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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File #0-9623
-------------
UST CORP.
(Exact Name of Registrant as Specified in its Charter)
MASSACHUSETTS 04-2436093
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
40 COURT STREET
BOSTON, MASSACHUSETTS 02108
(Address of principal executive offices) (Zip Code)
(617) 726-7000
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed since last
year.)
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. Yes /X/ No /_/
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. At October 31, 1997,
there were 29,718,593 shares of common stock outstanding, par value $.625 per
share.
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UST Corp.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets -- September 30, 1997 and December 31, 1996.......................................... 3
Consolidated Statements of Income -- Three and Nine Months Ended September 30, 1997 and 1996..................... 4
Consolidated Statements of Changes in Stockholders' Investment -- Nine Months Ended
September 30, 1997............................................................................................. 5
Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1997 and 1996........................... 6
Notes to Consolidated Financial Statements....................................................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.........................................................................................22
ITEM 6. Exhibits and Reports on Form 8-K..........................................................................22
SIGNATURES ........................................................................................................22
</TABLE>
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UST CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ------------
(Dollars in thousands)
ASSETS
<S> <C> <C>
Cash, due from banks and interest-bearing deposits............................. $ 92,171 $ 140,069
Federal funds sold and other short-term investments............................ 129,731 142,901
Securities:
Securities available-for-sale:
Mortgage-backed securities ................................................ 437,385 267,726
U.S. Treasury and federal agencies and other securities.................... 275,030 414,077
---------- ------------
Total securities available-for-sale................................. 712,415 681,803
Securities held-to-maturity (Note 5)......................................... 145,564
---------- ------------
Total securities.................................................... 712,415 827,367
Loans:
Loans -- net of unearned discount of $14,617,000 in 1997 and
$18,721,000 in 1996 (Note 2)............................................... 2,637,467 2,452,813
Reserve for possible loan losses (Note 2) ................................... (49,969) (50,204)
---------- ------------
Total loans, net.................................................... 2,587,498 2,402,609
Premises, furniture and equipment, net......................................... 64,258 53,439
Intangible assets, net......................................................... 59,634 66,826
Other real estate and vehicles owned, net ..................................... 1,106 1,792
Loans held-for-sale............................................................ 12,446
Other assets................................................................... 44,036 50,793
---------- ------------
Total assets........................................................ $ 3,690,849 $3,698,242
=========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Noninterest-bearing......................................................... $ 618,862 $ 599,927
Interest-bearing:
NOW...................................................................... 42,268 381,782
Money market............................................................. 628,746 313,548
Regular savings.......................................................... 662,295 649,974
Time:
Certificates of deposit over $100 thousand............................... 162,401 168,081
Other.................................................................... 749,355 742,500
----------- --------
Total deposits...................................................... 2,863,927 2,855,812
Short-term borrowings.......................................................... 427,782 412,331
Other borrowings............................................................... 18,063 66,091
Other liabilities.............................................................. 66,743 68,419
----------- --------
Total liabilities................................................... 3,376,515 3,402,653
Commitments and contingencies (Note 3)
Stockholders' investment (Note 4):
Preferred stock $1 par value; Authorized -- 4,000,000 shares; Outstanding --
none
Common stock $.625 par value; Authorized -- 45,000,000 shares;
Issued -- 28,531,343 and 28,020,645 shares in 1997 and 1996, respectively.. 17,832 17,590
Additional paid-in capital................................................... 116,087 110,644
Retained earnings............................................................ 179,767 169,465
Unrealized gain (loss) on securities available-for-sale, net of tax.......... 245 (2,576)
Deferred compensation and other.............................................. 403 466
----------- ----------
Total stockholders' investment...................................... 314,334 295,589
----------- ----------
Total liabilities and stockholders' investment...................... $ 3,690,849 $ 3,698,242
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
UST Corp.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans ................................. $ 58,198 $ 43,698 $ 165,324 $ 128,979
Interest and dividends on securities:
Taxable .................................................. 10,840 13,368 33,858 39,686
Nontaxable ............................................... 140 150 528 1,106
Interest on federal funds sold and other
short-term investments..................................... 1,657 450 3,728 440
------------ ------------ ------------ ------------
Total interest income ........................ 70,835 57,666 203,438 170,211
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits ....................................... 21,064 17,838 61,485 53,123
Interest on borrowings ..................................... 5,550 6,389 16,976 18,128
------------ ------------ ------------ ------------
Total interest expense ....................... 26,614 24,227 78,461 71,251
------------ ------------ ------------ ------------
Net interest income ........................................ 44,221 33,439 124,977 98,960
Provision for possible loan losses (Note 2) .................. 300 (14,301) 600 (17,674)
------------ ------------ ------------ ------------
Net interest income after provision for possible loan losses 43,921 47,740 124,377 116,634
------------ ------------ ------------ ------------
Noninterest income:
Asset management fees ...................................... 3,255 3,255 9,600 9,807
Service charges on deposit accounts ........................ 2,416 1,518 6,837 4,612
Corporate services income, net ............................. 1,444 1,092 4,210 3,349
Securities (losses) gains, net ............................. (578) 1,523 (1,151) 1,450
Gain on sale of loans held-for-sale ........................ 1,804 16
Other ...................................................... 1,666 2,205 5,611 5,127
------------ ------------ ------------ ------------
Total noninterest income .................... 8,203 9,593 26,911 24,361
------------ ------------ ------------ ------------
Noninterest expense:
Salary and employee benefits ............................... 17,330 15,410 53,128 44,545
Occupancy, net ............................................. 3,076 2,612 9,257 7,888
Equipment and furniture .................................... 1,970 1,276 5,404 3,705
Intangible asset amortization .............................. 1,953 570 5,225 1,720
Advertising and promotion .................................. 1,515 859 3,869 2,544
Professional and consulting fees ........................... 1,395 1,399 3,768 3,828
Service bureau and data processing ......................... 1,256 622 4,053 1,770
Restructuring charges ...................................... 11,752
Acquisition and merger-related expense ..................... 232 3,082
Deposit insurance assessment ............................... 186 3,667 687 4,292
Foreclosed asset and workout expense ....................... (6) 481 315 1,517
Other ...................................................... 4,881 3,879 16,474 11,575
------------ ------------ ------------ ------------
Total noninterest expense .................... 33,788 30,775 117,014 83,384
------------ ------------ ------------ ------------
Income before income taxes ................................... 18,336 26,558 34,274 57,611
Income tax provision ....................................... 7,527 10,582 14,859 22,457
------------ ------------ ------------ ------------
Net income .................................. $ 10,809 $ 15,976 $ 19,415 $ 35,154
============ ============ ============ ============
Per share data:
Net income (Note 4) ........................................ $ 0.37 $ 0.57 $ 0.67 $ 1.24
Cash dividends declared .................................... $ 0.12 $ 0.08 $ 0.32 $ 0.22
Weighted average number of common shares (Note 4) .......... 28,990,750 28,240,766 28,854,758 28,395,602
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
UST CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(Unaudited)
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED DEFERRED
COMMON PAID-IN RETAINED GAIN/(LOSS) COMPENSATION
STOCK CAPITAL EARNINGS ON SECURITIES AND OTHER TOTAL
------ --------- -------- ------------- ------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996, as
previously reported ..................... $ 11,262 $ 75,710 $ 112,975 $ (2,453) $ 466 $ 197,960
Adjustments for the Walden Bancorp, Inc. ..
pooling of interests .................... 6,328 34,934 56,490 (123) 97,629
--------- --------- --------- --------- --------- ---------
Balance December 31, 1996, as restated .... 17,590 110,644 169,465 (2,576) 466 295,589
Net income ................................ 19,415 19,415
Cash dividends declared ................... (9,113) (9,113)
Stock issued under stock option, restricted
stock and stock purchase plans .......... 242 5,443 5,685
Change from unrealized loss to gain on
securities available-for-sale, net of tax 2,821 2,821
Activity in Directors Deferred Compensation
Program and other, net .................. (63) (63)
--------- --------- --------- --------- --------- ---------
Balance September 30, 1997 ................ $ 17,832 $ 116,087 $ 179,767 $ 245 $ 403 $ 314,334
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
UST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---- ----
(Dollars in thousands)
Cash flows from operating activities:
<S> <C> <C>
Net income............................................................................ $ 19,415 $ 35,154
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for possible loan losses.................................................. 600 (17,674)
Depreciation and amortization....................................................... 10,227 4,820
Accretion of net securities discount................................................ (292) (46)
Securities losses (gains), net...................................................... 1,151 (1,450)
Gain on sale of other real estate owned, net........................................ (104) (469)
Gain on sale of loans held-for-sale................................................. (1,804) (16)
Writedowns of other real estate owned............................................... 47 496
Writedowns of fixed assets.......................................................... 1,255
Deferred income tax (benefit) expense............................................... (2,609) 2,806
Net change in other assets and other liabilities.................................... 9,239 (19,698)
-------- --------
Net cash provided by operating activities..................................... 37,125 3,923
Cash flows from investing activities:
Sales of available-for-sale securities................................................ 229,212 63,643
Maturities of available-for-sale securities........................................... 147,928 110,654
Maturities of held-to-maturity securities............................................. 32,363
Purchases of available-for-sale securities............................................ (258,055) (186,438)
Purchases of held-to-maturity securities.............................................. (66,515)
Net decrease in federal funds sold and other short-term investments................... 13,170 24,937
Net increase in loans................................................................. (188,656) (73,021)
Proceeds from other real estate owned................................................. 3,911 5,510
Proceeds from loans held-for-sale..................................................... 14,250 12,926
Purchases of premises and equipment................................................... (17,076) (4,613)
--------- --------
Net cash used by investing activities......................................... (55,316) (80,554)
Cash flows from financing activities:
Net increase (decrease) in nontime deposits........................................... 6,940 (23,930)
Net increase (decrease) in certificates of deposit.................................... 1,175 (2,147)
Net (decrease) increase in borrowings................................................. (32,577) 105,030
Cash dividends paid................................................................... (7,982) (4,753)
Treasury stock acquired............................................................... (8,410)
Issuance of common stock for cash, net................................................ 2,737 3,242
-------- --------
Net cash (used) provided by financing activities.............................. (29,707) 69,032
-------- --------
Decrease in cash and cash equivalents................................................. (47,898) (7,599)
Cash and cash equivalents at beginning of year........................................ 140,069 126,115
-------- --------
Cash and cash equivalents at end of period............................................ $ 92,171 $ 118,516
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................................................ $ 77,450 $ 71,214
========= =========
Income taxes........................................................................ $ 7,073 $ 20,436
========= =========
Noncash transactions:
Transfers from other assets to securities available-for-sale.......................... $ 180 $ 4,180
========= =========
Transfers from securities held-to-maturity to available-for-sale (Note 5)............. $ 145,564 $ 5,482
========= =========
Transfers from loans to other real estate owned, net.................................. $ 4,658 $ 550
========= =========
Common stock issuance................................................................. $ 1,028 $ 93
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of UST Corp. and its
subsidiaries ("the Company") included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and
regulations. The Company, however, believes that the disclosures are
adequate to make the information presented not misleading. All prior
period amounts included in this Form 10-Q have been restated to
reflect the January 3, 1997 acquisition of Walden Bancorp, Inc. as a
pooling of interests. Refer to Note 5 for a further discussion of
acquisitions. The amounts shown reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the
financial statements for the periods reported. These financial
statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
Certain prior period amounts have been reclassified to reflect
current reporting classifications.
The results of operations for three and nine months ended September
30, 1997 and 1996 are not necessarily indicative of the results of
operations for the full year or any other interim period.
(2) RESERVE FOR POSSIBLE LOAN LOSSES
Analysis of the reserve for possible loan losses for the nine
months ended September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period..................... $ 50,204 $68,120
Chargeoffs/transfers............................... 4,410 6,355
Recoveries on loans previously charged-off......... 3,575 8,652
------- -------
Net chargeoffs (recoveries)........................ 835 (2,297)
Provision (credit) for possible loan losses ....... 600 (17,674)
------- ---------
Balance at end of period........................... $ 49,969 $52,743
======== =======
</TABLE>
The reserve for possible loan losses is determined based on a
consistent, systematic method which analyzes the size and risk of
the loan portfolio on a monthly basis. See "Credit Quality and
Reserve for Possible Loan Losses" in Management's Discussion and
Analysis of Financial Condition and Results of Operations herein.
7
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) COMMITMENTS AND CONTINGENCIES
At September 30, 1997, the Company had the following off-balance
sheet financial instruments whose contract amounts represent credit
risk:
Contract or Notional Amount
---------------------------
(Dollars in thousands)
Commitments to extend credit.................. $793,000
Standby letters of credit and
financial guarantees written................ 67,000
Commercial letters of credit.................. 3,000
Foreign exchange contracts.................... 3,000
(4) NET INCOME PER SHARE CALCULATION
Net income per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding.
Common stock equivalents consist primarily of dilutive stock options
computed under the treasury stock method. Average dilutive common
stock equivalents totaled 489,559 and 455,148 for the three- and
nine-month periods ended September 30, 1997, respectively, and
449,202 and 447,046 for the three- and nine-month periods ended
September 30, 1996.
On March 3, 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings Per Share." This Statement supersedes APB
Opinion No. 15 regarding the presentation of earnings per share
("EPS") on the face of the income statement. SFAS No. 128 replaces
the presentation of Primary EPS with a Basic EPS calculation that
excludes the dilutive effect of common stock equivalents. The
Statement requires a dual presentation of Basic and Diluted EPS,
which is computed similarly to Fully Diluted EPS pursuant to APB
Opinion No. 15, for all entities with complex capital structures.
This Statement is effective for fiscal years ending after December
15, 1997 and requires restatement of all prior-period EPS data
presented. The net income per share for the three and nine months
ended September 30, 1997 would not materially change under SFAS No.
128.
8
UST Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) ACQUISITIONS
On January 3, 1997, the Company completed its acquisition of
Walden Bancorp, Inc. ("Walden"), a $1.0 billion multi-bank holding
company headquartered in Acton, Massachusetts. The transaction was
accounted for as a pooling of interests and was structured as a
tax-free exchange of 1.9 shares of the Company's common stock for
each share of Walden common stock. The Company's outstanding stock
increased by 10,125,540 shares to a total of 28,144,163 shares on the
date of acquisition. Based on the closing price of the Company's
stock as of January 3, 1997, the market value of the shares exchanged
totaled $207 million. Walden's two subsidiary banks, The Braintree
Savings Bank and The Co-operative Bank of Concord operated a total of
seventeen branches located in the Massachusetts counties of
Middlesex, Norfolk and Plymouth. On April 18, 1997, The Co-operative
Bank of Concord was merged into USTrust, the Company's principal
banking subsidiary. The Braintree Savings Bank was merged into
USTrust on May 16, 1997. The following presentation reflects key line
items on a historical basis for Walden and UST Corp. and on a pro
forma combined basis assuming the merger was in effect for the
periods presented.
<TABLE>
<CAPTION>
UST CORP. AS WALDEN AS UST CORP.
ORIGINALLY REPORTED ORIGINALLY REPORTED RESTATED
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Net interest income ...................... $ 96,126 $ 39,129 $ 135,255
Net income ............................... 32,662 10,519 43,181
Net income per share ..................... 1.79 1.97 1.52
Total assets ............................. 2,706,614 995,628 3,698,242
Total deposits ........................... 2,105,866 749,946 2,855,812
Total shareholders' investment ........... 197,960 97,629 295,589
THREE MONTHS ENDED SEPTEMBER 30, 1996
Net interest income ...................... $ 23,604 $ 9,835 $ 33,439
Net income ............................... 12,938 3,038 15,976
Net income per share ..................... 0.71 0.58 0.57
NINE MONTHS ENDED SEPTEMBER 30, 1996
Net interest income ...................... $ 69,683 $ 29,277 $ 98,960
Net income ............................... 26,299 8,855 35,154
Net income per share ..................... 1.45 1.65 1.24
Total assets ............................. 2,031,648 1,049,393 3,081,041
Total deposits ........................... 1,496,812 759,412 2,256,224
Total shareholders' investment ........... 190,101 95,049 285,150
</TABLE>
Upon the completion of the Walden acquisition, the Company redesignated
$146 million of former Walden securities from held-to-maturity to securities
available-for-sale.
9
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) ACQUISITIONS (CONT'D.)
Subsequent to September 30, 1997, on October 15, 1997, the
Company completed its acquisition of Firestone Financial Corp.
("Firestone"), an $85 million small business equipment finance
company headquartered in Newton, Massachusetts. The transaction was
accounted for as a pooling of interests and was structured as a
tax-free exchange of 0.59 shares of the Company's common stock for
each share of Firestone common stock. The Company's outstanding stock
increased 1,180,000 to a total of 29,716,593 shares on the date of
acquisition. Based on the closing price of the Company's stock as of
October 15, 1997, the market value of the shares exchanged totaled
$31 million. Firestone provides, directly or through equipment
dealers, secured installment loan and lease financing to commercial
customers throughout the United States and Canada. Firestone
specializes in financing of coin-operated amusement, vending machines
and laundry equipment. Firestone will initially operate as a
subsidiary of UST Corp. Application has been made to USTrust's
regulators to transfer this subsidiary to USTrust. On the acquisition
date Firestone had total loans and leases, assets and stockholders'
investment of approximately $84 million, $85 million, and $14
million, respectively. The Company recognized during the quarter a
one-time $232 thousand pre-tax charge for acquisition-related costs
in connection with this transaction. Firestone recognized $714
thousand during the quarter ended September 30, 1997, in nonrecurring
costs associated with the acquisition transaction.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements, notes, and tables included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996. The discussion contains
certain forward-looking statements regarding the future performance of the
Company. All forward-looking information is inherently uncertain and actual
results may differ materially from the assumptions, estimates or expectations
reflected or contained in the forward-looking information. Please refer to
"Cautionary Statement Regarding Forward-looking Information" of this Form 10-Q
for a further discussion. All 1996 financial data included in this discussion
has been restated to reflect the January 3, 1997 acquisition of Walden Bancorp,
Inc. ("Walden") as a pooling of interests.
HIGHLIGHTS
Net income for the quarter ended September 30, 1997, was $10.8 million,
or $0.37 per share, compared with $16.0 million, or $0.57 per share, for the
same period in 1996. The 1996 quarter included a $14.6 million pre-tax earnings
credit recorded through the provision for possible loan losses and a one-time
charge of $3.0 million to reflect the Company's liability for an assessment on
certain deposits insured by the Savings Association Insurance Fund. Excluding
these one-time charges and credits, the comparable third quarter 1996 earnings
were $9.3 million, or $0.33 per share. For the nine months ended September 30,
1997, net income was $19.4 million, or $0.67 per share, compared with $35.2
million, or $1.24 per share. Results for the 1997 period included a nonrecurring
charge of $3.1 million for certain nondeductible merger-related expenses and a
pre-tax charge of $11.8 million primarily associated with the acquisition of
Walden. The nine-month 1996 period included a net $17.7 million pre-tax earnings
credit recorded through the provision for possible loan losses. Both the third
quarter and first nine months of this year were positively affected by the
fourth quarter 1996 acquisition of 20 banking branches resulting in the
assumption of $508 million in loans and $744 million in deposit and other
liabilities from two banking subsidiaries of BankBoston Corp. ("the Branch
Purchase").
Return on average equity and average assets were 14.15 percent and 1.19
percent, respectively, comparatively lower than the 22.64 percent and 2.08
percent earned in the same quarter last year which included the aforementioned
$14.6 million pre-tax credit. This period's performance ratios are above the
second quarter 1997 return on average equity of 10.96 percent and return on
average assets of .93 percent, as the quarterly improvement trend continued.
Operating expense efficiency also reflected significant improvement over the
second quarter of this year from 70 percent to 64 percent. These improvements
reflect operating cost savings resulting from the merger of Walden banks with
the Company's principal banking subsidiary, USTrust, late in the second quarter.
NET INTEREST INCOME ANALYSIS
Net interest income on a fully taxable equivalent basis was $44.4 million
in the third quarter 1997, compared with $33.6 million in the same quarter last
year. For the first nine months of 1997, net interest income on a fully taxable
equivalent basis was $125.5 million compared with $100.0 million last year. The
increase in net interest income for both periods was due largely to the
additional volume of interest-earning assets and interest-bearing liabilities
acquired in the Branch Purchase.
Average loan volume increased $601 million and $580 million over the same
quarter and first nine months of 1996, respectively, reflecting the loans
acquired in the Branch Purchase and loan growth over the past year. This
quarter's average loan growth was 2 percent, or $50 million, compared with 4
percent, or $87 million, in the second quarter of this year. Average securities
decreased $207 million and $148 million for the three- and nine- month periods,
respectively, as a part of a portfolio restructuring program to sell off
lower-yielding securities. As shown in the table below, the increase in loans
and an increase in federal funds sold, partially reduced by lower average
securities resulted in a $11.7 million and $33.4 million volume-related increase
in interest income for the three- and nine-month comparisons, respectively.
Average interest-bearing liabilities increased $310 million for the quarter and
$390 million
11
for the first nine months due mostly to the deposits acquired in the Branch
Purchase. This increase in liabilities added $2.0 million and $7.8 million in
volume-related interest expense in the three- and nine-month periods,
respectively. The effect on net interest income from changes in volume of
interest-earning assets and interest-bearing liabilities was an increase of $9.7
million and $25.6 million for the three and nine months ended September 30,
1997.
Yield on loans increased 14 basis points to 9.01 percent for the quarter
while the year-to-date yield decreased 14 basis points from last year to 8.84
percent. In comparison to last year, 1997 loan yields reflect the effect of a
lower interest rate environment and some external pressure on loan pricing.
These downward pressures on loan yield were more than offset in the third
quarter of this year with an unusually high level of interest income recoveries
on former nonaccrual loans. Securities yield increased 27 basis points to 6.15
percent this quarter and 7 basis points to 6.13 percent for the first nine
months of this year reflecting the benefit of a portfolio restructuring
initiative to increase yield. The net effect on interest income from rate
changes on earning assets was an increase of $1.4 million for the three-month
period and a decrease of $250 thousand for the nine-month comparison. Yield on
interest-bearing liabilities decreased 13 basis points and 22 basis points to
3.97 percent and 3.62 percent for the three- and nine-month periods,
respectively. The effect on total interest expense from changes in rates and mix
of deposits and other interest-bearing liabilities was an increase of $419
thousand for the quarter and a decrease of $614 thousand for the nine-month
period. The net effect of rate changes on net interest income for the three and
nine months ending September 30, 1997, compared to the same periods last year,
was an increase of $1.0 million and $364 thousand, respectively.
The yield on total average-earning assets increased to 8.31 percent and
8.15 percent from 7.90 percent and 8.02 percent from the three- and nine-month
periods last year, respectively. The earning asset yield increase reflects the
effect of a favorable change in mix of earning assets. As a percentage of
interest-earning assets, higher-yielding loans increased to 75 percent for the
three- and nine-month periods, respectively, from 67 percent for both periods
last year. Yield on interest-bearing liabilities decreased from 4.10 percent and
4.12 percent last year to 3.97 percent and 3.88 percent for the three- and
nine-month periods this year, respectively. As a result of these favorable
changes, interest rate margin and spread for the quarter improved from 4.59
percent and 3.80 percent last year to 5.20 percent and 4.34 percent this year.
For the nine-month period, margin and spread increased from 4.67 percent and
3.90 percent last year to 5.02 percent and 4.27 percent this year.
12
The following table attributes changes in interest income and interest
expense to changes in interest rates and changes in the volume of
interest-earning assets and interest-bearing liabilities for the three and nine
months ended September 30, 1997 when compared with the three and nine months
ended September 30, 1996. Changes attributable to both rate and volume are
allocated on a weighted basis.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 COMPARED WITH 1996 1997 COMPARED WITH 1996
INCREASE (DECREASE) DUE TO CHANGE IN: INCREASE (DECREASE) DUE TO CHANGE IN:
------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ----- ------- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans*...... $ 13,624 $ 838 $14,462 $38,424 $(2,169) $ 36,255
Interest and dividends on
securities:
Taxable.................... (3,163) 635 (2,528) (6,676) 848 (5,828)
Nontaxable*................ (12) (13) (25) (74) (465) (539)
Interest on federal funds sold and 1,246 (39) 1,207 1,752 1,536 3,288
------- ------ ------ ------- ------ --------
other..............................
Total interest income*..... 11,695 1,421 13,116 33,426 (250) 33,176
------- ------ ------ ------- ------ --------
Interest expense:
Interest on regular savings, NOW and
money market deposits.......... 2,003 530 2,533 6,417 402 6,819
Interest on time deposits........ 770 (77) 693 2,580 (1,037) 1,543
Interest on borrowings........... (805) (34) (839) (1,173) 21 (1,152))
------- ------ ------ ------- ------ --------
Total interest expense..... 1,968 419 2,387 7,824 (614) 7,210
------- ------ ------ ------- ------ --------
Net interest income................ $ 9,727 $ 1,002 $10,729 $ 25,602 $ 364 $ 25,966
======== ======= ======= ======== ======= =========
</TABLE>
- -------------
* Fully taxable equivalent at the federal income tax rate of 35 percent, and
includes applicable state taxes, net of federal benefit. The tax equivalent
adjustments were $82 thousand and $282 thousand on loans and $58 thousand
and $253 thousand on nontaxable securities for the three and nine months
ended September 30, 1997, respectively.
NONINTEREST INCOME
Total noninterest income decreased $1.4 million compared to the same
quarter last year to $8.2 million. The 1997 quarter includes $578 thousand in
realized securities losses compared with $1.5 million in realized securities
gains in 1996. This year's net securities losses, which total $1.2 million year
to date, reflect a portfolio restructuring program to sell off low-yielding
securities which concluded during the third quarter. Other noninterest income
also decreased this quarter as a result of unusually high residual income on
terminating equipment leases in 1996. Partially offsetting these decreases was
the favorable combined effect of the Branch Purchase, increased service charges
on deposit accounts and growth in corporate services income. Deposit service
charges increased $898 thousand while corporate services income, which includes
merchant credit card income net of card processing expense, increased $352
thousand.
Total noninterest income increased $2.6 million compared to the same
nine-month period in 1996 to $26.9 million. Consistent with the quarter
comparison, service charges on deposit accounts and corporate services income
increased a combined $3.1 million. This year's realized gain on the loans
held-for-sale portfolio was $1.8 million compared to a nominal gain last year.
Partially offsetting these income increases was the change from net realized
gains to losses on securities sales of $2.6 million.
13
NONINTEREST EXPENSE
Total noninterest expense increased $3.0 million and $33.6 million for
the three and nine months ended September 30, 1997, respectively. Increases in
personnel costs, occupancy, and equipment and furniture reflect the operations
of twenty additional banking branches acquired in the Branch Purchase. The
increase in intangible asset amortization reflects the amortization of premium
incurred in the Branch Purchase. The increases in both comparisons in
advertising and promotion are consistent with the Company's growth in assets and
reflects the many product promotions and this year's advertising campaign, "THE
other BIG BANK." Service bureau and data processing costs increased over last
year as a result of a higher use of nonaffiliated banks' ATM's by new customers
and increased processing costs due to the Branch Purchase. Other noninterest
expense increased $1.0 million and $4.9 million for the three- and nine-month
periods. The increases in other noninterest expense reflect higher operating
expenses among numerous expense categories, many the result of the operation of
twenty additional banking branches. The largest of the increases were: higher
checkbook expense due to the replacements offered to deposit customers acquired
in the Branch Purchase, replacement of stationery and supplies with the
Company's new logo, settlement of a certain litigation matter during the year,
and higher communication expenses such as telephone, postage and delivery
charges. The nine-month comparison to last year also reflects restructuring
charges of $11.8 million which included expenses paid and provisions for
severance payments to former Walden executives and staff, writeoffs of certain
Walden assets and contract buyouts, systems conversion costs, and certain other
expenses associated with the integration of the Walden banking subsidiaries.
Year-to-date, merger-related expense of $3.1 million was primarily for
professional services paid in connection with the Walden acquisition of $2.8
million and Firestone acquisition of $232 thousand.
Earlier this year the Company assembled a project team of senior officers
and outside consultants to assess the impact of the so-called Year 2000 problem
on its information systems and certain information systems of its customers,
vendors and other parties that service or otherwise interact with the Company.
The Year 2000 problem, which is common to most corporations, concerns the
inability of information systems, primarily computer software programs, to
properly recognize and process date-sensitive information as the year 2000
approaches. Affected system inventories have been completed and the Company is
proceeding through what it calls its assessment phase. Once the assessment phase
is complete, a specific work plan which will include cost estimates, will be
developed and implemented. In a number of cases new Year 2000 compliant systems
have been installed or are already in process in the normal course of upgrade
and functionality improvement. The Company currently believes it will be able to
modify or replace any affected systems in time to minimize any detrimental
effects on operations. The cost of the plan development and implementation
however, may materially affect the future operating results of the Company in
the period(s) in which such expense is incurred. If the Company's resolution
plan were unsuccessful, it may have a material adverse effect on its future
operating results and financial condition of the Company.
INCOME TAXES
The Company recorded income taxes of $7.5 million compared with $10.6
million for the same quarter last year. The decrease is the direct result of the
lower level of pre-tax income. The effective tax rate for the quarter was 41.0
percent compared with 39.8 percent a year ago. Included in other assets as of
September 30, 1997 was a deferred tax asset of approximately $11.1 million. The
Company believes that it is more likely than not that the benefit of this
deferred asset will be realized.
ASSETS
Total assets at September 30, 1997 were $3.691 billion, a decrease of $7
million since the beginning of the year. Loan growth of $185 million to $2.637
billion was partially offset by a decline in securities of $115 million to $712
million. The securities decrease reflects restructuring of the Company's
portfolios. Also, during the year, the securities held-to-maturity portfolio
existing at December 31, 1996 was redesignated as securities available-for-sale.
Intangible assets decreased $7 million as a result of amortization during the
year and a reallocation of the Branch Purchase price based upon receipt of
appraisals of certain assets acquired.
14
The following table presents the composition of the loan portfolio:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1997 1997 1997 1996 1996
----- ----- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial and financial .......... $ 861,934 $ 855,846 $ 811,454 $ 820,540 $ 705,468
Commercial real estate:
Construction .................... 59,447 47,392 30,895 29,624 22,286
Developer, investor and land .... 252,772 283,481 317,050 305,056 314,693
Consumer:
Residential mortgage ............ 735,583 772,157 779,464 804,109 466,925
Home equity ..................... 111,063 111,692 108,820 107,310 114,566
Indirect automobile installment . 516,187 403,804 337,672 302,044 288,305
Other consumer .................. 37,900 37,401 40,280 40,461 40,974
Lease financing ................... 62,581 50,828 47,193 43,669 38,963
---------- ---------- ---------- ---------- ----------
Total loans ............... $2,637,467 $2,562,601 $2,472,828 $2,452,813 $1,992,180
========== ========== ========== ========== ==========
</TABLE>
The Company's commercial loan portfolios listed above totaled $1.174
billion at September 30, 1997, reflecting a net increase of $19 million since
year-end 1996 and $132 million from a year ago. Commercial loans acquired in the
1996 Branch Purchase totaled $111 million while commercial loans sold in the
fourth quarter 1996 sale of UST Bank/ Connecticut, a former banking subsidiary,
were approximately $19 million. Excluding these events, the commercial loan
portfolios grew $40 million from a year ago. Beginning with the June 30, 1997
presentation above, certain balances reflect reclassifications among loan
categories of former Walden bank loans as compared to prior periods.
Residential loans decreased $69 million during the year to $736 million
due to normal amortization. Since the Company does not originate residential
mortgage loans, growth in this portfolio is not expected unless through
acquisition. The increase in residential loans from a year ago reflects loans
acquired in the Branch Purchase.
The indirect automobile loan portfolio continues to experience strong
growth as planned. This portfolio grew 71 percent or $214 million in the first
nine months of this year to $516 million. In comparison to a year ago, the
portfolio has grown 79 percent, or $228 million. This quarter's growth was
particularly high, 28 percent, or $112 million, due to the exiting of some large
lending competitors from the market. This level of very high growth rate is not
expected in future quarters. These loans are subjected to the Company's credit
quality standards and are not what is referred to in the industry as "subprime"
or high risk automobile loans.
LIQUIDITY AND FUNDING
Liquidity involves the Company's ability to raise or gain access to funds
in order to fulfill its existing and anticipated financial obligations. It may
be provided through amortization, maturity or sale of assets such as loans and
securities, liability sources such as increased deposits, utilization of the
Federal Home Loan Bank credit facility, purchased or other borrowed funds, and
access to the capital markets. The Company's securities portfolio is classified
entirely as available-for-sale, which provides the flexibility to sell certain
securities based upon changes in economic or market conditions, interest rate
risk and the Company's financial position and liquidity.
At September 30, 1997, liquidity, which includes excess cash, funds sold
and unpledged securities, totaled approximately $493 million, or 14 percent of
total assets.
15
The funds needed to support the Company's loan and securities portfolios
are provided through a combination of commercial and retail deposits and
short-term and other borrowings. Total deposits decreased $8 million since
year-end 1996 to $2.864 billion. Noninterest-bearing deposits increased $19
million to $619 million. Interest-bearing savings deposits, including NOW, money
market and regular savings, decreased $12 million to $1.333 billion. The savings
deposit balances also reflect a shift from NOW to money market deposits of over
$300 million since the beginning of the year. This was a result of an overnight
deposit sweep process implemented earlier this year by the Company's subsidiary
bank, USTrust. This process transfers certain NOW account balances to money
market accounts on a nightly basis then returns the balances to a NOW account
status the following morning. The effect of this process, which has no impact on
an individual customer's account status, is a reduction of the cash reserve
balances required to be maintained at the Federal Reserve Bank. This process has
become a customary procedure for most large institutions and has Federal Reserve
Board approval. Time certificates of deposit were relatively flat since year-end
December 31, 1996 at $912 million. Short-term and other borrowings, which
consist principally of securities sold under agreement to repurchase and
borrowings from the Federal Home Loan Bank, decreased $33 million to $446
million, reflective of the reduction in federal funds sold, cash and lower
securities balance.
As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased $48 million during the nine-month period ended September
30, 1997. Cash provided by operations resulted largely from net income earned
during the period. Cash used by investing activities was due to an excess of
purchases of securities and increased loan volume over cash provided by
securities sales and maturities. Net cash used by financing activities was
primarily due to decreases in borrowings.
At September 30, 1997, the parent Company had $1.6 million in cash and $4
million in short-term securities purchased under agreement to resell compared
with $.8 million and $14 million, respectively, at year end. The decrease in
excess funds was primarily due to the net of a $20 million capital contribution
to USTrust, dividends paid to shareholders, and the receipt of $14.5 million in
dividends from subsidiaries during the first nine months of 1997.
INTEREST RATE RISK
Volatility in interest rates requires the Company to manage interest rate
risk which arises from differences in the timing of repricing of assets and
liabilities. Management monitors and adjusts the difference between
interest-sensitive assets and interest-sensitive liabilities ("GAP" position)
within various time frames. Within GAP limits established by the Board of
Directors, the Company seeks to balance the objective of insulating the net
interest margin from rate exposure with that of taking advantage of anticipated
changes in rates in order to enhance income. The Company's policy is to limit
its one-year cumulative GAP position to 2.5 times equity, presently equal to
approximately 21 percent of total assets. The Company manages its interest rate
GAP primarily by lengthening or shortening the maturity structure of its
securities portfolio.
The Company's GAP presentation may not reflect the degrees to which
interest-earning assets and core deposit costs respond to changes in market
interest rates. The Company's rate-sensitive assets consist primarily of loans
tied to the prime rate or the London Interbank Offered Rate ("LIBOR"). The
following table summarizes the Company's GAP position at September 30, 1997. The
majority of loans are included in 0-30 days as they reprice in response to
changes in the interest rate environment. Interest-bearing deposits are
classified according to their expected interest rate sensitivity. Actual
sensitivity of these deposits is reviewed periodically and adjustments are made
in the Company's GAP analysis that management deems appropriate. Securities and
noninterest-bearing deposits are categorized according to their expected lives
based on published industry prepayment estimates in the case of securities and
current management estimates for noninterest-bearing deposits. Securities are
evaluated in conjunction with the
16
Company's asset/liability management strategy and may be purchased or sold in
response to expected or actual changes in interest rates, credit risk,
prepayment risk, loan growth and similar factors. The reserve for possible loan
losses is included in the "Over 1 Year" category of loans. At September 30,
1997, the one-year cumulative GAP position was positive at $1 million, or less
than 1 percent of total assets.
<TABLE>
<CAPTION>
Interest Sensitive Periods
--------------------------------------------------------------------------
0-30 DAYS 31-90 DAYS 91-365 DAYS OVER 1 YEAR TOTAL
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Loans, net of reserve................... $ 982 $ 111 $ 355 $ 1,139 $ 2,587
Federal funds sold and other............ 130 130
Securities.............................. 14 53 88 558 713
Other assets............................ 21 3 237 261
------- ---- ----- ------ -------
Total assets..................... $ 1,147 $ 164 $ 446 $ 1,934 $ 3,691
-------- ----- ------ ------- ========
Interest-bearing deposits............... $ 522 $ 126 $ 493 $ 1,104 $ 2,245
Borrowed funds.......................... 364 33 34 15 446
Noninterest-bearing deposits............ 144 475 619
Other liabilities and stockholders'
equity................................. 40 341 381
-------- ---- ----- ------ -------
Total liabilities and equity..... $ 1,070 $ 159 $ 527 $ 1,935 $ 3,691
-------- ----- ------ ------- ========
GAP for period.......................... $ 77 $ 5 $ (81) $ (1)
======== ---- ------- -------
Cumulative GAP.......................... $ 82 $ 1 $ 0
==== ===== ======
As a percent of total assets............ 2.09% 2.22% .03%
</TABLE>
CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES
At September 30, 1997, substandard loans were $37.1 million compared with
$35.5 million at December 31, 1996. Loans reported as substandard include loans
classified as Substandard or Doubtful as determined by the Company in its
internal credit risk rating profile. Under the Company's definition, Substandard
loans, which include nonaccruals, are characterized by the distinct possibility
that some loss will be sustained if the credit deficiencies are not corrected.
The Substandard classification, however, does not necessarily imply ultimate
loss for each individual loan so classified. Loans classified as Doubtful have
all the weaknesses inherent in Substandard loans with the added characteristic
that the weaknesses make collection of 100 percent of the assets questionable
and improbable.
17
The following table displays the Company's total nonperforming assets and
measures performance regarding certain key indicators of asset quality:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1997 1997 1997 1996 1996
------------ --------- -------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans......................... $ 28,504 $ 26,275 $ 25,755 $ 33,710 $ 36,301
Accruing loans 90 days or more past due.. 2,047 826 524 997 1,184
Other real estate and vehicles owned, net
(OREO and OVO)......................... 1,106 692 1,638 1,792 2,342
Restructured loans....................... 754 1,264 810
------- ------- ------- ------- -------
Total nonperforming assets.................. $ 31,657 $ 27,793 $ 28,671 $ 37,763 $ 40,637
======== ======== ======= ======== ========
Reserve for possible loan losses............ $ 49,969 $ 50,155 $ 50,155 $50,204 $ 52,743
Net chargeoffs for the quarter.............. 486 300 49 809 83
OREO and OVO reserve........................ 367 367 320 320 412
Ratios:
Reserve to nonaccrual loans.............. 175.3% 190.9% 194.7% 148.9% 145.3%
Reserve to total of nonaccrual loans,
accruing
loans 90 days or more past due, and
restructured loans..................... 163.6% 185.1% 185.5% 139.6% 137.7%
Reserve to period-end loans.............. 1.9% 2.0% 2.0% 2.0% 2.6%
Nonaccrual loans and accruing loans over
90 days past due to period-end loans,
OREO, and OVO.......................... 1.2% 1.1% 1.1% 1.4% 1.9%
Annualized net chargeoffs to
average loans.......................... .1% nil nil .1% nil
OREO and OVO reserve to OREO and OVO..... 33.2% 34.7% 16.3% 15.2% 17.6%
</TABLE>
As shown in the table above, total nonperforming assets were $31.7
million at September 30, 1997, which reflects an increase in nonaccrual loans
during the quarter, while total nonperformers were down $6.1 million from the
end of 1996. The level of nonperforming assets at quarter end continues to be
within the range of industry norms relative to the Company's size and total
volume of loans. A nominal provision for possible loan losses of $300 thousand
was recorded during the quarter as asset quality remained relatively stable.
Losses of $1.6 million were charged against the reserve during the quarter and
recoveries on loans previously charged off totaled $1.1 million. At September
30, 1997, the reserve balance was $50.0 million and equaled 175 percent of
nonaccrual loans and 1.9 percent of total loans.
The Company's consumer loan delinquency rates (greater than 30 days past
due including nonaccruals) continue to remain at favorable levels. The
delinquency rate for the indirect automobile loans, the largest component of the
Company's consumer loan portfolio excluding residential mortgage loans, was 2.90
percent at September 30, 1997 compared with 2.89 percent at December 31, 1996.
The Company anticipates that the current high growth rate experience in the
indirect automobile loan portfolio will subside in future periods as well as
experience seasonal fluctuations. This factor, combined with the eventual
maturity of the existing portfolio may result in an increase in the delinquency
rate in future periods.
18
At September 30, 1997, total impaired loans were $18.6 million, comprised
of $1.0 million that required a reserve for possible loan losses of $.8 million
and $17.6 million that did not require a related reserve. Impaired loans, as
defined in Statement of Financial Accounting Standards No. 114 ("SFAS No. 114")
are commercial and commercial real estate loans recognized by the Company as
nonaccrual and restructured.
The Company maintains a reserve for possible loan losses to absorb future
chargeoffs of loans and leases in the existing portfolio. The reserve is
increased when a loan loss provision is recorded in the income statement. When a
loan, or portion thereof, is considered uncollectible, it is charged against the
reserve. Recoveries on amounts previously charged off are added to the reserve
when collected. Adequacy of the reserve for possible loan losses is evaluated on
a monthly basis using a consistent, systematic methodology which analyzes the
size and risk of the loan and lease portfolio. Factors in this analysis include
historical loss experience and asset quality, as reflected by delinquency
trends, nonaccrual and restructured loans and the Company's credit risk rating
profile. Consideration is also given to the current and expected economic
conditions and, in particular, how such conditions affect the types of credits
in the portfolio and the market area in general. This analysis is documented
using a combination of numerical and qualitative analysis and includes
sensitivity testing and a written conclusion.
No portion of the reserve is restricted to any loan or group of loans,
and the entire reserve is available to absorb future realized losses. The amount
and timing of realized losses and future reserve allocations may vary from
current estimates. An allocation of the reserve for possible loan losses to each
category of loans is presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1997 1997 1997 1996 1996
----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Reserve for possible loan losses allocation
to loans outstanding:
Commercial and financial............... $17,535 $17,315 $17,501 $16,473 $15,090
Commercial real estate:
Construction....................... 1,132 897 622 556 451
Developer, investor and land........ 3,696 4,241 5,215 4,638 5,414
Consumer*.............................. 19,860 18,626 15,737 15,836 11,626
Lease financing........................ 782 635 590 589 488
Unallocated............................ 6,964 8,441 10,490 12,112 19,674
------- ------- ------- ------- -------
Total loan loss reserve............. $49,969 $50,155 $50,155 $50,204 $52,743
======= ======= ======= ======= =======
</TABLE>
- ----------
* Consumer loans include indirect automobile installment loans, residential
mortgages, home equity lines of credit, credit cards, check credit and other
consumer loans.
The reserve for possible loan losses was $50.0 million at September 30,
1997, consistent with the June and March 1997 and December 1996 year-end
balances. The unallocated portion of the reserve was 14 percent at September 30,
1997 compared with 24 percent at year end. The decrease of 10 percentage points,
or $5.1 million, reflects a reallocation of the reserve to commercial loan
categories at the Walden banks and an increase in reserve allocated to the
consumer category consistent with loan growth.
19
CAPITAL AND DIVIDENDS
The Company and its banking subsidiaries are subject to various
regulatory capital requirements administered by the federal banking agencies.
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. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and its subsidiary banks must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and its banking subsidiaries to maintain minimum
amounts and ratios (set forth in the table below) of Total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management believes,
as of September 30, 1997, that the Company and its subsidiary banks meet all of
their respective capital adequacy requirements.
As a condition to Federal Deposit Insurance Corporation approval of
USTrust's fourth quarter 1996 Branch Purchase, USTrust was required to have a
Tier I leverage capital ratio of not less than: (i) 4.8 percent, no later than
ten days after consummation of the acquisition of sixteen BayBank branches; and
(ii) 5 percent, no later than three months after consummation of the acquisition
of the BayBank branches and for a period of six months thereafter. The
aforementioned conditions expired during the quarter and are no longer
applicable.
The actual capital amounts and ratios of the Company and its banking
subsidiaries as of September 30, 1997 are presented in the following summary:
<TABLE>
<CAPTION>
Amount Percent
------------------------------------------- ------------------------------------------
Adequately Well Adequately Well
Capitalized Capitalized Capitalized Capitalized
Actual Minimums Minimums Actual Minimums Minimums
-------- ------------- ------------- ---------- ------------- -------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
UST Corp. Consolidated:
Tier 1 leverage capital..... $ 254.7 $ 141.2 N/A 7.22% 4.00% N/A
Tier 1 capital.............. 254.7 118.1 N/A 8.63% 4.00% N/A
Total (Tier 1 and Tier 2) 291.6 235.1 N/A 9.92% 8.00% N/A
capital ......................
USTrust:
Tier 1 leverage capital..... 236.2 140.7 $ 175.8 6.71% 4.00% 5.00%
Tier 1 capital.............. 236.2 116.1 174.1 8.14% 4.00% 6.00%
Total (Tier 1 and Tier 2) 272.4 231.2 289.0 9.43% 8.00% 10.00%
capital ......................
United States Trust Company:
Tier 1 leverage capital..... 2.8 .7 .8 16.52% 4.00% 5.00%
Tier 1 capital.............. 2.8 .4 .6 26.20% 4.00% 6.00%
Total (Tier 1 and Tier 2) 2.8 .8 1.1 26.28% 8.00% 10.00%
capital ......................
</TABLE>
The Company paid cash dividends to stockholders in the first nine months
of the year in the amount of $8.0 million. On September 16, 1997, a regular
quarterly dividend to stockholders was declared of $0.12 per share for a total
of $3.4 million payable on October 24, 1997. The Company received cash dividends
from subsidiaries during the first nine months of 1997 of $14.5 million. In the
third quarter the subsidiaries declared dividends of $5.0 million, to be payable
in the fourth quarter of 1997.
20
RECENT ACCOUNTING DEVELOPMENTS
On June 30, 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS No. 125"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The standards are based on consistent application of a financial components
approach that focuses on control. After a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This Statement is
effective for transactions occurring after December 31, 1996, and is to be
applied prospectively. This Statement was adopted on January 1, 1997 and did not
have a material impact on the Company's financial condition or results of
operations.
On March 3, 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This Statement supersedes APB Opinion No. 15 regarding the presentation of
earnings per share ("EPS") on the face of the income statement. Refer to Note 4
to the Notes to Consolidated Financial Statements for a further discussion.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The preceding Management's discussion contains certain forward-looking
statements, including without limitation statements regarding the Year 2000
problem, loan growth, and consumer loan delinquencies. Moreover, the Company may
from time to time, in both written reports and oral statements by Company
management, express its expectations regarding future performance of the
Company. These forward-looking statements are inherently uncertain, and actual
results may differ from Company expectations. The Company disclaims any
obligation to announce publicly future events or developments which affect
forward-looking statements. Risk factors that could impact current and future
performance include but are not limited to: (i) changes in asset quality and
resulting credit risk-related losses and expense; (ii) adverse changes in the
economy of the New England region, the Company's primary market, which could
accentuate credit-related losses and expenses; (iii) adverse changes in the
local real estate market can also negatively affect credit risk since most of
the Company's loans are concentrated in Eastern Massachusetts and a substantial
portion of these loans have real estate as primary and secondary collateral;
(iv) an increasingly competitive New England financial services marketplace,
where a large number of bank acquisitions and mergers has resulted in fewer but
much larger and financially stronger competitors which could alter Company
expectations; (v) fluctuations in market rates and prices can negatively affect
net interest margin, asset valuations and expense expectations; and (vi)
changing regulatory requirements of federal and state agencies could materially
impact future operations of the Company.
21
PART II. OTHER INFORMATION
For the quarter ended September 30, 1997, Items 2, 3, 4, and 5 of Part II
are either inapplicable or would elicit a response of "None" and, therefore, no
reference thereto has been made herein.
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of operations, the Company and its subsidiaries
become defendants in a variety of judicial and administrative proceedings. In
the opinion of management, however, there is no proceeding pending, or to the
knowledge of management threatened, which, in the event of an adverse decision,
would be likely to result in a material adverse change in the financial
condition or results of operations of the Company and its subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
In accordance with the requirements of the Securities Exchange Act of
1934, the Company has caused this report to be signed on its behalf by the
undersigned duly authorized officers of the Company.
Date: November 14, 1997 By: /s/ Neal F. Finnegan
--------------------------------
Neal F. Finnegan, President and
Chief Executive Officer
Date: November 14, 1997 By: /s/ James K. Hunt
--------------------------------
James K. Hunt, Executive Vice
President, Treasurer, and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF UST CORP. AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
OF FORM 10-Q.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1.00
<CASH> 92,013
<INT-BEARING-DEPOSITS> 158
<FED-FUNDS-SOLD> 129,731
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 712,415
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,637,467
<ALLOWANCE> 49,969
<TOTAL-ASSETS> 3,690,849
<DEPOSITS> 2,863,927
<SHORT-TERM> 427,782
<LIABILITIES-OTHER> 66,743
<LONG-TERM> 18,063
17,832
0
<COMMON> 0
<OTHER-SE> 296,502
<TOTAL-LIABILITIES-AND-EQUITY> 3,690,849
<INTEREST-LOAN> 165,324
<INTEREST-INVEST> 34,386
<INTEREST-OTHER> 3,728
<INTEREST-TOTAL> 203,438
<INTEREST-DEPOSIT> 61,485
<INTEREST-EXPENSE> 78,461
<INTEREST-INCOME-NET> 124,977
<LOAN-LOSSES> 600
<SECURITIES-GAINS> (1,151)
<EXPENSE-OTHER> 117,014
<INCOME-PRETAX> 34,274
<INCOME-PRE-EXTRAORDINARY> 34,274
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,415
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
<YIELD-ACTUAL> 8.15
<LOANS-NON> 28,504
<LOANS-PAST> 2,047
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 37,000
<ALLOWANCE-OPEN> 50,204
<CHARGE-OFFS> 4,410
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<ALLOWANCE-CLOSE> 49,969
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<ALLOWANCE-UNALLOCATED> 6,964
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