Back to GetFilings.com
CONTENTS
Financial Highlights at a Glance 2
Financial Highlights 3
Message to the Shareholder 4
Service Area Map 10
Consolidated Balance Sheet 13
Consolidated Statement of Income 14
Consolidated Statement of Comprehensive Income 15
Consolidated Statement of Changes in Stockholders' Equity 16
Consolidated Statement of Cash Flows 17
Notes to Consolidated Financial Statements 19
Statement of Management Responsibility 41
Report of Independent Public Accountants 42
Market Price and Dividend Data 45
Selected Ten-Year Consolidated Financial Data 46
Selected Quarterly Consolidated Financial Data 48
Management's Discussion and Analysis 49
Form 10-K 71
Directors, General Officers, and Advisory Board 91
Office Locations 95
Shareholder Information 96
Annex A - Graph Data Points 97
1
FINANCIAL HIGHLIGHTS-AT A GLANCE
Presented on this page were six graphs. For a detailed description
of those graphs and data points, see Annex A on page 97.
2
FINANCIAL HIGHLIGHTS
% Increase
1998 1997 (Decrease)
FOR THE YEAR (In thousands, except per share and ratio data)
Net income $ 21,144 $ 23,497 (10)
Performance ratios:
Return on average assets 0.93% 1.09% (15)
Return on average equity 14.13 15.00 (6)
Net interest margin 3.17 3.43 (8)
Net charge-offs as a percentage of
average loans, net of unearned income 0.19 0.14 36
Loan loss provision as a percentage of
average loans, net of unearned income 0.06 0.02 200
Efficiency ratio 64.84 60.11 8
PER COMMON SHARE
Net income:
Basic $ 1.51 $ 1.56 (3)
Diluted 1.48 1.54 (4)
Cash dividends declared 0.60 0.53 13
Dividend payout ratio 41.00% 34.00% 21
Price earnings ratio 13.43x 15.84x (15)
AT PERIOD END
Total assets $2,377,081 $2,239,110 6
Investment securities:
Available for sale 661,491 580,115 14
Held to maturity 508,142 536,608 (5)
Loans and loans held for sale,
net of unearned income 1,066,321 989,575 8
Allowance for loan losses 10,725 12,113 (11)
Goodwill and core deposit intangibles 18,697 19,122 (2)
Deposits 1,176,291 1,139,527 3
Stockholders' equity 141,670 158,180 (10)
Trust assets (discretionary and
non-discretionary) 1,357,271 1,121,503 21
Non-performing assets 8,236 8,858 (7)
Non-performing assets as a percentage of
loans and loans held for sale, net of unearned
income, and other real estate owned 0.77% 0.89% (13)
Capital ratios:
Total risk-based 14.52 14.12 3
Asset leverage 6.62 6.25 6
Per common share:
Book value $ 10.48 $ 10.77 (3)
Market value 19.88 24.33 (18)
Market price to book value ratio 189.57% 225.87% (16)
CASH BASIS RESULTS
Net income $ 23,249 $ 25,623 (9)
Diluted earnings per common share 1.63 1.68 (3)
Return on average tangible equity 17.81% 18.81% (5)
Efficiency ratio 62.33 57.50 8
STATISTICAL DATA (Amounts not rounded)
AT YEAR END
Full-time equivalent employees 762 765 -
Branch locations 45 43 5
Common shareholders 5,311 5,402 (2)
Common shares outstanding 13,512,317 14,681,154 (8)
All per share and share data have been adjusted to reflect a
3 for 1 stock split effected in the form of a 200% stock dividend
that was distributed on July 31, 1998, to shareholders of record
on July 16, 1998.
Cash basis results exclude amortization and balance related
to goodwill and core deposit intangibles which, except in the
calculation of the efficiency ratio, are net of applicable
income tax effects.
3
MESSAGE TO THE
SHAREHOLDER Dear Fellow Shareholder:
USBANCORP, Inc. entered 1998 committed to improving shareholder
value while continuing to diversify our revenue stream with new
products and services which can offer protection against a low
interest rate environment and a flat yield curve. Your
leadership team which authored the Company's Five Year
(1997-2002) Strategic Plan, anticipated the challenges of the
current state of the economy. Actions taken during 1998 to
enhance our core business and to diversify USBANCORP's revenue
stream have validated our strategic direction, even at this early
stage in the implementation of the Five Year Strategic Plan.
USBANCORP earned $21.1 million or $1.48 per share on a diluted
basis in 1998. When compared to the $23.5 million or $1.54 per
share on a diluted basis earned in 1997, the 1998 results reflect
a 3.9% decrease in diluted earnings per share. Your Company's
return on equity averaged 14.13% for 1998 compared to 15.0% for
1997 and 13.36% for 1996. While I am disappointed that earnings
per share declined in 1998, it is important to note that over a
broader five-year period your Company's annual rate of EPS growth
has approximated 12%.
Accelerated asset prepayment speeds was a key factor contributing
to the reduced earnings in 1998 as this caused compression in our
net interest margin and reduced earnings at our mortgage banking
subsidiary. To help battle the earning pressures resulting from
the flat treasury yield, your Company continued to strategically
focus on growing non-interest revenue and aggressively managing
our capital. I am pleased to report success on both of these
fronts in 1998. Specifically, total non-interest income grew by
17.3% in 1998 and contributed to the non-interest income to total
revenue ratio increasing from 23.2% in 1997 to 26.6% in 1998.
Your management team has targeted a minimum non-interest income
to total revenue ratio of 30% as a critical strategic goal needed
to diversify our revenue stream and generate future earnings per
share growth.
Return on equity performance was enhanced by aggressive capital
management strategies which included an active treasury stock
repurchase program and increasing common dividend payments. The
successful execution of a $34.5 million oversubscribed retail
offering of trust preferred securities in April 1998 provided
your Company with the necessary capital to continue to execute an
active treasury stock repurchase program while growing the
earning asset base through branch acquisitions. During 1998, we
were able to return $30 million to you, our shareholders, through
open market repurchases of 1.2 million shares of USBANCORP common
stock. Improved liquidity in our stock resulting from the 3 for 1
stock split completed in July was one factor contributing to the
increased number of shares repurchased in 1998. Since the
inception of our stock buyback program, we have repurchased 22%
of the outstanding shares of USBANCORP common stock.
Your Board of Directors also believes that a growing common
dividend payment is also an important component of total
shareholder return. For the full year of 1998, total dividends
declared amounted to $0.60 per share which represents a 13%
increase over the $0.53 per share for 1997. The average annual
growth rate in dividends has approximated 16% over the past five
years. These results demonstrate our commitment to providing a
competitive common dividend yield.
Over a longer term horizon, shareholder value will be enhanced by
the execution of strategies created by your management team in
the development of the Five Year Strategic Plan. Our mission to
become the complete "financial service provider of choice" for
more customers will continue, driven by the same strategic
positioning. A review of 1998 actions reveals the priority
USBANCORP places on developing our core banking business while
diversifying our product offering.
4
DEVELOPING THE CORE BANKING BUSINESS
USBANCORP Inc. has added new offices during 1998 which will
further improve our delivery system while providing a stable core
deposit base from within our market area. Three Rivers Bank
acquired two former National City Bank offices with $27 million
in deposits during the second quarter of 1998 and the purchase of
one former office of First Western Bank will be completed during
the first quarter of 1999. The previous North Side branch of
Three Rivers Bank was consolidated into the newly acquired
National City branch, also in the North Side of Pittsburgh. The
newly acquired North Side office features a more accessible
location and the added customer convenience of drive up banking
lanes. U.S. Bank will add two offices of First Western Bank after
the purchase is finalized during the first quarter of 1999. U.S.
Bank's previous office in Ebensburg will be consolidated with a
newly acquired Ebensburg office to enhance efficiencies and to
provide customers with added conveniences such as drive-up
banking, on-site parking and on-site ATM service. These
intra-market transactions will ultimately result in an additional
$90 million in deposits and $10 million in loans for your Company
in 1999. The acquisitions also give affiliate banks access to
more than 7,000 new customers, which represents a significant
cross selling opportunity during 1999.
Direct consumer loan production increased during 1998 to more
than $64 million, or a $17 million or 35% increase over 1997.
Aggressive marketing strategies such as a promotion offering the
customer vacation accommodations for each approved loan
contributed to the 1998 growth. In 1996 your company made the
strategic decision to exit indirect lending due to the inherent
poor profit margin, and to focus our efforts on the direct
consumer loan business. USBANCORP's total consumer loan
portfolio remained flat in 1998, however, for the first year
since the decision to exit indirect lending, the positive growth
of direct loans has offset the run-off of indirect loans.
A Retail Division reorganization was implemented at U.S. Bank
during the third quarter to redirect efforts which are critical
to the continued development of our core banking business. The
Retail Division is now divided into the Retail Sales Division and
the Retail Service Division, both under the direction of the
Senior Vice President of Retail Banking. The re-engineered work
flows and segmented responsibility centers resulted in 13
position eliminations, and continues to flatten the
organizational structure to further advance our sales and service
culture by directing more responsibility and accountability
towards those closest to the customer. This realignment will
generate an annual cost savings of more than $300,000, will
enhance customer service, and will position U.S. Bank to more
aggressively compete with non-bank financial companies such as
brokerage firms, credit unions, and insurance companies.
In 1997 focus group discussions with current and prospective
small to medium sized business customers revealed a considerable
opportunity for USBANCORP affiliate banks to gain a stronger
position in the small and medium sized commercial business
segment. The Small Business Center, working through the current
delivery channels at all affiliate banks, addresses our research
findings which tell us small and medium sized business owners
want less "big-bank bureaucracy" and increased professional
service. The teamwork between Small Business Center and branch
network has delivered big-bank expertise to the customer-friendly
and convenient surroundings of the familiar branch office. This
action has spurred a 22% increase in middle market loans, and a
12% increase in small business loans for 1998. Cross selling
opportunities are increased by directing commercial loan
customers through the branch network for loan servicing. For
1999, the commercial lending efforts will focus on increasing
relationships with our current small and medium sized business
customers, and to continue to attract new customers with more
convenient and personal loan servicing through the current
delivery channels.
5
DIVERSIFYING THE PRODUCT LINE
USBANCORP continues to transition each affiliate bank from the
"bank of choice" to "the financial service provider of choice"
for an expanding customer base. This market positioning requires
the successful expansion of our core banking business, and the
strategic introduction of new products and services which will
positively impact non-interest income and provide protection
against the volatility of interest rate sensitive income.
The USBANCORP network is changing to better serve all the
financial needs of our customers. The addition of mutual funds
and annuities, available since late 1997 through our banking
network, is serving the lifestyle needs of a new segment of
customers who might otherwise seek the services of brokerage
firms or insurance companies to meet their long-term investment
needs. This broader array of financial services has led to a more
diversified revenue stream in 1998, and has positioned your
Company to more effectively compete with the non-banking
competition.
Mutual fund and annuity sales in 1998 were optimized without
significant expansion of the current delivery system. Gross
revenues from the first full year of mutual fund and annuity
sales reached $337,000 by year end. Customers can now shop for
these investment products in the same place where they purchase
CDs, checking accounts and loans. The low interest rate
environment of 1998 has encouraged investment customers to
consider the higher returns afforded by our newest product line,
or to consider the product offerings from USBANCORP Trust
Company. "One-stop" banking is the thrust behind the increasing
diversity in products and services. This convenience, combined
with ever improving access to each affiliate bank, is making
banking easier and more convenient.
USBANCORP Trust Company generated more than $4 million in fee
income in 1998, which is a 10% increase above 1997. This
represents the fifth consecutive year in which the Trust Company
has achieved this type of growth. To continue to grow the
significant contributions to fee income generated from the 401(k)
pension and profit sharing programs, the Trust Company has
expanded the investment options available to 401(k) program
participants. Through the Pathroad Lifestyle Alternative account,
401(k) participants will select from 19 investment options in
1999. The increased variety of investment options positions the
401(k) product to effectively compete with larger pension
programs, and contributes to management's confidence in the
future success of USBANCORP Trust's retirement investment product
line. The success of the ERECT Fund has led to the introduction
of ERECT Fund II - Equity, which further diversifies and expands
the trust product line and fees generated. The original ERECT
Fund manages union pension funds and provides construction and
long-term mortgage financing for approved projects. ERECT Fund
II - Equity diversifies the investment portfolio of Taft-Hartley
pension plans by utilizing equity investments in real estate. The
combined ERECT Fund has increased in 1998 to more than $72
million in assets under management, an increase of 14% over 1997.
The retail delivery system was further enhanced in 1998 with the
formation of UBAN Mortgage Company. The mortgage operations at
affiliate banks are now centrally consolidated in Greensburg, PA.
The completed mortgage consolidation accounted for a $100,000
savings in system equipment expense, salaries, and other
efficiencies gained by joining the two operations. Mortgage loan
originators, armed with laptop computers which are "online" with
credit scoring software, are able to minimize the time between
application and notification of approval. In addition to
improving the mortgage delivery channels with UBAN Mortgage
Company, customers are benefitting from the emphasis on timely
loan approval and closings for residential mortgage loan
applications.
6
Standard Mortgage Corporation of Georgia, USBANCORP's mortgage
banking affiliate, exceeded $450 million in loan production, or a
78% increase over the production level achieved in 1997. Standard
Mortgage has benefitted from sales opportunities in the
economically robust suburban Atlanta market area. In addition to
increasing new loan production, Standard Mortgage seized the
initiative to promote refinancings to current customers and to
minimize the run-off of mortgage accounts during the year. This
increased revenue from loan sale gains helped partially mitigate
the negative impact of the increased amortization on mortgage
servicing rights.
The VISA Check Card product, first introduced by Three Rivers
Bank in 1997, and during the third quarter 1998 at U.S. Bank, has
generated more than $100,000 in fee income for the year. We
expect the VISA Check Card product to continue to gain in
popularity, with a growth to $200,000 in fee income by year end
1999. The Three Rivers Bank Freedom Checking Account, which
offers more flexibility than a standard checking account, was
introduced during the second quarter of 1998. Total deposit
balances in the new account exceeded $300,000 by year's end.
The Bank Mobile, the area's first full service bank-on-wheels,
underscored USBANCORP's strategic plan to bring the bank to more
customers in 1998. The Bank Mobile expanded the availability of
banking services into locations not normally serviced by a bank,
and extended the convenience of permanent branch offices by
coordinating stops during peak business times, or by providing
extended banking hours.
EXPANDING THE TIME AND PLACE OF PRODUCT DELIVERY
The USBANCORP Strategic Plan emphasizes customer convenience,
along with a diversified line of products, as key components to
becoming the primary "financial service provider of choice" for
more customers. The Three Rivers Bank Call Center "which receives
all inbound telephone calls and generates outbound telemarketing
" has proven to be a success in delivering convenience and
improving sales. The Call Center was in operation for the first
full year in 1998, and the service handled more than 55,000
inbound calls during the year. Call Center outbound telemarketing
generated more than $6 million in consumer loans, surpassing the
Center's 1998 goal by more than $1 million. Affiliate U.S. Bank
will introduce their own Call Center during the first quarter,
1999.
Customers have access to their USBANCORP bank 24-hours a day, 365
days a year. They can apply for a loan, review account balances
or print out a listing of their up-to-the-minute checking
transactions right from their home. TellerPhone Banking, the
24-hour automated telephone banking service, has proven
enormously popular. More than 1 million transactions were
serviced by TellerPhone as a result of more than 360,000 inbound
calls at both banking affiliates. TellerPhone can be accessed
with a home personal computer and a modem through the PC
TellerPhone system. For 1998, USBANCORP continued to deliver
"High Touch, Medium Tech" service by emphasizing face-to-face
customer interaction, with the gradual introduction of new
technologies such as TellerPhone and PC TellerPhone.
The positive customer response to telephone banking convenience
started with the success of the Loan Patrol "loan-by-phone"
initiative. The 24-hour access, combined with the convenience of
banking from the home and the promise of home delivery, has
contributed to improved direct consumer loan volumes. A Loan
Store operation in Greensburg, and a scaled-down Loan Store
operation in State College, have made significant contributions
to your Company's growing commercial loan portfolio in 1998. Loan
Stores deliver loans to markets identified as growth areas, and
the expanded USBANCORP presence on a limited scale has proven
successful in achieving market penetration in a profitable
manner.
7
THE PARTNERSHIP FOR SUCCESS
Your management team continues to reinforce the "partnership for
success" among shareholders, customers, community and our
employees. The cycle continued in 1998 as we were able to
distribute $39 million back to our shareholders through our
treasury stock buyback program and common dividend payments.
Customers are responding to a diversified product line, accessed
through alternative delivery methods which make banking more
convenient. Affiliate bank communities have benefitted from our
efforts in 1998. U.S. Bank continues to support the largest
annual community event in Cambria County, the Johnstown Folkfest.
U.S. Bank has been the primary corporate sponsor for the event
for the last three years. The event has boosted community tourism
by attracting more than 120,000 people in 1998. U.S. Bank
provides 130 employee-volunteers to assist in the three day Labor
Day weekend festivities. Three Rivers Bank employees volunteered
to help lead more than 60 community organizations from director,
officer and chairperson leadership positions. In total, USBANCORP
employees have donated more than 11,000 hours of community
service among 450 organizations. I personally serve on the Board
of Directors for the Federal Home Loan Bank in Pittsburgh, among
other community leadership positions.
Transitioning your company from the bank of choice to the
financial services provider of choice is creating value for
employees. During the year emphasis was placed on training which
supports the expansion of USBANCORP's core banking business, and
provides a thorough understanding of the alternative delivery
systems which brings added convenience to the customer. In 1998,
Three Rivers Bank provided Retail Banking customer service
representatives and branch managers with the opportunity to
become licensed to sell fixed annuity products. Twelve
individuals successfully completed more than 30 hours of training
and preparation before receiving their Pennsylvania sales
license. The result is a flatter organizational structure which
puts sales decisions closer to the customer. The on-site sales
force for the new mutual fund, annuity and insurance products
will further enhance the stated initiatives to bring a
diversified product line to the customer.
Year 2000 computer hardware and software preparations are
proceeding on schedule. Our current estimate of the total cost to
achieve Year 2000 compliance is $1.4 million. USBANCORP has
implemented an aggressive communication program with our
customers to alleviate any doubts they may have concerning the
Year 2000 issue's affect on our systems - and on the systems
utilized by our vendors - and to further position your company as
a community resource for finding solutions and information on the
world-wide problem. Your Company's technology professionals
conducted bank-sponsored community seminars, business seminars,
and disseminated valuable Year 2000 information through newspaper
columns and television news programs. These proactive steps are
earning your Company a leadership role in the communities they
serve, and further position USBANCORP affiliate banks as valuable
community resources.
We approach the new millennium with an enhanced core banking
business, a diverse product line, and a commitment to further our
customer service advantage. It is our intent to aggressively
pursue strategies which will improve our value to our
shareholders, customers, employees and our communities.
8
CHALLENGES AND GOALS FOR 1999
Increase Return On Equity (ROE) to above 15% through continued
growth and diversification of revenue streams.
Increase our asset base through acquisitions where prudent. Our
focus in acquisition efforts will continue to be timeliness of
earnings accretion and increasing market share within the markets
we presently serve as well as contiguous counties in western
Pennsylvania.
Continue to service the stakeholders in the "partnership for
success" with nationally proven methods and technologies.
Expand the time, place and method of sales and service delivery
while employing "high touch, medium technology" strategies.
Maintain effective systems and processes for customer feedback.
Create career satisfaction and a mutually-beneficial working
environment for our employees which fosters the flattening of the
organization and promotes accountability to our corporate goals
at all levels of the organization.
We recognize that the challenges which accompany these goals will
require a diligent commitment to our long-term strategic plans. I
remain cautiously optimistic that 1999 will continue to show the
wisdom of our direction.
In conclusion, I want to thank our dedicated employees and
directors for their tireless efforts and you, our shareholders,
for your continued support.
/s/Terry K. Dunkle
Terry K. Dunkle
Chairman, President & CEO
USBANCORP, Inc.
9
SERVICE AREA MAP
Presented on this page was a map depicting the six counties
serviced by USBANCORP, Inc..
10
USBANCORP, INC.
FINANCIAL STATEMENTS
11
This page left intentially blank
12
CONSOLIDATED BALANCE SHEET
At December 31 1998 1997
ASSETS (In thousands)
Cash and due from banks $ 35,085 $ 38,056
Interest bearing deposits with banks 3,855 163
Investment securities:
Available for sale 661,491 580,115
Held to maturity (market value $516,452 on
December 31, 1998, and $545,194 on December 31, 1997) 508,142 536,608
Loans held for sale 51,317 13,163
Loans 1,020,280 981,739
Less: Unearned income 5,276 5,327
Allowance for loan losses 10,725 12,113
Net loans 1,004,279 964,299
Premises and equipment 18,020 17,630
Accrued income receivable 17,150 17,317
Mortgage servicing rights 16,197 14,960
Goodwill and core deposit intangibles 18,697 19,122
Bank owned life insurance 35,622 33,979
Other assets 7,226 3,698
TOTAL ASSETS $2,377,081 $2,239,110
LIABILITIES
Non-interest bearing deposits $ 166,701 $ 146,685
Interest bearing deposits 1,009,590 992,842
Total deposits 1,176,291 1,139,527
Federal funds purchased and securities sold under
agreements to repurchase 101,405 92,829
Other short-term borrowings 129,003 57,892
Advances from Federal Home Loan Bank 752,391 754,195
Guaranteed junior subordinated deferrable interest debentures 34,500 -
Long-term debt 9,271 8,140
Total borrowed funds 1,026,570 913,056
Other liabilities 32,550 28,347
TOTAL LIABILITIES 2,235,411 2,080,930
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, 1998, and 1997 - -
Common stock, par value $2.50 per share; 24,000,000 shares
authorized; 17,350,136 shares issued and 13,512,317
outstanding on December 31, 1998; 17,282,028 shares issued
and 14,681,154 shares outstanding on December 31, 1997 43,375 14,402
Treasury stock at cost, 3,837,819 shares on December 31, 1998,
and 2,600,874 shares on December 31, 1997 (61,521) (31,175)
Surplus 65,495 93,934
Retained earnings 91,737 78,866
Accumulated other comprehensive income 2,584 2,153
TOTAL STOCKHOLDERS' EQUITY 141,670 158,180
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,377,081 $2,239,110
All share data has been adjusted to reflect a 3 for 1 stock
split effected in the form of a 200% stock dividend that was
distributed on July 31, 1998, to shareholders of record on July 16, 1998.
See accompanying notes to consolidated financial statements.
13
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31 1998 1997 1996
INTEREST INCOME (In thousands, except per share data)
Interest and fees on loans:
Taxable $ 84,510 $ 81,105 $ 72,873
Tax exempt 2,469 2,400 1,560
Deposits with banks 120 190 132
Federal funds sold and securities purchased
under agreements to resell 2 2 36
Investment securities:
Available for sale 38,139 31,769 29,025
Held to maturity 33,718 39,322 33,707
Total Interest Income 158,958 154,788 137,333
INTEREST EXPENSE
Deposits 40,891 42,572 42,060
Federal funds purchased and securities
sold under agreements to repurchase 4,603 5,060 3,888
Other short-term borrowings 5,303 3,123 3,706
Advances from Federal Home Loan Bank 40,483 36,648 25,952
Guaranteed junior subordinated deferrable interest debentures 1,944 - -
Long-term debt 504 526 589
Total Interest Expense 93,728 87,929 76,195
NET INTEREST INCOME 65,230 66,859 61,138
Provision for loan losses 600 158 90
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 64,630 66,701 61,048
NON-INTEREST INCOME
Trust fees 4,430 4,022 3,708
Net gains on loans held for sale 3,697 2,008 1,060
Net realized gains on investment securities 2,267 792 638
Wholesale cash processing fees 706 976 1,085
Service charges on deposit accounts 3,409 3,323 3,264
Net mortgage servicing fees 692 2,104 2,312
Bank owned life insurance 1,643 1,644 1,574
Other income 6,845 5,334 5,048
Total Non-Interest Income 23,689 20,203 18,689
NON-INTEREST EXPENSE
Salaries and employee benefits 30,427 28,197 25,483
Net occupancy expense 4,474 4,431 4,463
Equipment expense 3,637 3,260 3,111
Professional fees 3,373 2,928 2,770
Supplies, postage, and freight 2,674 2,766 2,693
Miscellaneous taxes and insurance 1,568 1,483 1,418
FDIC deposit insurance expense 272 119 2,561
Amortization of goodwill and core deposit intangibles 2,308 2,356 2,360
Impairment charge for mortgage servicing rights 831 - -
Other expense 9,956 8,564 7,615
Total Non-Interest Expense 59,520 54,104 52,474
INCOME BEFORE INCOME TAXES 28,799 32,800 27,263
Provision for income taxes 7,655 9,303 7,244
NET INCOME $ 21,144 $ 23,497 $ 20,019
PER COMMON SHARE DATA:
Basic:
Net income $ 1.51 $ 1.56 $ 1.28
Average number of shares outstanding 14,011,893 15,043,128 15,586,092
Diluted:
Net income $ 1.48 $ 1.54 $ 1.28
Average number of shares outstanding 14,257,557 15,274,272 15,694,761
Cash dividends declared $ 0.60 $ 0.53 $ 0.46
All per share and share data have been adjusted to reflect a
3 for 1 stock split effected in the form of a 200% stock dividend
that was distributed on July 31, 1998, to shareholders of record
on July 16, 1998.
See accompanying notes to consolidated financial statements.
14
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended December 31 1998 1997 1996
COMPREHENSIVE INCOME (In thousands)
Net income $21,144 $23,497 $20,019
Other comprehensive income, before tax:
Unrealized holding gains (losses) arising
during period 2,426 3,633 (4,204)
Less: reclassification adjustment for
gains included in net income, net of tax (1,664) (567) (468)
Other comprehensive income (loss), before tax: 762 3,066 (4,672)
Income tax expense (credit) related to items
of other comprehensive income 331 1,127 (1,483)
Other comprehensive income (loss), net of tax 431 1,939 (3,189)
Comprehensive income $21,575 $25,436 $16,830
15
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other
Preferred Common Treasury Retained Comprehensive
Stock Stock Stock Surplus Earnings Income Total
(In thousands)
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
Other comprehensive loss,
net of tax - - - - - (3,189) (3,189)
Cash dividends declared:
Common stock ($0.46 per
share ) - - - - (7,062) - (7,062)
Treasury stock, 714,144
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
Other comprehensive income,
net of tax - - - - - 1,939 1,939
Cash dividends declared:
Common stock ($0.53 per
share ) - - - - (7,989) - (7,989)
Treasury stock, 617,094
shares at cost - - (11,637) - - - (11,637)
Balance at December 31, 1997 - 14,402 (31,175) 93,934 78,866 2,153 158,180
1998
Net income for the year 1998 - - - - 21,144 - 21,144
Stock options exercised - 75 - 459 - - 534
Other comprehensive income,
net of tax - - - - - 431 431
Effect of 3 for 1 stock split in
the form of a 200% stock
dividend - 28,898 - (28,898) - - -
Cash dividends declared:
Common stock ($0.60 per
share ) - - - - (8,273) - (8,273)
Treasury stock, 1,236,945
shares at cost - - (30,346) - - - (30,346)
Balance at December 31, 1998 $ - $43,375 $(61,521) $65,495 $91,737 $ 2,584 $141,670
See accompanying notes to consolidated financial statements.
16
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31 1998 1997 1996
OPERATING ACTIVITIES (In thousands)
Net income $ 21,144 $ 23,497 $ 20,019
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600 158 90
Depreciation and amortization expense 2,483 2,430 2,564
Amortization expense of goodwill and
core deposit intangibles 2,308 2,356 2,360
Amortization expense of mortgage
servicing rights 2,861 1,806 1,249
Net amortization of investment securities 1,038 218 182
Net realized gains on investment securities (2,267) (792) (638)
Net realized gains on loans held for sale (3,697) (2,008) (1,060)
Origination of mortgage loans held for sale (450,639) (260,984) (191,299)
Sales of mortgage loans held for sale 414,023 258,261 196,238
Decrease (increase) in accrued income receivable 167 45 (610)
Increase (decrease) in accrued expense payable (262) 1,385 397
Net cash (used) provided by operating activities (12,241) 26,372 29,492
INVESTING ACTIVITIES
Purchase of investment securities
and other short-term investments (819,080) (686,087) (633,641)
Proceeds from maturities of investment securities
and other short-term investments 257,073 164,721 128,973
Proceeds from sales of investment securities
and other short-term investments 509,383 414,682 389,068
Long-term loans originated (336,815) (322,491) (333,343)
Loans held for sale (51,317) (13,163) (14,809)
Principal collected on long-term loans 347,180 288,669 240,679
Loans purchased or participated - (2) (1,614)
Loans sold or participated 44 234 663
Net decrease (increase) in credit card receivables
and other short-term loans 2,487 261 (2,222)
Purchases of premises and equipment (2,947) (1,913) (2,227)
Sale/retirement of premises and equipment 74 54 49
Net decrease in assets held in trust for
collateralized mortgage obligation 1,424 992 1,840
Increase in mortgage servicing rights (4,098) (4,272) (2,371)
Net (increase) decrease in other assets (5,775) 583 (817)
Net cash used by investing activities $ (102,367) $(157,732) $ (229,772)
(continued on next page)
See accompanying notes to consolidated financial statements.
17
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Year ended December 31 1998 1997 1996
FINANCING ACTIVITIES (In thousands)
Proceeds from sales of certificates of deposit $ 483,384 $ 270,064 $ 248,589
Payments for maturing certificates of deposit (471,829) (258,653) (272,838)
Net increase (decrease) in demand and savings deposits 25,209 (10,622) (14,871)
Net increase (decrease) in federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings 81,382 (5,931) 59,527
Net principal (repayments) borrowings on advances
from Federal Home Loan Bank (1,804) 148,696 177,282
Principal borrowings of long-term debt 11,123 5,068 -
Repayments of long-term debt (11,687) (4,879) (889)
Common stock dividends paid (8,688) (9,305) (4,522)
Guaranteed junior subordinated deferrable interest
debenture dividends paid (1,944) - -
Proceeds from sale of guaranteed junior subordinated
deferrable interest debentures, net of expenses 33,172 - -
Proceeds from dividend reinvestment and
stock purchase plan and stock options exercised 534 453 188
Purchases of treasury stock (30,346) (11,637) (8,531)
Net increase in other liabilities 6,823 1,924 578
Net cash provided by financing activities 115,329 125,178 184,513
NET INCREASE (DECREASE) IN
CASH EQUIVALENTS 721 (6,182) (15,767)
CASH EQUIVALENTS AT JANUARY 1 38,219 44,401 60,168
CASH EQUIVALENTS AT DECEMBER 31 $ 38,940 $ 38,219 $ 44,401
See accompanying notes to consolidated financial statements.
18
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 45 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.
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, U.S. Bank ("U.S.
Bank"), Three Rivers Bank and Trust Company ("Three Rivers
Bank"), including its principal subsidiary, Standard Mortgage
Corporation of Georgia, USBANCORP Trust Company ("Trust
Company"), United Bancorp Life Insurance Company ("United Life"),
and UBAN Associates, Inc. Intercompany accounts and transactions
have been eliminated in preparing the consolidated financial
statements. The preparation of financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and
accompanying notes. Actual results may differ from these
estimates.
Investment Securities:
Securities are classified at the time of purchase as investment
securities held to maturity if it is management's intent and the
Company has the ability to hold the securities until maturity.
These held to maturity securities are carried on the Company's
books at cost, adjusted for amortization of premium and accretion
of discount which is computed using the level yield method which
approximates the effective interest method.
Alternatively, securities are classified as available for sale if
it is management's intent at the time of purchase to hold the
securities for an indefinite period of time and/or to use the
securities as part of the Company's asset/liability management
strategy. Securities classified as available for sale include
securities which may be sold to effectively manage interest rate
risk exposure, prepayment risk, and other factors (such as
liquidity requirements). These available for sale securities are
reported at fair value with unrealized aggregate appreciation
(depreciation) excluded from income and credited (charged) to a
separate component of shareholders' equity on a net of tax basis.
Any security classified as trading assets are reported at fair
value with unrealized aggregate appreciation (depreciation)
included in current income on a net of tax basis. The Company
presently does not engage in trading activity.
Realized gain or loss on securities sold was computed upon the
adjusted cost of the specific securities sold.
Loans:
Interest income is recognized using methods which approximate a
level yield related to principal amounts outstanding. The
Company's subsidiaries discontinue the accrual of interest income
when loans, except for loans that are insured for credit loss,
become 90 days past due in either principal or interest. In
addition, if circumstances warrant, the accrual of interest may
be discontinued prior to 90 days. In all cases, payments received
on non-accrual loans are credited to principal until full
recovery of principal has been recognized; it is only after full
recovery of principal that any additional payments received are
recognized as interest income. The only exception to this policy
is for residential mortgage loans wherein interest income is
recognized on a cash basis as payments are received. A
non-accrual loan is placed on accrual status after becoming
current and remaining current for twelve consecutive payments
(except for residential mortgage loans which only have to become
current).
Loan Fees:
Loan origination and commitment fees, net of associated direct
costs, are deferred and amortized into interest and fees on loans
over the loan or commitment period. Fee amortization is
determined by either the straight-line method, or the effective
interest method, which do not differ materially.
Mortgage Loans Held For Sale:
Newly originated fixed-rate residential mortgage loans are
classified as "held for sale," if it is management's intent to
sell these residential mortgage loans. The residential mortgage
loans held for sale are carried at the lower of aggregate cost or
market value.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is charged to
operations over the estimated useful lives of the premises and
equipment using the straight-line method. Useful lives of up to
45 years for buildings and up to 12 years for equipment are
utilized. Leasehold improvements are amortized using the
straight-line method over the terms of the respective leases or
useful lives of the improvements, whichever is shorter.
Maintenance, repairs, and minor alterations are charged to
current operations as expenditures are incurred.
Allowance for Loan Losses and Charge-off Procedures:
As a financial institution which assumes lending and credit risks
as a principal element of its business, the Company anticipates
that credit losses will be experienced in the normal course of
business. Accordingly, the Company consistently applies a
comprehensive methodology and procedural discipline which is
updated on a quarterly basis at the subsidiary bank level to
determine both the adequacy of the allowance for loan losses and
the necessary provision for loan losses to be charged against
earnings. This methodology includes:
19
A detailed review of all criticized and impaired loans to
determine if any specific reserve allocations are required on an
individual loan basis. The specific reserve established for these
criticized and impaired loans is based on careful analysis of the
loan's performance, the related collateral value, cash flow
considerations and the financial capability of any guarantor.
The application of formula driven reserve allocations for all
commercial and commercial real-estate loans are calculated by
using a three year migration analysis of net losses incurred
within each risk grade for the entire commercial loan portfolio.
The difference between estimated and actual losses is reconciled
through the dynamic nature of the migration analysis.
The application of formula driven reserve allocations to
installment and mortgage loans which are based upon historical
charge-off experience for those loan types. The residential
mortgage loan allocation is based upon the Company's five year
historical average of actual loan charge-offs experienced in that
category. The same methodology is used to determine the
allocation for consumer loans except the allocation is based upon
an average of the most recent actual three year historical
charge-off experience for consumer loans.
The application of formula driven reserve allocations to all
outstanding loans and certain unfunded commitments is based upon
review of historical losses and qualitative factors, which
include but are not limited to, economic trends, delinquencies,
concentrations of credit, trends in loan volume, experience and
depth of management, examination and audit results, effects of
any changes in lending policies and trends in policy exceptions.
The maintenance of a general unallocated reserve in order to
provide conservative positioning based on an assessment of the
regional economy and to provide protection against credit risks
resulting from other external factors such as the continued
growth of the loan portfolio. It must be emphasized that a
general unallocated reserve 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 recognizes as assets the rights to service mortgage
loans for others whether the servicing rights are acquired
through purchases or originations. Purchased mortgage servicing
rights are capitalized at cost. For loans originated and sold
where servicing rights have been retained, the Company allocates
the cost of originating the loan to the loan (without the
servicing rights) and the servicing rights retained based on
their relative fair market values if it is practicable to
estimate those fair values. Where it is not practicable to
estimate the fair values, the entire cost of originating the loan
is allocated to the loan without the servicing rights. For
purposes of evaluating and measuring impairment, the Company
stratifies the rights based on risk characteristics. If the
discounted projected net cash flows of a stratum are less than
the carrying amount of the stratum, the stratum is written down
to the amount of the discounted projected net cash flows through
a valuation account. This writedown is recorded in the line item
on the Consolidated Statement of Income titled "Impairment charge
for mortgage servicing rights". The Company has determined that
the predominant risk characteristics of its portfolio are loan
type and interest rate. For the purposes of evaluating
impairment, the Company has stratified its portfolio in 200 basis
point tranches by loan type. Mortgage servicing rights are
amortized in proportion to, and over the period of, estimated net
servicing income. The value of mortgage servicing rights is
subject to interest rate and prepayment risk. It is likely that
the value of these assets will decrease if prepayments occur at
greater than the expected rate.
Trust Fees:
All trust fees are recorded on the cash basis which approximates
the accrual basis for such income.
20
Earnings Per Common Share:
Basic earnings per share includes only the weighted average
common shares outstanding. Diluted earnings per share includes
the weighted average common shares outstanding and any dilutive
common stock equivalent shares in the calculation. Treasury
shares are treated as retired for earnings per share purposes.
Comprehensive Income:
In January 1998, the Company adopted SFAS #130, "Reporting
Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income and its components in a
financial statement. For the Company, comprehensive income
includes net income and unrealized holding gains and losses from
available for sale investment securities. The balances of other
accumulated comprehensive income were $2,584,000, $2,153,000 and
$214,000 at December 31, 1998, 1997 and 1996, respectively.
Consolidated Statement of Cash Flows:
On a consolidated basis, cash equivalents include cash and due
from banks, interest bearing deposits with banks, and federal
funds sold and securities purchased under agreements to resell.
For the Parent Company, cash equivalents also include short-term
investments. The Company made $6,695,000 in income tax payments
in 1998; $7,783,000 in 1997; and $4,870,000 in 1996. The Company
made total interest expense payments of $93,990,000 in 1998;
$86,544,000 in 1997; and $75,798,000 in 1996.
Income Taxes:
Deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax bases
of assets and liabilities using the enacted marginal tax rate.
Deferred income tax expenses or credits are based on the changes
in the asset or liability from period to period.
Interest Rate Contracts:
The Company uses various interest rate contracts, such as
interest rate swaps, caps and floors, to help manage interest
rate and market valuation risk exposure, which is incurred in
normal recurrent banking activities. These interest rate
contracts function as hedges against specific assets or
liabilities on the Consolidated Balance Sheet. Unrealized gains
or losses on these hedge transactions are deferred. It is the
Company's policy not to terminate hedge transactions prior to
expiration date.
For interest rate swaps, the interest differential to be paid or
received is accrued by the Company and recognized as an
adjustment to interest income or interest expense of the
underlying assets or liabilities being hedged. Because only
interest payments are exchanged, the cash requirement and
exposure to credit risk are significantly less than the notional
amount.
Any premium or transaction fee incurred to purchase interest rate
caps or floors is deferred and amortized to interest income or
interest expense over the term of the contract. Unamortized
premiums related to the purchase of caps and floors are included
in "Other assets" on the Consolidated Balance Sheet.
Risk Management Overview:
Risk identification and management are essential elements for the
successful management of the Company. In the normal course of
business, the Company is subject to various types of risk,
including interest rate, credit, and liquidity risk. The Company
controls and monitors these risks with policies, procedures, and
various levels of managerial and Board oversight. The Company's
objective is to optimize profitability while managing and
controlling risk within Board approved policy limits.
Interest rate risk is the sensitivity of net interest income and
the market value of financial instruments to the magnitude,
direction, and frequency of changes in interest rates. Interest
rate risk results from various repricing frequencies and the
maturity structure of assets, liabilities, and off-balance sheet
positions. The Company uses its asset liability management policy
and hedging policy to control and manage interest rate risk.
Credit risk represents the possibility that a customer may not
perform in accordance with contractual terms. Credit risk results
from extending credit to customers, purchasing securities, and
entering into certain off-balance sheet financial instruments.
The Company's primary credit risk occurs in the loan portfolio.
The Company uses its credit policy and disciplined approach to
evaluating the adequacy of the allowance for loan losses to
control and manage credit risk. The Company's investment policy
and hedging policy strictly limit the amount of credit risk that
may be assumed in the investment portfolio and through
off-balance sheet activities.
Liquidity risk represents the inability to generate cash or
otherwise obtain funds at reasonable rates to satisfy commitments
to borrowers, as well as, the obligations to depositors and
debtholders. The Company uses its asset liability management
policy and contingency funding plan to control and manage
liquidity risk
Future Accounting Standards:
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement #133, "Accounting for Derivative Instruments and
Hedging Activities"("SFAS #133"), which is required to be adopted
in years beginning after June 15, 1999. The statement permits
early adoption as of the beginning of any fiscal quarter after
its issuance. The statement will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through
income. If a derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of the derivative will
either be offset against the change in fair value of the hedged
asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portions of a
derivative's change in fair value will be immediately recognized
in earnings. The Company has not yet quantified the impact of
adopting SFAS #133 on its financial statements and has not
determined the timing of, or method of adoption of SFAS #133.
However, SFAS #133 could increase volatility in earnings and
other comprehensive income.
21
2. CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 1998, and 1997, included
$17,288,000 and $12,663,000, 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 1998 1997
(In thousands)
Total $ 3,855 $ 163
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, 1998 Value Gains Losses Value
(In thousands)
U.S. Treasury $ 442 $ 14 $ - $ 456
U.S. Agency 21,524 82 - 21,606
State and municipal 11,166 162 - 11,328
U.S. Agency
mortgage-backed
securities 577,241 4,119 (673) 580,687
Other securities(f1) 47,409 5 - 47,414
Total $657,782 $ 4,382 $ (673) $661,491
Investment securities held to maturity:
Gross Gross
Book Unrealized Unrealized Market
At December 31, 1998 Value Gains Losses Value
(In thousands)
U.S. Treasury $ 17,207 $ 86 $ (33) $ 17,260
U.S. Agency 23,928 371 - 24,299
State and municipal 147,628 2,816 (1,174) 149,270
U.S. Agency
mortgage-backed
securities 315,171 6,316 (196) 321,291
Other securities(f1) 4,208 124 - 4,332
Total $508,142 $9,713 $(1,403) $516,452
(f1) 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, 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(f1) 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 385,092 6,355 (681) 390,766
Other securities(f1) 2,951 144 - 3,095
Total $536,608 $9,309 $ (723) $545,194
(f1) Other investment securities include corporate notes and bonds,
asset-backed securities, and equity securities.
All purchased investment securities are recorded on settlement
date which is not materially different from the trade date.
Realized gains and losses are calculated by the specific
identification method.
Maintaining investment quality is a primary objective of the
Company's investment policy which, subject to certain limited
exceptions, prohibits the purchase of any investment security
below a Moody's Investors Service or Standard & Poor's rating of
"A." At December 31, 1998, 98.1% of the portfolio was rated "AAA"
as compared to 98.8% at December 31, 1997. Less than 1.0% of the
portfolio was rated below "A" or unrated on December 31, 1998.
The book value of securities pledged to secure public and trust
deposits, as required by law, was $628,369,000 at December 31,
1998, and $337,797,000 at December 31, 1997. The Company realized
$2,745,000 and $1,816,000 of gross investment security gains and
$478,000 and $1,024,000 of gross investment security losses on
available for sale securities in 1998 and 1997, respectively.
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, 1998. 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, 1998, the
Company's consolidated investment securities portfolio had a
modified duration of approximately 3.28 years.
22
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, 1998 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(In thousands, except yields)
Book Value
U.S. Treasury $ 243 6.38% $ 199 5.50% $ - -% $ - -% $ 442 5.98%
U.S. Agency - - 499 6.17 21,025 6.61 - - 21,524 6.60
State and municipal 400 5.54 - - 9,800 5.81 966 5.13 11,166 5.74
U.S. Agency mortgage-
backed securities 2,207 6.24 196,852 6.59 155,480 6.30 222,702 6.55 577,241 6.50
Other securities 46,000 5.97 - - - - 1,409 6.51 47,409 5.99
Total investment
securities available
for sale $ 48,850 5.98% $197,550 6.59% $186,305 6.31% $225,077 6.54% $657,782 6.45%
Market Value
U.S. Treasury $ 250 $ 206 $ - $ - $ 456
U.S. Agency - 503 21,103 - 21,606
State and municipal 406 - 9,947 975 11,328
U.S. Agency mortgage-
backed securities 2,233 199,031 155,997 223,426 580,687
Other securities 46,000 - - 1,414 47,414
Total investment
securities available
for sale $ 48,889 $199,740 $187,047 $225,815 $661,491
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, 1998 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(In thousands, except yields)
Book Value
U.S. Treasury $ 11,518 5.60% $ 5,689 4.40% $ - -% $ - -% $ 17,207 5.20%
U.S. Agency - - - - 23,928 6.56 - - 23,928 5.56
State and municipal 245 4.25 30,963 4.77 35,915 5.54 80,505 4.94 147,628 5.05
U.S. Agency mortgage
backed securities 17,267 6.35 199,623 7.23 48,763 7.00 49,518 6.76 315,171 7.07
Other securities 1,040 5.65 1,275 6.98 1,893 6.62 - - 4,208 6.49
Total investment
securities held
to maturity $ 30,070 6.02% $237,550 6.84% $110,499 6.42% $130,023 5.63% $508,142 6.39%
Market Value
U.S. Treasury $ 11,590 $ 5,670 $ - $ - $ 17,260
U.S. Agency - - 24,299 - 24,299
State and municipal 247 31,278 36,880 80,865 149,270
U.S. Agency mortgage-
backed securities 17,355 204,380 49,769 49,787 321,291
Other securities 1,143 1,275 1,914 - 4,332
Total investment
securities held
to maturity $ 30,335 $242,603 $112,862 $130,652 $516,452
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 1998 1997
(In thousands)
Commercial $ 139,751 $143,113
Commercial loans secured by
real estate 341,842 302,620
Real estate-mortgage 449,875 440,734
Consumer 88,812 95,272
Loans 1,020,280 981,739
Less: Unearned income 5,276 5,327
Loans, net of unearned income $1,015,004 $976,412
Real estate construction loans were not material at these
presented dates and comprised 4.9% and 2.3% of total loans net of
unearned income at December 31, 1998 and 1997, respectively. The
Company has no direct credit exposure to foreign countries. Most
of the Company's loan activity is with customers located in the
southwestern Pennsylvania geographic area. As of December 31,
1998, 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
$2,285,000 and $2,014,000 at December 31, 1998 and 1997,
respectively. An analysis of these related party loans follows:
Year ended December 31 1998 1997
(In thousands)
Balance January 1 $ 2,014 $ 8,105
New loans 2,720 12,604
Payments (2,449) (18,695)
Balance December 31 $ 2,285 $ 2,014
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses
follows:
Year ended December 31 1998 1997 1996
(In thousands)
Balance January 1 $12,113 $13,329 $14,914
Provision for loan losses 600 158 90
Recoveries on loans
previously charged-off 530 1,123 932
Loans charged-off (2,518) (2,497) (2,607)
Balance December 31 $10,725 $12,113 $13,329
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).
24
The following table presents information concerning
non-performing assets:
At December 31 1998 1997 1996 1995 1994
(In thousands, except percentages)
Non-accrual loans $5,206 $6,450 $6,365 $7,517 $5,446
Loans past due 90 days or more 1,579 1,601 2,043 995 1,357
Other real estate owned 1,451 807 263 914 1,098
Total non-performing assets $8,236 $8,858 $8,671 $9,426 $7,901
Total non-performing assets
as a percent of loans and
loans held for sale,
net of unearned income,
and other real estate owned 0.77% 0.89% 0.92% 1.13% 0.91%
The Company is unaware of any additional loans which are required
to either be charged-off or added to the non-performing asset
totals disclosed above. Other real estate owned is recorded at
the lower of 1) fair value minus estimated costs to sell, or 2)
carrying cost.
For impaired loans, the measurement of impairment may be based
upon: 1) the present value of expected future cash flows
discounted at the loan's effective interest rate; 2) the
observable market price of the impaired loan; or 3) the fair
value of the collateral of a collateral dependent loan.
The Company had loans totalling $1,759,000 and $1,012,000 being
specifically identified as impaired and a corresponding
allocation reserve of $375,000 and $650,000 at December 31, 1998
and 1997, respectively. The average outstanding balance for loans
being specifically identified as impaired was $1,519,000 for 1998
and $1,715,000 for 1997. 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 1998
or 1997.
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 1998 1997 1996 1995 1994
(In thousands)
Interest income due
in accordance with
original terms $ 367 $ 472 $ 560 $ 601 $ 509
Interest income recorded (134) (132) (75) (648) (588)
Net reduction (increase)
in interest income $ 233 $ 340 $ 485 $ (47) $ (79)
8. PREMISES AND EQUIPMENT
An analysis of premises and equipment follows:
At December 31 1998 1997
(In thousands)
Land $ 2,131 $ 2,131
Premises 24,822 23,283
Furniture and equipment 20,429 19,123
Leasehold improvements 2,667 2,639
Total at cost 50,049 47,176
Less: Accumulated depreciation 32,029 29,546
Net book value $18,020 $17,630
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, 1998 Purchased Repurchase Borrowings
(In thousands, except rates)
Balance $ 63,705 $ 37,700 $129,003
Maximum indebtedness at
any month end 65,900 41,602 191,835
Average balance during year 51,112 39,224 98,988
Average rate paid for the year 5.51% 5.41% 4.84%
Average rate on period end balance 5.58 5.16 3.44
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
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 $53,603,000 outstanding
balance on a $60 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, 1999, 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 62 days at the end of 1998, 80
days at the end of 1997 and 124 days at the end of 1996.
10. DEPOSITS
The following table sets forth the balance of the Company's
deposits:
At December 31 1998 1997 1996
(In thousands)
Demand:
Non-interest bearing $ 166,701 $ 146,685 $ 144,314
Interest bearing 92,060 89,082 89,035
Savings 167,167 174,459 196,650
Money market 172,807 159,505 150,358
Certificates of deposit
in denominations of
$100,000 or more 39,443 37,651 36,886
Other time 538,113 532,145 521,495
Total deposits $1,176,291 $1,139,527 $1,138,738
Interest expense on deposits consisted of the following:
At December 31 1998 1997 1996
(In thousands)
Interest bearing demand $ 889 $ 891 $ 811
Savings 2,617 3,139 3,525
Money market 6,041 5,689 4,977
Certificates of deposit
in denominations of
$100,000 or more 2,323 2,312 2,074
Other time 29,021 30,541 30,673
Total interest expense $ 40,891 $ 42,572 $ 42,060
The following table sets forth the balance of other time deposits
maturing in the periods presented:
Year
(In thousands)
1999 $365,325
2000 85,549
2001 34,517
2002 11,722
2003 and after 41,000
26
11. ADVANCES FROM FEDERAL HOME LOAN BANK, Guaranteed Junior
SUBORDINATED Deferrable Interest debentures and long-term debt
Advances from the Federal Home Loan Bank:
Advances from the Federal Home Loan Bank consist of the
following:
At December 31, 1998
Weighted
Maturing Average Yield Balance
(In thousands)
1999 5.34% $ 221,260
2000 6.15 3,755
2001 8.22 10,126
2002 5.72 258,500
2003 5.11 218,750
2004 and after 4.66 40,000
Total advances $ 752,391
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
Total Federal Home Loan Bank borrowings consist of $532,391,000
and $564,195,000 of term advances and $220,000,000 and
$219,000,000 of repo plus advances with maturities of less than
90 days for 1998 and 1997, respectively.
All Federal Home Loan Bank stock, along with an interest in
unspecified mortgage loans and mortgage-backed securities, with
an aggregate statutory value equal to the amount of the advances,
have been pledged as collateral to the Federal Home Loan Bank of
Pittsburgh.
Guaranteed Junior Subordinated Deferrable Interest Debentures:
On April 28, 1998, the Company completed a $34.5 million public
offering of 8.45% Trust Preferred Securities, which represent
undivided beneficial interests in the assets of a recently formed
Delaware business trust, USBANCORP Capital Trust I. The Trust
Preferred Securities will mature on September 30, 2028, and are
callable at par at the option of the Company after September 30,
2003.
Proceeds of the issue were invested by USBANCORP Capital Trust I
in Junior Subordinated Debenures issued by USBANCORP, Inc. Net
proceeds from the $34.5 million offering were used for general
corporate purposes, including the repayment of debt, the
repurchase of USBANCORP common stock, and investments in and
advances to the Company's subsidiaries. Unamortized deferred
issuance costs associated with the Trust Preferred Securities
amounted to $1.3 million as of December 31, 1998, and are being
amortized on a straight line basis over the term of the issue.
The Trust Preferred securities are listed on NASDAQ under the
symbol "UBANP."
Under the occurrence of certain events, specifically a tax event
or a capital treatment event, the Company may redeem in whole,
but not in part, the Guaranteed Junior Subordinated Deferrable
Interest Debentures prior to September 30, 2028. A tax event
basically means that the interest paid by the Company on the
subordinated debentures will no longer be deductible for federal
income tax purposes. A capital treatment event means that the
Trust Preferred Securities no longer qualify as Tier 1 capital
for purposes of the capital adequacy guidelines of the Federal
Reserve. Proceeds from any redemption of the subordinated
debentures would cause mandatory redemption of the Trust
Preferred Securities.
Long-Term Debt:
The Company's long-term debt consisted of the following:
At December 31 1998 1997
(In thousands)
Bank note $6,563 $4,083
Collateralized mortgage obligation 2,511 3,779
Other 197 278
Total long-term debt $9,271 $8,140
The bank note payable by Standard Mortgage Corporation is a $7.5
million non-revolving commercial loan commitment which is payable
monthly in fixed principal installments of $156,250 through June
25, 2002. This note replaces all previous loans incurred by
Standard Mortgage Corporation of Georgia.
The collateralized mortgage obligation was issued through
Community First Capital Corporation ("CFCC"), a wholly-owned,
single-purpose finance subsidiary of Three Rivers Bank. In 1988,
Three Rivers Bank transferred Federal Home Loan Mortgage
Corporation ("FHLMC") securities with a book value of
approximately $31,500,000 to CFCC which then collateralized the
issuance of bonds with a par value of $27,787,000.
Scheduled maturities of long-term debt for the years subsequent
to December 31, 1998, are $2,011,000 in 1999; $1,934,000 in 2000;
$1,877,000 in 2001; $938,000 in 2002; and $2,511,000 in 2003 and
thereafter.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS #107, "Disclosures about Fair Value of Financial
Instruments," requires all entities to disclose the estimated
fair value of its financial instrument assets and liabilities.
For the Company, as for most financial institutions,
approximately 95% of its assets and liabilities are considered
financial instruments. Many of the Company's financial
instruments, however, lack an available trading market
characterized by a willing buyer and willing seller engaging in
an exchange transaction. Therefore, significant estimations and
present value calculations were used by the Company for the
purpose of this disclosure.
27
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,
1998 and 1997, were as follows:
Financial instruments actively traded in a secondary market
have been valued using quoted available market prices.
1998 1997
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
(In thousands)
Investment securities $1,185,563 $1,173,384 $1,128,803 $1,116,723
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.
1998 1997
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
(In thousands)
Deposits with stated
maturities $ 540,813 $ 577,556 $ 574,281 $ 569,795
Short-term borrowings 553,213 553,213 504,474 504,474
All other borrowings 473,563 473,357 410,304 408,582
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.
1998 1997
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
(In thousands)
Deposits with no
stated maturities $ 598,735 $ 598,735 $ 569,732 $ 569,732
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.
1998 1997
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
(In thousands)
Net loans (including
loans held for sale) $1,071,514 $1,066,321 $1,008,738 $989,575
Purchased and originated mortgage servicing rights have been
valued by an independent third party using a methodology which
incorporates a discounted after-tax cash flow of the servicing
(loan servicing fees and other related ancillary fee income less
the costs of servicing the loans). This valuation also assumes
current PSA prepayment speeds which are based upon industry data
collected on mortgage prepayment trends. For further discussion
see Note #1.
1998 1997
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
(In thousands)
Purchased and
originated mortgage
servicing rights $ 16,447 $ 16,197 $ 15,657 $ 14,960
Changes in assumptions or estimation methodologies may have a
material effect on these estimated fair values.
The Company's remaining assets and liabilities which are not
considered financial instruments have not been valued differently
than has been customary with historical cost accounting. No
disclosure of the relationship value of the Company's deposits is
required by SFAS #107, however, management believes the
relationship value of these core deposits is significant. Based
upon the Company's most recent acquisitions and other limited
secondary market transactions involving similar deposits,
management estimates the relationship value of these funding
liabilities to range between $82 million to $129 million less
than their estimated fair value shown at December 31, 1998. The
estimated fair value of off-balance sheet financial instruments,
used for hedging purposes, is estimated by obtaining quotes from
brokers. These values represent the estimated amount the Company
would receive or pay, to terminate the agreements, considering
current interest rates, as well as, the creditworthiness of the
counterparties. At December 31, 1998, 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 ($869,000). 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.
28
Management believes that reasonable comparability of these
disclosed fair values between financial institutions may not be
likely due to the wide range of permitted valuation techniques
and numerous estimates which must be made given the absence of
active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a
greater degree of subjectivity to these estimated fair values.
13. INCOME TAXES
The provision for federal income taxes is summarized below:
Year ended December 31 1998 1997 1996
(In thousands)
Current $6,023 $7,913 $6,468
Deferred 1,632 1,390 776
Income tax provision $7,655 $9,303 $7,244
The reconciliation between the federal statutory tax rate and the
Company's effective consolidated income tax rate is as follows:
Year ended December 31 1998 1997 1996
Amount Rate Amount Rate Amount Rate
(In thousands, except percentages)
Tax expense based on federal statutory rate $10,079 35.0% $11,480 35.0% $ 9,542 35.0%
State income taxes 39 0.1 234 0.7 200 0.7
Tax exempt income (3,069) (10.7) (3,104) (9.5) (3,168)(11.6)
Goodwill and acquisition related costs 469 1.6 575 1.8 578 2.1
Other 137 0.6 118 0.3 92 0.3
Total provision for income taxes $ 7,655 26.6% $ 9,303 28.3% $ 7,244 26.5%
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 1998 1997 1996
(In thousands)
Provision for possible loan losses $ 486 $ 425 $ 555
Lease accounting 769 999 747
Accretion of discounts on securities, net 299 366 104
Investment write-downs - 83 230
Core deposit and mortgage servicing
intangibles 106 (289) (272)
Deposit liability write-down - (345) (465)
Deferred loan fees 82 82 82
Other, net (110) 69 (205)
Total $1,632 $1,390 $ 776
At December 31, 1998 and 1997, 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 1998 1997
(In thousands)
Deferred Assets:
Provision for loan losses $ 3,754 $ 4,240
Deferred loan fees 409 491
Other 426 603
Total assets 4,589 5,334
Deferred Liabilities:
Investment security write-ups
due to SFAS #115 (1,307) (976)
Accumulated depreciation (705) (779)
Accretion of discount (2,912) (2,613)
Lease accounting (3,344) (2,575)
Core deposit and mortgage
servicing intangibles (2,248) (2,142)
Other (269) (482)
Total liabilities (10,785) (9,567)
Valuation allowance (325) (325)
Net deferred liability $ (6,521) $ (4,558)
The change in the net deferred liability during 1998 and 1997 was
attributed to the following:
At December 31 1998 1997
(In thousands)
Investment write-ups due to
SFAS #115, charge
to equity $ (331) $(1,044)
Alternative minimum tax credit - (539)
Deferred provision for
income taxes (1,632) (1,390)
Net decrease $(1,963) $(2,973)
14. PENSION AND PROFIT SHARING PLANS
The Company has trusteed, noncontributory defined benefit
pension plans covering all employees who work at least 1,000
hours per year and who have not yet reached age 60 at their
employment date. The benefits of the plans are based upon the
employee's years of service and average annual earnings for the
highest five consecutive calendar years during the final ten year
period of employment. The Company's funding policy has been to
contribute annually an amount within the statutory range of
allowable minimum and maximum actuarially determined
tax-deductible contributions. Plan assets are primarily debt
securities (including U.S. Agency and Treasury securities,
corporate notes and bonds), listed common stocks (including
shares of USBANCORP, Inc. common stock), mutual funds, and
short-term cash equivalent instruments.
30
Pension Benefits:
At December 31 1998 1997
(In thousands, except percentages)
Change in benefit obligation
Benefit obligation at beginning of year $12,740 $11,416
Service cost 1,128 1,009
Interest cost 911 814
Deferred asset gain 1,077 528
Benefits paid (1,114) (939)
Expenses paid (81) (88)
Benefit obligation at end of year $14,661 $12,740
Change in plan assets
Fair value of plan assets at beginning
of year $12,343 $10,756
Actual return on plan assets 1,376 2,009
Employer contributions 1,799 605
Benefits paid (1,114) (939)
Expenses paid (81) (88)
Fair value of plan assets at end of year $14,323 $12,343
Funded status of the plan
(underfunded) $ (338) $ (397)
Unrecognized transition asset (232) (246)
Unrecognized prior service cost 140 167
Unrecognized actuarial loss (gain) 176 (558)
Accrued benefit cost $ (254) $ (1,034)
Components of net periodic benefit cost
Service cost $ 1,128 $ 1,009
Interest cost 911 814
Expected return on plan assets (1,033) (871)
Amortization of prior year service cost (14) (14)
Amortization of transition asset 27 27
Net periodic benefit cost $ 1,019 $ 965
Weighted-average assumptions
Discount rate 6.75% 7.00%
Expected return on plan assets 8.00 8.00
Rate of compensation increase 3.50 3.50
In addition, U.S. Bank has a trusteed, deferred profit sharing
plan with contributions made by U.S. Bank based upon income as
defined by the plan. All employees of U.S. Bank and the Company
who work over 1,000 hours per year participate in the plan
beginning on January 1 following six months of service.
Contributions to this profit sharing plan were $1,010,000 in 1998
and $899,000 in 1997. Plan assets are primarily debt securities
(including U.S. Agency and Treasury securities, corporate notes
and bonds), listed common stocks (including shares of USBANCORP,
Inc. common stock), mutual funds, and short-term cash equivalent
instruments.
Three Rivers Bank also has a trusteed 401(k) plan with
contributions made by Three Rivers Bank matching those by
eligible employees up to a maximum of 50% of the first 6% of
their annual salary. All employees of Three Rivers Bank who work
over 1,000 hours per year are eligible to participate in the plan
on January 1 following six months of service. Three Rivers Bank's
contribution to this 410(k) plan was $199,000 in 1998 and
$184,000 in 1997.
Except for the above pension benefits, the Company has no
significant additional exposure for any other post-retirement
benefits.
31
15. LEASE COMMITMENTS
The Company's obligation for future minimum lease payments on
operating leases at December 31, 1998, is as follows:
Year Future Minimum Lease Payments
(In thousands)
1999 $2,132
2000 1,440
2001 1,104
2002 878
2003 and thereafter (in total) 1,237
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
$868,000, $782,000 and $672,000, in 1998, 1997, and 1996,
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 $234,298,000
and standby letters of credit of $15,404,000 as of December 31,
1998.
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. STOCK Compensation plans
In 1991, the Company's Board of Directors adopted an Incentive
Stock Option Plan authorizing the grant of options covering
384,000 shares of common stock. In April 1995 and in April 1998,
the Company amended the Plan to increase the number of shares
available for issuance thereunder which presently stands at
1,455,000 shares. Under the Plan, options can be granted (the
"Grant Date") to employees with executive, managerial, technical,
or professional responsibility, as selected by a committee of the
Board of Directors. The Company accounts for this Plan under APB
Opinion #25, "Accounting for Stock Issued to Employees." The
option price at which a stock option may be exercised shall be
not less than 100% of the fair market value per share of common
stock on the Grant Date. The maximum term of any option granted
under the Plan cannot exceed 10 years. Generally, under the Plan
on or after the first anniversary of the Grant Date, one-third of
such options may be exercised. On or after the second anniversary
of the Grant Date, two-thirds of such options may be exercised
minus the aggregate number of such options previously exercised.
On or after the third anniversary of the Grant Date, the
remainder of the options may be exercised. In December 1997, the
Company issued 84,000 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.
Had compensation cost for these plans been determined consistent
with SFAS #123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
32
At December 31 1998 1997 1996
(In thousands, except per share data)
Net income:
As reported $21,144 $23,497 $20,019
Pro forma 20,468 23,285 19,810
Basic earnings per share:
As reported $ 1.51 $ 1.56 $ 1.28
Pro forma 1.46 1.55 1.27
Diluted earnings per share:
As reported $ 1.48 $ 1.54 $ 1.28
Pro forma 1.44 1.52 1.26
Because SFAS #123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be
expected in future years.
A summary of the status of the Company's Stock Option Plan at
December 31, 1998, 1997, and 1996, and changes during the years
then ended is presented in the table and narrative following:
Year ended December 31 1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 559,038 $11.35 525,774 $ 9.37 317,463 $ 8.11
Granted 15,600 26.30 88,500 21.13 234,000 10.85
Exercised (70,232) 8.35 (55,236) 8.18 (25,689) 7.62
Forfeited (58,503) 20.89 - - - -
Outstanding at end of year 445,903 11.09 559,038 11.35 525,774 9.37
Exercisable at end of year 349,303 10.44 272,997 8.90 162,840 7.76
Weighted average fair value
of options granted since 1-1-95 $7.86 $8.88 $6.99
33
A total of 349,303 of the 445,903 options outstanding at December
31, 1998, have exercise prices between $5.75 and $21.50, with a
weighted average exercise price of $10.44 and a weighted average
remaining contractual life of 6.5 years. All of these options are
exercisable. The remaining 96,600 options have exercise prices
between $10.85 and $26.65, with a weighted average exercise price
of $13.46 and a weighted average remaining contractual life of
7.5 years.
During 1998 two option grants totalling 15,600 shares were
issued, in 1997 two option grants totalling 88,500 shares were
issued, compared to one option grant totalling 234,000 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 1998, 1997, and
1996, respectively: risk-free interest rates of 5.53% and 5.43%
for 1998 options, 6.49% and 5.92% for 1997 options, and 5.49% for
the 1996 options; expected dividend yields of 2.50% for 1998
options, 3.25% and 2.25% for 1997 options, and 3.25% for the 1996
options: expected lives of 7.0 years for all the 1998, 1997, and
1996 options; expected volatility of 18.81% and 18.85% for 1998
options, 20.96% and 18.31% for 1997 options, and 21.28% for the
1996 options.
In January 1998, the Company granted restricted stock awards for
a total of 16,500 shares to certain executive officers. The
restricted stock grants will accumulate dividends and vest at the
rate of one-third of the total balance in January 1999, one-half
of the remaining balance in January 2000 and the remaining
balance in January 2001. The recipients must continue employment
through the vesting period to be eligible for each successive
award. The expense associated with these restricted stock awards
is included in compensation expense.
18. DIVIDEND REINVESTMENT PLAN
The Company's Dividend Reinvestment and Common Stock Purchase
Plan provides each record holder of Common Stock with a simple
and convenient method of purchasing additional shares without
payment of any brokerage commissions, service charges or other
similar expense. A participant in the Plan may purchase shares of
Common Stock by electing either to (1) reinvest dividends on all
of his or her shares of Common Stock or (2) make optional cash
payments of not less than $10 and up to a maximum of $2,000 per
month and continue to receive regular dividend payments on his or
her other shares. 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, 1998, the Company had 789,144 unissued reserved
shares available under the Plan. In the case of purchases of
shares of Common Stock on the open market, the average market
price will be the weighted average purchase price of shares
purchased for the Plan in the market for the relevant investment
date.
34
19. SHAREHOLDER RIGHTS PLAN
Each share of the Company's Common Stock had attached to it one
right (a "Right") issued pursuant to a Shareholder Protection
Rights Agreement, dated November 10, 1989 (the "Rights
Agreement"). Each Right entitled a holder to buy one-tenth of a
share of the Company's Series B Preferred Stock at a price of
$13.33, subject to adjustment (the "Exercise Price"). The Rights
became exercisable if a person, group, or other entity acquired
or announced a tender offer for 20% or more of the Company's
Common Stock. They could also have been exercised if a person or
group who had become a beneficial owner of at least 10% of the
Company's Common Stock was declared by the Board of Directors to
be an "adverse person" (as defined in the Rights Agreement).
Under the Rights Agreement, any person, group, or entity would be
deemed a beneficial owner of the Company's Common Stock if such
person, group, or entity would be deemed to beneficially own the
Company's Common Stock under the rules of the Securities and
Exchange Commission which generally require that such person,
group, or entity have, or have the right to acquire within sixty
days, voting or dispositive power of the Company's Common Stock;
provided, however, that the Rights Agreement excluded from the
definition of beneficial owner, holders of revocable proxies,
employee benefit plans of the Company or its subsidiaries and the
Trust Company. After the Rights became exercisable, the Rights
(other than rights held by a 20% beneficial owner or an "adverse
person") would entitle the holders to purchase, under certain
circumstances, either the Company's Common Stock or common stock
of the potential acquirer having a value equal to twice the
Exercise Price. The Company was generally entitled to redeem the
Rights at $0.0033 per Right at any time until the twentieth
business day following public announcement that a 20% position
had been acquired or the Board of Directors had designated a
holder of the Company's Common Stock an adverse person. The
Rights Agreement expired on November 10, 1994.
On February 24, 1995, the Company's Board of Directors adopted a
Shareholder Rights Plan which is substantially similar to and
replaces the previous Rights Agreement which expired on November
10, 1994. The only significant difference from the previous
Rights Agreement is that under the new plan each right will
initially entitle shareholders to buy one unit of a newly
authorized series of junior participating preferred stock at an
exercise price of $21.67. The rights attached to shares of
USBANCORP Common Stock outstanding on March 15, 1995, and will
expire in ten years.
20. GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
USBANCORP's balance sheet shows both tangible assets (such as
loans, buildings, and investments) and intangible assets (such as
goodwill). The Company now carries $13.8 million of goodwill and
$4.9 million of core deposit intangible assets on its balance
sheet. The majority of these intangible assets came from the 1994
Johnstown Savings Bank acquisition. Additionally in 1998, the
Company acquired two National City Branch offices in Allegheny
County with $27 million in deposits. The Company paid a 7%
deposit premium or $1.9 million to assume these deposit
liabilities.
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 1998
diluted earnings per share by $0.15. 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)
1999 $ 2,250
2000 2,139
2001 2,100
2002 2,100
2003 and after 10,108
A reconciliation of the Company's intangible asset balances for
1998 and 1997 is as follows:
At December 31 1998 1997
(In thousands)
Balance January 1 $19,122 $21,478
Additions due to branch acquisitions 1,883 -
Amortization expense (2,308) (2,356)
Balance December 31 $18,697 $19,122
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.
35
21. OFF-BALANCE SHEET HEDGE INSTRUMENTS
The Company uses various interest rate contracts, such as
interest rate swaps, caps and floors, to help manage interest
rate and market valuation risk exposure, which is incurred in
normal recurrent banking activities. A summary of the Company's
off-balance sheet derivative transactions are as follows:
Borrowed Funds Hedges:
The Company had entered into several interest rate swaps to hedge
short-term borrowings used to leverage the balance sheet.
Specifically, FHLB advances which reprice between 30 days and 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 1998
performance:
Fixed Floating Impact
Notional Start Termination Rate Rate Repricing On Interest
Amount Date Date Paid Received Frequency Expense
$ 40,000,000 3-17-97 3-15-99 6.19% 5.60% Monthly $228,213
50,000,000 5-08-97 5-10-99 6.20 5.59 Annually 305,626
25,000,000 6-20-97 6-20-99 5.96 5.36 Monthly 152,167
50,000,000 9-25-97 9-25-99 5.80 5.36 Monthly 225,450
$165,000,000 $911,456
The Company believes that its exposure to credit loss in the
event of non-performance by any of the counterparties (which
include Mellon Bank and First Union) in the interest rate swap
agreements is remote.
The Company monitors and controls all off-balance sheet
derivative products with a comprehensive Board of Director
approved hedging policy. This policy permits a total maximum
notional amount outstanding of $500 million for interest rate
swaps, and interest rate caps/floors. The Company had no interest
rate caps or floors outstanding at any time during the years
ended December 31, 1998, or December 31, 1997.
36
22. SEGMENT RESULTS
The financial performance of USBANCORP is also monitored by an
internal funds transfer pricing profitability measurement system
which produces line of business results and key performance
measures. USBANCORP's major business units include community
banking, mortgage banking, trust, and investment/parent. The
reported results reflect the underlying economics of the business
segments. Expenses for centrally provided services are allocated
based upon the cost and estimated usage of those services.
Capital has been allocated among the businesses on a
risk-adjusted basis. The businesses are match-funded and interest
rate risk is centrally managed and accounted for within the
investment/parent business segment. The key performance measures
the Company focuses on for each business segment are net income
and risk-adjusted return on equity.
The contribution of the major business segments to the
consolidated results for the past two years is summarized in the
following table:
Community Banking Mortgage Banking Trust Investment/Parent Total
Year ended December 31 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
(In thousands, except ratios)
Net interest income $ 49,566 $ 48,784 $ 1,448 $ 1,427 $ (64) $ (31) $ 13,680 $ 16,521 $ 64,630 $ 66,701
Non-interest income 10,119 8,944 6,572 6,299 4,444 4,022 2,554 938 23,689 20,203
Non-interest expense 46,046 42,642 7,599 5,631 3,340 3,022 2,535 2,809 59,520 54,104
Income before income
taxes 13,639 15,086 421 2,095 1,040 969 13,699 14,650 28,799 32,800
Income taxes 3,743 4,198 169 810 249 245 3,494 4,050 7,655 9,303
Net Income $ 9,896 $ 10,888 $ 252 $ 1,285 $ 791 $ 724 $ 10,205 $ 10,600 $ 21,144 $ 23,497
Average common
equity $ 85,575 $ 88,116 $ 9,074 $ 9,762 $ 2,987 $ 2,945 $ 52,028 $ 55,808 $ 149,664 $ 156,631
Risk-adjusted return
on equity 11.6% 12.4% 2.8% 13.2% 26.5% 24.6% 19.6% 19.0% 14.1% 15.0%
Total assets $1,128,625 $1,081,472 $77,187 $39,342 $1,636 $1,573 $ 1,169,633 $ 1,116,723 $ 2,377,081
$2,239,110
Community banking includes the deposit-gathering branch franchise
along with lending to both individuals and businesses. Lending
activities include commercial and commercial real-estate loans,
residential mortgage loans, direct consumer loans and credit
cards. Mortgage banking includes the servicing of mortgage loans
and the origination of residential mortgage loans through a
wholesale broker network. The trust segment has two primary
business divisions, institutional trust and personal trust.
Institutional trust products and services include 401(k) plans,
defined benefit and defined contribution employee benefit plans,
individual retirement accounts, and collective investment funds
for trade union pension plans. Personal trust products and
services include personal portfolio investment management, estate
planning and administration, custodial services and pre-need
trusts. The investment/parent includes the net results of
investment securities and borrowing activities, general corporate
expenses not allocated to the business segments, interest expense
on corporate debt, and centralized interest rate risk management.
37
23. CAPITAL
The Company is subject to various capital requirements
administered by the federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's
capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk
weightings, and other factors. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's
financial statements.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital
to risk-weighted assets, and of Tier I capital to average assets.
Management believes that as of December 31, 1998, the Company
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998 and 1997, 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, 1998 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(In thousands, except ratios)
Total Capital (to Risk Weighted Assets)
Consolidated $164,219 14.52% $90,472 8.00% $113,090 10.00%
U.S. Bank 92,039 15.33 48,018 8.00 60,023 10.00
Three Rivers Bank 73,027 13.84 42,199 8.00 52,749 10.00
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 153,494 13.57 45,236 4.00 67,854 6.00
U.S. Bank 87,418 14.56 24,009 4.00 36,014 6.00
Three Rivers Bank 66,923 12.69 21,100 4.00 31,649 6.00
Tier 1 Capital (to Average Assets)
Consolidated 153,494 6.62 92,680 4.00 115,850 5.00
U.S. Bank 87,418 6.85 51,060 4.00 63,825 5.00
Three Rivers Bank 66,923 6.47 41,377 4.00 51,721 5.00
38
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 44,422 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
24. Pending BRANCH ACQUISITION
On October 14, 1998, USBANCORP, Inc., and First Western Bancorp,
Inc. ("First Western"), entered into an agreement for USBANCORP
to purchase three branch offices in western Pennsylvania from
First Western in exchange for cash and one branch office from
USBANCORP. USBANCORP's U.S. Bank subsidiary will acquire the
Ebensburg and Barnesboro Offices of First Western which are
located in Cambria County. USBANCORP's Three Rivers Bank
subsidiary will acquire the Kiski Valley Office of First Western
located in Westmoreland County in exchange for Three Rivers
Bank's Moon Township Office which is located in Allegheny
County. On a net basis, USBANCORP will acquire $92 million in
deposits, $11 million in consumer loans and the related fixed
assets, leases, safe deposit box business and other agreements at
the branch offices. The cash purchase is expected to be completed
in the first quarter of 1999. The Company will pay a core deposit
premium of approximately ten percent for the acquired deposits
and purchase the consumer loans and fixed assets at book value.
25. 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 1998 1997
(In thousands)
ASSETS
Cash and cash equivalents $ 295 $ 582
Equity investment in banking subsidiaries 177,274 163,822
Equity investment in non-banking
subsidiaries 2,612 2,632
Guaranteed junior subordinated
deferrable interest debenture
issuance costs 1,328 -
Other assets 991 727
TOTAL ASSETS $ 182,500 $ 167,763
LIABILITIES
Short-term borrowings $ 4,800 $ 7,600
Guaranteed junior subordinated
deferrable interest debentures 34,500 -
Other liabilities 1,320 1,818
TOTAL LIABILITIES 40,620 9,418
STOCKHOLDERS' EQUITY
Total stockholders' equity 141,880 158,345
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 182,500 $ 167,763
39
STATEMENT OF INCOME
Year ended December 31 1998 1997 1996
(In thousands)
INCOME
Inter-entity management fees $ 3,961 $ 3,867 $ 3,817
Dividends from subsidiaries 16,819 19,601 15,491
Interest and dividend income 68 15 13
Total Income 20,848 23,483 19,321
EXPENSE
Interest expense 2,348 680 676
Salaries and employee benefits 2,796 2,793 2,753
Other expense 1,462 1,642 1,522
Total Expense 6,606 5,115 4,951
INCOME BEFORE
INCOME TAXES
AND EQUITY IN
UNDISTRIBUTED INCOME
OF SUBSIDIARIES 14,242 18,368 14,370
Provision for income taxes 979 522 484
Equity in undistributed
income of subsidiaries 5,967 4,667 5,271
NET INCOME $21,188 $23,557 $20,125
STATEMENT OF CASH FLOWS
Year ended December 31 1998 1997 1996
(In thousands)
OPERATING ACTIVITIES
Net income $21,188 $23,557 $20,125
Adjustment to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed
income of subsidiaries (5,967) (4,667) (5,271)
Net cash provided by operating
activities 15,221 18,890 14,854
INVESTING AND
FINANCING ACTIVITIES
Common stock cash dividends paid (10,638) (9,318) (4,522)
Proceeds from issuance of
common stock 534 453 188
Guaranteed junior subordinated
deferrable interest debentures, net
of expenses 33,172 - -
Guaranteed junior subordinated
deferrable interest debentures
dividends paid (1,944) - -
Purchases of treasury stock (30,346) (11,637) (8,531)
Net (decrease)increase
in borrowings (2,800) 2,800 (1,800)
Investment in subsidiaries (7,000) (600) -
Other - net 3,514 (34) (475)
Net cash used by investing and
financing activities (15,508) (18,336) (15,140)
NET (DECREASE) INCREASE IN
CASH EQUIVALENTS (287) 554 (286)
CASH EQUIVALENTS AT
JANUARY 1 582 28 314
CASH EQUIVALENTS AT
DECEMBER 31 $ 295 $ 582 $ 28
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, 1998, the subsidiary
banks were permitted to upstream an additional $16,881,000 in
cash dividends to the Parent Company. The subsidiary banks also
had a combined $152,830,000 of restricted surplus and retained
earnings at December 31, 1998.
The Parent Company renewed a $17 million unsecured line of credit
on December 21, 1998. This line of credit is subject to annual
review on October 30, 1999, and replaces the previous agreement
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, 1998, $12.2 million of this total $17.0 million
credit line.
40
STATEMENT OF MANAGEMENT RESPONSIBILITY
January 22, 1999
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
41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
2100 One PPG Place
Pittsburgh PA 15222-5498
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, 1998 and 1997, and the related consolidated
statements of income, comprehensive income, stockholders' equity
and cash flows for each of the three years in the period ended
December 31, 1998. 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,
1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting
principles.
/s/Arthur Andersen LLP
Pittsburgh, Pennsylvania
January 22, 1999
42
USBANCORP, INC.
management's discussion and analysis
43
This page left intentionally blank.
44
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, 1998:
First Quarter $25.71 $20.50 $ 0.12
Second Quarter 27.50 25.77 0.14
Third Quarter 26.67 19.00 0.14
Fourth Quarter 21.00 14.38 0.20
Year ended December 31, 1997:
First Quarter $16.42 $13.92 $ 0.10
Second Quarter 18.17 15.96 0.11
Third Quarter 21.83 17.58 0.12
Fourth Quarter 24.33 20.92 0.20
45
SELECTED TEN-YEAR CONSOLIDATED FINANCIAL DATA
At or for the year ended December 31 1998 1997 1996
(Dollars in thousands, except per share data and ratios)
Summary of Income Statement Data:
Total interest income $ 158,958 $ 154,788 $ 137,333
Total interest expense 93,728 87,929 76,195
Net interest income 65,230 66,859 61,138
Provision for loan losses 600 158 90
Net interest income after provision for loan losses 64,630 66,701 61,048
Total non-interest income 23,689 20,203 18,689
Total non-interest expense 59,520 54,104 52,474
Income before income taxes, extraordinary item and
cumulative effect of change in accounting principle 28,799 32,800 27,263
Provision for income taxes 7,655 9,303 7,244
Income before extraordinary item, cumulative effect of
change in accounting principle 21,144 23,497 20,019
Extraordinary item - utilization of tax loss carry forward - - -
Cumulative effect of change in accounting principle - - -
Net income $ 21,144 $ 23,497 $ 20,019
Net income applicable to common stock $ 21,144 $ 23,497 $ 20,019
Per Common Share Data:
Basic earnings per share $ 1.51 $ 1.56 $ 1.28
Diluted earnings per share 1.48 1.54 1.28
Cash dividends declared 0.60 0.53 0.46
Book value at period end 10.48 10.77 9.97
Balance Sheet and Other Data:
Total assets $ 2,377,081 $ 2,239,110 $ 2,087,112
Loans and loans held for sale, net of unearned income 1,066,321 989,575 939,726
Allowance for loan losses 10,725 12,113 13,329
Investment securities available for sale 661,491 580,115 455,890
Investment securities held to maturity 508,142 536,608 546,318
Deposits 1,176,291 1,139,527 1,138,738
Total borrowings 1,026,570 913,056 770,102
Stockholders' equity 141,670 158,180 151,917
Full-time equivalent employees 762 765 759
Selected Financial Ratios:
Return on average total equity 14.13% 15.00% 13.36%
Return on average assets 0.93 1.09 1.03
Loans and loans held for sale, net of unearned income,
as a percent of deposits, at period end 87.09 86.84 82.52
Ratio of average total equity to average assets 6.58 7.28 7.69
Common stock cash dividends as a percent of
net income applicable to common stock 41.00 34.00 35.28
Common and preferred stock cash dividends as a
percent of net income 41.00 34.00 35.28
Interest rate spread 2.58 2.97 3.06
Net interest margin 3.17 3.43 3.52
Allowance for loan losses as a percentage of
loans and loans held for sale, net of unearned income,
at period end 1.01 1.22 1.42
Non-performing assets as a percentage of loans and loans held
for sale and other real estate owned, at period end 0.77 0.89 0.92
Net charge-offs as a percentage of average loans and
loans held for sale 0.19 0.14 0.20
Ratio of earnings to fixed charges and preferred dividends:
Excluding interest on deposits 1.54x 1.72x 1.79x
Including interest on deposits 1.31 1.37 1.36
One year GAP ratio, at period end 1.03 0.88 0.79
All per share and share data have been adjusted to reflect a
3 for 1 stock split in the form of a 200% stock dividend that
was distributed on July 31, 1998, to shareholders of record on July 16, 1998.
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.
46
SELECTED TEN-YEAR CONSOLIDATED FINANCIAL DATA (con't.)
1995 1994 1993 1992 1991 1990 1989
(Dollars in thousands, except per share data and ratios)
$ 129,715 $ 102,811 $ 85,735 $ 82,790 $ 66,446 $ 70,469 $ 69,237
73,568 46,993 36,250 38,349 33,538 38,763 39,138
56,147 55,818 49,485 44,441 32,908 31,706 30,099
285 (2,765) 2,400 2,216 900 915 945
55,862 58,583 47,085 42,225 32,008 30,791 29,154
16,543 8,187 10,150 8,346 6,035 5,340 5,391
50,557 49,519 40,715 36,248 28,862 27,198 27,783
21,848 17,251 16,520 14,323 9,181 8,933 6,762
6,045 5,931 5,484 5,440 2,873 2,745 1,957
15,803 11,320 11,036 8,883 6,308 6,188 4,805
- - - - 1,004 1,474 1,711
- - 1,452 - - - -
$ 15,803 $ 11,320 $ 12,488 $ 8,883 $ 7,312 $ 7,662 $ 6,516
$ 15,803 $ 11,320 $ 12,385 $ 7,710 $ 6,139 $ 6,489 $ 5,343
$ 0.96 $ 0.73 $ 0.93 $ 0.89 $ 0.80 $ 0.85 $ 0.70
0.96 0.73 0.91 0.84 0.76 0.80 0.69
0.35 0.32 0.29 0.25 0.18 0.05 -
9.45 8.19 8.22 7.69 7.24 6.62 5.81
$ 1,885,372 $ 1,788,890 $ 1,241,521 $ 1,139,855 $ 784,036 $ 774,403 $ 751,228
834,634 868,004 727,186 648,915 430,151 445,814 446,046
14,914 15,590 15,260 13,752 13,003 12,470 12,315
427,112 259,462 428,712 366,888 - - -
463,951 524,638 - - 289,772 235,722 195,978
1,177,858 1,196,246 1,048,866 997,591 676,698 674,176 658,817
534,182 432,735 60,322 48,461 27,564 26,573 23,783
150,492 137,136 116,615 82,971 70,023 65,050 58,827
742 780 665 644 523 535 556
11.03% 8.92% 11.46% 11.41% 10.88% 12.38% 11.67%
0.87 0.75 1.03 0.85 0.96 1.01 0.88
70.86 72.56 69.33 65.05 63.57 66.13 67.70
7.85 8.39 8.96 7.48 8.85 8.18 7.53
36.43 44.57 32.28 28.16 22.94 5.90 -
36.43 44.57 32.84 37.64 35.30 20.31 18.00
2.94 3.47 3.72 3.93 3.69 3.46 3.23
3.45 4.03 4.34 4.58 4.69 4.56 4.35
1.79 1.80 2.10 2.12 3.02 2.80 2.76
1.13 0.91 0.89 1.58 1.10 0.87 0.94
0.08 0.04 0.13 0.58 0.08 0.17 0.28
1.77x 2.34x 5.26x 4.05x 4.54x 3.87x 3.17x
1.30 1.37 1.45 1.36 1.26 1.22 1.17
0.86 0.79 1.10 1.14 1.06 0.97 1.00
47
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited quarterly
consolidated financial data regarding the Company. All per share
and share data have been adjusted to reflect a 3 for 1 stock
split effected in the form of a 200% stock dividend that was
distributed on July 31, 1998, to shareholders of record on July
16, 1998.
1998 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
(In thousands, except per share data)
Interest income $39,883 $40,252 $39,131 $39,692
Non-interest income 5,743 6,227 6,351 5,368
Total operating income 45,626 46,479 45,482 45,060
Interest expense 24,076 24,053 22,768 22,831
Provision for loan losses 150 150 150 150
Non-interest expense 15,481 15,080 14,707 14,252
Income before income taxes 5,919 7,196 7,857 7,827
Provision for income taxes 1,507 1,896 2,120 2,132
Net income $ 4,412 $ 5,300 $ 5,737 $ 5,695
Basic earnings per share $ 0.32 $ 0.39 $ 0.41 $ 0.39
Diluted earnings per share 0.32 0.38 0.40 0.38
Cash dividends declared per common share 0.20 0.14 0.14 0.12
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 share $ 0.40 $ 0.40 $ 0.39 $ 0.37
Diluted earnings per share 0.40 0.39 0.38 0.37
Cash dividends declared per common share 0.20 0.12 0.11 0.10
The Company's Board of Directors approved a special dividend of
$0.06 and $0.08 per share in December 1998 and 1997,
respectively.
48
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, 1998, 1997, AND 1996
PERFORMANCE OVERVIEW...The Company's net income for 1998 was
$21.1 million or $1.48 on a diluted per share basis compared to
net income of $23.5 million or $1.54 per diluted share for 1997
and net income of $20.0 million or $1.28 per diluted share for
1996. When 1998 is compared to 1997, the Company's diluted
earnings per share decreased by $0.06 or 3.9% while net income
dropped by $2.4 million or 10.0%. 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 $0.26 or 20.4%. The
Company's return on equity averaged 14.13% for 1998 compared to
15.0% for 1997 and 13.36% for 1996.
Compression in the Company's net interest margin and a higher
level of non-interest expense offset the benefit of an increased
amount of non-interest income to cause the drop in earnings in
1998. Specifically, total non-interest income increased by $3.5
million or 17.3% while net interest income declined by $1.6
million or 2.4% from the prior year. This net $1.9 million
increase in total revenue was more than offset by higher
non-interest expense and an increase in the provision for loan
losses. Total non-interest expense was $5.4 million or 10.0%
higher in 1998 while the provision for loan losses increased by
$442,000. The Company's earnings per share, however, were
enhanced by the repurchase of its common stock because there were
1.0 million fewer average diluted shares outstanding in 1998.
When 1997 is compared to 1996, the 20.4% growth in diluted
earnings per share 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
were 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
420,000 fewer average diluted shares outstanding in 1997 than in
1996. Note also that a special assessment to recapitalize the
Savings Association Insurance Fund ("SAIF") amounted to $1.9
million on a pre-tax basis and reduced diluted earnings per share
by $0.09 in 1996.
49
The following table summarizes some of the Company's key
performance indicators for each of the past three years.
Year ended December 31 1998 1997 1996
(In thousands, except per share data and ratios)
Net income $21,144 $23,497 $20,019
Diluted earnings per share 1.48 1.54 1.28
Return on average assets 0.93% 1.09% 1.03%
Return on average equity 14.13 15.00 13.36
Average diluted common shares outstanding 14,258 15,274 15,695
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 1998 1997 1996
(In thousands, except ratios)
Interest income $158,958 $154,788 $137,333
Interest expense 93,728 87,929 76,195
Net interest income 65,230 66,859 61,138
Tax-equivalent adjustment 2,876 2,939 2,954
Net tax-equivalent interest income $ 68,106 $ 69,798 $ 64,092
Net interest margin 3.17% 3.43% 3.52%
1998 NET INTEREST PERFORMANCE OVERVIEW...USBANCORP's net interest
income on a tax-equivalent basis decreased by $1.7 million or
2.4% due to the negative impact of a 26 basis point decline in
the net interest margin to 3.17%. The drop in the net interest
margin reflects a 22 basis point decline in the earning asset
yield due primarily to accelerated mortgage prepayments in both
the securities and loan portfolios resulting from the flat
treasury yield curve and the reinvestment of these cash flows in
lower yielding assets. The cost of funds increased by two basis
points due in part to the interest cost associated with the $34.5
million of guaranteed junior subordinated deferrable interest
debentures issued on April 30, 1998, and an increased use of
borrowings to fund earning asset growth. This margin compression
offset the benefits resulting from growth in the earning asset
base.
Total average earning assets were $117 million higher in 1998 due
primarily to a $59 million or 6.1% increase in total loans and a
$59 million or 5.6% increase in investment securities. The
Company was able to achieve solid loan growth in commercial
loans, direct consumer loans, and residential mortgage and home
equity loans in 1998. The higher level of investment securities
resulted from more active buying of securities in the second half
of 1998 due to expected declines in interest rates and to
position the balance sheet for the inflow of deposits from the
First Western Branch Acquisition which will close in February
1999. The Company expects these branch acquisitions to be
accretive to earnings in 1999. The overall growth in the earning
asset base was one strategy used by the Company to leverage its
capital. The maximum amount of leveraging the Company can perform
is controlled by internal policy requirements to maintain a
minimum asset leverage ratio of no less than 6.0% (see further
discussion under Capital Resources) and to limit net interest
income variability to 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).
50
COMPONENT CHANGES IN NET INTEREST INCOME: 1998 VERSUS
1997...Regarding the separate components of net interest income,
the Company's total interest income for 1998 increased by $4.2
million or 2.7% when compared to 1997. This increase was due
primarily to a $117 million or 5.8% increase in total average
earning assets which caused interest income to rise by $7.8
million. This positive factor was partially offset by a 22 basis
point drop in the earning asset yield to 7.56% that caused a $3.7
million reduction in interest income. Within the earning asset
base, the yield on total investment securities decreased by 29
basis points to 6.65% as accelerated mortgage prepayment speeds
caused increased amortization expense on mortgage-backed
securities which had been purchased at a premium. The yield on
the total loan portfolio declined by 15 basis points to 8.51% due
to the downward repricing of floating rate assets and the
reinvestment of cash received on higher yielding prepaying assets
into loans with lower interest rates. These heightened
prepayments reflect increased customer refinancing activity due
to drops in intermediate- and long-term interest rates on the
treasury yield curve in 1998. Note that the decline in the loan
portfolio yield was not as significant as the drop in the
investment securities portfolio yield due partially to the
collection of prepayment penalties on certain commercial mortgage
loan pay-offs and a favorable shift in the loan portfolio mix
away from lower yielding indirect auto loans.
Continued improvement in the loan-to-deposit ratio contributed to
the earning asset growth. The Company's loan-to-deposit ratio
averaged 87.6% in 1998 compared to an average of 83.8% for 1997.
The growth in this ratio resulted from the Company's ability to
take loan market share from its competitors through strategies
that emphasize convenient customer service and hard work. Other
factors contributing to the loan growth were a stable economic
environment and the first full year results from two loan
production offices in the higher growth markets of Westmoreland
and Centre Counties.
The Company's total interest expense for 1998 increased by $5.8
million or 6.6% when compared to 1997. This higher interest
expense was due primarily to a $112 million increase in average
interest bearing liabilities. The growth in interest bearing
liabilities included the issuance of $34.5 million of 8.45%
guaranteed junior subordinated deferrable interest debentures
which increased interest expense by $2 million in 1998. The
proceeds from this retail offering of trust preferred securities
provided the Company with the necessary capital to continue to
execute an active treasury stock repurchase program and complete
the acquisition of two National City Branch Offices in Allegheny
County with $27 million in deposits. The remainder of the
interest bearing liability increase occurred in short-term
borrowings and FHLB advances which were used to fund the
previously mentioned earning asset growth. For 1998, the
Company's total level of short-term borrowed funds and FHLB
advances averaged $895 million or 39.4% of total assets compared
to an average of $806 million or 37.4% of total assets for 1997.
These borrowed funds had an average cost of 5.63% in 1998 which
was 158 basis points greater than the average cost of deposits
which amounted to 4.05%. This greater dependence on borrowings
to fund the earning asset base, along with the interest costs
associated with the guaranteed junior subordinated deferrable
interest debentures, were the factors responsible for the two
basis point increase in the total cost of interest bearing
liabilities to 4.83% in 1998. This increase in the total cost of
funds occurred despite a 16 basis point drop in the cost of
interest bearing deposits to 4.05% as management was able to
51
reprice all major deposit categories downward in 1998.
It is recognized that interest rate risk does exist from this use
of borrowed funds to leverage the balance sheet. To neutralize a
portion of this risk, the Company has executed a total of $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 accelerated prepayments expected to continue in
future months, the Company will try to channel cash flow 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 greater than the short-term borrowed funds costs, then the
Company will de-lever the balance sheet by paying-off borrowings.
The Company also plans to use the majority of the deposits
acquired with the First Western Branch Acquisition to pay down
FHLB borrowings.
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.
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%. 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. The loan yield
also benefited 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
52
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.
The table that follows provides an analysis of net interest
income on a tax-equivalent basis setting forth (i) average
assets, liabilities and stockholders' equity, (ii) interest
income earned on interest earning assets and interest expense
paid on interest bearing liabilities, (iii) average yields earned
on interest earning assets and average rates paid on interest
bearing liabilities, (iv) USBANCORP's interest rate spread (the
difference between the average yield earned on interest earning
assets and the average rate paid on interest bearing
liabilities), and (v) USBANCORP's net interest margin (net
interest income as a percentage of average total interest earning
assets). For purposes of this table, loan balances include
non-accrual loans and interest income on loans includes loan fees
or amortization of such fees which have been deferred, as well
as, interest recorded on non-accrual loans as cash is received.
Additionally, a tax rate of approximately 35% is used to compute
tax equivalent yields.
53
Year ended December 31 1998 1997 1996
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
(In thousands, except percentages)
Interest earning assets:
Loans, net of
unearned income $1,019,215 $ 87,783 8.51% $ 960,673 $ 84,309 8.66% $ 857,921 $ 74,967 8.62%
Deposits with banks 3,874 120 3.07 3,792 190 4.97 2,746 132 4.74
Federal funds sold
and securities purchased
under agreements to resell 41 2 5.29 36 2 5.20 667 36 5.35
Investment securities:
Available for sale 604,872 38,890 6.43 479,383 32,806 6.84 441,638 29,719 6.73
Held to maturity 502,206 34,758 6.92 568,534 40,065 7.05 502,335 34,963 6.96
Total investment securities 1,107,078 73,648 6.65 1,047,917 72,871 6.94 943,973 64,682 6.85
Assets held in trust for
collateralized mortgage
obligation 3,655 281 7.70 4,816 355 7.38 6,236 470 7.54
Total interest earning
assets/interest income 2,133,863 161,834 7.56 2,017,234 157,727 7.78 1,811,543 140,287 7.72
Non-interest earning assets:
Cash and due from banks 34,009 32,743 35,547
Premises and equipment 17,946 17,952 18,325
Other assets 99,452 97,514 96,164
Allowance for loan losses (11,715) (13,057) (14,322)
TOTAL ASSETS $2,273,555 $2,152,386 $1,947,257
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 89,890 $ 892 0.99% $ 90,179 $ 895 0.99% $ 81,233 $ 953 1.17%
Savings 171,769 2,615 1.52 185,959 3,140 1.69 209,054 3,525 1.69
Money markets 167,758 6,040 3.60 153,345 5,688 3.71 144,718 4,978 3.44
Other time 581,351 31,344 5.39 580,720 32,849 5.66 586,874 32,604 5.56
Total interest bearing
deposits 1,010,768 40,891 4.05 1,010,203 42,572 4.21 1,021,879 42,060 4.12
Federal funds purchased,
securities sold under
agreements to repurchase,
and other short-term
borrowings 189,324 9,906 5.23 156,499 8,183 5.23 146,593 7,594 5.18
Advances from Federal
Home Loan Bank 705,507 40,483 5.74 649,235 36,648 5.64 453,838 25,952 5.72
Collateralized mortgage
obligation 3,236 319 9.86 4,259 415 9.73 5,670 470 8.29
Guaranteed junior subordinated
deferrable interest debentures 23,096 1,981 8.58 - - - - - -
Long-term debt 5,552 148 2.67 5,070 111 2.18 4,786 119 2.02
Total interest bearing
liabilities/interest expense 1,937,483 93,728 4.83 1,825,266 87,929 4.81 1,632,766 76,195 4.66
Non-interest bearing liabilities:
Demand deposits 159,515 143,767 140,574
Other liabilities 26,893 26,722 24,126
Stockholders' equity 149,664 156,631 149,791
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $2,273,555 $2,152,386 $1,947,257
Interest rate spread 2.73 2.97 3.06
Net interest income/net
interest margin 68,106 3.17% 69,798 3.43% 64,092 3.52%
Tax-equivalent adjustment (2,876) (2,939) (2,954)
Net interest income $ 65,230 $ 66,859 $ 61,138
54
The average balance and yield on taxable securities was $975
million and 6.61%, $916 million and 6.94%, and $797 million and
6.81% for 1998, 1997, and 1996, respectively. The average balance
and tax-equivalent yield on tax-exempt securities was $133
million and 6.94%, $132 million and 6.92%, $146 million and 7.06%
for 1998, 1997, and 1996, 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.
1998 vs. 1997 1997 vs. 1996
Increase (decrease) Increase (decrease)
due to change in: due to change in:
Average Average Average Average
Volume Rate Total Volume Rate Total
(In thousands)
Interest earned on:
Loans, net of unearned income $ 4,854 $ (1,380) $ 3,474 $9,200 $ 142 $ 9,342
Deposits with banks 4 (74) (70) 56 2 58
Federal funds sold and securities purchased
under agreements to resell -- -- -- (35) 1 (34)
Investment securities 2,990 (2,213) 777 7,970 219 8,189
Assets held in trust for collateralized
mortgage obligation (90) 16 (74) (117) 2 (115)
Total interest income 7,758 (3,651) 4,107 17,074 366 17,440
Interest paid on:
Interest bearing demand deposits (3) -- (3) (42) (16) (58)
Savings deposits (226) (299) (525) (390) 5 (385)
Money market 514 (162) 352 688 22 710
Other time deposits 35 (1,540) (1,505) 245 -- 245
Federal funds purchased, securities sold
under agreements to repurchase, and other
short-term borrowings 1,723 -- 1,723 586 3 589
Advances from Federal Home Loan Bank 3,184 651 3,835 10,814 (118) 10,696
Collateralized mortgage obligation (102) 6 (96) (35) (20) (55)
Guaranteed junior subordinated deferrable
interest debentures 1,981 -- 1,981 -- -- --
Long-term debt 11 26 37 13 (21) (8)
Total interest expense 7,117 (1,318) 5,799 11,879 (145) 11,734
Change in net interest income $ 641 $ (2,333) $(1,692)$5,195 $ 511 $ 5,706
55
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 1998 1997 1996
(In thousands, except percentages)
Total loan delinquency (past due 30 to 89 days) $15,427 $19,890 $20,284
Total non-accrual loans 5,206 6,450 6,365
Total non-performing assets 8,236 8,858 8,671
Loan delinquency as a percentage of total loans
and loans held for sale, net of unearned income 1.45% 2.01% 2.16%
Non-accrual loans as a percentage of total loans
and loans held for sale, net of unearned income 0.49 0.65 0.68
Non-performing assets as a percentage of total loans
and loans held for sale, net of unearned income,
and other real estate owned 0.77 0.89 0.92
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, 1997, and December 31, 1998, each of the key
asset quality indicators demonstrated improvement. Total loan
delinquency declined by $4.5 million causing the delinquency
ratio to drop to 1.45%. Total non-performing assets decreased by
$622,000 since year-end 1997 causing the non-performing assets to
total loans ratio to drop to 0.77%. The overall improvement in
asset quality resulted from enhanced collection efforts on
residential mortgage loans and continued low levels of
non-performing commercial loans. These favorable asset quality
trends supported the Company's ability to fund the loan loss
provision at a level lower than the net-charge off experience in
1998. 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.
56
ALLOWANCE AND PROVISION FOR LOAN LOSSES...As described in more
detail in the accounting policy footnote, the Company uses a
comprehensive methodology and procedural discipline to maintain
an allowance for loan losses to absorb inherent losses in the
loan portfolio. The allowance can be summarized into three
elements; 1) reserves established on specifically identified
problem loans, 2) formula driven general reserves established for
loan categories based upon historical loss experience and other
qualitative factors which include delinquency and non-performing
loan trends, concentrations of credit, trends in loan volume,
experience and depth of management, examination and audit
results, effects of any changes in lending policies, and trends
in policy exceptions, and 3) a general unallocated reserve which
provides conservative positioning in the event of variance from
our assessment in the regional and local economies and to provide
protection against credit risks resulting from other external
factors such as the continued growth of the loan portfolio. Note
that the qualitative factors used in the formula driven general
reserves are evaluated quarterly (and revised if necessary) by
the Company's management to establish allocations which
accommodate each of the listed risk factors. The general
unallocated reserve is not formula driven and inherently involves
a higher degree of uncertainty than the formula driven and
specific reserves and considers factors unique to the markets in
which the Company operates. The following table sets forth
changes in the allowance for loan losses and certain ratios for
the periods ended:
Year ended December 31 1998 1997 1996 1995 1994
(In thousands, except ratios and percentages)
Balance at beginning of year: $ 12,113 $ 13,329 $ 14,914 $ 15,590 $ 15,260
Addition due to acquisitions -- -- -- -- 3,422
Reduction due to disposition of business line -- -- -- (342) --
Charge-offs:
Commercial 899 1,040 1,705 576 352
Real estate-mortgage 359 202 156 135 155
Consumer 1,260 1,255 746 589 591
Total charge-offs 2,518 2,497 2,607 1,300 1,098
Recoveries:
Commercial 113 529 527 183 199
Real estate-mortgage 132 262 108 41 100
Consumer 285 332 297 457 472
Total recoveries 530 1,123 932 681 771
Net charge-offs 1,988 1,374 1,675 619 327
Provision for loan losses 600 158 90 285 (2,765)
Balance at end of year $ 10,725 $ 12,113 $ 13,329 $ 14,914 $ 15,590
Loans and loans held for sale, net of unearned income:
Average for the year $ 1,019,215 $ 960,673 $ 857,921 $ 823,807 $ 809,695
At December 31 1,066,321 989,575 939,726 834,634 868,004
As a percent of average loans and loans held for sale:
Net charge-offs 0.19% 0.14% 0.20% 0.08% 0.04%
Provision for loan losses 0.06 0.02 0.01 0.03 (0.34)
Allowance for loan losses 1.05 1.26 1.55 1.81 1.93
Allowance as a percent of each of the following:
Total loans and loans held for sale, net of unearned income
1.01 1.22 1.42 1.79 1.80
Total delinquent loans (past due 30 to 89 days) 69.52 60.90 65.71 104.12 121.49
Total non-accrual loans 206.01 187.80 209.41 198.40 286.27
Total non-performing assets 130.22 136.75 153.72 158.22 197.32
Allowance as a multiple of net charge-offs 5.39x 8.82x 7.96x 24.09x 47.68x
Total classified loans $ 28,307 $ 26,184 $ 24,027 $ 28,355 $ 39,338
Dollar allocation of reserve to general risk 4,663 5,980 6,984 7,471 6,643
Percentage allocation of reserve to general risk 43.48% 49.37% 52.40% 50.09% 42.61%
57
The Company recorded a provision for loan losses of $600,000 in
1998, $158,000 in 1997, and $90,000 in 1996. When expressed as a
percentage of average loans, the provision has increased from
0.01% to 0.06% over this three-year period. The Company's net
charge-offs amounted to $2.0 million or 0.19% of average loans in
1998, $1.4 million or 0.14% in 1997, and $1.7 million or 0.20% in
1996. The Company did experience heightened net charge-offs in
the consumer loan portfolio in both 1998 and 1997 due to
increased numbers of personal bankruptcies.
The higher loan loss provision in 1998 was due in part to
continuing higher levels of consumer net charge-offs and
continued growth of commercial and commercial real-estate loans.
During 1998, commercial and commercial real-estate loans grew by
$36 million or 8.0% while the growth rate for this higher risk
loan category was $41 million or 10.1% in 1997. An increased
level of classified loans resulting from this loan growth also
supported the higher provision level.
Overall, the Company's allowance for loan losses was 130% of
non-performing assets and 206% of non-accrual loans at December
31, 1998. Both of these coverage ratios were comparable with the
prior year. It is important to note that approximately $3.6
million or 43% of the Company's non-performing assets are
residential mortgages which exhibit a historically low level of
net charge-off. During 1998, there were no changes in the
estimation methods or assumptions that affected the Company's
methodology for assessing the appropriateness of the allowance
for loan losses except that we developed an allocation to reflect
the risks associated with our wholesale residential mortgage
banking operation. The impact of this change resulted in a
$575,000 increase in the formula allowance for real estate
mortgage loans. The decline in the portion of the allowance for
loan losses allocated to general risk was due primarily to the
shrinkage in the total loan loss reserve balance as the specific
and formula driven general reserve allocations were overall
comparable with the prior year. Over the past five years, the
unallocated general portion of the allowance for loan losses has
stayed in a relatively narrow range of 43% to 52% of the total
loan loss reserve balance. The Company does not weight the
unallocated general allowance among segments of the loan
portfolio. The Company expects to increase its loan loss
provision level in 1999 due to continued loan growth and
increased holdings of commercial and commercial real estate loans
and if net charge-offs remain at current levels.
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 that was
previously discussed. The entire allowance for loan losses is
available to absorb future loan losses in any loan category.
At December 31 1998 1997 1996 1995 1994
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 $ 1,004 13.1% $ 1,020 14.4% $ 1,826 14.7% $ 2,127 12.3% $ 1,894 13.4%
Commercial loans
secured by real estate 2,082 32.1 2,543 30.6 2,796 28.4 3,286 21.5 5,278 19.3
Real estate-mortgage 1,038 47.0 414 45.9 472 45.6 345 50.2 339 48.8
Consumer 1,563 7.8 1,506 9.1 959 11.3 600 16.0 1,436 18.5
Allocation to
general risk 4,663 5,980 6,984 7,471 6,643
Allocation for
impaired loans 375 650 292 1,085 -
Total $10,725 $12,113 $13,329 $ 14,914 $ 15,590
58
Even though real estate-mortgage loans comprise 47% of the
Company's total loan portfolio, only $1 million or 9.7% of the
total allowance for loan losses is allocated against this loan
category. The real estate-mortgage loan allocation is based
primarily upon the Company's five-year historical average of
actual loan charge-offs experienced in that category along with
the previously mentioned allocation for wholesale mortgage
banking activities. The disproportionately higher allocations for
commercial loans and commercial loans secured by real estate
reflect the increased credit risk associated with this type of
lending, the evaluation of the previously mentioned qualitative
factors, and the Company's historical loss experience in these
categories. The higher allocation for consumer loans reflect
increased credit card charge-offs due to personal bankruptcies
over the past two years. At December 31, 1998, management of the
Company believes the allowance for loan losses was adequate to
cover potential inherent losses within the Company's loan
portfolio.
NON-INTEREST INCOME...Non-interest income for 1998 totaled $23.7
million which represented a $3.5 million or 17.3% increase when
compared to 1997. This increase was primarily due to the
following items:
a $408,000 or 10.1% increase in trust fees to $4.4 million in
1998. This trust fee growth reflects increased assets under
management due to the profitable expansion of the Trust Company's
business. The average annual growth rate in trust fees has been
in excess of 10% over the past five years.
a $1.7 million increase in gains realized on loans held for
sale to $3.7 million due to heightened residential mortgage
refinancing and origination activity at the Company's mortgage
banking subsidiary. Total mortgage loans closed amounted to $450
million in 1998 compared to $253 million in 1997. Reflected in
this increase the Company generated $681,000 in gains on the sale
of mortgage servicing rights.
a $1.5 million increase in gains realized on investment
security sales as the Company focused on selling mortgage-backed
securities which were experiencing rapid prepayments in 1998.
These security sales were part of an asset liability management
strategy to extend the duration of the portfolio while
maintaining yield.
a $1.5 million or 28% increase in other income due in part to
additional income resulting from ATM surcharging, other mortgage
banking processing fees, credit card merchant income, and revenue
generated from annuity and mutual fund sales in the Company's
financial service subsidiaries.
59
a $1.4 million or 67% decrease in net mortgage servicing fee
income to $692,000 due to greater amortization expense on
mortgage servicing rights as a result of faster mortgage
prepayment speeds in 1998. Given the low interest rate
environment and heightened mortgage refinancing activity, the
Company expects this trend of high amortization expense on the
servicing rights to continue into 1999. The following chart
highlights some of the key information related to SMC's mortgage
servicing portfolio:
At December 31 1998 1997
(In thousands, except percentages
and prepayment data)
MSR portfolio balance $1,175,138 $1,175,593
Fair value of MSRs based upon
discounted cash flow of servicing portfolio 16,447 15,657
Fair value as a percentage of MSR balance 1.40% 1.33%
PSA prepayment speed 289 230
Weighted average portfolio interest rate 7.58% 7.79%
A rollforward of the MSRs is as follows:
(In thousands)
Balance as of December 31, 1997 $14,960
Acquisition of servicing rights 7,038
Impairment charge (831)
Sale of servicing rights (2,109)
Amortization of servicing rights (2,861)
Balance as of December 31, 1998 $16,197
Non-interest income as a percentage of total revenue increased
from 23.2% in 1997 to 26.6% in 1998. This diversification of the
revenue stream will continue to be a key strategic focal point
for the Company in the future.
Non-interest income for 1997 totaled $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.
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 subsidiary. Total
mortgage originations exceeded $253 million in 1997 compared to
$205 million in 1996. The Company also generated $153,000 in
gains on the sale of servicing rights in 1997 which is reflected
in the above gain figure.
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. 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.
60
NON-INTEREST EXPENSE...Non-interest expense for 1998 totaled
$59.5 million which represented a $5.4 million or 10.0% increase
when compared to 1997. This increase was primarily due to the
following items:
a $2.2 million or 7.9% increase in salaries and employee
benefits due to merit pay increases, higher commission and
incentive payments, increased pension expense and higher medical
insurance premiums. The Company also incurred $350,000 of
severance costs resulting from a realignment of the Company's
retail banking division and human resources function. On an
ongoing basis, these changes should result in 13 fewer full-time
equivalent employees and save in excess of $450,000 annually.
a $377,000 or 11.6% increase in equipment expense due to
technology related expenses such as the system costs associated
with optical disk imaging of customer statements and the
installation of wide area networks.
an $831,000 expense related to the establishment of an
impairment reserve on the mortgage servicing portfolio. This
reserve was needed on certain tranches of mortgage servicing
rights whose market value had fallen below cost due to
accelerated prepayment speeds and low long-term interest rates.
a $1.4 million increase in other expense due to higher outside
processing fees, increased advertising expense, heightened
foreclosure losses and costs associated with Year 2000
compliance.
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,
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.
61
YEAR 2000...The Year 2000 ("Y2K") issue, is the result of
computer programs having been written using two digits, rather
than four, to define the applicable year. Any of the Company's
computer systems that have date-sensitive software or
date-sensitive hardware may potentially recognize a date using
"00" as the Year 1900 rather than the Year 2000. This could
result in system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary
inability to process transactions, send statements or engage in
similar normal business activities.
Due to the critical nature of the Y2K issue quarterly status
reports are provided to the Boards of both bank subsidiaries and
the Company. Personnel from all operational areas of the company
are involved in the Y2K solution.
USBANCORP has been actively working on the Year 2000 computer
problem and has made significant progress in ensuring that both
its information technology and non-information technology systems
and applications will be Y2K compliant. To date, the Company has
completed the inventory, assessment and strategy phases of its
Year 2000 program. During these phases, the Company identified
hardware and software that required modification, developed
implementation plans, prioritized tasks and established
implementation timelines. The Company is targeting to have the
majority of testing completed and, if necessary, any mission
critical systems repaired by the end of the first quarter of
1999. The Company has reviewed the building and office equipment
for embedded microchip problems. The required components to
correct the problems discovered have been ordered and will be
tested when installed.
The Y2K process has also required that the Company work with
vendors, third-party service providers, and customers. The
Company continues to communicate with all its vendors and large
commercial customers to determine the extent to which the Company
is vulnerable to these parties' failure to remediate there own
Year 2000 issue. Mission critical vendors have affirmed their
Year 2000 compliance. No mission critical system vendor changes
are expected at this time.
The Company's business resumption plan is also being expanded to
address the potential problems of Y2K such as the loss of power,
telecommunications, or the failure of a mission critical vendor.
An outside consulting firm has been retained to create a company
wide business resumption plan. The firm will use its considerable
experience with business resumption planning and the existing
company contingency plans to create a business resumption plan
which will support our continued operation in the face of
external or internal Y2K caused disruptions.
The Company recognizes the serious risks it faces regarding
credit customers not properly remediating their automated systems
to conform with Year 2000 related problems. The failure of a loan
customer to prepare adequately to conform with Year 2000 could
have an adverse effect on such customer's operations and
profitability, in turn limiting their ability to repay loans in
accordance with scheduled terms. During the second half of 1998,
the Company completed a detailed analysis of its major loan
customers' compliance with Year 2000. The focus of the analysis
was on commercial credit exposures with balances in excess of
$250,000 and included discussions between loan officers,
customers, and information system representatives in select
cases. As a result of this analysis, the Company currently
believes that the portion of the loan loss reserve allocated for
general risk is adequate to cover the customer credit risk
associated with Year 2000.
The Company has also begun to address the potential liquidity
risks associated with Year 2000. The Company has reviewed its top
100 deposit customers by branch and offered educational sessions
to help them better understand the Y2K problem. Additionally, the
Company has developed a contingency funding plan which provides
for the use of the Federal Reserve Discount Window, brokered
deposits and more aggressive wholesale borrowings should the
Company experience an outflow of deposits. From an asset
liability management standpoint, the Company has begun to
emphasize deposit products which encourage extension of shorter
term maturities into products maturing after the century date
change to further limit liquidity risk.
62
The Company is using both internal and external resources to
complete its comprehensive Y2K compliance program. The Company
currently estimates that the total cost to achieve Y2K compliance
will approximate $1.4 million. Approximately 66% of this total
cost represents incremental expenses to the Company while
approximately 34% represents the internal cost of redeploying
existing information technology resources to the Y2K issue. To
date, the Company has expensed $537,000 or 38% of its total
estimated cost to achieve Year 2000 compliance. The Company does
not believe that these expenditures have yet had, nor will have,
a material impact on the results of operation, liquidity, or
capital resources.
Based on the companies efforts to date, mission critical
information systems and non-information systems are expected to
function properly before and after January 1, 2000. The company
does not currently anticipate that internal systems failures will
result in any material adverse effect to its operations or
financial condition. At this time, the company believes that the
most likely "worst case" scenario involves potential disruptions
in areas in which the company operations must rely on third
parties whose systems may not work properly after January 1,
2000. While such failures could affect important operations of
the company in a significant manner, the company cannot at
present estimate either the likelihood or the potential cost of
such failures. The following chart summarizes the Company's Y2K
progress.
Resolution
Phases Assessment Remediation Testing Implementation
Information 100% complete 80% complete 90% complete 80% complete
Technology
External contractors Testing of one All internal supported
have been scheduled remaining mission mission critical programs
to complete changes critical system is are Y2K compliant.
by 3/31/99. expected in
March 1999.
Business critical One externally provided
applications will be mission critical system has
tested by July 1999. been tested but is not in
production. Implementation
is scheduled for completion
by 3/31/99.
Operating equipment 100% complete 70% complete 50% complete 70% complete
with embedded chips
or software. All upgrades have Tests are scheduled Most of the equipment
been ordered and with vendors to be and buildings are of a
installation is to completed by 6/30/99. vintage which is not
be completed by date dependent.
3/31/99.
Third party 100% complete 80% for system 60% complete for 80% complete for
interfaces system interfaces system interfaces
Contingency plans Expected completion Expected completion
are being developed. March 1999. March 1999.
Due June 1999.
Contingency plans being
developed. Due June 1999.
63
NET OVERHEAD BURDEN...The Company's efficiency ratio
(non-interest expense divided by total revenue) averaged 64.8% in
1998 compared to 60.1% in 1997, and 63.4% in 1996. Factors
contributing to the higher efficiency ratio in 1998 included the
compression experienced in the net interest margin, increased
expenses in the mortgage banking operation, and the costs
associated with several strategic initiatives which began in 1997
and are designed to diversify the Company's revenue stream in
future years. These new strategic initiatives include the opening
of financial services subsidiaries which sell annuities, mutual
funds, and insurance, the establishment of the first full service
mobile bank branch in Western Pennsylvania, and the opening of
two loan production offices. Additionally, the repurchase of the
Company's stock has a favorable impact on return on equity but a
negative impact on the efficiency ratio due to the interest cost
associated with borrowings which provide funds to repurchase the
stock (i.e. the $2 million interest expense on the $34.5 million
of guaranteed junior subordinated deferrable interest
debentures). The amortization of intangible assets also creates a
$2.3 million non-cash charge that negatively impacts the
efficiency ratio. The 1998 efficiency ratio, stated on a cash
basis excluding the intangible amortization, was 62.3% or 2.5%
lower than the reported efficiency ratio of 64.8%. Total assets
per employee improved 5.8% from $2.8 million for 1997 to $3.0
million for 1998. Net income per employee averaged $27,700 in
1998 compared to $30,700 in 1997 and $26,600 in 1996.
INCOME TAX EXPENSE...The Company's provision for income taxes for
1998 was $7.7 million reflecting an effective tax rate of 26.6%.
The Company's 1997 income tax provision was $9.3 million or an
effective tax rate of 28.4%. The lower income tax expense and
effective tax rate in 1998 was due primarily to a reduced level
of pre-tax income combined with a relatively consistent level of
tax-free asset holdings between years. The tax-free asset
holdings consist primarily of municipal investment securities,
bank owned life insurance, and commercial loan tax anticipation
notes. Between 1997 and 1996, the $2.1 million increase in income
tax expense was due to higher pre-tax earnings as the level of
tax free income was relatively consistent between years.
BALANCE SHEET...The Company's total consolidated assets were
$2.377 billion at December 31, 1998, compared with $2.239 billion
at December 31, 1997, which represents an increase of $138
million or 6.2%. During 1998, total loans and loans held for sale
increased by approximately $77 million or 7.8% due to growth in
commercial mortgage loans as a result of the successful execution
of strategies to increase both middle market and small business
lending. Heightened refinancing activity and a successful direct
consumer loan promotion also contributed to sharp growth in
residential mortgage loans held for sale and home equity loans.
Consumer loans continued to decline due to net run-off
experienced in the indirect auto loan portfolio as the Company
has exited this low profit line of business. Total investment
securities increased by $53 million as the Company more
aggressively purchased mortgage-backed securities in the second
half of 1998 due to expected continuation of strong cash flow
from mortgage-backed securities in future months and to position
the balance sheet for the net inflow of approximately $70 million
in cash from the First Western Branch Acquisition which will
close in the first quarter of 1999.
64
Total deposits increased by $37 million or 3.2% since December
31, 1997, due largely to the acquisition of $27 million of
deposits with the purchase of two National City branch offices in
Allegheny County. The issuance of guaranteed junior subordinated
deferrable interest debentures provided the Company with $34.5
million of funds which were used to repurchase treasury stock and
paydown borrowings at the Parent Company. The remainder of the
asset growth was funded by a $78 million increase in total
short-term and FHLB borrowings. The Company plans to paydown
approximately $70 million of borrowings in 1999 with the deposits
received from the First Western Branch Acquisition. The
repurchase of treasury stock was the major factor causing the net
$17 million decline in total equity since December 31, 1997.
INTEREST RATE SENSITIVITY...Asset/liability management involves
managing the risks associated with changing interest rates and
the resulting impact on the Company's net interest income, net
income and capital. The management and measurement of interest
rate risk at USBANCORP is performed by using the following tools:
1) Simulation modeling which analyzes the impact of interest rate
changes on net interest income, net income and capital levels
over specific future time periods. The simulation modeling
forecasts earnings under a variety of scenarios that incorporate
changes in the absolute level of interest rates, the shape of the
yield curve, prepayments and changes in the volumes and rates of
various loan and deposit categories. The simulation modeling also
incorporates all off balance sheet hedging activity as well as
assumptions about reinvestment and the repricing characteristics
of certain assets and liabilities without stated contractual
maturities. 2) Static "GAP" analysis which analyzes the extent to
which interest rate sensitive assets and interest rate sensitive
liabilities are matched at specific points in time. For static
GAP analysis, USBANCORP typically defines interest rate sensitive
assets and liabilities as those that reprice within six months or
one year. 3) Market value of portfolio equity sensitivity
analysis. The overall interest rate risk position and strategies
are reviewed by senior management and the Company's Board of
Directors on an ongoing basis.
65
The following table presents a summary of the Company's static
GAP positions at December 31, 1998:
Over Over
3 Months 6 Months
3 Months Through Through Over
Interest Sensitivity Period or Less 6 Months 1 Year 1 Year Total
(In thousands, except ratios and percentages)
Rate sensitive assets:
Loans $ 291,619 $ 101,535 $ 135,011 $ 527,431 $1,055,596
Investment securities and assets
held in trust for collateralized
mortgage obligation 206,147 112,840 177,045 673,601 1,169,633
Short-term assets 3,855 - - - 3,855
Other assets - - 35,622 - 35,622
Total rate sensitive assets $ 501,621 $ 214,375 $ 347,678 $1,201,032 $2,264,706
Rate sensitive liabilities:
Deposits:
Non-interest bearing deposits $ - $ - $ - $ 166,701 $ 166,701
NOW and Super NOW - - - 92,060 92,060
Money market 172,807 - - - 172,807
Other savings - - - 167,167 167,167
Certificates of deposit of $100,000
or more 26,876 3,821 4,192 4,553 39,442
Other time deposits 95,631 98,238 171,455 172,790 538,114
Total deposits 295,314 102,059 175,647 603,271 1,176,291
Borrowings 458,714 383 416 567,057 1,026,570
Total rate sensitive liabilities $ 754,028 $ 102,442 $ 176,063 $1,170,328 $2,202,861
Off-balance sheet hedges (75,000) 25,000 50,000 - -
Interest sensitivity GAP:
Interval (177,407) 86,933 121,615 30,704
Cumulative $ (177,407) $ (90,474) $ 31,141 $ 61,845 $ 61,845
Period GAP ratio 0.74x 1.68x 1.54x 1.03x
Cumulative GAP ratio 0.74 0.89 1.03 1.03
Ratio of cumulative GAP to total assets (7.92)% (4.04)% 1.39% 2.76%
When December 31, 1998, is compared to December 31, 1997, the
Company's six month cumulative GAP became less negative and the
one year cumulative GAP turned slightly positive due to the
extension of FHLB borrowings beyond one year and expectations for
continued strong cash flow from the mortgage-backed securities
portfolio. As separately disclosed in the above table, the
off-balance sheet hedge transactions (described in detail in Note
#21) had no net impact on the one year cumulative GAP since all
hedges are scheduled to mature in 1999.
A portion of the Company's funding base is low cost core deposit
accounts which do not have a specific maturity date. The accounts
that comprise these low cost core deposits include passbook
savings accounts, money market accounts, NOW accounts, and daily
interest savings accounts. At December 31, 1998, the balance in
these accounts totaled $432 million or 18.2% of total assets.
Within the above static GAP table, approximately $173 million or
40% 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.
66
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 in 1998 began using market value
sensitivity measures to further evaluate the balance sheet
exposure to changes in interest rates. Market value of portfolio
equity sensitivity analysis captures the dynamic aspects of
long-term interest rate risk across all time periods by
incorporating the net present value of expected cash flows from
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. The interest rate scenarios in
the table compare the Company's base forecast or most likely rate
scenario at December 31, 1998, 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, 1998, 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.
Variability Of Change In
Interest Rate Net Interest Variability Of Market Value Of
Scenario Income Net Income Portfolio Equity
Base 0% 0% 0%
Flat 0.18 0.31 1.89
200 bp increase (5.91) (11.70) (22.28)
200 bp decrease 1.31 (5.93) 17.10
As indicated in the table, the maximum negative variability of
USBANCORP's net interest income and net income over the next
twelve month period was (5.9%) and a (11.7%) 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 (22%) under
this interest rate scenario. The off-balance sheet borrowed funds
hedges also helped reduce the variability of forecasted net
interest income, net income and market value of portfolio equity
in a rising interest rate environment. Finally, this sensitivity
analysis is limited by the fact that it does not include any
balance sheet repositioning actions the Company may take should
severe movements in interest rates occur such as lengthening or
shortening the duration of the securities portfolio or entering
into additional off-balance sheet hedging transactions. These
actions would likely reduce the variability of each of the
factors identified in the above table in the more extreme
interest rate shock forecasts.
67
Within the investment portfolio at December 31, 1998, 56.6% of
the portfolio is currently classified as available for sale and
43.4% as held to maturity. This compares to a portfolio
composition breakdown of 52.1% available for sale and 47.9% held
to maturity at December 31, 1997. 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 totaled $382 million at
December 31, 1998, compared to $231 million at December 31, 1997.
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, 1998, USBANCORP's subsidiaries had approximately $115 million
of unused lines of credit available under informal arrangements
with correspondent banks compared to $130 million at December 31,
1997. These lines of credit enable USBANCORP's subsidiaries to
purchase funds for short-term needs at current market rates.
Additionally, each of the Company's subsidiary banks are members
of the Federal Home Loan Bank which provides the opportunity to
obtain intermediate to longer term advances up to approximately
80% of their investment in assets secured by one- to four-family
residential real estate. This would suggest a remaining current
total available Federal Home Loan Bank aggregate borrowing
capacity of approximately $125 million. Furthermore, the Parent
Company had available at December 31, 1998, $12.2 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 increased by $721,000
between December 31, 1998, and December 31, 1997, due primarily
to $115.3 million of net cash provided by financing activities.
This more than offset $12.2 million of net cash used by operating
activities and $102.4 million of net cash used by investing
activities. Within investing activities, purchases of investment
securities exceeded the cash proceeds from investment security
maturities and sales by approximately $52.6 million. Cash
advanced for new loan fundings totaled $388.1 million and was
approximately $41 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 $11.6
million. An increase in demand and savings deposits provided
$25.2 million of cash and includes the acquired National City
branch deposits. Net proceeds from the issuance of guaranteed
junior subordinated deferrable interest debentures provided the
Company with $33 million of cash. Increased short-term borrowings
provided the Company with $81.4 million of cash.
68
CAPITAL RESOURCES...As presented in Note #23, each of the
Company's regulatory capital ratios increased between December
31, 1997, and December 31, 1998, due to the issuance of the $34.5
million of guaranteed junior subordinated deferrable interest
debentures which qualify as Tier 1 capital. Specifically, the
Tier 1 capital and asset leverage ratio increased from 12.96% and
6.25% at December 31, 1997, to 13.57% and 6.62% at December 31,
1998. The Company targets an operating range of 6.0% to 6.50% for
the asset leverage ratio because management and the Board of
Directors believes that this level provides an optimal balance
between regulatory capital requirements and shareholder value
needs. Strategies that the Company uses to manage its capital
include common dividend payments, treasury stock repurchases, and
earning asset growth. The Company expects that the asset leverage
ratio will decline to approximately 6.25% in the first quarter of
1999 when the acquisition of the First Western Branches is
completed. The Company also plans to continue to actively use its
stock repurchase program to manage capital in 1999 as additional
earning asset growth will be constrained by asset liability
management policies which limit total borrowings to 40% of
assets.
The Company used funds provided from the issuance of the
guaranteed junior subordinated deferrable interest debentures to
repurchase 1.2 million shares or $30.3 million of its common
stock during 1998. Improved liquidity in the Company's stock
resulting from the 3 for 1 stock split was one factor
contributing to the increased number of shares repurchased in
1998. Through December 31, 1998, the Company has repurchased a
total of 3.8 million shares of its common stock at a total cost
of $61.5 million or $16.03 per share. The Company plans to
continue its treasury stock repurchase program which currently
permits a maximum total repurchase authorization of $70 million.
During the second quarter of 1998, the Board of Directors
eliminated the previous maximum price per share threshold at
which the stock could be repurchased of 250% of book value.
The Company exceeds all regulatory capital ratios for each of the
periods presented. Furthermore, each of the Company's subsidiary
banks is considered "well capitalized" under all applicable FDIC
regulations. It is the Company's ongoing intent to continue to
prudently leverage the capital base in an effort to increase
return on equity performance while maintaining necessary capital
requirements. It is, however, the 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
$0.60 for 1998 which was a 13.2% increase over the $0.53 per
share dividend for 1997. The 1998 dividends included a special
$0.06 per share dividend that was declared in December. This
represents the third consecutive year that a special dividend was
declared. Based upon the Company's total declared 1998 common
dividends, the dividend yield on the Company's common stock was
approximately 3.0%. This common dividend yield is almost 1%
better than the average Pennsylvania Bank Holding Company common
dividend yield. The Company's Board of Directors believes that a
competitive common dividend is a key component of total
shareholder return particularly for retail shareholders.
69
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; (vi) the effect of Y2K on borrowers ability to repay
based on contractual terms and; (vii) other external developments
which could materially impact the Company's operational and
financial performance.
70
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
H 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, 1998
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.) $243,150,354.00 as of
January 31, 1999.
Note - If a determination as to whether a particular person or
entity is an affiliate cannot be made without involving
unreasonable effort and expense, the aggregate market value of
the common stock held by non-affiliates may be calculated on the
basis of assumptions reasonable under the circumstances, provided
that the assumptions are set forth in this Form.
Applicable only to registrants involved in bankruptcy proceedings
during the preceding five years: Indicate by check mark whether
the registrant has filed all documents and reports required to be
filed by Sections 12, 13, or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
(Applicable only to corporate registrants) Indicate the number of
shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date. 13,508,353 shares were
outstanding as of January 31, 1999.
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, 1998, 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 72.
71
FORM 10-K INDEX
PART I
Item 1. Business 73
Item 2. Properties 83
Item 3. Legal Proceedings 83
Item 4. Submission of Matters to a Vote of Security Holders 83
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 83
Item 6. Selected Consolidated Financial Data 83
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 83
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk 84
Item 8. Consolidated Financial Statements and Supplementary
Data 84
Item 9. Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure 84
PART III
Item 10. Directors and Executive Officers of the Registrant 84
Item 11. Executive Compensation 84
Item 12. Security Ownership of Certain Beneficial Owners and
Management 84
Item 13. Certain Relationships and Related Transactions 84
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K 84
Signatures 88
72
PART I
ITEM 1. BUSINESS
General
USBANCORP, Inc. (the "Company") is a registered bank holding
company organized under the Pennsylvania Business Corporation Law
and is registered under the Bank Holding Company Act of 1956, as
amended (the "BHCA.") The Company became a holding company upon
acquiring all of the outstanding shares of U.S. Bank ("U.S.
Bank") on January 5, 1983. The Company also acquired all of the
outstanding shares of Three Rivers Bank and Trust Company ("Three
Rivers Bank") in June 1984, McKeesport National Bank ("McKeesport
Bank") in December 1985 (which was subsequently merged into Three
Rivers Bank), Community Bancorp, Inc. in March 1992 (which was
also subsequently merged into Three Rivers Bank in July 1997),
and Johnstown Savings Bank ("JSB") in June 1994 (which was
immediately merged into U.S. Bank). Immediately following the
acquisition of JSB, U.S. Bank caused the intracompany transfer by
Standard Mortgage Corporation of Georgia, a wholly-owned
subsidiary of JSB, of all its assets, subject to all of its
liabilities, to SMC Acquisition Corporation, an indirect
subsidiary of Community. SMC Acquisition Corporation was renamed
Standard Mortgage Corporation of Georgia and is a mortgage
banking company organized under the laws of the State of Georgia
that originates, sells, and services residential mortgage loans.
In addition, the Company formed United Bancorp Life Insurance
Company ("United Life") in October 1987, USBANCORP Trust 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, 1998, the Company had, on a consolidated basis,
total assets, deposits, and shareholders' equity of $2.38
billion, $1.18 billion and $142 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 state bank chartered under the Pennsylvania
Banking code of 1965, as amended. Through 21 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, 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;
73
and (iii) credit card operations through MasterCard and VISA. U.S. Bank
also operates 26 automated bank teller machines ("ATM"s) through
its 24-Hour Banking Network which is linked with MAC, a regional
ATM network and CIRRUS, a national ATM network. U.S. Bank also
has a wholly owned mortgage banking subsidiary - UBAN Mortgage
Company. UBAN Mortgage Company was formed in January 1997 for the
purpose of originating and selling mortgage loans primarily in
Western Pennsylvania. Additionally, USNB Financial Services
Corporation, a wholly owned subsidiary of U.S. Bank, was formed
on May 23, 1997. USNB Financial Services Corporation engages in
the sale of annuities, mutual funds, and insurance.
U.S. Bank's deposit base is such that loss of one depositor or a
related group of depositors would not have a materially adverse
effect on its business. In addition, the loan portfolio is also
diversified so that one industry or group of related industries
does not comprise a material portion of the loan portfolio.
U.S. Bank's business is not seasonal nor does it have any risks
attendant to foreign sources.
In October 1998, U.S. Bank changed its charter from a national
bank to a state bank. Under the new charter U.S Bank is subject
to supervision and regular examination by the Federal Reserve,
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, 1998:
Headquarters Johnstown, PA
Chartered 1933
Total Assets $1,308,872
(55.1% of the Company's total)
Total Investment Securities $688,065
(58.8% of Company's total)
Total Loans (net of unearned income) $539,860
(50.6% of the Company's total)
Total Deposits $615,819
(52.4% of the Company's total)
Total Net Income $11,857
(56.1% of the Company's total)
Asset Leverage Ratio 6.85%
1998 Return on Average Assets 0.94%
1998 Return on Average Equity 11.49%
Total Full-time Equivalent Employees 379
(49.7% of the Company's total)
Number of Offices 21
(46.7% of the Company's total)
Three Rivers Bank
Three Rivers Bank is a state bank chartered under the
Pennsylvania Banking Code of 1965, as amended. Through 24
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.
74
Three Rivers Bank also offers wholesale banking services to other banks,
merchants, governmental units, and other large commercial
accounts. Such services include balancing services, lock box
accounts, and providing coin and currency. Three Rivers Bank also
has a wholly owned mortgage banking subsidiary - Standard
Mortgage Corporation. Standard Mortgage Corporation, based in
Atlanta, Georgia, is a mortgage banking company that originates,
sells, and services residential mortgage loans. Additionally,
TRB Financial Services Corporation, a wholly owned subsidiary of
Three Rivers Bank was formed on August 5, 1997. TRB Financial
Services Corporation engages in the sale of annuities and mutual
funds.
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, 1998:
Headquarters McKeesport, PA
Chartered 1965
Total Assets $1,061,987
(44.7% of the Company's total)
Total Investment Securities $ 477,657
(40.8% of Company's total)
Total Loans (net of unearned income) $ 526,461
(49.4% of the Company's total)
Total Deposits $ 560,472
(47.6% of the Company's total)
Total Net Income $ 11,259
(53.3% of the Company's total)
Asset Leverage Ratio 6.47%
1998 Return on Average Assets 1.13%
1998 Return on Average Equity 16.09%
Total Full-time Equivalent Employees 332
(43.6% of the Company's total)
Number of Offices 24
(53.3% of the Company's total)
75
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, 1998, United Life had total
assets of $2.4 million and total shareholder's equity of
$1.1 million.
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, 1998, USBANCORP Trust Company had $1.36 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 57 Chairman, President & Chief Executive
Officer of USBANCORP, Inc., and Chairman
of U.S. Bank, Three Rivers Bank, and
USBANCORP Trust Company
Orlando B. Hanselman 39 Executive Vice President of USBANCORP, Inc.,
and President & Chief Executive Officer of U.S.
Bank.
W. Harrison Vail 58 President & Chief Executive Officer of
Three Rivers Bank
Ronald W. Virag, CFTA 53 President & Chief Executive
Officer, USBANCORP Trust Company
Kevin J. O'Neil 61 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 29 years of mortgage banking experience.
76
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 45 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 21 offices
and a $1.3 billion asset presence primarily in the Greater
Johnstown marketplace. Three Rivers Bank has 24 offices and a
$1.1 billion asset presence primarily in the suburban Pittsburgh
marketplace.
The momentum of the U.S. economy remains strong, as evidenced by
strong consumer confidence, a rebound in exports, and a jump in
federal purchases. These factors contributed to produce a 6.1%
increase (annual rate) in real GDP in the fourth quarter, capping
off a much stronger than expected economic expansion that stands
in stark contrast to recessionary conditions covering the rest of
the world. The risk of recession in 1999 has receded, although
not completely. Continued low commodity prices, low interest
rates, and high stock prices have given both consumers and
business the wherewithal, as well as, the desire to spend. The
Federal Reserve is unlikely to raise interest rates as long as
inflation remains stable and employment cost increases do not
accelerate. An increase in interest rates might cause the stock
market to drop; triggering a sharp downturn that could turn into
a recession. The economy grew 3.9% in both 1997 and 1998 without
any increase in inflation. In fact, inflation decelerated even as
the economy soared. The unemployment rate, at 4.3%, is at its
lowest level since 1970.
77
Unemployment is expected to rise only
marginally over the next year. Payroll jobs rose strongly in
early 1999. December 1998 ended with a 245,000-job gain, which
was close to the average monthly gain for 1998 when 2.9 million
new jobs were created. Average hourly wages jumped by 0.5%
In U.S. Bank's market area, business should continue to expand in
Cambria, Bedford, and Blair counties, but slow slightly in
Somerset County, the Federal Reserve predicted. Local economic
developers, however, are optimistic about the Cambria and
Somerset county outlook. With planned construction of an
automobile dealership and a strip mall just outside Somerset
Borough, manufacturers expect a business increase within the next
six months. Downtown Johnstown, which has lacked growth over the
years, is part of the area's recent economic revitalization.
Johnstown's 1998 building permit revenues will be nearly double
the amount anticipated due to more than $10 million in
construction projects. Economic developers predict that this is
an indication the city is moving in the right direction.
Construction in the past year includes: A $5 million UPMC Lee
Regional Expansion project at the Main Street hospital, a $1.5
million Rite Aid to be built in the city's Moxham section, and a
$3.5 million Social Security building on Washington Street,
downtown Johnstown. Unemployment reports by the state Department
of Labor and Industry show the Johnstown Metropolitan Statistical
Area, which encompasses Cambria and Somerset Counties, at 5.7%,
the highest in Pennsylvania. This, however, represents solid
improvement from the 7.2% unemployment rate in December 1997.
Unemployment in Greater Johnstown is higher than suburban
Pittsburgh, Pennsylvania, and the Nation, and is also subject to
a greater level of volatility.
In Three Rivers Bank's market area, new multi-family housing
construction continues to surpass 1997 results in the
metropolitan Pittsburgh area. A survey by the U.S. Census Bureau
shows total number of building permit applications for
multi-family units through the ten month period ending in October
ran 15% higher than for the comparable period last year.
Unemployment in the Pittsburgh region increased in October to
4.7%. The seasonally adjusted jobless rate was pushed up from
September's 4.5% rate largely due to layoffs in the metals and
mining industries. Job cuts in those and other sectors offset
gains in trade, transportation and elsewhere. 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.
Employees
The Company employed approximately 857 persons as of December 31,
1998, in full- and part-time positions. Approximately 258
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.
78
Commitments and Lines of Credit
The Company's banking subsidiaries are obligated under
commercial, standby, and trade-related irrevocable letters of
credit aggregating $15.4 million at December 31, 1998. 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, 1998, the Company's
banking subsidiaries had unused loan commitments of approximately
$234.3 million.
Statistical Disclosures for Bank Holding Companies
Certain information regarding statistical disclosure for bank
holding companies pursuant to Guide 3 is provided in the 1998
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 54, 55, 64, 65, 66, 67 and 68.
II. Investment Portfolio
Information required by this section is presented on
pages 22, 23, 79 and 80.
III. Loan Portfolio
Information required by this section appears on pages
24, 25, 81 and 82.
IV. Summary of Loan Loss Experience
Information required by this section is presented on
pages 24, 57, 58 and 59.
V. Deposits
Information required by this section follows on pages
26, 82 and 83.
VI. Return on Equity and Assets
Information required by this section is presented on
page 46.
VII. Short-Term Borrowings
Information required by this section is presented on
page 26.
Investment Portfolio
Investment securities held to maturity are carried at amortized
cost while investment securities classified as available for sale
are reported at fair value. At December 31, 1998, approximately
43% of the portfolio was categorized as held to maturity and 57%
as available for sale.
79
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 1998 1997 1996
(In thousands)
Book Value:
U.S. Treasury $ 442 $ 2,496 $ 10,934
U.S. Agency 21,524 1,769 4,224
State and municipal 11,166 13,516 21,772
Mortgage-backed securities 577,241 516,476 382,384
Other securities 47,409 42,370 35,880
Total book value
of investment securities available for sale $657,782 $576,627 $455,194
Total market value
of investment securities available for sale $661,491 $580,115 $455,890
Investment Securities Held to Maturity at December 31 1998 1997 1996
(In thousands)
Book Value:
U.S. Treasury $ 17,207 $ 16,320 $ 10,198
U.S. Agency 23,928 17,512 27,468
State and municipal 147,628 114,733 110,287
Mortgage-backed securities 315,171 380,825 395,199
Other securities 4,208 2,951 3,166
Total book value
of investment securities held to maturity $508,142 $532,341 $546,318
Total market value
of investment securities held to maturity $516,452 $541,093 $549,427
The total securities portfolio increased by approximately $53
million between December 31, 1997, and December 31, 1998, and by
$110 million between year end 1996 and year-end 1997. The Company
more aggressively purchased securities in the second half of 1998
due to expected continuation of strong cash flow from
mortgage-backed securities in future months and to position the
balance sheet for the net inflow of approximately $70 million in
cash from the First Western Branch Acquisition which will close
in the first quarter of 1999. The growth in 1997 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. The Company also had increased
purchases of municipal securities as these are a key tool used to
manage the effective tax rate.
At December 31, 1998, investment securities having a book value
of $628.4 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, 1998.
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, 1998, 98.1% of the portfolio was rated "AAA"
compared to 98.8% at December 31, 1997. Less than 1.0% was rated
below "A" or unrated at December 31, 1998.
80
Loan Portfolio
The following table sets forth the Company's loans by major
category as of the dates set forth below:
At December 31 1998 1997 1996 1995 1994
(In thousands)
Commercial $ 139,751 $ 143,113 $ 138,008 $ 103,546 $116,702
Commercial loans secured
by real estate 341,842 302,620 266,700 179,793 168,238
Real estate-mortgage 449,875 440,734 414,003 414,967 407,177
Consumer 88,812 95,272 111,025 133,820 161,642
Loans 1,020,280 981,739 929,736 832,126 853,759
Less: Unearned income 5,276 5,327 4,819 2,716 3,832
Loans, net of
unearned income $1,015,004 $ 976,412 $924,917 $ 829,410 $849,927
At December 31, 1998 and 1997, real estate-construction loans
constituted 4.9% and 2.3% of the Company's total loans, net of
unearned income, respectively.
Total loans, net of unearned income, increased by $38.6 million,
or 4.0%, between December 31, 1997, and December 31, 1998. This
growth occurred in commercial mortgage loans which increased by
$39.2 million, or 13.0%, and real estate-mortgage loans which
grew by $9.1 million, or 2.1%. The higher loan totals in
commercial mortgages resulted from increased production from both
middle market and small business lending (loans less than
$250,000). This improved new loan production was due primarily to
more effective sales efforts which have included an intensive
customer calling program and canvassing of small commercial
businesses. Other factors contributing to the loan growth were a
stable economic environment and the first full year results from
two loan production offices in the higher growth markets of
Westmoreland and Centre counties.
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 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
the majority of new fixed-rate mortgage product to assist in
asset/liability positioning and to reduce the Company's overall
dependence on residential mortgage loans. Total consumer loans
declined by $6.5 million or 6.8% in 1998, $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 each of the past three years.
The amount of loans outstanding by category as of December 31,
1998, 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.
81
More Than
One Year
One Year Through Over Total
or Less Five Years Five Years Loans
(In thousands, except ratios)
Commercial $ 35,265 $ 64,421 $ 40,065 $ 139,751
Commercial loans secured by real estate 38,738 125,319 177,785 341,842
Real estate-mortgage 20,469 71,180 358,226 449,875
Consumer 14,697 53,758 20,357 88,812
Total $ 109,169 $ 314,678 $ 596,433 $1,020,280
Loans with fixed-rate $ 42,442 $ 250,565 $ 385,423 $ 678,430
Loans with floating-rate 66,727 64,113 211,010 341,850
Total $ 109,169 $ 314,678 $ 596,433 $1,020,280
Percent composition of maturity 10.7% 30.8% 58.5% 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, 1998, 66.5% of total loans were fixed-rate which
was comparable with the prior year. The stability in the
fixed-rate percentage between years reflects continued customer
preference for fixed-rate loans in this overall low interest rate
environment. Also, a good portion of the commercial real estate
loan growth has occurred in the five year fixed-rate area. For
additional information regarding interest rate sensitivity, see
"Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations - Interest Rate Sensitivity."
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:
1998 1997 1996
Amount Rate Amount Rate Amount Rate
(In thousands, except rates)
Demand - non-interest bearing $ 159,515 -% $ 143,767 -% $ 140,574 -%
Demand - interest bearing 89,890 0.99 90,179 0.99 81,233 1.17
Savings 171,769 1.52 185,959 1.69 209,054 1.69
Money markets 167,758 3.60 153,345 3.71 144,718 3.44
Other time 581,351 5.39 580,720 5.66 586,874 5.56
Total deposits $1,170,283 4.05% $1,153,970 4.21% $ 1,162,453 4.12%
Total deposits increased by $16.3 million or 1.4% in 1998 due to
the acquisition in June of 1998 of two National City branch
offices with $27 million of deposits. The Company's average
deposits decreased by $8.5 million or 0.7% in 1997 due to
management's application of a consistent pricing strategy which
emphasized 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. The growth in
demand deposits over each of the past two years reflects the
success of new business generated in conjunction with the
increased commercial lending activity.
82
The following table indicates the maturities and amounts of
certificates of deposit issued in denominations of $100,000 or
more as of December 31, 1998:
Maturing in:
(In thousands)
Three months or less $26,876
Over three through six months 3,821
Over six through twelve months 4,192
Over twelve months 4,554
Total $39,443
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 April
30, 1999, to March 31, 2008.
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 45. As of January 31, 1999, the Company had 5,321
shareholders of its Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information required by this section is presented on page 46 and
47.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information required by this section is presented on pages 49 to
70.
83
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 65 to 68. 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
40.
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
1998 Annual Report to Shareholders and Part II - Item 8. Page
references are to said Annual Report.
84
Consolidated Financial Statements:
USBANCORP, Inc. and Subsidiaries
Consolidated Balance Sheet, 13
Consolidated Statement of Income, 14
Consolidated Statement of Comprehensive Income, 15
Consolidated Statement of Changes in Stockholders' Equity, 16
Consolidated Statement of Cash Flows, 17
Notes to Consolidated Financial Statements, 19
Statement of Management Responsibility, 41
Report of Independent Public Accountants, 42
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, 1998.
85
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 Dated March 1, 1995
Trust Company, as Rights Agent.
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, Exhibit 10.3 to 1994 Form 10-K
Inc. and W. Harrison Vail. Filed March 22, 1995
10.6 Loan Agreement, dated December
19, 1997, between Exhibit 10.6 to 1997 Form 10-K
USBANCORP, Inc. and PNCBANK. Filed March 24, 1998
10.7 Agreement, dated October 25,
1994, between USBANCORP, Exhibit 10.7 to 1994 Form 10-K
Inc. 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, Filed March 22, 1995
1995.
10.9 Agreement, dated December 1,
1994, between USBANCORP, Exhibit 10.9 to 1994 Form 10-K
Inc. and Ronald W. Virag. Filed March 22, 1995
10.10 Agreement, dated July 15,
1994, between USBANCORP, Exhibit 10.10 to 1994 Form 10-K
Inc. and Kevin J. O'Neil. Filed March 22, 1995
10.11 Collective Bargaining Agreement,
dated October 16, 1995, Exhibit 10.1 to Form 8-K/A
between United States National Dated March 1, 1996
Bank in Johnstown and Steel
Workers of America, AFL-CIO-CLC
Local Union 8204.
13 1998 Annual Report to Shareholders. Page 1
22 Subsidiaries of the Registrant. Below
24.1 Consent of Arthur Andersen LLP
86
EXHIBIT A
(22) Subsidiaries of the Registrant
Percent Jurisdiction
Name of Ownership of Organization
U.S. Bank 100% Commonwealth of
Main and Franklin Streets Pennsylvania
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
101 N. First Avenue #2460
Phoenix, AZ 85003
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
87
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 26, 1999 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 26, 1999:
/s/ Terry K. Dunkle
TERRY K. DUNKLE, Chairman, President
and Chief Executive Officer; Director
/s/ Jeffrey A. Stopko
JEFFREY A. STOPKO, Senior Vice President
and Chief Financial Officer
/s/ Jerome M. Adams
JEROME M. ADAMS, Director
/s/ Clifford A. Barton
CLIFFORD A. BARTON, Director
/s/ Michael F. Butler
MICHAEL F. BUTLER, Director
/s/ James C. Dewar
JAMES C. DEWAR, Director
/s/ James M. Edwards, Sr.
JAMES M. EDWARDS, SR., Director
RICHARD W. KAPPEL, Director
/s/ Margaret A. O'Malley
MARGARET A. O'MALLEY, Director
/s/ Mark E. Pasquerilla
MARK E. PASQUERILLA, Director
/s/ Jack Sevy
JACK SEVY, Director
/s/ Thomas C. Slater
THOMAS C. SLATER, Director
/s/ James C. Spangler
JAMES C. SPANGLER, Director
/s/ Robert L. Wise
ROBERT L. WISE, Director
88
USBANCORP, INC.
directors, general officers, advisory board,
community offices, and shareholder information
89
This page left intentionally blank
90
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.
Michael F. Butler
Business Consultant &
Attorney-at-Law
James C. Dewar
President & CEO,
Geo. C. Dewar, Inc.;
Retired President
& CEO, Dewar's
Car World
Terry K. Dunkle
Chairman, President & CEO,
USBANCORP, Inc.
James M. Edwards, Sr.
Retired President & CEO,
WJAC, Incorporated
Richard W. Kappel
Retired CEO,
Secretary & Treasurer,
Wm. J. Kappel Wholesale Co.
Margaret A. O'Malley
Attorney-at-Law
Yost & O'Malley
Mark E. Pasquerilla
Vice Chairman & 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 International, Inc.,
GPU Power, Inc., and
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
91
U.S. Bank
Board of Directors
Clifford A. Barton
Retired; Former Chairman, President
& CEO, USBANCORP, Inc.
Michael F. Butler
Business Consultant &
Attorney-at-Law
William F. Casey
CEO, Conemaugh
Health System, Inc.
Edward J. Cernic, Sr.
President,
Cernic Enterprises, Inc.
Daniel R. DeVos
President and CEO,
Concurrent Technologies Corporation
James C. Dewar
President & CEO,
Geo. C. Dewar, Inc.; Retired
President & CEO, Dewar's Car World
Bruce E. Duke III, M.D.
Surgeon, Valley Surgeons
Terry K. Dunkle
Chairman, President & CEO,
USBANCORP, Inc.
James M. Edwards, Sr.
Retired President & CEO,
WJAC, Incorporated
Orlando B. Hanselman
President & CEO,
U.S. 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
Vice Chairman & President,
Crown American
Realty Trust
Howard M. Picking, III
President,
The Picking Company
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 International, Inc.,
GPU Power, Inc., and
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
Wayne A. Kessler
Senior Vice President,
Community Banking
Douglas B. Bickmore
Vice President &
Commercial Equipment
Leasing Manager
James S. Bubenko
Vice President & Manager
of Retail Credit Operations
Timothy D. McDonald
Vice President,
Life Insurance and Annuities
Mark D. Shelhammer
Vice President,
Community Banking
Directors Emeriti
John N. Crichton
John L. Williams
Advisory Board
Orlando B. Hanselman, Chairman
Edward J. Cernic
David N. Crichton
George B. Kaufman
Mark Miller
William C. Polacek
David J. Rizzo
Carl R. Sax
92
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.
Terry K. Dunkle
Chairman, President &
CEO, USBANCORP, Inc.
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.
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
James G. Caliendo
Senior Vice President,
Community Banking, Planning
& Business Development
Thomas J. Chunchick
Senior Vice President,
CRA, Compliance &
Branch Operations
Harry G. King
Senior Vice President,
Bank Support Services
Louis S. Klippa
Senior Vice President &
Chief Operating Officer
Vincent W. Locher
Senior Vice President &
Chief Commercial Loan Officer
James F. Ackman
Vice President,
Retail Lending
Richard L. Barron
Vice President,
Human Resources
Fred Geisler
Vice President,
Mortgage Lending
Patricia M. Smarra
Vice President,
Operations
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
93
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.
John N. Crichton
Chairman, Concurrent
Technologies Corporation
Terry K. Dunkle
Chairman, President & CEO,
USBANCORP, Inc.
J. Terrence Farrell
Attorney-at-Law
William M. George
President, PA AFL-CIO
Richard W. Kappel
CEO, Secretary & Treasurer,
Wm. J. Kappel Wholesale Co.
Kim W. Kunkle
President & CEO,
Laurel Holding Company
Rev. Christian R. Oravec
President, St. Francis College
Fred R. Shaffer
Senior Pharmacist/Director,
Findley's Pharmacy, Inc.
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
Orlando B. Hanselman
Vice Chairman
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
Nicholas E. Debias, Jr.
Vice President, Institutional Trust
Frank J. Lapinsky
Vice President &
Trust Investment Officer
James P. McCarthy, CPA
Vice President, Tax & Financial Planning
Carol D. Stern, CTFA
Vice President, Personal Trust
William S. Townsend
Vice President &
Trust Investment Officer
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, Inc.
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
94
U.S. Bank
OFFICE LOCATIONS
a Main Office Downtown
216 Franklin Street
P.O. Box 520
Johnstown, PA 15907-0520
(814) 533-5300
a Westmont Office
110 Plaza Drive
Johnstown, PA 15905-1211
(814) 255-6836
a University Heights Office
1404 Eisenhower Boulevard
Johnstown, PA 15904-3280
(814) 266-9691
a East Hills Office
1219 Scalp Avenue
Johnstown, PA 15904-3182
(814) 266-3181
a 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
a Carrolltown Office
101 S. Main Street
Carrolltown, PA 15722-0507
(814) 344-6501
a Barnesboro Office
103 10th Street
Barnesboro, PA 15714-1342
(814) 948-9540
Ebensburg Office
104 S. Center Street
Ebensburg, PA 15931-1656
(814) 472-8706
a Lovell Park Office
179 Lovell Avenue
Ebensburg, PA 15931-0418
(814) 472-5200
Nanty Glo Office
928 Roberts Street
Nanty Glo, PA 15943-1303
(814) 749-9227
Nanty Glo Drive-In
1383 Shoemaker Street
Nanty Glo, PA 15943-1252
(814) 749-0955
a Galleria Mall Office
500 Galleria Drive Suite 100
Johnstown, PA 15904-8911
(814) 266-5969
a St. Michael Office
900 Locust Street
St. Michael, PA 15951-0393
(814) 495-5514
a 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
a 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
a Somerset Office
108 W. Main Street
Somerset, PA 15501-2035
(814) 445-4193
a Derry Office
112 South Chestnut Street
Derry, PA 15627-1938
(724) 694-8887
a 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
a Boston Office
1701 Boston Hollow Road
McKeesport, PA 15135-1217
(412) 754-2014
Braddock Office
823 Braddock Avenue
Braddock, PA 15104-1714
(412) 351-0400
a Century III Office
269 Clairton Boulevard
Pittsburgh, PA 15236-1499
(412) 653-7199
a 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
a 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
a Motor Bank
1415 Fifth Avenue
McKeesport, PA 15132-2427
(412) 664-8755
a Port Vue Office
1194 Romine Avenue
McKeesport, PA 15133-3596
(412) 664-8975
a Rainbow Village Office
1 Rainbow Village
Shopping Center
White Oak, PA 15131-2415
(412) 664-8771
a South Strabane Office
590 Washington Road
Washington, PA 15301-9621
(724) 225-9800
a University Office
2016 Eden Park Boulevard
McKeesport, PA 15132-7619
(412) 664-8780
Lawrenceville
4319 Butler Street
Pittsburgh, PA 15201-3094
(412) 681-8390
a Kiski
451 Hyde Park Road
Leechburg, PA 15656-9458
(724) 845-8642
a New Kensington
2 Feldarelli Square
2300 Freeport Road
New Kensington, PA 15068-4669
(724) 335-9811
a North Side
600 East Ohio Street
Pittsburgh, PA 15212-5588
(412) 231-4300
a Northway Mall
1002 Northway Mall
Pittsburgh, PA 15237-3098
(412) 364-8692
a Monroeville
2681 Moss Side Boulevard
Monroeville, PA 15146-3394
(412) 856-8431
a North Versailles
Great Valley Shopping Center
500 Lincoln Highway
North Versailles, PA 15137-1524
(412) 829-1360
a Carrick
1817 Brownsville Road
Pittsburgh, PA 15210-3999
(412) 881-3500
a Bethel Park
2739 South Park Road
Bethel Park, PA 15102-3805
(412) 835-2100
a Finleyville
3576 Sheridan Avenue
Finleyville, PA 15332-1018
(724) 348-6626
a Jeannette
401 Clay Avenue
Jeannette, PA 15644-2124
(724) 527-1501
a = 24-Hour Banking Available
Remote Banking Locations
Main Office, Main & Franklin Streets,
Johnstown
Lee Hospital, Main Street, Johnstown
The Galleria, Johnstown
BiLo Supermarket, Scalp Avenue,
Johnstown
Derry BP - Pit Stop Quick Shop, Derry
Robyn's Shoppe, Nanty Glo
Hill's, 7005 Clairton Rd., West Mifflin
Gogas Service Station, Cairnbrook
Community College of Allegheny
County, North Campus, Pittsburgh
Community College of Allegheny County,
Allegheny Campus, Pittsburgh
Shop & Save, Ohio Avenue, Glassport
Washington Mall, Oak Springs Road,
Washington
95
Shareholder Information
Securities Markets
USBANCORP, Inc. Common Stock is publicly traded and quoted on the
NASDAQ National Market System. The common stock is traded under
the symbol of "UBAN." The listed market makers for the stock are:
Herzog, Heine, Geduld, Inc.
525 Washington Boulevard
Jersey City, NJ 07310
Telephone: (212) 908-4156
Legg Mason Wood Walker, Inc.
969 Eisenhower Boulevard
Oak Ridge East
Johnstown, PA 15904
Telephone: (814) 266-7900
F. J. Morrissey & Co., Inc.
1700 Market Street
Suite 1420
Philadelphia, PA 19103-3913
Telephone: (215) 563-8500
Keefe Bruyette & Woods, Inc.
Two World Trade Center
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, PA 15901
Telephone: (814) 535-8403
Sandler O'Neill & Partners, L.P.
2 World Trade Center
104th Floor
New York, NY 10048
Telephone: (800) 635-6860
Weeden & Co. L.P.
145 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, 1999, there were 5,321 shareholders of common
stock and 13,508,353 shares outstanding. Of the total shares
outstanding, approximately 662,030 or 5% are held by insiders
(directors and executive officers) while approximately 3,545,044
or 26% 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.
96
ANNEX A TO USBANCORP, INC. 1998 ANNUAL REPORT & FORM
10-K
The following is a listing of the graphs presented in
USBANCORP, Inc.'s 1998 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 diluted earnings per share:
1994 1995 1996 1997
1998
0.73% 0.96% 1.28% 1.54% 1.48%
Earnings per share growth is a key determinant of
shareholder value and the Company s ongoing financial
soundness. Over the past five years, USBANCORP's
annual rate of earnings per share growth has
approximated 12%.
The middle left graph is a bar graph showing dividends
per common share:
1994 1995 1996 1997 1998
$0.32 $0.35 $0.46 $0.53 $0.60
USBANCORP's believes that growing common dividend
payment is an important component of total shareholder
return. USBANCORP s dividends paid to shareholders
have increased at an average annual rate of
approximately 17% over the past five years. The
Company declared, for the third consecutive year, a
special dividend which amounted to $0.06 per share in
1998.
The bottom left graph is an area graph showing non-
performing assets as a percentage of loans and OREO at
December 31 for the periods presented:
1994 1995 1996 1997 1998
0.91% 1.13% 0.92% 0.89% 0.77%
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 asset ratio continued to
trend downward in 1998 and remained favorably lower
than peer.
The top right graph is a bar graph showing the
Company's return on equity for
the periods presented:
1994 1995 1996 1997 1998
8.92% 11.03% 13.36% 15.00% 14.13 %
Return on equity (ROE) is a standard measurement of
a company s profitability. USBANCORP has a
disciplined ROE focus throughout all organizational
levels and business lines within the Company.
USBANCORP achieved a 14.13% ROE in 1998.
The middle right graph is an bar graph showing treasury
stock buy-back (dollar value of shares):
1994 1995 1996 1997 1998
3,064,000 7,943,000 8,531,000
11,637,000 30,346,000
USBANCORP uses an active treasury stock repurchase
program to enhance both return on equity and earnings
per share performance. During 1998, the Company
returned $30 million to its shareholders through open
market repurchases of 1.2 million shares of USBANCORP
common stock. Improved liquidity in our stock
resulting from the 3 for 1 stock split completed in
July was one factor contributing to the increased
number of shares repurchased in 1998.
The bottom right graph is a bar graph showing the
Company's non-interest income to total revenue for the
periods presented:
1994 1995 1996 1997 1998
17.90% 22.80% 23.40% 23.20% 26.60%
To help battle the earning s pressures resulting from
shrinking net interest margins, USBANCORP has
strategically focused on growing non-interest revenue.
Non-interest income grew by 17% in 1998 and contributed
to the non-interest income to total revenue ratio
improving to 26.6%. The Company has targeted a non-
interest income to total revenue ratio of 30% as a
critical strategic goal needed to diversify our revenue
stream and generate future earnings per share growth.
Page 4: The top left graph is a bar graph showing
common stock price per share at December 31:
1994 1995 1996 1997 1998
$7.00 $11.00 $13.92 $23.33 $19.88
The bottom left graph is an bar graph showing treasury
stock buy-back (number of shares):
1994 1995 1996 1997 1998
3,064,000 7,943,000 8,531,000
11,637,000 30,346,000
Page 5: Appearing in the margin is a "call out"
reflecting the quote:
My husband and I actually paid a higher rate of
interest to get our refinancing done at Three Rivers
Bank. We were willing to pay the extra percent in
exchange for the personalized services we received.
Cindy Sollosi, Findleyville, PA
Page 6: Appearing in the top left margin is a "call
out" reflecting the quote:
I am well-satisfied with the services of USNB
Financial Services. I recently converted my IRAs over
to a mutual fund account. If the bank did not have
this service available, I would have taken my money to
a brokerage firm. I rely on a reputable bank that I
trust to provide me with good information. Thomas
Heider, Davidsville, PA.
Appearing in the bottom left margin is a "call out"
reflecting the quote:
The high level of service at a reasonable cost makes
USBANCORP Trust Company our provider of choice for our
401(k) Pension Plan. Ed Johnson, Manager, Human
Resources Retirement Plan Trustee T.W. Phillips Gas and
Oil Co., Butler, PA.
Page 7: Appearing in the top left margin is a "call
out" reflecting the quote:
From a business standpoint the U.S. Bank Bank Mobile
is fantastic. From a community standpoint it s a real
asset and convenience to the people who live here (in
Nicktown, PA). Joe Shimko, Nicktown, PA.
Appearing in the bottom left margin is a "call out"
reflecting the quote:
My husband and I both work full-time. Getting to a
bank during normal working hours is next to impossible.
A few months ago I started using the services of the
Three Rivers Bank Call Center and have been completely
satisfied with the convenience and flexibility.
Nancy Engle, Washington, PA.
Page 8: Appearing in the top left margin is a "call
out" reflecting the quote:
The financial support provided by U.S. Bank and the
volunteer and leadership support from employees helps
make the Johnstown Folkfest a continuing success. The
Folkfest is the premier event which brings together the
entire community to celebrate and showcase our rich
heritage. Richard Burkert, Executive Director,
Johnstown Area Heritage Association (JAHA), Johnstown,
PA.
Appearing in the bottom left margin is a "call out"
reflecting the quote:
After participating in the U.S. Bank - sponsored Year
2000 seminar, we knew where and how to start taking
more pro-active measures to ensure compliance. Ellen
Zalevsky, Chief Financial Officer, Westmoreland Housing
Authority, Greensburg, PA.
Page 9: The top left graph is a bar graph showing the
Company's return on equity for the periods presented:
1994 1995 1996 1997 1998
8.92% 11.03% 13.36% 15.00% 14.13 %
Page 10: This page shows a service area map showing the
Company s six county area and also a closeup map with
the location of the branches.
Page 45: The bottom left graph is a bar graph showing
dividends per common share:
1994 1995 1996 1997 1998
$0.32 $0.35 $0.46 $0.53 $0.60
The graph at the bottom right is area
graph showing market capitalization at December 31 (in
thousands):
1994 1995 1996 1997 1998
$117,225 $175,246 $212,132 $357,241 $268,625
Page 49: The top left graph is a bar graph showing
net income (in thousands):
1994 1995 1996 1997 1998
$13,320 $15,803 $20,019 $23,497 $21,144
The graph at the bottom left is an bar graph
showing total common shares outstanding at December 31:
1994 1995 1996 1997 1998
16,745,685 15,931,467 15,243,012 14,681,154 13,512,317
Page 50: The top left graph is a bar graph showing
diluted earnings per share:
1994 1995 1996 1997 1998
$0.73 $0.96 $1.28 $1.54 $1.48
The bottom left graph is a bar graph showing
the Company's return on equity for the periods
presented:
1994 1995 1996 1997 1998
8.92% 11.03% 13.36% 15.00% 14.13%
Page 51: The top left graph is a bar graph showing
average loans to average deposits ratio for the periods
presented:
1994 1995 1996 1997 1998
71.87% 69.15% 74.35% 83.81% 87.57%
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:
1994 1995 1996 1997 1998
NII $57,564 $58,954 $64,092 $69,798 $68,106
NIM 4.03% 3.45% 3.52% 3.43% 3.17%
Page 52: The top left graph is a pie chart showing
the liability funding mix at December 31, 1998:
Deposits 51%
Borrowing 42%
Equity 7%
The graph at the bottom left is a pie
chart showing loan portfolio composition at December
31, 1998, by loan type:
Commercial 13%
Commercial secured by real estate 32%
Real estate - mortgage 47%
Consumer 8%
Page 53: The graph at the top left is a pie chart
showing the deposit composition at December 31, 1998:
DDA 14%, CD's 49%
Savings & NOW 22%, Money market 15%
The bottom left graph is a area graph
showing net interest margin dollars (in thousands):
1994 1995 1996 1997 1998
$55,918 56,147 61,138 66,859 $65,230
The bottom right graph is a bar graph
showing net interest margin percentage:
1994 1995 1996 1997 1998
4.03% 3.45% 3.52% 3.43% 3.17%
Page 56: The top left graph is an area graph showing
non-performing assets as a percentage of loans and OREO
at December 31 for the periods presented:
1994 1995 1996 1997 1998
0.91% 1.13% 0.92% 0.89% 0.77%
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:
1994 1995 1996 1997 1998
197.32% 158.22% 153.72% 136.75% 130.22
Page 57: The top left graph is an area graph showing
the allowance for loan losses as a percentage of loans
at December 31 for the periods presented:
1994 1995 1996 1997 1998
1.80% 1.79% 1.42% 1.22% 1.01%
Page 58: The top left graph is a bar graph showing the
loan loss provision as a percentage of average loans:
1994 1995 1996 1997 1998
(0.34%) 0.03% 0.01% 0.02% 0.06%
The bottom left graph is a bar graph
showing the net charge-offs as a percentage of average
loans:
1994 1995 1996 1997 1998
0.04% 0.08% 0.20% 0.14% 0.19%
Page 59: The top left graph is an bar graph showing
non-interest income (in thousands):
1994 1995 1996 1997 1998
$8,187 $16,543 $18,689 $20,203 $23,689
The bottom left graph is a bar
graph showing the Company's non-interest income to
total revenue for the periods presented:
1994 1995 1996 1997 1998
17.90% 22.80% 23.40% 23.20% 26.60%
Page 60: The top left graph is a bar graph showing the
Company's SMC residential mortgage loans originated (in
thousands) for the periods presented:
1994 1995 1996 1997 1998
$85,469 $147,254 $205,085 $253,418 $449,739
The bottom left graph is a bar graph
showing trust fee income (in thousands):
1994 1995 1996 1997 1998
$3,023 $3,395 $3,708 $4,022 $4,430
Page 61: The top left graph is an bar graph showing the
components of non-interest income (in thousands):
1994 1995 1996 1997 1998
All other $492 $7,780 $8,345 $8,746 $11,461
Deposit
service
charges $2,779 $2,937 $3,264 $3,323 $3,409
Mortgage
Banking
Revenue $1,893 $1,431 $3,372 $4,112 $4,339
Trust fees $3,023 $3,395 $3,708 $4,022 $4,430
The bottom left graph is a bar graph
showing non-interest expense (in thousands):
1994 1995 1996 1997 1998
$49,519 $50,557 $52,474 $54,104 $59,200
Page 62: The top left graph is an bar graph showing the
components of non-interest expense (in thousands):
1994 1995 1996 1997 1998
All other $14,605 $15,278 $17,057 $15,860 $18,674
Goodwill &
Core Dep.
Amortization $ 1,805 $2,473 $2,360 $2,356 $2,308
Occupancy
Equipment $ 7,222 $ 7,507 $7,574 $7,691 $8,111
Salaries &
benefits $23,311 $25,305 $25,483 $28,197 $30,427
The bottom left graph is a bar graph
showing net overhead expense as a percentage of net
interest income (excluding net security gains and
losses):
1994 1995 1996 1997 1998
60.67% 60.58% 53.71% 49.70% 56.55%
Page 64: The top left graph is a bar graph showing the
Company s efficiency ratio for the periods presented:
1994 1995 1996 1997 1998
75.31% 66.97% 63.39% 60.11% 64.84%
The bottom left graph is a bar graph showing the
Company's income per employee for the periods
presented:
1994 1995 1996 1997 1998
$15,429 $20,915 $26,604 $30,721 $27,682
Page 65: The graph at the top left is a bar graph
showing total assets at December 31 for the periods
presented (in thousands):
1994 $1,788,890
1995 $1,885,372
1996 $2,087,112
1997 $2,239,110
1998 $2,377,081
The graph at the bottom left is bar
graph showing total loans at December 31 for the
periods presented (in thousands):
1994 1995 1996 1997 1998
$868,004 $834,634 $939,726 $989,575 $1,066,321
Page 67: The top left graph is an bar graph showing
the Company's one year GAP ratio at December 31 for the
periods presented:
1994 1995 1996 1997 1998
0.79x 0.86x 0.79x 0.88x 1.03x
The graph at the bottom left is a pie
chart showing the deposit composition at December 31,
1998:
DDA 14%, CD's 49%
Savings & NOW 22%, Money market 15%
Page 68: The top left graph is a pie chart showing the
liability funding mix at December 31, 1998:
Deposits 51%
Borrowing 42%
Equity 7%
The bottom left graph is a pie chart
showing the investment portfolio liquidity (scheduled
maturities) at December 31, 1998:
Less than 1 year is 7%
Greater than 1 year but less than 5 years is 38%
Greater than 5 year but less than 10 years is 25%
Greater than 10 years is 30%
Page 69: The top left graph is an area graph showing
asset leverage ratio compared to the management minimum
target of 6%:
1994 1995 1996 1997 1998
6.64% 6.63% 6.51% 6.25% 6.62%
The bottom left graph is a bar graph
showing the Company's total risk- based capital ratio
at December 31 compared to a regulatory requirement of
8.00%:
1994 1995 1996 1997 1998
13.70% 14.88% 14.16% 14.12% 14.52%
Page 70: The top left graph is an bar graph showing
treasury stock buy-back (dollar value of shares):
1994 1995 1996 1997 1998
3,064,000 7,943,000 8,531,000 11,637,000 30,346,000
The bottom left graph is a pie chart
showing 1998 net income contribution by product
(dollars in thousands):
Community Banking $9,896, Trust $791,
Mortgage Banking $252, Investment/Parent $10,205,
The bottom right graph is a pie chart
showing 1997 net income contribution by product (
dollars in thousands):
Community Banking $10,888, Trust $724,
Mortgage Banking $1,285, Investment/Parent $10,600,
Page 73: The top left graph is a bar graph showing net
income (in thousands):
1994 1995 1996 1997 1998
$11,320 $15,803 $20,019 $23,497 $21,144
The bottom left graph is a bar graph showing book
value per common share at December 31:
1994 1995 1996 1997 1998
$8.19 $9.45 $9.97 $10.77 $10.48
Page 74: The top left graph is a bar graph showing the
Company's return on equity for the periods presented:
1994 1995 1996 1997 1998
8.92% 11.03% 13.36% 15.00% 14.13 %
The bottom left graph is a bar graph showing
the Company's diluted earnings per share::
1994 1995 1996 1997 1998
0.73% 0.96% 1.28% 1.54% 1.48%
Page 75: The graph at the top left is a bar graph
showing total loans at December 31 for the periods
presented (in thousands):
1994 1995 1996 1997 1998
$868,004 $834,634 $939,726 $989,575 $1,066,321
Page 76: 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):
1994 1995 1996 1997 1998
$1,027 $1,043 $1,157 $1,122 $1,357
Note: 32% growth rate from 1994 to 1998.
Page 77: The graph at the top left of the page is a bar
graph showing total assets at December 31 for the
periods presented (in thousands):
1994 $1,788,890
1995 $1,885,372
1996 $2,087,112
1997 $2,239,110
1998 $2,377,081
Page 78: The top left graph is a bar graph showing
average loans to average deposits ratio for the periods
presented:
1994 1995 1996 1997 1998
71.87% 69.15% 74.35% 83.81% 87.57%
The bottom left graph is a bar graph
showing the Company's income per employee for the
periods presented:
1994 1995 1996 1997 1998
$15,429 $20,915 $26,604 $30,721 $27,682
Page 79: The top left graph is a bar graph showing
assets per full-time equivalent employee at December 31
for the periods presented (in thousands):
1994 1995 1996 1997 1998
$2,070 $2,419 $2,588 $2,814 $2,977
Page 80: The top left graph is a pie chart showing the
investment portfolio liquidity (scheduled maturities)
as of December 31, 1998:
Less than 1 year is 7%
Greater than 1 year but less than 5 years is 38%
Greater than 5 year but less than 10 years is 25%
Greater than 10 years is 30%
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 81: The graph at the middle left is a pie chart
showing loan portfolio composition at December 31,
1998, by loan type:
Commercial 13%
Commercial secured by real estate 32%
Real estate - mortgage 47%
Consumer 8%
The graph at the left of the page 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%
Page 83: The graph at the bottom left is a pie chart
showing the deposit composition as of December 31,
1998:
DDA 14%, CD's 49%
Savings & NOW 22%, Money market 15%
Page 96: The graph at the bottom right is a bar graph
showing common stock price to book value at December
31:
1994 1995 1996 1997 1998
85.47% 116.44% 139.63% 225.87% 189.57%
The graph at the bottom right is a
bar graph showing market price to diluted earnings per
share for the periods presented:
1994 1995 1996 1997 1998
9.63x 11.50x 10.90x 15.84x 13.43x
Exhibit 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated January 22, 1999 included in this
Form 10-K, into USBANCORP, Inc.'s previously filed Registration
Statements on Form S-3 (Registration No. 33-56604); Form S-3
(Registration No. 333-50225); Form S-8 (Registration No. 33-53935);
Form S-8 (registration No. 33-55845); Form S-8 (Registration No.
33-55207) and Form S-8 (Registration No. 33-55211).
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
March 25, 1999