in income tax payments in 1999; $6,695,000 in 1998; and $7,783,000 in 1997. The Company made total interest expense payments of $97,586,000 in 1999; $93,990,000 in 1998; and $86,544,000 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 Company uses various interest rate contracts, such as interest rate swaps, caps and floors, to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. These interest rate contracts function as hedges against specific assets or liabilities on the Consolidated Balance Sheet. Unrealized gains or losses on these hedge transactions are deferred. It is the Company's policy not to terminate hedge transactions prior to their expiration date. For interest rate swaps, the interest differential to be paid or received is accrued by the Company and recognized as an adjustment to interest income or interest expense of the underlying assets or liabilities being hedged. Because only interest payments are exchanged, the cash requirement and exposure to credit risk are significantly less than the notional amount. Any premium or transaction fee incurred to purchase interest rate caps or floors is deferred and amortized to interest income or interest expense over the term of the contract. Unamortized premiums related to the purchase of caps and floors are included in "Other assets" on the Consolidated Balance Sheet. RISK MANAGEMENT OVERVIEW: Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, including interest rate, credit, and liquidity risk. The Company controls and monitors these risks with policies, procedures, and various levels of managerial and Board oversight. The Company's objective is to optimize profitability while managing and controlling risk within Board approved policy limits. 42 44 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets, liabilities, and off-balance sheet positions. The Company uses its asset liability management policy and hedging policy to control and manage interest rate risk. Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from extending credit to customers, purchasing securities, and entering into certain off-balance sheet financial instruments. The Company's primary credit risk occurs in the loan portfolio. The Company uses its credit policy and disciplined approach to evaluating the adequacy of the allowance for loan losses to control and manage credit risk. The Company's investment policy and hedging policy strictly limit the amount of credit risk that may be assumed in the investment portfolio and through off-balance sheet activities. Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as, the obligations to depositors and debtholders. The Company uses its asset liability management policy and contingency funding plan to control and manage liquidity risk. FUTURE ACCOUNTING STANDARDS: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement #133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS #133"), which is required to be adopted in years beginning after June 15, 1999. The statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. This statement has been amended by SFAS #137, "Accounting for Derivative Instruments and Hedging Activity -- Deferral of the effective date of SFAS #133." SFAS #137 will be effective for years beginning after June 15, 2000. The ineffective portions of a derivative's change in fair value will be immediately recognized in earnings. The Company 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. 2. CASH AND DUE FROM BANKS Cash and due from banks at December 31, 1999, and 1998, included $18,448,000 and $17,288,000, respectively, of reserves required to be maintained under Federal Reserve Bank regulations. 3. INTEREST BEARING DEPOSITS WITH BANKS The book value of interest bearing deposits with domestic banks are as follows:
AT DECEMBER 31 -------------- 1999 1998 ---- ------ (IN THOUSANDS) Total..................................................... $758 $3,855 ==== ======
All interest bearing deposits with domestic banks mature within three months. The Company had no deposits in foreign banks nor in foreign branches of United States banks. 43 45 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. INVESTMENT SECURITIES The book and market values of investment securities are summarized as follows: Investment securities available for sale:
AT DECEMBER 31, 1999 ------------------------------------------------- GROSS GROSS BOOK UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) U.S. TREASURY................................... $ 15,855 $ 2 $ (135) $ 15,722 U.S. AGENCY..................................... 43,599 -- (2,917) 40,682 STATE AND MUNICIPAL............................. 156,256 745 (7,529) 149,472 U.S. AGENCY MORTGAGE-BACKED SECURITIES.......... 943,474 637 (43,401) 900,710 OTHER SECURITIES(1)............................. 82,568 48 (1,867) 80,749 ---------- ------ -------- ---------- TOTAL........................................... $1,241,752 $1,432 $(55,849) $1,187,335 ========== ====== ======== ==========
- --------------- (1) Other investment securities include corporate notes and bonds, asset-backed securities, and equity securities. During the second half of 1999, the Company in preparation for liquidity needs for Year 2000 sold $16 million of mortgage backed securities that had been purchased in 1993 through 1995 and classified as held to maturity. The Company believed the sales were allowable under the provision of SFAS #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 Company, 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 Company purchased the securities in the secondary market. As a result of this interpretation error, the Company 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 $495.8 million and a market value of $485.4 million. Prior to the transfer, approximately 60% of the Company's investment securities were already classified as available for sale. With the entire portfolio now being classified as available for sale, the Company 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:
AT DECEMBER 31, 1998 --------------------------------------------- GROSS GROSS BOOK UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE -------- ---------- ---------- -------- (IN THOUSANDS) U.S. Treasury...................................... $ 442 $ 14 $ -- $ 456 U.S. Agency........................................ 21,524 82 -- 21,606 State and municipal................................ 11,166 162 -- 11,328 U.S. Agency mortgage-backed securities............. 577,241 4,119 (673) 580,687 Other securities(1)................................ 47,409 5 -- 47,414 -------- ------ ----- -------- Total.............................................. $657,782 $4,382 $(673) $661,491 ======== ====== ===== ========
44 46 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Investment securities held to maturity:
AT DECEMBER 31, 1998 --------------------------------------------- GROSS GROSS BOOK UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE -------- ---------- ---------- -------- (IN THOUSANDS) U.S. Treasury...................................... $ 17,207 $ 86 $ (33) $ 17,260 U.S. Agency........................................ 23,928.. 371 -- 24,299 State and municipal................................ 147,628 2,816 (1,174) 149,270 U.S. Agency mortgage-backed securities............. 315,171 6,316 (196) 321,291 Other securities(1)................................ 4,208 124 -- 4,332 -------- ------ ------- -------- Total.............................................. $508,142 $9,713 $(1,403) $516,452 ======== ====== ======= ========
- --------------- (1) Other investment securities include corporate notes and bonds, asset-backed securities, and equity securities. All purchased investment securities are recorded on settlement date which is not materially different from the trade date. Realized gains and losses are calculated by the specific identification method. Maintaining investment quality is a primary objective of the Company's investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody's Investors Service or Standard & Poor's rating of "A." At December 31, 1999, 97.3% of the portfolio was rated "AAA" as compared to 98.1% at December 31, 1998. Less than 1.5% 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 $788,622,000 at December 31, 1999, and $628,369,000 at December 31, 1998. The Company realized $624,000 and $2,745,000 of gross investment security gains and $525,000 and $478,000 of gross investment security losses on available for sale securities in 1999 and 1998, respectively. The Company realized $355,000 of gross investment security gains and $18,000 of gross investment security losses on held to maturity securities in 1999. The following table sets forth the contractual maturity distribution of the investment securities, book and market values, and the weighted average yield for each type and range of maturity as of December 31, 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 maturity dates with the exception of mortgage-backed securities and asset-backed securities for which the average lives were used. At December 31, 1999, the Company's consolidated investment securities portfolio had a modified duration of approximately 5.25 years. 45 47 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Investment securities available for sale:
AT DECEMBER 31, 1999 ------------------------------------------------------------------------------------------ AFTER 5 YEARS AFTER 1 YEAR BUT BUT WITHIN WITHIN 1 YEAR WITHIN 5 YEARS 10 YEARS AFTER 10 YEARS TOTAL AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD -------------- ----------------- --------------- --------------- ----------------- (IN THOUSANDS, EXCEPT YIELDS) BOOK VALUE U.S. TREASURY....................... $ 5,633 4.51% $ 10,222 5.59% $ -- --% $ -- --% $ 15,855 5.21% U.S. AGENCY......................... -- -- 9,294 5.80 33,828 6.51 477 6.37 43,599 6.36 STATE AND MUNICIPAL................. 524 7.00 15,348 4.70 34,240 5.54 106,144 4.91 156,256 5.04 U.S. AGENCY MORTGAGE-BACKED SECURITIES........................ 18,054 6.60 94,913 6.97 409,008 6.53 421,499 6.64 943,474 6.63 OTHER SECURITIES(1)................. 59,006 5.99 1,250 6.97 4,854 5.90 17,458 7.78 82,568 6.35 ------- ---- -------- ---- -------- ---- -------- ---- ---------- ---- TOTAL INVESTMENT SECURITIES AVAILABLE FOR SALE................ $83,217 6.03% $131,027 6.51% $481,930 6.45% $545,578 6.34% $1,241,752 6.38% ======= ==== ======== ==== ======== ==== ======== ==== ========== ==== MARKET VALUE U.S. TREASURY....................... $ 5,589 $ 10,133 $ -- $ -- $ 15,722 U.S. AGENCY......................... -- 8,856 31,375 451 40,682 STATE AND MUNICIPAL................. 527 15,329 34,384 99,232 149,472 U.S. AGENCY MORTGAGE-BACKED SECURITIES........................ 18,020 93,991 389,401 399,298 900,710 OTHER SECURITIES(1)................. 59,054 1,250 4,819 15,626 80,749 ------- -------- -------- -------- ---------- TOTAL INVESTMENT SECURITIES AVAILABLE FOR SALE................ $83,190 $129,559 $459,979 $514,607 $1,187,335 ======= ======== ======== ======== ==========
- --------------- (1) Other investment securities include corporate notes and bonds, asset-backed securities, and equity securities. 5. LOANS The loan portfolio of the Company consisted of the following:
AT DECEMBER 31 ------------------------ 1999 1998 ---------- ---------- (IN THOUSANDS) Commercial.................................................. $ 152,042 $ 139,751 Commercial loans secured by real estate..................... 406,927 341,842 Real estate-mortgage........................................ 452,507 449,875 Consumer.................................................... 70,983 88,812 ---------- ---------- Loans....................................................... 1,082,459 1,020,280 Less: Unearned income....................................... 8,408 5,276 ---------- ---------- Loans, net of unearned income............................... $1,074,051 $1,015,004 ========== ==========
Real estate construction loans comprised 4.5% and 4.9% of total loans net of unearned income at December 31, 1999 and 1998, respectively. The Company has no direct credit exposure to foreign countries. Most of the Company'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 involve more than the normal credit 46 48 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) risk. These loans totaled $4,779,000 and $2,285,000 at December 31, 1999 and 1998, respectively. An analysis of these related party loans follows:
YEAR ENDED DECEMBER 31 ------------------------ 1999 1998 -------- ------- (IN THOUSANDS) Balance January 1........................................... $ 2,285 $ 2,014 New loans................................................... 16,178 2,720 Payments.................................................... (13,684) (2,449) -------- ------- Balance December 31......................................... $ 4,779 $ 2,285 ======== =======
6. ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses follows:
YEAR ENDED DECEMBER 31 ----------------------------- 1999 1998 1997 ------- ------- ------- (IN THOUSANDS) Balance January 1........................................... $10,725 $12,113 $13,329 Provision for loan losses................................... 1,900 600 158 Recoveries on loans previously charged-off.................. 728 530 1,123 Loans charged-off........................................... (3,003) (2,518) (2,497) ------- ------- ------- --- Balance December 31......................................... $10,350 $10,725 $12,113 ======= ======= ======= ===
7. NON-PERFORMING ASSETS Non-performing assets are comprised of (i) loans which are on a non-accrual basis, (ii) loans which are contractually past due 90 days or more as to interest or principal payments some of which are insured for credit loss, and (iii) other real estate owned (real estate acquired through foreclosure and in-substance foreclosures). The following table presents information concerning non-performing assets:
AT DECEMBER 31 ------------------------------------------- 1999 1998 1997 1996 1995 ------- ------ ------ ------ ------ (IN THOUSANDS, EXCEPT PERCENTAGES) Non-accrual loans................................ $ 4,928 $5,206 $6,450 $6,365 $7,517 Loans past due 90 days or more................... 1,305 1,579 1,601 2,043 995 Other real estate owned.......................... 7,126 1,451 807 263 914 ------- ------ ------ ------ ------ Total non-performing assets...................... $13,359 $8,236 $8,858 $8,671 $9,426 Total non-performing assets as a percent of loans and loans held for sale, net of unearned income, and other real estate owned............ 1.21% 0.77% 0.89% 0.92% 1.31% ======= ====== ====== ====== ======
The Company is unaware of any additional loans which are required to either be charged-off or added to the non-performing asset totals disclosed above. Other real estate owned is recorded at the lower of 1) fair value minus estimated costs to sell, or 2) carrying cost. 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. 47 49 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company had loans totalling $,2,169,000 and $1,759,000 being specifically identified as impaired and a corresponding allocation reserve of $49,000 and $375,000 at December 31, 1999 and 1998, respectively. The average outstanding balance for loans being specifically identified as impaired was $4,610,000 for 1999 and $1,519,000 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.
YEAR ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 1996 1995 ---- ----- ----- ---- ----- (IN THOUSANDS) Interest income due in accordance with original terms............................................ $494 $ 367 $ 472 $560 $ 601 Interest income recorded........................... (20) (134) (132) (75) (648) ---- ----- ----- ---- ----- Net reduction (increase) in interest income........ $474 $ 233 $ 340 $485 $ (47) ==== ===== ===== ==== =====
8. PREMISES AND EQUIPMENT An analysis of premises and equipment follows:
AT DECEMBER 31, ------------------ 1999 1998 ------- ------- (IN THOUSANDS) Land........................................................ $ 2,131 $ 2,131 Premises.................................................... 26,730 24,822 Furniture and equipment..................................... 22,052 20,429 Leasehold improvements...................................... 2,709 2,667 ------- ------- Total at cost............................................... 53,622 50,049 Less: Accumulated depreciation.............................. 34,685 32,029 ------- ------- Net book value.............................................. $18,937 $18,020 ======= =======
48 50 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, AND OTHER SHORT-TERM BORROWINGS The outstanding balances and related information for federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings are summarized as follows:
AT DECEMBER 31, 1999 ---------------------------------------- SECURITIES OTHER FEDERAL SOLD UNDER SHORT- FUNDS AGREEMENTS TERM PURCHASED TO REPURCHASE BORROWINGS --------- ------------- ---------- (IN THOUSANDS, EXCEPT RATES) BALANCE.................................................. $15,300 $ 1,069 $ 84,874 MAXIMUM INDEBTEDNESS AT ANY MONTH END.................... 65,600 37,087 218,204 AVERAGE BALANCE DURING YEAR.............................. 56,396 10,548 148,668 AVERAGE RATE PAID FOR THE YEAR........................... 5.13% 4.69% 4.99% AVERAGE RATE ON PERIOD END BALANCE....................... 4.75 3.00 3.07 ======= ======= ========
AT DECEMBER 31, 1998 ---------------------------------------- SECURITIES FEDERAL SOLD UNDER OTHER FUNDS AGREEMENTS SHORT-TERM PURCHASED TO REPURCHASE BORROWINGS --------- ------------- ---------- (IN THOUSANDS, EXCEPT RATES) Balance.................................................. $63,705 $37,700 $129,003 Maximum indebtedness at any month end.................... 65,900 41,602 191,835 Average balance during year.............................. 51,112 39,224 98,988 Average rate paid for the year........................... 5.51% 5.41% 4.84% Average rate on period end balance....................... 5.58 5.16 3.44 ======= ======= ========
AT DECEMBER 31, 1997 ---------------------------------------- SECURITIES FEDERAL SOLD UNDER OTHER FUNDS AGREEMENTS SHORT-TERM PURCHASED TO REPURCHASE BORROWINGS --------- ------------- ---------- (IN THOUSANDS, EXCEPT RATES) Balance.................................................. $52,800 $40,029 $ 57,892 Maximum indebtedness at any month end.................... 58,651 71,888 106,408 Average balance during year.............................. 37,632 51,621 67,246 Average rate paid for the year........................... 5.60% 5.56% 4.76% Average rate on period end balance....................... 6.43 5.54 5.35 ======= ======= ========
Average amounts outstanding during the year represent daily averages. Average interest rates represent interest expense divided by the related average balances. Collateral related to securities sold under agreements to repurchase are maintained within the Company's investment portfolio. Included in the above borrowings is a $33,499,000 outstanding balance on a $100 million mortgage warehouse line of credit at Standard Mortgage Corporation (a mortgage banking subsidiary of Three Rivers Bank). This line of credit bears interest at a rate between 1.00% and 1.35% on the used portion for which a compensating balance is maintained and Libor plus 1.35% on the used portion for which no compensating balance is maintained. This line of credit, which expires May 7, 2000, is secured by Standard Mortgage Corporation's inventory, servicing rights, and commitments. Compensating balances held by the lender are used in determining the interest rates charged on the mortgage warehouse lines of credit and a bank note (discussed in Note #11). These balances, which are derived from customer escrow balances, amounts of collections in transit on loans serviced and corporate cash 49 51 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) balances, can further decrease the interest rate charged on the line of credit if the compensating balance is maintained at a level greater than the used portion of the line. These borrowing transactions range from overnight to one year in maturity. The average maturity was 87 days at the end of 1999, 62 days at the end of 1998 and 80 days at the end of 1997. 10. DEPOSITS The following table sets forth the balance of the Company's deposits:
AT DECEMBER 31 -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- (IN THOUSANDS) Demand: Non-interest bearing................................... $ 160,253 $ 166,701 $ 146,685 Interest bearing....................................... 88,661 92,060 89,082 Savings................................................ 162,653 167,167 174,459 Money market........................................... 177,935 172,807 159,505 Certificates of deposit in denominations of $100,000 or more................................................. 90,921 39,443 37,651 Other time............................................. 550,518 538,113 532,145 ---------- ---------- ---------- Total deposits......................................... $1,230,941 $1,176,291 $1,139,527 ========== ========== ==========
Interest expense on deposits consisted of the following:
AT DECEMBER 31 ----------------------------- 1999 1998 1997 ------- ------- ------- (IN THOUSANDS) Interest bearing demand..................................... $ 928 $ 889 $ 891 Savings..................................................... 2,799 2,617 3,139 Money market................................................ 6,302 6,041 5,689 Certificates of deposit in denominations of $100,000 or more...................................................... 2,596 2,323 2,312 Other time.................................................. 28,525 29,021 30,541 ------- ------- ------- Total interest expense...................................... $41,150 $40,891 $42,572 ======= ======= =======
The following table sets forth the balance of other time deposits maturing in the periods presented:
YEAR - ---- (IN THOUSANDS) 2000........................................................ $342,816 2001........................................................ 105,350 2002........................................................ 46,990 2003........................................................ 14,153 2004 and after.............................................. 41,209 ========
50 52 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. ADVANCES FROM FEDERAL HOME LOAN BANK, GUARANTEED JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES AND LONG-TERM DEBT Advances from the Federal Home Loan Bank consist of the following:
AT DECEMBER 31 --------------------------- WEIGHTED MATURING AVERAGE YIELD BALANCE - -------- ------------- ---------- (IN THOUSANDS) Overnight................................................... 4.06% $ 45,375 2000........................................................ 5.25 758,750 2001........................................................ 8.22 10,126 2002........................................................ 5.84 183,500 2003........................................................ 6.61 3,750 2004 and after.............................................. 6.71 873 ---- ---------- Total advances.............................................. 5.40 956,999 ---- ---------- Total FHLB Borrowings....................................... 5.34% $1,002,374 ==== ==========
AT DECEMBER 31 ------------------------- WEIGHTED MATURING AVERAGE YIELD BALANCE - -------- ------------- -------- (IN THOUSANDS) 1999........................................................ 5.34% $221,260 2000........................................................ 6.15 3,755 2001........................................................ 8.22 10,126 2002........................................................ 5.72 258,500 2003........................................................ 5.11 218,750 2004 and after.............................................. 4.66 40,000 ---- -------- Total FHLB Borrowings....................................... 5.41% $752,391 ==== ========
Total Federal Home Loan Bank borrowings consist of $611,999,000 and $532,391,000 of term advances and $390,375,000 and $220,000,000 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. GUARANTEED JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES: On April 28, 1998, the Company completed a $34.5 million public offering of 8.45% Trust Preferred Securities, which represent undivided beneficial interests in the assets of a Delaware business trust, USBANCORP Capital Trust I. The Trust Preferred Securities will mature on September 30, 2028, and are callable at par at the option of the Company after September 30, 2003. Proceeds of the issue were invested by USBANCORP Capital Trust I in Junior Subordinated Debentures issued by USBANCORP, Inc. Net proceeds from the $34.5 million offering were used for general corporate purposes, including the repayment of debt, the repurchase of USBANCORP common stock, and investments in and advances to the Company's subsidiaries. Unamortized deferred issuance costs associated with the Trust Preferred Securities amounted to $1.3 million as of December 31, 1999, and are being amortized on a straight line basis over the term of the issue. The Trust Preferred securities are listed on NASDAQ under the symbol "UBANP." 51 53 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Upon the occurrence of certain events, specifically a tax event or a capital treatment event, the Company may redeem in whole, but not in part, the Guaranteed Junior Subordinated Deferrable Interest Debentures prior to September 30, 2028. A tax event basically means that the interest paid by the Company on the subordinated debentures will no longer be deductible for federal income tax purposes. A capital treatment event means that the Trust Preferred Securities no longer qualify as Tier 1 capital for purposes of the capital adequacy guidelines of the Federal Reserve. Proceeds from any redemption of the subordinated debentures would cause mandatory redemption of the Trust Preferred Securities. LONG-TERM DEBT: The Company's long-term debt consisted of the following:
AT DECEMBER 31 ---------------- 1999 1998 ------ ------ (IN THOUSANDS) Bank note................................................... $4,688 $6,563 Collateralized mortgage obligation.......................... 1,582 2,511 Other....................................................... 830 197 ------ ------ Total long-term debt........................................ $7,100 $9,271 ====== ======
The bank note payable by Standard Mortgage Corporation is a $7.5 million non-revolving commercial loan commitment which is payable monthly in fixed principal installments of $156,250 through June 25, 2002. This note replaces all previous loans incurred by Standard Mortgage Corporation of Georgia. The collateralized mortgage obligation was issued through Community First Capital Corporation ("CFCC"), a wholly-owned, single-purpose finance subsidiary of Three Rivers Bank. In 1988, Three Rivers Bank transferred Federal Home Loan Mortgage Corporation ("FHLMC") securities with a book value of approximately $31,500,000 to CFCC which then collateralized the issuance of bonds with a par value of $27,787,000. Scheduled maturities of long-term debt for the years subsequent to December 31, 1999, are $2,069,000 in 2000; $2,037,000 in 2001; $1,038,000 in 2002; $111,000 in 2003; and $1,845,000 in 2003 and thereafter. 12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS #107, "Disclosures about Fair Value of Financial Instruments," requires all entities to disclose the estimated fair value of its financial instrument assets and liabilities. For the Company, as for most financial institutions, approximately 95% of its assets and liabilities are considered financial instruments. Many of the Company's financial instruments, however, lack an available trading market characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimations and present value calculations were used by the Company for the purpose of this disclosure. Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. Management believes that cash, cash equivalents, and loans and deposits with floating interest rates have estimated fair values which approximate the recorded book balances. The estimation methodologies used, the estimated fair values, and recorded book balances at December 31, 1999 and 1998, were as follows: Financial instruments actively traded in a secondary market have been valued using quoted available market prices. 52 54 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 1998 -------------------------- -------------------------- ESTIMATED RECORDED ESTIMATED RECORDED FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE ---------- ------------ ---------- ------------ (IN THOUSANDS) Investment securities.................... $1,187,335 $1,187,335 $1,185,563 $1,173,384 ========== ========== ========== ==========
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.
1999 1998 -------------------------- -------------------------- ESTIMATED RECORDED ESTIMATED RECORDED FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE ---------- ------------ ---------- ------------ (IN THOUSANDS) Deposits with stated maturities............. $596,678 $641,439 $540,813 $577,556 Short-term borrowings....................... 646,744 646,744 553,213 553,213 All other borrowings........................ 452,909 453,098 473,563 473,357 ======== ======== ======== ========
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.
1999 1998 -------------------------- -------------------------- ESTIMATED RECORDED ESTIMATED RECORDED FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE ---------- ------------ ---------- ------------ (IN THOUSANDS) Deposits with no stated maturities.......... $589,502 $589,502 $598,735 $598,735 ======== ======== ======== ========
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.
1999 1998 -------------------------- -------------------------- ESTIMATED RECORDED ESTIMATED RECORDED FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE ---------- ------------ ---------- ------------ (IN THOUSANDS) Net loans (including loans held for sale).................................. $1,091,552 $1,095,804 $1,071,514 $1,066,321 ========== ========== ========== ==========
Purchased and originated mortgage servicing rights have been valued by an independent third party using a methodology which incorporates a discounted after-tax cash flow of the servicing (loan servicing fees and other related ancillary fee income less the costs of servicing the loans). This valuation also assumes current PSA prepayment speeds which are based upon industry data collected on mortgage prepayment trends. For further discussion see Note #1.
1999 1998 -------------------------- -------------------------- ESTIMATED RECORDED ESTIMATED RECORDED FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE ---------- ------------ ---------- ------------ (IN THOUSANDS) Purchased and originated mortgage servicing rights.................................... $14,190 $13,510 $16,447 $16,197 ======= ======= ======= =======
Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company's deposits is required by SFAS #107, however, management believes the relationship value of these core deposits is significant. Based upon the Company's most recent acquisitions and other limited secondary market transactions involving similar deposits, management estimates the relationship 53 55 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) value of these funding liabilities to range between $87 million to $137 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 Company 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 Company's off-balance sheet financial instruments (interest rate swaps and cap) totalled $390 million with an estimated fair value of approximately $905,000. There is no material difference between the notional amount and the estimated fair value of the remaining off-balance sheet items which total $240.3 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. 13. INCOME TAXES The provision for federal income taxes is summarized below:
YEAR ENDED DECEMBER 31 -------------------------- 1999 1998 1997 ------ ------ ------ (IN THOUSANDS) Current..................................................... $5,403 $6,023 $7,913 Deferred.................................................... 1,519 1,632 1,390 ------ ------ ------ Income tax provision........................................ $6,922 $7,655 $9,303 ====== ====== ======
The reconciliation between the federal statutory tax rate and the Company's effective consolidated income tax rate is as follows:
YEAR ENDED DECEMBER 31 -------------------------------------------------------- 1999 1998 1997 ---------------- ---------------- ---------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE ------- ----- ------- ----- ------- ----- (IN THOUSANDS, EXCEPT PERCENTAGES) Tax expense based on federal statutory rate..................... $ 9,570 35.0% $10,079 35.0% $11,480 35.0% State income taxes................... 13 0.1 39 0.1 234 0.7 Tax exempt income.................... (3,359) (12.3) (3,069) (10.7) (3,104) (9.5) Goodwill and acquisition related costs.............................. 469 1.7 469 1.6 575 1.8 Other................................ 229 0.8 137 0.6 118 0.3 ------- ----- ------- ----- ------- ----- Total provision for income taxes..... $ 6,922 25.3% $ 7,655 26.6% $ 9,303 28.3% ======= ===== ======= ===== ======= =====
54 56 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
YEAR ENDED DECEMBER 31 -------------------------- 1999 1998 1997 ------ ------ ------ (IN THOUSANDS) Provision for possible loan losses.......................... $ 131 $ 486 $ 425 Lease accounting............................................ 1,356 769 999 Accretion of discounts on securities, net................... 506 299 366 Investment write-downs...................................... -- -- 83 Core deposit and mortgage servicing intangibles............. (351) 106 (289) Deposit liability write-down................................ -- -- (345) Deferred loan fees.......................................... 89 82 82 Other, net.................................................. (212) (110) 69 ------ ------ ------ Total............................................. $1,519 $1,632 $1,390 ====== ====== ======
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:
AT DECEMBER 31 -------------------- 1999 1998 -------- -------- (IN THOUSANDS) Deferred Assets: Provision for loan losses................................. $ 3,623 $ 3,754 Investment security write-downs due to SFAS #115.......... 19,046 -- Deferred loan fees........................................ 320 409 Other..................................................... 603 426 -------- -------- Total assets...................................... 23,592 4,589 Deferred Liabilities: Investment security write-ups due to SFAS #115............ -- (1,307) Accumulated depreciation.................................. (534) (705) Accretion of discount..................................... (3,418) (2,912) Lease accounting.......................................... (4,700) (3,344) Core deposit and mortgage servicing intangibles........... (1,897) (2,248) Other..................................................... (405) (269) -------- -------- Total liabilities................................. (10,954) (10,785) Valuation allowance......................................... (325) (325) -------- -------- Net deferred asset (liability).............................. $ 12,313 $ (6,521) ======== ========
55 57 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The change in the net deferred asset (liability) during 1999 and 1998 was attributed to the following:
AT DECEMBER 31 ------------------ 1999 1998 ------- ------- (IN THOUSANDS) Investment write-downs (ups) due to SFAS #115, charge to equity.................................................... $20,353 $ (331) Deferred provision for income taxes......................... (1,519) (1,632) ------- ------- Net increase (decrease)..................................... $18,834 $(1,963) ======= =======
14. PENSION AND PROFIT SHARING PLANS The Company has trusteed, noncontributory defined benefit pension plans covering all employees who work at least 1,000 hours per year and who have not yet reached age 60 at their employment date. The benefits of the plans are based upon the employee's years of service and average annual earnings for the highest five consecutive calendar years during the final ten year period of employment. The Company's funding policy has been to contribute annually an amount within the statutory range of allowable minimum and maximum actuarially determined tax-deductible contributions. Plan assets are primarily debt securities (including U.S. Agency and Treasury securities, corporate notes and bonds), listed common stocks (including shares of USBANCORP, Inc. common stock), mutual funds, and short-term cash equivalent instruments. Pension Benefits:
AT DECEMBER 31 -------------------- 1999 1998 -------- -------- (IN THOUSANDS, EXCEPT PERCENTAGES) Change in benefit obligation Benefit obligation at beginning of year..................... $14,661 $12,740 Service cost................................................ 1,283 1,128 Interest cost............................................... 1,023 911 Deferred asset (loss) gain.................................. (1,376) 1,077 Benefits paid............................................... (1,484) (1,114) Expenses paid............................................... (73) (81) ------- ------- Benefit obligation at end of year........................... $14,034 $14,661 ======= ======= Change in plan assets Fair value of plan assets at beginning of year.............. $14,323 $12,343 Actual return on plan assets................................ 142 1,376 Employer contributions...................................... 1,534 1,799 Benefits paid............................................... (1,484) (1,114) Expenses paid............................................... (73) (81) ------- ------- Fair value of plan assets at end of year.................... $14,442 $14,323 ======= =======
56 58 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT DECEMBER 31 -------------------- 1999 1998 -------- -------- (IN THOUSANDS, EXCEPT PERCENTAGES) Funded status of the plan overfunded (underfunded).......... $ 408 $ (338) Unrecognized transition asset............................... (219) (232) Unrecognized prior service cost............................. 113 140 Unrecognized actuarial (gain)loss........................... (151) 176 ------- ------- Net prepaid (accrued) benefit cost.......................... $ 151 $ (254) ======= ======= Components of net periodic benefit cost Service cost................................................ $ 1,283 $ 1,128 Interest cost............................................... 1,023 911 Expected return on plan assets.............................. (1,194) (1,033) Amortization of prior year service cost..................... (14) (14) Amortization of transition asset............................ 27 27 Recognized net actuarial losses............................. 2 -- ------- ------- Net periodic benefit cost................................... $ 1,127 $ 1,019 ======= ======= 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 ======= =======
In addition, U.S. Bank has a trusteed, deferred profit sharing plan with contributions made by U.S. Bank based upon income as defined by the plan. All employees of U.S. Bank and the Company who work over 1,000 hours per year participate in the plan beginning on January 1 following six months of service. Contributions to this profit sharing plan were $1,122,000 in 1999 and $1,010,000 in 1998. Plan assets are primarily debt securities (including U.S. Agency and Treasury securities, corporate notes and bonds), listed common stocks (including shares of USBANCORP, Inc. common stock), mutual funds, and short-term cash equivalent instruments. 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 410(k) plan was $207,000 in 1999 and $199,000 in 1998. Except for the above pension benefits, the Company has no significant additional exposure for any other post-retirement benefits. 57 59 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. LEASE COMMITMENTS The Company's obligation for future minimum lease payments on operating leases at December 31, 1999, is as follows:
YEAR FUTURE MINIMUM LEASE PAYMENTS (IN THOUSANDS) 2000........................................................ $1,791 2001........................................................ 1,567 2002........................................................ 1,422 2003........................................................ 813 2004 and thereafter (in total).............................. 1,835 ======
In addition to the amounts set forth above, certain of the leases require payments by the Company for taxes, insurance, and maintenance. Rent expense included in total non-interest expense amounted to $634,000, $868,000 and $782,000, in 1999, 1998, and 1997, respectively. 16. COMMITMENTS AND CONTINGENT LIABILITIES The Company's banking subsidiaries incur off-balance sheet risks in the normal course of business in order to meet the financing needs of their customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. Commitments to extend credit are obligations to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The banking subsidiaries evaluate each customer's creditworthiness on a case-by-case basis. Collateral which secures these types of commitments is the same as for other types of secured lending such as accounts receivable, inventory, and fixed assets. Standby letters of credit are conditional commitments issued by the banking subsidiaries to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including normal business activities, bond financings, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Letters of credit are issued both on an unsecured and secured basis. Collateral securing these types of transactions is similar to collateral securing the subsidiary banks' commercial loans. The Company's exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The banking subsidiaries use the same credit and collateral policies in making commitments and conditional obligations as for all other lending. The Company had outstanding various commitments to extend credit approximating $240,331,000 and standby letters of credit of $22,736,000 as of December 31, 1999. Additionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of management and legal counsel, neither the resolution of these claims nor the funding of these credit commitments will have a material adverse effect on the Company's consolidated financial position or results of operation. 58 60 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. STOCK COMPENSATION PLANS In 1991, the Company's Board of Directors adopted an Incentive Stock Option Plan authorizing the grant of options covering 384,000 shares of common stock. In April 1995 and in April 1998, the Company amended the Plan to increase the number of shares available for issuance thereunder which presently stands at 1,455,000 shares. Under the Plan, options can be granted (the "Grant Date") to employees with executive, managerial, technical, or professional responsibility, as selected by a committee of the Board of Directors. The Company accounts for this Plan under APB Opinion #25, "Accounting for Stock Issued to Employees." The option price at which a stock option may be exercised shall be not less than 100% of the fair market value per share of common stock on the Grant Date. The maximum term of any option granted under the Plan cannot exceed 10 years. Generally, under the Plan on or after the first anniversary of the Grant Date, one-third of such options may be exercised. On or after the second anniversary of the Grant Date, two-thirds of such options may be exercised minus the aggregate number of such options previously exercised. On or after the third anniversary of the Grant Date, the remainder of the options may be exercised. Had compensation cost for these plans been determined consistent with SFAS #123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have changed to the following pro forma amounts:
AT DECEMBER 31 -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income: As reported............................................... $20,421 $21,144 $23,497 Pro forma................................................. 20,381 20,468 23,285 Basic earnings per share: As reported............................................... 1.53 1.51 1.56 Pro forma................................................. 1.53 1.46 1.55 Diluted earnings per share: As reported............................................... 1.52 1.48 1.54 Pro forma................................................. 1.52 1.44 1.52 ======= ======= =======
Because SFAS #123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. A summary of the status of the Company's Stock Option Plan at December 31, 1999, 1998, and 1997, and changes during the years then ended is presented in the table and narrative following:
YEAR ENDED DECEMBER 31 -------------------------------------------------------------- 1999 1998 1997 ------------------ ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE -------- ------ -------- ------ -------- ------ Outstanding at beginning of year............................ 445,903 $11.09 559,038 $11.35 525,774 $ 9.37 Granted........................... 9,100 17.22 15,600 26.30 88,500 21.13 Exercised......................... (56,170) 7.85 (70,232) 8.35 (55,236) 8.18 Forfeited......................... (29,502) 10.21 (58,503) 20.89 -- -- Outstanding at end of year........ 369,331 10.71 445,903 11.09 559,038 11.35 Exercisable at end of year........ 347,034 10.05 349,303 10.44 272,997 8.90 Weighted average fair value of options granted since 1-1-95.... $ 7.03 $ 7.86 $ 8.88 ====== ====== ======
59 61 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A total of 347,034 of the 369,331 options outstanding at December 31, 1999, have exercise prices between $5.75 and $26.65, with a weighted average exercise price of $10.05 and a weighted average remaining contractual life of 5.5 years. All of these options are exercisable. The remaining 22,297 options have exercise prices between $14.32 and $26.65, with a weighted average exercise price of $21.10 and a weighted average remaining contractual life of 8.6 years. During 1999 two option grants totalling 9,100 shares were issued, in 1998 two option grants totalling 15,600 shares were issued, compared to two option grant totalling 88,500 shares in 1997. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1999, 1998, and 1997, respectively: risk-free interest rates of 5.29% and 4.49% for 1999 options, 5.53% and 5.43% for 1998 options, and 6.49% and 5.92% for the 1997 options; expected dividend yields of 3.75% and 3.00% for 1999 options, 2.50% for 1998 options, and 3.25% and 2.25% for the 1997 options: expected lives of 7.0 years for all the 1999, 1998, and 1997 options; expected volatility of 23.00% and 21.69% for 1999 options, 18.81% and 18.85% for 1998 options, and 20.96% and 18.31% for the 1997 options. In January 1998, the Company granted restricted stock awards for a total of 16,500 shares to certain executive officers. The restricted stock grants will accumulate dividends and vest at the rate of one-third of the total balance in January 1999, one-half of the remaining balance in January 2000 and the remaining balance in January 2001. The recipients must continue employment through the vesting period to be eligible for each successive award. The expense associated with these restricted stock awards is included in compensation expense. 18. DIVIDEND REINVESTMENT PLAN The Company's Dividend Reinvestment and Common Stock Purchase Plan provides each record holder of Common Stock with a simple and convenient method of purchasing additional shares without payment of any brokerage commissions, service charges or other similar expense. A participant in the Plan may purchase shares of Common Stock by electing either to (1) reinvest dividends on all of his or her shares of Common Stock or (2) make optional cash payments of not less than $10 and up to a maximum of $2,000 per month and continue to receive regular dividend payments on his or her other shares. A participant may withdraw from the Plan at any time. In the case of purchases from USBANCORP, Inc. of treasury or newly-issued shares of Common Stock, the average market price is determined by averaging the high and low sale price of the Common Stock as reported on the NASDAQ on the relevant investment date. At December 31, 1999, the Company had 789,144 unissued reserved shares available under the Plan. In the case of purchases of shares of Common Stock on the open market, the average market price will be the weighted average purchase price of shares purchased for the Plan in the market for the relevant investment date. 19. SHAREHOLDER RIGHTS PLAN Each share of the Company's Common Stock had attached to it one right (a "Right") issued pursuant to a Shareholder Protection Rights Agreement, dated November 10, 1989 (the "Rights Agreement"). Each Right entitled a holder to buy one-tenth of a share of the Company's Series B Preferred Stock at a price of $13.33, subject to adjustment (the "Exercise Price"). The Rights became exercisable if a person, group, or other entity acquired or announced a tender offer for 20% or more of the Company's Common Stock. They could also have been exercised if a person or group who had become a beneficial owner of at least 10% of the Company's Common Stock was declared by the Board of Directors to be an "adverse person" (as defined in the Rights Agreement). Under the Rights Agreement, any person, group, or entity would be deemed a beneficial owner of the Company's Common Stock if such person, group, or entity would be deemed to beneficially own the Company's Common Stock under the rules of the Securities and Exchange Commission which generally require that such person, group, or entity have, or have the right to acquire within sixty days, 60 62 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) voting or dispositive power of the Company's Common Stock; provided, however, that the Rights Agreement excluded from the definition of beneficial owner, holders of revocable proxies, employee benefit plans of the Company or its subsidiaries and the Trust Company. After the Rights became exercisable, the Rights (other than rights held by a 20% beneficial owner or an "adverse person") would entitle the holders to purchase, under certain circumstances, either the Company's Common Stock or common stock of the potential acquirer having a value equal to twice the Exercise Price. The Company was generally entitled to redeem the Rights at $0.0033 per Right at any time until the twentieth business day following public announcement that a 20% position had been acquired or the Board of Directors had designated a holder of the Company's Common Stock an adverse person. The Rights Agreement expired on November 10, 1994. On February 24, 1995, the Company's Board of Directors adopted a Shareholder Rights Plan which is substantially similar to and replaces the previous Rights Agreement which expired on November 10, 1994. The only significant difference from the previous Rights Agreement is that under the new plan each right will initially entitle shareholders to buy one unit of a newly authorized series of junior participating preferred stock at an exercise price of $21.67. The rights attached to shares of USBANCORP Common Stock outstanding on March 15, 1995, and will expire in ten years. 20. GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS USBANCORP's balance sheet shows both tangible assets (such as loans, buildings, and investments) and intangible assets (such as goodwill). The Company now carries $12.4 million of goodwill and $13.3 million of core deposit intangible assets on its balance sheet. The majority of these intangible assets came from the 1994 Johnstown Savings Bank acquisition, the 1998 acquisition of two National City Branch offices in Allegheny County with $27 million in deposits, and the 1999 acquisition of three First Western Branches with $91 million in deposits. The Company is amortizing core deposit intangibles over periods ranging from five to ten years while goodwill is being amortized over a 15 year life. The straight-line method of amortization is being used for both of these categories of intangibles. The amortization expense of these intangible assets reduced 1999 diluted earnings per share by $0.20. It is important to note that this intangible amortization expense is not a future cash outflow. The following table reflects the future amortization expense of the intangible assets:
YEAR EXPENSE - ------------ (IN THOUSANDS) 2000........................................................ $ 3,151 2001........................................................ 3,112 2002........................................................ 3,112 2003........................................................ 3,112 2004 and after.............................................. 13,168 =======
A reconciliation of the Company's intangible asset balances for 1999 and 1998 is as follows:
AT DECEMBER 31 ------------------ 1999 1998 ------- ------- (IN THOUSANDS) Balance January 1........................................... $18,697 $19,122 Additions due to branch acquisitions........................ 10,093 1,883 Amortization expense........................................ (3,135) (2,308) ------- ------- Balance December 31......................................... $25,655 $18,697 ======= =======
Goodwill and other intangible assets are reviewed for possible impairment at a minimum annually, or more frequently, if events or changed circumstances may affect the underlying basis of the asset. The 61 63 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company uses an estimate of the subsidiary bank's undiscounted future earnings over the remaining life of the goodwill and other intangibles in measuring whether these assets are recoverable. 21. OFF-BALANCE SHEET HEDGE INSTRUMENTS The Company uses various interest rate contracts, such as interest rate swaps, caps and floors, to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. A summary of the Company's off-balance sheet derivative transactions are as follows: BORROWED FUNDS HEDGES: The Company had entered into several interest rate swaps to hedge short-term borrowings used to leverage the balance sheet. Specifically, FHLB advances which reprice between 30 days and two years are being used to fund fixed-rate agency mortgage-backed securities with durations ranging from three to five years. Under these swap agreements, the Company pays a fixed-rate of interest and receives a floating-rate which resets either monthly or quarterly. For the $120 million interest rate cap, the Company only receives payment from the counterparty if the federal funds rate goes above the 5.00% strike rate. The following table summarizes the interest rate swap and cap transactions which impacted the Company's 1999 performance:
IMPACT FIXED FLOATING ON NOTIONAL START TERMINATION RATE RATE REPRICING INTEREST AMOUNT DATE DATE PAID RECEIVED FREQUENCY EXPENSE - ------------ -------- ----------- ----- -------- --------- -------- $ 40,000,000 3-17-97 3-15-99 6.19% 5.60% Expired $ 88,958 50,000,000 5-08-97 5-10-99 6.20 5.59 Expired 138,903 25,000,000 6-20-97 6-20-99 5.96 5.36 Expired 148,499 50,000,000 9-25-97 9-25-99 5.80 5.36 Expired 354,834 130,000,000 10-25-99 10-25-00 6.17 6.22 Quarterly 13,079 90,000,000 10-25-99 10-25-01 6.41 6.22 Quarterly 32,252 50,000,000 10-25-99 10-25-01 6.42 6.22 Quarterly 18,180 120,000,000 5-1-99 4-30-00 5.00 5.25 Monthly (44,865) -------- $749,840 ========
The Company 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 Company monitors and controls all off-balance sheet derivative products with a comprehensive Board of Director approved hedging policy. This policy permits a total maximum notional amount outstanding of $500 million for interest rate swaps, and interest rate caps/floors. The Company had no interest rate floors outstanding at any time during the years ended December 31, 1999, or December 31, 1998. 22. SEGMENT RESULTS The financial performance of USBANCORP is also monitored by an internal funds transfer pricing profitability measurement system which produces line of business results and key performance measures. USBANCORP's major business units include community banking, mortgage banking, trust, and investment/ parent. The reported results reflect the underlying economics of the business segments. Expenses for centrally provided services are allocated based upon the cost and estimated usage of those services. Capital has been allocated among the businesses on a risk-adjusted basis. The businesses are match-funded and interest rate risk is centrally managed and accounted for within the investment/parent business segment. The key performance measures the Company focuses on for each business segment are net income and risk-adjusted 62 64 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) return on equity. The contribution of the major business segments to the consolidated results for the past two years is summarized in the following table:
YEAR ENDED DECEMBER 31 --------------------------------------------------------------------------------------- MORTGAGE COMMUNITY BANKING BANKING TRUST INVESTMENT/ PARENT ----------------------- ----------------- --------------- ----------------------- 1999 1998 1999 1998 1999 1998 1999 1998 ---------- ---------- ------- ------- ------ ------ ---------- ---------- (IN THOUSANDS, EXCEPT RATIOS) Net interest income......... $ 48,092 $ 49,566 $ 1,163 $ 1,448 $ 126 $ (64) $ 14,403 $ 13,680 Non-interest income......... 12,341 10,119 5,865 6,572 5,271 4,444 897 2,554 Non-interest expense........ 47,344 46,046 7,045 7,599 4,004 3,340 2,422 2,535 ---------- ---------- ------- ------- ------ ------ ---------- ---------- Income before income taxes...................... 13,089 13,639 (17) 421 1,393 1,040 12,878 13,699 Income taxes................ 3,414 3,743 13 169 344 249 3,151 3,494 ---------- ---------- ------- ------- ------ ------ ---------- ---------- Net Income.................. $ 9,675 $ 9,896 $ (30) $ 252 $1,049 $ 791 $ 9,727 $ 10,205 ========== ========== ======= ======= ====== ====== ========== ========== Average common equity....... $ 75,569 $ 85,575 $ 8,320 $ 9,074 $2,862 $2,987 $ 45,176 $ 52,028 Risk-adjusted return on equity..................... 12.8% 11.6% (0.4)% 2.8% 36.6% 26.5% 21.5% 19.6% Total assets................ $1,074,192 $1,128,625 $53,312 $77,187 $1,693 $1,636 $1,338,282 $1,169,633 ========== ========== ======= ======= ====== ====== ========== ========== YEAR ENDED DECEMBER 31 ----------------------- TOTAL ----------------------- 1999 1998 ---------- ---------- (IN THOUSANDS, EXCEPT RATIOS) Net interest income......... $ 63,784 $ 64,630 Non-interest income......... 24,374 23,689 Non-interest expense........ 60,815 59,520 ---------- ---------- Income before income taxes...................... 27,343 28,799 Income taxes................ 6,922 7,655 ---------- ---------- Net Income.................. $ 20,421 $ 21,144 ========== ========== Average common equity....... $ 131,927 $ 149,664 Risk-adjusted return on equity..................... 15.5% 14.1% Total assets................ $2,467,479 $2,377,081 ========== ==========
Community banking includes the deposit-gathering branch franchise along with lending to both individuals and businesses. Lending activities include commercial and commercial real-estate loans, residential mortgage loans, direct consumer loans and credit cards. Mortgage banking includes the servicing of mortgage loans and the origination of residential mortgage loans through a wholesale broker network. The trust segment has two primary business divisions, institutional trust and personal trust. Institutional trust products and services include 401(k) plans, defined benefit and defined contribution employee benefit plans, individual retirement accounts, and collective investment funds for trade union pension plans. Personal trust products and services include personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Financial services includes the sale of mutual funds and annuities. The investment/parent includes the net results of investment securities and borrowing activities, general corporate expenses not allocated to the business segments, interest expense on corporate debt, and centralized interest rate risk management. 23. CAPITAL The Company is subject to various capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. As of December 31, 1999, the Company met all capital adequacy requirements to which it was subject. As of December 31, 1999 and 1998, the Federal Reserve categorized the Company as "Well Capitalized" under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier I risk- based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company's classification category. 63 65 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1999 ---------------------------------------------------------- TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS ----------------- ---------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- ------- ----- -------- ----- (IN THOUSANDS, EXCEPT RATIOS) TOTAL CAPITAL (TO RISK WEIGHTED ASSETS) CONSOLIDATED............. $166,187 13.72% $96,872 8.00% $121,090 10.00% U.S. BANK........................ 89,868 14.11 50,966 8.00 63,707 10.00 THREE RIVERS BANK................ 73,836 12.97 45,540 8.00 56,925 10.00 TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS) CONSOLIDATED............. 155,837 12.87 48,436 4.00 72,654 6.00 U.S. BANK........................ 84,614 13.28 25,483 4.00 38,224 6.00 THREE RIVERS BANK................ 68,740 12.08 22,770 4.00 34,155 6.00 TIER 1 CAPITAL (TO AVERAGE ASSETS) CONSOLIDATED..................... 155,837 6.41 97,241 4.00 121,551 5.00 U.S. BANK........................ 84,614 6.42 52,681 4.00 65,851 5.00 THREE RIVERS BANK................ 68,740 6.21 44,280 4.00 55,350 5.00 ======== ===== ======= ==== ======== =====
AS OF 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) Total Capital (to Risk Weighted Assets) Consolidated............. $164,219 14.52% $90,472 8.00% $113,090 10.00% U.S. Bank........................ 92,039 15.33 48,018 8.00 60,023 10.00 Three Rivers Bank................ 73,027 13.84 42,199 8.00 52,749 10.00 Tier 1 Capital (to Risk Weighted Assets) Consolidated 153,494.. 13.57 45,236 4.00 67,854 6.00 U.S. Bank........................ 87,418 14.56 24,009 4.00 36,014 6.00 Three Rivers Bank................ 66,923 12.69 21,100 4.00 31,649 6.00 Tier 1 Capital (to Average Assets) Consolidated..................... 153,494 6.62 92,680 4.00 115,850 5.00 U.S. Bank........................ 87,418 6.85 51,060 4.00 63,825 5.00 Three Rivers Bank................ 66,923 6.47 41,377 4.00 51,721 5.00 ======== ===== ======= ==== ======== =====
24. BRANCH ACQUISITION On February 12, 1999, the Company and First Western Bancorp, Inc. (First Western), completed an agreement for the Company to purchase three branch offices in western Pennsylvania from First Western in exchange for cash and one branch from the Company. The Company's U.S. Bank subsidiary acquired the Ebensburg and Barnesboro offices of First Western which are located in Cambria County. The Company's Three Rivers Bank subsidiary acquired the Kiski Valley office of First Western located in Westmoreland County in exchange for Three Rivers Bank's Moon Township office which is located in Allegheny County. On a net basis, the Company acquired $91 million in deposits, $10 million in consumer loans and the related fixed assets, leases, safe deposit box business and other agreements at the branch offices. The Company paid a core 64 66 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) deposit premium of approximately $10 million for the acquired deposits and purchased the consumer loans and fixed assets. 25. PROPOSED TAX-FREE SPIN-OFF PLAN On July 12, 1999, the Company announced that its Board of Directors has approved a plan to split the Company's banking subsidiaries into two separate publicly traded companies. The plan would be effected through a tax-free spin-off, and is expected to become effective April 1, 2000. 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 the Company in proportion to their existing Company ownership. Shareholders would retain their existing Company shares. Standard Mortgage Company (SMC), a mortgage banking company, currently a subsidiary of Three Rivers Bank, will be internally spun-off from Three Rivers Bank to the Company prior to consummation of the proposed Three Rivers Bank spin-off. For more information on the proposed spin-off, see "Proposed Tax-Free Spin-Off Plan" in the MD&A. 26. PARENT COMPANY FINANCIAL INFORMATION The Parent Company functions primarily as a coordinating and servicing unit for all subsidiary entities. Provided services include general management, credit policies and procedures, accounting and taxes, loan review, auditing, investment advisory, compliance, marketing, insurance risk management, general corporate services, and financial and strategic planning. The following financial information relates only to the Parent Company operations: BALANCE SHEET
AT DECEMBER 31 -------------------- 1999 1998 -------- -------- (IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 286 $ 295 Equity investment in banking subsidiaries................... 145,110 177,274 Equity investment in non-banking subsidiaries............... 2,785 2,612 Guaranteed junior subordinated deferrable interest debenture issuance costs............................................ 1,283 1,328 Other assets................................................ 1,481 991 -------- -------- TOTAL ASSETS................................................ $150,945 $182,500 ======== ======== LIABILITIES Short-term borrowings....................................... $ 3,500 $ 4,800 Guaranteed junior subordinated deferrable interest debentures................................................ 34,500 34,500 Other liabilities........................................... 141 1,320 -------- -------- TOTAL LIABILITIES........................................... 38,141 40,620 -------- -------- STOCKHOLDERS' EQUITY Total stockholders' equity.................................. 112,804 141,880 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $150,945 $182,500 ======== ========
65 67 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 -------------------------------- 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) INCOME Inter-entity management fees............................... $ 4,035 $ 3,961 $ 3,867 Dividends from subsidiaries................................ 17,061 16,819 19,601 Interest and dividend income............................... 20 68 15 -------- -------- -------- TOTAL INCOME............................................... 21,116 20,848 23,483 -------- -------- -------- EXPENSE Interest expense........................................... 3,304 2,348 680 Salaries and employee benefits............................. 2,968 2,796 2,793 Other expense.............................................. 1,397 1,462 1,642 -------- -------- -------- TOTAL EXPENSE.............................................. 7,669 6,606 5,115 -------- -------- -------- INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES................................... 13,447 14,242 18,368 Provision for income taxes................................. 1,299 979 522 Equity in undistributed income of subsidiaries............. 5,713 5,967 4,667 -------- -------- -------- NET INCOME................................................. $ 20,459 $ 21,188 $ 23,557 ======== ======== ======== STATEMENT OF CASH FLOWS OPERATING ACTIVITIES Net income................................................. $ 20,459 $ 21,188 $ 23,557 Adjustment to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries............. (5,713) (5,967) (4,667) -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 14,746 15,221 18,890 -------- -------- -------- INVESTING AND FINANCING ACTIVITIES Common stock cash dividends paid........................... (11,586) (10,638) (9,318) Proceeds from issuance of common stock..................... 292 534 453 Guaranteed junior subordinated deferrable interest debentures, net of expenses.............................. -- 33,172 -- Guaranteed junior subordinated deferrable interest debentures dividends paid................................ (2,916) (1,944) -- Purchases of treasury stock................................ (4,204) (30,346) (11,637) Net (decrease)increase in borrowings....................... (1,300) (2,800) 2,800 Investment in subsidiaries................................. (50) (7,000) (600) Other -- net............................................... 5,009 3,514 (34) -------- -------- -------- NET CASH USED BY INVESTING AND FINANCING ACTIVITIES........ (14,755) (15,508) (18,336) -------- -------- -------- NET (DECREASE) INCREASE IN CASH EQUIVALENTS................ (9) (287) 554 CASH EQUIVALENTS AT JANUARY 1.............................. 295 582 28 -------- -------- -------- CASH EQUIVALENTS AT DECEMBER 31............................ $ 286 $ 295 $ 582 ======== ======== ========
66 68 USBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The ability of subsidiary banks to upstream cash to the Parent Company is restricted by regulations. Federal law prevents the Parent Company from borrowing from its subsidiary banks unless the loans are secured by specified assets. Further, such secured loans are limited in amount to ten percent of the subsidiary banks' capital and surplus. In addition, the subsidiary banks are subject to legal limitations on the amount of dividends that can be paid to their shareholder. The dividend limitation generally restricts dividend payments to a bank's retained net income for the current and preceding two calendar years. Cash may also be upstreamed to the Parent Company by the subsidiary banks as an inter-entity management fee. At December 31, 1999, the subsidiary banks were permitted to upstream an additional $17,145,000 in cash dividends to the Parent Company. The subsidiary banks also had a combined $158,347,000 of restricted surplus and retained earnings at December 31, 1999. The Parent Company renewed a $17 million unsecured line of credit on December 21, 1999. This line of credit is subject to annual review on March 31, 2000. Future drawdowns on this line would be either at an "As Offered Rate" or at a "Euro-Rate" Option, a rate equal to the LIBOR plus one hundred fifty (150) basis points (1 1/2%) per annum. The Parent Company had available at December 31, 1999, $13.5 million of this total $17.0 million credit line. The agreement for this line of credit requires the Company to maintain compliance with certain financial covenants. The Company was not in compliance with the minimum loan loss reserve to non-performing assets ratio as of December 31, 1999, however the correspondent bank has waived this requirement. 67 69 STATEMENT OF MANAGEMENT RESPONSIBILITY January 21, 2000 To the Stockholders and Board of Directors of USBANCORP, Inc. Management of USBANCORP, Inc. and its subsidiaries have prepared the consolidated financial statements and other information in the "Annual Report and Form 10-K" in accordance with generally accepted accounting principles and are responsible for its accuracy. In meeting its responsibility, management relies on internal accounting and related control systems, which include selection and training of qualified personnel, establishment and communication of accounting and administrative policies and procedures, appropriate segregation of responsibilities, and programs of internal audit. These systems are designed to provide reasonable assurance that financial records are reliable for preparing financial statements and maintaining accountability for assets and that assets are safeguarded against unauthorized use or disposition. Such assurance cannot be absolute because of inherent limitations in any internal control system. Management also recognizes its responsibility to foster a climate in which Company affairs are conducted with the highest ethical standards. The Company's Code of Conduct, furnished to each employee and director, addresses the importance of open internal communications, potential conflicts of interest, compliance with applicable laws, including those related to financial disclosure, the confidentiality of proprietary information, and other items. There is an ongoing program to assess compliance with these policies. The Audit Committee of the Company's Board of Directors consists solely of outside directors. The Audit Committee meets periodically with management and the independent public accountants to discuss audit, financial reporting, and related matters. Arthur Andersen LLP and the Company's internal auditors have direct access to the Audit Committee. /s/ Terry K. Dunkle /s/ Jeffery A. Stopko Terry K. Dunkle Jeffrey A. Stopko Chairman, Senior Vice President & President & CEO Chief Financial Officer
68 70 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP To the Stockholders and Board of Directors of USBANCORP, Inc.: We have audited the accompanying consolidated balance sheets of USBANCORP, Inc. (a Pennsylvania corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 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 USBANCORP, 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 Andersen LLP Pittsburgh, Pennsylvania January 21, 2000 69 71 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable for the years presented. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this section relative to Directors of the Registrant is presented in the Proxy Statement for the Annual Meeting of Shareholders. Executive officer information has been provided in Item 1. ITEM 11. EXECUTIVE COMPENSATION Information required by this section is presented in the Proxy Statement for the Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this section is presented in the Proxy Statement for the Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this section is presented in the Proxy Statement for the Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K CONSOLIDATED FINANCIAL STATEMENTS FILED: The consolidated financial statements listed below are from the 1999 Form 10-K and Part II -- Item 8. Page references are to said Form 10-K. CONSOLIDATED FINANCIAL STATEMENTS: USBANCORP, Inc. and Subsidiaries Consolidated Balance Sheet, 31 Consolidated Statement of Income, 32-33 Consolidated Statement of Comprehensive Income, 34 Consolidated Statement of Changes in Stockholders' Equity, 35 Consolidated Statement of Cash Flows, 36-37 Notes to Consolidated Financial Statements, 38 Statement of Management Responsibility, 67 Report of Independent Public Accountants, 68 CONSOLIDATED FINANCIAL STATEMENT SCHEDULES: These schedules are not required or are not applicable under Securities and Exchange Commission accounting regulations and therefore have been omitted. REPORTS ON FORM 8-K: There were no reports on Form 8-K for the quarter ended December 31, 1999. 70 72 EXHIBITS: The exhibits listed below are filed herewith or to other filings.
EXHIBIT PRIOR FILING OR EXHIBIT NUMBER DESCRIPTION PAGE NUMBER HEREIN - ------- ----------- ----------------------- 3.1 Articles of Incorporation, as amended on February Exhibit III, Part II to Form S-14 24, 1995. File No. 2-79639 Exhibit 4.2 to Form S-2 File No. 33-685 Exhibit 4.3 to Form S-2 File No. 33-685 Exhibit 4.1 to Form S-3 File No. 33-56604 3.2 Bylaws, as amended and restated on February 24, Exhibit IV, Part II to Form S-14 1995. File No. 2-79639 Exhibit 3.2 4.1 Rights Agreement, dated as of February 24, 1995, Exhibit 1 to Form 8-A between USBANCORP, Inc. and USBANCORP Trust Company, Dated March 1, 1995 as Rights Agent. 10.2 Agreement, dated June 22, 1994, between USBANCORP, Exhibit 10.2 to 1994 Form 10-K Inc. and Terry K. Dunkle. Filed March 22, 1995 10.3 Agreement, dated October 25, 1994, between Exhibit 10.3 to 1994 Form 10-K USBANCORP, Inc. and W. Harrison Vail. Filed March 22, 1995 10.6 Loan Agreement, dated December 19, 1997, between Exhibit 10.6 to 1997 Form 10-K USBANCORP, Inc. and PNCBANK. Filed March 24, 1998 10.7 Agreement, dated October 25, 1994, between Exhibit 10.7 to 1994 Form 10-K USBANCORP, Inc. and Orlando B. Hanselman. Filed March 22, 1995 10.8 1991 Stock Option Plan, dated August 23, 1991, as Exhibit 10.8 to 1994 Form 10-K amended and restated on February 24, 1995. Filed March 22, 1995 10.9 Agreement, dated December 1, 1994, between Exhibit 10.9 to 1994 Form 10-K USBANCORP, Inc. and Ronald W. Virag. Filed March 22, 1995 10.10 Agreement, dated July 15, 1994, between USBANCORP, Exhibit 10.10 to 1994 Form 10-K Inc. and Kevin J. O'Neil. Filed March 22, 1995 10.11 Collective Bargaining Agreement, dated October 16, Exhibit 10.1 to Form 8-K/A 1995, between United States National Bank in Dated March 1, 1996 Johnstown and Steel Workers of America, AFL-CIO-CLC Local Union 8204. 22 Subsidiaries of the Registrant. Below 24.1 Consent of Arthur Andersen LLP
71 73 EXHIBIT A (22) SUBSIDIARIES OF THE REGISTRANT
PERCENT OF JURISDICTION NAME OWNERSHIP OF ORGANIZATION ---- ---------- --------------- U.S. Bank............................................ 100% Commonwealth of Pennsylvania Main and Franklin Streets P.O. Box 520 Johnstown, PA 15907 Three Rivers Bank and Trust Company.................. 100% Commonwealth of Pennsylvania 633 State Route 51, South Jefferson Borough P.O. Box 10915 Pittsburgh, PA 15236 United Bancorp Life Insurance Company................ 100% State of Arizona 101 N. First Avenue #2460 Phoenix, AZ 85003 USBANCORP Trust and Financial Services Company....... 100% Commonwealth of Pennsylvania Main and Franklin Streets P.O. Box 520 Johnstown, PA 15907 UBAN Associates, Inc. ............................... 100% Commonwealth of Pennsylvania 110 Regent Court, Suite 104 State College, PA 16801
72 74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. USBANCORP, Inc. (Registrant) By: /s/ TERRY K. DUNKLE ------------------------------------ Terry K. Dunkle Chairman, President and Chief Executive Officer Date: February 25, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 25, 2000: /s/ TERRY K. DUNKLE Chairman, President and Chief Executive - ----------------------------------------------------- Officer; Director Terry K. Dunkle /s/ JEFFREY A. STOPKO Senior Vice President and Chief Financial - ----------------------------------------------------- Officer Jeffrey A. Stopko /s/ JEROME M. ADAMS Director - ----------------------------------------------------- Jerome M. Adams Director - ----------------------------------------------------- Clifford A. Barton /s/ MICHAEL F. BUTLER Director - ----------------------------------------------------- Michael F. Butler /s/ JAMES C. DEWAR Director - ----------------------------------------------------- James C. Dewar /s/ JAMES M. EDWARDS, SR. Director - ----------------------------------------------------- James M. Edwards, Sr. Director - ----------------------------------------------------- Richard W. Kappel /s/ MARGARET A. O'MALLEY Director - ----------------------------------------------------- Margaret A. O'Malley /s/ MARK E. PASQUERILLA Director - ----------------------------------------------------- Mark E. Pasquerilla /s/ JACK SEVY Director - ----------------------------------------------------- Jack Sevy /s/ THOMAS C. SLATER Director - ----------------------------------------------------- Thomas C. Slater /s/ ROBERT L. WISE Director - ----------------------------------------------------- Robert L. Wise
73 75 U.S. BANK OFFICE LOCATIONS * Main Office Downtown 216 Franklin Street P.O. Box 520 Johnstown, PA 15907-0520 (814) 533-5300 * Westmont Office 110 Plaza Drive Johnstown, PA 15905-1286 (814) 255-6836 * University Heights Office 1404 Eisenhower Boulevard Johnstown, PA 15904-3280 (814) 266-9691 * East Hills Office 1219 Scalp Avenue Johnstown, PA 15904-3182 (814) 266-3181 * Eighth Ward Office 1059 Franklin Street Johnstown, PA 15905-4303 (814) 535-8317 West End Office 163 Fairfield Avenue Johnstown, PA 15906-2392 (814) 533-5436 * Carrolltown Office 101 Main Street Carrolltown, PA 15722-0507 (814) 344-6501 * Barnesboro Office 4206 Crawford Avenue Suite 1 Northern Cambria, PA (814) 948-9540 Ebensburg Office 104 S. Center Street Ebensburg, PA 15931-0209 (814) 472-8706 * Lovell Park Office 179 Lovell Avenue Ebensburg, PA 15931-0418 (814) 472-5200 Nanty Glo Office 928 Roberts Street Nanty Glo, PA 15943-1303 (814) 749-9227 Nanty Glo Drive-In 1383 Shoemaker Street Nanty Glo, PA 15943-1255 (814) 749-0955 * Galleria Mall Office 500 Galleria Drive Suite 100 Johnstown, PA 15904-8911 (814) 266-5969 * St. Michael Office 900 Locust Street St. Michael, PA 15951-9998 (814) 495-5514 * Coalport Office Main Street, P.O. Box 356 Coalport, PA 16627-0356 (814) 672-5303 * Seward Office #1, Roadway Plaza Seward, PA 15954-9501 (814) 446-5655 * Windber Office 1501 Somerset Avenue Windber, PA 15963-1745 (814) 467-4591 Central City Office 104 Sunshine Avenue Central City, PA 15926-1129 (814) 754-4141 * Somerset Office 108 W. Main Street Somerset, PA 15501-2035 (814) 445-4193 * Derry Office 112 South Chestnut Street Derry, PA 15627-1938 (724) 694-8887 * Mobile Branch U.S. Bank operates a Mobile Bank Branch that circulates to various businesses and locations throughout the Bank's service area on a scheduled basis. THREE RIVERS BANK OFFICE LOCATIONS * Boston Office 1701 Boston Hollow Road McKeesport, PA 15135-1217 (412) 754-2014 Braddock Office 823 Braddock Avenue Braddock, PA 15104-1737 (412) 351-0400 * Century III Office 269 Clairton Boulevard Pittsburgh, PA 15236-1401 (412) 653-7199 * Washington Crown Center 1500 W. Chestnut Street Washington, PA 15301-5856 (724) 228-0065 Glassport Office 600 Monongahela Avenue Glassport, PA 15045-1608 (412) 664-8760 * Jefferson Borough Office Route 51, South P.O. Box 10915 Pittsburgh, PA 15236-0915 (412) 382-1000 Liberty Boro Office 3107 Liberty Way McKeesport, PA 15133-2103 (412) 664-8707 McKeesport Office 500 Fifth Avenue McKeesport, PA 15132-2503 (412) 664-8715 * Motor Bank 1415 Fifth Avenue McKeesport, PA 15132-2427 (412) 664-8755 * Port Vue Office 1194 Romine Avenue McKeesport, PA 15133-3532 (412) 664-8975 * Rainbow Village Office 1 Rainbow Village Shopping Center White Oak, PA 15131-2415 (412) 664-8771 * South Strabane Office 590 Washington Road Washington, PA 15301-9621 (724) 225-9800 * University Office 2016 Eden Park Boulevard McKeesport, PA 15132-7619 (412) 664-8780 Lawrenceville 4319 Butler Street Pittsburgh, PA 15201-3094 (412) 681-8390 * New Kensington 2 Feldarelli Square 2300 Freeport Road New Kensington, PA 15068-4669 (724) 335-9811 * North Side 600 East Ohio Street Pittsburgh, PA 15212-5620 (412) 231-4300 * Northway Mall 8000 Mcknight Road STE 1102 Pittsburgh, PA 15237-3000 (412) 364-8692 * Monroeville 2681 Moss Side Boulevard Monroeville, PA 15146-3315 (412) 856-8431 * North Versailles Great Valley Shopping Center 500 Lincoln Highway North Versailles, PA 15137-1526 (412) 829-1360 * Carrick 1817 Brownsville Road Pittsburgh, PA 15210-3958 (412) 881-3500 * Bethel Park 2739 South Park Road Bethel Park, PA 15102-3805 (412) 835-2100 * Finleyville 3576 Sheridan Avenue Finleyville, PA 15332-1071 (724) 348-6626 * Jeannette 401 Clay Avenue Jeannette, PA 15644-2124 (724) 527-1501 * = 24-Hour Banking Available REMOTE BANKING LOCATIONS Main Office, Main & Franklin Streets, Johnstown Lee Hospital, Main Street, Johnstown The Galleria, Johnstown Johnstown Cambria County Airport Derry BP -- Pit Stop Quick Shop, Derry Robyn's Shoppe, Nanty Glo Ames, 7005 Clairton Rd., West Mifflin Gogas Service Station, Cairnbrook Community College of Allegheny County, North Campus, Pittsburgh Community College of Allegheny County, Allegheny Campus, Pittsburgh Foodland, Ohio Avenue, Glassport Washington Mall, Oak Springs Road, Washington 74 76 SHAREHOLDER INFORMATION SECURITIES MARKETS USBANCORP, Inc. Common Stock is publicly traded and quoted on the NASDAQ National Market System. The common stock is traded under the symbol of "UBAN." The listed market makers for the stock are: Herzog, Heine, Geduld, Inc. 525 Washington Boulevard Jersey City, NJ 07310 Telephone: (212) 908-4156 Legg Mason Wood Walker, Inc. 969 Eisenhower Boulevard Oak Ridge East Johnstown, PA 15904 Telephone: (814) 266-7900 F. J. Morrissey & Co., Inc. 1700 Market Street Suite 1420 Philadelphia, PA 19103-3913 Telephone: (215) 563-8500 Keefe Bruyette & Woods, Inc. Two World Trade Center 89th Floor New York, NY 10048 Telephone: (800) 342-5529 CJBC World Markets Oppenheimer Tower 200 Liberty Street One World Financial Center New York, NY 10281 Telephone: (212) 667-7000 Parker/Hunter, Inc. 416 Main Street Johnstown, PA 15901 Telephone: (814) 535-8403 Sandler O'Neill & Partners, L.P. 2 World Trade Center 104th Floor New York, NY 10048 Telephone: (800) 635-6860 Weeden & Co. L.P. 145 Mason Street Greenwich, CT 06830 Telephone: (203) 861-7600 CORPORATE OFFICES The corporate offices of USBANCORP, Inc. are located in the United States National Bank Building at Main and Franklin Streets, Johnstown, PA 15901. Mailing address: P.O. Box 430 Johnstown, PA 15907-0430 (814) 533-5300 AGENTS The transfer agent and registrar for USBANCORP, Inc.'s common stock is: EquiServe Investor Relations Department 150 Royall Street Canton, MA 02021 1-800-730-4001 SHAREHOLDER DATA As of January 31, 2000, there were 5,213 shareholders of common stock and 13,316,474 shares outstanding. Of the total shares outstanding, approximately 775,101 or 6% are held by insiders (directors and executive officers) while approximately 4,988,126 or 37% are held by institutional investors (mutual funds, employee benefit plans, etc.). DIVIDEND REINVESTMENT Shareholders seeking information about USBANCORP, Inc.'s dividend reinvestment plan should contact Betty L. Jakell, Executive Office, at (814) 533-5158 INFORMATION Analysts, investors, shareholders, and others seeking financial data about USBANCORP, Inc. or any of its subsidiaries annual and quarterly reports, proxy statements, 10-K, 10-Q, 8-K, and call reports -- are asked to contact Jeffrey A. Stopko, Senior Vice President & Chief Financial Officer at (814) 533-5310. 75 EX-24.1 2 CONSENT OF ARTHUR ANDERSON 1 Exhibit 24.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 21, 2000 included in this Form 10-K, into USBANCORP, Inc.'s previously filed Registration Statements on Form S-3 (Registration No. 33-56604); Form S-3 (Registration No. 33-50225); Form S-8 (Registration No. 33-53935); Form S-8 (Registration No. 33-55845); Form S-8 (Registration No. 33-55207) and Form S-8 (Registration No. 33-55211). /s/Arthur Andersen LLP Pittsburgh, Pennsylvania March 6, 2000 EX-27 3 FINANCIAL DATA SCHEDULE
9 12-MOS DEC-31-1999 DEC-31-1999 54,676 758 0 0 1,187,335 0 0 1,095,804 10,350 2,467,479 1,230,941 101,243 981,138 41,600 0 0 43,476 69,081 2,467,479 86,835 78,232 121 165,188 41,150 99,504 65,684 1,900 436 60,815 27,343 27,343 0 0 20,421 1.53 1.52 7.27 4,928 1,305 0 0 10,725 3,003 728 10,350 10,350 0 4,009
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