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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 MARCH 31, 1998
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 April 30, 1998,
there were 29,878,628 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 -- March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income -- Three Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Changes in Stockholders' Investment -- Three Months Ended
March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows -- Three Months Ended March 31, 1998 and 1997 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
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UST CORP.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- -----------
(unaudited)
ASSETS
<S> <C> <C>
Cash, due from banks and interest-bearing deposits............................. $ 101,914 $ 95,702
Federal funds sold and other short-term investments............................ 28,821 67,851
Securities available-for-sale:
Mortgage-backed securities .................................................. 495,088 490,691
U.S. Treasury and federal agencies and other securities...................... 194,517 231,741
---------- -------
Total securities available-for-sale................................. 689,605 722,432
Loans:
Loans -- net of unearned discount of $30,037 in 1998 and
$29,053 in 1997 (Note 2)................................................... 2,893,189 2,835,982
Reserve for possible loan losses (Note 2) ................................... (54,060) (52,230)
---------- -------
Total loans, net.................................................... 2,839,129 2,783,752
Premises, furniture and equipment, net......................................... 63,947 64,407
Intangible assets, net......................................................... 55,987 57,807
Other property owned, net ..................................................... 1,370 1,334
Other assets................................................................... 54,082 44,973
---------- ------
Total assets........................................................ $3,834,855 $3,838,258
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Noninterest-bearing......................................................... $ 657,672 $ 708,399
Interest-bearing:
NOW...................................................................... 56,391 43,116
Money market............................................................. 678,470 660,641
Regular savings.......................................................... 703,330 675,087
Time:
Certificates of deposit over $100 thousand............................. 156,443 159,644
Other.................................................................. 705,772 731,328
-------- -------
Total deposits...................................................... 2,958,078 2,978,215
Short-term borrowings.......................................................... 433,390 421,313
Other borrowings............................................................... 41,289 49,338
Other liabilities.............................................................. 51,497 49,266
------- ------
Total liabilities................................................... 3,484,254 3,498,132
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 -- 29,817,577 and 29,762,224 shares in 1998 and 1997, respectively.. 18,636 18,601
Additional paid-in capital................................................... 118,767 117,236
Retained earnings............................................................ 210,633 201,355
Accumulated other comprehensive income....................................... 2,326 2,245
Deferred compensation and other.............................................. 239 689
---- ---
Total stockholders' investment...................................... 350,601 340,126
-------- -------
Total liabilities and stockholders' investment...................... $3,834,855 $3,838,258
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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UST CORP.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
---- ----
<S> <C> <C>
Interest income:
$ 62,421 $ 55,215
Interest and fees on loans......................................
Interest and dividends on securities:
Taxable....................................................... 10,605 11,887
Nontaxable.................................................... 124 117
Interest on federal funds sold and other short-term
investments................................................... 966 1,006
-------- --------
Total interest income............................ 74,116 68,225
-------- --------
Interest expense:
Interest on deposits.......................................... 20,543 20,137
Interest on borrowings........................................ 5,945 6,848
-------- --------
Total interest expense........................... 26,488 26,985
-------- --------
Net interest income........................................... 47,628 41,240
Provision for possible loan losses (Note 2)..................... 975
-------- --------
Net interest income after provision for possible loan losses.. 46,653 41,240
-------- --------
Noninterest income:
Asset management fees......................................... 3,728 3,157
Deposit account service charges............................... 2,474 2,249
Corporate services income, net................................ 1,478 1,375
Securities gains, net......................................... 1,441 11
Gain on sale of loans......................................... 1,804
Other......................................................... 2,200 2,332
-------- --------
Total noninterest income......................... 11,321 10,928
-------- --------
Noninterest expense:
Salary and employee benefits.................................. 19,279 18,381
Occupancy, net................................................ 3,421 3,370
Equipment depreciation and maintenance........................ 2,261 1,754
Intangible asset amortization................................. 1,774 2,113
Data processing services...................................... 1,378 1,204
Advertising and promotion..................................... 1,172 1,176
Professional and consulting fees.............................. 966 1,026
Year 2000 readiness expense................................... 494
Foreclosed asset and workout expense.......................... 156 142
Acquisition and merger-related expense........................ 14 2,850
Restructuring charges......................................... 11,751
Other......................................................... 6,242 5,443
-------- --------
Total noninterest expense....................... 37,157 49,210
-------- --------
Income before income taxes...................................... 20,817 2,958
Income tax provision.......................................... 7,961 2,054
-------- --------
Net income...................................... $ 12,856 $ 904
======== ========
Per share data (Note 4):
Basic earnings per share................................... $0.43 $0.03
Diluted earnings per share................................. $0.42 $0.03
Cash dividends declared per share.......................... $0.12 $0.10
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 5
UST CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER DEFERRED
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE COMPENSATION
INCOME (LOSS) STOCK CAPITAL EARNINGS INCOME (LOSS) AND OTHER TOTAL
-------------- ------- ---------- -------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996................. $18,328 $111,158 $181,645 $(2,576) $466 $309,021
Comprehensive income (loss) (Note 6):
Net income.............................. $ 904 904 904
Other comprehensive income (loss):
Unrealized securities losses,
net of $3,328 tax benefit........... (4,679)
Less: Reclassification adjustment
for securities gains included
in net income, net of $5 tax
expense............................. 6
-------
Total other comprehensive loss... (4,685) (4,685) (4,685)
-------
Total comprehensive loss......... $(3,781)
=======
Cash dividends declared................... (2,841) (2,841)
Activity related to stock option, restricted
stock and stock purchase plans.......... 164 2,119 2,283
Activity in Directors Deferred
Compensation Program and other, net... (437) (437)
------- -------- -------- -------- ---- --------
Balance March 31, 1997.................... $18,492 $113,277 $179,708 $(7,261) $ 29 $304,245
======= ======== ======== ======== ==== ========
Balance December 31, 1997................. $18,601 $117,236 $201,355 $2,245 $689 $340,126
Comprehensive income (Note 6):
Net income.............................. $12,856 12,856 12,856
Other comprehensive income:
Unrealized securities gains,
net of $655 tax expense............. 924
Less: Reclassification adjustment for
securities gains included in net
income, net of $598 tax expense..... 843
-------
Total other comprehensive income 81 81 81
-------
Total comprehensive income........ $12,937
=======
Cash dividends declared................... (3,578) (3,578)
Activity related to stock option, restricted
stock and stock purchase plans.......... 35 1,531 1,566
Activity in Directors Deferred
Compensation Program and other, net..... (450) (450)
------- -------- -------- ------ ---- --------
Balance March 31, 1998........... $18,636 $118,767 $210,633 $2,326 $239 $350,601
======= ======== ======== ====== ==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
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UST Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................................. $ 12,856 $ 904
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for possible loan losses.................................................... 975
Depreciation and amortization......................................................... 3,815 4,071
Accretion of securities discount, net................................................. (270) (22)
Securities gains, net................................................................. (1,441) (11)
Gain on sale of other property owned, net.......................................... (160)
Gain on sale of loans held-for-sale................................................... (1,804)
Writedowns of fixed assets............................................................ 658 1,255
Deferred income tax benefit........................................................... (1,294)
Net change in other assets and other liabilities...................................... (4,842) (17,818)
-------- --------
Net cash provided (used) by operating activities................................ 10,457 (13,585)
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale.................................... 102,502 90,890
Proceeds from maturities of securities available-for-sale............................... 35,139 61,632
Purchases of securities available-for-sale.............................................. (102,933) (75,984)
Net decrease in federal funds sold and other............................................ 39,030 74,608
Net increase in loans................................................................... (57,808) (19,847)
Proceeds from other property owned...................................................... 1,419 1,374
Proceeds from loans held-for-sale 14,250
Proceeds from sale of fixed assets ..................................................... 40
Purchases of premises and equipment .................................................... (2,279) (7,789)
-------- --------
Net cash provided by investing activities....................................... 15,110 139,134
Cash flows from financing activities:
Net increase (decrease) in nontime deposits............................................. 8,620 (44,742)
Net decrease in certificates of deposit................................................. (28,757) (22,891)
Net increase (decrease) increase in short-term and other borrowings..................... 4,028 (56,890)
Cash dividends paid..................................................................... (3,570) (2,294)
Issuance of common stock for cash, net.................................................. 324 1,800
-------- --------
Net cash used by financing activities........................................... (19,355) (125,017)
-------- --------
Increase in cash and cash equivalents................................................... 6,212 532
Cash and cash equivalents at beginning of year.......................................... 95,702 140,263
-------- --------
Cash and cash equivalents at end of period.............................................. $101,914 $140,795
======== ========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest.............................................................................. $ 25,854 $ 25,689
======== ========
Income taxes.......................................................................... $ 11,450 $ 3,478
======== ========
Noncash transactions:
Transfers from securities held-to-maturity to available-for-sale........................ $145,564
========
Transfers from loans to other property owned............................................ $ 2,400 $ 1,564
======== ========
Common stock issuance................................................................... $ 1,242 $ 483
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
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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 applicable prior period
amounts included in this Form 10-Q have been restated to reflect the October
1997 acquisition of Firestone Financial Corp. 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, 1997. Certain prior period amounts have been reclassified to
reflect current reporting classifications.
The results of operations for three months ended March 31, 1998 and 1997
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 three months ended
March 31, 1998 and 1997 is as follows:
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of period................ $52,230 $51,984
Chargeoffs.................................... 2,397 860
Recoveries on loans previously charged-off.... 3,252 811
------- -------
Net (recoveries) chargeoffs................... (855) 49
Provision for possible loan losses ........... 975
------- -------
Balance at end of period...................... $54,060 $51,935
======= =======
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
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UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) COMMITMENTS AND CONTINGENCIES
At March 31, 1998, 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.................. $966,000
Standby letters of credit and financial
guarantees written......................... 69,000
Commitments to purchase when issued securities 25,000
Loans sold with recourse...................... 13,000
Commercial letters of credit.................. 6,000
Foreign exchange contracts.................... 4,000
(4) EARNINGS PER SHARE CALCULATION
The Company computes earnings per share in accordance with SFAS No. 128.
This Statement supersedes APB No. 15 regarding the presentation of earnings per
share ("EPS") on the face of the income statement. SFAS No. 128 replaced 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 No. 15, for all entities with complex capital
structures. This Statement was effective for fiscal years ending after December
15, 1997 and requires restatement of all prior period EPS data presented,
including quarterly information. The Company's common stock equivalents consist
primarily of dilutive outstanding stock options computed under the treasury
stock method. Basic and Diluted EPS computations for the three months ended
March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Basic earnings per share computation:
Numerator:
Net Income..................................... $ 12,856 $ 904
Denominator:
Weighted average shares outstanding.................. 29,800,873 29,442,905
Basic earnings per share............................. $ 0.43 $ 0.03
Diluted earnings per share computation:
Numerator:
Net income..................................... $ 12,856 $ 904
Denominator:
Weighted average shares outstanding............ 29,800,873 29,442,905
Dilutive stock options......................... 568,975 433,825
------- -------
Weighted average diluted shares outstanding.......... 30,369,848 29,876,730
========== ==========
Diluted earnings per share........................... $ 0.42 $ 0.03
</TABLE>
8
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UST Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) ACQUISITIONS
Walden Bancorp, Inc.
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. The Co-operative
Bank of Concord and The Braintree Savings Bank were merged into USTrust during
the second quarter of 1997. In the first quarter of 1997 the Company recognized
a nondeductible charge of $2.9 million in nonrecurring acquisition and
merger-related expense and a pre-tax $11.8 million restructuring charge
associated with the transaction.
Firestone Financial Corp.
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 by 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 operates as a wholly-owned subsidiary of USTrust.
Somerset Savings Bank--Pending
On December 10, 1997, the Company announced the execution of a definitive
agreement to acquire Somerset Savings Bank ("Somerset"), a $533 million bank
headquartered in Somerville, Massachusetts. The transaction is expected to close
during the second or third quarter of 1998, and is structured to qualify as a
tax-free exchange and as a pooling of interests for accounting purposes. The
agreement provides for the issuance of 0.19 shares of the Company's common stock
for each share of Somerset common stock. Based on the closing price of the
Company's stock as of December 9, 1997, the transaction would be valued at
approximately $94 million. The agreement is subject to the approval of Somerset
shareholders as well as federal and state regulatory authorities. The Company
expects an estimated one-time charge of $5.3 million ($7.5 million pre-tax) in
1998 for acquisition-related costs.
9
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UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) ACQUISITIONS (CONT'D.)
Affiliated Community Bancorp, Inc.--Pending
On December 15, 1997, the Company announced the execution of a definitive
agreement to acquire Affiliated Community Bancorp, Inc. ("Affiliated"), a $1.1
billion bank holding company headquartered in Waltham, Massachusetts. The
transaction is expected to close during the second or third quarter of 1998, and
is structured to qualify as a tax-free exchange and as a pooling of interests
for accounting purposes. The agreement provides for the issuance of 1.41 shares
of the Company's common stock for each share of Affiliated common stock. Based
on the closing price of the Company's stock as of December 12, 1997, the
transaction would be valued at approximately $259 million. The agreement is
subject to the approval of the shareholders of the Company and Affiliated as
well as federal and state bank regulatory authorities. The Company expects an
estimated one-time charge of $8.7 million ($12.0 million pre-tax) in 1998 for
acquisition-related costs.
(6) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), which requires companies to
report all changes in stockholders' investment during a period, except those
resulting from investment by owners and distribution to owners, in a financial
statement for the period in which they are recognized. The Company has chosen,
as allowed by SFAS No. 130, to disclose Comprehensive Income, which encompasses
net income and unrealized gains or losses on securities available-for- sale, in
the Consolidated Statements of Changes in Stockholders' Investment. Prior years
have been restated to conform to SFAS No. 130 requirements.The impact of this
Statement on net income for the three months ended March 31,1997 was to change
reported net income of $904 thousand to total comprehensive net loss of $3.8
million. The impact on net income for the three months ended March 31,1998 was
insignificant.
10
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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, 1997. 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 applicable prior period financial data included in
this discussion has been restated to reflect the 1997 acquisition of Firestone
Financial Corp. ("Firestone") as a pooling of interests.
HIGHLIGHTS
Net income for the quarter ended March 31, 1998 was $12.9 million, or
$0.42 per diluted share, compared with $904 thousand, or $0.03 per diluted
share, for the same period last year. The 1997 quarter included a nonrecurring
charge of $2.9 million for certain nondeductible merger-related expenses and a
pre-tax charge of $11.8 million for restructuring charges associated with the
acquisition of Walden Bancorp, Inc. ("Walden"). Excluding merger and
restructuring charges, net income increased 22 percent from $10.5 million, or
$0.35 per share in the 1997 quarter to the $12.9 million, or $0.42 per diluted
share this year. The increase was driven by a stronger net interest margin this
year and, to a lesser degree, by improvement in fee-based revenues. Included in
noninterest income was $1.4 million in realized securities gains in 1998 and
$1.8 million in gains from the sale of loans in 1997. The provision for possible
loan losses was $975 thousand this year, while there was no provision recorded
in the first quarter of last year. This quarter's provision compares with the
previous quarter's provision of $300 thousand. The increased provision reflects,
in part, the purchase of an $80 million commercial loan portfolio during the
first quarter of this year.
Return on average equity and average assets were 14.98 percent and 1.38
percent, respectively, comparatively higher than the 1.19 percent and 0.10
percent earned in the same quarter last year which included the aforementioned
merger and restructuring charges. Excluding such nonrecurring charges, the 1997
quarter's return on average equity and average assets would have been 13.85
percent and 1.18 percent, respectively.
NET INTEREST INCOME ANALYSIS
Net interest income on a fully taxable equivalent basis was $47.8 million
for the three months ended March 31, 1998 compared with $41.4 million for the
same period a year ago. The increase in net interest income was largely the
result of loan growth, increased interest income recoveries on former nonaccrual
loans, and favorable changes in deposit mix.
Average loan volume increased 12 percent, or $299 million, from the same
quarter last year to $2.809 billion. As exhibited in the table below, loan
growth was the largest contributor to the improvement in net interest income, a
$6.6 million volume-related interest income increase. Average securities
decreased $114 million to $688 million reflecting the restructuring and sale of
securities from the portfolio throughout all four quarters of 1997. Average
savings deposits, a low-cost funding source, increased $8 million, or slightly
above the same quarter a year ago while higher-cost average time certificates of
deposit decreased $27 million. The decrease in time deposits, coupled with
reduced volume of borrowings, resulted in a reduction in volume-related interest
expense for the quarter. Much of the funding for the loan growth was provided
through an increase in average noninterest-bearing deposits of $145 million from
the same quarter last year. The effect on net interest income from changes in
volume of interest-earning assets and interest-bearing liabilities was an
increase of $5.6 million for the three months ended March 31, 1998.
11
<PAGE> 12
Yield on loans increased 8 basis points to 9.02 percent from last year. The
improvement, which occurred during a period of relatively stable interest rates,
was the combination of an increase of approximately $900 thousand in interest
income recoveries on former nonaccrual loans, and the effect of a decline in
residential loans replaced with higher yielding indirect automobile loans,
partially offset by the effect of external pressure on pricing of new commercial
loans. Yield on securities improved 26 basis points to 6.36 percent, the direct
benefit of 1997's portfolio restructuring and sale of lower-yielding securities.
Yield on total interest-earning assets was 8.45 percent compared to 8.20
percent. The average cost of funds was flat with a year ago at 3.93 percent. The
effect of an increased average savings deposit cost, principally higher money
market rates, was mostly offset with lower short-term borrowing rates. The net
effect of rate changes on net interest income for the three months ended March
31, 1998 compared to the same period last year, was an increase of $796
thousand.
As a result of the favorable change in earning asset mix from loan growth,
securities yield improvement, increased income recoveries, a more favorable
deposit mix, the interest rate margin and spread improved from 4.96 percent and
4.27 percent, respectively, to 5.44 percent and 4.52 percent, respectively, this
year.
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 months
ended March 31, 1998 when compared with the three months ended March 31, 1997.
Changes attributable to both rate and volume are allocated on a weighted basis.
THREE MONTHS ENDED MARCH 31,
1998 COMPARED WITH 1997
INCREASE (DECREASE) DUE TO CHANGE IN:
-------------------------------------
AVERAGE AVERAGE
VOLUME RATE TOTAL
------- ------- -----
(DOLLARS IN THOUSANDS)
Interest income:
Interest and fees on loans*...... $ 6,648 $ 525 $7,173
Interest and dividends on securities:
Taxable.................... (1,780) 498 (1,282)
Nontaxable*................ 14 (3) 11
Interest on federal funds sold and other (109) 69 (40)
------- ------- -------
Total interest income*..... 4,773 1,089 5,862
------- ------- -------
Interest expense:
Interest on regular savings, NOW and
money market deposits.......... 49 624 673
Interest on time deposits........ (361) 94 (267)
Interest on borrowings........... (478) (425) (903)
------- ------- -------
Total interest expense..... (790) 293 (497)
------- ------- -------
Net interest income................ $ 5,563 $ 796 $ 6,359
======= ======= =======
- -------------
* 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 $66 thousand on loans and $60 thousand on nontaxable
securities for the three months ended March 31, 1998.
12
<PAGE> 13
NONINTEREST INCOME
Total noninterest income was $11.3 million, $393 thousand higher than a
year ago. Included in 1998 noninterest income was a $1.4 million realized
securities gain on the sale of equity investments held by a venture capital
subsidiary. Asset management fees, the largest source of noninterest income,
increased 18 percent, or $571 thousand, to $3.7 million this year. Also higher
was deposit account service charges due to the increased deposit volume and
corporate services income due to business growth. The 1997 quarter
included a $1.8 million gain on the sale of loans.
NONINTEREST EXPENSE
Total noninterest expense was $37.2 million for the three months ended
March 31, 1998, $12.1 million lower than the same quarter last year. The large
decrease reflects last year's $2.9 million in acquisition and merger-related
expenses and $11.8 million for restructuring charges associated with the
acquisition of Walden. The Company expects to record one-time, pre-tax charges
totaling $19.5 million in connection with its pending acquisitions of Somerset
Savings Bank and Affiliated Community Bancorp, Inc. upon consummation of these
transactions. Refer to Note 5 to the Notes to Consolidated Financial Statements
for a further discussion of acquisitions.
Salary and employee benefits were up 5 percent, or $898 thousand, this year
while equipment expense increased 29 percent, or $507 thousand, reflective of
the Company's investment in computer hardware and software. This quarter also
included $494 thousand in Year 2000 readiness expense. Refer to "Year 2000"
below for a further discussion. Included in noninterest expense this quarter was
a $658 thousand writedown to market value of bank-owned real estate expected to
be sold during the second quarter.
Year 2000
In 1997 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 (but not exclusively), computer software
programs, to recognize properly and process date-sensitive information as the
Year 2000 approaches. Data processing for the Company's major operating systems
(loans and deposits) is conducted in-house using programs developed primarily by
third-party vendors. Inventory and Year 2000 readiness assessment of all systems
and applications have been completed and all third-party vendors who provided
applications to the Company have been contacted. Efforts to bring the major
operating systems, and certain outsourced applications, into compliance with
Year 2000 requirements will be accomplished through the installation of updated
or replacement programs developed by third parties.
Bank regulatory agencies have recently issued additional guidance under
which they are assessing and will assess Year 2000 readiness. The failure of a
financial institution, such as the Company, to take appropriate steps to address
deficiencies in their Year 2000 project management process may result in
regulatory enforcement actions which could have a material adverse effect on
such institution, result in the imposition of civil money penalties, or result
in the delay (or receipt of an unfavorable or critical evaluation of management
of a financial institution in connection with regulatory review) of applications
seeking to acquire other entities or otherwise expand the institution's
activities.
13
<PAGE> 14
The Company concluded earlier this year that sufficient progress against
planning objectives had not been achieved. Accordingly, the Board of Directors
of the Company has instructed management to accelerate the pace of achieving the
milestones listed in the project plan and to add such additional milestone,
assessments, documentation procedures and take such further steps and actions as
may be necessary to attain Year 2000 readiness. The Board specifically directed
management to modify the Company's Year 2000 compliance process to address the
following items: (i) include more specific milestones and target dates in the
project plan; (ii) complete an inventory and assessment of hardware at both the
Company's data processing center and its back-up location; (iii) complete the
project planning phase for resolution of Year 2000 problems; (iv) formulate
contingency plans covering both the hypothetical failure of a critical
information system and the hypothetical failure of a key outside servicer to
make its product Year 2000 compliant; (v) develop more detailed testing plans
for Year 2000 compliance; (vi) formalize documentation procedures for Year 2000
compliance; (vii) accelerate efforts to address credit risks associated with
Year 2000 issues of the Company's customers; (viii) develop procedures to
address customers' Year 2000 inquiries concerning the Company; and (ix) such
other matters as management of the Company deems appropriate. Moreover, the
Board of Directors has directed management of the Company to dedicate the human
and financial resources needed to address Year 2000 compliance to take those
steps needed to assure that conversion issues involving pending acquisitions and
new application installations will not be detrimental to (or in any way
diminish) the Company's Year 2000 readiness. In March 1998, the Company
retained the services of Arthur Andersen LLP and certain additional outside
advisors and programmers to augment the Company's effort in addressing its Year
2000 compliance.
The Company currently believes that it will be able to modify or replace
any affected systems in time to minimize any detrimental effects on the
Company's operations. In a number of cases, Year 2000 compliant systems have
been installed or are already in the process of installation in the normal
course of upgrade and functionality improvement. The Company expects that it
will incur costs to replace existing hardware and software which will be
capitalized and amortized in accordance with the Company's existing accounting
policy while maintenance or modification costs will be expensed as incurred.
Although final costs have yet to be determined, the Company currently expects to
incur costs in the range of $4 million to $5 million to assure Year 2000
readiness. Costs of the Year 2000 project are based on current estimates and
actual results could vary significantly from such estimates once detailed test
plans are developed. If the Company's resolution plan were unsuccessful, it
would have a material adverse effect on its future operating results and the
financial condition of the Company.
Ultimately, an estimation of the efforts of the Company in addressing the
Year 2000 issue in a successful and timely manner depends to a large extent not
only on the corrective measures that the Company undertakes, but also on the
efforts undertaken by businesses and other independent entities who provide data
to, or receive data from, the Company as borrowers, vendors or customers. In
particular, the Company's credit risk associated with its borrowers may increase
as a result of problems such borrowers may have in resolving their own Year 2000
issues. Although it is not possible to evaluate the magnitude of any potential
increased credit risk at this time, the impact of the Year 2000 problem on
borrowers could result in increases in problem loans and credit losses in future
years. Over the course of the next two years, the Company will endeavor to
monitor the Year 2000 efforts of its borrowers and will implement a course of
action and procedures designed to reduce any increased potential risk as a
result of Year 2000 issues.
INCOME TAXES
The Company recorded income taxes of $8.0 million compared with $2.1
million for the same quarter last year. The increase reflects the higher level
of pre-tax income. The effective tax rate for the quarter was 38 percent
compared with 69 percent a year ago. The 1997 effective rate reflects the effect
of $2.9 million of merger-related charges included in noninterest expense that
were not deductible for tax purposes. Excluding these nondeductible expenses,
the 1997 effective tax rate would have approximated 35 percent, lower than the
38 percent this year as the marginal effect on taxable income of tax-exempt and
tax-preference items was reduced in 1998 due to the higher level of pre-tax
income. Late in the first quarter of this year, $369 million of commercial real
estate loans were transferred
14
<PAGE> 15
from USTrust to a wholly-owned real estate investment trust ("REIT") subsidiary
of USTrust. Income earned by a REIT is taxed at a lower state rate which is
expected to have a favorable impact on the Company's tax provisions and
effective tax rate in future periods.
Included in other assets as of March 31, 1998 was a deferred tax asset of
approximately $16.2 million. The Company believes that it is more likely than
not that the benefit of this deferred asset will be realized in future periods.
ASSETS
Total assets at March 31, 1998 were $3.835 billion, a slight decrease of $3
million since the beginning of the year. Loan growth of $57 million to $2.893
billion was partially offset by a $33 million decrease in securities and a lower
balance of federal funds sold.
The following table presents the composition of the loan portfolio:
<TABLE>
<CAPTION>
MARCH 31, December 31, MARCH 31,
1998 1997 1997
--------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial and financial .............. $1,077,033 $1,023,783 $ 890,229
Commercial real estate:
Construction ........................ 39,773 41,834 30,895
Developer, investor and land ........ 226,057 236,263 317,050
Commercial lease financing ............ 58,965 56,260 49,575
Consumer:
Residential mortgage ................ 632,780 697,874 779,464
Home equity ......................... 106,433 111,151 108,820
Indirect automobile installment ..... 672,778 605,486 336,672
Other consumer ...................... 38,548 37,048 41,280
Indirect automobile lease financing . 40,822 26,283
---------- ---------- ----------
Total loans ................... $2,893,189 $2,835,982 $2,553,985
========== ========== ==========
</TABLE>
The Company's commercial loan portfolios listed above totaled $1.343
billion at March 31, 1998, reflecting a net increase of $41 million since year
end and $105 million from a year ago. The increase in commercial loans was the
result of the purchase of an $80 million commercial loan portfolio during the
quarter.
Residential loans decreased $65 million during the first three months to
$633 million due to high levels of prepayment and normal amortization. The
currently low interest rate environment has accelerated the prepayment rates in
this portfolio and is expected to continue in the near term.
The indirect automobile loan portfolio grew 11 percent, or $67 million, in
the first three months of this year to $673 million. In comparison with a year
ago, the portfolio grew 100 percent, or $336 million, due to the exiting of some
larger competitors from the market during the latter half of 1997. Management
expects growth in this portfolio to be at a more moderate pace in 1998. These
loans are subjected to the Company's credit quality standards and are not what
is referred to in the industry as "subprime" automobile loans.
In 1997, the Company made available indirect automobile lease financing
through existing client automobile dealers. This portfolio totaled $41 million
at March 31, 1998, reflecting an increase of 55 percent, or $15 million, since
year end.
15
<PAGE> 16
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 March 31, 1998, liquidity, which includes excess cash, funds sold and
unpledged securities, totaled approximately $379 million, or 10 percent of total
assets.
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 $20 million since
year-end 1997 to $2.958 billion. Noninterest-bearing deposits decreased $51
million following the seasonal build-up of balances by commercial customers at
year end. Savings deposits increased $59 million while certificates of deposit
decreased $29 million. Short-term and other borrowings, which consist
principally of securities sold under agreement to repurchase and borrowings from
the Federal Home Loan Bank, increased $4 million to $475 million.
As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents increased $6 million during the three-month period ended March 31,
1998. Cash provided by operations resulted largely from net income earned during
the period. Cash provided by investing activities was due to an excess of sales
and maturities of securities and a decrease in federal funds sold over
securities purchases and net new loan fundings. Net cash used by financing
activities was primarily due to decreases in certificates of deposit.
At March 31, 1998, the parent Company had $7 million in cash and $4 million
in certificates of deposit compared with $6 million in cash and $4 million in
repurchase agreements at year end. The increase in excess funds was primarily
due to $4 million in cash dividend payments received from subsidiaries net of $3
million in dividends paid to stockholders.
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 23 percent of total assets. The Company manages its interest rate
GAP primarily by lengthening or shortening the maturity structure of its
securities portfolio.
16
<PAGE> 17
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 March 31, 1998. 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 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 March 31, 1998, the one-year cumulative GAP position was positive
at $81 million, or 2 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................... $ 1,008 $165 $ 469 $1,197 $ 2,839
Federal funds sold and other............ 28 28
Securities.............................. 43 63 102 482 690
Other assets............................ 278 278
------- ---- ----- ------ -------
Total assets..................... $ 1,079 $228 $ 571 $1,957 $ 3,835
------- ---- ----- ------ =======
Interest-bearing deposits............... $ 616 $134 $ 443 $1,107 $ 2,300
Borrowed funds.......................... 434 13 18 10 475
Noninterest-bearing deposits............ 130 528 658
Other liabilities and stockholders' equity 9 393 402
------- ---- ----- ------ -------
Total liabilities and equity..... $ 1,189 $147 $ 461 $2,038 $ 3,835
------- ---- ----- ------ =======
GAP for period.......................... $ (110) $ 81 $ 110 $ (81)
======= ---- ----- ------
Cumulative GAP.......................... $(29) $ 81 $ 0
==== ===== ======
As a percent of total assets............ (2.87%) (0.76%) 2.11%
</TABLE>
The Company also uses simulation analysis to measure the exposure of net
interest income to changes in interest rates ("market rate risk") over a
relatively short (i.e., 12 month) time horizon. Simulation analysis involves
projecting future interest income and expense from the Company's assets,
liabilities, and off-balance sheet positions under various scenarios. There was
no material change in the Company's estimated exposure from market rate risk
since year-end 1997. Refer to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 for a further discussion.
CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES
At March 31, 1998, substandard loans were $27.6 million compared with $36.0
million at December 31, 1997. 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
<PAGE> 18
At March 31, 1998, approximately 58 percent of loans classified as
Substandard or Doubtful were collateralized by real estate, and the remainder
were collateralized by accounts receivable, inventory, equipment and other
business assets. Of the loans secured by real estate, approximately 33 percent
were collateralized by owner-occupied commercial properties, approximately 56
percent were collateralized by commercial real estate, and approximately 10
percent by residential real estate. The remaining loans were collateralized by
real estate under construction and raw land.
The following table displays the Company's total nonperforming assets and
measures performance regarding certain key indicators of asset quality:
<TABLE>
<CAPTION>
MARCH 31, December 31, March 31,
1998 1997 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans .......................... $24,640 $25,518 $26,867
Accruing loans 90 days or more past due ... 1,192 1,069 580
Other property owned (OPO), net* .......... 1,370 1,334 1,959
Restructured loans ........................ 754
------- ------- -------
Total nonperforming assets ................... $27,202 $27,921 $30,160
======= ======= =======
Reserve for possible loan losses ............. $54,060 $52,230 $51,935
Net (recoveries) chargeoffs for the quarter .. (855) 654 49
OPO reserve .................................. 154 623 320
Ratios:
Reserve to nonaccrual loans ............... 219.4% 204.7% 193.3%
Reserve to total of nonaccrual loans, accruing
loans 90 days or more past due, and
restructured loans ...................... 209.3% 196.4% 184.2%
Reserve to period-end loans ............... 1.9% 1.8% 2.0%
Nonaccrual loans and accruing loans over
90 days past due to period-end loans .... 0.9% 0.9% 1.1%
Nonperforming assets to period-end
loans and OPO ........................... 0.9% 1.0% 1.2%
Annualized net (recoveries) chargeoffs
to average loans ........................ (0.1%) 0.1% nil
OPO reserve to OPO ........................ 10.1% 31.8% 14.0%
</TABLE>
- ------------
* Included in other property owned ("OPO") are other real estate,
automobiles and equipment acquired through foreclosure or in settlement of
loans.
As shown in the table above, total nonperforming assets were $27.2 million,
little change from the $27.9 million at year end. Nonaccrual loans remain at a
level appropriate to the size of the loan portfolio, while other nonperforming
assets remain at low levels. The net recoveries of $855 thousand and provision
for possible loan losses this quarter resulted in a reserve which increased to
$54.1 million. The reserve to nonaccrual loan ratio increased to 219 percent
while reserve to total loans increased to 1.9 percent at March 31, 1998.
18
<PAGE> 19
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 2.73
percent at March 31, 1998 favorably lower than the 3.20 percent at December 31,
1997. 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 and subsequent level of chargeoffs in future periods.
At March 31, 1998, total impaired loans were $14.9 million, comprised of
$1.9 million that required a reserve for possible loan losses of $1.1 million
and $13.0 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>
MARCH 31, DECEMBER 31, MARCH 31,
1998 1997 1997
-------- ------------ ---------
<S> <C> <C> <C>
Reserve for possible loan losses allocation
to loans outstanding:
Commercial and financial ................. $ 19,652 $19,449 $ 18,769
Commercial real estate:
Construction .......................... 614 747 622
Developer, investor and land .......... 2,452 3,057 5,215
Commercial lease financing ............... 1,138 974 628
Consumer* ................................ 20,949 20,745 15,737
Unallocated .............................. 9,255 7,258 10,964
-------- -------- --------
Total loan loss reserve $ 54,060 $ 52,230 $ 51,935
======== ======== ========
</TABLE>
- ----------
* Consumer loans include indirect automobile installment loans and leases,
residential mortgages, home equity lines of credit, credit cards, check
credit and other consumer loans.
The reserve for possible loan losses was $54.1 million at March 31, 1998,
an increase of approximately $2 million since December 1997 and March 1997. The
increase from year end was the result of net recoveries of $855 thousand and a
provision to the reserve of $975 thousand. The unallocated portion of the
reserve was 17 percent at March 31, 1998 compared with 14 percent at year end
reflecting the quarter's provision and net recoveries.The 33 percent increase in
reserve for consumer loans from a year ago was consistent with the strong growth
in the consumer indirect automobile portfolio. The decline in the reserve
allocated to commercial real estate loans is consistent with the decrease in
volume in these loans.
19
<PAGE> 20
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 March 31,
1998, that the Company and its subsidiary banks meet all of their respective
capital adequacy requirements.
The actual capital amounts and ratios of the Company and its banking
subsidiaries as of March 31, 1998 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..... $293.1 $ 148.3 N/A 7.90% 4.00% N/A
Tier 1 capital.............. 293.1 128.7 N/A 9.11% 4.00% N/A
Total (Tier 1 and Tier 2) capital 333.3 256.2 N/A 10.41% 8.00% N/A
USTrust:
Tier 1 leverage capital..... 275.3 147.7 $ 184.6 7.46% 4.00% 5.00%
Tier 1 capital.............. 275.3 128.0 192.0 8.60% 4.00% 6.00%
Total (Tier 1 and Tier 2) capital 315.3 255.0 318.7 9.89% 8.00% 10.00%
United States Trust Company:
Tier 1 leverage capital..... 4.0 .8 1.0 19.40% 4.00% 5.00%
Tier 1 capital.............. 4.0 .4 .7 35.77% 4.00% 6.00%
Total (Tier 1 and Tier 2) capital 4.0 .9 1.1 35.84% 8.00% 10.00%
</TABLE>
On March 17, 1998, a regular quarterly dividend to stockholders was
declared of $0.12 per share for a total of $3.6 million payable on April 24,
1998. This quarter's dividend declaration was consistent with the previous
quarter and above the $0.10 per share declared for the same quarter a year ago.
20
<PAGE> 21
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." Refer to Note 6 to the Notes to
Consolidated Financial Statements for a further discussion.
In June 1997, FASB also issued Statement of Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
Statement changes the way public companies report segment information in annual
financial statements and requires public companies to report selected segment
information in interim financial reports to shareholders. Under the Statement's
"management approach," public companies are to report financial and descriptive
information about their operating segments. Operating segments are components of
an enterprise for which separate financial information is produced internally
and are subject to evaluation by the chief operating decision maker in deciding
how to allocate resources to segments and assess segment performance. This
Statement is effective for fiscal years beginning after December 15, 1997;
however, it is not required to be applied for interim reporting in the initial
year of application. These disclosure requirements will have no material impact
on the Company's financial position or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This Statement does not
change the recognition or measurement associated with pension or postretirement
plans. It standardizes certain disclosures, requires additional information
about changes in the benefit obligations and about change in the fair value of
plan assets to facilitate analysis, and it eliminates certain disclosures that
were not deemed useful. This Statement is effective for financial statements
issued for periods beginning after December 15, 1997. These disclosure
requirements will have no material impact on the Company's financial position or
results of operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The preceding Management's discussion and Notes to Consolidated Financial
Statements of this Form 10-Q contain certain forward-looking statements,
including without limitation statements regarding (i) rates of loan growth and
amortization; (ii) the rate of delinquencies and amounts of chargeoffs; (iii)
the level of reserve for possible loan losses; (iv) the amount and timing of
acquisition and restructuring charges related to the Somerset and Affiliated
transactions; (v) the Company's ability to minimize any detrimental effects of
the Year 2000 problem and associated expense; and (vi) utilization of deferred
tax assets. 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 and estimates of the effects of its
acquisition activities. These forward-looking statements are inherently
uncertain, and actual results may differ from Company expectations. Risk factors
that could impact current and future performance include but are not limited to:
(i) adverse changes in asset quality and resulting credit risk-related losses
and expenses; (ii) adverse changes in the economy of the New England region, the
Company's primary market, which could further accentuate credit-related losses
and expenses; (iii) adverse changes in the local real estate market can also
negatively affect credit risk as 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) the consequences of continued bank
acquisitions and mergers in the Company's market, resulting in fewer but much
larger and financially stronger competitors which could increase competition for
financial services to the Company's detriment; (v) fluctuations in market rates
and prices can negatively affect net interest margin, asset valuations and
expense expectations; and (vi) changes in the regulatory requirements of federal
and state agencies applicable to bank holding companies and banks, such as the
Company and its Subsidiary Banks, which could have a materially adverse effect
on the Company's future operating results.
21
<PAGE> 22
PART II. OTHER INFORMATION
For the quarter ended March 31, 1998, 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.
27.1 Article 9 Summary Financial Information for the three
months ended March 31, 1998.
27.2 Article 9 Restated Summary Financial Information for
the three months ended March 31, 1997.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K with the
Commission on February 6, 1998 which provided historical
financial statements and related exhibits regarding: (i)
Firestone Financial Corp.; (ii) Somerset Savings Bank; and
(iii) Affiliated Community Bancorp, Inc.
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: May 14, 1998 By: /s/ Neal F. Finnegan
-----------------------
Neal F. Finnegan, President and
Chief Executive Officer
Date: May 14, 1998 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. FOR THE THREE MONTHS ENDED MARCH 31,
1998 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> 3-MOS
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<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<CASH> 101,754
<INT-BEARING-DEPOSITS> 160
<FED-FUNDS-SOLD> 28,821
<TRADING-ASSETS> 0
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<LOANS> 2,893,189
<ALLOWANCE> 54,060
<TOTAL-ASSETS> 3,834,855
<DEPOSITS> 2,958,078
<SHORT-TERM> 433,390
<LIABILITIES-OTHER> 51,497
<LONG-TERM> 41,289
18,636
0
<COMMON> 0
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<TOTAL-LIABILITIES-AND-EQUITY> 3,834,855
<INTEREST-LOAN> 62,421
<INTEREST-INVEST> 10,729
<INTEREST-OTHER> 966
<INTEREST-TOTAL> 74,116
<INTEREST-DEPOSIT> 20,543
<INTEREST-EXPENSE> 26,488
<INTEREST-INCOME-NET> 47,628
<LOAN-LOSSES> 975
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<EXPENSE-OTHER> 37,157
<INCOME-PRETAX> 20,817
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<EPS-PRIMARY> .43
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<LOANS-NON> 24,640
<LOANS-PAST> 1,192
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<ALLOWANCE-UNALLOCATED> 9,255
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<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF UST CORP. FOR THE THREE MONTHS ENDED MARCH 31,1997, WHICH
HAS BEEN RESTATED TO REFLECT THE ACQUISITION OF FIRESTONE FINANCIAL CORP. AS A
POOLING OF INTERESTS, AND THE ADOPTION OF SFAS NO.128 " EARNINGS PER SHARE," AND
IS QUALIFIED IN ITS ENTIRETY BY REFRENCE TO SUCH FINANCIAL STATEMENTS OF
FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1.00
<CASH> 140,738
<INT-BEARING-DEPOSITS> 57
<FED-FUNDS-SOLD> 68,293
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 743,535
<INVESTMENTS-CARRYING> 0
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<LOANS> 2,553,985
<ALLOWANCE> 51,935
<TOTAL-ASSETS> 3,620,893
<DEPOSITS> 2,788,179
<SHORT-TERM> 447,714
<LIABILITIES-OTHER> 41,161
<LONG-TERM> 39,594
18,492
0
<COMMON> 0
<OTHER-SE> 285,753
<TOTAL-LIABILITIES-AND-EQUITY> 3,620,893
<INTEREST-LOAN> 55,215
<INTEREST-INVEST> 12,004
<INTEREST-OTHER> 1,006
<INTEREST-TOTAL> 68,225
<INTEREST-DEPOSIT> 20,137
<INTEREST-EXPENSE> 26,985
<INTEREST-INCOME-NET> 41,240
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 49,210
<INCOME-PRETAX> 2,958
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<YIELD-ACTUAL> 8.20
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