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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE #0-9623
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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 July 31, 1997,
there were 28,505,293 shares of common stock outstanding, par value $.625 per
share.
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UST CORP.
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets -- June 30, 1997 and December 31, 1996............................................... 3
Consolidated Statements of Income -- Three and Six Months Ended June 30, 1997 and 1996........................... 4
Consolidated Statements of Changes in Stockholders' Investment -- Six Months Ended
June 30, 1997.................................................................................................. 5
Consolidated Statements of Cash Flows -- Six Months Ended June 30, 1997 and 1996................................. 6
Notes to Consolidated Financial Statements....................................................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.........................................................................................21
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................................21
ITEM 6. Exhibits and Reports on Form 8-K..........................................................................22
SIGNATURES ........................................................................................................22
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UST CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash, due from banks and interest-bearing deposits ............................ $ 136,204 $ 140,069
Federal funds sold and other short-term investments ........................... 105,142 142,901
Securities:
Securities available-for-sale:
Mortgage-backed securities ................................................ 393,867 267,726
U.S. Treasury and federal agencies and other securities ................... 306,564 414,077
------------ ------------
Total securities available-for-sale ................................ 700,431 681,803
Securities held-to-maturity (Note 5) ........................................ 145,564
------------ ------------
Total securities ................................................... 700,431 827,367
Loans:
Loans -- net of unearned discount of $16,001,000 in 1997 and
$18,721,000 in 1996 (Note 2) .............................................. 2,562,601 2,452,813
Reserve for possible loan losses (Note 2) ................................... (50,155) (50,204)
------------ ------------
Total loans, net ................................................... 2,512,446 2,402,609
Premises, furniture and equipment, net ........................................ 61,573 53,439
Intangible assets, net ........................................................ 58,916 66,826
Other real estate owned, net .................................................. 692 1,792
Loans held-for-sale ........................................................... 12,446
Other assets .................................................................. 44,650 50,793
------------ ------------
Total assets ....................................................... $ 3,620,054 $ 3,698,242
============ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
Noninterest-bearing ........................................................ $ 589,587 $ 599,927
Interest-bearing:
NOW ..................................................................... 49,644 381,782
Money market ............................................................ 614,086 313,548
Regular savings ......................................................... 649,188 649,974
Time:
Certificates of deposit over $100 thousand .............................. 165,498 168,081
Other ................................................................... 747,307 742,500
------------ ------------
Total deposits ..................................................... 2,815,310 2,855,812
Short-term borrowings ......................................................... 438,130 412,331
Other borrowings .............................................................. 28,504 66,091
Other liabilities ............................................................. 35,332 68,419
------------ ------------
Total liabilities .................................................. 3,317,276 3,402,653
Commitments and contingencies (Note 3)
Stockholders' investment (Note 4):
Preferred stock $1 par value; Authorized -- 4,000,000 shares; Outstanding --
none
Common stock $.625 par value; Authorized -- 45,000,000 shares;
Issued -- 28,469,820 and 28,020,645 shares in 1997 and 1996, respectively . 17,794 17,590
Additional paid-in capital .................................................. 115,610 110,644
Retained earnings ........................................................... 172,382 169,465
Unrealized loss on securities available-for-sale, net of tax ................ (3,253) (2,576)
Deferred compensation and other ............................................. 245 466
------------ ------------
Total stockholders' investment ..................................... 302,778 295,589
------------ ------------
Total liabilities and stockholders' investment ..................... $ 3,620,054 $ 3,698,242
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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UST CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Interest income:
Interest and fees on loans ................................. $ 54,647 $ 42,470 $ 107,126 $ 85,234
Interest and dividends on securities:
Taxable .................................................. 11,131 13,234 23,018 26,310
Nontaxable ............................................... 271 144 388 289
Interest on federal funds sold and other short-term
investments .............................................. 1,065 376 2,071 656
------------ ------------ ------------ ------------
Total interest income ........................ 67,114 56,224 132,603 112,489
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits ....................................... 20,284 17,484 40,421 35,270
Interest on borrowings ..................................... 5,736 6,213 11,426 11,742
------------ ------------ ------------ ------------
Total interest expense ....................... 26,020 23,697 51,847 47,012
------------ ------------ ------------ ------------
Net interest income ........................................ 41,094 32,527 80,756 65,477
Provision for possible loan losses (Note 2) .................. 300 (5,248) 300 (3,375)
------------ ------------ ------------ ------------
Net interest income after provision for possible loan
losses ................................................... 40,794 37,775 80,456 68,852
------------ ------------ ------------ ------------
Noninterest income:
Asset management fees ..................................... 3,188 3,282 6,345 6,552
Service charges on deposit accounts ....................... 2,172 1,528 4,421 3,094
Corporate services income, net ............................ 1,384 1,160 2,759 2,251
Securities losses, net .................................... (584) (122) (573) (73)
Gain on sale of loans held-for-sale ....................... 12 1,804 15
Other ..................................................... 1,888 1,541 3,950 2,971
------------ ------------ ------------ ------------
Total noninterest income .................... 8,048 7,401 18,706 14,810
------------ ------------ ------------ ------------
Noninterest expense:
Salary and employee benefits .............................. 18,096 14,323 35,798 29,022
Occupancy and equipment expense ........................... 4,567 3,692 9,615 7,705
Deposit insurance assessment .............................. 255 311 321 1,036
Foreclosed asset and workout expense ...................... 179 408 502 623
Restructuring charges ..................................... 11,752
Acquisition and merger-related expense .................... 2,850
Other ..................................................... 11,899 7,233 22,386 14,222
------------ ------------ ------------ ------------
Total noninterest expense .................... 34,996 25,967 83,224 52,608
------------ ------------ ------------ ------------
Income before income taxes .................................. 13,846 19,209 15,938 31,054
Income tax provision ...................................... 5,602 7,417 7,332 11,876
------------ ------------ ------------ ------------
Net income .................................. $ 8,244 $ 11,792 $ 8,606 $ 19,178
============ ============ ============ ============
Per share data:
Net income (Note 4) ....................................... $ 0.29 $ 0.41 $ 0.30 $ 0.67
Cash dividends declared ................................... $ 0.10 $ 0.08 $ 0.20 $ 0.14
Weighted average number of common shares (Note 4) ......... 28,873,654 28,422,465 28,785,672 28,472,957
The accompanying notes are an integral part of these consolidated financial
statements.
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UST CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(UNAUDITED)
ADDITIONAL UNREALIZED DEFERRED
COMMON PAID-IN RETAINED GAIN/(LOSS) COMPENSATION
STOCK CAPITAL EARNINGS ON SECURITIES AND OTHER TOTAL
--------- ---------- --------- ------------- ------------ ---------
(DOLLARS IN THOUSANDS)
Balance December 31, 1996, as
previously reported ..................... $ 11,262 $ 75,710 $ 112,975 $ (2,453) $ 466 $ 197,960
Adjustments for the Walden Bancorp, Inc. ..
pooling of interests .................... 6,328 34,934 56,490 (123) 97,629
--------- ---------- --------- --------- ------ ---------
Balance December 31, 1996, as restated .... 17,590 110,644 169,465 (2,576) 466 295,589
Net income ................................ 8,606 8,606
Cash dividends declared ................... (5,689) (5,689)
Stock issued under stock option, restricted
stock and stock purchase plans .......... 204 4,966 5,170
Change in unrealized loss on securities
available-for-sale, net of tax .......... (677) (677)
Activity in Directors Deferred Compensation
Program and other, net .................. (221) (221)
--------- ---------- --------- --------- ------ ---------
Balance June 30, 1997 ..................... $ 17,794 $ 115,610 $ 172,382 $ (3,253) $ 245 $ 302,778
========= ========== ========= ========= ====== =========
The accompanying notes are an integral part of these consolidated financial
statements.
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UST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income .......................................................... $ 8,606 $ 19,178
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for possible loan losses ................................ 300 (3,375)
Depreciation and amortization ..................................... 6,605 3,096
(Accretion) amortization of securities discount or premium, net ... (124) 134
Securities losses, net ............................................ 573 73
Gain on sale of other real estate owned, net ...................... (99) (283)
Gain on sale of loans held-for-sale ............................... (1,804) (15)
Writedowns of other real estate owned ............................. 47 245
Writedowns of fixed assets ........................................ 1,255
Deferred income tax expense ....................................... (7,342)
Net change in other assets and other liabilities .................. (19,830) (22,366)
--------- ---------
Net cash used by operating activities ....................... (4,471) (10,655)
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale ................ 175,177 62,086
Proceeds from maturities of securities available-for-sale ........... 99,298 69,137
Proceeds from maturities of securities held-to-maturity ............. 23,972
Purchases of securities available-for-sale .......................... (148,949) (151,658)
Purchases of securities held-to-maturity ............................ (65,930)
Net decrease (increase) in federal funds sold and other
short-term investments ............................................ 37,759 (642)
Net increase in loans ............................................... (111,965) (47,080)
Proceeds from other real estate owned ............................... 2,980 2,828
Proceeds from loans held-for-sale ................................... 14,250 12,861
Purchases of premises and equipment ................................. (12,721) (2,631)
--------- ---------
Net cash provided (used) by investing activities ............ 55,829 (97,057)
Cash flows from financing activities:
Net decrease in nontime deposits .................................... (42,726) (34,362)
Net increase in certificates of deposit ............................. 2,224 36,667
Net (decrease) increase in borrowings ............................... (11,788) 93,222
Cash dividends paid ................................................. (5,135) (2,669)
Treasury stock acquired ............................................. (3,363)
Issuance of common stock for cash, net .............................. 2,202 2,445
--------- ---------
Net cash (used) provided by financing activities ............ (55,223) 91,940
--------- ---------
Decrease in cash and cash equivalents ............................... (3,865) (15,772)
Cash and cash equivalents at beginning of year ...................... 140,069 126,115
--------- ---------
Cash and cash equivalents at end of period .......................... $ 136,204 $ 110,343
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 51,509 $ 47,004
========= =========
Income taxes ...................................................... $ 6,680 $ 16,179
========= =========
Noncash transactions:
Transfers from other assets to securities available-for-sale ........ $ 4,180
=========
Transfers from securities held-to-maturity to available-for-sale .... $ 145,564 $ 4,312
========= =========
Transfers from loans to other real estate owned, net ................ $ 2,922 $ 550
========= =========
Common stock issuance ............................................... $ 1,048 $ 93
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of UST Corp. and its
subsidiaries ("the Company") included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company,
however, believes that the disclosures are adequate to make the information
presented not misleading. All prior period amounts included in this Form
10-Q have been restated to reflect the January 3, 1997 acquisition of
Walden Bancorp, Inc. as a pooling of interests. Refer to Note 5 for a
further discussion of acquisitions. The amounts shown reflect, in the
opinion of management, all adjustments necessary for a fair presentation of
the financial statements for the periods reported. These financial
statements should be read in conjunction with the financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996. Certain prior period amounts have
been reclassified to reflect current reporting classifications.
The results of operations for three and six months ended June 30, 1997
and 1996 are not necessarily indicative of the results of operations for
the full year or any other interim period.
(2) RESERVE FOR POSSIBLE LOAN LOSSES
Analysis of the reserve for possible loan losses for the six months
ended June 30, 1997 and 1996 is as follows:
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of period ...................... $ 50,204 $ 68,120
Chargeoffs/transfers ................................ 2,836 4,660
Recoveries on loans previously charged-off .......... 2,487 7,042
-------- --------
Net chargeoffs (recoveries) ......................... 349 (2,382)
Provision (credit) for possible loan losses ......... 300 (3,375)
-------- --------
Balance at end of period ............................ $ 50,155 $ 67,127
======== ========
The reserve for possible loan losses is determined based on a
consistent, systematic method which analyzes the size and risk of the loan
portfolio on a monthly basis. See "Credit Quality and Reserve for Possible
Loan Losses" in Management's Discussion and Analysis of Financial Condition
and Results of Operations herein.
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UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) COMMITMENTS AND CONTINGENCIES
At June 30, 1997, the Company had the following off-balance sheet
financial instruments whose contract amounts represent credit risk:
CONTRACT OR NOTIONAL AMOUNT
---------------------------
(DOLLARS IN THOUSANDS)
Commitments to extend credit ............. $678,000
Standby letters of credit and
financial guarantees written ........... 59,000
Commercial letters of credit ............. 5,000
Foreign exchange contracts ............... 4,000
(4) NET INCOME PER SHARE CALCULATION
Net income per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding. Common
stock equivalents consist primarily of dilutive stock options computed
under the treasury stock method. Average dilutive common stock equivalents
totaled 441,512 and 437,695 for the three- and six-month periods ended June
30, 1997, respectively, and 518,932 and 558,487 for the three- and
six-month periods ended June 30, 1996.
On March 3, 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share." This Statement supersedes APB Opinion No. 15
regarding the presentation of earnings per share ("EPS") on the face of the
income statement. SFAS No. 128 replaces the presentation of Primary EPS
with a Basic EPS calculation that excludes the dilutive effect of common
stock equivalents. The Statement requires a dual presentation of Basic and
Diluted EPS, which is computed similarly to Fully Diluted EPS pursuant to
APB Opinion No. 15, for all entities with complex capital structures. This
Statement is effective for fiscal years ending after December 15, 1997 and
requires restatement of all prior-period EPS data presented. The net income
per share for the three and six months ended June 30, 1997 would not change
under SFAS No. 128.
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UST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) ACQUISITIONS
On January 3, 1997, the Company completed its acquisition of Walden
Bancorp, Inc. ("Walden"), a $1.0 billion multi-bank holding company
headquartered in Acton, Massachusetts. The transaction was accounted for as
a pooling of interests and was structured as a tax-free exchange of 1.9
shares of the Company's common stock for each share of Walden common stock.
The Company's outstanding stock increased by 10,125,540 shares to a total
of 28,144,163 shares on the date of acquisition. Based on the closing price
of the Company's stock as of January 3, 1997, the market value of the
shares exchanged totaled $207 million. Walden's two subsidiary banks, The
Braintree Savings Bank and The Co-operative Bank of Concord operated a
total of seventeen branches located in the Massachusetts counties of
Middlesex, Norfolk and Plymouth. On April 18, 1997, The Co-operative Bank
of Concord was merged into USTrust, the Company's principal banking
subsidiary. The Braintree Savings Bank was merged into USTrust on May 16,
1997. The following presentation reflects key line items on a historical
basis for Walden and UST Corp. and on a pro forma combined basis assuming
the merger was in effect for the periods presented.
UST CORP. AS WALDEN AS UST CORP.
ORIGINALLY REPORTED ORIGINALLY REPORTED RESTATED
------------------- ------------------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1996
Net interest income .......... $ 96,126 $ 39,129 $ 135,255
Net income ................... 32,662 10,519 43,181
Net income per share ......... 1.79 1.97 1.52
Total assets ................. 2,706,614 995,628 3,702,242
Total deposits ............... 2,105,866 749,946 2,855,812
Total shareholders'
investment ................. 197,960 97,629 295,589
THREE MONTHS ENDED JUNE 30, 1996
Net interest income .......... $ 22,660 $ 9,867 $ 32,527
Net income ................... 8,824 2,968 11,792
Net income per share ......... 0.49 0.55 0.41
SIX MONTHS ENDED JUNE 30, 1996
Net interest income .......... $ 46,035 $ 19,442 $ 65,477
Net income ................... 13,361 5,817 19,178
Net income per share ......... 0.74 1.07 0.67
Total assets ................. 2,027,016 1,051,743 3,078,759
Total deposits ............... 1,516,377 768,229 2,284,606
Total shareholders'
investment ................. 177,145 97,255 274,400
Upon the completion of the Walden acquisition, the Company
redesignated $146 million of former Walden securities from held-to-maturity
to securities available-for-sale.
On August 12, 1997, the Company announced the execution of a
definitive agreement to acquire Firestone Financial Corp. ("Firestone"), a $87
million small business equipment finance company headquartered in Newton,
Massachusetts. The transaction, which will be accounted for as a pooling of
interests, is expected to close during the fourth quarter of 1997, and is
structured as a tax-free exchange of 0.63 shares of the Company's common stock
for each share of Firestone common stock. There are 2.0 million outstanding
shares of Firestone common stock which is closely held. The Company's common
stock to be exchanged for Firestone common stock will not have been registered
prior to the effectiveness of the transaction and may not be offered or resold
absent registration or an applicable exemption from registration requirements.
At the Company's closing common stock price of $21.75 on August 8, 1997, the
transaction would be valued at approximately $27.4 million. The agreement is
subject to the approval of federal and state bank regulation authorities. The
Company expects an estimated one-time, pre-tax charge of $900 thousand for
acquisition-related costs in connection with the transaction.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements, notes, and tables included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996. The discussion contains
certain forward-looking statements regarding the future performance of the
Company. All forward-looking information is inherently uncertain and actual
results may differ materially from the assumptions, estimates or expectations
reflected or contained in the forward-looking information. Please refer to
"Cautionary Statement Regarding Forward-looking Information" of this Form 10-Q
for a further discussion. All 1996 financial data included in this discussion
has been restated to reflect the January 3, 1997 acquisition of Walden Bancorp,
Inc. as a pooling of interests.
HIGHLIGHTS
Net income for the quarter ended June 30, 1997, was $8.2 million, or
$0.29 per share, compared with $11.8 million, or $0.41 per share, for the same
period in 1996. The second quarter results in 1996 reflected a $5.2 million net
pre-tax earnings credit that was recorded through the provision for possible
loan losses and added significantly to last year's results. For the six months
ended June 30, 1997, net income was $8.6 million, or $0.30 per share, compared
with $19.2 million, or $0.67 per share, reported for the first half of 1996.
Results for the 1997 period included a nonrecurring charge of $2.8 million for
certain nondeductible merger-related expenses and a pre-tax charge of $11.8
million for restructuring expenses associated with the acquisition of Walden
accounted for as a pooling of interests and completed in January 1997. Also
during the first six months of this year the Company realized a $1.8 million
gain on the loans held-for-sale portfolio. Both the second quarter and first six
months of this year were positively affected by the fourth quarter 1996
acquisition of 20 banking branches resulting in the assumption of $508 million
in loans and $744 million in deposit and other liabilities from two banking
subsidiaries of BankBoston Corp. ("the Branch Purchase").
Return on average equity and average assets were 10.96 percent and .93
percent, respectively, comparatively lower than the 17.32 percent and 1.57
percent earned in the same quarter last year which included the aforementioned
$5.2 million pre-tax credit recorded through the provision for possible loan
losses.
NET INTEREST INCOME ANALYSIS
Net interest income on a fully taxable equivalent basis was $41.3 million
in the second quarter 1997, compared with $32.7 million in the same quarter last
year. For the first six months of 1997, net interest income on a fully taxable
equivalent basis was $81.2 million compared with $65.9 million last year. The
increase in net interest income for both periods was due largely to the
additional volume of interest-earning assets and interest-bearing liabilities
acquired in the Branch Purchase. Average loan volume increased $596 million and
$570 million over the same quarter and first six months of 1996, respectively,
reflecting the loans acquired in the Branch Purchase and loan growth over the
past year. This quarter's average loan growth over the first quarter of this
year was 4 percent, or $87 million. Average securities decreased $154 million
and $109 million for the three- and six-month periods, respectively, as a part
of a portfolio restructuring program to sell off lower-yielding securities. As
shown in the table below, the increase in loans and an increase in federal funds
sold, partially reduced by lower average securities resulted in a $11.3 million
and $22.8 million volume-related increase in interest income for the three- and
six-month comparisons, respectively. Average interest-bearing liabilities
increased $417 million for the quarter and $429 million for the first six months
due mostly to
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the deposits acquired in the Branch Purchase. This increase in liabilities added
$2.7 million and $5.9 million in volume-related interest expense in the three-
and six-month periods, respectively. The net effect on net interest income from
changes in volume of interest-earning assets and interest-bearing liabilities
was an increase of $8.6 million and $16.0 million for the three and six months
ended June 30, 1997.
Yield on loans decreased 20 basis points and 31 basis points to 8.73
percent and 8.75 percent for the three and six months ended June 30, 1997,
reflecting the effect of a lower interest rate environment and some external
pressure on loan pricing. Securities yield increased 20 basis points to 6.20
percent this quarter reflecting the benefit of a portfolio restructuring
initiative to increase yield. The net effect on interest income from rate
changes on earning assets was a decrease of $406 thousand and $2.7 million for
the three- and six-month comparisons. Yield on total deposits decreased 28 basis
points and 31 basis points for the three- and six-month periods, respectively.
The effect on total interest expense from rate changes in deposits and other
interest-bearing liabilities was a decrease of $378 thousand and $1.0 million
for the three- and six-month periods. The net effect of rate changes on net
interest income for the three and six months ending June 30, 1997, compared to
the same periods last year, was a decrease of $28 thousand and $1.6 million,
respectively.
The yield on total average-earning assets increased slightly to 8.09
percent and 8.07 percent from 7.97 percent and 8.05 percent from the three- and
six-month periods last year, respectively. The earning asset yield increase
reflects the effect of a favorable change in mix of earning assets which was
only partially offset by the aforementioned loan yield decline. As a percentage
of interest-earning assets, higher-yielding loans increased to 75 percent and 74
percent for the three- and six-month periods, respectively, from 67 percent for
both periods last year. Yield on interest-bearing liabilities decreased
reflecting lower deposit costs, from 4.09 percent and 4.12 percent last year to
3.81 percent and 3.83 percent for the three- and six-month periods this year,
respectively. As a result of these favorable changes, interest rate margin and
spread for the quarter improved from 4.62 percent and 3.87 percent last year to
4.96 percent and 4.28 percent this year. For the six-month period, margin and
spread increased from 4.70 percent and 3.94 percent last year to 4.92 percent
and 4.24 percent this year.
The following table attributes changes in interest income and interest
expense to changes in interest rates and changes in the volume of
interest-earning assets and interest-bearing liabilities for the three and six
months ended June 30, 1997 when compared with the three and six months ended
June 30, 1996. Changes attributable to both rate and volume are allocated on a
weighted basis.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 COMPARED WITH 1996 1997 COMPARED WITH 1996
INCREASE (DECREASE) DUE TO CHANGE IN: INCREASE (DECREASE) DUE TO CHANGE IN:
------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ----- ------- ------- -----
(DOLLARS IN THOUSANDS)
Interest income:
Interest and fees on loans* ............ $ 13,006 $ (856) $ 12,150 $ 24,825 $ (2,984) $ 21,841
Interest and dividends on securities:
Taxable ............................ (2,268) 166 (2,102) (2,882) (410) (3,292)
Nontaxable* ........................ (75) 270 195 (265) 422 157
Interest on federal funds sold and
other ................................. 675 14 689 1,113 302 1,415
-------- -------- -------- -------- -------- --------
Total interest income* ............. 11,338 (406) 10,932 22,791 (2,670) 20,121
-------- -------- -------- -------- -------- --------
Interest expense:
Interest on regular savings, NOW and
money market deposits ................ 2,362 (327) 2,035 4,527 315 4,842
Interest on time deposits .............. 910 (145) 765 1,840 (1,531) 309
Interest on borrowings ................. (571) 94 (477) (489) 173 (316)
-------- -------- -------- -------- -------- --------
Total interest expense ............. 2,701 (378) 2,323 5,878 (1,043) 4,835
-------- -------- -------- -------- -------- --------
Net interest income ...................... $ 8,637 $ (28) $ 8,609 $ 16,913 $ (1,627) $ 15,286
======== ======== ======== ======== ======== ========
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* 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 $97 thousand and $200 thousand on loans and $136 thousand
and $195 thousand on nontaxable securities for the three and six months
ended June 30, 1997, respectively.
NONINTEREST INCOME
Noninterest income increased $647 thousand and $3.9 million for the three
and six months ended June 30, 1997, respectively. The combination of the
favorable effect of the Branch Purchase and fee income growth was reflected in
the increases in service charges on deposit accounts and corporate services
income for the three and six months ended June 30, 1997. Deposit fees increased
$644 thousand and $1.3 million, respectively. Corporate services income, which
includes merchant credit card income net of card processing expense, increased
$224 thousand and $508 thousand, respectively. Realized losses on securities
increased $462 thousand for the quarter and $500 thousand from the same
six-month period last year reflecting the sale of low-yielding securities as
part of the portfolio restructuring. Other noninterest income reflects increases
in both comparisons due mostly to fee income from debit cards, a new product
introduced in the fourth quarter of 1996 and higher ATM fee income charged to
ATM users from nonaffiliated banks. The six-month comparison also reflects
realized gains on the loans held-for-sale portfolio of $1.8 million compared to
a nominal gain last year.
NONINTEREST EXPENSE
Total noninterest expense increased $9.0 million from the same quarter
last year to $35.0 million. Salary and employee benefits expense increased $3.8
million while occupancy and equipment expense increased $875 thousand reflecting
the addition of the twenty banking branches acquired in the Branch Purchase.
Other noninterest expense, which is detailed below, increased $4.7 million.
Partially offsetting these expense increases was a decrease of $229 thousand in
foreclosed asset and workout expense reflecting the reduced level of problem
assets.
For the six-month comparison, noninterest expense increased $30.6 million
to $83.2 million. In the first quarter of this year nonrecurring acquisition and
merger-related expense and restructuring charges of $14.6 million were recorded.
Merger-related expense of $2.8 million was primarily for professional services
paid in connection with the Walden acquisition transaction. Restructuring
charges of $11.8 million included expenses paid and provisions for severance
payments to former Walden executives and staff, writeoffs of certain Walden
assets and contract buyouts, system conversion costs, and certain other expenses
associated with the integration of the Walden banking subsidiaries. The
increases in salary and employee benefits, occupancy and equipment reflect the
operation of twenty additional branches. Other noninterest expense, which is
described below, increased $8.2 million.
As displayed in the table below, other noninterest expense increased $4.7
million and $8.2 million for the three and six months ended June 30, 1997,
respectively. In both comparisons the increased service bureau expense reflects
the result of higher use of nonaffiliated banks ATM's by the acquired customers
in the Branch Purchase, a $230 thousand nonrecurring system conversion cost not
included in the first quarter restructuring charge, and higher processing costs
due to the branch additions. The increases in advertising and promotion expense
are consistent with the Company's' growth in assets and reflect the continuation
of the fourth quarter 1996 product promotion and this year's advertising
campaign, "THE other BIG BANK." The amortization of intangibles increase
reflects the amortization of premium incurred in the Branch Purchase. Litigation
expense reflects a large settlement of a certain litigation matter during the
current quarter. Increases in legal and consulting fees include the legal
expenses associated with this year's litigation settlement and a $140 thousand
one-time restructuring-related consulting expense. All other noninterest expense
increased $1.9 million and $3.4 million for the three- and six-month periods.
The largest increases for both periods were in checkbook expense due to free
replacements offered to deposit customers acquired in the Branch Purchase,
replacement stationery and supplies with the Company's new logo, and other
miscellaneous categories due to the operation of twenty additional banking
branches.
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
Service bureau and other data processing 1,500 717 2,716 1,396
Advertising and promotion .............. 1,163 887 2,354 1,685
Amortization intangibles ............... 1,162 571 3,273 1,140
Legal and consulting ................... 1,082 795 1,783 1,433
Litigation provisions .................. 1,150 300 1,150 770
All other .............................. 5,842 3,963 11,110 7,798
------- ------- ------- -------
Total other noninterest expense ... $11,899 $ 7,233 $22,386 $14,222
======= ======= ======= =======
The Company recently initiated a study of the impact of the so-called
Year 2000 problem on its information systems. The Year 2000 problem, which is
common to most corporations, concerns the inability of information systems,
primarily computer software programs, to properly recognize and process
date-sensitive information as the year 2000 approaches. Once an assessment of
the Company's systems is complete, a specific work plan will be developed and
implemented. The Company currently believes it will be able to modify or replace
any affected systems in time to minimize any detrimental effects on operations.
The cost of the plan development and implementation, however, may materially
effect the future operating results of the Company in the period(s) in which
such expense is incurred.
INCOME TAXES
The Company recorded income taxes of $5.6 million compared with $7.4
million for the same quarter last year. The effective tax rate for the quarter
was 40.5 percent compared with 38.6 percent a year ago. Included in other assets
as of June 30, 1997 was a deferred tax asset of approximately $10 million. The
Company believes that it is more likely than not that the benefit of this
deferred asset will be realized.
ASSETS
Total assets at June 30, 1997 were $3.620 billion, a decrease of $78
million from $3.698 billion at December 31, 1996. This decrease in asset size
was largely attributed to the restructuring of the securities portfolio
principally at the acquired Walden banks. Total securities decreased $127
million to $700 million at June 30, 1997. Also, during the year, the securities
held-to-maturity portfolio existing at December 31, 1996 was redesignated as
securities available-for-sale. Federal funds sold decreased approximately $38
million and the entire $12 million loans held-for-sale portfolio at year-end
1996 was sold during the first quarter. Intangible assets decreased $8 million
as a result of amortization during the year and a reallocation of the Branch
Purchase price based upon receipt of appraisals of certain assets acquired.
Total loans increased $110 million to $2.563 billion.
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The following table presents the composition of the loan portfolio:
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30,
1997 1997 1996 1996
---------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
Commercial and financial .......... $ 855,846 $ 811,454 $ 820,540 $ 707,031
Commercial real estate:
Construction .................... 47,392 30,895 29,624 17,359
Developer, investor and land .... 283,481 317,050 305,056 338,222
Consumer:
Residential mortgage ............ 772,157 779,464 804,109 476,367
Home equity ..................... 111,692 108,820 107,310 100,166
Indirect automobile installment . 401,154 336,672 301,072 250,535
Other consumer .................. 40,051 41,280 41,433 38,090
Lease financing ................... 50,828 47,193 43,669 39,141
---------- ---------- ---------- ----------
Total loans ............... $2,562,601 $2,472,828 $2,452,813 $1,966,911
========== ========== ========== ==========
The Company's commercial loan portfolios listed above totaled $1.187
billion at June 30, 1997, reflecting a net increase of $31 million since
year-end 1996 and $124 million from a year ago. Commercial loans acquired in the
1996 Branch Purchase totaled $111 million while commercial loans sold in the
fourth quarter 1996 sale of UST Bank/ Connecticut, a former banking subsidiary,
were approximately $19 million. Excluding these events, the commercial loan
portfolios grew $32 million over the past year. The June 30, 1997 commercial
balances listed reflect some reclassifications among commercial loan categories
of former Walden bank loans as compared to prior periods.
Residential loans decreased $32 million during the year to $772 million
due to normal amortization. Since the Company does not originate residential
mortgage loans, growth in this portfolio is not expected unless through
acquisition. The increase in residential loans from a year ago reflects loans
acquired in the Branch Purchase.
The indirect automobile loan portfolio continues to experience strong
growth as planned. This portfolio grew 33 percent or $100 million in the first
six months of this year to $401 million. In comparison to a year ago, the
portfolio has grown 60 percent, or $151 million. These loans are subjected to
the Company's credit quality standards and are not what is referred to in the
industry as "subprime" or high risk automobile loans.
LIQUIDITY AND FUNDING
Liquidity involves the Company's ability to raise or gain access to funds
in order to fulfill its existing and anticipated financial obligations. It may
be provided through amortization, maturity or sale of assets such as loans and
securities, liability sources such as increased deposits, utilization of the
Federal Home Loan Bank credit facility, purchased or other borrowed funds, and
access to the capital markets. The Company's securities portfolio is classified
entirely as available-for-sale, which provides the flexibility to sell certain
securities based upon changes in economic or market conditions, interest rate
risk and the Company's financial position and liquidity.
At June 30, 1997, liquidity, which includes excess cash, funds sold and
unpledged securities, totaled approximately $493 million, or 14 percent of total
assets.
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15
The funds needed to support the Company's loan and securities portfolios
are provided through a combination of commercial and retail deposits and
short-term and other borrowings. Total deposits decreased $41 million since
year-end 1996 to $2.815 billion. Noninterest-bearing deposits decreased $10
million to $590 million from the seasonal high at the beginning of the year.
Interest-bearing savings deposits, including NOW, money market and regular
savings, decreased $32 million to $1.313 billion. The savings deposit balances
also reflect a shift from NOW to money market deposits of over $300 million
since the beginning of the year. This was a result of an overnight deposit sweep
process implemented earlier this year by the Company's subsidiary bank, USTrust.
This process transfers certain NOW account balances to money market accounts on
a nightly basis then returns the balances to a NOW account status the following
morning. The effect of this process, which has no impact on an individual
customer's account status, is a reduction of the cash reserve balances required
to be maintained at the Federal Reserve Bank. This process has become a
customary procedure for most large institutions and has Federal Reserve Board
approval. Time certificates of deposit increased slightly from $911 million at
December 31, 1996 to $913 million at June 30, 1997. Short-term and other
borrowings, which consist principally of securities sold under agreement to
repurchase and borrowings from the Federal Home Loan Bank, decreased $12 million
to $467 million, reflective of the reduction in federal funds sold and lower
securities balance.
As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased $3.9 million during the six-month period ended June 30,
1997. Cash used by operations resulted largely from the net change in other
assets and other liabilities partially offset by the aggregate of operating
income items. Cash provided by investing activities was due to an excess of
maturities and sales of securities over cash used for securities purchases and
increased loan volume. Net cash used by financing activities was primarily due
to decreases in nontime deposits and borrowings.
At June 30, 1997, the parent Company had $1.1 million in cash and $4
million in short-term securities purchased under agreement to resell compared
with $.8 million and $14 million, respectively, at year end. The decrease in
excess funds was primarily due to the net of a $20 million capital contribution
to USTrust, dividends paid to shareholders, and the receipt of $14.5 million in
dividends from subsidiaries during the first half of 1997.
INTEREST RATE RISK
Volatility in interest rates requires the Company to manage interest rate
risk which arises from differences in the timing of repricing of assets and
liabilities. Management monitors and adjusts the difference between
interest-sensitive assets and interest-sensitive liabilities ("GAP" position)
within various time frames. Within GAP limits established by the Board of
Directors, the Company seeks to balance the objective of insulating the net
interest margin from rate exposure with that of taking advantage of anticipated
changes in rates in order to enhance income. The Company's policy is to limit
its one-year cumulative GAP position to 2.5 times equity, presently equal to
approximately 21 percent of total assets. The Company manages its interest rate
GAP primarily by lengthening or shortening the maturity structure of its
securities portfolio.
The Company's GAP presentation may not reflect the degrees to which
interest-earning assets and core deposit costs respond to changes in market
interest rates. The Company's rate-sensitive assets consist primarily of loans
tied to the prime rate or the London Interbank Offered Rate ("LIBOR"). The
following table summarizes the Company's GAP position at June 30, 1997. The
majority of loans are included in 0-30 days as they reprice in response to
changes in the interest rate environment. Interest-bearing deposits are
classified according to their expected interest rate sensitivity. Actual
sensitivity of these deposits is reviewed periodically and adjustments are made
in the Company's GAP analysis that management deems appropriate. Securities and
noninterest-bearing deposits are categorized according to their expected lives
based on published industry prepayment estimates in the case of securities and
current management estimates for noninterest-bearing deposits. Securities are
evaluated in conjunction with the
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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 June 30, 1997, the
one-year cumulative GAP position was positive at $103 million, or approximately
3 percent of total assets.
INTEREST SENSITIVE PERIODS
------------------------------------------------------------------
0-30 DAYS 31-90 DAYS 91-365 DAYS OVER 1 YEAR TOTAL
--------- ---------- ----------- ----------- -----
(DOLLARS IN MILLIONS)
Loans, net of reserve ............. $ 938 $ 139 $ 334 $ 1,101 $ 2,512
Federal funds sold and other ...... 105 105
Securities ........................ 35 54 81 530 700
Other assets ...................... 122 3 178 303
------- ------- ------- ------- -------
Total assets ............... $ 1,200 $ 193 $ 418 $ 1,809 $ 3,620
------- ------- ------- ------- =======
Interest-bearing deposits ......... $ 513 $ 122 $ 476 $ 1,115 $ 2,226
Borrowed funds .................... 379 59 28 466
Noninterest-bearing deposits ...... 159 430 589
Other liabilities and stockholders'
equity ........................... 339 339
------- ------- ------- ------- -------
Total liabilities and
equity ................... $ 1,051 $ 122 $ 535 $ 1,912 $ 3,620
------- ------- ------- ------- =======
GAP for period .................... $ 149 $ 71 $ (117) $ (103)
======= ------- ------- -------
Cumulative GAP .................... $ 220 $ 103 $ 0
======= ======= =======
As a percent of total assets ...... 4.12% 6.08% 2.85%
CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES
At June 30, 1997, substandard loans were $34.8 million compared with
$37.7 million at December 31, 1996. Loans reported as substandard include loans
classified as Substandard or Doubtful as determined by the Company in its
internal credit risk rating profile. Under the Company's definition, Substandard
loans, which include nonaccruals, are characterized by the distinct possibility
that some loss will be sustained if the credit deficiencies are not corrected.
The Substandard classification, however, does not necessarily imply ultimate
loss for each individual loan so classified. Loans classified as Doubtful have
all the weaknesses inherent in Substandard loans with the added characteristic
that the weaknesses make collection of 100 percent of the assets questionable
and improbable.
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The following table displays the Company's total nonperforming assets and
measures performance regarding certain key indicators of asset quality:
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30,
1997 1997 1996 1996
-------- --------- ------------ --------
(DOLLARS IN THOUSANDS)
Nonperforming assets:
Nonaccrual loans ........................ $ 26,275 $ 25,755 $ 33,710 $ 29,925
Accruing loans 90 days or more past due . 826 524 997 731
Other real estate owned ("OREO"), net ... 692 1,638 1,792 4,204
Restructured loans ...................... 754 1,264 584
-------- -------- -------- --------
Total nonperforming assets ................. $ 27,793 $ 28,671 $ 37,763 $ 35,444
======== ======== ======== ========
Reserve for possible loan losses ........... $ 50,155 $ 50,155 $ 50,204 $ 67,127
Net chargeoffs (recoveries) for the
quarter ................................... 300 49 809 (4,406)
OREO reserve ............................... 367 320 320 813
Ratios:
Reserve to nonaccrual loans ............. 190.9% 194.7% 148.9% 224.3%
Reserve to total of nonaccrual loans,
accruing loans 90 days or more past
due, and restructured loans ........... 185.1% 185.5% 139.6% 214.9%
Reserve to period-end loans ............. 2.0% 2.0% 2.0% 3.4%
Nonaccrual loans and accruing loans over
90 days past due to period-end loans
and OREO .............................. 1.1% 1.1% 1.4% 1.6%
Annualized net chargeoffs to
average loans ......................... nil nil .1% (.9)%
OREO reserve to OREO .................... 34.7% 16.3% 15.2% 19.3%
As shown in the table above, total nonperforming assets were $27.8
million at June 30, 1997, which reflects a slight decrease in nonaccrual loans
during the quarter, while total nonperformers were down $10 million from the end
of 1996. The level of nonperforming assets at quarter end continues to be within
the range of industry norms relative to the Company's size and total volume of
loans. A nominal provision for possible loan losses of $300 thousand was
recorded during the quarter as asset quality remained relatively stable. Losses
of $2.0 million were charged against the reserve during the quarter and
recoveries on loans previously charged off totaled $1.7 million. At June 30,
1997, the reserve balance was $50.2 million and equaled 191 percent of
nonaccrual loans and 2.0 percent of total loans.
At June 30, 1997, total impaired loans were $18.3 million, comprised of
$.5 million that required a reserve for possible loan losses of $.3 million 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 on
a monthly basis using a consistent, systematic methodology which analyzes the
size and risk of the loan and lease portfolio. Factors in this analysis include
historical loss experience and asset quality, as reflected by
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delinquency trends, nonaccrual and restructured loans and the Company's credit
risk rating profile. Consideration is also given to the current and expected
economic conditions and, in particular, how such conditions affect the types of
credits in the portfolio and the market area in general. This analysis is
documented using a combination of numerical and qualitative analysis and
includes sensitivity testing and a written conclusion.
No portion of the reserve is restricted to any loan or group of loans,
and the entire reserve is available to absorb future realized losses. The amount
and timing of realized losses and future reserve allocations may vary from
current estimates. An allocation of the reserve for possible loan losses to each
category of loans is presented below:
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30,
1997 1997 1996 1996
-------- --------- ------------ --------
Reserve for possible loan losses allocation
to loans outstanding:
Commercial and financial ................. $17,315 $17,501 $16,473 $19,836
Commercial real estate:
Construction .......................... 897 622 556 463
Developer, investor and land .......... 4,241 5,215 4,638 7,095
Consumer* ................................ 18,626 15,737 15,836 10,896
Lease financing .......................... 635 590 589 489
Unallocated .............................. 8,441 10,490 12,112 28,348
------- ------- ------- -------
Total loan loss reserve ............... $50,155 $50,155 $50,204 $67,127
======= ======= ======= =======
- ----------
* Consumer loans include indirect automobile installment loans, residential
mortgages, home equity lines of credit, credit cards, check credit and other
consumer loans.
The reserve for possible loan losses was $50.2 million at June 30,
1997, consistent with the March 1997 and December 1996 year-end balances. The
reserve was $18 million lower than June 30, 1996 balance as a result of earnings
credits recorded through the provision for possible loan losses in the second
and third quarters of 1996. The unallocated portion of the reserve was 17
percent at June 30, 1997 compared with 24 percent at year end. The decrease of 7
percentage points, or $3.7 million, reflects a reallocation of the reserve to
commercial loan categories at the Walden banks during the quarter and an
increase in reserve allocated to the consumer category consistent with loan
growth.
CAPITAL AND DIVIDENDS
The Company and its banking subsidiaries are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory--and
possibly additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and its subsidiary banks must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and its banking subsidiaries to maintain minimum
amounts and ratios (set forth in the table below) of Total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management believes,
as of June 30, 1997, that the Company and its subsidiary banks meet all of their
respective capital adequacy requirements.
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As a condition to Federal Deposit Insurance Corporation approval of
USTrust's fourth quarter 1996 Branch Purchase, USTrust was required to have a
Tier I leverage capital ratio of not less than: (i) 4.8 percent, no later than
ten days after consummation of the acquisition of sixteen BayBank branches; and
(ii) 5 percent, no later than three months after consummation of the acquisition
of the BayBank branches and for a period of six months thereafter. As of June
30, 1997, USTrust continued to be in compliance with the foregoing provisions
and the Company expects that these conditions will not have a material adverse
impact on the future operations of USTrust. During a period from the
consummation of the Branch Purchase in December 1996 until March 5, 1997,
USTrust's Total capital to total risk-based assets ratio temporarily fell below
the requirement of an adequately capitalized bank. The parent Company effected a
$20 million capital contribution to USTrust on March 5, 1997 in order to meet
this requirement.
The actual capital amounts and ratios of the Company and its banking
subsidiaries as of June 30, 1997 are presented in the following summary:
AMOUNT PERCENT
---------------------------------- -------------------------------------
ADEQUATELY WELL ADEQUATELY WELL
CAPITALIZED CAPITALIZED CAPITALIZED CAPITALIZED
ACTUAL MINIMUMS MINIMUMS ACTUAL MINIMUMS MINIMUMS
------ ----------- ----------- ------ ----------- -----------
(DOLLARS IN MILLIONS)
UST Corp. Consolidated:
Tier 1 leverage capital ............ $249.1 $139.8 N/A 7.13% 4.00% N/A
Tier 1 capital ..................... 249.1 111.2 N/A 8.96% 4.00% N/A
Total (Tier 1 and Tier 2) capital .. 283.8 220.3 N/A 10.31% 8.00% N/A
USTrust:
Tier 1 leverage capital ............ 228.5 171.0 $171.0 6.68% 5.00% 5.00%
Tier 1 capital ..................... 228.5 111.8 167.7 8.18% 4.00% 6.00%
Total (Tier 1 and Tier 2) capital .. 263.4 222.5 278.1 9.47% 8.00% 10.00%
United States Trust Company:
Tier 1 leverage capital ............ 3.2 .5 .7 23.79% 4.00% 5.00%
Tier 1 capital ..................... 3.2 .3 .5 37.32% 4.00% 6.00%
Total (Tier 1 and Tier 2) capital .. 3.2 .7 .8 37.37% 8.00% 10.00%
The Company paid cash dividends to stockholders in the first half of the
year in the amount of $5.1 million. On June 17, 1997, a regular quarterly
dividend to stockholders was declared of $0.10 per share for a total of $2.8
million payable on July 25, 1997. The Company received cash dividends from
subsidiaries during the first half of 1997 of $14.5 million.
RECENT ACCOUNTING DEVELOPMENTS
On June 30, 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS No. 125"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The standards are based on consistent application of a financial components
approach that focuses on control. After a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This Statement is
effective for transactions occurring after December 31, 1996, and is to be
applied prospectively. This Statement was adopted on January 1, 1997 and did not
have a material impact on the Company's financial condition or results of
operations.
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20
On March 3, 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This Statement supersedes APB Opinion No. 15 regarding the presentation of
earnings per share ("EPS") on the face of the income statement. Refer to Note 4
to the Notes to Consolidated Financial Statements for a further discussion.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The preceding Management's discussion contains certain forward-looking
statements, including without limitation statements regarding the Year 2000
problem. Moreover, the Company may from time to time, in both written reports
and oral statements by Company management, express its expectations regarding
future performance of the Company. These forward-looking statements are
inherently uncertain, and actual results may differ from Company expectations.
The Company disclaims any obligation to announce publicly future events or
developments which affect forward-looking statements. Risk factors that could
impact current and future performance include but are not limited to: (i)
changes in asset quality and resulting credit risk-related losses and expense;
(ii) adverse changes in the economy of the New England region, the Company's
primary market, which could accentuate credit-related losses and expenses; (iii)
adverse changes in the local real estate market can also negatively affect
credit risk since most of the Company's loans are concentrated in Eastern
Massachusetts and a substantial portion of these loans have real estate as
primary and secondary collateral; (iv) an increasingly competitive New England
financial services marketplace, where a large number of bank acquisitions and
mergers has resulted in fewer but much larger and financially stronger
competitors which could alter Company expectations; (v) fluctuations in market
rates and prices can negatively affect net interest margin, asset valuations and
expense expectations; and (vi) changing regulatory requirements of federal and
state agencies could materially impact future operations of the Company.
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PART II. OTHER INFORMATION
For the quarter ended June 30, 1997, Items 2, 3, and 5 of Part II are
either inapplicable or would elicit a response of "None" and, therefore, no
reference thereto has been made herein.
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of operations, the Company and its subsidiaries
become defendants in a variety of judicial and administrative proceedings. In
the opinion of management, however, there is no proceeding pending, or to the
knowledge of management threatened, which, in the event of an adverse decision,
would be likely to result in a material adverse change in the financial
condition or results of operations of the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on
May 20, 1997.
(b) The election of each of the following eight Directors of the
Company, each of whom will serve for a three-year term, was
submitted to a vote of the Stockholders of the Company:
David E. Bradbury Donald C. Dolben
Robert M. Coard Francis X. Messina
Domenic Colasacco James V. Sidell
Alan K. DerKazarian G. Robert Tod
The following votes were cast with respect to the election of Directors:
FOR WITHHOLD AUTHORITY ABSTAIN NONVOTING
--- ------------------ ------- ---------
David E. Bradbury 21,846,372 57,583 0 0
Robert M. Coard 20,070,633 1,833,321 0 0
Domenic Colasacco 21,845,557 58,398 0 0
Alan K. DerKazarian 21,831,690 72,265 0 0
Donald C. Dolben 21,845,902 58,053 0 0
Francis X. Messina 21,818,133 85,822 0 0
James V. Sidell 21,703,718 200,237 0 0
G. Robert Tod 21,592,250 311,704 0 0
The following is a list of the fifteen (15) additional Directors of the
Company whose terms of office as Directors continued after the meeting:
Chester G. Atkins Gerald M. Ridge
Robert L. Culver William Schwartz
Neal F. Finnegan Barbara C. Sidell
Edward Guzovsky Paul D. Slater
Wallace M. Haselton Edward J. Sullivan
Brian W. Hotarek Michael J. Verrochi, Jr.
Sydney L. Miller Gordon M. Weiner
Vikki L. Pryor
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Notice of Annual Meeting of Stockholders dated April 15,
1997 and related proxy card for the Annual Meeting of the
Board of Directors of the Company to be held on May 20, 1997
was previously filed with the Securities and Exchange
Commission on April 15, 1997 in hard copy and EDGAR electronic
formats.
(b) Reports on Form 8-K or 8-K/A
None.
In accordance with the requirements of the Securities Exchange Act of
1934, the Company has caused this report to be signed on its behalf by the
undersigned duly authorized officers of the Company.
Date: August 14, 1997 By: /s/ Neal F. Finnegan
------------------------------------
Neal F. Finnegan, President and
Chief Executive Officer
Date: August 14, 1997 By: /s/ James K. Hunt
------------------------------------
James K. Hunt, Executive Vice
President, Treasurer, and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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