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1997 Annual Report and Form 10-K
CONTENTS
FINANCIAL HIGHLIGHTS AT A GLANCE 2
FINANCIAL HIGHLIGHTS 3
SHAREHOLDER INFORMATION AT A GLANCE 4
MESSAGE TO THE SHAREHOLDER 5
SERVICE AREA MAP 10
CONSOLIDATED BALANCE SHEET 13
CONSOLIDATED STATEMENT OF INCOME 14
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDER'S EQUITY 15
CONSOLIDATED STATEMENT OF CASH FLOWS 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19
STATEMENT OF MANAGEMENT RESPONSIBILITY 40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 41
MARKET PRICE AND DIVIDEND DATA 44
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA 45
MANAGEMENT'S DISCUSSION AND ANALYSIS 47
FORM 10-K 66
DIRECTORS, GENERAL OFFICERS, AND ADVISORY BOARD 85
OFFICE LOCATIONS 90
SHAREHOLDER INFORMATION 91
INFORMATION PRESENTED GRAPHICALLY ANNEX A
1
FINANCIAL HIGHLIGHTS AT A GLANCE
2
FINANCIAL HIGHLIGHTS
% Increase
1997 1996 (Decrease)
FOR THE YEAR (In thousands, except per share and ratio data)
Net interest income $ 66,859 $ 61,138 9
Net income 23,497 20,019 17
Performance ratios:
Return on average assets 1.09% 1.03% 6
Return on average equity 15.00 13.36 12
Net interest margin 3.43 3.52 (3)
Net charge-offs as a percentage of
average loans, net of unearned
income 0.14 0.20 (30)
Loan loss provision as a percentage
of average loans, net of unearned
income 0.02 0.01 100
Efficiency ratio 60.11 63.39 (5)
PER COMMON SHARE
Net income:
Basic $ 4.69 $ 3.85 22
Diluted 4.61 3.83 20
Cash dividends declared 1.60 1.37 17
Dividend payout ratio 34.00% 35.28% (4)
Price earnings ratio 15.84x 10.90x 45
AT PERIOD END
Total assets $2,239,110 $2,087,112 7
Investment securities:
Available for sale 580,115 455,890 27
Held to maturity 532,341 546,318 (3)
Loans and loans held for sale,
net of unearned income 989,575 939,726 5
Allowance for loan losses 12,113 13,329 (9)
Goodwill and core deposit intangibles 19,122 21,478 (11)
Deposits 1,139,527 1,138,738 -
Stockholders equity 158,180 151,917 4
Trust assets (discretionary and
non-discretionary) 1,121,503 1,157,072 (3)
Non-performing assets 8,858 8,671 2
Non-performing assets as a
percentage ofloans and loans
held for sale, net of unearned
income, and other real estate
owned 0.89% 0.92% (3)
Capital ratios:
Common equity 7.06 7.28 (3)
Total risk-based 14.12 14.16 -
Asset leverage 6.25 6.51 (4)
Per common share:
Book value $ 32.32 $ 29.90 8
Market value 73.00 41.75 75
Market price to book value ratio 225.87% 139.63% 62
Assets per employee $ 2,814 $ 2,588 9
STATISTICAL DATA (Amounts not rounded)
AT YEAR END
Full-time equivalent employees 765 759 1
Branch locations 43 44 (2)
Common shareholders 5,402 6,246 (14)
Common shares outstanding 4,893,718 5,081,004 (4)
The prior year earnings per share has been
restated to reflect adoption of SFAS #128.
3
SHAREHOLDER INFORMATION AT A GLANCE
4
MESSAGE TO THE SHAREHOLDER
Dear Shareholder:
USBANCORP, Inc. continued to build on success
throughout 1997. I am pleased to report to our
shareholders that your Company has met or surpassed
each financial goal I pledged to you in my 1996
shareholder letter. Your management team developed
these goals as the keys to continued profitable growth
during 1997, and the year's success has rewarded our
efforts.
Strategies implemented by your leadership team to meet
the goals stated in our 1996 annual report can be
characterized as striking a productive "partnership for
success" among shareholders, customers, communities and
employees, and creating improving value for each. A
review of these 1997 goals reveals an enduring
attention to the key principles that made the year a
success.
IMPROVING VALUE FOR SHAREHOLDERS
An improving earnings performance demonstrates that our
emphasis on improving core banking business has resulted
in increased value for our shareholders. USBANCORP
earned a record $23.5 million or $4.61 on a diluted per
share basis in 1997. Your Company s performance reflects
a 17.4% earnings increase and a 20.4% increase in diluted
earnings per share when compared to the $20.0 million or
$3.83 per diluted share reported to you in my 1996
message. USBANCORP's goal to achieve a sustainable return
on equity of 15.00% for full year 1997 was achieved.
These results demonstrate continual improvement and
compare favorably to the 13.36% return on equity reported
to you in my 1996 message.
In 1995, your leadership team committed to grow earnings
per share in excess of 20% for each of the next two
years. Our ability to achieve this meaningful growth in
earnings per share was driven by eight consecutive
quarters of increasing revenue and the implementation of
ongoing strategies designed to optimally leverage the
organization to maximize shareholder value through
treasury stock repurchases, common dividend payments, and
earning asset growth. The significant growth in earnings,
combined with a "bull" stock market, led to a 121%
appreciation in our stock price over this two-year
period. The annual total return on USBANCORP common stock
over a broader five-year period has averaged 32%. This
32% total return exceeds the S&P 500 Index average annual
total return of 20% for this same time period. Our market
capitalization has grown from under $100 million to $357
million over the same five-year time frame, resulting in
more than $250 million of additional wealth created for
our shareholders. I am pleased that our strategies to
profitably grow your Company are working and have
generated significant increased value for our
shareholders.
IMPROVING VALUE FOR CUSTOMERS
Your Company's retail banking subsidiaries experienced a
record year in serving the needs of more customers during
1997. Personal service delivery enhancements, combined
with the gradual introduction of convenience-oriented
technology, has attracted more customers. This
high-touch, medium-tech approach to customer service
first described to you in 1995, provides customers with
convenient options for conducting business anytime,
anywhere.
The 43 branch locations in the USBANCORP Network - many
now open evenings and weekends including Sunday - offered
customers the option to conduct their banking
face-to-face with service representatives. Customers
with busy lifestyles responded favorably to payroll
direct deposit accounts and automatic loan payment
options. TellerPhone Banking, originally introduced in
1995, provides customers with access to their account
information 24 hours a day, 365 days a year. In 1996,
TellerPhone received an average of 10,000 calls per
month. TellerPhone calls - both conventional and via
computer modem access - steadily increased as customers
became familiar with this new and convenient technology.
5
The USBANCORP TellerPhone systems facilitated nearly one
million customer transactions during 1997.
Retail banking segments continue to emphasize convenience
and delivery, as symbolized through the network-wide Loan
Patrol delivery positioning statement. The Loan Patrol
message of bringing the service to the customer, aided by
on-the-spot laptop computer servicing, has contributed to
a strong demand for retail mortgage and home equity
loans. The consumer segment grew these types of loans by
$26.7 million or 6.5% during 1997. Additionally, new loan
originations at our mortgage banking subsidiaries
increased to more than $250 million in 1997.
Our diligent search for new growth markets was rewarded
in 1997. USBANCORP expanded its lending presence into
two new markets with the opening of the Westmoreland
County Loan Store, and a similar, scaled-down version of
the Loan Store in State College, Centre County. The Loan
Store operations bring affiliate lending services into
markets identified as high growth, and which offer a high
potential for increased income through commercial and
consumer loan generation. After incurring initial
start-up costs in 1997, we expect both Loan Stores to be
net income contributors in 1998.
The USBANCORP Network also introduced its first Bank
Mobile in 1997. The Bank Mobile, offering complete
banking service on wheels, is successfully emphasizing
the message of convenient service delivery since its
introduction during the third quarter, 1997. The Bank
Mobile is the only full service bank on wheels within its
service area, and in December alone, the bank logged more
than 42 stops within a three-county area.
Your Company continues its goal of diversifying retail
product and service offerings to increase non-interest
income. USBANCORP's five-year strategic plan (1997-2002)
specifies the development of increasing sales by
optimizing our current delivery channels and introducing
new services which enhance customer convenience. The 1997
introduction of two financial service affiliates expands
the retail income stream within the current retail
delivery system. This new ability to offer annuities,
mutual funds and insurance, along with other, more
standard bank offerings through the current branch
network enables each affiliate to offer a complete line
of financial services to the customer. Complete - or
"one-stop" banking - service is the thrust behind a new
market positioning theme. The positioning theme
identifies affiliate banks as complete financial service
organizations, fully capable of meeting their customers
life-cycle financial needs. The marketing message for
1998 and beyond is, "Feather Your Nest" with the wide
array of products and services now available at USBANCORP
affiliate banks. The inside front cover of this
publication displays an eagle and nest image which
symbolizes the complete line of financial products and
services we offer to satisfy nearly every customer need.
With a more complete line of products available at every
branch office - from CDs, loans, checking and savings to
retirement investments and insurance - your Company is
moving from the "Bank of Choice" to the "Financial
Services Provider of Choice". This subtle shift in our
market positioning strategy enhances our mission of
satisfying all customer financial needs.
Your Trust Company is contributing their products and
services to enhance the "Financial Services Provider of
Choice" programs, and this affiliate has experienced
growth of its own in 1997. Diversified investment options
complimented by a flexible high-touch approach to
customer service is contributing to increasing fee income
from your Company s Trust affiliate. Trust fees increased
by $314,000 or 8.5% in 1997, driven by a successful
employee benefit program which includes the
administration of corporate 401(k) investment plans.
6
The late-1997 addition of OmniPhone, which provides 401(k)
participants with 24-hour account information access,
makes USBANCORP Trust more appealing to current and
prospective retirement program participants.
Focus group discussions with current and prospective
small to medium sized business customers in each
USBANCORP geographic marketing region revealed a
considerable opportunity for USBANCORP affiliate banks to
gain a stronger position in the small to medium size
commercial business segment. Responses from participants
indicate that both USBANCORP affiliate banks have solid
reputations as financial providers. Participants told us
of a strong desire to deal with smaller, less
bureaucratic banks offering personalized service
delivered by a team of knowledgeable professionals. The
Small Business Center - in its second year of operation -
acts upon the findings of the focus group by forging
profitable working processes with the current retail
delivery channels at all affiliate banks. This brings
big-bank expertise to the customer-friendly and familiar
branch office surroundings.
USBANCORP affiliates established three pilot commercial
lending teams in the growth markets of Somerset,
Westmoreland and Washington counties. The team s purpose
is to increase cross sell opportunities through sharing
prospect information with members from each banking
segment. Joint visits made by officers from various
segments are then scheduled with the customer to discuss
financial options available to meet their specific needs.
IMPROVING VALUE FOR EMPLOYEES
Employees are improving the value of USBANCORP through
the effective use of the high-touch approach to
delivering customer service. In 1997, net income per
employee increased by 15% over 1996. This increase
demonstrates our employee commitment to listen to
customer needs and respond to those needs with the
correct product or service solution.
Employee efforts contributed to our efficiency ratio
improving from 63.4% in 1996 to 60.1% in 1997. Through
participation on high-performance work teams - the Rapid
Response Teams introduced to you in my 1995 message -
employees accept the challenge of translating your
Company's strategy into actionable steps. Rapid Response
Teams evaluate and make recommendations to management for
improvement opportunities in product and process. In
1997, more than 25 projects were completed by these
teams. Employees are applying their "hands-on" knowledge
of daily operations and processes to improve affiliate
bank efficiency.
Skills based learning opportunities reached new heights
in 1997. USBANCORP invested $342,000 in employee skill
development, with course content which is closely linked
to your Company's future goals. In addition to structured
classroom learning opportunities, USBANCORP continues to
provide flexible learning alternatives for all employees.
Each branch location is now equipped with a video
learning center, providing flexibility and convenience
for the further education of employees. Self-study
modules, focusing on "mission-critical" subjects,
continue to be an additional source for employee learning
outside of the training room.
Employees were rewarded for achieving 1996 goals, and
were encouraged to meet 1997 goals through the
introduction of the first phase of a more comprehensive
merit program. Eligibility for the merit reward was based
upon the employees efforts to:
1) contribute to achieving the ROE goal,
2) work outside the scope of their day-to-day
responsibilities,
3) meet or exceed individual departmental goals,
4) volunteer in the community, and participate on
high performance work teams.
7
EARNING A LEADERSHIP ROLE IN THE COMMUNITY
Affiliate banks are working diligently to lend
credibility to our mission of delivering convenience and
the widest array of financial products and services.
Employees have also raised their banks' reputation as
caring neighbors in their communities. For 1997,
USBANCORP employees have donated more than 11,000 hours
of community service to more than 450 civic organizations
and charities. Employees are encouraged to participate in
this organized corporate effort, and their involvement in
community affairs underscores to business people and
customers that your Company delivers service on many
levels - including to the communities that support us.
More than 130 employees, their families and friends
volunteered to serve during the largest annual community
event in Cambria County, as USBANCORP continues to
demonstrate its support for projects that foster
community growth. In 1997, each affiliate bank has forged
a continuous support and working relationship with
community colleges within their service areas. By lending
our considerable business experience to this partnership,
the colleges are able to provide the best business
education available within the community. The employee
volunteerism has also touched important community
programs for 1997. These programs include the
School-To-Work program, the Take Your Daughter To Work
program, and a continuing strong support for youth groups
such as Junior Achievement and the Boy Scouts of America.
Among several civic and professional organizations, I
personally serve on the Board of Directors for the
Federal Home Loan Bank in Pittsburgh. USBANCORP's
commitment to our communities is on record, as each
affiliate bank enters 1998 with an "outstanding"
Community Reinvestment Act (CRA) rating.
CHALLENGES AND GOALS FOR 1998
One of the challenges USBANCORP will face over the next
two years is the "Year 2000" turn-of-the-century system
compliance. The majority of the nation's computer systems
utilize dates and date logic which assumes all dates are
in the 1900-1999 range. Any computer hardware and
software system and any computer controlled device that
cannot distinguish between 1999 and the year 2000 can
potentially "fail". Such failures could result in
processing errors or incorrect information. I am pleased
to inform you that your Company is already executing
detailed plans now to proactively address the Year 2000
issue. We are committed to providing the necessary
personnel and financial resources to ensure timely
compliance with this non-negotiable deadline.
Additionally, we have already partnered with a local high
technology company to provide educational training
sessions on the Year 2000 issue to our customer base. Our
current estimate of the total cost for USBANCORP to
achieve Year 2000 compliance is between $1.7 and $2.2
million.
Throughout 1998 and into 1999, each affiliate will
strengthen its position as the "Bank of Choice", and will
continue the transition of becoming the "Financial
Services Provider of Choice" within their service areas.
Strategic initiatives will remain focused on building
upon our successful momentum of creating improved value
for shareholders, customers and employees.
More specifically our goals are:
For Shareholders:
Meet the challenge of achieving continual earnings
performance improvement in 1998 given the costs
associated with Year 2000 compliance and an economic
climate where the forecast for a continued flat yield
curve will place pressure on our net interest margin.
8
Achieve a sustainable return on equity which is in
the top quartile of our peer group.
Achieve an annual total shareholder return of at
least 10%.
Continue to optimally leverage the organization to
maximize shareholder value through stock repurchases,
dividend payments, diversification of our revenue stream,
and earning asset growth which can be obtained through
internal initiatives or prudent acquisitions.
For Customers:
Continue to foster the delivery of a high-touch,
medium-technology approach to servicing the needs of each
customer.
Furnish customers with effective means to provide
feedback directly to the president of each company
through customer value surveys, consumer focus group
discussions and regularly scheduled bank president visits
to neighborhood branch locations. This feedback will be
used to correctly identify customer needs, and to satisfy
these needs.
Through "Feather Your Nest" market positioning we
will transition from the "Bank of Choice" to the
"Financial Services Provider of Choice".
Continuously improve upon our business efficiencies,
customer convenience and service quality to the extent
that we can compete for the Malcolm Baldrige Quality
Award in the year 2002.
For Employees:
Provide advancement opportunities and career
satisfaction through participation in skill based
learning processes.
Furnish employees with avenues to provide feedback
directly to the CEO through Dazzled or Disappointed
programs, CEO Hotlines, CEO site visits and Employee
Satisfaction surveys.
I am proud of the teamwork demonstrated by the leadership
and employees of your Company. Together we have achieved
the goals I detailed to you in my letter last year.
USBANCORP's improved performance and the strategic
initiatives set into place for the next three years
provide the foundation for continual improvement and
sustained growth. I want to thank each of our dedicated
employees and directors for their tireless commitment to
achieving our goals, and to you our shareholder, for your
continued confidence and support.
/s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President & CEO
USBANCORP, Inc.
9
SERVICE AREA MAP
10
USBANCORP,INC. FINANCIAL STATEMWNTS
11
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12
CONSOLIDATED BALANCE SHEET
At December 31 1997 1996
ASSETS (In thousands)
Cash and due from banks $ 38,056 $ 43,183
Interest bearing deposits with banks 163 1,218
Investment securities:
Available for sale 580,115 455,890
Held to maturity (market value $541,093 on
December 31, 1997, and $549,427 on
December 31, 1996) 532,341 546,318
Assets held in trust for collateralized mortgage
obligation 4,267 5,259
Loans held for sale 13,163 14,809
Loans 981,739 929,736
Less: Unearned income 5,327 4,819
Allowance for loan losses 12,113 13,329
Net loans 964,299 911,588
Premises and equipment 17,630 18,201
Accrued income receivable 17,317 17,362
Mortgage servicing rights 14,960 12,494
Goodwill and core deposit intangibles 19,122 21,478
Bank owned life insurance 33,979 32,451
Other assets 3,698 6,861
TOTAL ASSETS $2,239,110 $2,087,112
LIABILITIES
Non-interest bearing deposits $ 146,685 $ 144,314
Interest bearing deposits 992,842 994,424
Total deposits 1,139,527 1,138,738
Federal funds purchased and securities sold under
agreements to repurchase 92,829 76,672
Other short-term borrowings 57,892 79,068
Advances from Federal Home Loan Bank 754,195 605,499
Collateralized mortgage obligation 3,779 4,691
Long-term debt 4,361 4,172
Total borrowed funds 913,056 770,102
Other liabilities 28,347 26,355
TOTAL LIABILITIES 2,080,930 1,935,195
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, 1997, and 1996 - -
Common stock, par value $2.50 per share; 12,000,000
shares authorized; 5,760,676 shares issued and
4,893,718 outstanding on December 31, 1997;
5,742,264 shares issued and 5,081,004 shares
outstanding on December 31, 1996 14,402 14,356
Treasury stock at cost, 866,958 shares on December 31,
1997, and 661,260 shares on December 31, 1996 (31,175) (19,538)
Surplus 93,934 93,527
Retained earnings 78,866 63,358
Net unrealized gains on available for sale
securities 2,153 214
TOTAL STOCKHOLDERS' EQUITY 158,180 151,917
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $2,239,110 $2,087,112
See accompanying notes to consolidated financial
statements.
13
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31 1997 1996 1995
INTEREST INCOME (In thousands, except per share data)
Interest and fees on loans:
Taxable $ 81,105 $ 72,873 $ 69,019
Tax exempt 2,400 1,560 2,134
Deposits with banks 190 132 280
Federal funds sold and securities purchased
under agreements to resell 2 36 165
Investment securities:
Available for sale 31,769 29,025 22,940
Held to maturity 38,967 33,237 34,621
Assets held in trust for collateralized mortgage
obligation 355 470 556
Total Interest Income 154,788 137,333 129,715
INTEREST EXPENSE
Deposits 42,572 42,060 45,403
Federal funds purchased and securities
sold under agreements to repurchase 5,060 3,888 4,769
Other short-term borrowings 3,123 3,706 2,284
Advances from Federal Home Loan Bank 36,648 25,952 20,043
Collateralized mortgage obligation 415 470 848
Long-term debt 111 119 221
Total Interest Expense 87,929 76,195 73,568
NET INTEREST INCOME 66,859 61,138 56,147
Provision for loan losses 158 90 285
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 66,701 61,048 55,862
NON-INTEREST INCOME
Trust fees 4,022 3,708 3,395
Net gains (losses) on loans held for sale 2,008 1,060 (124)
Net realized gains on investment securities 792 638 702
Gain on disposition of business line - - 905
Wholesale cash processing fees 976 1,085 1,154
Service charges on deposit accounts 3,323 3,264 2,937
Net mortgage servicing fees 2,104 2,312 2,555
Bank owned life insurance 1,644 1,574 738
Other income 5,334 5,048 4,281
Total Non-Interest Income 20,203 18,689 16,543
NON-INTEREST EXPENSE
Salaries and employee benefits 28,197 25,483 25,305
Net occupancy expense 4,431 4,463 4,215
Equipment expense 3,260 3,111 3,292
Professional fees 2,928 2,770 2,570
Supplies, postage, and freight 2,766 2,693 2,608
Miscellaneous taxes and insurance 1,483 1,418 1,414
FDIC deposit insurance expense 119 2,561 1,728
Amortization of goodwill and core deposit intangibles 2,356 2,360 2,473
Other expense 8,564 7,615 6,952
Total Non-Interest Expense 54,104 52,474 50,557
INCOME BEFORE INCOME TAXES 32,800 27,263 21,848
Provision for income taxes 9,303 7,244 6,045
NET INCOME $ 23,497 $ 20,019 $ 15,803
PER COMMON SHARE DATA:
Basic:
Net income $ 4.69 $ 3.85 $ 2.89
Average number of shares outstanding 5,014,376 5,195,364 5,468,681
Diluted:
Net income $ 4.61 $ 3.83 $ 2.88
Average number of shares outstanding 5,091,424 5,231,587 5,480,527
Cash Dividends Declared $ 1.60 $ 1.37 $ 1.06
The prior years earnings per share have been
restated to reflect adoption of SFAS #128.
See accompanying notes to consolidated financial
statements.
14
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'EQUITY
Net
Unrealized
Preferred Common Treasury Retained Gains
Stock Stock Stock Surplus Earnings (Losses) Total
(In thousands)
Balance at December 31, 1994 $ - $14,275 $ (3,064) $92,923 $40,355 $(7,353) $137,136
1995
Net income for the year 1995 - - - - 15,803 - 15,803
Stock options exercised - 59 - 438 - - 497
Net unrealized holding gains
on available for sale securities - - - - - 10,756 10,756
Cash dividends declared:
Common stock ($0.25 per
share on 5,584,722 shares;
$0.27 per share on
5,531,966 shares; $0.27
per share on 5,304,457
shares; and $0.27 per share
on 5,310,489 shares) - - - - (5,757) - (5,757)
Treasury stock, 295,512
shares at cost - - (7,943) - - - (7,943)
Balance at December 31, 1995 - 14,334 (11,007) 93,361 50,401 3,403 150,492
1996
Net income for the year 1996 - - - - 20,019 - 20,019
Stock options exercised - 22 - 166 - - 188
Net unrealized holding losses
on available for sale securities - - - - - (3,189) (3,189)
Cash dividends declared:
Common stock ($0.27 per
share on 5,266,539 shares;
$0.30 per share on
5,186,989 shares; $0.30
per share on 5,147,403
shares; $0.30 per share
on 5,081,004 shares; and
$0.20 per share on
5,081,004 shares) - - - - (7,062) - (7,062)
Treasury stock, 238,048
shares at cost - - (8,531) - - - (8,531)
Balance at December 31, 1996 - 14,356 (19,538) 93,527 63,358 214 151,917
1997
Net income for the year 1997 - - - - 23,497 - 23,497
Stock options exercised - 46 - 407 - - 453
Net unrealized holding gains
on available for sale securities - - - - - 1,939 1,939
Cash dividends declared:
Common stock ($0.30 per
share on 5,085,429 shares;
$0.35 per share on
5,021,429 shares; $0.35
per share on 4,993,318
shares; $0.35 per share
on 4,955,233 shares; and
$0.25 per share on
4,893,718 shares) - - - - (7,989) - (7,989)
Treasury stock, 205,698
shares at cost - - (11,637) - - - (11,637)
Balance at December 31, 1997 $ - $14,402 $(31,175) $93,934 $78,866 $ 2,153 $158,180
See accompanying notes to consolidated financial
statements.
15
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31 1997 1996 1995
OPERATING ACTIVITIES (In thousands)
Net income $ 23,497 $ 20,019 $ 15,803
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 158 90 285
Depreciation and amortization expense 2,430 2,564 2,484
Amortization expense of goodwill and
core deposit intangibles 2,356 2,360 2,473
Amortization expense of mortgage
servicing rights 1,806 1,249 1,175
Net amortization (accretion) of
investment securities 218 182 (3,694)
Net realized gains on
investment securities (792) (638) (702)
Net realized (gains) losses on loans
held for sale (2,008) (1,060) 124
Origination of mortgage loans held for sale (260,984) (191,299) (102,780)
Sales of mortgage loans held for sale 258,261 196,238 97,424
Decrease (increase) in accrued income receivable 45 (610) 142
Net gain on disposition of business line - - (905)
Increase in accrued expense payable 1,385 397 4,773
Net cash provided by operating activities 26,372 29,492 16,602
INVESTING ACTIVITIES
Purchase of investment securities
and other short-term investments (686,087) (633,641) (468,096)
Proceeds from maturities of investment securities
and other short-term investments 164,721 128,973 108,880
Proceeds from sales of investment securities
and other short-term investments 414,682 389,068 273,118
Long-term loans originated (322,491) (333,343) (261,943)
Loans held for sale (13,163) (14,809) (5,224)
Principal collected on long-term loans 288,669 240,679 243,965
Loans purchased or participated (2) (1,614) (31,760)
Loans sold or participated 234 663 90,933
Net decrease (increase) in credit card receivables
and other short-term loans 261 (2,222) 1,670
Purchases of premises and equipment (1,913) (2,227) (2,383)
Sale/retirement of premises and equipment 54 49 411
Net decrease in assets held in trust for
collateralized mortgage obligation 992 1,840 2,005
Increase in mortgage servicing rights (4,272) (2,371) (1,095)
Cash received from disposition of business line - - 5,644
Premium paid to purchase bank owned
life insurance - - (30,000)
Net decrease (increase) in other assets 583 (817) (1,601)
Net cash used by investing activities $ (157,732) $(229,772) $ (75,476)
(continued on next page)
See accompanying notes to consolidated financial statements.
16
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Year ended December 31 1997 1996 1995
FINANCING ACTIVITIES (In thousands)
Proceeds from sales of certificates of deposit $270,064 $ 248,589 $ 386,052
Payments for maturing certificates of deposit (258,653) (272,838) (370,851)
Net decrease in demand and savings deposits (10,622) (14,871) (33,589)
Net (decrease) increase in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings (5,931) 59,527 (124,228)
Net principal borrowings on advances
from Federal Home Loan Bank 148,696 177,282 226,420
Principal borrowings of long-term debt 5,068 - 4,800
Repayments of long-term debt (4,879) (889) (5,545)
Common stock dividends paid (9,305) (4,522) (7,160)
Proceeds from dividend reinvestment and
stock purchase plan and stock options exercised 453 188 497
Purchases of treasury stock (11,637) (8,531) (7,943)
Net increase (decrease) in other liabilities 1,924 578 (3,302)
Net cash provided by financing activities 125,178 184,513 65,151
NET (DECREASE) INCREASE IN
CASH EQUIVALENTS (6,182) (15,767) 6,277
CASH EQUIVALENTS AT JANUARY 1 44,401 60,168 53,891
CASH EQUIVALENTS AT DECEMBER 31 $ 38,219 $ 44,401 $ 60,168
See accompanying notes to consolidated financial statements.
17
THIS PAGE IS INTENTIONALLY LEFT BLANK.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AT AND FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
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
43 banking offices in six southwestern Pennsylvania
counties. These offices provide a full range of
consumer, mortgage, commercial, and trust financial
products including deposit and credit card services.
These operations represent one industry segment.
Principles of Consolidation:
The consolidated financial statements include the
accounts of the Company and its wholly-owned
subsidiaries, United States National Bank in Johnstown
("U.S. Bank"), Three Rivers Bank and Trust Company
("Three Rivers Bank"), including its principal
subsidiary, Standard Mortgage Corporation of Georgia,
USBANCORP Trust Company ("Trust Company"), United
Bancorp Life Insurance Company ("United Life"), and
UBAN Associates, Inc. Effective July 3, 1997, the
merger of Community Bancorp, Inc. into Three Rivers
Bank was successfully completed. 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:
The Company uses Statement of Financial Accounting
Standards ("SFAS") #115, "Accounting for Certain
Investments in Debt and Equity Securities," which
specifies a methodology for the classification of
securities as either held to maturity, available for
sale, or as trading assets. 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 immediately
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) and upon the approval of the Credit
Committee and/or Board Discount/Loan Committee with
final approval resting with the Chief Financial
Officer.
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. Servicing rights are generally retained on sold
loans. The residential mortgage loans held for sale are
carried at the lower of aggregate cost or market value.
Net realized and unrealized gains and losses are
included in "Net gains (losses) on loans held for sale"
in the Consolidated Statement of Income.
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.
19
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 application of reserve allocations for all
commercial and commercial real-estate loans are
calculated by using a three year migration analysis of
net losses incurred within the entire commercial loan
portfolio.
The application of 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 reserve allocations to all loans
is based upon review of historical and qualitative
factors, which include but are not limited to, national
and economic trends, delinquencies, concentrations of
credit, and trends in loan volume.
The maintenance of a general unallocated reserve of
at least 20% of the systematically determined minimum
amount from the items listed above in order to provide
conservative positioning in the event of any unforeseen
deterioration in the economy. This 20% policy
requirement was mandated by the Board of Directors
after the Company experienced significant credit
quality problems in the period from 1985 to 1989. It
must be emphasized that the Board views this policy as
establishing a minimum requirement only and the
requirement of a general unallocated reserve of at
least 20% of the determined need is prudent recognition
of the fact that reserve estimates, by definition, lack
precision.
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 $250,000 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 uses SFAS #122, "Accounting for Mortgage
Servicing Rights" to account for 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.
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.
20
Earnings Per Common Share:
During the fourth quarter of 1997, the Company adopted
SFAS #128, "Earnings Per Share." Under SFAS #128,
earnings per share are classified as basic earnings per
share and diluted earnings per 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. All prior periods have been restated to
reflect this adoption. Treasury shares are treated as
retired for earnings per share purposes.
The following table reflects the calculation of
earnings per share under SFAS #128.
At December 31 1997 1996 1995
Basic earnings per share:
Net income $ 23,497 $ 20,019 $ 15,803
Average shares outstanding 5,014,376 5,195,364 5,468,681
Earnings per share $ 4.69 $ 3.85 $ 2.89
Diluted earnings per share:
Net income $ 23,497 $ 20,019 $ 15,803
Average shares outstanding 5,014,376 5,195,364 5,468,681
Option shares to executive officers 77,048 36,223 11,846
Diluted average shares outstanding 5,091,424 5,231,587 5,480,527
Earnings per share $ 4.61 $ 3.83 $ 2.88
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 $7,783,000 in income tax payments in
1997; $4,870,000 in 1996; and $3,590,000 in 1995. The
Company made total interest expense payments of
$86,544,000 in 1997; $75,798,000 in 1996; and
$68,795,000 in 1995.
Income Taxes:
As discussed in Note #13, the Company accounts for
income taxes utilizing SFAS #109, "Accounting for
Income Taxes." Under SFAS #109, 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 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. Since only interest payments
are exchanged, the cash requirement and exposure to
credit risk are significantly less than the notional
amount.
Any premium or transaction fee incurred to purchase
interest rate caps or floors is deferred and amortized
to interest income or interest expense over the term of
the contract. Unamortized premiums related to the
purchase of caps and floors are included in "Other
assets" on the Consolidated Balance Sheet.
Risk Management Overview:
Risk identification and management are essential
elements for the successful management of the Company.
In the normal course of business, the Company is
subject to various types of risk, including interest
rate, credit, and liquidity risk. The Company controls
and monitors these risks with policies, procedures, and
various levels of managerial and Board oversight. The
Company s objective is to optimize profitability while
managing and controlling risk within Board approved
policy limits.
Interest rate risk is the sensitivity of net interest
income and the market value of financial instruments to
the magnitude, direction, and frequency of changes in
interest rates. Interest rate risk results from various
repricing frequencies and the maturity structure of
assets, liabilities, and off-balance sheet positions.
The Company uses its asset liability management policy
and hedging policy to control and manage interest rate
risk.
Credit risk represents the possibility that a customer
may not perform in accordance with contractual terms.
Credit risk results from extending credit to customers,
purchasing securities, and entering into certain
off-balance sheet financial instruments. The Company's
primary credit risk occurs in the loan portfolio. The
Company uses its credit policy and disciplined approach
to evaluating the adequacy of the allowance for loan
losses to control and manage credit risk. The Company s
investment policy and hedging policy strictly limit the
amount of credit risk that may be assumed in the
investment portfolio and through off-balance sheet
activities.
Liquidity risk represents the inability to generate
cash or otherwise obtain funds at reasonable rates to
satisfy commitments to borrowers, as well as, the
obligations to depositors and debtholders. The Company
uses its asset liability management policy and
contingency funding plan to control and manage
liquidity risk
Future Accounting Standards:
In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS #130, "Reporting Comprehensive
Income." This standard establishes reporting
requirements for a new statement of comprehensive
income and its components to be included with the
financial statements currently required. SFAS #130 is
effective for fiscal years beginning after December 15,
1997. The Company will adopt SFAS #130 in the fiscal
year ending December 31, 1998.
Also in June 1997, the FASB issued SFAS #131,
"Disclosures about Segments of an Enterprise and
Related Information." This standard establishes
requirements for reporting information about operating
segments. SFAS #131 is effective for fiscal years
ending after December 15, 1997. The Company will adopt
SFAS #131 in the fiscal year ending December 31, 1998.
21
2. CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 1997, and 1996,
included $12,663,000 and $11,883,000, 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 1997 1996
(In thousands)
Total $ 163 $1,218
All interest bearing deposits with domestic banks
mature within three months. The Company had no deposits
in foreign banks nor in foreign branches of United
States banks.
4. INVESTMENT SECURITIES
The book and market values of investment securities are
summarized as follows:
Investment securities available for sale:
Gross Gross
Book Unrealized Unrealized Market
At December 31, 1997 Value Gains Losses Value
(In thousands)
U.S. Treasury $ 2,496 $ 7 $ (8) $ 2,495
U.S. Agency 1,769 11 (1) 1,779
State and municipal 13,516 309 - 13,825
U.S. Agency
mortgage-backed
securities 516,476 3,755 (585) 519,646
Other securities 42,370 - - 42,370
Total $ 576,627 $ 4,082 $ (594) $ 580,115
Investment securities held to maturity:
Gross Gross
Book Unrealized Unrealized Market
At December 31, 1997 Value Gains Losses Value
(In thousands)
U.S. Treasury $ 16,320 $ 12 $ (13) $ 16,319
U.S. Agency 17,512 188 (6) 17,694
State and municipal 114,733 2,610 (23) 117,320
U.S. Agency
mortgage-backed
securities 380,825 6,355 (515) 386,665
Other securities 2,951 144 - 3,095
Total $ 532,341 $ 9,309 $ (557) $ 541,093
Other investment securities include corporate
notes and bonds, asset-backed securities, and equity
securities.
Investment securities available for sale:
Gross Gross
Book Unrealized Unrealized Market
At December 31, 1996 Value Gains Losses Value
(In thousands)
U.S. Treasury $ 10,934 $ 147 $ (21) $ 11,060
U.S. Agency 4,224 12 (39) 4,197
State and municipal 21,772 524 (1) 22,295
U.S. Agency
mortgage-backed
securities 382,384 2,459 (2,385) 382,458
Other securities 35,880 - - 35,880
Total $ 455,194 $ 3,142 $ (2,446) $455,890
Investment securities held to maturity:
Gross Gross
Book Unrealized Unrealized Market
At December 31, 1996 Value Gains Losses Value
(In thousands)
U.S. Treasury $ 10,198 $ 4 $ (13) $ 10,189
U.S. Agency 27,468 113 (29) 27,552
State and municipal 110,287 1,624 (308) 111,603
U.S. Agency
mortgage-backed
securities 395,199 3,937 (2,281) 396,855
Other securities 3,166 62 - 3,228
Total $ 546,318 $ 5,740 $ (2,631) $549,427
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 and
are included in "Net realized gain or (loss) on
investment securities" in the Consolidated Statement of
Income.
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, 1997, 98.8% of the portfolio was rated "AAA" as
compared to 98.7% at December 31, 1996. Less than 1.0%
of the portfolio was rated below "A" or unrated on
December 31, 1997.
The book value of securities pledged to secure public
and trust deposits, as required by law, was
$337,797,000 at December 31, 1997, and $371,725,000 at
December 31, 1996. The Company realized $1,816,000 and
$2,462,000 of gross investment security gains and
$1,024,000 and $1,824,000 of gross investment security
losses on available for sale securities in 1997 and
1996, respectively.
The Company may sell covered call options on securities
held in the available for sale investment portfolio. At
the time a call is written, the Company records a
liability equal to the premium fee received. The call
liability is marked to market monthly and the offset is
made to earnings. During 1997, there was $25,000 of
income generated from call option contracts on
securities totalling $20 million. As of December 31,
1997, there were no written open call options. During
1996, $70,000 of income was generated from call option
contracts on securities totalling $29 million. At
December 31, 1996, one contract covering securities
totalling $20 million remained open with a market value
liability of $25,000. The Company limits total covered
call options outstanding at any time to $25 million of
available for sale securities.
22
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, 1997.
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, 1997, the Company's
consolidated investment securities portfolio had a
modified duration of approximately 3.40 years.
Investment securities available for sale:
After 1 Year After 5 Years
but but
Within 1 Year Within 5 Years Within 10 Years After 10 Years Total
At December 31, 1997 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(In thousands, except yields)
Book Value
U.S. Treasury $ 2,253 5.00% $ 243 6.38% $ - -% $ - -% $ 2,496 5.13%
U.S. Agency - - 749 6.17 1,020 7.76 - - 1,769 7.09
State and municipal 740 5.76 1,811 5.58 3,819 5.63 7,146 5.81 13,516 5.72
U.S. Agency mortgage-
backed securities - - 80,359 7.02 155,674 7.09 280,443 6.86 516,476 6.95
Other securities 42,370 6.00 - - - - - - 42,370 6.00
Total investment
securities available
for sale $ 45,363 5.95% $ 83,162 6.98% $160,513 7.06% $287,589 6.83% $ 576,627 6.85%
Market Value
U.S. Treasury $ 2,243 $ 252 $ - $ - $ 2,495
U.S. Agency - 748 1,031 - 1,779
State and municipal 751 1,858 3,902 7,314 13,825
U.S. Agency mortgage-
backed securities - 81,259 156,674 281,713 519,646
Other securities 42,370 - - - 42,370
Total investment
securities available
for sale $ 45,364 $ 84,117 $161,607 $289,027 $ 580,115
Investment securities held to maturity:
After 1 Year After 5 Years
but but
Within 1 Year Within 5 Years Within 10 Years After 10 Years Total
At December 31, 1997 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(In thousands, except yields)
Book Value
U.S. Treasury $ 9,200 5.67% $ 7,120 5.72% $ - -% $ - -% $ 16,320 5.69%
U.S. Agency - - 2,006 6.13 15,506 6.66 - - 17,512 6.60
State and municipal 440 4.29 14,194 4.71 39,713 5.05 60,386 5.58 114,733 5.28
U.S. Agency mortgage-
backed securities 5,637 6.65 224,339 7.23 89,230 7.40 61,619 6.99 380,825 7.23
Other securities - - 1,761 7.07 - - 1,190 6.75 2,951 6.94
Total investment
securities held
to maturity $ 15,277 5.99% $249,420 7.04% $144,449 6.68% $123,195 6.30% $532,341 6.74%
Market Value
U.S. Treasury $ 9,200 $ 7,119 $ - $ - $ 16,319
U.S. Agency - 2,000 15,694 - 17,694
State and municipal 441 14,308 40,383 62,188 117,320
U.S. Agency mortgage-
backed securities 5,983 227,991 91,019 61,672 386,665
Other securities - 1,879 - 1,216 3,095
Total investment
securities held
to maturity $ 15,624 $253,297 $147,096 $125,076 $ 541,093
Other investment securities include corporate
notes and bonds, asset-backed securities, and equity
securities.
23
5. LOANS
The loan portfolio of the Company consisted of the
following:
At December 31 1997 1996
(In thousands)
Commercial $143,113 $138,008
Commercial loans secured by
real estate 302,620 266,700
Real estate-mortgage 440,734 414,003
Consumer 95,272 111,025
Loans 981,739 929,736
Less: Unearned income 5,327 4,819
Loans, net of unearned income $976,412 $924,917
Real estate construction loans were not material
at these presented dates and comprised 2.3% and 1.9% of
total loans net of unearned income at December 31,
1997, and 1996, respectively. The Company has no credit
exposure to foreign countries or highly leveraged
transactions. Most of the Company's loan activity is
with customers located in the southwestern Pennsylvania
geographic area. As of December 31, 1997, 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 risk. These loans
totaled $2,014,000 and $8,105,000 at December 31, 1997,
and 1996, respectively. An analysis of these related
party loans follows:
Year ended December 31 1997 1996
(In thousands)
Balance January 1 $ 8,105 $ 5,490
New loans 12,604 27,192
Payments (18,695) (24,577)
Balance December 31 $ 2,014 $ 8,105
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for
loan losses follows:
Year ended December 31 1997 1996 1995
(In thousands)
Balance January 1 $13,329 $14,914 $15,590
Reduction due to disposition
of business line - - (342)
Provision for loan losses 158 90 285
Recoveries on loans
previously charged-off 1,123 932 681
Loans charged-off (2,497) (2,607) (1,300)
Balance December 31 $12,113 $13,329 $14,914
In the first quarter of 1995, the Company sold Frontier
Consumer Discount Company, a subsidiary of Community,
at a gain of $905,000 and recognized a reduction to the
allowance for loan losses which is reflected in the
above table in the line item "Reduction due to
disposition of business line."
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). All loans, except for loans that are
insured for credit loss, are placed on non-accrual
status immediately upon becoming 90 days past due in
either principal or interest. In addition, if
circumstances warrant, the accrual of interest may be
discontinued prior to 90 days. In all cases, payments
received on non-accrual loans are credited to principal
until full recovery of principal has been recognized;
it is only after full recovery of principal that any
additional payments received are recognized as interest
income. The only exception to this policy is for
residential mortgage loans wherein interest income is
recognized on a cash basis as payments are received.
24
The following table presents information concerning
non-performing assets:
At December 31 1997 1996 1995 1994 1993
(In thousands, except percentages)
Non-accrual loans $6,450 $6,365 $7,517 $5,446 $5,304
Loans past due 90 days or more 1,601 2,043 995 1,357 203
Other real estate owned 807 263 914 1,098 991
Total non-performing assets $8,858 $8,671 $9,426 $7,901 $6,498
Total non-performing assets
as a percent of loans and
loans held for sale,
net of unearned income,
and other real estate owned 0.89% 0.92% 1.13% 0.91% 0.89%
The Company is unaware of any additional loans
which are required to either be charged-off or added to
the non-performing asset totals disclosed above. Other
real estate owned is recorded at the lower of 1) fair
value minus estimated costs to sell, or 2) carrying
cost.
The Company uses SFAS #114, "Accounting by
Creditors for Impairment of a Loan" which was
subsequently amended by SFAS #118, Accounting by
Creditors for Impairment of a Loan-Income Recognition
and Disclosures to account for impaired loans. SFAS
#114 addresses the treatment and disclosure of certain
loans where it is probable that the creditor will be
unable to collect all amounts due according to the
contractual terms of the loan agreement. This standard
defines the term "impaired loan" and indicates the
method used to measure the impairment. 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.
Additionally, SFAS #118 requires the disclosure of how
the creditor recognizes interest income related to
these impaired loans.
The Company had loans totalling $1,012,000 and
$2,297,000 being specifically identified as impaired
and a corresponding allocation reserve of $650,000 and
$292,000 at December 31, 1997, and 1996, respectively.
The average outstanding balance for loans being
specifically identified as impaired was $1,715,000 for
1997 and $2,186,000 for 1996. 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 1997 or 1996.
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 1997 1996 1995 1994 1993
(In thousands)
Interest income due in
accordance with original terms $ 472 $ 560 $ 601 $ 509 $ 753
Interest income recorded (132) (75) (648) (588) (442)
Net reduction (increase)
in interest income $ 340 $ 485 $ (47) $ (79) $ 311
8. PREMISES AND EQUIPMENT
An analysis of premises and equipment follows:
At December 31 1997 1996
(In thousands)
Land $ 2,131 $ 2,131
Premises 23,283 22,938
Furniture and equipment 19,123 17,946
Leasehold improvements 2,639 2,302
Total at cost 47,176 45,317
Less: Accumulated depreciation 29,546 27,116
Net book value $17,630 $18,201
25
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:
Securities
Federal Sold Under Other
Funds Agreements to Short-term
At December 31, 1997 Purchased 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
Securities
Federal Sold Under Other
Funds Agreements to Short-term
At December 31, 1996 Purchased Repurchase Borrowings
(In thousands, except rates)
Balance $ 29,000 $ 47,672 $ 79,068
Maximum indebtedness at
any month end 46,433 56,325 249,035
Average balance during year 26,485 46,402 73,706
Average rate paid for the year 5.72% 5.45% 4.59%
Average rate on period
end balance 7.26 5.42 5.44
Securities
Federal Sold Under Other
Funds Agreements to Short-term
At December 31, 1995 Purchased Repurchase Borrowings
(In thousands, except rates)
Balance $ 28,000 $ 35,828 $ 30,528
Maximum indebtedness at
any month end 37,599 126,575 50,507
Average balance during year 25,184 81,732 28,868
Average rate paid for the year 6.36% 5.48% 4.16%
Average rate on period
end balance 6.01 5.38 4.54
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 $18,892,000
outstanding balance on a $33 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 of 1.25% on the
used portion for which a compensating balance is
maintained and Libor plus 1.25% on the used portion for
which no compensating balance is maintained. This line
of credit, which expires July 1, 1998, 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 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 80 days
at the end of 1997, 124 days at the end of 1996 and ten
days at the end of 1995.
10. DEPOSITS
The following table sets forth the balance of the
Company's deposits:
At December 31 1997 1996 1995
(In thousands)
Demand -
non-interest bearing $ 146,685 $ 144,314 $ 145,379
Demand -
interest bearing 89,082 89,035 99,051
Savings 174,459 196,650 216,115
Money market 159,505 150,358 134,685
Certificates of deposit
in denominations of
$100,000 or more 37,651 36,886 42,786
Other time 532,145 521,495 539,842
Total deposits $1,139,527 $1,138,738 $1,177,858
Interest expense on deposits consisted of the
following:
At December 31 1997 1996 1995
(In thousands)
Interest bearing demand $ 891 $ 811 $ 1,258
Savings 3,139 3,525 4,302
Money market 5,689 4,977 4,226
Certificates of deposit
in denominations of
$100,000 or more 2,312 2,074 3,149
Other time 30,541 30,673 32,468
Total interest expense $ 42,572 $ 42,060 $ 45,403
The following table sets forth the balance of other
time deposits maturing in the periods presented:
Year (In thousands)
1998 $307,633
1999 111,397
2000 47,913
2001 21,325
2002 and after 43,877
26
11. ADVANCES FROM FEDERAL HOME LOAN BANK,
COLLATERALIZED MORTGAGE OBLIGATION, AND LONG-TERM DEBT
Advances from Federal Home Loan Bank:
Advances from Federal Home Loan Bank consist of the
following:
At December 31, 1997
Weighted
Maturing Average Yield Balance
(In thousands)
1998 5.47% $630,796
1999 5.86 126,273
2000 6.15 3,750
2001 8.22 10,126
2002 7.06 8,500
2003 and after 6.61 3,750
Total advances $783,195
At December 31, 1996
Weighted
Maturing Average Yield Balance
(In thousands)
1997 5.52% $401,250
1998 5.11 176,873
1999 6.09 1,250
2000 6.15 3,750
2001 8.22 10,126
2002 and after 6.92 12,250
Total advances $605,499
Total Federal Home Loan Bank borrowing exposure at
December 31, 1997, was $783,195,000. Total Federal Home
Loan Bank borrowings consist of $564,195,000 of term
advances and $219,000,000 of repo plus advances with
maturities of less than 90 days.
Total Federal Home Loan Bank borrowing exposure at
December 31, 1996, was $605,499,000. Total Federal Home
Loan Bank borrowings consisted of $281,999,000 of term
advances and $323,500,000 of repo plus advances with
maturities of less than 90 days.
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 with the Federal Home Loan Bank
of Pittsburgh.
Collateralized Mortgage Obligation:
The collateralized mortgage obligation was issued
through Community First Capital Corporation ("CFCC"), a
wholly-owned, single-purpose finance subsidiary of
Three Rivers Bank. The former Community Savings Bank
transferred in 1988 Federal Home Loan Mortgage
Corporation ("FHLMC") securities with a book value of
approximately $31,500,000 to CFCC which were then used
as collateral for issuance of bonds with a par value of
$27,787,000 in the form of a collateralized mortgage
obligation.
Assets held in trust for the collateralized mortgage
obligation consist of the following:
At December 31 1997 1996
(In thousands)
FHLMC securities $3,849 $4,834
Accrued interest receivable on FHLMC 10 46
Funds held by trustee 408 379
Total $4,267 $5,259
Under provisions of the Trust Indenture, the bonds are
fully collateralized by the FHLMC securities and funds
held by the trustee. Funds held by the trustee
represent payments received on FHLMC securities,
collateral reserves, and reinvestment of earnings on
such funds which have not been applied to pay principal
and interest on the bonds. These funds are restricted
to assure payment on the bonds in accordance with the
Indenture.
Long-Term Debt:
The Company's long-term debt consisted of the
following:
At December 31 1997 1996
(In thousands)
Bank notes $4,083 $3,700
Other 278 472
Total long-term debt $4,361 $4,172
The bank notes evidence three loans at Standard
Mortgage Corporation of Georgia and include a $4.8
million non-revolving commercial loan commitment which
is payable monthly in fixed principal installments of
$100,000 through January 25, 2000. Also included are
two additional $1 million commercial loan commitments
which are payable monthly in fixed principal
installments of $21,000 each through January 25, 2001,
and February 25, 2001, respectively. These commercial
loans bear interest at 2.25% on the portion for which
a compensating balance is maintained and Libor plus
2.25% for which no compensating balance is maintained.
These loans are secured by Standard Mortgage
Corporation's mortgage inventory, servicing rights, and
commitments.
Scheduled maturities of long-term debt for the years
subsequent to December 31, 1997 are $1,841,000 in 1998;
$1,804,000 in 1999; $627,000 in 2000; and finally
$89,000 in 2001.
27
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 as
defined in SFAS #107. Many of the Company's financial
instruments, however, lack an available trading market
as 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, 1997, and 1996,
were as follows:
Financial instruments actively traded in a secondary
market have been valued using quoted available market
prices.
1997 1996
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
(In thousands)
Investment securities
(including assets held in
trust for collateralized
mortgage obligation) $1,128,803 $1,116,723 $1,011,451 $1,007,467
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.
1997 1996
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
(In thousands)
Deposits with stated
maturities $ 574,281 $ 569,795 $ 562,415 $ 558,383
Short-term borrowings 504,474 504,474 533,935 533,935
Long-term debt (including
collateralized mortgage
obligation and non-
current portion of
FHLB advances) 410,304 408,582 235,934 236,167
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.
1997 1996
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
(In thousands)
Deposits with no
stated maturities $ 569,732 $ 569,732 $ 580,355 $ 580,355
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.
1997 1996
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
(In thousands)
Net loans (including
loans held for sale) $1,008,738 $ 989,575 $ 927,043 $ 926,397
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.
This methodology is consistent with SFAS #122. For
further discussion see Note #1.
1997 1996
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
(In thousands)
Purchased and
originated mortgage
servicing rights $ 15,657 $ 14,960 $ 14,596 $ 12,494
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. Because of the Company's core
deposit base (which comprises 96% of total deposits),
and a below peer cost of deposits (actual cost in 1997
of 4.21% vs. a peer average of 4.47% as of September
30, 1997), management believes the relationship value
of these deposits is significant. Based upon the
Company's most recent acquisitions and other limited
secondary market transactions involving similar
deposits, management estimates the relationship value
of these funding liabilities to range between $55
million to $110 million less than their estimated fair
value shown at December 31, 1997. 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.
28
At December 31, 1997, the notional value of the Company's
off-balance sheet financial instruments (interest
rate swaps) totalled $165 million with an estimated
fair value of approximately ($925,000). There is no
material difference between the notional amount and the
estimated fair value of the remaining off-balance sheet
items which total $214.3 million and are primarily
comprised of unfunded loan commitments which are
generally priced at market at the time of funding.
Management is concerned 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 1997 1996 1995
(In thousands)
Current $7,913 $6,468 $4,862
Deferred 1,390 776 1,183
Income tax provision $9,303 $7,244 $6,045
The reconciliation between the federal statutory tax
rate and the Company s effective consolidated income
tax rate is as follows:
Year ended December 31 1997 1996 1995
Amount Rate Amount Rate Amount Rate
(In thousands, except percentages)
Tax expense based on federal statutory rate $11,480 35.0% $ 9,542 35.0% $ 7,647 35.0%
State income taxes 234 0.7 200 0.7 350 1.6
Tax exempt income (3,104) (9.5) (3,168)(11.6) (2,766)(12.7)
Goodwill and acquisition related costs 575 1.8 578 2.1 555 2.5
Other 118 0.3 92 0.3 259 1.3
Total provision for income taxes $ 9,303 28.3% $ 7,244 26.5% $ 6,045 27.7%
29
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 1997 1996 1995
(In thousands)
Provision for possible
loan losses $ 425 $ 555 $ 236
Lease accounting 999 747 212
Accretion of discounts on
securities, net 366 104 1,170
Investment write-downs 83 230 416
Core deposit and
mortgage servicing
intangibles (289) (272) (209)
Deposit liability
write-down (345) (465) (453)
Deferred loan fees 82 82 82
Other, net 69 (205) (271)
Total $1,390 $ 776 $ 1,183
At December 31, 1997, and 1996, 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 1997 1996
(In thousands)
Deferred Assets:
Provision for loan losses $ 4,240 $ 4,665
Investment security write-downs
due to SFAS #115 - 151
Deferred loan fees 491 573
Tax credits and carryovers - 540
Other 603 426
Total assets 5,334 6,355
Deferred Liabilities:
Investment security write-ups
due to SFAS #115 (976) -
Accumulated depreciation (779) (927)
Accretion of discount (2,613) (2,247)
Lease accounting (2,575) (1,576)
Core deposit and mortgage
servicing intangibles (2,142) (1,950)
Deposit liability write-down - (345)
Other (482) (570)
Total liabilities (9,567) (7,615)
Valuation allowance (325) (325)
Net deferred liability $(4,558) $(1,585)
The change in the net deferred liability during 1997
and 1996 was attributed to the following:
At December 31 1997 1996
(In thousands)
Investment write-ups due to
SFAS #115, charge
to equity $(1,044) $ 1,712
Use of NOL - (154)
Alternative minimum tax credit (539) (1,351)
Deferred provision for
income taxes (1,390) (776)
Net decrease $(2,973) $ (569)
14. PENSION AND PROFIT SHARING PLANS
U.S. Bank:
U.S. Bank has a trusteed, noncontributory defined
benefit pension plan covering all employees who work at
least 1,000 hours per year for U.S. Bank or the Company
and who have not yet reached age 60 at their employment
date. The benefits of the plan are based upon the
employee's years of service and average annual earnings
for the highest five consecutive calendar years during
the final ten year period of employment. U.S. Bank's
plan 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.
Net periodic pension cost for the plan is as follows:
Year ended December 31 1997 1996 1995
(In thousands)
Service cost $ 461 $ 455 $ 399
Interest cost 454 413 390
Deferred asset gain 665 241 575
Amortization of transition
asset (17) (17) (17)
Amortization of
unrecognized prior
service cost (30) (30) (31)
Actual return on plan assets (1,193) (665) (919)
Net periodic pension cost $ 340 $ 397 $ 397
30
A reconciliation of the funded status of the plan to
the recorded net pension liability is as follows:
At December 31 1997 1996
(In thousands)
Fair value of plan assets $ 7,424 $ 6,599
Projected benefit obligation (7,051) (6,418)
Overfunded projected
benefit obligation 373 181
Unrecognized net transition asset (261) (278)
Unrecognized prior service cost (450) (480)
Unrecognized net gain (679) (227)
Net pension liability $ (1,017) $ (804)
The actuarial present value of benefit obligations is
as follows:
At December 31 1997 1996
(In thousands)
Accumulated benefit obligation $ 4,995 $ 4,563
Vested benefit obligation $ 4,676 $ 4,339
The following rate assumptions were used in the plan
accounting:
Jan. 1, Dec. 31, Jan. 1, Dec. 31,
Measurement Date 1997 1997 1996 1996
Discount rate
(weighted-average) 7.25% 7.00% 7.00% 7.25%
Rate of compensation increases 3.50 3.50 3.50 3.50
Expected long-term rate
of return on plan assets
(weighted-average) 8.00 8.00 8.00 8.00
U.S. Bank also has a trusteed, deferred profit sharing
plan with contributions made by U.S. Bank based upon
income as defined in 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 $899,000 in 1997; $287,000 in
1996; and $764,000 in 1995. 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:
Three Rivers Bank has a trusteed, noncontributory
defined benefit pension plan covering all employees who
work at least 1,000 hours per year and who have not yet
reached age 60 at their employment date. The benefits
of the plan are based upon the employee's years of
service and average annual earnings for the highest
five consecutive calendar years during the final ten
year period of employment. Three Rivers Bank's plan
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.
Net periodic pension cost for the plan is as follows:
Year ended December 31 1997 1996 1995
(In thousands)
Service cost $ 548 $ 518 $ 410
Interest cost 360 316 259
Deferred asset gain 384 240 232
Amortization of transition
obligation 3 3 3
Amortization of unrecognized
prior service cost 57 57 53
Actual return on plan assets (727) (488) (448)
Amortization of loss - 13 -
Net periodic pension cost $ 625 $ 659 $ 509
A reconciliation of the funded status of the plan to
the recorded net pension (liability) asset is as
follows:
At December 31 1997 1996
(In thousands)
Fair value of plan assets $ 4,919 $ 4,157
Projected benefit obligation (5,689) (4,998)
Unfunded projected benefit obligation (770) (841)
Unrecognized net transition obligation 15 19
Unrecognized prior service cost 617 674
Unrecognized net loss 121 278
Net pension (liability) asset $ (17) $ 130
The actuarial present value of benefit obligations is
as follows:
At December 31 1997 1996
(In thousands)
Accumulated benefit obligation $ 4,247 $ 3,903
Vested benefit obligation $ 3,683 $ 3,336
31
The following rate assumptions were used in the plan
accounting:
Jan. 1, Dec. 31, Jan. 1, Dec. 31,
Measurement Date 1997 1997 1996 1996
Discount rate
(weighted-average) 7.25% 7.00% 7.00% 7.25%
Rate of compensation increases 3.50 3.50 3.50 3.50
Expected long-term rate
of return on plan assets
(weighted-average) 8.00 8.00 8.00 8.00
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 beginning on
January 1 following six months of service. Three Rivers
Bank s contribution to this 401(k) plan was $184,000 in
1997; $166,000 in 1996; and $128,000 in 1995.
Except for the above pension benefits provided by each
subsidiary, the Company has no significant additional
exposure for any other post-retirement benefits.
15. LEASE COMMITMENTS
The Company's obligation for future minimum lease
payments on operating leases at December 31, 1997, is
as follows:
Year Future Minimum Lease Payments
(In thousands)
1998 $585
1999 478
2000 307
2001 164
2002 and thereafter (in total) 190
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 $782,000, $672,000 and $533,000, in 1997,
1996, and 1995, 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 $214,307,000 and standby letters of
credit of $10,712,000 as of December 31, 1997.
Additionally, the Company is also subject to a number
of asserted and unasserted potential claims encountered
in the normal course of business. In the opinion of
management and legal counsel, neither the resolution of
these claims nor the funding of these credit
commitments will have a material adverse effect on the
Company's consolidated financial position or results of
operation.
17. INCENTIVE STOCK OPTION PLAN
In 1991, the Company's Board of Directors adopted
an Incentive Stock Option Plan authorizing the grant of
options covering 128,000 shares of common stock. In
April 1995, the Company amended the Plan to increase
the number of shares available for issuance thereunder
from 128,000 to 285,000 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," under which no compensation cost has been
recognized. 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. Had compensation
cost for these plans been determined consistent with
FASB #123, "Accounting for Stock-Based Compensation,"
the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:
32
At December 31 1997 1996 1995
(In thousands, except per share data)
Net Income:
As Reported $23,497 $20,019 $15,803
Pro Forma 23,285 19,810 15,767
Basic Earnings Per Share:
As Reported $ 4.69 $ 3.85 $ 2.89
Pro Forma 4.64 3.81 2.88
Diluted Earnings Per Share:
As Reported $ 4.61 $ 3.83 $ 2.88
Pro Forma 4.57 3.79 2.88
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.
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. In December
1997, the Company issued 28,000 options to certain
executive officers under a long-term performance based
stock option program. Under the program, these options
will vest after three years only if specific financial
performance goals are achieved. The purpose of this
program is to encourage financial performance at a
level which is significantly above average within the
industry.
A summary of the status of the Company's Stock Option
Plan at December 31, 1997, 1996, and 1995, and changes
during the years then ended is presented in the table
and narrative following:
Year ended December 31 1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 175,258 $28.11 105,821 $24.34 75,867 $21.70
Granted 29,500 63.40 78,000 32.56 56,800 26.25
Exercised (18,412) 24.55 (8,563) 22.87 (23,846) 20.75
Forfeited - - - - (3,000) 22.40
Outstanding at end of year 186,346 34.05 175,258 28.11 105,821 24.34
Exercisable at end of year 90,999 26.70 54,280 23.29 20,854 20.09
Weighted average fair value
of options granted since 1-1-95 $8.88 $6.99 $6.38
33
A total of 90,999 of the 186,346 options outstanding at
December 31, 1997, have exercise prices between $17.25
and $32.56, with a weighted average exercise price of
$26.70 and a weighted average remaining contractual
life of 6.9 years. All of these options are
exercisable. The remaining 95,347 options have exercise
prices between $21.25 and $64.50, with a weighted
average exercise price of $41.06 and a weighted average
remaining contractual life of 8.6 years.
During 1997 two option grants totalling 29,500 shares
were issued, compared to one option grant totalling
78,000 shares in 1996. 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 1997, 1996, and 1995,
respectively: risk-free interest rates of 6.49% and
5.92% for 1997 options, 5.49% for the 1996 options and
5.79%, 6.13%, and 7.82% for the 1995 options; expected
dividend yields of 3.25% and 2.25% for 1997 options,
3.25% for the 1996 options, and 3.25%, 3.50%, and 4.00%
for the 1995 options; expected lives of 7.0 years for
all the 1997, 1996, and 1995 options; expected
volatility of 20.96% and 18.31% for 1997 options,
21.28% for the 1996 options, 21.29%, 21.85%, and 22.32%
for the 1995 options.
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.
Participants who enroll to reinvest dividends may also
make optional cash payments of not less than $10 and up
to a maximum of $2,000 per month. 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, 1997, the Company had 263,048 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 $40.00, subject
to adjustment (the "Exercise Price"). The Rights became
exercisable if a person, group, or other entity
acquired or announced a tender offer for 20% or more of
the Company's Common Stock. They could also have been
exercised if a person or group who had become a
beneficial owner of at least 10% of the Company's
Common Stock was declared by the Board of Directors to
be an "adverse person" (as defined in the Rights
Agreement). Under the Rights Agreement, any person,
group, or entity would be deemed a beneficial owner of
the Company's Common Stock if such person, group, or
entity would be deemed to beneficially own the
Company s Common Stock under the rules of the
Securities and Exchange Commission which generally
require that such person, group, or entity have, or
have the right to acquire within sixty days, voting or
dispositive power of the Company's Common Stock;
provided, however, that the Rights Agreement excluded
from the definition of beneficial owner, holders of
revocable proxies, employee benefit plans of the
Company or its subsidiaries and the Trust Company.
After the Rights became exercisable, the Rights (other
than rights held by a 20% beneficial owner or an
"adverse person") would entitle the holders to
purchase, under certain circumstances, either the
Company's Common Stock or common stock of the potential
acquirer having a value equal to twice the Exercise
Price. The Company was generally entitled to redeem the
Rights at $0.01 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 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 $65.00. The
rights attached to shares of USBANCORP Common Stock
outstanding on March 15, 1995, and will expire in ten
years.
34
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 $15.4 million of goodwill and $3.7 million of
core deposit intangible assets on its balance sheet.
The majority of these intangible assets came from the
1994 Johnstown Savings Bank acquisition ($25.9 million)
and the 1993 Integra Branches acquisition ($1.2
million).
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
1997 diluted earnings per share by $0.42. 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)
1998 $ 2,170
1999 2,014
2000 1,904
2001 1,865
2002 and after $ 11,169
A reconciliation of the Company's intangible asset
balances for 1997 and 1996 is as follows:
At December 31 1997 1996
(In thousands)
Balance January 1 $21,478 $23,838
Amortization expense (2,356) (2,360)
Balance December 31 $19,122 $21,478
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 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:
35
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 one year are being used to
fund fixed-rate agency mortgage-backed securities with
durations ranging from two to three years. Under these
swap agreements, the Company pays a fixed rate of
interest and receives a floating rate which resets
either monthly, quarterly, or annually. The following
table summarizes the interest rate swap transactions
which impacted the Company s 1997 performance:
Fixed Floating Impact
Notional Start Termination Rate Rate Repricing On Interest
Amount Date Date Paid Received Frequency Expense
$60,000,000 3-16-95 3-16-97 6.93% 5.54% Matured $184,000
25,000,000 9-29-95 9-29-97 6.05 5.71 Matured 64,023
40,000,000 3-17-97 3-15-99 6.19 5.66 Monthly 162,757
50,000,000 5-08-97 5-10-99 6.20 5.88 Annually 103,556
25,000,000 6-20-97 6-20-99 6.20 5.53 Monthly 89,264
50,000,000 9-25-97 9-25-99 5.80 5.50 Monthly 40,278
The Company believes that its exposure to credit loss
in the event of non-performance by any of the
counterparties (which include PNCBank, Mellon Bank, and
Corestates Bank) 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 caps or
floors outstanding at December 31, 1997, or December
31, 1996.
36
22. 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.
Management believes that as of December 31, 1997, the
Company meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997, and 1996, 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.
To Be Well
Capitalized Under
For Capital Prompt Corrective
As of December 31, 1997 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(In thousands, except ratios)
Total Capital (to Risk Weighted Assets)
Consolidated $147,883 14.12% $83,796 8.00% $104,745 10.00%
U.S. Bank 87,625 15.77 44,442 8.00 55,552 10.00
Three Rivers Bank 65,581 13.37 39,248 8.00 49,060 10.00
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 135,770 12.96 41,898 4.00 62,847 6.00
U.S. Bank 81,518 14.67 22,221 4.00 33,331 6.00
Three Rivers Bank 59,575 12.14 19,624 4.00 29,436 6.00
Tier 1 Capital (to Average Assets)
Consolidated 135,770 6.25 86,882 4.00 108,603 5.00
U.S. Bank 81,518 6.74 48,349 4.00 60,436 5.00
Three Rivers Bank 59,575 6.21 38,366 4.00 47,958 5.00
37
To Be Well
Capitalized Under
For Capital Prompt Corrective
As of December 31, 1996 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(In thousands, except ratios)
Total Capital (to Risk Weighted Assets)
Consolidated $142,832 14.16% $80,683 8.00% $100,853 10.00%
U.S. Bank 86,087 15.47 44,505 8.00 55,631 10.00
Three Rivers Bank 31,878 13.55 18,818 8.00 23,523 10.00
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 130,225 12.91 40,341 4.00 60,512 6.00
U.S. Bank 79,133 14.22 22,252 4.00 33,379 6.00
Three Rivers Bank 29,281 12.45 9,409 4.00 14,114 6.00
Tier 1 Capital (to Average Assets)
Consolidated 130,225 6.51 79,966 4.00 99,958 5.00
U.S. Bank 79,133 6.91 45,790 4.00 57,238 5.00
Three Rivers Bank 29,281 6.44 18,174 4.00 22,718 5.00
23. SUBSEQUENT EVENT BRANCH ACQUISITION
On January 30, 1998, Three Rivers Bank and National
City Bank of Pennsylvania ("National City") entered
into a Purchase and Assumption Agreement (the Branch
Agreement ), pursuant to which Three Rivers Bank agreed
to purchase certain assets and assume certain
liabilities of two National City offices located in
Allegheny County. Pursuant to the Branch Agreement, and
subject to certain conditions set forth therein, Three
Rivers Bank will: (i) assume certain deposit
liabilities totalling approximately $38 million; (ii)
purchase all the real estate and furniture and fixtures
of these two branch locations; (iii) purchase the safe
deposit box business conducted at the branches; (iv)
assume contracts that relate to the operation of the
branches; and (v) purchase the vault cash.
In consideration for the assumption of the deposit
liabilities, Three Rivers Bank will pay National City a
deposit premium of 7.0% or approximately $2.6 million.
In addition, Three Rivers Bank is purchasing cash
reserve loans at par value.
The consummation of the branch acquisition is
contingent upon, among other things, receipt of all
necessary regulatory approvals. Management anticipates
that this transaction will be consummated in the second
quarter of 1998.
24. 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 1997 1996
(In thousands)
ASSETS
Cash and cash equivalents $ 582 $ 28
Equity investment in banking
subsidiaries 163,822 157,120
Equity investment in non-banking
subsidiaries 2,632 2,128
Other assets 727 878
TOTAL ASSETS $167,763 $160,154
LIABILITIES
Short-term borrowings $ 7,600 $ 4,800
Other liabilities 1,818 3,332
TOTAL LIABILITIES 9,418 8,132
STOCKHOLDERS' EQUITY
Total stockholders' equity 158,345 152,022
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $167,763 $160,154
38
STATEMENT OF INCOME
Year ended December 31 1997 1996 1995
(In thousands)
INCOME
Inter-entity management fees $ 3,867 $ 3,817 $ 3,899
Dividends from subsidiaries 19,601 15,491 9,237
Interest and dividend income 15 13 776
Net realized losses on
investment securities - - (469)
Total Income 23,483 19,321 13,443
EXPENSE
Interest expense 680 676 1,343
Salaries and employee benefits 2,793 2,753 2,885
Other expense 1,642 1,522 1,563
Total Expense 5,115 4,951 5,791
INCOME BEFORE
INCOME TAXES
AND EQUITY IN
UNDISTRIBUTED INCOME
OF SUBSIDIARIES 18,368 14,370 7,652
Provision for income taxes 522 484 641
Equity in undistributed
income of subsidiaries 4,667 5,271 7,510
NET INCOME $23,557 $20,125 $15,803
STATEMENT OF CASH FLOWS
Year ended December 31 1997 1996 1995
(In thousands)
OPERATING ACTIVITIES
Net income $23,557 $20,125 $15,803
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed
income of subsidiaries (4,667) (5,271) (7,510)
Net cash provided by operating
activities 18,890 14,854 8,293
INVESTING AND
FINANCING ACTIVITIES
Common stock cash dividends paid (9,318) (4,522) (7,156)
Proceeds from issuance of
common stock 453 188 497
Sale of investment securities - - 16,356
Purchase of treasury stock (11,637) (8,531) (7,943)
Repayment to fund
JSB acquisition - - (16,669)
Increase (decrease)
in borrowings 2,800 (1,800) 5,600
Investment in subsidiaries (600) - (200)
Other - net (34) (475) (996)
Net cash used by investing and
financing activities (18,336) (15,140) (10,511)
NET INCREASE (DECREASE) IN
CASH EQUIVALENTS 554 (286) (2,218)
CASH EQUIVALENTS AT
JANUARY 1 28 314 2,532
CASH EQUIVALENTS AT
DECEMBER 31 $ 582 $ 28 $ 314
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, 1997, the subsidiary banks were permitted to
upstream an additional $18,299,000 in cash dividends to
the Parent Company. The subsidiary banks also had a
combined $138,115,000 of restricted surplus and
retained earnings at December 31, 1997.
The Parent Company entered into a $17 million unsecured
line of credit on December 19, 1997. This line of
credit is subject to annual review on October 30, 1998,
and replaces all previous agreements which matured in
December 1997. 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, 1997, $9.4
million of this total $17.0 million credit line.
39
STATEMENT OF MANAGEMENT RESPONSIBILITY
January 23, 1998
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/Jeffrey A. Stopko
Terry K. Dunkle Jeffrey A. Stopko
Chairman, Senior Vice President &
President & CEO Chief Financial Officer
40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
2100 One PPGPlace
Pittsburgh PA15222-5498
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, 1997 and 1996, and
the related consolidated statements of income,
stockholders equity and cash flows for each of the
three years in the period ended December 31, 1997.
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 generally
accepted auditing standards. 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, 1997 and 1996, and the
results of their operations and their cash flows for
each of the three years in the period ended December
31, 1997, in conformity with generally accepted
accounting principles.
As explained in Note 1 to the consolidated financial
statements, effective January 1, 1995, the Company
changed its method of accounting for loan losses. In
addition, the Company changed its method of accounting
for mortgage servicing rights effective for the quarter
ended June 30, 1995.
Pittsburgh, Pennsylvania
January 23, 1998
(except for the matter discussed
in Note #23, as to which the date
is January 30, 1998)
/s/ARTHUR ANDERSEN LLP
41
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42
USBANCORP, INC.
Mangagement's Discussion and Analysis
43
MARKET PRICE AND DIVIDEND DATA
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, 1997:
First Quarter $49.25 $41.75 $ 0.30
Second Quarter 54.50 47.88 0.35
Third Quarter 65.50 52.75 0.35
Fourth Quarter 73.00 62.75 0.60
Year ended December 31, 1996:
First Quarter $33.50 $31.50 $ 0.27
Second Quarter 36.88 31.75 0.30
Third Quarter 38.94 31.00 0.30
Fourth Quarter 42.50 38.50 0.50
44
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA
At or for the year ended December 31 1997 1996 1995 1994 1993
(Dollars in thousands, except per share data and ratios)
Summary of Income Statement Data:
Total interest income $ 154,788 $ 137,333 $ 129,715 $ 102,811 $ 85,735
Total interest expense 87,929 76,195 73,568 46,993 36,250
Net interest income 66,859 61,138 56,147 55,818 49,485
Provision for loan losses 158 90 285 (2,765) 2,400
Net interest income after provision for loan losses 66,701 61,048 55,862 58,583 47,085
Total non-interest income 20,203 18,689 16,543 8,187 10,150
Total non-interest expense 54,104 52,474 50,557 49,519 40,715
Income before income taxes and cumulative effect
of change in accounting principle 32,800 27,263 21,848 17,251 16,520
Provision for income taxes 9,303 7,244 6,045 5,931 5,484
Income before cumulative effect of change in
accounting principle 23,497 20,019 15,803 11,320 11,036
Cumulative effect of change in accounting principle - - - - 1,452
Net income $ 23,497 $ 20,019 $ 15,803 $ 11,320 $ 12,488
Net income applicable to common stock $ 23,497 $ 20,019 $ 15,803 $ 11,320 $ 12,385
Per Common Share Data:
Basic Earnings:
Net income $ 4.69 $ 3.85 $ 2.89 $ 2.18 $ 2.78
Income before cumulative effect of change in
accounting principle, and acquisition charge 4.69 3.85 2.89 2.54 2.46
Diluted Earnings:
Net income 4.61 3.83 2.88 2.18 2.78
Income before cumulative effect of change in
accounting principle, and acquisition charge 4.61 3.83 2.88 2.54 2.45
Cash dividends declared 1.60 1.37 1.06 0.97 0.86
Book value at period end 32.32 29.90 28.34 24.57 24.67
Balance Sheet and Other Data:
Total assets $2,239,110 $2,087,112 $1,885,372 $1,788,890 $1,241,521
Loans and loans held for sale, net of unearned income 989,575 939,726 834,634 868,004 727,186
Allowance for loan losses 12,113 13,329 14,914 15,590 15,260
Investment securities available for sale 580,115 455,890 427,112 259,462 428,712
Investment securities held to maturity 532,341 546,318 463,951 524,638 -
Deposits 1,139,527 1,138,738 1,177,858 1,196,246 1,048,866
Long-term debt 4,361 4,172 5,061 5,806 3,445
Stockholders equity 158,180 151,917 150,492 137,136 116,615
Full-time equivalent employees 765 759 742 780 665
Selected Financial Ratios:
Return on average total equity before SFAS #109
benefit and acquisition charge 15.00% 13.36% 11.03% 10.41% 10.13%
Return on average assets before SFAS #109
benefit and acquisition charge 1.09 1.03 0.87 0.87 0.91
Loans and loans held for sale, net of unearned income,
as a percent of deposits, at period end 86.84 82.52 70.86 72.56 69.33
Ratio of average total equity to average assets 7.28 7.69 7.85 8.39 8.96
Common stock cash dividends as a percent of
net income applicable to common stock 34.00 35.28 36.43 44.57 32.28
Common and preferred stock cash dividends as a
percent of net income 34.00 35.28 36.43 44.57 32.84
Interest rate spread 2.97 3.06 2.94 3.47 3.72
Net interest margin 3.43 3.52 3.45 4.03 4.34
Allowance for loan losses as a percentage of
loans and loans held for sale, net of unearned
income, at period end 1.22 1.42 1.79 1.80 2.10
Non-performing assets as a percentage of loans and
loans held for sale and other real estate owned,
at period end 0.89 0.92 1.13 0.91 0.89
Net charge-offs as a percentage of average loans and
loans held for sale 0.14 0.20 0.08 0.04 0.13
Ratio of earnings to fixed charges and preferred
dividends:
Excluding interest on deposits 1.72x 1.79x 1.77x 2.34x 5.26x
Including interest on deposits 1.37 1.36 1.30 1.37 1.45
One Year GAP ratio, at period end 0.88 0.79 0.86 0.79 1.10
The prior years earnings per share have been
restated to reflect adoption of SFAS #128.
Full-time equivalent employees in 1994 include 115
employees as a result of JSB acquisition. Full-time
equivalent employees in 1993 include 18 employees as a
result of the Integra Branches Acquisition.
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.
45
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited
quarterly consolidated financial data regarding the
Company. The prior year earnings per share has been
restated to reflect adoption of SFAS #128:
1997 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
(In thousands, except per share data)
Interest income $39,196 $39,284 $38,870 $37,438
Non-interest income 5,629 5,151 4,800 4,623
Total operating income 44,825 44,435 43,670 42,061
Interest expense 22,594 22,401 22,001 20,933
Provision for loan losses 90 23 22 23
Non-interest expense 13,817 13,624 13,457 13,206
Income before income taxes 8,324 8,387 8,190 7,899
Provision for income taxes 2,352 2,370 2,350 2,231
Net income $ 5,972 $ 6,017 $ 5,840 $ 5,668
Basic Earnings Per Common Share:
Net income $ 1.21 $ 1.20 $ 1.16 $ 1.12
Diluted Earnings Per Common Share:
Net income 1.19 1.18 1.15 1.10
Cash Dividends Declared Per Common Share 0.60 0.35 0.35 0.30
1996 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
(In thousands, except per share data)
Interest income $35,991 $35,330 $33,245 $32,767
Non-interest income 4,665 4,922 4,572 4,530
Total operating income 40,656 40,252 37,817 37,297
Interest expense 20,006 19,709 18,213 18,267
Provision for loan losses 22 23 22 23
Non-interest expense 13,108 14,675 12,380 12,311
Income before income taxes 7,520 5,845 7,202 6,696
Provision for income taxes 2,025 1,546 1,920 1,753
Net income $ 5,495 $ 4,299 $ 5,282 $ 4,943
Basic Earnings Per Common Share:
Net income $ 1.07 $ 0.83 $ 1.01 $ 0.93
Diluted Earnings Per Common Share:
Net income 1.06 0.83 1.01 0.93
Cash Dividends Declared Per Common Share 0.50 0.30 0.30 0.27
The Company s Board of Directors approved a
special dividend of $0.25 and $0.20 per share in
December 1997 and 1996, respectively.
On September 30, 1996, the Company accrued a
one-time assessment of $1,925,000 mandated by Congress
to recapitalize the Savings Association Insurance Fund.
The negative after-tax impact of this special
assessment on net income was $1,368,000 or $0.26 on
diluted EPS.
46
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, 1997, 1996, AND 1995
PERFORMANCE OVERVIEW...The Company s net income for
1997 was $23.5 million or $4.61 on a diluted per share
basis compared to net income of $20.0 million or $3.83
per diluted share for 1996 and net income of $15.8
million or $2.88 per diluted share for 1995. When 1997
is compared to 1996, the Company's net income increased
by $3.5 million or 17.4% while diluted earnings per
share increased by $0.78 or 20.4%. The Company's return
on equity increased by 164 basis points to 15.00% while
return on assets increased by six basis points to
1.09%. Similar earnings growth trends are also
demonstrated when 1996 is compared to 1995 as the
Company's net income increased by $4.2 million or 26.7%
while diluted earnings per share increased by $0.95 or
33.0%. For each of the periods presented, earnings per
share grew at a faster rate than net income due to the
success of the Company's ongoing treasury stock
repurchase program.
The Company's improved financial performance in 1997
was due to a combination of increased revenue generated
from its core businesses and effective capital
management strategies. Specifically, net interest
income increased by $5.7 million or 9.4% while total
non-interest income grew by $1.5 million or 8.1%. This
increased revenue more than offset higher non-interest
expense which partially resulted from the start-up
costs of several new strategic initiatives which are
designed to further diversify the Company's revenue
stream in future years. These new strategic
initiatives include the selling of annuities, mutual
funds, and insurance, the formation of a subsidiary
which offers investment and asset/liability management
services to smaller financial institutions, the
establishment of the first full service mobile bank
branch in Western Pennsylvania, and the opening of two
loan production offices. Overall, total non-interest
expense was $1.6 million or 3.1% higher in 1997. The
Company s earnings per share were also enhanced by the
repurchase of its common stock as there were 140,000
fewer average diluted shares outstanding in 1997 than
in 1996. The Company demonstrated an improving
quarterly earnings trend in 1997 as diluted earnings
per share improved from $1.10 in the first quarter to
$1.19 in the fourth quarter.
When 1996 is compared to 1995, the 33.0% growth in
diluted earnings per share was also driven by revenue
growth. Specifically, net interest income increased by
$5.0 million or 8.9% while total non-interest income
grew by $2.1 million or 13.0%. This growth in revenue
more than offset the negative impact of higher
non-interest expense. Total non-interest expense
increased by $1.9 million or 3.8% due primarily to a
special assessment to recapitalize the Savings
Association Insurance Fund ("SAIF") in the third
quarter of 1996. This special assessment amounted to
$1.9 million on a pre-tax basis and reduced diluted
earnings per share by $0.26 in 1996. Excluding the
special SAIF assessment, the Company's total
non-interest expense was essentially flat between
years. The Company s return on equity increased by 233
basis points to 13.36% while return on assets increased
by 16 basis points to 1.03%. A 249,000 reduction in
average diluted shares outstanding in 1996 was again a
factor contributing to the return on equity improvement
and growth in diluted earnings per share.
47
The following table summarizes some of the Company's
key performance indicators for each of the past three
years. The prior years earnings per share have been
restated to reflect adoption of SFAS #128:
Year ended December 31 1997 1996 1995
(In thousands, except per share
data and ratios)
Net income $23,497 $20,019 $15,803
Diluted earnings per share 4.61 3.83 2.88
Return on average assets 1.09% 1.03% 0.87%
Return on average equity 15.00 13.36 11.03
Average diluted common shares outstanding 5,091 5,253 5,500
NET INTEREST INCOME AND MARGIN...The Company's net
interest income represents the amount by which interest
income on earning assets exceeds interest paid on
interest bearing liabilities. Net interest income is a
primary source of the Company's earnings; it is
affected by interest rate fluctuations as well as
changes in the amount and mix of earning assets and
interest bearing liabilities. It is the Company's
philosophy to strive to optimize net interest 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 1997 1996 1995
(In thousands, except per ratios)
Interest income $154,788 $137,333 $129,715
Interest expense 87,929 76,195 73,568
Net interest income 66,859 61,138 56,147
Tax-equivalent adjustment 2,939 2,954 2,807
Net tax-equivalent interest income $ 69,798 $ 64,092 $ 58,954
Net interest margin 3.43% 3.52% 3.45%
1997 NET INTEREST PERFORMANCE OVERVIEW...The Company's
net interest income on a tax-equivalent basis increased
by $5.7 million or 8.9% due to growth in earning
assets. Total average earning assets were $206 million
higher in 1997 with this growth in earning assets
almost evenly distributed between loans and investment
securities. Specifically, total loans grew by $103
million or 12.0% while investment securities increased
by $104 million or 11.0%. Despite this balanced growth
in the earning asset base, the net interest margin
declined by nine basis points to 3.43%. An increased
use of borrowings from the Federal Home Loan Bank to
fund the earning asset growth combined with a higher
cost of deposits to cause the compression in the net
interest margin. The overall growth in the earning
asset base was one important 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 plus or minus 7.5% and
net income variability to plus or minus 15% over a
twelve month period (see further discussion under
Interest Rate Sensitivity).
COMPONENT CHANGES IN NET INTEREST INCOME: 1997 VERSUS
1996...Regarding the separate components of net
interest income, the Company's total tax-equivalent
interest income for 1997 increased by $17.4 million or
12.4% when compared to 1996. This increase was due
primarily to a $206 million or 11.4% increase in total
average earning assets which caused interest income to
rise by $17.1 million. The remainder of the increase in
interest income was caused by a six basis point
improvement in the earning asset yield to 7.78%.
48
Within the earning asset base, the yield on total investment
securities increased by nine basis points to 6.94%
while the yield on the total loan portfolio increased
by four basis points to 8.66%.
Eight consecutive quarters of loan growth fueled the
improvement in the loan-to-deposit ratio which
contributed to the earning asset growth. The Company's
loan to deposit ratio averaged 83.8% in 1997 compared
to an average of 74.4% in 1996. This loan growth
primarily resulted from the Company's ability to take
market share from its competitors through strategies
which emphasize convenient customer service and hard
work. Other factors contributing to the loan growth
were a stable economic environment and the formation of
two loan production offices in better growth markets.
The loan yield also benefitted from a shift in the loan
portfolio composition away from fixed-rate residential
mortgage loans and lower yielding indirect auto loans
to higher yielding commercial and commercial mortgage
loans. Total commercial and commercial mortgage loans
comprised 45.7% of total loans at December 31, 1997,
compared to 43.8% at December 31, 1996. The higher
commercial loan totals resulted from increased
production from middle market and small business
lending (loans less than $250,000). During 1997, new
loan production for the middle market group exceeded
$150 million while the small business loan center
closed approximately $23 million of new loans.
The Company's total interest expense for 1997 increased
by $11.7 million or 15.4% when compared to 1996 due
primarily to a $193 million increase in average
interest bearing liabilities. The remainder of the
increase was due to a 15 basis point rise in the cost
of funds to 4.81%. The cost of deposits increased by
nine basis points to 4.21% as the Company has
experienced gradual disintermediation within the
deposit base from lower cost passbook savings accounts
to higher cost money market accounts and certificates
of deposit. Within the liability mix, total average
borrowed funds increased by $204 million in order to
fund the earning asset growth and replace a $12 million
outflow in deposits. For 1997, the Company's total
level of short-term borrowed funds and FHLB advances
averaged $806 million or 37.4% of total assets compared
to an average of $600 million or 30.8% of total assets
for 1996. These borrowed funds had an average cost of
5.56% in 1997 which was 135 basis points greater than
the average cost of deposits which amounted to 4.21%.
This greater dependence on borrowings to fund the
earning asset base was a key factor responsible for the
increased cost of funds even though the actual cost of
the short-term borrowed funds and FHLB advances was
three basis points lower in 1997. The combination of
all these price and liability composition movements
caused USBANCORP's average cost of interest bearing
liabilities to increase by 15 basis points from 4.66%
in 1996 to 4.81% in 1997.
It is recognized that interest rate risk does exist,
particularly in a rising interest rate environment,
from this use of borrowed funds to leverage the balance
sheet. To neutralize a portion of this risk, the
Company currently has outstanding a total of $165
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. With an expected acceleration in prepayments in
1998 due to the current flatness of the yield curve,
the Company will look to channel cashflow from the
investment securities portfolio into the loan
portfolio. If new loan opportunities do not occur or if
the incremental spread on new investment security
purchases is not at least 100 basis points over the
short-term borrowed funds costs, then the Company will
de-lever the balance sheet by paying off borrowings.
49
1996 NET INTEREST PERFORMANCE OVERVIEW...The Company's
net interest income on a tax-equivalent basis increased
by $5.1 million or 8.7% due to growth in earning assets
and improved net interest margin performance. The 1996
net interest margin of 3.52% was seven basis points
better than the 1995 net interest margin of 3.45% and
reflects the benefits of reduced funding costs and loan
growth. The total cost of funds decreased by 17 basis
points as deposit and borrowing costs dropped by 15 and
55 basis points, respectively. Growth in higher
yielding loans helped limit the decline in the earning
asset yield to five basis points despite the lower
interest rate environment which was experienced in
1996. Total loans outstanding averaged $858 million or
73.8% of total deposits in 1996 compared to an average
of $824 million or 68.7% of total deposits in 1995.
This growth in loans along with greater balance sheet
leveraging through the investment securities portfolio
caused total average earning assets to be $111 million
higher in 1996 compared to 1995.
COMPONENT CHANGES IN NET INTEREST INCOME: 1996 VERSUS
1995... Regarding the separate components of net
interest income, the Company's total 1996
tax-equivalent interest income increased by $7.8
million or 5.9% when compared to 1995. This increase
was due primarily to a $111 million or 6.5% increase in
total average earning assets which caused interest
income to rise by $7.2 million. This net increase in
average earning assets reflects $84 million of growth
in average investment securities and a $34 million
increase in total average loans. The additional
interest income generated from higher earning asset
volumes was partially offset by a five basis point
decline in the earning asset yield to 7.72%. Within the
earning asset base, the yield on total investment
securities declined by eight basis points to 6.85% due
primarily to the lower interest rate environment
experienced in 1996. Both the prime rate and fed funds
rate were approximately 50 basis points lower in 1996
as compared to 1995.
Despite the lower interest rate environment, the yield
on the total loan portfolio decreased by only five
basis points to 8.62%. A mix shift in the loan
portfolio towards higher yielding commercial product
had a favorable impact on the total loan portfolio
yield. Total commercial and commercial mortgage loans
comprised 43.1% of total loans at December 31, 1996,
compared to 33.9% at December 31, 1995. Residential
mortgage loans comprised 45.6% of total loans at
December 31, 1996, compared to 50.3% at December 31,
1995. The higher commercial loan totals resulted from
increased production from both small business (loans
less than $250,000) and middle market lending. 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. During 1996, in its first
full year of operation, the Company's small business
loan center approved 688 applications for $40 million
and closed 401 loans for $27 million with an average
approval time of 48 hours. This enhanced commercial
loan production also attests to the modest economic
growth of the Western Pennsylvania market.
The reduced dependence on residential mortgage loans as
an earning asset reflects the Company's ongoing
strategy to sell newly originated 30 year fixed-rate
mortgage product. The decline in consumer loans from
15.8% of total loans at December 31, 1995, to 11.3% of
total loans at December 31, 1996, was due entirely to
net run-off experienced within the lower yielding
indirect auto loan portfolio. This indirect auto loan
run-off has more than offset improved production of
higher yielding direct consumer loans from the
Company's branch offices which for 1996 were $14
million or 40% greater than 1995.
50
The Company's total interest expense for 1996 increased
by $2.6 million, or 3.6%, when compared to 1995. This
higher interest expense was caused by a $112 million
increase in average interest bearing liabilities which
caused interest expense to rise by $3.8 million. Within
the liability mix, total borrowed funds increased by
$153 million in order to fund greater balance sheet
leverage and replace a $41 million outflow in interest
bearing deposits. For 1996, the Company's total level
of short-term borrowed funds and FHLB advances averaged
$600 million or 30.8% of total assets compared to an
average of $449 million or 24.6% of total assets for
1995. Lower rates paid for both deposits and FHLB
borrowings caused a favorable rate variance of $1.2
million which partially offset the increased interest
expense resulting from the higher level of interest
bearing liabilities. The cost of deposits decreased by
15 basis points to 4.12% as the Company was able to
reprice all major deposit categories downward during
1996. Due to the lower interest rate environment and
the favorable extension of $150 million of non-hedged
FHLB borrowings at a fixed rate of 5.0%, the Company's
cost of borrowed funds averaged 5.59% for 1996 or 55
basis points lower than the 6.14% average cost for
1995. The combination of all these price and liability
composition movements caused USBANCORP's average cost
of interest bearing liabilities to decrease by 17 basis
points from 4.83% in 1995 to 4.66% in 1996.
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
34% is used to compute tax equivalent yields.
51
Year ended December 31 1997 1996 1995
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 $ 960,673 $ 84,309 8.66% $ 857,921 $ 74,967 8.62% $ 823,807 $ 71,855 8.67%
Deposits with banks 3,792 190 4.97 2,746 132 4.74 5,477 280 5.84
Federal funds sold
and securities purchased
under agreements to resell 36 2 5.20 667 36 5.35 2,715 165 5.94
Investment securities:
Available for sale 479,383 32,806 6.84 441,638 29,719 6.73 322,172 22,940 7.11
Held to maturity 568,534 40,065 7.05 502,335 34,963 6.96 538,028 36,726 6.82
Total investment securities 1,047,917 72,871 6.94 943,973 64,682 6.85 860,200 59,666 6.93
Assets held in trust for
collateralized mortgage
obligation 4,816 355 7.38 6,236 470 7.54 8,143 556 6.85
Total interest earning
assets/interest income 2,017,234 157,727 7.78 1,811,543 140,287 7.72 1,700,342 132,522 7.77
Non-interest earning assets:
Cash and due from banks 32,743 35,547 36,657
Premises and equipment 17,952 18,325 19,052
Other assets 97,514 96,164 85,403
Allowance for loan losses (13,057) (14,322) (15,146)
TOTAL ASSETS $2,152,386 $1,947,257 $1,826,308
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 90,179 $ 895 0.99% $ 81,233 $ 953 1.17% $ 91,596 $ 1,258 1.37%
Savings 185,959 3,140 1.69 209,054 3,525 1.69 229,423 4,302 1.88
Money markets 153,345 5,688 3.71 144,718 4,978 3.44 128,531 4,226 3.29
Other time 580,720 32,849 5.66 586,874 32,604 5.56 613,602 35,617 5.80
Total interest bearing
deposits 1,010,203 42,572 4.21 1,021,879 42,060 4.12 1,063,152 45,403 4.27
Federal funds purchased,
securities sold under
agreements to repurchase,
and other short-term
borrowings 156,499 8,183 5.23 146,593 7,594 5.18 135,784 7,053 5.17
Advances from Federal
Home Loan Bank 649,235 36,648 5.64 453,838 25,952 5.72 313,026 20,043 6.40
Collateralized mortgage
obligation 4,259 415 9.73 5,670 470 8.29 7,388 848 11.48
Long-term debt 5,070 111 2.18 4,786 119 2.02 1,603 221 12.40
Total interest bearing
liabilities/interest expense 1,825,266 87,929 4.81 1,632,766 76,195 4.66 1,520,953 73,568 4.83
Non-interest bearing liabilities:
Demand deposits 143,767 140,574 136,543
Other liabilities 26,722 24,126 25,534
Stockholders' equity 156,631 149,791 143,278
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY $2,152,386 $1,947,257 $1,826,308
Interest rate spread 2.97 3.06 2.94
Net interest income/net
interest margin 69,798 3.43% 64,092 3.52% 58,954 3.45%
Tax-equivalent adjustment (2,939) (2,954) (2,807)
Net interest income $ 66,859 $ 61,138 $ 56,147
52
The average balance and yield on taxable securities was
$916 million and 6.94%, $797 million and 6.81%, and
$723 million and 6.95% for 1997, 1996, and 1995,
respectively. The average balance and tax-equivalent
yield on tax-exempt securities was $132 million and
6.92%, $146 million and 7.06%, $137 million and 6.83%
for 1997, 1996, and 1995, 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.
1997 vs. 1996 1996 vs. 1995
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 $ 9,200 $ 142 $ 9,342 $ 2,546 $ 566 $ 3,112
Deposits with banks 56 2 58 (220) 72 (148)
Federal funds sold and securities purchased
under agreements to resell (35) 1 (34) (138) 9 (129)
Investment securities 7,970 219 8,189 5,117 (101) 5,016
Assets held in trust for collateralized
mortgage obligation (117) 2 (115) (74) (12) (86)
Total interest income 17,074 366 17,440 7,231 534 7,765
Interest paid on:
Interest bearing demand deposits (42) (16) (58) (325) 20 (305)
Savings deposits (390) 5 (385) (819) 42 (777)
Money market 688 22 710 725 27 752
Other time deposits 245 - 245 (3,023) 10 (3,013)
Federal funds purchased, securities sold
under agreements to repurchase, and other
short-term borrowings 586 3 589 572 (31) 541
Advances from Federal Home Loan Bank 10,814 (118) 10,696 6,883 (974) 5,909
Collateralized mortgage obligation (35) (20) (55) (433) 55 (378)
Long-term debt 13 (21) (8) 228 (330) (102)
Total interest expense 11,879 (145) 11,734 3,808 (1,181) 2,627
Change in net interest income $ 5,195 $ 511 $ 5,706 $ 3,423 $ 1,715 $ 5,138
53
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 $250,000 within an 18
month period. In addition, due to the secured nature of
residential mortgages and the smaller balances of
individual installment loans, sampling techniques are
used on a continuing basis for credit reviews in these
loan areas.
The following table sets forth information concerning
USBANCORP's loan delinquency and other non-performing
assets:
At December 31 1997 1996 1995
(In thousands, except percentages)
Total loan delinquency (past due 30 to 89 days) $19,890 $20,284 $14,324
Total non-accrual loans 6,450 6,365 7,517
Total non-performing assets 8,858 8,671 9,426
Loan delinquency as a percentage of total loans
and loans held for sale, net of unearned income 2.01% 2.16% 1.72%
Non-accrual loans as a percentage of total loans
and loans held for sale, net of unearned income 0.65 0.68 0.90
Non-performing assets as a percentage of total loans
and loans held for sale, net of unearned income,
and other real estate owned 0.89 0.92 1.13
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, 1996, and December 31, 1997, there
were only minimal changes in the total dollars
outstanding of loan delinquency, non-accrual loans, and
non-performing assets. Each of the ratios demonstrated
modest improvement over this same period due to the
increase in the size of the total loan portfolio.
Between December 31, 1995, and December 31, 1996, the
ratio of delinquent loans to total loans increased from
1.72% to 2.16%. This increase was primarily
attributable to greater delinquency in both commercial
and residential mortgage loans in the 30-59 day past
due category. Non-performing assets demonstrated a
decline between 1995 and 1996 due largely to enhanced
collection efforts on residential mortgage loans and
the success of the Company's ongoing commercial loan
workout programs.
54
ALLOWANCE AND PROVISION FOR LOAN LOSSES...The following
table sets forth changes in the allowance for loan
losses and certain ratios for the periods ended:
Year ended December 31 1997 1996 1995 1994 1993
(In thousands, except ratios and percentages)
Balance at beginning of year: $ 13,329 $ 14,914 $ 15,590 $ 15,260 $ 13,752
Addition due to acquisitions - - - 3,422 -
Reduction due to disposition of business line - - (342) - -
Charge-offs:
Commercial 1,040 1,705 576 352 383
Real estate-mortgage 202 156 135 155 628
Consumer 1,255 746 589 591 750
Total charge-offs 2,497 2,607 1,300 1,098 1,761
Recoveries:
Commercial 529 527 183 199 338
Real estate-mortgage 262 108 41 100 27
Consumer 332 297 457 472 504
Total recoveries 1,123 932 681 771 869
Net charge-offs 1,374 1,675 619 327 892
Provision for loan losses 158 90 285 (2,765) 2,400
Balance at end of year $ 12,113 $ 13,329 $ 14,914 $ 15,590 $ 15,260
Loans and loans held for sale, net of unearned income:
Average for the year $ 960,673 $ 857,921 $ 823,807 $ 809,695 $ 708,690
At December 31 989,575 939,726 834,634 868,004 727,186
As a percent of average loans and loans held for sale:
Net charge-offs 0.14% 0.20% 0.08% 0.04% 0.13%
Provision for loan losses 0.02 0.01 0.03 (0.34) 0.34
Allowance for loan losses 1.26 1.55 1.81 1.93 2.15
Allowance as a percent of each of the following:
Total loans and loans held for sale,
net of unearned income 1.22 1.42 1.79 1.80 2.10
Total delinquent loans (past due 30 to 89 days) 60.90 65.71 104.12 121.49 146.34
Total non-accrual loans 187.80 209.41 198.40 286.27 287.71
Total non-performing assets 136.75 153.72 158.22 197.32 234.84
Allowance as a multiple of net charge-offs 8.82x 7.96x 24.09x 47.68x 17.11x
Total classified loans $ 26,184 $ 24,027 $ 28,355 $ 39,338 $ 38,227
Dollar allocation of reserve to general risk 5,980 6,984 7,471 6,643 7,635
Percentage allocation of reserve to general risk 49.37% 52.40% 50.09% 42.61% 50.03%
The Company recorded a provision for loan losses of
$158,000 in 1997, $90,000 in 1996, and $285,000 in
1995. When expressed as a percentage of average loans,
the provision averaged between 0.01% and 0.03% over
this three year period. The Company's net charge-offs
amounted to $1.4 million or 0.14% of average loans in
1997, $1.7 million or 0.20% in 1996, and $619,000 or
0.08% in 1995. The Company did experience heightened
net charge-offs in the consumer loan portfolio in 1997
due to increased numbers of personal bankruptcies.
The strength of the allowance for loan losses at each
of the Company's banking subsidiaries supported
continued low loan loss provision levels. The Company
applies a consistent methodology and procedural
discipline to evaluate the adequacy of the allowance
for loan losses at each subsidiary bank on a quarterly
basis. At December 31, 1997, the allowance for loan
losses at each of the Company's banking subsidiaries
was in compliance with the Company's policy of
maintaining a general unallocated reserve of at least
20% of the systematically determined minimum reserve
need. In total, the Company's general unallocated
reserve was $6.0 million at December 31, 1997, or 49.4%
of the allowance for loan losses. Additionally, the low
loan loss provision level was also supported by
relatively consistent levels of substandard and
doubtful classified loans over the past three year
period.
55
The Company's allowance for loan losses at December 31,
1997, was 1.22% of total loans and 137% of
non-performing assets. Both of these ratios declined
from the December 31, 1996, levels of 1.42% and 154%,
respectively, due to the decline in the reserve balance
and growth in the loan portfolio. It is important to
note that approximately $5.7 million or 65% of the
Company's non-performing assets are residential
mortgages which exhibit a historically low level of
net-charge off. The Company expects to increase its
loan loss provision level in 1998 due to continued loan
growth and 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. 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 which was
previously discussed. The entire allowance for loan
losses is available to absorb future loan losses in any
loan category.
At December 31 1997 1996 1995 1994 1993
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
Amount to Loans Amount to Loans Amount to Loans Amount to Loans Amount to Loans
(In thousands, except percentages)
Commercial $ 1,020 14.4% $ 1,826 14.7% $ 2,127 12.3% $ 1,894 13.4% $ 1,637 13.6%
Commercial loans
secured by real estate 2,543 30.6 2,796 28.4 3,286 21.5 5,278 19.3 4,073 17.2
Real estate-mortgage 414 45.9 472 45.6 345 50.2 339 48.8 279 46.3
Consumer 1,506 9.1 959 11.3 600 16.0 1,436 18.5 1,636 22.9
Allocation to
general risk 5,980 6,984 7,471 6,643 7,635
Allocation for
impaired loans 650 292 1,085 - -
Total $12,113 $13,329 $14,914 $15,590 $15,260
Even though real estate-mortgage loans comprise
45.9% of the Company's total loan portfolio, only
$414,000 or 3.4% of the total allowance for loan losses
is allocated against this loan category. The real
estate-mortgage loan allocation is based upon the
Company s five year historical average of actual loan
charge-offs experienced in that category. The higher
allocations for commercial loans and commercial loans
secured by real estate reflect the increased credit
risk associated with this type of lending, the current
economic environment, and the Company's historical loss
experience in these categories. The higher allocation
for consumer loans reflect recent increased credit card
charge-offs due to personal bankruptcies. At December
31, 1997, management of the Company believes the
allowance for loan losses was adequate to cover
potential yet undetermined losses within the Company's
loan portfolio.
56
NON-INTEREST INCOME...Non-interest income for 1997
totalled $20.2 million which represented a $1.5 million
or 8.1% increase when compared to 1996. This increase
was primarily due to the following items:
a $314,000 or 8.5% increase in trust fees to $4.0
million in 1997. This trust fee growth reflects
increased assets under management due to the profitable
expansion of the Trust Company's business throughout
western Pennsylvania. For the full year of 1997, the
Trust Company's business development efforts have
generated new trust assets amounting to $207 million
which should generate annual fees approximating
$351,000.
a $948,000 increase in gains realized on loans
held for sale due to heightened residential mortgage
origination and sales activity at the Company's
mortgage banking subsidiaries. Total mortgage
originations exceeded $253 million in 1997 compared to
$205 million in 1996. The Company also generated
$153,000 in gains on sale of servicing rights in 1997
which is reflected in the above gain figure. It is the
Company's ongoing strategy to sell newly originated
fixed-rate residential mortgage loans excluding those
loans retained for CRA purposes.
a $286,000 or 5.7% increase in other income due in
part to additional income resulting from ATM
transaction charges, other mortgage banking processing
fees, credit card charges, and premium income
commissions from insurance sales.
a $208,000 or 9.0% decrease in net mortgage
servicing fee income to $2.1 million. This amount
resulted from $3.9 million of mortgage servicing fees
net of $1.8 million of amortization expense of the cost
of purchased and originated mortgage servicing rights
("MSR"). The decline in earnings between 1997 and 1996
was due to increased amortization expense on the
mortgage servicing rights as a result of faster
mortgage prepayment speeds in 1997. Given the current
flat shape of the yield curve and heightened mortgage
refinancing activity, the Company expects these trends
to continue into 1998. The following chart highlights
some of the key information related to SMC's mortgage
servicing portfolio:
At December 31 1997 1996
(In thousands, except percentages and prepayment data)
MSR portfolio balance $1,175,593 $992,839
Fair value of MSRs based upon
discounted cash flow of servicing portfolio 15,657 14,596
Fair value as a percentage of MSR balance 1.33% 1.36%
PSA prepayment speed 230 197
Weighted average portfolio interest rate 7.79% 7.93%
A rollforward of the MSRs is as follows:
(In thousands)
Balance as of December 31, 1996 $12,494
Acquisition of servicing rights 6,089
Sale of servicing rights (1,817)
Amortization of servicing rights (1,806)
Balance as of December 31, 1997 $14,960
57
Non-interest income for 1996 totalled $18.7 million
which represented a $2.1 million, or 13.0%, increase
when compared to 1995. This increase was primarily due
to the following items:
a $313,000 or 9.2% increase in trust fees to $3.7
million in 1996. This trust fee growth reflects
increased assets under management as a result of
successful business development efforts in the
Company's southwestern Pennsylvania marketplace.
a $1.1 million gain realized on the sale of loans
held for sale in 1996 compared to a $124,000 loss
realized on this same type of activity in 1995 (a net
favorable shift of $1.2 million). The 1996 gain
resulted from normal sales activity at the Company's
mortgage banking subsidiary as SMC generated over $205
million of new loan originations in 1996. The 1995 loss
resulted from the sale of $34 million of fixed-rate
residential mortgage loans as part of a balance sheet
repositioning strategy after the Johnstown Savings Bank
acquisition.
a $327,000 or 11.1% increase in deposit service
charges to $3.3 million in 1996. This increase resulted
primarily from fewer waivers of overdraft charges due
to enhanced monitoring techniques and pricing increases
on several demand deposit account related services.
a $243,000 or 9.5% decrease in net mortgage
servicing fee income to $2.3 million due to increased
amortization expense of the cost of purchased and
originated mortgage servicing rights as a result of
faster mortgage prepayment speeds.
an $836,000 increase in the net cash surrender
value of a $32.5 million Bank Owned Life Insurance
Policy because the total balance of this asset was
outstanding for the entire year of 1996 compared to
only a portion of the year in 1995.
NON-INTEREST EXPENSE...Non-interest expense for 1997
totalled $54.1 million which represented a $1.6 million
or 3.1% increase when compared to 1996. This increase
was primarily due to the following items:
a $2.7 million or 10.6% increase in salaries and
employee benefits due to 12 additional full-time
equivalent employees ("FTE"), merit pay increases and
the reinstatement of salary rollbacks, higher profit
sharing expense, and increased hospitalization
premiums.
a $2.4 million decrease in FDIC deposit insurance
expense due to the non- recurrence of a $1.9 million
special assessment and lower basic deposit premium
costs on SAIF insured deposits.
a $149,000 or 4.8% increase in equipment expense
due to the purchase of additional personal computers
and enhancements to local and wide area networks.
a $949,000 or 12.5% increase in other expense due
to higher telecommunication costs, advertising expense,
employee training costs, and outside processing fees.
58
Non-interest expense for 1996 totalled $52.5 million,
which represented a $1.9 million, or 3.8%, increase
when compared to 1995. This increase was primarily due
to the following items:
an $833,000 increase in FDIC deposit insurance
expense due to a special assessment to recapitalize the
SAIF in the third quarter of 1996. This Congressionally
mandated special assessment amounted to $1.9 million on
a pre-tax basis as a result of a charge of 65.7 cents
per $100 of SAIF insured deposits held as of March 31,
1995. Beginning January 1, 1997, the annual rate the
Company paid on SAIF deposits dropped from 23 cents to
6.44 cents per $100 of deposits while the rate on Bank
Insurance Fund ("BIF") deposits increased from zero
cents to 1.29 cents per $100 of deposits.
a $178,000 or 0.7% increase in salaries and
employee benefits to $25.5 million. This modest
increase was due to higher pension and bonus costs
which were partially offset by three fewer FTE on
average and lower group insurance medical premiums as a
result of a switch to a managed care program.
a $200,000 increase in professional fees due to
higher legal and other professional fees in 1996.
a $663,000 increase in other expense due to theft
loss and higher advertising expense, other real estate
owned expense, telephone expense, and outside
processing fees.
YEAR 2000...During 1997, the Company initiated a
program to ensure that its computer systems and
applications will be Year 2000 compliant. This program
has included generating awareness of the Year 2000
issue throughout all subsidiaries of the Company,
inventorying affected computer systems and
applications, and developing a plan to modify or
replace those systems and applications which are not
Year 2000 compliant. The Company is requiring that
external software providers demonstrate and represent
that the products provided are or will be Year 2000
compliant and has planned a program of testing for
compliance. Additionally, the Company has partnered
with a local high technology corporation to provide
educational training sessions on the Year 2000 issue to
its customer base. The Company expects to incur
internal staff costs as well as consulting and other
expenses related to infrastructure and system
enhancements in order to prepare the Company for the
Year 2000. The Company currently estimates that the
total cost to achieve Year 2000 compliance will range
between $1.7 million and $2.2 million over the next two
year period. 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 Year 2000 issue. These expenditures are not
expected to have a material impact on the Company's
results of operation, liquidity, or capital resources.
NET OVERHEAD BURDEN...The Company's efficiency ratio
(non-interest expense divided by total revenue, which
consists of tax-equivalent net interest income and
non-interest income) showed continued improvement as it
declined from 67.0% in 1995 to 63.4% in 1996 to 60.1%
in 1997. The increased revenue generated in each of the
past two years was the key factor responsible for the
improved efficiency ratio. The Company is well
positioned to achieve its goal of reducing this ratio
to below 60% on a sustained basis. Employee
productivity ratios also continued to demonstrate
improvement as total assets per employee averaged $2.8
million for 1997, an 8.7% increase over the $2.6
million average for 1996. Net income per employee also
increased by $4,100 to $30,700 in 1997 compared to
$26,600 in 1996.
59
INCOME TAX EXPENSE...The Company's provision for income
taxes for 1997 was $9.3 million, reflecting an
effective tax rate of 28.4%. The Company's income tax
provision for 1996 was $7.2 million, reflecting an
effective tax rate of 26.6%. The higher tax provision
and effective rate in 1997 was due to the Company's
increased pre-tax earnings combined with a relatively
consistent level of tax-free income between years. The
tax-free asset holdings consisted of municipal
investment securities, bank owned life insurance, and
commercial loan tax anticipation notes. Between 1996
and 1995, the $1.2 million increase in income tax
expense was due entirely to the higher level of pre-tax
earnings because the Company benefitted from a
reduction in its effective tax rate from 27.7% to
26.6%. This lower effective tax rate in 1996 was caused
predominately by increased total tax-free asset
holdings which were $13 million higher on average in
1996 as compared to 1995.
BALANCE SHEET...The Company's total consolidated assets
were $2.239 billion at December 31, 1997, compared with
$2.087 billion at December 31, 1996, which represents
an increase of $152 million or 7.3% due to increased
leveraging of the balance sheet. During 1997, total
loans and loans held for sale increased by
approximately $50 million due primarily to the
previously mentioned growth in commercial and
commercial mortgage loans. Consumer loans continued to
decline due to net run-off experienced in the indirect
auto loan portfolio as the Company has not actively
pursued new loans in this low margin line of business.
Total investment securities increased by $110 million
due to purchases of mortgage-backed securities. The
Company was more aggressive in increasing the size of
the balance sheet with security purchases as the
Company believes that opportunities to purchase new
securities in 1998 will be limited due to the
flattening of the yield curve which began late in the
fourth quarter of 1997. Given the current economic
environment and the Company's balance sheet structure,
the Company does not anticipate much additional earning
asset growth in 1998. Rather, the Company expects to
gradually diversify the earning asset mix by channeling
cash flow from the securities portfolio into the loan
portfolio in 1998.
Since total deposits were relatively constant between
year-end 1997 and year-end 1996, the growth in the
earning asset base was funded with borrowed money.
Total advances from the Federal Home Loan Bank
increased by $149 million and were the primary source
of the borrowings. These new FHLB borrowings have
maturities ranging from 90 days to two years. The
Company is presently at its maximum internal policy
limit of borrowed funds to total assets of 40%. Total
equity increased by $6.3 million due to net income
retained after dividend payments and treasury stock
repurchases and a $2 million increase in the equity
valuation allowance for available for sale securities.
Overall, the Company's asset leverage ratio dropped to
6.25% at December 31, 1997, from 6.51% at December 31,
1996.
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.
60
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. For static GAP
analysis, USBANCORP typically defines interest rate
sensitive assets and liabilities as those that reprice
within six months or one year. 3) Duration and market
value sensitivity measures are also utilized when they
can provide added value to the overall interest rate
risk management process. The overall interest rate risk
position and strategies are reviewed by senior
management and the Company's Board of Directors on an
ongoing basis.
The following table presents a summary of the Company's
static GAP positions at December 31, 1997:
Over Over
3 Months 6 Months
3 Months Through Through Over
Interest Sensitivity Period or Less 6 Months 1Year 1 Year Total
(In thousands, except ratios and percentages)
Rate sensitive assets:
Loans $ 225,053 $ 72,951 $ 128,207 $ 551,251 $ 977,462
Investment securities and assets
held in trust for collateralized
mortgage obligation 263,013 130,800 106,239 616,671 1,116,723
Short-term assets 163 - - - 163
Other assets - - 33,979 - 33,979
Total rate sensitive assets $ 488,229 $ 203,751 $ 268,425 $1,167,922 $2,128,327
Rate sensitive liabilities:
Deposits:
Non-interest bearing deposits $ - $ - $ - $ 146,685 $ 146,685
NOW and Super NOW - - - 89,082 89,082
Money market 159,505 - - - 159,505
Other savings - - - 174,459 174,459
Certificates of deposit of
$100,000 or more 26,117 5,481 2,309 3,744 37,651
Other time deposits 109,692 88,321 109,617 224,515 532,145
Total deposits 295,314 93,802 111,926 638,485 1,139,527
Borrowings 636,852 239 120,485 155,480 913,056
Total rate sensitive liabilities $ 932,166 $ 94,041 $ 232,411 $ 793,965 $2,052,583
Off-balance sheet hedges (115,000) (50,000) - 165,000 -
Interest sensitivity GAP:
Interval (328,937) 159,710 36,014 208,957
Cumulative $(328,937) $(169,227) $(133,213) $ 75,744 $ 75,744
Period GAP ratio 0.60x 4.63x 1.15x 1.22x
Cumulative GAP ratio 0.60 0.80 0.88 1.04
Ratio of cumulative GAP to total assets (14.69)% (7.56)% (5.95)% 3.38%
61
When December 31, 1997, is compared to December 31,
1996, both the Company's six month and one year
cumulative GAP ratios became less negative due to the
impact of increased off-balance hedge transactions. As
separately disclosed in the above table, these hedge
transactions (described in detail in Note #21) reduced
the negativity of the both the six month and one year
GAP by $165 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 which comprise these low
cost core deposits include passbook savings accounts,
money market accounts, NOW accounts, daily interest
savings accounts, purpose clubs, etc. At December 31,
1997, the balance in these accounts totalled $423
million or 18.9% of total assets. Within the above
static GAP table, approximately $160 million or 38% 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 and
generally assumes that up to a 200 basis point increase
in rates will not necessitate a change in the cost of
these accounts.
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 plus
or minus 7.5% and net income variability to plus or
minus 15.0% based upon varied economic rate forecasts
which include interest rate movements of up to 200
basis points and alterations of the shape of the yield
curve. Additionally, the Company also recently began
using market value sensitivity measures to further
evaluate the balance sheet exposure to changes in
interest rates. Market value of portfolio equity
sensitivity analysis captures the dynamic aspects of
long-term interest rate risk across all time periods by
incorporating the net present value of expected cash
flows from the Company s assets and liabilities. No
formal ALCO policy parameters have yet been established
for changes in the variability of market value of
portfolio equity.
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
(market value of assets, less market value of
liabilities, adjusted for the market value of mortgage
servicing rights and off-balance sheet hedging
instruments). The interest rate scenarios in the table
compare the Company's base forecast or most likely rate
scenario at December 31, 1997, 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, 1997, levels. The Company's most
likely rate scenario is based upon published economic
consensus estimates which currently forecast a moderate
decrease 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.
62
Variability Of Change In
Interest Rate Net Interest Variability Of Market Value Of
Scenario Income Net Income Portfolio Equity
Base 0% 0% 0%
Flat (1.10) (2.10) (1.50)
200 bp increase (6.20) (12.00) (25.00)
200 bp decrease 3.10 6.00 18.20
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 (6.2%) and
a (12.0%) 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
(25%) under this interest rate scenario. The
off-balance sheet borrowed funds hedge transactions
also helped reduce the variability of forecasted net
interest income, net income and market value of
portfolio equity in a rising interest rate environment.
Finally, this sensitivity analysis is limited by the
fact that it does not include 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, 1997,
52.1% of the portfolio is currently classified as
available for sale and 47.9% as held to maturity. This
compares to a portfolio composition breakdown of 45.5%
available for sale and 54.5% held to maturity at
December 31, 1996. 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. 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 mortgage loans.
LIQUIDITY...Financial institutions must maintain
liquidity to meet day-to-day requirements of depositor
and borrower customers, take advantage of market
opportunities, and provide a cushion against unforeseen
needs. Liquidity needs can be met by either reducing
assets or increasing liabilities. Sources of asset
liquidity are provided by short-term investment
securities, time deposits with banks, federal funds
sold, banker's acceptances, and commercial paper. These
assets totalled $231 million at December 31, 1997,
compared to $160 million at December 31, 1996. 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,
1997, USBANCORP's subsidiaries had approximately $130
million of unused lines of credit available under
informal arrangements with correspondent banks compared
to $55 million at December 31, 1996. These lines of
credit enable USBANCORP's subsidiaries to purchase
funds for short-term needs at current market rates.
63
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 $246
million. Furthermore, USBANCORP had available at
December 31, 1997, $9.4 million of a total $17.0
million unsecured line of credit.
Liquidity can be further analyzed by utilizing the
Consolidated Statement of Cash Flows. Cash equivalents
decreased by $6.2 million between December 31, 1997,
and December 31, 1996, due primarily to $157.7 million
of net cash used by investing activities. This more
than offset $26.4 million of net cash provided by
operating activities and $125.2 million of net cash
provided by financing activities. Within investing
activities, purchases of investment securities exceeded
the cash proceeds from investment security maturities
and sales by approximately $106.7 million due to
increased leveraging of the balance sheet. Cash
advanced for new loan fundings totalled $335.7 million
and was approximately $47 million greater than the cash
received from loan principal payments. Within financing
activities, cash generated from the sale of new
certificates of deposit exceeded the cash payments for
maturing certificates of deposit by $11.4 million.
Demand and savings deposits experienced a net decrease
of $10.6 million in 1997 which represented the third
consecutive year that the Company has experienced
modest run-off in this deposit category. Net principal
borrowings of advances from the Federal Home Loan Bank
provided $148.7 million of cash.
EFFECTS OF INFLATION...USBANCORP's asset and liability
structure is primarily monetary in nature. As such,
USBANCORP's assets and liabilities tend to move in
concert with inflation. While changes in interest rates
may have an impact on the financial performance of the
banking industry, interest rates do not necessarily
move in the same direction or in the same magnitude as
prices of other goods and services and may frequently
reflect government policy initiatives or economic
factors not measured by a price index.
CAPITAL RESOURCES...As presented in Note #22, there was
little change in each of the Company's regulatory
capital ratios between December 31, 1997, and December
31, 1996. The Company targets an operating range of
6.25% 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.
In 1998, the Company expects to leverage its capital
more through treasury stock repurchases and common
dividend payments as the expectations for a relatively
flat treasury yield curve will limit opportunities for
additional earning asset growth through the investment
securities portfolio.
The Company used funds provided by dividend payments
from its subsidiaries and a $17 million unsecured line
of credit to repurchase 206,000 shares or $11.6 million
of its common stock during 1997. Through December 31,
1997, the Company has repurchased a total of 867,000
shares of its common stock at a total cost of $31.2
million or $35.96 per share. The Company plans to
continue its treasury stock repurchase program which
currently permits a maximum total repurchase
authorization of $45 million. The maximum price per
share at which the Company can repurchase stock is 250%
of book value. At December 31, 1997, the Company's
common stock market price was $73.00 per share or 226%
of the book value of $32.32 per share. This represented
a 75% improvement from the December 31, 1996, common
stock market price of $41.75 per share or 140% of book
value.
64
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 ongoing intent to prudently leverage
the capital base in an effort to increase return on
equity performance while maintaining necessary capital
requirements. It is, however, the Company's intent to
maintain the FDIC "well capitalized" classification for
each of its subsidiaries to ensure the lowest deposit
insurance premium and to maintain an asset leverage
ratio of no less than 6.0%.
The Company's declared common stock cash dividend per
share was $1.60 for 1997 which was a 16.8% increase
over the $1.37 per share dividend for 1996. The 1997
dividends include a special $0.25 per share dividend
which was declared in December in order to provide
further opportunity to the Company's shareholders to
participate in the record success that the Company
achieved in 1997. This represents the second
consecutive year that a special dividend was declared.
Based upon the Company's total declared 1997 common
dividends, the dividend yield on the Company's common
stock was approximately 2.50%. This common dividend
yield compares favorably to the Pennsylvania Bank
Holding Companies' yield of approximately 2.0%. For the
full year 1997, $19.6 million or 84% of the Company's
net income was distributed back to the shareholders
through common dividends and treasury share
repurchases. Similar performance was noted in 1996 when
$15.6 million or 78% of net income was distributed back
to the Company s shareholders.
FORWARD-LOOKING STATEMENT...This annual report contains
various forward-looking statements and includes
assumptions concerning the Company's operations, future
results, and prospects. These forward-looking
statements are based upon current expectations and are
subject to risk and uncertainties. In connection with
the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company provides the
following cautionary statement identifying important
factors 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) the effect of
changing regional and national economic conditions;
(ii) significant changes in interest rates and
prepayment speeds; (iii) credit risks of commercial,
real estate, consumer, and other lending activities;
(iv) changes in federal and state banking regulations;
(v) the presence in the Company's market area of
competitors with greater financial resources than the
Company and; (vi) other external developments which
could materially impact the Company's operational and
financial performance.
65
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 (Fee Required)
For the fiscal year ended December 31, 1997
or
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (No Fee Required)
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 incorporation or
organization) (I.R.S. Employer Identification No.)
Main & Franklin Streets, P.O. Box 430, Johnstown,
Pennsylvania 15907-0430
(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
(Title of class)
Share Purchase Rights
(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.) $347,248,788.00
as of January 31, 1998.
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. 4,890,828 shares were outstanding as
of January 31, 1998.
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, 1997, 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 73.
66
FORM 10-K INDEX
PART I
Item 1. Business 68
Item 2. Properties 78
Item 3. Legal Proceedings 78
Item 4. Submission of Matters to a Vote of Security Holders 78
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 78
Item 6. Selected Consolidated Financial Data 78
Item 7. Management s Discussion and Analysis of
Consolidated Financial Condition and Results of
Operations 78
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 79
Item 8. Consolidated Financial Statements and
Supplementary Data 79
Item 9. Changes In and Disagreements With Accountants
On Accounting and Financial Disclosure 79
PART III
Item 10. Directors and Executive Officers of the Registrant 79
Item 11. Executive Compensation 79
Item 12. Security Ownership of Certain Beneficial
Owners and Management 79
Item 13. Certain Relationships and Related Transactions 79
PART IV
Item 14. Exhibits, Consolidated Financial Statement
Schedules, and Reports on Form 8-K 79
Signatures 83
67
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 United
States National Bank in Johnstown ("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 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, 1997, the Company had, on a consolidated
basis, total assets, deposits, and shareholders' equity
of $2.24 billion, $1.14 billion and $158 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").
USBANCORP Banking Subsidiaries:
U.S. Bank
U.S. Bank is a national banking association organized
under the laws of the United States. Through 20
locations in Cambria, 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,
68
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; and (iii) credit
card operations through MasterCard and VISA. U.S. Bank
also operates 24 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. 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.
Since U.S. Bank is federally chartered, it is subject
to primary supervision of the Office of the Comptroller
of the Currency. U.S. Bank is also subject to the
regulations of the Board of Governors of the Federal
Reserve Bank and the Federal Deposit Insurance
Corporation.
The following is a summary of key data (dollars in
thousands) and ratios at December 31, 1997:
Headquarters Johnstown, PA
Chartered 1933
Total Assets $1,247,845
(55.7% of the Company's total)
Total Investment Securities $ 666,020
(59.9% of Company s total)
Total Loans (net of unearned income) $ 501,214
(50.6% of the Company's total)
Total Deposits $ 613,666
(53.9% of the Company's total)
Total Net Income $ 13,263
(56.4% of the Company's total)
Asset Leverage Ratio 6.74%
1997 Return on Average Assets 1.08%
1997 Return on Average Equity 13.02%
Total Full-time Equivalent Employees 376
(49.2% of the Company's total)
Number of Offices 20
(46.5% 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 (the
"Pennsylvania Banking Code"). Through 23 locations in
Allegheny 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 23 ATMs that are
affiliated with MAC, a regional ATM network, and Plus
System, a national ATM network. Three Rivers Bank also
offers wholesale banking services to other banks,
69
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 two wholly owned
mortgage banking subsidiaries - Standard Mortgage
Corporation and UBAN Mortgage Company. Standard
Mortgage Corporation, based in Atlanta, Georgia, is a
mortgage banking company that originates, sells, and
services residential mortgage loans. UBAN Mortgage
Company was formed in January 1997 for the purpose of
originating and selling mortgage loans primarily in
Western Pennsylvania. Additionally, TRB Financial
Services Corporation, a wholly owned subsidiary of
Three Rivers Bank was formed on August 5, 1997. TRB
Financial Services Corporation engages in the sale of
annuities and mutual funds.
Three Rivers Bank'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, 1997:
Headquarters McKeesport, PA
Chartered 1965
Total Assets $ 986,376
(44.1% of the Company's total)
Total Investment Securities $ 442,533
(39.8% of Company's total)
Total Loans (net of unearned income) $ 488,361
(49.4% of the Company's total)
Total Deposits $ 525,861
(46.1% of the Company's total)
Total Net Income $ 11,405
(48.5% of the Company's total)
Asset Leverage Ratio 6.21%
1997 Return on Average Assets 1.24%
1997 Return on Average Equity 18.86%
Total Full-time Equivalent Employees 336
(43.9% of the Company's total)
Number of Offices 23
(53.5% of the Company's total)
70
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, 1997, United Life had total assets of $1.8
million and total shareholder's equity of $969,000.
USBANCORP Trust Company
USBANCORP Trust Company is a trust company organized
under Pennsylvania law in October 1992. USBANCORP Trust
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 subsidiary
banks. At December 31, 1997, USBANCORP Trust Company
had $1.12 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 56 Chairman, President & Chief Executive Officer
of USBANCORP, Inc., and Chairman of U.S. Bank,
Three Rivers Bank, and USBANCORP Trust Company
Orlando B. Hanselman 38 Executive Vice President of USBANCORP, Inc.,
and President & Chief Executive Officer of
U.S. Bank
W. Harrison Vail 57 President & Chief Executive Officer of Three
Rivers Bank
Ronald W. Virag, CFTA 52 President & Chief Executive Officer, USBANCORP
Trust Company
Kevin J. O Neil 60 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 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 28
years of mortgage banking experience.
71
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 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 Company, headquartered in Johnstown, Pennsylvania,
operates through 43 branch offices in six southwestern
Pennsylvania counties with a combined population of
approximately 2.2 million: Allegheny, Cambria,
Clearfield, Somerset, Washington, and Westmoreland. The
Company s U.S. Bank subsidiary has 20 offices and a
$1.2 billion asset presence primarily in the Greater
Johnstown marketplace. Three Rivers Bank has 23 offices
and a $987 million asset presence primarily in the
suburban Pittsburgh marketplace.
72
The U.S. Economy remains strong, with the fourth
quarter suggesting the momentum will continue into
1998. Inflation remains very low. The Consumer Price
Index rose only 1.7% in 1997, the lowest increase since
1965. This occurred despite the fact that the
unemployment rate was the lowest in over 24 years.
Inflation remains low despite tight labor markets.
Nationally, the unemployment rate is beginning to
create difficulties for employers who now describe the
ability to find skilled labor as their biggest economic
problem. This tightness is beginning to be reflected in
wages. Average hourly earnings rose 3.7% last year
(December over December), up from 2.7% in 1994. Overall
nationally, 3.2 million jobs were added in 1997,
compared with 2.5 million in 1996.
The unemployment rates for Pennsylvania and the
suburban Pittsburgh region move in tandem and are more
comparable to the National rate, but at a slower pace.
The seasonally adjusted unemployment rate in
Pennsylvania at December 1997 was 4.8% compared with
the seasonally adjusted December 1996 rate of 4.9%.
Unemployment in Greater Johnstown is higher than
suburban Pittsburgh, Pennsylvania, and the Nation, and
is also subject to a greater level of volatility. The
seasonally adjusted unemployment rate for Greater
Johnstown for December 1997 was 7.2% compared with 7.1%
for December 1996. Greater Johnstown continues its
economic transition from a reliance on heavy industry
to a more diversified economy including more light
manufacturing, technological, and service related
businesses.
The Greater Pittsburgh region, where Three Rivers Bank
operates, correlates closely with the national economy.
The seasonally adjusted unemployment rate for December
1997 was 4.7% compared with 4.5% for December 1996. The
Pittsburgh economy is generally well diversified. The
Company believes that the state and regional economics
will continue this diversification throughout 1998 and
remain in a slow positive expansion period.
Consequently, the Company's marketplace should continue
to display modest growth.
Employees
The Company employed approximately 873 persons as of
December 31, 1997, in full- and part-time positions.
Approximately 249 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, 1999. 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, 1995.
73
Commitments and Lines of Credit
The Company's banking subsidiaries are obligated under
commercial, standby, and trade-related irrevocable
letters of credit aggregating $10.7 million at December
31, 1997. 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, 1997, the Company's banking
subsidiaries had unused loan commitments of
approximately $214.3 million.
Statistical Disclosures for Bank Holding Companies
Certain information regarding statistical disclosure
for bank holding companies pursuant to Guide 3 is
provided in the 1997 Annual Report to Shareholders and
such pages are incorporated herein by reference. The
remaining 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.
This section is presented on pages 52, 53, 60, 61, and 63.
II. Investment Portfolio
Information required by this section is
presented on pages 22, 23, 74, and 75.
III. Loan Portfolio
Information required by this section appears
on pages 24, 25, 76, and 77.
IV. Summary of Loan Loss Experience
Information required by this section is
presented on pages 24, 55, and 56.
V. Deposits
Information required by this section follows
on pages 26, 77, and 78.
VI. Return on Equity and Assets
Information required by this section is
presented on page 45.
VII. Short-Term Borrowings
Information required by this section is
presented on page 26.
Investment Portfolio
The Company uses Statement of Financial Accounting
Standards ("SFAS") #115, "Accounting for Certain
Investments in Debt and Equity Securities," to account
for investments. This statement addresses the
accounting and reporting for investments in equity
securities that have readily determinable fair values
and for all investments in debt securities. 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, 1997, approximately 48% of the portfolio
was categorized as held to maturity and 52% as
available for sale.
74
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
1997 1996 1995
(In thousands)
Book Value:
U.S. Treasury $ 2,496 $ 10,934 $ 22,431
U.S. Agency 1,769 4,224 12,408
State and municipal 13,516 21,772 58,698
Mortgage-backed securities 516,476 382,384 296,669
Other securities 42,370 35,880 30,869
Total book value
of investment securities
available for sale $576,627 $455,194 $421,075
Total market value
of investment securities
available for sale $580,115 $455,890 $427,112
Investment Securities Held to Maturity at December 31
1997 1996 1995
(In thousands)
Book Value:
U.S. Treasury $ 16,320 $ 10,198 $ 796
U.S. Agency 17,512 27,468 31,512
State and municipal 114,733 110,287 97,900
Mortgage-backed securities 380,825 395,199 330,312
Other securities 2,951 3,166 3,431
Total book value
of investment securities
held to maturity $532,341 $546,318 $463,951
Total market value
of investment securities
held to maturity $541,093 $549,427 $471,191
The total securities portfolio increased by
approximately $110 million between December 31, 1996,
and December 31, 1997, and by $111 million between year
end 1995 and year-end 1996. This growth in both years
resulted from increased balance sheet leveraging in an
effort to improve return on equity performance. The
securities portfolio growth occurred primarily in
mortgage-backed securities as the management of the
cash flow from these securities provides a significant
source of liquidity to the Company. Adjustable-rate
securities were also purchased to increase the
repricing sensitivity of the Company's earning assets
as part of ongoing asset/liability management
strategies.
At December 31, 1997, investment securities having a
book value of $337.8 million were pledged as collateral
for public funds and other purposes as required by law.
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, 1997.
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, 1997,
98.8% of the portfolio was rated "AAA" compared to
98.7% at December 31, 1996. Less than 1.0% was rated
below "A" or unrated at December 31, 1997.
75
Loan Portfolio
The following table sets forth the Company's loans by
major category as of the dates set forth below:
At December 31 1997 1996 1995 1994 1993
(In thousands)
Commercial $ 143,113 $ 138,008 $ 103,546 $ 116,702 $ 99,321
Commercial loans
secured by real estate 302,620 266,700 179,793 168,238 126,044
Real estate-mortgage 440,734 414,003 414,967 407,177 338,778
Consumer 95,272 111,025 133,820 161,642 167,883
Loans 981,739 929,736 832,126 853,759 732,026
Less: Unearned income 5,327 4,819 2,716 3,832 5,894
Loans, net of
unearned income $ 976,412 $ 924,917 $ 829,410 $ 849,927 $ 726,132
At December 31, 1997, and 1996, real
estate-construction loans constituted 2.3% and 1.9% of
the Company's total loans, net of unearned income,
respectively.
Total loans, net of unearned income, increased by $51.5
million, or 5.6%, between December 31, 1996, and
December 31, 1997. This growth occurred in commercial
mortgage loans which increased by $35.9 million, or
13.5%, and real estate-mortgage loans which grew by
$26.7 million, or 6.5%. The higher loan totals in the
commercial categories 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. Expansion of the Company's commercial
lending into the State College market was also a
contributing factor to the loan growth in 1997.
The Company experienced strong retail demand in both
residential mortgages and home equity loans in 1997
which was a key factor contributing to the 6.5% growth
rate. The formation of UBAN Mortgage Company at Three
Rivers Bank and the opening of a U.S. Bank loan
production office in Westmoreland County were other
factors contributing to the increased residential
mortgage loan growth in 1997.
Total residential mortgage loans were relatively flat
between 1996 and 1995 as growth in adjustable-rate
mortgage loans was more than offset by principal
amortization in the existing fixed-rate mortgage loan
portfolio. The Company is also selling all 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 $15.8 million or 14.2% in
1997 and $22.8 million, or 17.0% in 1996, due to
continued net run-off in the indirect auto loan
portfolio. This indirect auto loan run-off has more
than offset improved production of higher yielding
direct consumer loans from the Company's branch offices
over the past two years.
The amount of loans outstanding by category as of
December 31, 1997, 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.
76
More Than
One Year
One Year Through Over Total
or Less Five Years Five Years Loans
(Dollars in thousands)
Commercial $ 24,371 $ 67,397 $ 51,345 $143,113
Commercial loans secured
by real estate 22,973 118,910 160,737 302,620
Real estate-mortgage 34,234 54,281 352,219 440,734
Consumer 17,455 62,230 15,587 95,272
Total $ 99,033 $302,818 $579,888 $981,739
Loans with fixed-rate $ 39,982 $217,014 $396,060 $653,056
Loans with floating-rate 59,051 85,804 183,828 328,683
Total $ 99,033 $302,818 $579,888 $981,739
Percent composition
of maturity 10.1% 30.8% 59.1% 100.0%
Fixed-rate loans as a percentage of total loans 66.5%
Floating-rate loans as a percentage of total loans 33.5%
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, 1997, 66.5% of total loans were
fixed-rate compared to 64.1% at December 31, 1996. The
increase in the fixed-rate percentage between years
reflects 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."
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:
1997 1996 1995
Amount Rate Amount Rate Amount Rate
(In thousands, except rates)
Demand -
non-interest bearing $ 143,767 -% $ 140,574 -% $ 136,543 -%
Demand - interest bearing 90,179 0.99 81,233 1.17 91,596 1.37
Savings 185,959 1.69 209,054 1.69 229,423 1.88
Money markets 153,345 3.71 144,718 3.44 128,531 3.29
Other time 580,720 5.66 586,874 5.56 613,602 5.80
Total deposits $1,153,970 4.21% $ 1,162,453 4.12% $ 1,199,695 4.27%
The Company's average deposits decreased by $8.5
million or 0.7% in 1997 and $37.2 million or 3.1% in
1996. This drop in deposits reflects management s
application of a consistent pricing strategy which
emphasizes profitable net interest margin management
rather than increased deposit size. Customer movement
toward mutual funds due to the strong returns offered
by these products in a rising stock market also
contributed to the deposit decline. The drop in
deposits occurred primarily in savings accounts and
certificates of deposit. The growth in demand deposits
reflects the success of new business generated in
conjunction with the increased commercial lending
activity.
77
The following table indicates the maturities and
amounts of certificates of deposit issued in
denominations of $100,000 or more as of December 31,
1997:
Maturing in:
(In thousands)
Three months or less $26,117
Over three through six months 5,481
Over six through twelve months 2,309
Over twelve months 3,744
Total $37,651
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 33 other
locations which are owned in fee. Fourteen additional
locations are leased with terms expiring from March 31,
1998, to April 1, 2005.
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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Information relating to the Company's Common Stock is
presented on pages 32 and 44. As of January 31, 1998,
the Company had 5,471 shareholders of its Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information required by this section is presented on
page 45.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Information required by this section is presented on
pages 47 to 65.
78
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 60 to 63.
The Company's principal market risk exposure is to
interest rates.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Information required by this section is presented on
pages 13 to 39.
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 1997 Annual Report to Shareholders and Part II
Item 8. Page references are to said Annual Report.
79
Consolidated Financial Statements:
USBANCORP, Inc. and Subsidiaries
Consolidated Balance Sheet, 13
Consolidated Statement of Income, 14
Consolidated Statement of Changes in Stockholders'Equity, 15
Consolidated Statement of Cash Flows, 16
Notes to Consolidated Financial Statements, 19
Statement of Management Responsibility, 40
Report of Independent Public Accountants, 41
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, 1997.
80
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 24, 1995. Exhibit III, Part II to Form S-14
File No. 2-79639
Exhibit 4.2 to Form S-2
File No. 33-685
Exhibit 4.3 to Form S-2
File No. 33-685
Exhibit 4.1 to Form S-3
File No. 33-56604
3.2 Bylaws, as amended and
restated on February 24,1995. Exhibit IV, Part II to Form S-14
File No. 2-79639
Exhibit 3.2
4.1 Rights Agreement, dated as
of February 24, 1995,
between Exhibit 1 to Form 8-A
USBANCORP, Inc. and
USBANCORP Trust Company, as
Rights Agent. Dated March 1, 1995
10.2 Agreement, dated
June 22, 1994, between
USBANCORP,Inc. Exhibit 10.2 to 1994 Form 10-K
and Terry K. Dunkle. Filed March 22, 1995
10.3 Agreement, dated
October 25, 1994, between
USBANCORP, Inc, Exhibit 10.3 to 1994 Form 10-K
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 23, 1998
10.7 Agreement, dated
October 25, 1994, between
USBANCORP, Inc. Exhibit 10.7 to 1994 Form 10-K
and Orlando B. Hanselman. Filed March 22, 1995
10.8 1991 Stock Option Plan,
dated August 23, 1991, as
amended Exhibit 10.8 to 1994 Form 10-K
and restated on
February 24, 1995. Filed March 22, 1995
10.9 Agreement, dated
December 1, 1994, between
USBANCORP, Inc. Exhibit 10.9 to 1994 Form 10-K
and Ronald W. Virag. Filed March 22, 1995
10.10 Agreement, dated
July 15, 1994, between
USBANCORP, Inc. Exhibit 10.10 to 1994 Form 10-K
and Kevin J. O Neil. Filed March 22, 1995
10.11 Collective Bargaining
Agreement, dated
October 16, 1995, Exhibit 10.1 to Form 8-K/A
between United States
National Bank in Johnstown
and Steel Dated March 1, 1996
Workers of America,
AFL-CIO-CLC Local Union 8204.
13 1997 Annual Report to Shareholders. Page 1
22 Subsidiaries of the Registrant. Below
24.1 Consent of Arthur Andersen LLP
81
EXHIBIT A
(22) Subsidiaries of the Registrant
Percent Jurisdiction
Name of Ownership of Organization
United States National Bank in Johnstown 100% United States
Main and Franklin Streets of America
P.O. Box 520
Johnstown, PA 15907
Three Rivers Bank and Trust Company 100% Commonwealth of
633 State Route 51, South Pennsylvania
Jefferson Borough
P.O. Box 10915
Pittsburgh, PA 15236
United Bancorp Life Insurance Company 100% State of Arizona
1421 East Thomas Road
Phoenix, AZ 85014
USBANCORP Trust Company 100% Commonwealth of
Main and Franklin Streets Pennsylvania
P.O. Box 520
Johnstown, PA 15907
UBAN Associates, Inc. 100% Commonwealth of
110 Regent Court, Suite 104 Pennsylvania
State College, PA 16801
82
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)
Date: February 27, 1998 By: /s/ Terry K. Dunkle
TERRY K. DUNKLE
Chairman, President
and Chief Executive Officer
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 27, 1998:
/s/ Terry K. Dunkle
TERRY K. DUNKLE
/s/ Jeffrey A. Stopko
JEFFREY A. STOPKO
/s/ Jerome M. Adams
JEROME M. ADAMS, Director
/s/ Clifford A. Barton
CLIFFORD A. BARTON, Director
/s/ Michael F. Butler
MICHAEL F. BUTLER, Director
JAMES C. DEWAR, Director
/s/ James M. Edwards, Sr.
JAMES M. EDWARDS, SR., Director
/s/ Richard W. Kappel
RICHARD W. KAPPEL, Director
JOHN H. KUNKLE, JR., Director
/s/ Margaret A. O'Malley
MARGARET A. O'MALLEY
/s/ Mark E. Pasquerilla
MARK E. PASQUERILLA
/s/ Jack Sevy
JACK SEVY
/s/ Thomas C. Slater
THOMAS C. SLATER
/s/ James C. Spangler
JAMES C. SPANGLER
/s/ Robert L. Wise
ROBERT L. WISE
83
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84
USBANCORP, INC.
DIRECTORS, GENERAL OFFICERS, ADVISORY BOARD,
COMMUNITY OFFICES AND SHAREHOLDER INFORMATION
85
USBANCORP, INC.
Board of Directors
Jerome M. Adams
Senior Partner,
Adams, Myers & Baczkowski
Attorneys-at-Law
Clifford A. Barton
Retired; Former Chairman, President & CEO,
USBANCORP, Inc., and
Chairman of the Board of
United States National Bank,
Three Rivers Bank
& Trust Company,
USBANCORP Trust Company
Michael F. Butler
Business Consultant &
Attorney-at-Law
James C. Dewar
President & Owner,
Jim Dewar Oldsmobile, Inc.
Terry K. Dunkle
Chairman, President & CEO,
USBANCORP, Inc., and
Chairman of the Board of
United States National Bank,
Three Rivers Bank
& Trust Company,
USBANCORP Trust Company,
and UBAN Associates, Inc.
James M. Edwards, Sr.
Retired President & CEO,
WJAC, Inc.
Richard W. Kappel
Retired CEO,
Secretary & Treasurer,
Wm. J. Kappel Wholesale Co.
John H. Kunkle, Jr.
Retired; Former Vice-Chairman
& Director, Commonwealth Land
Title Insurance Co.
Margaret A. O'Malley
Attorney-at-Law
Yost & O'Malley
Mark E. Pasquerilla
President
Crown American
Realty Trust
Jack Sevy
Retired; Former Owner
& Operator,
New Stanton West
Auto/Truck Plaza
Thomas C. Slater
Owner, President &
Director,
Slater Laboratories, Inc.
Clinical Laboratory
James C. Spangler
Retired; Former Owner,
Somerset Auction and
Transfer, Inc.
Robert L. Wise
President,
GPU Generation, Inc.
General Officers
Terry K. Dunkle
Chairman, President
& Chief Executive Officer
Orlando B. Hanselman
Executive Vice President
Gary M. McKeown
Senior Vice President, Manager of
Credit Policy and Administration
& Assistant Secretary
Dan L. Hummel
Senior Vice President &
Marketing Director
Jeffrey A. Stopko, CPA
Senior Vice President &
Chief Financial Officer
John Suierveld, Jr.
Senior Vice President &
Chief Auditor
Anthony M.V. Eramo
Vice President &
Manager of Specialized Accounting
Ray M. Fisher
Vice President &
Chief Investment Officer
John H. Follansbee, III
Vice President, Compliance
John J. Legath
Vice President,
CRA/Community
Development
Leslie N. Morgenstern
Vice President & Manager,
Loan Review
Betty L. Jakell
Corporate Secretary
86
U.S. BANK
Board of Directors
Clifford A. Barton
Retired; Former Chairman, President
& CEO, USBANCORP, Inc., and
Chairman of the Board of
United States National Bank,
Three Rivers Bank &
Trust Company, and
USBANCORP Trust Company
Michael F. Butler
Business Consultant &
Attorney-at-Law
William F. Casey
CEO, Conemaugh
Health System, Inc.
Daniel R. DeVos
President and CEO,
Concurrent Technologies Corporation
James C. Dewar
President & Owner,
Jim Dewar Oldsmobile, Inc.
Bruce E. Duke III, M.D.
Surgeon, Valley Surgeons
Terry K. Dunkle
Chairman, President & CEO,
USBANCORP, Inc., and
Chairman of the Board of
United States National Bank,
Three Rivers Bank &
Trust Company,
USBANCORP Trust Company, and
UBAN Associates, Inc.
James M. Edwards, Sr.
Retired President & CEO,
WJAC, Inc.
Orlando B. Hanselman
President & CEO,
United States National Bank,
and Executive Vice President,
USBANCORP, Inc.
Kim W. Kunkle
President & CEO,
Laurel Holding Company
Rev. Christian R. Oravec
President,
St. Francis College
Margaret A. O'Malley
Attorney-at-Law
Yost & O'Malley
Mark E. Pasquerilla
President
Crown American
Realty Trust
Howard M. Picking, III
President,
The Picking Corporation
Sara A. Sargent
President,
The Sargent's Group
Fred R. Shaffer
Senior Pharmacist/Director,
Findley's Pharmacy, Inc.
Thomas C. Slater
Owner, President &
Director,
Slater Laboratories, Inc.
Clinical Laboratory
James C. Spangler
Retired; Former Owner,
Somerset Auction and
Transfer, Inc.
Robert L. Wise
President,
GPU Generation, Inc.
General Officers
Terry K. Dunkle
Chairman of the Board
Orlando B. Hanselman
President &
Chief Executive Officer
Leo J. Fronczek
Senior Vice President,
Management Information
Systems & Security Officer
Jeryl L. Graham
Senior Vice President,
Lending & Leasing
Robert S. Berezansky
Vice President &
Commercial Loan Officer
James S. Bubenko
Vice President & Manager
of Retail Credit Operations
Wayne A. Kessler
Vice President,
Community Banking
Michael F. Komara
Vice President,
Human Resources
Frank A. Krall
Vice President,
Mortgage Lending
Timothy D. McDonald
Vice President,
Life Insurance and Annuities
Mark D. Shelhammer
Vice President,
Community Banking
Victor L. Tatum
Vice President &
Commercial Equipment
Leasing Manager
Directors Emeriti
John N. Crichton
John L. Williams
Advisory Board
Orlando B. Hanselman, Chairman
Edward J. Cernic
Teresa T. Chianese
David N. Crichton
John M. Kriak
David J. Rizzo
Carl R. Sax
Fred R. Shaffer
James C. Spangler
Robert W. Turkovich, Sr.
87
THREE RIVERS BANK
Board of Directors
Jerome M. Adams
Senior Partner,
Adams, Myers, & Baczkowski
Attorneys-at-Law
Clifford A. Barton
Retired; Former Chairman,
President & CEO,
USBANCORP, Inc., and
Chairman of the Board of
United States National Bank,
Three Rivers Bank &
Trust Company, and
USBANCORP Trust Company
Janey D. Barton
Retired; Vice President,
Three Rivers Bank &
Trust Company
Terry K. Dunkle
Chairman, President &
CEO, USBANCORP, Inc., and
Chairman of the Board of
United States National Bank,
Three Rivers Bank &
Trust Company,
UBAN Associates, Inc., and
USBANCORP Trust Company
J. Terrence Farrell
Attorney-at-Law
Marylouise Fennell, Ed.D.
Higher Education Consultant
James R. Ferry
President,
Ferry Electric Company
Electrical Contractor
Richard W. Kappel
Retired; CEO,
Secretary & Treasurer,
Wm. J. Kappel Wholesale Co.
John H. Kunkle, Jr.
Retired; Former Vice-Chairman
& Director, Commonwealth Land
Title Insurance Co.
Stephen I. Richman
Senior Partner,
Ceisler, Richman, Smith
Law Firm
Edward W. Seifert
Attorney-at-Law, Partner,
Reed, Smith, Shaw & McClay
Jack Sevy
Retired; Former Owner & Operator,
New Stanton West
Auto/Truck Plaza
W. Harrison Vail
President & CEO,
Three Rivers Bank &
Trust Company
General Officers
Terry K. Dunkle
Chairman of the Board
W. Harrison Vail
President &
Chief Executive Officer
Louis S. Klippa
Executive Vice President,
Chief Operating Officer
& Secretary
Harry G. King
Executive Vice President,
Retail Banking
Thomas J. Chunchick
Senior Vice President,
Administrative, Secretary,
Community Development
Officer & Compliance Officer
Vincent W. Locher
Senior Vice President &
Chief Commercial Loan Officer
James F. Ackman
Vice President,
Consumer Loans
Richard L. Barron
Vice President,
Human Resources
Robert J. DeGrazia
Vice President,
Information Systems
Fred Geisler
Vice President,
Mortgage Lending
Patricia M. Smarra
Vice President
& Operations Officer
Robert J. Smerker
Vice President,
Operations, Bank Secrecy
Act Officer &
Assistant Secretary
Mary Pat Soltis
Vice President,
Sales & Business Development
Hudson Stoner
Vice President,
Small Business Center
Directors Emeriti
J. Paul Farrell
William R. Hoag
88
USBANCORP TRUST COMPANY
Board of Directors
Jerome M. Adams
Senior Partner,
Adams, Myers & Baczkowski
Attorneys-at-Law
Clifford A. Barton
Retired; Former Chairman, President
& CEO, USBANCORP, Inc., and
Chairman of the Board of
United States National Bank,
Three Rivers Bank &
Trust Company, and
USBANCORP Trust Company
John N. Crichton
Chairman, Concurrent
Technologies Corporation
Terry K. Dunkle
Chairman, President & CEO,
USBANCORP, Inc., and
Chairman of the Board of
United States National Bank,
Three Rivers Bank &
Trust Company,
UBAN Associates, Inc., and
USBANCORP Trust Company
William M. George
President, PA AFL-CIO
Richard W. Kappel
CEO, Secretary & Treasurer,
Wm. J. Kappel Wholesale Co.
John H. Kunkle, Jr.
Retired; Former Vice Chairman
& Director, Commonwealth Land
Title Insurance Co.
Kim W. Kunkle
President & CEO,
Laurel Holding Company
Rev. Christian R. Oravec
President, St. Francis College
W. Harrison Vail
President & CEO,
Three Rivers Bank
& Trust Company
Ronald W. Virag, CTFA
President & CEO,
USBANCORP Trust Company
Robert L. Wise
President,
GPU Generation, Inc.
General Officers
Terry K. Dunkle
Chairman of the Board
Ronald W. Virag, CTFA
President &
Chief Executive Officer
Jeffrey A. Stopko, CPA
Treasurer
David L. Mordan, CPA
Senior Vice President &
Manager of Institutional
Trust Services
Gerald R. Baxter, CPA, CTFA
Vice President &
Manager of Personal Trust Services
Richard F. Chimelewski
Vice President & Trust
Business Development Officer
Frank J. Lapinsky
Vice President &
Trust Investment Officer
William S. Townsend
Vice President &
Trust Investment Officer
James T. Vaughan
Vice President &
Manager of Western Region
M. Randolph Westlund, CFA
Vice President &
Chief Investment Officer
Director Emeritus
James F. O'Malley, Esq.
Senior Lawyer,
Yost & O'Malley
Attorneys-at-Law
Trust Company Offices
Main and Franklin Streets, 11th Floor
U.S. Bank Building
P.O. Box 520
Johnstown, Pennsylvania 15907-0520
500 Fifth Avenue, 2nd Floor
Three Rivers Bank and
Trust Company Building
McKeesport, Pennsylvania 15132-2500
UBAN ASSOCIATES
General Officers
Terry K. Dunkle
Chairman of the Board
Ray M. Fisher
President &
Chief Executive Officer
Wendy L. Rager
Vice President &
Chief Operating Officer
UBAN Associates, Inc., Office
110 Regent Court, Suite 104
State College, PA 16801-7966
89
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 15905-1211
(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 S. Main Street
Carrolltown, PA 15722-0507
(814) 344-6501
Ebensburg Office
101 W. High Street
Ebensburg, PA 15931-0209
(814) 472-8706
* Lovell Park Office
179 Lovell Ave.
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 15943-1252
(814) 749-0955
Loretto Office
180 St. Mary s Street
P.O. Box 116
Loretto, PA 15940-0116
(814) 472-8452
* Galleria Mall Office
500 Galleria Drive Suite 100
Johnstown, PA 15904-8911
(814) 266-5969
* St. Michael Office
900 Locust Street
St. Michael, PA 15951-0393
(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
* Century III Office
269 Clairton Boulevard
Pittsburgh, PA 15236-1499
(412) 653-7199
* Franklin Mall Office
1500 W. Chestnut Street
Washington, PA 15301-5871
(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 15133-2198
(412) 664-8707
McKeesport Office
500 Fifth Avenue
McKeesport, PA 15132-2500
(412) 664-8715
* Motor Bank
1415 Fifth Avenue
McKeesport, PA 15132-2427
(412) 664-8755
* Port Vue Office
1194 Romine Avenue
McKeesport, PA 15133-3596
(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
401 East Ohio Street
Pittsburgh, PA 15212-5588
(412) 231-4300
* Northway Mall
1002 Northway Mall
Pittsburgh, PA 15237-3098
(412) 364-8692
* Moon Township
914 Narrows Run Road
Coraopolis, PA 15108-2306
(412) 262-2210
* Monroeville
2681 Moss Side Boulevard
Monroeville, PA 15146-3394
(412) 856-8410
* North Versailles
Great Valley Shopping Center
500 Lincoln Highway
North Versailles, PA 15137-1524
(412) 829-1360
* Carrick
1817 Brownsville Road
Pittsburgh, PA 15210-3999
(412) 881-3500
* Bethel Park
2739 South Park Road
Bethel Park, PA 15102-3805
(412) 835-2100
* Finleyville
3576 Sheridan Avenue
Finleyville, PA 15332-1018
(724) 348-6626
* Jeannette
401 Clay Avenue
Jeannette, PA 15644-2124
(724) 527-1501
*24-Hour Banking Available
90
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:
Ferris Baker Watts, Inc.
6 Bird Cage Walk
Hollidaysburg, PA16648
Telephone: (800) 343-5149
Herzog, Heine, Geduld, Inc.
525 Washington Boulevard
Jersey City, NJ 07310
Telephone: (212) 908-4156
Janney Montgomery Scott, Inc.
1801 Market Street 10th Floor
Philadelphia, PA 19103
Telephone: (215) 665-6500
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 Brugette & Woods, Inc.
Two World Trade Center
85th Floor
New York, NY 10048
Telephone: (800) 342-5529
Oppenheimer & Co., Inc.
Oppenheimer Tower
200 Liberty Street
One World Financial Center
New York, NY 10281
Telephone: (212) 667-7000
Parker/Hunter, Inc.
416 Main Street
Johnstown, PA15901
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 Madison Ave.
Greenwich, CT 06830
Telephone: (203) 861-7600
Form 10-K
USBANCORP, Inc.'s Annual Report to the Securities and
Exchange Commission on Form 10-K is integrated within
this Annual Report.
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) 535-5300
Agents
The transfer agent and registrar for USBANCORP, Inc.'s
common stock is: Boston EquiServe
Investor Relations Department
P.O. Box 644
Mail Stop 45-02-09
Boston, MA 02102-0644
1-800-730-4001
Shareholder Data
As of January 31, 1998, there were 5,471 shareholders
of common stock and 4,890,828 shares outstanding. Of
the total shares outstanding, approximately 265,075 or
5% are held by insiders (directors and executive
officers) while approximately 1,789,278 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.
91
EXHIBIT 10.6
AMENDED AND RESTATED
COMMITTED LINE OF CREDIT NOTE
$17,000,000.00 December 19, 1997
FOR VALUE RECEIVED, USBANCORP, INC. (the "Borrower"),
with an address at Main and Franklin Streets,
Johnstown, Pennsylvania 15901, promises to pay to the
order of PNC BANK, NATIONAL ASSOCIATION (the "Bank"),
in lawful money of the United States of America in
immediately available funds at its offices located at
One PNC Plaza, Pittsburgh, Pennsylvania 15265, or at
such other location as the Bank may designate from time
to time, the principal sum of SEVENTEEN MILLION AND
NO/100 DOLLARS ($17,000,000.00) (the "Facility") or
such lesser amount as may be advanced to or for the
benefit of the Borrower hereunder, together with
interest accruing on the outstanding principal balance
from the date hereof, as provided below:
1. Interest. Interest on the unpaid principal balance
hereof shall be due and payable at the rates and the
times set forth in that certain letter agreement dated
October 31, 1997 by and between the Borrower and the
Bank (the letter agreement and all extensions,
renewals, amendments, substitutions or replacements
referred to herein as the "Agreement"). In no event
will the rate of interest hereunder exceed the maximum
rate allowed by law.
2. Advances. The Borrower may borrow, repay and
reborrow hereunder until the Expiration Date, subject
to the terms and conditions of this Note and the Loan
Documents (as defined herein). The "Expiration Date"
shall mean October 30, 1998, or such later date as may
be designated by the Bank by written notice from the
Bank to the Borrower. The Borrower acknowledges and
agrees that in no event will the Bank be under any
obligation to extend or renew the Facility or this Note
beyond the initial Expiration Date. In no event shall
the aggregate unpaid principal amount of advances under
this Note exceed the face amount of this Note.
3. Payment Terms. The outstanding principal balance
and any accrued but unpaid interest shall be due and
payable on the Expiration Date. If any payment under
this Note shall become due on a Saturday, Sunday or
public holiday under the laws of the State where the
Bank's office indicated above is located, such payment
shall be made on the next succeeding business day and
such extension of time shall be included in computing
interest in connection with such payment. The Borrower
hereby authorizes the Bank to charge the Borrower's
deposit account at the Bank for any payment when due
hereunder. Payments received will be applied to
charges, fees and expenses (including attorneys' fees),
accrued interest and principal in any order the Bank
may choose, in its sole discretion.
4. Prepayment. The Borrower shall have the right to
prepay at any time and from time to time, in whole or
in part, without penalty, any advance hereunder which
is accruing interest under the Prime Rate or the As
Offered Rate Option. If the Borrower prepays all or
any part of any advance which is accruing interest
under the Euro-Rate Option on other than the last day
of the applicable interest period, the Borrower shall
pay to the Bank, on demand therefor, all amounts due
pursuant to paragraph 5 below, including the Cost of
Prepayment, if any.
92
5. Yield Protection. The Borrower shall pay to the
Bank, on written demand therefor, together with the
written evidence of the justification therefor, all
direct costs incurred, losses suffered or payments made
by Bank by reason of any change in law or regulation or
its interpretation imposing any reserve, deposit,
allocation of capital, or similar requirement
(including without limitation, Regulation D of the
Board of Governors of the Federal Reserve System) on
the Bank, its holding company or any of their
respective assets. In addition, the Borrower agrees to
indemnify the Bank against any liabilities, losses or
expenses (including loss of margin, any loss or expense
sustained or incurred in liquidating or employing
deposits from third parties acquired to effect, fund or
maintain any Loan bearing interest under the Euro-Rate
Option or any part thereof) which the Bank sustains or
incurs as a consequence of either (i) the Borrower's
failure to make a payment on the due date thereof, (ii)
the Borrower s revocation (expressly, by later
inconsistent notices, or otherwise) in whole or in part
of any notice given to Bank to request, convert, renew
or prepay any advance, or (iii) the Borrower's payment,
prepayment or conversion of any Loan bearing interest
under the Euro-Rate Option on a day other than the
last day of the applicable interest period including
but not limited to the Cost of Prepayment. "Cost of
Prepayment" means an amount equal to the present value,
if positive, of the product of (a)the difference
between (i)the yield, on the beginning date of the
applicable interest period, of a U.S. Treasury
obligation with a maturity similar to the applicable
interest period minus (ii)the yield, on the prepayment
date, of a U.S. Treasury obligation with a maturity
similar to the remaining maturity of the applicable
interest period, and (b)the principal amount to be
prepaid, and (c)the number of years, including
fractional years from the prepayment date to the end of
the applicable interest period. The yield on any U.S.
Treasury obligation shall be determined by reference to
Federal Reserve Statistical Release H.15(519) "Selected
Interest Rates". For purposes of making present value
calculations, the yield to maturity of a similar
maturity U.S. Treasury obligation on the prepayment
date shall be deemed the discount rate. The Cost of
Prepayment shall also apply to any payments made after
acceleration of the maturity of this Note. The Bank's
determination of an amount payable under this paragraph
shall, in the absence of manifest error, be conclusive
and shall be payable on demand.
6. Loan Account. The Bank shall open and maintain on
its books a loan account in the name of the Borrower
with respect to advances, payments and the computation
and payment of interest, fees and other amounts due
hereunder and under the Agreement. Such loan account
shall be conclusive and binding on the Borrower as to
the amount at any time due to the Bank from the
Borrower except in the case of error in computation.
93
7. Other Loan Documents. This Note is issued in
connection with the Agreement, the terms of which are
incorporated herein by reference (the Agreement and the
Note shall be collectively referred to as the "Loan
Documents"), and is secured by the property described
in the Loan Documents (if any) and by such other
collateral as previously may have been or may in the
future be granted to the Bank to secure this Note.
Capitalized terms used herein and not defined herein
shall have the meanings ascribed thereto in the
Agreement.
8. Events of Default. The occurrence of any of the
following events will be deemed to be an "Event of
Default" under this Note: (i) the nonpayment of any
principal, interest or other indebtedness under this
Note when due; (ii) the occurrence of any event of
default or default and the lapse of any notice or cure
period under any other debt, liability or obligation to
the Bank of any Obligor; (iii) the filing by or against
any Obligor of any proceeding in bankruptcy,
receivership, insolvency, reorganization, liquidation,
conservatorship or similar proceeding, or any
assignment by any Obligor for the benefit of creditors,
or any levy, garnishment, attachment or similar
proceeding is instituted against any property of any
Obligor held by or deposited with the Bank; (iv) a
default with respect to any other indebtedness of any
Obligor for borrowed money, if the effect of such
default is to cause or permit the acceleration of such
debt; (v) the commencement of any foreclosure
proceeding, execution or attachment against any
collateral securing the obligations of any Obligor to
the Bank; (vi) the entry of a final judgment against
any Obligor and the failure of such Obligor to
discharge the judgment within ten days of the entry
thereof; (vii) in the event that this Note or any
guarantee executed by any Guarantor is secured, the
failure of any Obligor to provide the Bank with
additional collateral if in the opinion of the Bank at
any time or times, the market value of any of the
collateral securing this Note or any guarantee has
depreciated; (viii) any material adverse change in the
business, assets, operations, financial condition or
results of operations of any Obligor; (ix) the
revocation or attempted revocation, in whole or in
part, of any guarantee by any Guarantor;(x) any
representation or warranty made by any Obligor to the
Bank in any Loan Document, or any other documents now
or in the future securing the obligations of any
Obligor to the Bank, is false, erroneous or misleading
in any material respect; or (xi) the failure of any
Obligor to observe or perform any covenant or other
agreement with the Bank contained in any Loan Document
or any other documents now or in the future securing
the obligations of any Obligor to the Bank.
As used herein, the term "Obligor" means any Borrower
and any Guarantor, and the term "Guarantor" means any
guarantor of the obligations of the Borrower to the
Bank existing on the date of this Note or arising in
the future.
94
Upon the occurrence of an Event of Default: (a) the
Bank shall be under no further obligation to make
advances hereunder; (b) if an Event of Default
specified in clause (iii) above shall occur, the
outstanding principal balance and accrued interest
hereunder together with any additional amounts payable
hereunder shall be immediately due and payable without
demand or notice of any kind; (c)if any other Event of
Default shall occur, the outstanding principal balance
and accrued interest hereunder together with any
additional amounts payable hereunder, at the option of
the Bank and without demand or notice of any kind, may
be accelerated and become immediately due and payable;
(d)at the option of the Bank, this Note will bear
interest at the Default Rate (as provided for in the
Agreement) from the date of the occurrence of the Event
of Default; and (e)the Bank may exercise from time to
time any of the rights and remedies available to the
Bank under the Loan Documents or under applicable law.
9. Right of Setoff. In addition to all liens upon and
rights of setoff against the money, securities or other
property of the Borrower given to the Bank by law, the
Bank shall have, with respect to the Borrower's
obligations to the Bank under this Note and to the
extent permitted by law, a contractual possessory
security interest in and a right of setoff against, and
the Borrower hereby assigns, conveys, delivers, pledges
and transfers to the Bank all of the Borrower's right,
title and interest in and to, all deposits, moneys,
securities and other property of the Borrower now or
hereafter in the possession of or on deposit with the
Bank whether held in a general or special account or
deposit, whether held jointly with someone else, or
whether held for safekeeping or otherwise, excluding,
however, all IRA, Keogh, and trust accounts. Every
such security interest and right of setoff may be
exercised without demand upon or notice to the
Borrower.
10. Miscellaneous. No delay or omission of the Bank to
exercise any right or power arising hereunder shall
impair any such right or power or be considered to be a
waiver of any such right or power or any acquiescence
therein nor shall the action or inaction of the Bank
impair any right or power hereunder. The Borrower
agrees to pay on demand, to the extent permitted by
law, all costs and expenses incurred by the Bank in the
enforcement of its rights in this Note and in any
security therefor, including without limitation
reasonable fees and expenses of the Bank's counsel. If
any provision of this Note is found to be invalid by a
court, all the other provisions of this Note will
remain in full force and effect.
The Borrower and all other makers and indorsers of this
Note hereby forever waive presentment, protest, notice
of dishonor and notice of non-payment. The Borrower
also waives all defenses based on suretyship or
impairment of collateral.
95
If this Note is executed by more than one Borrower, the
obligations of such persons or entities hereunder will
be joint and several. This Note shall bind the
Borrower and the heirs, executors, administrators,
successors and assigns of the Borrower, and the
benefits hereof shall inure to the benefit of Bank and
its successors and assigns.
This Note has been delivered to and accepted by the
Bank and will be deemed to be made in the State where
the Bank's office indicated above is located. This
Note will be interpreted and the rights and liabilities
of the parties hereto determined in accordance with the
laws of the State where the Bank's office indicated
above is located, excluding its conflict of laws rules.
The Borrower hereby irrevocably consents to the
exclusive jurisdiction of any state or federal court
for the county or judicial district where the Bank's
office indicated above is located, and consents that
all service of process be sent by nationally recognized
overnight courier service directed to the Borrower at
the Borrower's address set forth herein and service so
made will be deemed to be completed on the business day
after deposit with such courier; provided that nothing
contained in this Note will prevent the Bank from
bringing any action, enforcing any award or judgment or
exercising any rights against the Borrower
individually, against any security or against any
property of the Borrower within any other county, state
or other foreign or domestic jurisdiction. The
Borrower acknowledges and agrees that the venue
provided above is the most convenient forum for both
the Bank and the Borrower. The Borrower waives any
objection to venue and any objection based on a more
convenient forum in any action instituted under this
Note.
10. WAIVER OF JURY TRIAL. THE BORROWER IRREVOCABLY
WAIVES ANY AND ALL RIGHTS THE BORROWER MAY HAVE TO A
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY
NATURE RELATING TO THIS NOTE, ANY DOCUMENTS EXECUTED IN
CONNECTION WITH THIS NOTE OR ANY TRANSACTION
CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE BORROWER
ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND
VOLUNTARY.
96
The Borrower acknowledges that it has read and
understood all the provisions of this Note, including
the waiver of jury trial, and has been advised by
counsel as necessary or appropriate.
11. Replacement Promissory Note. This Note is the note
issued by the Borrower in order to amend, consolidate
and completely restate, and to evidence the
indebtedness outstanding and be substituted for, but
not to be a payment, satisfaction, cancellation or
novation of, the original note issued by the Borrower
dated October 11, 1994 and the original note issued by
the Borrower dated August 1, 1995.
WITNESS the due execution hereof as a document under
seal, as of the date first written above, with the
intent to be legally bound hereby.
ATTEST: USBANCORP, INC.
____________________________________
By:_________________________________
(SEAL)
Print Name:___________________________ Print
Name:___________________________
Title:________________________________
97
October 31, 1997
USBANCORP, Inc.
Main and Franklin Streets
Johnstown, Pennsylvania 15901
Attention: Orlando B. Hanselman, Executive Vice
President,
Chief Financial Officer and Manager of
Corporate Services
Re: $17,000,000.00 364-Day Committed Line
of Credit
Ladies/Gentlemen:
We are pleased to inform you that PNC Bank, National
Association (the "Bank"), has approved your request for
a $17,000,000.00 unsecured, committed line of credit
(the "Line of Credit") to USBANCORP, Inc. (the
"Borrower"). The Bank is willing to establish the Line
of Credit upon the following terms and conditions:
Commitment The Bank hereby agrees to make advances
(the "Loans") to the Borrower under the Line of Credit
in an aggregate amount not to exceed $17,000,000.00 at
any one time outstanding. The Line of Credit shall be
available for a period of one year from the date hereof
to October 30, 1998 (the "Expiration Date"), or such
later date as may be designated by the Bank by written
notice to the Borrower. Subject to the terms and
conditions hereof, the Borrower shall have the right to
borrow, repay and reborrow amounts hereunder during the
period of the Line of Credit; provided that principal
amounts outstanding and all accrued unpaid interest
under the Line of Credit shall be repaid in full on or
before the Expiration Date.
Note The Borrower's obligation to repay the Loans
shall be evidenced by a promissory note substantially
in the form of Exhibit "A" hereto (the "Note"). This
Agreement and the Note are collectively referred to as
the "Loan Documents".
Use The proceeds of the Loans shall be used by
the Borrower as direct extensions of of Proceeds credit
from the Bank to fund working capital needs of the
Borrower and other general corporate purposes.
Advance The Borrower may request advances hereunder
upon giving oral or written notice Procedures to
the Bank by 11:00 A.M. (Pittsburgh, Pennsylvania time)
(i) on the day of any proposed advance bearing interest
under the As Offered Rate Option or (ii) on the third
Business Day prior to any proposed advance bearing
interest under the Euro-Rate Option, in each case
followed promptly thereafter by the Borrower's written
confirmation to the Bank of any oral notice. The
Borrower authorizes the Bank to accept telephonic
requests for advances, and the Bank shall be entitled
to rely upon the authority of any person providing such
instructions.
98
Interest All amounts outstanding under the Note shall
bear interest at a rate or rates per annum
Rate as may be selected by the Borrower from the
interest rate options set forth below (each, an
"Option"):
(a) As Offered Rate Option. A rate of interest per
annum which is at all times equal to a rate per annum
as offered by the Bank in its sole discretion for the
interest period requested, each as agreed upon in
writing between the Borrower and the Bank.
(b) Euro-Rate Option. A rate per annum equal to the
sum of (i) the Euro-Rate plus (ii) one hundred fifty
(150) basis points (1 1/2%) per annum, for the
applicable Interest Period in an amount equal to the
advance and having a comparable maturity, all as
determined below.
For the purpose hereof, the following terms shall have
the following meanings:
"Business Day" shall mean any day other than a Saturday
or Sunday or a legal holiday on which commercial banks
are authorized or required to be closed for business in
Pittsburgh, Pennsylvania.
"Euro-Rate" shall mean, with respect to any advance to
which the Euro-Rate Option applies for the applicable
Interest Period, the interest rate per annum determined
by the Bank by dividing (the resulting quotient rounded
upwards, if necessary, to the nearest 1/100th of 1% per
annum) (i) the rate of interest determined by the Bank
in accordance with its usual procedures (which
determination shall be conclusive absent manifest
error) to be the eurodollar rate two (2) Business Days
prior to the first day of such Interest Period for an
amount comparable to such advance and having a
borrowing date and a maturity comparable to such
Interest Period by (ii) a number equal to 1.00 minus
the Euro-Rate Reserve Percentage. The Euro-Rate shall
be adjusted with respect to any advance to which the
Euro-Rate Option applies on the effective date of any
change in the Euro-Rate Reserve Percentage as of such
effective date. The Bank shall give prompt notice to
the Borrower of the Euro-Rate as determined or adjusted
in accordance herewith, which determination shall be
conclusive absent manifest error.
"Euro-Rate Reserve Percentage" shall mean the maximum
effective percentage in effect on such day as
prescribed by the Board of Governors of the Federal
Reserve System (or any successor) for determining the
reserve requirements (including, without limitation,
supplemental, marginal and emergency reserve
requirements) with respect to eurocurrency funding
(currently referred to as "Eurocurrency liabilities").
99
"Interest Period" shall mean the period of one (1),
two, (2) or three (3) months selected by the Borrower
commencing on the date of disbursement of an advance
and each successive period selected by the Borrower
thereafter; provided, that if an Interest Period would
end on a day which is not a Business Day, it shall end
on the next succeeding Business Day, unless such day
falls in the succeeding calendar month in which case
the Interest Period shall end on the next preceding
Business Day. In no event shall any Interest Period
end on a day after the Expiration Date.
"Prime Rate" shall mean the rate publicly announced by
the Bank from time to time as its prime rate. The
Prime Rate is determined from time to time by the Bank
as a means of pricing some loans to its borrowers. The
Prime Rate is not tied to any external rate of interest
or index, and does not necessarily reflect the lowest
rate of interest actually charged by the Bank to any
particular class or category of customers. If and when
the Prime Rate changes, the rate of interest with
respect to any advance to which the Prime Rate applies
will change automatically without notice to the
Borrower, effective on the date of any such change.
It is understood that the Borrower may select no more
than four (4) different Interest Periods to apply
simultaneously. Interest will be calculated on the
basis of a year of 360 days for the actual number of
days in each interest period. In no event will the
rate of interest hereunder exceed the maximum rate
allowed by law.
Interest Rate Subject to the terms and conditions of
this Agreement, at the end of each interest
Election. interest period applicable to any advance,
the Borrower may renew the Option
applicable to such advance or convert such advance to a
different Option. The Borrower shall notify the Bank
of each election of an Option, each conversation from
one Option to another, the amount of the advances then
outstanding to be allocated to each Option and where
relevant, the interest periods therefor on or before
11:00 A.M. (Pittsburgh, Pennsylvania time) (i) on the
day of the proposed beginning of any Interest Period in
the case of the As Offered Rate or (ii) on the day
three (3) Business Days prior to the proposed beginning
of any Interest Period or the end of any such Interest
Period in the case of the Euro-Rate Option. If no
notice of conversion or renewal is received by the
Bank, the Borrower shall be deemed to have converted
such advance to the Prime Rate. The Borrower shall
notify the Bank of each election of an Option, each
conversion from one Option to another, the amount of
the advances then outstanding to be allocated to each
Option and where relevant the interest periods.
100
Changes in If the Bank determines (which
determination shall be final and conclusive) that, by
Circum- reason of circumstances affecting the
eurodollar market generally, deposits in dollars
stances (in the applicable amounts) are not being
offered to banks in the eurodollar market for the
selected term, or adequate means do not exist for
ascertaining the Euro-Rate, then the Bank shall give
notice thereof to the Borrower. Thereafter, until the
Bank notifies the Borrower that the circumstances
giving rise to such suspension no longer exist, (a) the
availability of the Euro-Rate Option shall be
suspended, and (b) the interest rate for all advances
then bearing interest under the Euro-Rate Option shall
be converted at the expiration of the then current
Euro-Rate Interest Period(s) to the Prime Rate.
In addition, if, after the date of this Agreement, the
Bank shall determine (which determination shall be
final and conclusive) that any enactment, promulgation
or adoption of or any change in any applicable law,
rule or regulation, or any change in the interpretation
or administration thereof by a governmental authority,
central bank or comparable agency charged with the
interpretation or administration thereof, or compliance
by the Bank with any guideline, request or directive
(whether or not having the force of law) of any such
authority, central bank or comparable agency shall make
it unlawful or impossible for the Bank to make or
maintain or fund loans under the Euro-Rate Option, the
Bank shall notify the Borrower. Upon receipt of such
notice, until the Bank notifies the Borrower that the
circumstances giving rise to such determination no
longer apply, (a) the availability of the Euro-Rate
Option shall be suspended, and (b) the interest rate on
all advances then bearing interest under the Euro-Rate
Option shall be converted to the Prime Rate either (i)
on the last day of the then current Interest Period(s)
if the Bank may lawfully continue to maintain advances
under the Euro-Rate Option to such day, or
(ii)immediately if the Bank may not lawfully continue
to maintain advances under the Euro-Rate Option.
Default Rate After the principal amount of all or any
part of the Loans shall have become due and payable,
whether by acceleration or otherwise, all the Loans
shall bear interest at a rate per annum which shall be
two hundred (200) basis points (2%) per annum in excess
of the Prime Rate.
Payment The Borrower shall pay accrued interest on
the unpaid principal balance of the Note in arrears:
(a) for the advances bearing interest under the As
Offered Rate Option or the Prime Rate, on the last
Business Day of each calendar quarter during the term
hereof, (b) for the advances bearing interest under the
Euro-Rate Option, on the last day of each Interest
Period and (c) for all advances, at maturity, whether
by acceleration of the Note or otherwise, and after
maturity, on demand until paid in full. All
outstanding principal and accrued interest hereunder
shall be due and payable in full on the Expiration
Date.
101
Commitment Beginning on December 30, 1997 and
continuing on the last day of each calendar
Fee quarter thereafter until the Expiration Date
and on the Expiration Date, the Borrower shall pay a
commitment fee to the Bank, in arrears, at the rate of
one tenth of one percent (.001%) per annum on the
average daily unused portion of the Line of Credit
during the calendar quarter then ending. The
commitment fee shall be computed on the basis of a year
of 365 or 366 days, as the case may be, and paid on the
actual number of days elapsed.
Conditions The obligation of the Bank to make any
Loan hereunder is subject to the condition to Lending
that:
(a) in the case of the initial loan hereunder, the
Borrower shall provide to the Bank this Agreement and
the Note, each duly executed by the Borrower; evidence
of the due authorization by the Borrower of this
Agreement and the Note; an opinion of counsel to the
Borrower; and such other instruments as the Bank shall
reasonably require in form and substance satisfactory
to the Bank.
(b) in the case of any loan, each request for an
advance under the Line of Credit shall constitute, as
of the time made, a certification by the Borrower that
the Borrower shall have performed and complied with all
agreements and conditions herein required under this
Agreement, and at the time of the advance, no condition
or event shall exist which constitutes an Event of
Default.
Covenants Unless waived in writing by the Bank or until
payment in full and termination of the Line of Credit:
(a) Borrower will preserve, or cause to be preserved,
its corporate existence and be and be qualified, or
cause to be qualified, to do business in all
jurisdictions where ownership of property or the nature
of its business requires such qualifications, and
obtain and retain all necessary licenses, permits,
leases and other permissions to conduct its business.
(b) Borrower will pay or cause to be paid all
taxes, assessments and other governmental charges to
which Borrower or its properties are or shall be
subject before such charges become delinquent, except
that no such charge need be paid for so long as its
validity or amount shall be contested in good faith by
appropriate proceedings duly prosecuted and Borrower
shall have set up on its books such reserve with
respect thereto as shall be dictated by sound
accounting practices.
(c) Borrower will maintain, or cause to be
maintained, its properties and assets in good order.
102
(d) Borrower will deliver to Bank as soon as
practicable, but in any event (i) within 120 days after
the close of each fiscal year, Borrower's Financial
Statements for the year, together with statements of
changes in consolidated financial position, certified
without qualification, as to scope, by a certified
public accountant acceptable to Bank; and (ii) within
60 days after the close of each fiscal quarter,
Borrower's Financial Statements for the quarter,
together with comparative figures for the corresponding
period of the prior year, certified, subject to
ordinary and usual year-end adjustment, by the chief
financial officer of Borrower. Further, Borrower shall
at any time and from time to time submit to Bank such
other or additional information relating to its affairs
as Bank shall reasonably request. "Financial
Statements" means Borrower's consolidated and
consolidating balance sheets and statements of income
and retained earnings for the year or quarter prepared
in accordance with generally accepted accounting
principles consistently applied on a basis consistent
with prior years, unless specifically noted therein.
(e) Borrower will (i) maintain proper books of
record and account in accordance with sound accounting
practice in which full, true and correct entries shall
be made of all its properties and assets and its
dealings and business affairs; (ii)permit Bank to have
access, at any time and from time to time, on
reasonable notice and during normal business hours, to
its books and records to the extent that Bank shall
reasonably request; and (iii) permit Bank to make
copies of such books and records and to remove such
copies from the offices of Borrower to the extent that
Bank shall deem necessary.
(f) Borrower will simultaneously with the
delivery of the Financial Statements, issue a
certification of the chief financial officer of
Borrower (i) stating that (A) during such period
Borrower has observed and performed all of its
covenants and agreements set forth in this Agreement,
except as disclosed in such certificate and (B) neither
a default or an unmatured default has occurred or is
continuing and, if such a condition or event has been
so disclosed, specifying the nature and extent thereof
and the corrective measures which Borrower proposes to
take in relation thereto, and (ii) computing at the end
of such period and for such period of Borrowers
compliance with the terms and conditions of subsections
(m) and (n) hereof.
(g) Borrower will maintain at all times adequate
insurance to the satisfaction of Bank with insurers
acceptable to Bank or self-insurance against such risks
of loss as are customarily insured against and in
amounts customarily carried by persons owning, leasing
or operating similar properties, including, but not
limited to, fire and theft and extended coverage
insurance in an amount at least equal to the total full
insurable value of Borrower's insurable property,
provided that the amount of such insurance shall at all
times be sufficient to prevent Borrower from becoming a
co-insurer under the terms of any insurance policy.
Borrower will also keep itself adequately insured at
all times against liability on account of injury to
persons or property and comply with the insurance
provisions of all applicable workers' compensation laws
and will effect all such insurance under valid and
enforceable policies issued by insurers of recognized
responsibility. Prior to the first borrowing under
this Agreement, Borrower will deliver to Bank a
schedule indicating all insurance then in force.
103
In the event Borrower fails to secure insurance as
provided above, Bank is hereby authorized, at its
option, to pay the cost of insurance. Borrower hereby
agrees to repay to Bank all sums so paid on demand with
interest at the highest rate provided for in this
Agreement.
(h) Borrower will pay or cause to be paid all
costs and expenses in connection with the recording
and/or filing of any documents, statements or
instruments incidental hereto, or the insuring of same,
and any stamp or other taxes which may be payable with
respect to the execution or delivery of the Loan
Documents or of any statements, instruments or
documents, which obligation shall survive the
termination of this Agreement.
(i) Borrower will promptly notify Bank of any
material litigation or proceedings commenced against
Borrower.
(j) Borrower will promptly furnish to Bank copies
of all material which Borrower shall file with the
Securities and Exchange Commission or any national
securities exchange, including, but not limited to, all
registration statements, annual reports on Form 10K,
quarterly reports on Form 10Q, reports on Form 8K,
proxy material and annual reports to shareholders, and
any and all amendments thereof or supplements thereto.
(k) Borrower will promptly furnish to Bank upon
their becoming available, the "Consolidated Reports of
Condition and Income" of Borrower's subsidiaries that
are banks, the "Parent Company Only Financial
Statements for Bank Holding Companies" (report no. FR
Y-9LP or any successor form of the Federal Reserve
System) of Borrower, the "Consolidated Financial
Statements for Bank Holding Companies" (report no. FR
Y-9c) of Borrower and the Office of Thrift Supervision
Financial Report (OTS Form 1313).
(l) Borrower will promptly notify Bank of (i) the
happening of any default or unmatured default, and (ii)
any other materially adverse change in Borrower's
financial condition, business or operation, indicating
in each case the corrective measures which Borrower
proposes to take in relation thereto.
(m) Borrower will maintain at all times (i) a
ratio of equity to assets of at least 6.25%; (ii) a
ratio of loan loss reserves to non-performing assets at
all times of at least 1.25 to 1; (iii) a ratio of its
equity investment in and advances to its subsidiaries,
less good will, to tangible net worth of not more than
1.10 to 1; and (iv) a ratio of cash operating income
and cash interest expense to interest expense and
preferred dividends of at least 3.0 to 1.
(n) Borrower will maintain funded indebtedness
not to exceed 15%.
104
(o) Borrower will, and will cause each of its
banking subsidiaries to, maintain at all times such
amount of capital as may be prescribed by the Board of
Governors of the Federal Reserve System (in the case of
any national banking subsidiary), or the Office of
Thrift Supervision (in the case of any savings
association subsidiary), as the case may be, from time
to time, whether by regulation, agreement or order.
(p) Borrower will preserve, renew and keep in
full force and effect its corporate existence, and the
rights, privileges and franchises necessary or
desirable in the normal course of business as a state
bank holding corporation.
(q) At the request of Bank, Borrower will execute
such other documents as Bank may require to carry out
the intent and purpose of this Agreement.
(r) Borrower will not liquidate, merge or
consolidate with any person, firm or corporation or
sell, lease, transfer or otherwise dispose of all or
any substantial part of its property or assets, whether
now owned or hereafter acquired.
(s) Borrower will not make acquisitions of all or
substantially all of the property or assets of any
person, firm or corporation, unless Borrower is the
surviving entity.
(t) Borrower will not make any distribution with
respect to any class of its or its subsidiaries stock,
or pledge, hypothecate or otherwise grant a security
interest in the same.
(u) Borrower will not make or permit any material
change in the nature of its business as carried on as
of the date of this Agreement.
(v) Borrower will not use any part of the
proceeds of the Line of Credit to purchase or carry any
margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock, or
for any purpose that directly or indirectly violates,
or is inconsistent with, the provisions of Regulation U
or Regulation X of the Board of Governors of the
Federal Reserve System as now and from time to time
hereafter in effect.
Representa- The Borrower represents and warrants to
the Bank as follows:
tions and
Warranties (a) The Borrower is duly organized,
validly existing and in good standing under the laws of
the state of its incorporation or organization and has
the power and authority to own and operate its assets
and to conduct its business as now or proposed to be
carried on, and is duly registered as a Bank holding
company under the Bank Holding Company Act of 1956, as
amended.
105
(b) The Borrower has the power to make and carry
out the terms of this Agreement and has taken all
necessary corporate action to authorize the execution,
delivery and performance of this Agreement.
(c) This Agreement constitutes the legally binding
obligation of the Borrower enforceable in accordance
with its terms.
(d) The making and performance of this Agreement
does not and will not violate in any respect any
provisions of (i) any federal, state or local law or
regulation or any order or decree of any federal, state
or local governmental authority, agency or court, (ii)
the organizational documents of the Borrower or of any
of its subsidiaries, or (iii) any mortgage, contract or
other undertaking to which the Borrower is a party or
which is binding upon the Borrower or any of its
subsidiaries or any of their respective assets, and
does not and will not result in the creation or
imposition of any security interest, lien, charge or
other encumbrance on any of their respective assets
pursuant to the provisions of any such mortgage,
contract or other undertaking.
(e) Neither the Borrower nor any of its
subsidiaries is in default with respect to any material
order, writ, injunction or decree (i) of any court or
(ii) of any Federal, state, municipal or other
governmental instrumentality. The Borrower and each
subsidiary is substantially complying with all
applicable statutes and regulations of each
governmental authority having jurisdiction over its
activities, except where failure to comply would not
have a material adverse effect on the Borrower and its
subsidiaries, taken as a whole.
(f) There are no actions, suits, proceedings or
governmental investigations pending or, to the
knowledge of the Borrower, threatened against the
Borrower which could result in a material adverse
change in its business, assets, operations, financial
condition or results of operations and there is no
basis known to the Borrower or its officers or
directors for any such action, suit, proceedings or
investigation.
(g) The Borrower's latest financial statements
provided to the Bank are true, complete and accurate in
all material respects and fairly present the financial
condition, assets and liabilities, whether accrued,
absolute, contingent or otherwise and the results of
the Borrower's operations for the period specified
therein. The Borrower's financial statements have been
prepared in accordance with generally accepted
accounting principles consistently applied from period
to period subject in the case of interim statements to
normal year-end adjustments. Since the date of the
latest financial statements provided to the Bank, the
Borrower has not suffered any damage, destruction or
loss which has materially adversely affected its
business, assets, operations, financial condition or
results of operations.
106
(h) The Borrower has filed all returns and reports
that are required to be filed by it in connection with
any federal, state or local tax, duty or charge levied,
assessed or imposed upon the Borrower or its property,
including unemployment, social security and similar
taxes and all of such taxes have been either paid or
adequate reserve or other provision has been made
therefor.
Default The events which give the Bank the right to
accelerate the maturity of the Loans outstanding
hereunder and terminate the Line of Credit are set
forth in the Note.
Notices All notices required to be sent to the
Borrower shall be sent by hand delivery, overnight
courier or facsimile transmission (with confirmation of
receipt) to the Borrower at the address set forth on
the records of the Bank.
Governing This Agreement and the Note shall be governed
by the laws of the Commonwealth
Law of Pennsylvania, except conflict of law
rules.
Counterparts This Agreement may be executed in
counterparts, each of which when executed by the
Borrower and the Bank shall be regarded as an original.
Termination On the effective date of this Agreement,
the letter agreement dated August 1, 1995
of Existing and the letter agreement dated October
11, 1994, as each has been amended (the
Credit ("Prior Agreements") by and between the
Borrower and the Bank and the
Facilities commitments thereunder shall be
terminated and no further effect. Any and all loans
outstanding under the Prior Agreements and all other
amounts owing thereunder shall be deemed to be
outstanding under this Agreement and the Note executed
in connection herewith.
If the foregoing accurately reflects the understanding
of the parties, please execute the duplicate original
of this Agreement and return it to me.
Very truly yours,
PNC BANK, NATIONAL
ASSOCIATION
By__________________________________
Title_________________________________
Accepted this ____ day of
______________, 1997
USBANCORP, INC.
By_________________________________
Title_______________________________
107
ANNEX A TO USBANCORP, INC. 1997 ANNUAL REPORT & FORM 10-K
The following is a listing of the graphs presented in USBANCORP, Inc.'s
1997 Annual Report & Form 10-K.
Page 2: The following six graphs present Financial
Highlights-At A Glance:
The top left graph is a bar graph showing the
Company's efficiency ratio:
1993 1994 1995 1996 1997
67.44% 75.31% 66.97% 63.39% 60.11%
The efficiency ratio reflects the Company's ability
to generate revenue and control its non-interest
expenses. USBANCORP's significantly improved its
performance in this key area of profitability over the
past two years by generating increased revenue from
its core banking business.
The middle left graph is an area graph showing
non-performing assets as a percentage of loans and OREO
at December 31 for the periods presented:
1993 1994 1995 1996 1997
0.89% 0.91% 1.13% 0.92% 0.89%
Asset quality is critical to a bank's safety and
ongoing earnings power. Non-performing assets are
those loans and foreclosed properties that are not
generating income and represent collection risk.
USBANCORP's non-performing assets continue to be lower
than peer.
The bottom left graph is an bar graph showing the
allowance for loan losses as a percentage of total non-
performing assets at December 31 for the periods
presented:
1993 1994 1995 1996 1997
234.84% 197.32% 158.22% 153.72% 136.75%
The allowance for loan losses help protect a bank's
future earnings from losses due to credit risk.
USBANCORP's allowance reflects a reserve of $1.37 for
each $1.00 of non-performing assets.
The top right graph is a bar graph showing the
Company's return on equity for the periods presented:
1993 1994 1995 1996 1997
11.46% 8.92% 11.03% 13.36% 15.00%
The return on equity (ROE) is a standard measurement of a company's
profitability. USBANCORP's ROE has
improved from 11.0% in 1995 to 15.0% in 1997. Eight
consecutive quarters of increasing revenue combined
with effective capital management strategies to cause
the improved ROE.
The middle right graph is a bar graph showing the
Company's net income per employee for the periods
presented:
1993 1994 1995 1996 1997
$18,788 $15,429 $20,915 $26,604 $30,721
108
USBANCORP has aggressively captured the financial
benefits from each of its past acquisitions. Improved
employee productivity is one such integral benefit from
these acquisitions.
USBANCORP has nearly doubled its
net income per employee over the past five years.
The bottom right graph is a area graph showing net
interest income (in thousands):
1993 1994 1995 1996 1997
$49,485 $55,818 $56,147 $61,138 $66,859
As a result of effective asset/liability management
practices, prudent acquisitions, and balance sheet
leveraging, USBANCORP has increased net interest income
for each of the past five years.
Page 4: The following six graphs present Shareholder
Information-At A Glance:
The top left graph is a bar graph showing
diluted earnings per share:
1993 1994 1995 1996 1997
$2.78 $2.18 $2.88 $3.83 $4.61
USBANCORP has grown earnings per share in excess of
20% for each of the past two years. Earnings per share
growth is a key determinant of shareholder value and
the Company's ongoing financial soundness.
The middle left graph is a bar graph showing
dividends per common share:
1993 1994 1995 1996 1997
$0.86 $0.97 $1.06 $1.37 $1.60
USBANCORP's dividends paid to shareholders have
increased at an average annual rate of 14.8% over the
past five years. The Company declared, for the second
consecutive year, a special dividend which amounted to
$0.25 per share in 1997. This special dividend allowed
shareholders to further participate in the record
success that USBANCORP achieved.
109
The bottom left graph is a bar graph showing
common stock price per share at December 31:
1993 1994 1995 1996 1997
$23.75 $21.00 $33.00 $41.75 $73.00
A second key element of shareholder return is
the price appreciation of each common share.
USBANCORP's common stock price per share
appreciated 121% over the past two years.
The top right graph is a pie graph showing the
distribution of 1997 net income:
Common dividend payout 34%
Treasury stock repurchases 50%
Retained for internal
capital growth 16%
In 1997, USBANCORP distributed 84% of its net
income back to its shareholders through treasury stock
repurchases and common dividend payments. These
distributions are key strategies the Company uses to
leverage its capital.
The middle right graph is a bar graph showing book
value per common share at December 31:
1993 1994 1995 1996 1997
$24.67 $24.57 $28.34 $29.90 $32.32
A company's book value per common share
represents the accumulated and undistributed
shareholder wealth. USBANCORP has increased this
shareholder wealth by 31% over the past five years to
$32.32 at December 31, 1997.
The bottom right graph is an area graph showing
asset leverage ratio compared to the management minimum
target of 6% and the regulatory requirement of 5%:
1993 1994 1995 1996 1997
9.18% 6.64% 6.63% 6.51% 6.25%
Fundamental to shareholder and depositor safety
is the capital strength of the financial institution.
It is USBANCORP's intent to optimally leverage the
capital base in order to enhance shareholder value
while maintaining necessary regulatory requirements.
110
Page 5: The top left graph is a bar graph showing
UBAN total return vs. S&P 500 total return for the periods
presented:
1993 1994 1995 1996 1997
UBAN 12% -8% 64% 31% 80%
S&P 10% 1% 28% 22% 33%
Note: Total return includes dividends reinvested into security.
The graph at the bottom left is area graph
graph showing market capitalization at December 31 (in
thousands):
1993 1994 1995 1996 1997
$101,559 $117,225 $175,246 $212,132 $357,241
Page 6: The graph at the top left is bar graph
showing total loans at December 31 (in thousands):
1993 1994 1995 1996 1997
$727,186 $868,004 $834,634 $939,726 $989,575
Appearing in the margin is a "call out"
reflecting the quote:
"Feather Your Nest" symbolizes the complete line
of financial products and services available to
satisfy customer needs throughout their life-
cycle.
Page 7: Appearing in the margin is a "call out"
reflecting the quote:
Listening and responding to customer feedback
creates opportunity for growth in the small to medium
size business segment.
The bottom left graph is a bar graph showing the
Company's net income per employee for the periods
presented:
1993 1994 1995 1996 1997
$18,788 $15,429 $20,915 $26,604 $30,721
Page 8: Appearing in the margin at the top of the
page is a "call out" reflecting the quote:
Employees who donated over 11,000 hours of
community service to more than 450 civic
organizations earns your company the reputation of
being a caring neighbor.
Appearing in the margin at the bottom of the
page is a "call out" reflecting the quote:
Creating improved value for shareholders,
customers, employees and the community will remain
the focus of strategic initiatives in 1998 and
beyond.
111
Page 9: The graph is a bar graph showing the
Company's return on equity for the periods presented:
1993 1994 1995 1996 1997
11.46% 8.92% 11.03% 13.36% 15.00%
Page 10: Shows a service area map of
USBANCORP, Inc.'s six southwestern Pennsylvania counties. The
second map shows a closeup of the six counties
identifying branch locations by subsidiary.
Page 44: The bottom left graph is a bar graph showing
common stock price per share at December 31:
1993 1994 1995 1996 1997
$23.75 $21.00 $33.00 $41.75 $73.00
The bottom right graph is a bar graph
showing the common dividend yield (based upon dividends
declared and purchase at average market price each
year) for the periods presented:
1993 1994 1995 1996 1997
3.50% 4.20% 4.13% 3.88% 2.93%
Page 47: The top left graph is a bar graph showing
net income (in thousands):
1993 1994 1995 1996 1997
$12,488 $11,320 $15,803 $20,019 $23,497
The graph at the bottom left is an area
graph showing total common shares outstanding at
December 31:
1993 1994 1995 1996 1997
4,726,181 5,582,155 5,310,489 5,081,004 4,893,718
Page 48: The top left graph is a bar graph showing
diluted earnings per share:
1993 1994 1995 1996 1997
$2.78 $2.18 $2.88 $3.83 $4.61
The bottom left graph is a bar graph showing
the Company's return on equity for the periods
presented:
1993 1994 1995 1996 1997
11.46% 8.92% 11.03% 13.36% 15.00%
112
Page 49: The graph at the top left is an bar graph
showing return on average assets:
1993 1994 1995 1996 1997
1.03% 0.75% 0.87% $1.03 $1.09
The graph at the bottom left is a bar graph
showing tax equivalent net interest income (NII) in
thousands and data points showing the net interest
margin (NIM) percentage:
1993 1994 1995 1996 1997
NII $50,225 $57,564 $58,954 $64,092 $69,798
NIM 4.34% 4.03% 3.45% 3.52% 3.43%
Page 50: The graph at the top left is a pie chart
showing loan portfolio composition at December 31,
1997, by loan type:
Commercial 14%
Commercial secured by real estate 31%
Real estate - mortgage 46%
Consumer 9%
The bottom left graph is a pie chart
showing the liability funding mix at December 31, 1997:
Deposits 52%
Borrowing 40%
Equity 8%
Page 51: The graph at the top left is a pie chart
showing the deposit composition as of December 31,
1997:
DDA 13%, CD's 50%
Savings & NOW 23%, Money market 14%
The bottom left graph is a area graph
showing net interest income (in thousands):
1993 1994 1995 1996 1997
$49,485 $55,818 $56,147 $61,138 $66,859
The bottom right graph is a area graph
showing net interest margin percentage:
1993 1994 1995 1996 1997
4.34% 4.03% 3.45% 3.52% 3.43%
Page 54: The top left graph is a bar graph
showing non-performing assets as a percentage of loans
and OREO at December 31 for the periods presented:
1993 1994 1995 1996 1997
0.89% 0.91% 1.13% 0.92% 0.89%
113
The bottom left graph is an bar graph
showing the allowance for loan losses as a percentage
of total non-performing assets at December 31 for the
periods presented:
1993 1994 1995 1996 1997
234.84% 197.32% 158.22% 153.72% 136.75%
The bottom right graph is an area graph
showing the allowance for loan losses as a percentage
of loans at December 31 for the periods presented:
1993 1994 1995 1996 1997
2.10% 1.80% 1.79% 1.42% 1.22%
Page 55: The bottom left graph is a bar graph
showing the loan loss provision as a percentage of
average loans:
1993 1994 1995 1996 1997
0.34% (0.34%) 0.03% 0.01% 0.02%
Page 56: The bottom left graph is a bar graph showing
the net charge-offs as a percentage of average loans:
1993 1994 1995 1996 1997
0.13% 0.04% 0.08% 0.20% 0.14%
Page 57: The top left graph is an bar graph showing
non-interest income (in thousands):
1993 1994 1995 1996 1997
$10,150 $8,187 $16,543 $18,689 $20,203
The bottom left graph is a bar graph showing
SMC residential mortgage loans originated
(in thousands) for the periods presented:
1994 1995 1996 1997
$85,469 $147,254 $205,085 $253,418
Page 58: The top left graph is a bar graph showing
trust fee income (in thousands):
1993 1994 1995 1996 1997
$2,578 $3,023 $3,395 $3,708 $4,022
The average annual growth rate in trust fee income
is 11.8%.
The bottom left graph is an bar graph showing
the components of non-interest income (in thousands):
1993 1994 1995 1996 1997
All other $4,801 $1,256 $7,656 $9,405 $10,754
Deposit
service
charges $2,771 $2,779 $2,937 $3,264 $3,323
Net mortgage
servicing
fees $0 $1,130 $2,555 $2,312 $2,104
Trust fees $2,578 $3,023 $3,395 $3,708 $4,022
114
Page 59: The top left graph is a bar graph showing
non-interest expense(in thousands):
1993 1994 1995 1996 1997
$40,715 $49,519 $50,557 $52,474 $54,104
The bottom left graph is an bar graph showing
the components of non-interest expense (in thousands):
1993 1994 1995 1996 1997
All other $12,605 $13,973 $16,017 $25,483 $18,097
FDIC Ins. $ 2,157 $ 2,576 $1,728 $ 636 $119
Occupancy
Equipment $ 6,001 $ 7,222 $ 7,507 $7,574 $7,691
Salaries &
benefits $19,952 $23,311 $25,305 $ 25,483 $28,197
Page 60: The top left graph is a bar graph showing
net overhead expense as a percentage of net interest
income (excluding net security gains and losses):
1993 1994 1995 1996 1997
62.02% 60.67% 60.58% 53.71% 49.70%
The bottom left graph is a bar graph
showing the Company's efficiency ratio:
1993 1994 1995 1996 1997
67.44% 75.31% 66.97% 63.39% 60.11%
Page 61: The graph at the top of the page is a bar
graph showing total assets at December 31 for the
periods presented (in thousands):
1993 $1,241,521
1994 $1,788,890
1995 $1,885,372
1996 $2,087,112
1997 $2,239,110
Page 62: The top left graph is an bar graph showing
the Company's one year GAP ratio at December 31 for the
periods presented:
1993 1994 1995 1996 1997
1.10x 0.79x 0.86x 0.79x 0.88x
115
The graph at the bottom left is a pie
chart showing the deposit composition as of December
31, 1997:
DDA 13%, CD's 50%
Savings & NOW 23%, Money market 14%
Page 63: The top left graph is a pie chart showing the
liability funding mix at December 31, 1997:
Deposits 52%
Borrowing 40%
Equity 8%
The bottom left graph is a pie chart
showing the investment portfolio liquidity(scheduled
maturities) as of December 31, 1997:
Less than 1 year is 5%
Greater than 1 year but less than 5 years is 30%
Greater than 5 year but less than 10 years is 28%
Greater than 10 years is 37%
Page 64: The top left graph is a bar graph showing
average loans to average deposits ratio for the periods
presented:
1993 1994 1995 1996 1997
68.49% 71.87% 69.15% 74.35% 83.81%
The bottom left graph is an area graph
showing asset leverage ratio compared to the management
minimum target of 6% and the regulatory requirement of
5%:
1993 1994 1995 1996 1997
9.18% 6.64% 6.63% 6.51% 6.25%
Page 65: The top left graph is a bar graph showing the
Company's total risk based capital at December 31
compared to a regulatory requirement of 8.00%:
1993 1994 1995 1996 1997
15.97% 13.70% 14.88% 14.16% 14.12%
The graph at the bottom left is a pie chart
showing the distribution of 1997 net income:
Common dividend payout 34%
Treasury stock repurchases 50%
Retained for internal capital 16%
growth
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Page 68: The top left graph is a pie chart showing
1997 gross revenue contribution by product segment (in
thousands):
Investments $72,075, Trust $4,022,
Commercial $39,084, Wholesale $976,
Consumer $58,834,
The bottom left graph is a pie chart showing
1997 gross revenue contribution by product segment
(percentage):
Investments 41%, Trust 2%,
Commercial 22%, Wholesale 1%,
Consumer 34%,
Page 69: The top left graph is a pie chart showing
1996 gross revenue contribution by product segment (in
thousands):
Investments $63,538, Trust $3,708,
Commercial $30,606, Wholesale $1,085,
Consumer $57,085,
The bottom left graph is a pie chart showing
1996 gross revenue contribution by product segment
(percentage):
Investments 41%, Trust 2%,
Commercial 20%, Wholesale 1%,
Consumer 36%,
Page 70: The top left graph is a area graph showing
pre tax income (in thousands):
1993 1994 1995 1996 1997
$16,520 $17,251 $21,848 $27,263 $32,800
The bottom left graph is a bar graph
showing diluted earnings per share:
1993 1994 1995 1996 1997
$2.78 $2.18 $2.88 $3.83 $4.61
Page 71: The graph at the top left is a bar graph
showing trust assets. The graph presents the book value
of client assets which is discretionary and non-
discretionary at December 31 (in millions):
1993 1994 1995 1996 1997
$943 $1,027 $1,043 $1,157 $1,122
Note: 19% growth rate from 1993 to 1997.
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Page 72: The graph at the top left is bar graph
showing total loans at December 31 (in thousands):
1993 1994 1995 1996 1997
$727,186 $868,004 $834,634 $939,726 $989,575
The graph at the bottom left is line
graph comparing Johnstown s unemployment rates to the
city of Pittsburgh, the state of Pennsylvania and
National unemployment rates from January 1995 to
December 1997.
Page 73: The middle left graph is a bar graph showing
the Company's net income per employee for the periods
presented:
1993 1994 1995 1996 1997
$18,788 $15,429 $20,915 $26,604 $30,721
Page 74: The middle left graph is a bar graph showing
assets per full time equivalent employee at December 31
for the periods presented (in thousands):
1993 1994 1995 1996 1997
$1,829 $2,070 $2,419 $2,588 $2,814
Page 75: The top left graph is a pie chart showing the
investment portfolio liquidity(scheduled maturities) as
of December 31, 1997:
Less than 1 year is 5%
Greater than 1 year but less than 5 years is 30%
Greater than 5 year but less than 10 years is 28%
Greater than 10 years is 37%
The bottom left graph is a pie chart showing
the investment portfolio liquidity(scheduled
maturities) as of December 31, 1996:
Less than 1 year is 3%
Greater than 1 year but less than 5 years is 23%
Greater than 5 year but less than 10 years is 32%
Greater than 10 years is 42%
Page 76: The graph at the middle left is a pie chart
showing loan portfolio composition at December 31,
1997, by loan type:
Commercial 14%
Commercial secured by real estate 31%
Real estate - mortgage 46%
Consumer 9%
The graph at the bottom left is a pie
chart showing loan portfolio composition at December
31, 1996, by loan type:
Commercial 15%
Commercial secured by real estate 29%
Real estate - mortgage 44%
Consumer 12%
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Page 77: The middle left graph is a bar graph showing
average loans to average deposits ratio for the periods
presented:
1993 1994 1995 1996 1997
68.49% 71.87% 69.15% 74.35% 83.81%
Page 78: The graph at the top left is a pie chart
showing the deposit composition as of December 31,
1997:
DDA 13%, CD's 50%
Savings & NOW 23%, Money market 14%
The graph at the middle left is a pie
chart showing the deposit composition as of December
31, 1996:
DDA 13%, CD's 50%
Savings & NOW 24%, Money market 13%
Page 91: The graph at the bottom left is a bar graph
showing common stock price to book value at December
31:
1993 1994 1995 1996 1997
96.27% 85.47% 116.44% 139.63% 225.87%
The graph at the bottom right is a bar graph showing
common stock market price to diluted earnings per share
for the periods presented:
1993 1994 1995 1996 1997
9.85x 9.63x 11.50x 10.90x 15.84x
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Exhibit 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated January 23, 1998 included in this Form 10-K, into USBANCORP,
Inc.'s previously filed Registration Statements on Form S-3(Registration No.
33-56604); Form S-8(Registration No. 33-53935); Form S-8(Registration No.
33-55845); Form S-8(Registration No. 33-55207) and Form S-8(Registration No.
33-55211).
\s\Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
March 23, 1998
120