<PAGE> 1
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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, 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 October 30, 1998,
there were 42,745,834 shares of common stock outstanding, par value $.625 per
share.
================================================================================
<PAGE> 2
UST CORP.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997....................................... 3
Consolidated Statements of Income -- Three and Nine
Months Ended September 30, 1998 and 1997.................... 4
Consolidated Statements of Changes in Stockholders'
Investment -- Nine Months Ended September 30, 1998
and 1997.................................................... 5
Consolidated Statements of Cash Flows -- Nine Months
Ended September 30, 1998 and 1997........................... 6
Notes to Consolidated Financial Statements..................... 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 13
ITEM 3. Quantitative and Qualitative Disclosures
about Market Risk.......................................... 29
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................ 30
ITEM 6. Exhibits and Reports on Form 8-K......................... 30
SIGNATURES ...................................................... 30
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UST CORP.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash, due from banks and interest-bearing deposits .................. $ 112,688 $ 120,521
Federal funds sold and other short-term investments ................. 17,424 81,000
Securities:
Securities available-for-sale:
Mortgage-backed securities .................................... 936,823 697,791
U.S. Treasury and federal agencies, and other securities ...... 270,756 249,645
---------- ----------
Total securities available-for-sale ................... 1,207,579 947,436
Securities held-to-maturity ....................................... 260,307
---------- ----------
Total securities ...................................... 1,207,579 1,207,743
Loans:
Loans - net of unearned discount of $40,552 in 1998 and
$31,662 in 1997 (Note 2) ...................................... 4,181,778 3,967,529
Reserve for possible loan losses (Note 2) ......................... (65,146) (68,539)
---------- ----------
Total loans, net ...................................... 4,116,632 3,898,990
Premises, furniture and equipment, net .............................. 87,026 85,692
Intangible assets, net .............................................. 53,240 58,991
Other property owned, net ........................................... 3,391 7,046
Other assets ........................................................ 70,931 72,995
---------- ----------
Total assets .......................................... $5,668,911 $5,532,978
========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Noninterest-bearing ............................................... $ 771,118 $ 781,926
Interest-bearing:
NOW ........................................................... 136,180 128,293
Money market .................................................. 812,011 786,358
Regular savings ............................................... 944,076 866,164
Time:
Certificates of deposit over $100 thousand ............... 309,511 326,102
Other .................................................... 1,162,322 1,276,697
---------- ----------
Total deposits ........................................... 4,135,218 4,165,540
Short-term borrowings ............................................... 837,176 589,881
Other borrowings .................................................... 89,423 226,345
Other liabilities ................................................... 78,823 62,156
---------- ----------
Total liabilities ..................................... 5,140,640 5,043,922
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 - 75,000,000 and
45,000,000 shares in 1998 and 1997, respectively
Issued - 42,691,469 and 42,097,643 shares in 1998
and 1997, respectively ........................................ 26,682 26,528
Additional paid-in capital ........................................ 199,906 191,645
Retained earnings ................................................. 289,307 268,049
Accumulated other comprehensive income ............................ 13,659 3,164
Deferred compensation and other ................................... (1,283) (330)
---------- ----------
Total stockholders' investment ........................ 528,271 489,056
---------- ----------
Total liabilities and stockholders' investment ........ $5,668,911 $5,532,978
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
UST CORP.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
1998 1997 1998 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans .................... $ 89,041 $ 84,290 $263,262 $242,156
Interest and dividends on securities:
Taxable ................................... 16,941 18,225 52,381 55,566
Nontaxable and preferential rate income ... 508 540 1,773 1,526
Interest on federal funds sold and other
short-term investments .................... 1,024 1,760 3,147 4,023
-------- -------- -------- --------
Total interest income ................ 107,514 104,815 320,563 303,271
-------- -------- -------- --------
Interest expense:
Interest on deposits .......................... 32,916 33,432 98,922 97,736
Interest on borrowings ........................ 11,862 11,770 34,054 34,846
-------- -------- -------- --------
Total interest expense ............... 44,778 45,202 132,976 132,582
-------- -------- -------- --------
Net interest income ........................... 62,736 59,613 187,587 170,689
Provision for possible loan losses (Note 2) ....... 789 850 1,010 2,200
-------- -------- -------- --------
Net interest income after provision for
possible loan losses ...................... 61,947 58,763 186,577 168,489
-------- -------- -------- --------
Noninterest income:
Asset management fees ......................... 3,732 3,254 11,311 9,599
Deposit account service charges ............... 3,017 2,789 8,819 7,975
Corporate services income, net ................ 1,493 1,452 4,490 4,211
Securities gains (losses), net ................ 862 (488) 2,606 (1,054)
Gain on sale of loans ......................... 193 1 588 1,911
Other ......................................... 2,595 2,462 7,661 7,680
-------- -------- -------- --------
Total noninterest income ............. 11,892 9,470 35,475 30,322
-------- -------- -------- --------
Noninterest expense:
Salary and employee benefits .................. 23,980 22,524 71,703 68,128
Restructuring charges ......................... 11,505 11,505 11,751
Acquisition and merger-related expense ........ 8,046 946 8,071 3,796
Occupancy, net ................................ 3,898 3,775 11,948 11,217
Equipment depreciation and maintenance ........ 2,512 2,403 7,904 6,547
Data processing services ...................... 2,263 1,806 6,392 5,433
Year 2000 readiness expense ................... 1,738 42 3,077 42
Intangible asset amortization ................. 1,589 2,004 5,213 5,336
Advertising and promotion ..................... 1,495 1,836 4,378 4,793
Professional and consulting fees .............. 908 1,646 3,618 4,873
Foreclosed asset and workout expense .......... 429 429 3,128 1,585
Other ......................................... 8,667 6,271 22,931 21,621
-------- -------- -------- --------
Total noninterest expense ............ 67,030 43,682 159,868 145,122
-------- -------- -------- --------
Income before income taxes .................... 6,809 24,551 62,184 53,689
Income tax provision .......................... 5,071 9,253 24,265 20,143
-------- -------- -------- --------
Net income ........................... $ 1,738 $ 15,298 $ 37,919 $ 33,546
======== ======== ======== ========
Per share data (Note 4):
Basic earnings per share ...................... $ 0.04 $ 0.36 $ 0.90 $ 0.80
Diluted earnings per share .................... $ 0.04 $ 0.36 $ 0.88 $ 0.79
Cash dividends declared per share ............. $ 0.14 $ 0.10 $ 0.39 $ 0.27
</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
COMPREHENSIVE ADDITIONAL OTHER DEFERRED
INCOME COMMON PAID-IN RETAINED COMPREHENSIVE COMPENSATION
(LOSS) STOCK CAPITAL EARNINGS INCOME (LOSS) AND OTHER TOTAL
------------- ------ ---------- -------- ------------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996,
as previously reported .................. $18,328 $111,158 $181,645 $(2,576) $ 466 $309,021
Adjustment for the Somerset
Savings Bank pooling of
interests (Note 5) ...................... 1,977 33,272 (5,401) 29,848
Adjustment for the Affiliated
Community Bancorp, Inc.
pooling of interests (Note 5) ........... 5,890 39,920 57,518 (532) (1,394) 101,402
------- -------- -------- ------- ------ --------
Balance December 31, 1996,
as restated ............................. $26,195 $184,350 $233,762 $(3,108) $(928) $440,271
Comprehensive income (Note 6):
Net income .............................. $33,546 33,546 33,546
Other comprehensive income:
Unrealized securities
gains, net of $2,406 tax
expense ............................ 3,242
Less: Reclassification of
securities losses included
in net income, net of $437
tax benefit ........................ (617) 3,859 3,859
-------
Total other comprehensive
income ........................ 3,859
-------
Total comprehensive income ...... $37,405
=======
Cash dividends declared .................... (11,436) (11,436)
Activity related to stock option,
restricted stock and stock
purchase plans. ......................... 243 6,152 6,395
Activity in Directors Deferred
Compensation Program and other, net...... 480 480
------- -------- -------- ------- ------ --------
Balance September 30, 1997 ................. $26,438 $190,502 $255,872 $ 751 $ (448) $473,115
======= ======== ======== ====== ====== ========
Balance December 31, 1997,
as previously reported .................. $18,601 $117,236 $201,355 $ 2,245 $ 689 $340,126
Adjustment for the Somerset
Savings Bank pooling of
interests (Note 5) ...................... 1,978 33,333 566 35,877
Adjustment for the Affiliated
Community Bancorp, Inc.
pooling of interests (Note 5) ........... 5,949 41,076 66,128 919 (1,019) 113,053
------- -------- -------- ------- ------ --------
Balance December 31, 1997,
as restated ............................. $26,528 $191,645 $268,049 $3,164 $ (330) $489,056
Comprehensive income (Note 6):
Net income .............................. $37,919 37,919 37,919
Other comprehensive income:
Unrealized securities
gains, net of $6,215
tax expense ........................ 12,020
Less: Reclassification of
securities gains included
in net income, net of $1,081
tax expense ........................ 1,525
-------
Total other comprehensive
income ....................... 10,495 10,495 10,495
-------
Total comprehensive income ...... $48,414
=======
Cash dividends declared .................... (16,707) (16,707)
Activity related to stock option,
restricted stock and stock
purchase plans .......................... 154 8,261 8,415
Activity in Directors Deferred
Compensation Program and other, net ..... 46 (953) (907)
------- -------- -------- ------- ------ --------
Balance September 30, 1998 ................. $26,682 $199,906 $289,307 $13,659 $(1,283) $528,271
======= ======== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
UST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 37,919 $ 33,546
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses ............................... 1,010 2,200
Depreciation and amortization .................................... 13,475 10,769
Accretion of securities discount, net ............................ (836) (94)
Securities gains (losses), net ................................... (2,606) 1,054
Gain on sale of other property owned, net ........................ 1856 330
Gain on sale of loans held-for-sale .............................. (588) (1,889)
Writedowns of fixed assets ....................................... 710 1,255
Deferred income tax benefit ...................................... (3,670) (3,337)
Net change in other assets and other liabilities ................. 14.914 9,612
--------- ---------
Net cash provided (used) by operating activities ........... 62,184 53,446
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale ............... 299,610 267,679
Proceeds from sales of securities held-to-maturity ................. 24,127 25,136
Proceeds from maturities of securities available-for-sale .......... 105,633 165,356
Proceeds from maturities of securities held-to-maturity ............ 139,886 19,197
Purchases of securities available-for-sale ......................... (544,505) (335,325)
Purchases of securities held-to-maturity ........................... (19,011) (58,900)
Net decrease in federal funds sold and other ....................... 60,283 13,170
Net increase in loans .............................................. (230,777) (249,877)
Net increase in loans held-for-sale ................................ 3,955 (944)
Proceeds from other property owned ................................. 6,481 8,509
Proceeds from loans held-for-sale .................................. 14,250
Net proceeds from sale of bank subsidiary........................... 7,795
Purchases of premises and equipment ................................ (9,768) (18,734)
--------- ---------
Net cash (used) provided by investing activities ........... (156,291) (150,483)
Cash flows from financing activities:
Net increase (decrease) in nontime deposits ........................ 103,402 33,093
Net (decrease) increase in certificates of deposit ................. (116,024) 41,138
Net increase (decrease) in short-term and other borrowings ......... 110,373 (12,708)
Cash dividends paid ................................................ (15,291) (10,305)
Issuance of common stock for cash, net ............................. 3,814 3,156
--------- ---------
Net cash provided (used) by financing activities ........... 86,274 54,374
--------- ---------
Decrease in cash and cash equivalents .............................. (7,833) (42,663)
Cash and cash equivalents at beginning of year ..................... 120,521 158,538
--------- ---------
Cash and cash equivalents at end of period ......................... $ 112,688 $ 115,875
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ......................................................... $ 132,816 $ 128,120
========= =========
Income taxes ..................................................... $ 35,777 $ 12,092
========= =========
Noncash transactions:
Transfers from other assets to securities available-for-sale ....... $ 180
=========
Transfers from securities held-to-maturity to available-for-sale ... $ 170,758 $ 145,564
========= =========
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C> <C>
Transfers from loans to other property owned ....................... $ 10,009 $ 7,669
========= =========
Common stock issuance .............................................. $ 4,601 $ 1,504
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 8
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
disclosure 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., the July 1998 acquisition of
Somerset Savings Bank, and the August 1998 acquisition of Affiliated
Community Bancorp, Inc., as poolings 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 the three and nine months ended
September 30, 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 nine months
ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period..................... $68,539 $65,979
Chargeoffs......................................... 11,076 5,375
Recoveries on loans previously charged-off......... 6,726 4,630
------- -------
Net chargeoffs..................................... 4,350 745
Provision for possible loan losses ................ 1,010 2,200
Reserve of sold bank............................... (53)
------- -------
Balance at end of period........................... $65,146 $67,434
======= =======
</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. See "Credit Quality and Reserve for Possible Loan Losses" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations herein.
8
<PAGE> 9
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) COMMITMENTS AND CONTINGENCIES
At September 30, 1998, the Company had the following off-balance
sheet financial instruments whose contract amounts represent credit risk:
<TABLE>
<CAPTION>
CONTRACT OR NOTIONAL AMOUNT
---------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Commitments to extend credit .................... $1,051,000
Standby letters of credit and financial
guarantees written ........................... 85,000
Loans sold with recourse ........................ 9,621
Commercial letters of credit .................... 6,000
Foreign exchange contracts ...................... 2,000
</TABLE>
(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 and nine months ended September
30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Basic earnings per share computation:
Numerator:
Net income .......................................... $ 1,738 $15,298 $37,919 $33,546
Denominator:
Weighted average shares outstanding ................. 42,606 42,267 42,247 42,082
Basic earnings per share .................................. $ 0.04 $ 0.36 $ 0.90 $ 0.80
Diluted earnings per share computation:
Numerator:
Net income .......................................... $ 1,738 $15,298 $37,919 $33,546
Denominator:
Weighted average shares outstanding ................. 42,606 42,267 42,247 42,082
Dilutive stock options .............................. 785 579 993 577
------- ------- ------- -------
Weighted average diluted shares outstanding ....... 43,391 42,846 43,240 42,659
======= ======= ======= =======
Diluted earnings per share ................................ $ 0.04 $ 0.36 $ 0.88 $ 0.79
</TABLE>
9
<PAGE> 10
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 $2.8 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
On July 20, 1998, the Company completed its acquisition of Somerset
Savings Bank ("Somerset"), a Massachusetts savings bank headquartered in
Somerville. The transaction was accounted for as a pooling of interests
and was structured as a tax-free exchange of 0.19 shares of the Company's
common stock for each share of Somerset common stock. The Company's
outstanding stock increased by 3,203,373 shares to a total of 33,100,551
shares on the date of acquisition. Based on the closing price of the
Company's stock as of July 20, 1998, the market value of the shares
exchanged totaled $88.9 million. Somerset operated six branches in
Middlesex County. At the date of acquisition, Somerset was merged with and
into USTrust, a principal subsidiary bank of the Company. Also, upon the
completion of the acquisition, the Company redesignated approximately $82
million of former Somerset securities from the held-to-maturity
classification to securities available-for sale.
10
<PAGE> 11
UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) ACQUISITIONS (CONT'D.)
Affiliated Community Bancorp, Inc.
On August 7, 1998, the Company completed its acquisition of
Affiliated Community Bancorp, Inc. ("Affiliated"), a multi-bank holding
company headquartered in Waltham, Massachusetts. The transaction was
accounted for as a pooling of interests and was structured as a tax-free
exchange of 1.41 shares of the Company's common stock for each share of
Affiliated common stock. The Company's outstanding stock increased by
9,439,735 shares to a total of 42,542,386 shares on the date of
acquisition. Based on the closing price of the Company's stock as of
August 7, 1998, the market value of the shares exchanged was $225 million.
Affiliated's three subsidiary banks, The Federal Savings Bank
("Federal"), Lexington Savings Bank ("Lexington") and Middlesex Bank &
Trust Company ("Middlesex"), operate a total of thirteen branch offices in
Middlesex County. It is expected that Federal and Lexington will be merged
with and into USTrust during the fourth quarter. As contemplated by the
terms of the agreement under which the Affiliated acquisition was
consummated, Middlesex Bank & Trust Company, a $28 million bank, was sold
for $8.24 million to a private investor unaffiliated with the Company.
Upon the completion of the Affiliated acquisition, the Company
redesignated approximately $137 million of former Affiliated securities
from the held-to-maturity classification to securities available-for-sale.
The following presentation reflects key line items on a historical basis
for Somerset, Affiliated and UST Corp. and on a pro forma combined basis
assuming the mergers were in effect for the periods presented:
<TABLE>
<CAPTION>
UST CORP., AS SOMERSET, AS AFFILIATED, AS UST CORP.,
ORIGINALLY REPORTED ORIGINALLY REPORTED ORIGINALLY REPORTED RESTATED
------------------- ------------------- ------------------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Net interest income...................... $ 175,205 $ 19,826 $ 35,499 $ 230,530
Net income............................... 32,393 5,967 11,856 50,216
Net income per diluted share............. 1.08 0.35 1.78 1.18
Total assets............................. 3,838,258 539,672 1,155,048 5,532,978
Total deposits........................... 2,978,215 455,886 731,439 4,165,540
Total shareholders' investment........... 340,126 35,877 113,053 489,056
THREE MONTHS ENDED SEPTEMBER 30, 1997
Net interest income...................... $ 45,737 $ 4,960 $ 8,916 $ 59,613
Net income............................... 10,600 1,749 2,949 15,298
Net income per diluted share............. 0.35 0.10 0.43 0.36
NINE MONTHS ENDED SEPTEMBER 30, 1997
Net interest income...................... $ 129,540 $ 14,780 $ 26,369 $ 170,689
Net income............................... 20,273 4,445 8,828 33,546
Net income per diluted share............. 0.67 0.26 1.32 0.79
Total assets............................. 3,775,950 520,339 1,128,579 5,424,868
Total deposits........................... 2,863,927 457,813 705,434 4,027,174
Total shareholders' investment........... 328,624 34,333 110,158 473,115
</TABLE>
11
<PAGE> 12
(6) COMPREHENSIVE INCOME
On January 1, 1998, 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 for the nine months ended September 30, 1997 was
to increase reported net income of $33.5 million to a total comprehensive
net income of $37.4 million. The impact for the nine months ended
September 30, 1998 was to increase reported income of $37.9 million to a
total comprehensive net income of $48.4 million.
12
<PAGE> 13
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") and the 1998 acquisitions of Somerset Savings Bank
("Somerset") and Affiliated Community Bancorp, Inc. ("Affiliated") as poolings
of interests.
HIGHLIGHTS
Net income for the quarter, which included merger-related and
restructuring charges, was $1.7 million, or $0.04 per diluted share, compared
with $15.3 million, or $0.36 per diluted share, for the same period last year.
The third quarter 1998 results included nonrecurring charges of $8.1 million for
nondeductible merger-related expenses and a pre-tax charge of $11.5 million for
restructuring expenses associated with the Somerset and Affiliated acquisitions.
Third quarter 1997 results included $946 thousand of merger-related expenses
related to the acquisition of Firestone. Excluding these merger and
restructuring costs, operating earnings for the quarter were $16.9 million, or
$0.39 per diluted share, compared with $16.2 million, or $0.38 per diluted share
last year.
This quarter's earnings reflect a $3.1 million increase net interest
margin due to favorable changes in asset and liability mix and earning asset
growth, increases in asset management and deposit fee income, and an increase
in realized securities gains of $1.4 million. This quarter also included a
one-time cost of $2.0 million resulting from the upgrade of the Company's
automated branch platform and teller systems and $1.7 million in Year 2000
readiness expense. For the nine months ended September 30, 1998, net income was
$37.9 million, or $0.88 per diluted share compared with $33.5 million, or $0.79
per diluted share for the same period last year. Results for both year-to-date
periods included merger-related and restructuring charges associated with
acquisitions.
Return on average equity and average assets were 1.32 percent and .12
percent for the third quarter of 1998. Excluding merger-related and
restructuring charges, operating returns on average equity and average assets
were 12.86 percent and 1.20 percent compared with 14.05 percent and 1.22
percent, respectively, last year. The decrease in these performance ratios was
reflective of the one-time $2.0 million automated branch and teller systems
costs and $1.7 million in Year 2000 readiness expense this quarter.
NET INTEREST INCOME ANALYSIS
Net interest income on a fully taxable equivalent basis was $63.0 million
for the quarter ended September 30, 1998, compared with $59.9 million for the
same period a year ago. For the first nine months of 1998, net interest income
was $188.5 million compared with $171.8 million last year. The increase in net
interest income in both comparisons was due to a combination of earning asset
growth, favorable changes in earning asset and deposit mix, noninterest and low
cost deposit growth and lower borrowing costs.
13
<PAGE> 14
Average loans increased 10 percent in both the three- and nine-month
periods, or $392 million and $380 million, respectively, from the same period
last year to $4.134 billion and $4.039 billion, respectively, this year. As
exhibited in the table below, loan growth was the largest contributor to the
improvement in net interest income, with an $8.6 million volume-related interest
income increase for the quarter and a $24.9 million increase for the nine months
ended September 30. Lower-yielding assets, such as securities, decreased an
average of $82 million and $74 million for the three- and nine-month periods,
respectively, and average Federal Funds sold decreased $34 million and $18
million for the same periods. Average low-cost savings deposits, including
regular savings, NOW and money market increased $140 million and $75 million
from the three- and nine-month periods last year while higher-cost certificates
of deposit decreased an average of $78 million and $34 million, respectively.
Noninterest-bearing deposits increased an average of $111 million and $159
million from the three- and nine-month periods last year. The effect on net
interest income from these favorable changes in volume of interest-earning
assets and interest-bearing liabilities was an increase of $6.3 million and
$20.0 million for the three and nine months ended September 30, 1998 compared
with the same periods last year.
Yield on earning assets declined 23 basis points for the three months
ended September 30, 1998 while the decrease for the nine-month period was
limited to 2 basis points. A decrease in loan yield of 40 basis points in the
quarter comparison and 14 basis points in the nine-month comparison was the
largest factor affecting total earning asset yield. Loan yields, in particular
rates on new commercial loans, are below last year's levels reflective of the
competitive pressure on loan pricing. In addition, this quarter and also the
nine-month period reflected lower interest income recoveries on payoffs of
nonaccrual loans than the same periods last year. While there has been a lot of
volatility, market rates, particularly short term, have been on a downward
trend. The Federal Reserve Board recently announced two interest rate cuts in
the rate charged to member banks for borrowings from the Federal Reserve.
Following the announcement, the Company's subsidiary banks, consistent with most
banks across the country, decreased the prime lending rate a total of 50 basis
points. As a result, the Company's yield on earning assets is expected to
decrease further in future quarters.
The cost of interest-bearing liabilities decreased 15 basis points this
quarter to 4.20 percent and 4 basis points to 4.23 percent for the nine-month
period. While rates on deposits, such as NOW, money market and regular savings
increased slightly to assist in maintaining the strong growth in these low-cost
deposits, time certificates of deposit decreased 13 basis points this quarter
compared to a year ago as older certificates matured and repriced at the current
lower offering rates. The Company expects to continue to adjust rates on new
certificates as well as some savings products consistent with the general trend
in interest rates. Borrowing costs decreased 26 basis points in the three-month
period and 22 basis points in the nine-month period to 5.37 percent and 5.40
percent, respectively. The decrease reflects the replacement of long-term,
higher rate borrowings with overnight borrowings which allows the Company to
take advantage of falling interest rates and reduce its funding costs. The net
effect of rate changes on net interest income for the three and nine months
ended September 30, 1998, compared with the same periods last year, was a
decrease of $3.2 million for both periods.
As a result of the aforementioned yield and volume changes, the interest
rate margin and spread decreased slightly from 4.72 percent and 3.93 percent,
respectively, last year, to 4.71 percent and 3.85 percent, respectively, this
year. This quarter's interest rate margin and spread were also lower than the
4.78 percent and 3.94 percent in the second quarter of this year. The Company,
in anticipation of continued falling interest rates has positioned its balance
sheet to be liability sensitive which should allow it to take greater advantage
of falling funding costs. As part of this positioning, the Company extended the
average life of earning assets to reduce the effects of earning assets repricing
at lower rates. The Company expects that this position will assist in
maintaining its current level of interest rate margin and spread. Although such
expectations, which are subject to the volatility of market interest rates, may
not be actually realized. For a further discussion, refer to the caption
Interest Rate Risk contained in this Form 10-Q. For the year-to-date period
through September 30, the interest rate margin and spread of 4.80 percent and
3.96 percent, respectively, were ahead of last year of 4.63 percent and 3.94
percent, respectively.
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<PAGE> 15
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-month periods ended September 30, 1998 when compared with the three and
nine months ended September 30, 1997. 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,
1998 COMPARED WITH 1997 1998 COMPARED WITH 1997
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*.................... $ 8,562 $(3,843) $4,719 $24,859 $(3,851) $21,008
Interest and dividends on securities:
Taxable.................................... (1,417) 133 (1,284) (4,027) 842 (3,185)
Nontaxable and preferential
rate income* ........................... 89 (132) (43) 509 (281) 228
Interest on federal funds sold and other....... (456) (280) (736) (772) (104) (876)
------- ------ ------ ------- ------- -------
Total interest income*........ .......... 6,778 (4,122) 2,656 20,569 (3,394) 17,175
------- ------ ------ ------- ------- -------
Interest expense:
Interest on regular savings, NOW and
money market deposits........................ 920 174 1,094 1,429 1,351 2,780
Interest on time deposits...................... (1,079) (531) (1,610) (1,419) (175) (1,594)
Interest on borrowings......................... 652 (560) 92 583 (1,375) (792)
------- ------ ------ ------- ------- -------
Total interest expense................... 493 (917) (424) 593 (199) 394
------- ------ ------ ------- ------- -------
Net interest income.............................. $ 6,285 $(3,205) $3,080 $19,976 $(3,195) $16,781
======= ======= ====== ======= ======= =======
</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 $61 and $196 thousand on loans and $219 and $762 thousand
on nontaxable and preferential rate taxable securities for the three and
nine months ended September 30, 1998, respectively.
NONINTEREST INCOME
Total noninterest income increased $2.4 million this quarter to $11.9
million. Realized gains this quarter of $862 thousand were recorded from the
sale of smaller denomination securities and those containing risk of prepayment
in a falling interest rate environment and sales of certain equity securities
held by the parent Company. This compares with a net loss of $488 thousand in
the same quarter last year. Asset management fees were up 15 percent, or $478
thousand, from the same quarter a year ago. Service charges on deposit accounts
increased 8 percent, or $228 thousand, due to the growth in noninterest-bearing
and saving deposit balances. Gain on sale of loans this quarter of $193
thousand, included gains recorded on the sale of $21 million in substandard
commercial and residential loans.
For the first nine months of this year, total noninterest income increased
$5.2 million to $35.5 million. Securities gains totaled $2.6 million, a $3.7
million increase over the $1.1 million in realized losses recorded last year.
Asset management fees increased 18 percent, or $1.7 million due to growth in
balances under management, and deposit services charges increased 11 percent due
to growth in deposits. Gain from loan sales this year were $588 million, which
includes gains on sale of fixed rate residential mortgage loans in the secondary
market and gains on sale of substandard loans. The $1.9 million gain last year
was mostly from the sale of substandard loans.
15
<PAGE> 16
NONINTEREST EXPENSE
Total noninterest expense was $67.0 million, $23.3 million higher than the
same quarter a year ago. This quarter included $11.5 million in restructuring
charges and $8.1 million in nondeductible acquisition and merger-related expense
related to the Somerset and Affiliated acquisitions, compared with $946 thousand
in merger costs associated with the acquisition of Firestone Financial Corp. in
1997. Acquisition and merger-related expense consisted of professional fees paid
to attorneys, accountants and investment advisory firms for work performed on
the acquisition transactions. Restructuring charges included expenses paid and
provisions for severance payments to Somerset and Affiliated executives and
staff, processing systems conversions and deconversion costs, customer
communications related to the effect of the acquisitions, and write-offs of
certain Somerset and Affiliated assets. Year 2000 readiness expense was $1.7
million this quarter compared with a nominal expense last year. Refer to below
for a further discussion of Year 2000. Other noninterest expense increased $2.4
million from the same quarter last year. The increase includes a one-time cost
of $2.0 million in connection with the upgrade of the Company's automated branch
platform and teller systems.
The third quarter operating efficiency ratio, which excludes realized
gains/losses on sales of securities and loans and merger-related and
restructuring expenses was 64.5 percent compared with 61.4 percent for the same
period last year. Excluding unusual charges such as the Year 2000 readiness
expense of $1.7 million and $2.0 million expense associated with the branch
automation, the efficiency ratio for the third quarter of this year was 59.4
percent.
For the nine months ended September 30, 1998, noninterest expense
increased $14.7 million to $159.9 million. This year included $19.6 million in
merger and restructuring charges compared with $15.5 million last year. Year
2000 readiness expense was $3.1 million in 1998 compared to a nominal expense
last year. Personnel costs increased $3.6 million from last year. Foreclosed
asset and workout expense of $3.1 million this year included a $1.8 million
writedown of other real estate owned formerly held by Somerset. Other
noninterest expense this year included the aforementioned costs associated with
branch automation.
The merger of Somerset with and into USTrust, a principal banking
subsidiary of the Company, occurred during the third quarter. Consequently, the
integration and conversion of Somerset operating systems with USTrust systems
began late in the quarter and will continue into the fourth quarter. Also the
merger with and into USTrust and system integration and conversions of the
Affiliated banks, The Federal Savings Bank and Lexington Savings Bank, is
expected to occur in the fourth quarter of this year. As a result, the Company's
noninterest expenses reflected little cost savings associated with the
acquisitions in the third quarter of this year and limited savings is expected
in the fourth quarter.
Year 2000
In 1997, the Company assembled a project team of senior officers and
outside consultants to assess the impact of the Year 2000 problem on its systems
and certain 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 computer-based systems, including
among others, computer hardware, embedded chips, and computer software programs,
to recognize properly and process date-sensitive information involving 20th and
21st century dates. 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
information and noninformation 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 have or will be
accomplished primarily through the installation of updated or replacement
programs developed by third parties. In addition, the status of all Company
facilities and all significant third-party providers of goods and services to
the Company has been assessed. Starting in
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<PAGE> 17
March 1998, the Company retained the services of Arthur Andersen LLP, Atlantic
Data Services, Inc., and certain additional outside advisors and programmers to
augment the Company's efforts in addressing its Year 2000 compliance. Arthur
Andersen's efforts have been focused upon assisting the Company in project
management and progress assessment.
Bank regulatory agencies have issued guidance as to the standards they
will use when assessing 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 the
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.
The Company's Year 2000 Readiness Program contains a number of discrete
segments, including among others, Awareness and Assessment, Project Planning,
Remediation, Unit Test Plans, Unit Testing, Commercial (including evaluation and
monitoring stages), Retail, Contingency Plans for Information Systems and
Contingency Plans for Business Continuation. Awareness and Assessment, Project
Planning for all aspects and Unit Test Plans for mission critical technology
systems have been completed. Mission critical systems are defined by the Company
as those vital to the successful continuance of core business activities. Test
Plans for noncritical applications are in process of development and are
expected to be completed during the first quarter of 1999.
The Remediation phase, wherein software and hardware are either modified
or replaced, is well underway and presently scheduled to be substantially
completed by year-end 1998 for mission critical applications and by mid-1999 for
nonmission critical applications. Specifically, during the third quarter of
1998, the Company successfully installed a new commercial loan system, upgraded
its deposit system to the vendor's latest version, and began installing a new
teller system. Mission critical systems testing is targeted to be substantially
complete by December 31, 1998 and nonmission critical systems are expected to be
completely tested by the end of the first half of 1999. To help achieve the
completion of testing for nonmission critical applications, the Company has
engaged the services of an additional third-party vendor, Command Systems, Inc.
The initial portion of the Commercial phase, which includes the evaluation
of credit risk stemming from problems borrowers may have in resolving their own
Year 2000 issues, has been completed; however, monitoring of the remediation
efforts of high risk customers will be ongoing. During the monitoring stage the
Company is implementing a course of action and procedures designed to reduce any
increased potential credit risk as a result of borrowers' Year 2000 issues. Also
encompassed in this phase is the in-process evaluation, assessment and
monitoring of the state of readiness of the Company's funds providers and the
capital markets. The Retail phase is largely focused on customer communications
as to the state of the Company's Year 2000 readiness. The initial communications
have been distributed and the process is ongoing.
Contingency Planning (other than business continuation planning) for
all mission critical technology systems has been completed and will be updated
periodically during 1998 and 1999. The process of updating the Company's
existing Business Continuation Plan to address Year 2000 issues began July 1.
The Company has yet to identify any operating system which appears unlikely to
be Year 2000 compliant or for which a suitable alternative cannot be
implemented. Since, however, the Company is heavily dependent on third parties
for software and other support, there are risks that the Company's operations
could be disrupted by adverse developments affecting the operations of these
third parties. Such risks include, among other matters, an inability to process
and underwrite loan applications, to credit deposits and withdrawals from
deposit accounts, to credit loan payments or track delinquencies, to properly
reconcile and record daily activity or to engage in normal banking activities.
Additionally, if those commercial borrowers whose operations depend heavily on
automated systems experience Year 2000 compliance problems affecting their
ability to repay, the Company's financial condition and results of operations
could be adversely affected by requirements to record additional loan loss
provisions. Furthermore, the Company faces financial risk from
17
<PAGE> 18
its fund providers as the Year 2000 problem may produce some deposit contraction
forcing a change to alternative and higher cost funding sources. Finally, to the
extent that certain utility and communication services utilized by the Company
face Year 2000 problems, the Company's operations could be disrupted. Utilizing
the resources of the Company's existing Disaster Recovery consultant, all
Business Continuation Plans will address Year 2000 issues with completion of
initial contingency plans targeted for December 31, 1998.
The Company 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 large number of cases, Year 2000 compliant systems have been
installed or are in the process of installation. 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. At
September 30, 1998, Year 2000 readiness expense totaled $3.1 million, all of
which was recorded during the first nine months of 1998. Although total costs
for the entire project have yet to be determined, the Company expects to incur,
as current operating expense (including the above $3.1 million), costs in the
range of $7 million to $8 million to assure Year 2000 readiness. This estimate
represents an increase over the original estimate of $4 million to $5 million
and results primarily from additional third-party costs to be incurred in the
testing phase. These costs and estimates do not include internal costs incurred
for Year 2000 matters. Such internal costs, which are not separately tracked by
the Company, consist principally of payroll costs of the Company's information
systems group. Capital expenditures for new equipment and software purchases are
expected to total an additional $1 million. This estimate does not include the
cost of a number of system installations previously planned by the Company in
the normal course of business. Costs of the Year 2000 project are based on
current estimates and actual results could vary significantly from such
estimates. If the Company's Year 2000 Readiness Program were unsuccessful, it
would have a material adverse effect on its future operating results and the
financial condition of the Company. Accordingly, the Company's Board of
Directors is actively involved in monitoring management's efforts to address
Year 2000 readiness and has instructed management to allocate appropriate
resources to address these matters.
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 the Company has completed its initial evaluation, it is a
continuing process and is subject to re-evaluation. It is not possible to
quantify the magnitude of any potential increased credit risk at this time. The
impact of the Year 2000 problem on borrowers, however, could result in increases
in problem loans and credit losses in future years.
INCOME TAXES
The Company recorded income taxes in the third quarter of this year of
$5.1 million which resulted in an effective tax rate of 74.5 percent compared
with $9.3 million at an effective rate of 37.7 percent for the same period last
year. The Company recorded $8.1 million this quarter and $946 thousand in the
third quarter of 1997 in nondeductible merger-related expenses. Excluding these
expenses from pre-tax income, the effective tax rate for this quarter was 34.1
percent and 36.3 percent last year. The decrease in effective rate was mostly
attributable to the formation of a wholly-owned Real Estate Investment Trust
("REIT") subsidiary earlier this year. The REIT holds a substantial portion of
the Company's commercial real estate loan portfolio, which was originated by and
transferred from USTrust. Income earned by a REIT is taxed at a lower state tax
rate than a bank.
Included in other assets as of September 30, 1998 was a deferred tax asset
of approximately $18.9 million. The Company believes that it is more likely than
not that the benefit of this deferred asset will be realized in future periods.
18
<PAGE> 19
ASSETS
Total assets at September 30, 1998 were $5.669 billion, an increase of
$136 million since the beginning of the year. Loan growth of $214 million to
$4.182 billion was net of a $21 million sale of substandard loans in the third
quarter. The increase in assets from loan growth was partially offset by a $61
million decrease in federal funds sold and a lower balance of cash. The
following table presents the composition of the loan portfolio:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1998 1997 1997
----------- ---------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial and financial................ $1,215,197 $1,134,797 $1,060,745 $1,076,980 $ 994,023
Commercial real estate:
Construction.......................... 64,408 103,162 105,170 109,787 120,519
Developer, investor and land.......... 520,741 530,353 524,245 540,924 559,925
Commercial lease financing.............. 74,961 65,366 58,965 56,260 55,466
Consumer:
Residential mortgage.................. 1,196,963 1,240,197 1,297,330 1,371,021 1,390,215
Home equity........................... 125,446 129,365 131,905 134,874 134,061
Indirect automobile installment....... 859,978 753,362 676,999 605,486 516,187
Other consumer........................ 39,102 41,715 42,611 45,914 46,668
Indirect automobile lease financing .. 84,982 62,119 40,822 26,283 10,582
---------- ---------- ---------- ---------- ----------
Total loans..................... $4,181,778 $4,060,436 $3,938,792 $3,967,529 $3,827,646
========== ========== ========== ========== ==========
</TABLE>
The Company's commercial loan portfolios listed above totaled $1.800
billion at September 30, 1998, reflecting a net increase of $73 million since
year end and $126 million from a year ago. The net increase was primarily due to
the purchase of an $80 million commercial loan portfolio during the first
quarter of 1998 as new loan originations and advances were offset with payoffs.
Residential loans decreased $174 million during the first nine months to
$1.197 billion due to high levels of prepayment and normal amortization. The
currently low interest rate environment has accelerated prepayment rates in this
portfolio and is expected to continue in the near term. Accompanying the
Company's acquisition of Affiliated this quarter was the residential mortgage
loan origination operations of Lexington Savings Bank. Following the merger of
Lexington with and into USTrust during the fourth quarter, the Company expects
to expand residential mortgage origination activities throughout all of USTrust
branch and retail service outlets. Prior to this acquisition, the Company's
subsidiary banks did not provide residential origination services.
The indirect automobile loan portfolio grew 42 percent, or $254 million,
in the first nine months of this year to $860 million. In comparison with a year
ago, the portfolio grew 66 percent, or $344 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 the more moderate pace as competition
has recently intensified. 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.
Beginning in the second half of 1997, the Company made available indirect
automobile lease financing through existing client automobile dealers. This
portfolio totaled $85 million at September 30, 1998, compared with $26 million
at year end.
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<PAGE> 20
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 a
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, 1998, liquidity, which includes excess cash, funds sold
and unpledged securities, totaled approximately $499 million, or 9 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 $30 million since
year-end 1997 to $4.135 billion. Noninterest-bearing deposits decreased $11
million. Savings deposits increased $111 million while certificates of deposit
decreased $131 million. Short-term and other borrowings, which consist
principally of securities sold under agreement to repurchase and borrowings from
the Federal Home Loan Bank ("FHLB"), increased $110 million to $927 million. The
decrease in other borrowings since year end reflects the maturity of long-term
FHLB borrowings in the first nine months of this year, refinanced as short-term
or overnight FHLB borrowings.
As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased $10 million during the nine-month period ended September
30, 1998. Cash provided by operations resulted largely from net income earned
during the period. Cash used by investing activities was due to net new loan
fundings partially offset by a reduction in federal funds sold. Net cash
provided by financing activities was primarily due to a shift in the deposit
mix from certificates of deposit to nontime deposits and increased short-term
and other borrowings.
At September 30, 1998, the parent Company had $3 million in cash and $4
million in repurchase agreements compared to $6 million in cash and $4 million
in repurchase agreements at year end. The decrease in cash was primarily due to
$11 million in dividends paid to shareholders net of $8 million in dividends
received from subsidiaries.
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.
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, U.S. Treasuries or the London Interbank Offered Rate
("LIBOR").
20
<PAGE> 21
The following table summarizes the Company's GAP position at September
30, 1998.
<TABLE>
<CAPTION>
INTEREST SENSITIVE PERIODS
-------------------------------------------------------------------------
0-30 DAYS 31-91 DAYS 91-365 DAYS OVER 1 YEAR TOTAL
--------- ---------- ----------- ----------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Loans, net of reserve........................ $1,305 $ 228 $ 724 $1,860 $4,117
Federal funds sold and other................. 20 20
Securities................................... 61 106 190 851 1,208
Other assets................................. 324 324
------ ----- ----- ------ ------
Total assets......................... $1,386 $ 334 $ 914 $3,035 $5,669
------ ----- ----- ------ ======
Interest-bearing deposits.................... $ 885 $ 250 $ 715 $1,514 $3,364
Borrowed funds............................... 820 33 43 31 927
Noninterest-bearing deposits................. 164 607 771
Other liabilities and
stockholders' equity ................... 7 600 607
------ ----- ----- ------ ------
Total liabilities and equity......... $1,876 $ 283 $ 758 $2,752 $5,669
------ ----- ----- ------ ======
GAP for period............................... $ (490) $ 51 $ 156 $ 283
------ ----- ----- ------
Cumulative GAP............................... $ (490) $(439) $(283) $ 0
====== ===== ===== ======
As a percent of total assets................. (8.64)% (7.74)% (4.99)%
</TABLE>
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 September 30, 1998, the one-year cumulative GAP position was
negative at $283 million, or approximately 5 percent of total assets, in
anticipation of continued falling interest rates. Average life of earning assets
has been extended through reductions in federal funds sold and replacement and
build-up in the securities portfolio of long-term securities containing reduced
economic risk from prepayment. In addition, the average life of interest-bearing
liabilities has been shortened as long-term borrowings at maturity have been
replaced with short-term over overnight borrowings.
The Company also uses simulation analysis to measure the exposure of net
interest income to changes in interest rates 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. The Company's limits on interest rate risk
specify that, if interest rates were to shift immediately up or down 200 basis
points, estimated net interest income for the next 12 months should decline by
less than 10 percent. The following tables reflects the Company's estimated
exposure as a percentage of estimated net interest income, and consequently net
income, for the next 12 months, assuming an immediate shift in interest rates:
<TABLE>
<CAPTION>
ESTIMATED EXPOSURE AS A PERCENTAGE
RATE CHANGE (BASIS POINTS) OF NET INTEREST INCOME
-------------------------- ----------------------------------
<S> <C>
+200 (3.00%)
-200 3.00%
</TABLE>
21
<PAGE> 22
As shown in the table above, the Company's liability sensitive balance
sheet position would produce a 3 percent increase in net interest income over
the 12 months if rates were to decrease 200 basis points. Shortcomings are
inherent in a simulation analysis. Certain assets, such as adjustable rate
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the assets. Additionally, the proportion of
fixed-rate loans in the Company's portfolio could increase in future periods if
market interest rates remain at or decrease below current levels due to
refinance activity. Further, in the event of a change in interest rates, early
withdrawal and prepayments levels could deviate significantly from those assumed
in the analysis. Finally, the ability of some borrowers to repay their
adjustable rate mortgage loans may decrease in the event of interest rate
increases.
CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES
At September 30, 1998, substandard loans were $34.1 million compared with
$53.8 million at December 31, 1997. A large portion of this year's decrease in
substandard loans was the result of the third quarter sale of $21 million in
substandard loans. 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.
At September 30, 1998, approximately 43 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 28 percent
were collateralized by owner-occupied commercial properties, approximately 49
percent were collateralized by commercial real estate, and approximately 9
percent by residential real estate. The remaining loans were collateralized by
real estate under construction and raw land.
22
<PAGE> 23
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,
1998 1998 1998 1997 1997
------------ ------- -------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans............................... $25,354 $27,854 $32,489 $33,092 $36,656
Accruing loans 90 days or more past due........ 2,983 1,252 1,192 1,069 2,061
Other property owned (OPO), net*............... 3,391 3,756 5,772 7,046 8,558
Restructured loans (TDR's)..................... 6,681 12,879 16,844 17,443 20,165
------- ------- ------- ------- -------
Total nonperforming assets........................ $38,409 $45,741 $56,297 $58,650 $67,440
======= ======= ======= ======= =======
Reserve for possible loan losses.................. $65,146 $68,708 $70,738 $68,539 $67,434
Net chargeoffs (recoveries) for the quarter....... 4,298 71 (1,082) (425) 643
OPO reserve....................................... 5,611 5,604 3,582 3,628 3,205
Ratios:
Reserve to nonaccrual loans.................... 256.9% 246.7% 217.7 % 207.1% 184.0%
Reserve to total of nonaccrual loans,
accruing loans 90 days or more past due,
and restructured loans....................... 186.0% 163.6% 140.0 % 132.8% 114.5%
Reserve to period-end loans.................... 1.6% 1.7% 1.8 % 1.7% 1.8%
Nonaccrual loans and accruing loans over
90 days past due to period-end loans......... 0.7% 0.7% 0.8 % 0.9% 1.0%
Nonperforming assets to period-end
loans and OPO................................ 0.8% 1.0% 1.3 % 1.3% 1.5%
Annualized net (recoveries) chargeoffs
to average loans............................. 0.4% 0.0% (0.1)% 0.0% 0.1%
OPO reserve to OPO............................. 62.3% 59.9% 38.3 % 34.0% 27.2%
</TABLE>
- - ------------
* Included in other property owned ("OPO") are other real estate, automobiles
and equipment acquired through foreclosure or in settlement of loans and
leases.
As shown in the table above, total nonperforming assets were $38.4
million, a $20.2 million decrease from the $58.7 million at year end. This
quarter's reduction in TDR's of $6.2 million and higher level of net chargeoffs
of $4.3 million were recorded in connection with the sale of $21 million in
substandard commercial and residential loans. The year-to-date net chargeoffs of
$4.4 million and provision for possible loan losses this year of $1.0 million
resulted in a reserve of $65.1 million at September 30. The reserve to
nonaccrual loan ratio improved to 257 percent. The reduction in nonperforming
assets was the most significant factor in the $3.4 million reduction in the
Reserve for Loan Losses. Reserve to total loans changed from 1.7 percent at year
end to 1.6 percent at September 30.
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 second largest component
of the Company's consumer loan portfolio was 3.20 percent at September 30, 1998,
consistent with year end, while above the 2.78 percent reported at June 30,
1998. 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.
23
<PAGE> 24
At September 30, 1998, total impaired loans were $18.0 million, comprised
of $207 thousand that required a reserve for possible loan losses of $17
thousand and $17.8 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
using consistent, systematic methodologies which analyze 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.
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,
1998 1998 1998 1997 1997
----------- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Reserve for possible loan losses
allocation to loans outstanding:
Commercial and financial................. $18,642 $17,897 $20,455 $20,232 $19,549
Commercial real estate:
Construction.......................... 988 1,605 1,747 1,900 2,115
Developer, investor and land.......... 7,989 8,839 8,485 8,831 9,597
Commercial lease financing............... 1,421 1,202 1,138 974 837
Consumer*................................ 30,215 28,225 27,991 27,657 26,396
Unallocated.............................. 5,891 10,940 10,922 8,945 8,940
------- ------- ------- ------- -------
Total loan loss reserve............... $65,146 $68,708 $70,738 $68,539 $67,434
======= ======= ======= ======= =======
</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 $65.1 million at September 30,
1998, a decrease of $3.4 million since December 1997 and a decrease of $2.3
million from September 1997. The unallocated portion of the reserve was 9
percent at September 30, 1998 compared with 13 percent at year end reflecting
the increase in reserve allocated to the consumer and commercial loans
consistent with the growth in these portfolios since year end and an overall
improvement in asset quality in the third quarter directly attributable to a
sale of $21 million of substandard loans at the end of the quarter. A 14 percent
increase in reserve for consumer loans a year ago was consistent with the strong
growth in the consumer indirect automobile portfolio.
24
<PAGE> 25
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 to
risk-weighted assets, and of Tier I capital to average assets (all as defined in
the regulations). Management believes, as of September 30, 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 September 30, 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................ $463.4 $220.3 * 8.42% 4.00% *
Tier 1 capital......................... 463.4 179.2 * 10.41% 4.00% *
Total (Tier 1 and Tier 2) capital ..... 520.9 357.8 * 11.72% 8.00% *
USTrust:
Tier 1 leverage capital................ 321.3 182.3 $227.9 7.05% 4.00% 5.00%
Tier 1 capital......................... 321.3 154.7 232.0 8.31% 4.00% 6.00%
Total (Tier 1 and Tier 2) capital ..... 370.0 308.8 386.0 9.59% 8.00% 10.00%
The Federal Savings Bank:
Tier 1 leverage capital................ 58.3 21.5 26.8 10.87% 4.00% 5.00%
Tier 1 capital......................... 58.3 11.0 16.4 21.29% 4.00% 6.00%
Total (Tier 1 and Tier 2) capital ..... 61.8 21.9 27.4 22.55% 8.00% 10.00%
Tangible capital....................... 58.3 10.7 * 10.87% 2.00% *
Lexington Savings Bank:
Tier 1 leverage capital................ 49.1 20.8 26.0 9.44% 4.00% 5.00%
Tier 1 capital......................... 49.1 13.0 19.5 15.13% 4.00% 6.00%
Total (Tier 1 and Tier 2) capital ..... 52.7 26.0 32.5 16.25% 8.00% 10.00%
United States Trust Company:
Tier 1 leverage capital................ 4.5 0.9 1.2 19.26% 4.00% 5.00%
Tier 1 capital......................... 4.5 0.6 0.8 32.13% 4.00% 6.00%
Total (Tier 1 and Tier 2) capital ..... 4.6 1.1 1.4 32.18% 8.00% 10.00%
</TABLE>
- - ------------
* Not applicable
25
<PAGE> 26
On September 15, 1998, a regular quarterly dividend to stockholders was
declared of $0.14 per share for a total of $6.0 million payable on October 23,
1998. This quarter's dividend compares with $0.15 per share last quarter and
$0.10 per share for the same quarter last year. The second quarter dividend of
this year included a second, or additional, declaration by Affiliated to its
former shareholders. The additional quarterly dividend declaration aligned
Affiliated's dividend declaration and payment periods with that of the Company's
prior to the acquisition of Affiliated by the Company in the third quarter. The
additional dividend accounted for $0.02 of the $0.15 per share declared in the
second quarter by the Company as restated under the pooling of interests method
of accounting. For the first nine months of this year dividends declared totaled
$16.7 million, or $0.39 per share compared with $11.4 million, or $0.27 per
share for the same period last year.
In October 1998, the Company announced that its Board of Directors
approved a stock repurchase program. Under the program, the Company is
authorized to repurchase up to 310,000 shares which constitutes less than 1
percent of the Company's common stock outstanding. The repurchase program will
not affect the Company's use of the pooling of interests method of accounting to
record the recent acquisitions by the Company of Affiliated and Somerset. The
program authorizes the Company to buy back common stock from time to time,
subject to prevailing market conditions. Purchases may be made on the open
market or in privately negotiated transactions. As of October 30, 1998, no
shares had been repurchased under this program.
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." Refer to Note 6 to the Notes to Consolidated Financial
Statements for a further discussion.
In June 1997, the FASB also issued SFAS 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 impact on the Company's financial position or results
of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company does not expect that the adoption of this Statement
will have a material impact on the Company's financial position or results of
operations.
26
<PAGE> 27
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This Statement further amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," as amended by
SFAS No. 115 and SFAS No. 125. This Statement requires that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. The Company does not expect that the adoption of this
Statement will have a material impact on the Company's financial position or
results of operation.
27
<PAGE> 28
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 loan delinquencies and amounts of chargeoffs;
(iii) the level of reserve for possible loan losses; (iv) the amount and timing
of cost savings resulting from the Somerset and Affiliated banks' mergers with
and into USTrust; (v) the Company's ability to minimize any detrimental effects
of the Year 2000 problem and estimates of associated expense; (vi) expectations
regarding the Company's earning asset and cost of interest-bearing liabilities
rates as well as the effects on operating results from changes in market
interest rates; and (vii) 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.
28
<PAGE> 29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Refer to Management's Discussion and Analysis of Financial Condition and
Results of Operations of this Form 10-Q under "Interest Rate Risk" for a
discussion of market risk.
29
<PAGE> 30
PART II. OTHER INFORMATION
For the quarter ended September 30, 1998, Items 2, 3, 4 and 5 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 nine
months ended September 30, 1998.
27.2 Article 9 Restated Summary Financial Information for
the nine months ended September 30, 1997.
(b) Reports on Form 8-K.
(i) Report on Form 8-K filed July 31, 1998 (reporting the
consummation on July 20, 1998 of the Company's
acquisition of Somerset Savings Bank and providing
financial statements related thereto).
(ii) Report on Form 8-K filed August 13, 1998 (reporting the
consummation on August 7, 1998 of the Company's
acquisition of Affiliated Community Bancorp, Inc. and
providing financial statements related thereto).
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 13, 1998 By: /s/ Neal F. Finnegan
----------------------------------
Neal F. Finnegan, President and
Chief Executive Officer
Date: November 13, 1998 By: /s/ James K. Hunt
----------------------------------
James K. Hunt, Executive Vice
President, Treasurer and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
30
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF UST CORP. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS OF
FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1.00
<CASH> 110,562
<INT-BEARING-DEPOSITS> 2,126
<FED-FUNDS-SOLD> 17,424
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,207,579
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 4,181,778
<ALLOWANCE> 65,146
<TOTAL-ASSETS> 5,668,911
<DEPOSITS> 4,135,218
<SHORT-TERM> 837,176
<LIABILITIES-OTHER> 78,823
<LONG-TERM> 89,423
0
0
<COMMON> 26,682
<OTHER-SE> 501,589
<TOTAL-LIABILITIES-AND-EQUITY> 5,668,911
<INTEREST-LOAN> 263,262
<INTEREST-INVEST> 54,154
<INTEREST-OTHER> 3,147
<INTEREST-TOTAL> 320,563
<INTEREST-DEPOSIT> 98,922
<INTEREST-EXPENSE> 34,054
<INTEREST-INCOME-NET> 187,587
<LOAN-LOSSES> 1,010
<SECURITIES-GAINS> 2,606
<EXPENSE-OTHER> 159,868
<INCOME-PRETAX> 62,184
<INCOME-PRE-EXTRAORDINARY> 62,184
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,919
<EPS-PRIMARY> .90
<EPS-DILUTED> .88
<YIELD-ACTUAL> 8.19
<LOANS-NON> 25,354
<LOANS-PAST> 2,983
<LOANS-TROUBLED> 6,681
<LOANS-PROBLEM> 58,500
<ALLOWANCE-OPEN> 68,539
<CHARGE-OFFS> 11,076
<RECOVERIES> 6,726
<ALLOWANCE-CLOSE> 65,146
<ALLOWANCE-DOMESTIC> 65,146
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,891
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF UST CORP. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997,
WHICH HAS BEEN RESTATED TO REFLECT THE ACQUISITIONS OF FIRESTONE FINANCIAL
CORP., SOMERSET SAVINGS BANK AND AFFILIATED COMMUNITY BANCORP, INC. AS POOLINGS
OF INTERESTS, AND THE ADOPTION OF SFAS NO. 128, "EARNINGS PER SHARE," AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS OF
FORM 10-Q.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1.00
<CASH> 120,186
<INT-BEARING-DEPOSITS> 335
<FED-FUNDS-SOLD> 81,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 947,436
<INVESTMENTS-CARRYING> 260,307
<INVESTMENTS-MARKET> 283,157
<LOANS> 3,967,529
<ALLOWANCE> 68,539
<TOTAL-ASSETS> 5,532,978
<DEPOSITS> 4,165,540
<SHORT-TERM> 589,881
<LIABILITIES-OTHER> 62,156
<LONG-TERM> 226,345
0
0
<COMMON> 26,528
<OTHER-SE> 462,528
<TOTAL-LIABILITIES-AND-EQUITY> 5,532,978
<INTEREST-LOAN> 242,156
<INTEREST-INVEST> 57,092
<INTEREST-OTHER> 4,023
<INTEREST-TOTAL> 303,271
<INTEREST-DEPOSIT> 97,736
<INTEREST-EXPENSE> 34,846
<INTEREST-INCOME-NET> 170,689
<LOAN-LOSSES> 2,200
<SECURITIES-GAINS> (1,054)
<EXPENSE-OTHER> 145,122
<INCOME-PRETAX> 53,689
<INCOME-PRE-EXTRAORDINARY> 53,689
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,546
<EPS-PRIMARY> .80
<EPS-DILUTED> .79
<YIELD-ACTUAL> 8.21
<LOANS-NON> 36,656
<LOANS-PAST> 2,061
<LOANS-TROUBLED> 20,165
<LOANS-PROBLEM> 50,300
<ALLOWANCE-OPEN> 65,979
<CHARGE-OFFS> 5,375
<RECOVERIES> 4,630
<ALLOWANCE-CLOSE> 67,434
<ALLOWANCE-DOMESTIC> 67,434
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,940
</TABLE>
